Rural Funds Group (RFF.XA) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the FY '25 Financial Results Webinar for the Rural Funds Group. [Operator Instructions] Please be advised today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, James Powell, Rural Funds Management General Manager, Investor Relations, Corporate Affairs and Sustainability. Please go ahead, sir.

Good morning, and welcome to the financial results presentation for the Rural Funds Group for the full year ended 30 June 2025. Presenting today is David Bryant, Managing Director; Tim Sheridan, Chief Operating Officer; and Daniel Yap, Chief Financial Officer. After the presentation, we have allowed time to take questions from attendees via the methods that have just been outlined by the operator. I'll now hand over to our first presenter.

Good morning, everyone. I will present the financial results for the year before handing over to David Bryant, who will provide a portfolio and strategy update. Firstly, by way of summary, from an earnings perspective, as I'll detail on the next few slides, FY '25 has been a positive period for the group. Net property income is up 9%. Revenue from farming operations have reverted from loss-making to a profit and AFFO is up compared to the prior period, a slight improvement on guidance. From a balance sheet perspective, gearing has increased marginally, primarily from income-generating CapEx deployed on development assets. In line with our intention to bring gearing back towards the target range, RFF divested $89 million of assets in line with book values, including $19 million, which settled after 30 June. Leasing activity during the period included those mentioned in the first half, which included 8 properties being leased. These and other activities contributed to maintaining RFF's long WALE of 13.9 years, which supports providing stable income generation to our investors. Now moving to the financial results in more detail. The first slide of this section provides a more detailed analysis of RFF's key earnings drivers for the period. Net property income from leased assets increased 9%, up $8 million to $95 million. This increase is mainly due to the additional rent being generated from the lease of macadamia orchards, which are being developed. Also contributing to this was annual lease indexation mechanisms. Net farming income, that is the operating result of approximately 16% of the assets, which are operated by RFF, provided a positive contribution for the period, having incurred a loss on the prior period. This result is largely due to an improvement in agricultural commodity prices. We have observed a greater contribution to farming income in the second half in line with the timing of various crop harvests as foreshadowed in the half year results. Adjusted funds from operations, the net cash earnings measure of the group increased by 4.5% compared to the prior period and slightly exceeded half year forecast. Earnings, including noncash items, were lower than the prior corresponding period. The current period result was mainly due to mark-to-market of interest rate swaps as well as higher property valuation movements in the prior period compared to a relatively flat property revaluations in FY '25. Finally, on this page, RFF paid 4 distributions during the year, totaling $0.1173 per unit, in line with forecast. The payout ratio of 102% reflects the greater AFFO generation during the period and the third consecutive year, the payout ratio has improved. Now looking at the balance sheet. Assets increased marginally during the period through the deployment of development CapEx despite some divestments. The adjusted NAV per unit at 30 June was down from $3.14 per unit to $3.08 per unit, mainly because of the mark-to-market of interest rate swaps. Gearing increased marginally by less than 1% despite the capital deployed for the macadamia developments during the period. This was largely because of the prior mentioned divestments. While gearing ended the period at 39.3%, the sale of some unleased water entitlements settled after the reporting period brings pro forma gearing largely in line with the prior period. Additional asset sales are planned for FY '26 as we continue to balance the capital requirement of the group. This next page provides more detailed analysis of property valuation movements that have occurred within RFF over the past 12 months. RFF has a policy to independently revalue all assets at least once every 2 years. During the year, 68% was subject to independent valuations, resulting in an increase of $15 million or 1.2%. On the remaining portion of the portfolio, directors valuations have been applied in line with standard practice. This includes the Yilgah almond orchard, which is being prepared based on unencumbered methodology as the property is subject to a market rent review. Looking now at the capital management aspects of the group. During the period, RFF's core syndicate debt facility had a scheduled refinance, including an $80 million increase to the limit for CapEx requirements, offset by amortization on the fixed facility. As noted during the first half presentation, during the period, RFM suspended the distribution reinvestment plan as the dilution from issuing new units at a significantly discounted price to book value was deemed not to be in the best interest of investors. Furthermore, the group does not require additional equity given the sufficient debt funding arrangements that have been outlined. The core facility remains within all covenants, including LVR, which decreased during the period from 48% to 46% compared to a covenant of 60% and ICR, which improved to 2.2x compared to a covenant of 1.5x. Taking into account the fixed facility and interest rate hedges, 69% of RFF's debt was fixed at 30 June with $90 million of additional forward start date hedges entered into during FY '25. Overall, the finance facilities provide sufficient headroom for upcoming CapEx. I'll now hand over to David.

Good morning, ladies and gentlemen. This page provides an overview of the Rural Funds Group assets and lessees. The strategy for RFF, which is owned by approximately 20,000 retail investors and a number of institutions is to generate capital growth and income from developing and leasing agricultural assets. The lessees include high-quality agricultural businesses and institutional-grade investors as shown on the right of this page. A significant strategy to generate additional returns for investors include productivity development and higher and better use conversions. Consistent with this approach, RFM has been developing macadamia orchards, which has increased the value and revenue generation from this sector. The macadamia lease is also contributing to the long-weighted average lease expiry of RFF, which is 13.9 years. Overall, 84% of the assets are leased and lease agreements include a range of indexation mechanisms. During the first half, several leasing transactions were completed and are again summarized on the page. Lease maturities in FY '26 will be managed through a combination of asset sales processes or re-leasing of those assets. This next slide outlines the completion of the development phase of 3,000 hectares of macadamia orchards, which are leased to a global institutional investor. In Maryborough and Bundaberg, 1,600 hectares of orchards have been developed with minor tree plantings to occur shortly with the transition into spring. A residual 2,000 hectares of sugarcane properties in Maryborough will be held for future development or may be sold. In Rockhampton, 1,400 hectares have been developed. Residual areas will provide up to 1,000 hectares of additional macadamia development in the area. The macadamia lease is forecasted to generate revenue of $20 million in FY '26, an increase of 18% on FY '24 following the deployment of additional CapEx throughout the year. Revenue is forecast to continue to increase as smaller amounts of CapEx are incorporated into the lease for initial orchard maintenance costs over the next 4 years. With the completion of the leased macadamia developments, RFM has progressed with the development of 2 other assets. Firstly, the next stage of macadamia orchards on Rookwood Farms. The benefit of commencing this development, whilst unleased is that it provides future AFFO generation through operating or leasing and it improves the utilization of the new water supply infrastructure constructed in that area. Development of the cattle and cropping property, Kaiuroo, has also commenced. A 5,400 megaliter water storage is nearing completion, which will support 375 hectares of irrigating cropping area. The planting of a cotton crop is expected to occur in the following months, providing forecast revenue for RFF in FY '26. As highlighted in the Kaiuroo example, a distinguishing feature of agricultural property is that it can generate income from operations despite being unleased. This slide shows a number of the properties which are unleased, but the majority of which will contribute to the earnings of RFF. The underlying commodity prices for macadamias and cattle improved significantly over the past 2 years with the cotton price in line with the long-term average. The final page in this section provides an update on some of the sustainability initiatives, which are being undertaken by RFF and importantly, how we are using technology to drive both sustainability and productivity gains. Now moving to RFF forecasts and a conclusion. For the 2026 financial year, we forecast AFFO of $0.117 per unit. We also expect distributions to remain constant, resulting in a payout ratio of 100% for the period. Major priorities for the year include the continued stage development of Rookwood Farms and Kaiuroo as well as noncore asset sales. Finally, we wish to extend an invitation to all investors to attend our roadshow, which will be conducted during October. We look forward to meeting you in Melbourne, Sydney, Brisbane or Canberra. Please register your interest to attend via the details on the screen. I'll now invite questions from attendees.

[Operator Instructions] We will now take our first question from the line of Cody Shield from UBS.

Just on FY '26 CapEx. So I can see estimates were for $40 million in '26 at the half. It's now expected to be around $100 million. So is that spend going to be matched up with divestments? Or are you going to let gearing run a touch higher?

Thanks for that. It's Tim speaking. It will be matched up with divestments. So we've identified some assets which we wish to sell, and we're running through that process. So we anticipate that any of that CapEx in FY '26 will be offset by equivalent divestments.

Okay. Great. And how should we be thinking about the return on that spend in '26, '27.

So the 2 things we're spending capital on is the development of the Kaiuroo property. It's being converted from a cattle property into an irrigated cotton property. We will get our first cotton crop planted on that property this calendar year. So we expect to see additional FFO coming from that cotton property this calendar year. In terms of the additional macadamias that we're developing, we will develop them up and seek a lessee. And hopefully, that process can occur quite quickly. But if not, there will be no FFO generation from the macadamia developments in this financial year.

Okay, sure. Maybe just one more on '26 guidance. So it looks like low to mid-teens revenue growth for '26, but then AFFO guidance is only 2% higher year-on-year. Can you just give me a read on some of the moving parts there for '26?

So FY '26, we haven't -- we've assumed that interest rates, we only have one more cut, and that's for 6 months of the financial year. We've also had a slight reduction in the forecast rent on one of our almond orchards that's currently subject to a rent review. So that has reduced our forecast guidance slightly. But beyond that, we're forecasting about 2% AFFO growth. If that rent hadn't come off on that orchard, it would have been closer to the 4%. But however, because of that, we're forecasting only 2% AFFO growth this financial year.

[Operator Instructions] We'll now take our next question from James Druce from CLSA.

I was just interested in your comments, I think you said you're looking at selling Maryland. Can you just dig into that, please?

It's Tim speaking again. I'm not sure what Maryland is. No, we are not looking at selling that because we don't own it. Maybe -- sorry, we are -- maybe you're referring to some of the Maryborough Sugar assets. There are a few that we have identified that aren't suited to a macadamia future development. So we are selling a couple of those assets, and that's progressing, but they're not significant amounts of land that we're selling. It's just a little bit around the edges, and that will happen this calendar year.

And the quantum of that is what -- how much should we be thinking about?

The quantum is probably about $10 million. So it's not significant. That will hopefully occur this calendar year.

And then stretching out to FY '27, I mean, you'd be using -- I mean, you do have to execute on some asset sales. But if you didn't execute on asset sales, you'd be using most of your debt, I suppose, debt capacity this year. Are you guys planning on picking up those debt facilities that are due to accommodate that? Or like what happens in FY '27 if we can't get that asset sales away, do you just have to cut CapEx? Like how do we sort of think about that scenario?