Rural Funds Group (RFF) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. This is James Powell speaking. Today's brief presentation provides information for a unitholder meeting to be held on the 4th of February, which has been convened to approve an increase to the RFF guarantee provided to J&F Australia. Today's presentation will provide information on these arrangements as well as details on how to participate in the meeting. Today, I'll be joined by Tim Sheridan, Chief Operating Officer; Daniel Yap, Chief Financial Officer; and Sandra Walton, Investor Services Manager. If you have any questions for myself or one of the other panel, please type your question via the question manager tab at the top of your screen, and we will answer it at the end of the presentation. First, some background on the JBS investments. In August 2018, RFF raised equity to acquire 5 feedlots from JBS Australia for $52.7 million. The location and carrying capacity of these feedlots is set out on the map on this page of the presentation. The capital raising also included $75 million to guarantee a cattle supply facility for cattle held primarily in these feedlots. This arrangement was approved by unitholders also in August 2018 with 99.8% of participating unitholders voting in favor. In April 2020, a subsequent increase to the guarantee was approved by unitholders by a similar margin. The proposal currently before unitholders seeks approval for an additional increase to the guarantee, which I'll detail on the next page. As illustrated in the diagram on the right-hand side of this page, the guarantee is provided to a subsidiary of RFM called J&F Australia. The guarantee allows J&F to provide the cattle supply facility using bank funding. While RFM is the owner and manager of J&F, it receives no remuneration or profit other than an amount limited to 1.05% of the guarantee. The transaction has been structured in this way so that RFF continues to earn passive income from the guarantee, which helps to maintain RFF's reclassification. JBS have requested an increase to the cattle supply facility due to continued high demand both domestically and internationally, combined with higher cattle prices. Both banks who provide the existing debt facility have agreed to increase their funding on the basis that the guarantee increases proportionally. The resolution before members seek approval to increase the guarantee from the current $100 million to $132 million. However, it should be noted that initially the guarantee will only increase to $114 million with a total increase in the supply facility of $380 million. The approval of the higher amount provides flexibility for RFM to increase the guarantee in the future within the limits just described without us having to return to a further unitholder meeting. Consistent with many of RFF's other lease arrangements, the guarantee has no direct operating risk and is supported by a high-quality counterpart. JBS Australia and their international parent, JBS S.A. are the largest processes domestically and globally. Other highlights are included in the table on the right-hand side of this slide, including the fact that globally JBS S.A. employ approximately 250,000 people and have a current market capitalization of over $20 billion. Counterpart performance is guaranteed by Baybrick Proprietary Limited, an Australian entity with $3.5 billion of net assets and they are wholly owned subsidiary of JBS S.A. While RFF does not have exposure to the production and market risk typical of an operating business, there is limited exposure to the risk of cattle mortalities. However, JBS perform the day-to-day management of the feedlots and are responsible for mortalities of up to 15%. RFM has in place insurance for additional mortalities greater than this level. Mortality risk is quite low because it is risk reduced through the geographic diversification of the feedlots and the fact that the feedlot mortalities are typically around only 1% because cattle generally pass through the feedlot within approximately 100 days. Finally, it should be reiterated that the guarantee has a distinct limit. In compensation for the guarantee RFF supplies to J&F, RFF is paid a return. The table at the left shows the return for the guarantee during the most recent financial year was 10.6%. The income paid from J&F totaled $7.1 million, in addition to an interest saving of $2.4 million. This saving occurs because the $75 million that was initially raised was used to pay down debt. Consistent with this calculation, an independent expert has assessed that the guarantee will earn a return between 9.7% and 11.2%. This represents a good return on investment for RFF, particularly given the quality of the counterpart as just described. The chart on this next page provides the past performance of RFF and shows the steady growth in key drivers of fund returns. The inclusion of the JBS feedlots and the guarantee have been important contributors to this performance. As noted on the right-hand side of this page, forecast FY '22 AFFO or adjusted funds from operations will increase from $0.118 per unit to $0.119 per unit if the guarantee increase is approved by unitholders. This relatively small impact will, of course, be larger on a full year basis. I'll now hand over to Sandra Walton, who will provide details of the meeting and how unitholders may vote prior to the meetings. Just handing over to you, Sandra. Sandra, we appear to be having some trouble with your line. I'll just give that one more try. Apologies attendees. We are having trouble with that line. I'll outline the Slide 9, which Sandra was going to present. So just moving to Slide 9. So RFM has arranged the unitholders to be able to efficiently cast their vote prior to the meetings with a simple 4-step process and the details of that process are shown on this slide. To vote online, simply scan the QR code located on your proxy form and you'll be guided through the process. Your proxy form also includes additional methods of submitting your vote, including by fax, e-mail, in person or by post. Importantly, your lodgement and receipt of any other means must be received no later than 11:00 a.m. on Wednesday, the 2nd of February 2022. The meeting will be held in the office -- in the RFM office in Canberra on Friday, the 4th of February at 11:00 a.m. If you are attending or attending the meetings in person, to ensure we comply with the current COVID restrictions, we would appreciate if you could register your attendance by e-mailing Investor Services at ruralfunds.com.au or by calling us on 1800-026-665. I'll now just move to the conclusion of the presentation. And in conclusion, the meetings to be held next week to seek approval for an increase to an existing arrangement, which has been well supported by unitholders in the past and is a good investment with a high-quality counterpart. Approval by unitholders will result in an increase to forecast AFFO of $0.119 per unit or to $0.119 per unit, I should say. The notice of meetings are explanatory memorandum containing additional information, and we encourage unitholders to read those documents. This concludes today's presentation.

And we are happy to take questions from any participants today, and you can submit your question by clicking the question manager or the blue button with the hand in it. Type that question, and we will receive it at our end and either Tim Sheridan, Daniel Yap or myself can respond as appropriate. We'll just pause for a moment just to allow anyone to type those questions and send them through to us, should they have any. It appears as though we don't have any questions from our participants. And if you do have a question after the webinar naturally, please don't hesitate to contact our Investor Services team, and we'd be more than pleased to answer any queries that you may have. Sorry, we do have one question which has come through. And it's just in relation to the gearing capacity for RFF and the way that the guarantee impacts that. And I'll just hand over to Tim Sheridan. Tim, if you can unmute your line to respond.

Thanks, James, you can hear me?

Yes.

Yes. I think your question is how do we allow the fact that it does take up gearing capacity. I think it's just a very good investment. So we on the additional guarantee that we're providing to J&F, we earn a return on it, and that's a cash return, the cash yield that we generate. And it's a very good one with a very strong counterpart. So that makes a lot of sense for us to build it in a relationship. We want to keep supporting JBS because I think there will be future growth opportunities with them, and they're performing very well at the moment.

Thanks, Tim. There being no further questions, I'll conclude today's presentation, and just reiterate that if you do have any questions after the session, please don't hesitate to contact RFM Investor Services or myself, and we'd be most pleased to respond. So a copy of this webinar will also be put on the RFM website shortly. So thank you very much for your interest, your attendance, and we look forward to reporting to you later in the year. Thank you.