Rural Funds Group has caught our (and others) attention following the sale of four cattle properties and 2,500 megalitres of NSW river water for a combined $256m, with the proceeds earmarked for debt reduction.
As a refresher, RFF is an agricultural real estate investment trust that owns a diversified portfolio of Australian farming assets and leases them to experienced agricultural operators. Its properties span sectors including almonds, macadamias, vineyards, poultry, cattle, cotton and water entitlements, providing investors with exposure to agriculture through rental income rather than directly taking on day-to-day farming risk.
The recently announced transactions address the key issue that has weighed on RFF for some time, and kept us on the sidelines – an overgeared balance sheet. Gearing is now expected to fall from ~39% in FY26 to ~30–32% once the sales settle, comfortably within management’s 30–35% target range. Debt facility headroom should also improve materially, reducing the risk of a dilutive equity raising and leaving sufficient capacity to fund the remaining development expenditure.
Importantly, the asset sales should also be earnings accretive. The cattle properties and water assets were generating relatively low returns, while the savings on interest costs and management fees are expected to more than offset the lost income. We now estimate the transactions could increase Adjusted Funds From Operations (AFFO) per security by around 6–7% across FY27 and FY28.
This creates a much healthier outlook for distributions that are now likely to increase by 8-10% for the next two years, putting the stock on a forward yield of around 6%. There may also be further upside if the J&F guarantee* is increased toward its full $200m limit, while improving macadamia prices provide some optionality from RFF’s farming operations.
The appeal of RFF is that it offers exposure to a diversified portfolio of Australian agricultural assets, an attractive and probably growing income stream, and a balance sheet that is moving in the right direction. The stock also continues to trade at a sizeable discount to its underlying asset value, although its structure and disclosures remain more complicated than those of a traditional property trust.
- We like the improving investment case and believe RFF is becoming increasingly attractive as an income investment. However, the shares have rallied strongly over the past two sessions, and we are reluctant to chase the move. RFF is now firmly on our radar, with a preference to accumulate into a pullback rather than buy following the recent spike.
* The J&F guarantee is a limited financial guarantee provided by RFF to J&F Australia, a wholly owned subsidiary of Rural Funds Management, RFF’s manager. J&F uses bank funding to purchase cattle, feed and related inputs that are supplied to JBS Australia’s feedlots, including feedlots owned by RFF and leased to JBS. RFF guarantees part of J&F’s borrowing facilities and, in return, receives a monthly guarantee fee—effectively creating an additional income stream without RFF directly operating the cattle business.
MM is bullish RFF for yield & some growth
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