The Rural Funds Group (ASX: RFF) share price is up after reporting its FY22 result and announcing more distribution growth.
Rural Funds owns a diversified portfolio of agricultural assets which are leased predominately to corporate operators.
Rural Funds’ HY22 result
Here are some of the highlights from the result. Adjusted funds from operations (AFFO) is the rental profit in cash terms. The ‘earnings’ includes valuation gains of the farms.
- AFFO per unit of 5.8 cents
- Distributions per unit of 5.87 cents
- Earnings (total income) of 10.36 cents per unit
- Adjusted net asset value (NAV) increase of 3% to $2.24 per unit
Whilst the distributions were slightly higher than rental profit in this half, AFFO per unit is forecast to increase in the second half due to the contribution of additional income from the increased J&F guarantee and acquisitions.
FY22 forecast AFFO is expected to be 11.9 cents per unit, with distributions of 11.73 per unit. That represents a sustainable distribution payout ratio, whilst the business invests for growth.
Acquisitions
In November, Rural Funds announced the acquisition of three cattle and cropping properties totalling 33,926 hectares (including 33.2 GL of water entitlements) and two mature macadamia orchards totalling 475 hectares.
Development
The development of ‘stage one’ of the macadamia orchards, being 1,000 hectares in Maryborough, Bundaberg and Rockhampton, is on track to be ‘materially’ complete in FY22. The completion of this will boost rental profit.
Discussions with potential lessees are ongoing.
Major lease
Rural Funds announced that Australian Agricultural Company Ltd (ASX: AAC) has entered a 10-year lease of cattle properties Comanche and Homehill.
Distribution increase
Rural Funds announced yet another increase to its distribution. The goal is to increase the distribution by 4% each year,
The business announced a FY23 forecast distribution of 12.2 cents per unit, including franking credits. Rural Funds’ cash distribution will be at least 11.73 cents per unit. Normally Rural Funds just refers to the cash part of the distribution, so this is an interesting development.
Final thoughts on the Rural Funds share price
Rural Funds continues to make the right moves to grow its asset value and income potential.
With an underlying value (including water entitlements) of $2.24 per unit, the current Rural Funds share price is at close to a 30% premium. The distribution yield for FY22 is 4.1% and for FY23 is 4.2%.
For me, it’s a bit too expensive to want to buy more shares in a rising interest rate environment. For my own portfolio, I’d consider buying more at a Rural Funds share price of around $2.35. But income-focused investors could probably justify buying at a higher price than that.
