Rural Funds Group (RFF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Rural Funds Group FY '24 Financial Results Presentation. [Operator Instructions] I would now like to hand the conference over to James Powell, General Manager, Investor Relations.

Good morning, and welcome to the financial results presentation for the Rural Funds Group for the full year-ended 30 June 2024. 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. Attendees can submit a question by selecting the hand icon, typing into the question box and clicking submit. For those dialing in to ask a verbal question, please dial star one. I'll now hand over to our first presenter.

Thank you, James. Good morning, everyone. As usual, I will present the financial results and capital management before handing over to David Bryant, who will provide a portfolio and strategy update. The first slide of this section outlines the key earnings results for the period. Revenue from property leasing increased by 8% compared to FY '23. The increase is mainly due to additional rent being generated from the lease of Macadamia orchards under development. Also contributing to property revenue growth was annual lease indexation and market rent reviews on 3 cattle properties. On a full year basis, the market rent review on the 3 cattle properties resulted in a 27% uplift in rent. The group achieved earnings of $117 million or $0.30 per unit on a full year basis. Independent valuations were conducted on 2/3 of the portfolio in FY '24, resulting in a valuation uplift of $97 million in total. The figure on the bottom right of this slide shows the valuation movements by sector. Valuation increases were received for cattle and macadamia assets. RFF vineyards, the smallest sector within the portfolio received a valuation decrement reflecting the challenging conditions faced by this industry in recent years. Cash earnings or adjusted funds from operations of $0.11 per unit was achieved. This result was slightly lower than the guidance of $0.112 per unit, mainly because of weather-related CapEx delays on the macadamia developments and lower cattle prices. However, the result reflects an increase of 3% compared to the prior year. AFFO benefited from rent from the second tranche of the macadamia developments following the financial condition of that lease being satisfied, which was the issuance of water entitlements for the orchards located near Rockhampton. Distributions of $0.1173 per unit were in line with forecast. Now looking at the balance sheet. Total assets increased by 13%. This was largely due to property valuations and rentalized capital expenditure for the macadamia orchard developments. Despite the significant capital deployment for the macadamia developments, gearing increased a modest 2% to 37%. After adjusting for post year-end items, including the partial sale of 2 cotton properties announced in June. Additional transactions will be outlined later in the presentation, which have been worked on to seek to further reduce gearing. The chart on the bottom right of this page shows the net asset value of investors units have increased 7% from $2.93 per unit to $3.14 per unit. I'll now move on to capital management. During the year, RFF's core syndicated debt facility was refinanced, providing an increase to the limit and extension in the tenor. An additional $80 million of interest rate hedges have been entered into since July 2023. The profile of interest rate hedges is detailed in the chart at the bottom of this page. RFF weighted average hedge rate for FY '25 is 2.8%. Looking more closely at the debt facilities. The chart on the right-hand side shows limit and maturity profiles of both floating and fixed rate facilities. In aggregate, facilities increased from $795 million to $867 million during FY '25 to provide funding for the macadamia developments. The facilities remain within all covenants, including the LVR, which was 48.5% compared to a covenant limit of 55% and the interest rate cover ratio, which was 2x compared to a covenant of 1.5x. Taking into account the fixed facility and interest rate hedges, 70% of RFF's debt is fixed at 30 June. The facilities pro forma headroom is $98 million, providing sufficient funding for committed FY '25 CapEx. I'll now hand over to David. Thank you.

Good morning, ladies and gentlemen. RFF is in the business of generating capital growth and income from developing and leasing agricultural assets. A significant feature of the 2024 financial year has been the continued development of the macadamia orchards leased to the Rockhampton Group. The deployment of capital into these developments have improved a number of portfolio metrics presented on this page, including RFF's 13.5 year weighted average lease expiry, diversification of revenue and diversity of institutional and corporate leases. Presented along the top of the chart on this page are the historical total assets of the fund and the steadily increasing net asset value per unit. The green bars show earnings per unit with investor distributions in set in gray. Finally, the composition of revenue by agricultural sector is shown in the bar charts at the bottom of the page. Looking at the revenue composition, RFF's early years were dominated by high-yielding but low growth infrastructure style assets, mainly in the form of poultry sheds, denoted in yellow. Over the past decade, as the RFF portfolio expanded, a gradual reweighting to natural resource assets has been achieved. These are assets which are relatively lower yielding, but with higher growth potential, particularly when the productivity of these natural resources is better utilized following the improvements that are typically made on each property. In more recent years, these assets have contributed to the generation of relatively high earnings and capital growth. The next 2 slides provide an update on RFF's macadamia developments, which are on track to be materially complete by year-end. The associated 40-year lease is forecast to constitute almost 1/5 of RFF's revenue this year and will continue to grow as rent is earned on additional CapEx. The orchard developments, which are mainly located in Maryborough and Rockhampton started in 2021, and their completion is a major achievement for the Rural Funds Group, representing around $300 million of capital and an estimated 7% of Australia's total planted area. During the Orchards development, our continued focus on precision is expected to culminate in high-yielding low cost of production assets for the lessee. Achieving high yields and managing efficiency will be assisted through the integration of new technology. RFM has been working with a technology company Inform Ag for the past 2 years as we develop irrigation and farm management systems. The inclusion of this technology provides full WiFi connectivity throughout the whole orchards. Over 100 sites spread throughout the orchards have been established to collect and transmit environmental, tree and soil data in real time. This information will be able to be used to inform irrigation scheduling, which can be controlled remotely as well as other data informed operational decisions. Much of this technology has been available for some time and RFM over the past 27 years, has had the opportunity to trial and deploy these technologies from numerous service providers. We have determined that Inform Ag provides the best suite of technologies for our purposes. As a result, RFF has entered into agreements to acquire 50% of this business on the basis that the collaboration between RFM and Inform Ag will improve the further development of technology for RFF and other farmers. It is expected that RFF's collaboration and investment in Inform Ag will also drive higher profits within that business. I'll now provide an update on other transactions, which RFM is working on. A significant achievement during FY '24 was the agreements for lease and partial sale of 2 cropping properties with a global institutional investor. Settlement of this transaction is expected shortly following the provision of FIRB approval. This transaction will improve earnings, operating exposure and gearing. An additional lease is also currently being documented for a $26 million cattle property with the local lessee. Several assets are still being operated by RFF as they are being developed or have recently had their development completed. RFM will continue to focus on leasing these assets. This includes 2 cattle properties, Kaiuroo and Yarra. Both of these farms carry significant water entitlements, enabling the development of irrigated cropping fields. These developments and other improvements will increase productivity, enhancing value and rent payments once they are leased. RFF also continues to operate 4 mature macadamia orchards. During the period of recent low macadamia prices, RFM has undertaken various improvements on areas in these farms, which will increase their yield in future years. It is also expected that the productivity improvements and price recovery will make them more attractive to lessees. Overall, it is expected that the number of operated assets within RFF will continue to decrease in line with strategy. In conclusion, FY '24 represented another year of high earnings for the Rural Funds Group, with $117 million of earnings, driven primarily by property valuations. During the year, RFM also progressed several significant leasing transactions with the continuation of the macadamia developments, lease partial sale of 2 cropping properties and documentation of a cattle property lease. Over the next year, we will continue to focus on completing transactions to further improve the earnings generation and risk profile of the portfolio through similar transactions on cropping and macadamia assets. For this financial year, we are forecasting AFFO to be $0.114 per unit, representing a 4% increase and distributions to remain at $0.1173 per unit. I'll now invite questions from attendees.

[Operator Instructions] The first question today comes from James Ferrier from Wilsons Advisory.

First question is on Slide 13 or related to Slide 13, where you're talking about the TRG macadamia lease and the expectation it's going to contribute about 18% of FY '25 revenue. Is that 18% of property revenue? Or is that 18% of total revenue, including direct farming operations?

It's Daniel Yap here. So it is relating to forecast revenue, including AFFO contributions from the farming operations.

Okay. And within that, is there any expected timing differentials or nuances in relation to TRG lease revenue in FY '25, a little bit like what we saw in '24, anything like that? Or is it pretty straight through?

It's Tim Sheridan speaking, James there. We can still see some minor movements because there is still CapEx to be rolled out this financial year. But the movements this year, you would expect would be less than last year because there's more trees planted to date. So I think the variability will be minor this year.

Okay. That's helpful. On a related topic and looking at the CapEx projections or in terms of what we spent in FY '24 and what's projected for FY '25. If I compare that with what was presented back in February for the macadamia segment in total, it's about $20 million below previous projections. So that's the FY '24 and FY '25 combined. Can you just shed some color on why the total CapEx spend would be lower than previously expected.

Yes. It's all related to timing. So some of the commencement of some of the properties was later than we forecast, and that was mainly related to weather-related events. So we couldn't actually commence CapEx as on the date we forecast. So that will all watch out the developments are sort of on track with the original budgeted numbers. So it's just timing related.

Understood. And then on the distribution, this one might be for David perhaps. But just wondering your thoughts today on the outlook for the distribution, what are the triggers or perhaps the hurdles that you're looking at or the Board is looking at for a return to growth in the distribution?

Yes. Thanks, James. It's David speaking. Yes, it's a third year in a row where we've had the same rate of distribution and we're paying out more than AFFO. We wouldn't go back to increasing distributions until we know that we're below 100% payout ratio. So I think for the next year as well, it's most likely that distributions will remain flat.

The next question comes from James Druce from CLSA.

Just a question on guidance for this year. What kind of -- what are the sort of the big drivers that we should be thinking about? And maybe just touch on the cost of debt and that sort of thing.

Yes. Thanks, James. I think that the -- in terms of drivers, I'll probably more -- it's probably better. And I assume the question is directed at the key areas of sensitivity. And that would be interest rates and macadamia prices. So as you know, we've got some mature orchards that we're operating. The macadamia price is recovering actually quite strongly. I think the price paid to grow has reached -- it went from $6 to $1.80 a couple of years ago. This year, growers received about $3.20 a seeing a price with a 4 in front of it would not be surprising in the coming year. I think we've assumed $3.70 in our forecasting to provide that AFFO guidance. So there's -- regrettably, there is some exposure to that commodity price. Over time, we will lease those orchards out. But in the coming year, that's a source of sensitivity along with interest rates.

What have you assumed for the cost of debt this year?

Yes, 4.35%. So we've assumed rates stay flat.

Okay. All right. I just noticed the J&F guarantee rolled off a little bit over the period down about $10 million to $123 million. Just curious if that was just natural commissions or whether that was you guys sort of tightening things up a bit.

No, it was purely the cattle price. So we saw the cattle price throughout the year come off about 70% at one point. So because we're financing cattle when the cattle price comes off, we finance less cattle. The cattle price has since recovered, it's up about 90-odd percent since the start of this calendar year. So we should see that guarantee tick back up because cattle are worth more.

Okay. What's driving the volatility in that cattle price?

There was a dry season in Southern Australia, James. So Victoria will be some or Southern New South Wales, South Australia, they had a very dry season. So they had a lot of cattle to sell. And that the [indiscernible] were at full capacity. And so they could name their price really. The [indiscernible] actually have increased capacity with some addition of additional shifts. But then it's rained -- we've had widespread rain. So farmers are now hanging on to their cattle for longer. And so prices recovered.

Yes. Okay. One more, if I may. Just the ICR, I mean, you got a bit of headroom to 1.5, which is a covenant. Do you expect -- I think this year, you printed 2.1. Do you expect that to -- where do you think that will trough? Is that going to be this year? Or how do we think about that number?

Yes. I mean, if interest rates stayed flat, it should sort of stay there. I mean we'll be generating more revenue on one side of that calculation. So we expect that sort of where it should track with these rates.

Okay. And the outlook for asset values this year.

I think -- and David, you might add a bit. This year, we saw with a lot of interest rate uncertainty, low -- some low commodity prices, in particular, cattle and macadamia and asset values seem to hold flat. I think if we see interest rates start to come off in these favorable commodity prices, we could see the market start to pick up again, but we're certainly not assuming that we're going to have growth like we've seen in the last 4 to 5 years.

Yes, I might just chime in. There's also a kind of written question from Larry Schlesinger from the AFR along the same lines. Larry points out that there's been full in vineyard values, but there's been big rises in values recorded for cattle stations and Macadamia orchards. We think that particularly, if I look at our valuations and I compare those values to prices that were paid at the peak of land transactions in cattle, where interest rates were very low. Cattle prices were high. Farmers had very strong balance sheet because of uplifts in their own property values. And so there were some transactions that occurred at very high rates. Those very high rates were not reflected in our valuations. The value was logically looked through those outliers and have adopted a more steady -- a more moderate rate of growth to what some of those transactions occurred at. So we think that the cattle values will remain flat. I don't think they'll decline, particularly because they're supported by a recovery in cattle prices and a very good outlook for the cattle industry with the U.S. herd, the U.S. is a major market for Australia and also a major competitor in other markets for Australian beef. The U.S. herd is, I think, at a 70-year low and is now going to -- is now entering into a rebuild. So beef prices in the U.S. will be very supportive of the Australian cattle industry, both in that domestic market and in the international markets with which we compete. Macadamia orchards, just to address Larry's question specifically about that. Again, we think it will be flat. The macadamia price is just moving through its cycle. Demand growth is very, very strong. So we would see that existing valuations of macadamia orchards are really just confirmation of the underlying price. So I don't think that we will be printing big valuation uplifts in the next few years because probably the market's got -- commodity prices has got to catch up with things a bit.

And then just one final thing on that, James and Larry. Part of our valuation increases is actually an increase in the productivity of those assets. So one of the big drivers for the cattle valuation uplift was in the tail property, it's running a lot more cattle. So it's not just the market increasing, it's also the productivity. And that's the same with the macadamia that conversion from sugarcane to macadamia driving those valuations.

The next question comes from Edward Day from MA Financial.

Just a further one on valuations. With regards to the uplift you get at completion of CapEx, specifically with your lease to TIG. How much of that valuation, I believe to be recognized already? And I guess sort of how much is still to be recognized after you spend the remaining $70 million in CapEx?

Yes. As the leases commence, majority would have already been recognized. There might be a little bit more to go, but the majority has been recognized.

Okay. And with regards to your comment on valuations probably don't go much higher from here. I'm just keen to get an understanding of how you plan to get gearing back in line with your targets over the medium term?

I think valuations will remain steady for a period of years, apart from the contribution that comes from productivity gains. And so that's the result of real work being done on the farms to improve those properties values or improve their productivity. So there will be some contribution there, but there won't be the tailwind of the market, the tailwind of very low interest rates. Our outlook is that whilst interest rates may come off a little bit, they'll still be greater than 3%. And so they'll be restrictive rather than supportive of economic growth and therefore, we'll, I suppose, produce-- they've turned from a tailwind to a headwind. But our main game or our main job is to increase or grow our income, grow our AFFO. And that is flowing through gradually with completion of Macadamia orchards, better utilization of farms that we've acquired for development. And so we still have a pipeline of farms that are earmarked for development. They're reasonably significant. And those developments are being rolled out. They'll produce income from farming prior to them being leased and then produce good, reliable, steady income streams once they're leased out. So it's the full utilization of our development pipeline will grow earnings. And then, of course, the underlying indexation clauses and mechanisms within our leases that are increasing rent each year. So that is how we will grow income. And I suppose it might just actually having, hopefully, satisfactorily answered your question, Edward, I'll just refer to a question that's come from Ben Stas, from Stace Holdings, which is, in your opinion, why is RFF trading on the ASX at such a significant discount to NAV. Well, I suppose the market is not satisfied with the rate of growth of the income that RFF has generated is generating what I think will occur is that the growth rate of NAV will slow whilst the points that I've expressed before about getting our pipeline fully working and producing income plus the indexation mechanisms will gradually increase the income that we're generating and that will serve to close that gap. So I think there's a bit of a cyclical thing that's occurred. Obviously, there's the interest rate cycle, but there's the very low interest rates drove an increase in asset valuations. So drove an increase in our net asset value and our income generation didn't keep pace, so in many respects, the market for farms and the valuation placed on them is forward-looking. And that forward-looking is coming from the farmers next door that are buying the farms, and they can see the growth in income will come through and enable them to service the debt that they take on to acquire these farms and to produce commodities profitably. So I think it's just the cycle catching up. Hopefully, that -- well, at least it gives you my opinion.

Yes. David, I have one more question, if I may. It's Ed here.

Yes. Thanks, Ed.

Yes. Just on your CapEx. So you've called out the remainder for that Macadamia orchard. But what's your estimated run rate for some of those other projects? I guess, if you can give that on an annualized basis?

What do you mean by run rate? Is it in respect to…

Yes, correct.

Going forward. So I mean, the CapEx with what we've got will reduce significantly going forward. It's really just around the edges. We still have the Kaiuroo property to complete development on. That's the last major spend. But apart from that, we also have 700 hectares of Macadamia orchards that can be developed at Rockhampton or at the Rookwood vicinity. So that's water that we own and land that we own that can be developed we'll get that underway and develop that with the aim of leasing it as well. So that's about, I think, $30 million of CapEx that's sitting there unutilized, not generating an income, we'll develop it so that we can generate income there. The Kaiuroo property, it can be quite a significant development, and we're still working through the options for just how and when we develop it. But it would -- I really don't want to put a number on it because we're still doing our calculations, doing the water modeling and so forth. But that's -- I think it's about probably $80 million worth of asset at the moment that is generating suboptimal income because the water entitlements have not been utilized at all. Once we bring those into work, that farm will produce a lot more income.

Yes. And just to be clear, on the Macadamia is relating to the TRG in case either is still additional CapEx beyond to be rolled out on those. So we actually -- once you plant the trees, you have another few years to go on CapEx on those assets, which I think we've provided those numbers previously. So there's a little bit more CapEx on those macadamia developments beyond FY '25.

[Operator Instructions] The next question is from Tom Bodor from UBS.

Just be interested if there's any plans for further asset sales over '25 you're thinking.

Yes, Tom, yes, there is. So the unutilized assets that we've got, we need to get them leased out. So probably if we can, replicating the recent transaction we did for the 2 cotton farms, so selling 50% of the asset and leasing 100% of it that we're working on doing that with a couple of the farms that are unutilized and unleased at the moment. And we're also looking at whether there are assets that could be sold and use the capital from that to drive the development of our unutilized water entitlements harder. So basically, sell assets that are generating low rates of income and that have a medium-term outlook of lower rates of growth and invest that in water entitlements that we own that are generating no income and would have very high rates of capital growth if we were to switch them on. So we're exploring asset sales for that purpose as well.

Do you sort of have a quantum in mind? Or is it more opportunistic around what you can get done?

It's not opportunistic, but we're still arriving at a quantum. So that's a pretty sophisticated way of not answering your question. But we're still doing the numbers, but it would be tens of millions of dollars, not small nonmaterial transactions. And that's beyond -- we've got 2 or 3 assets listed for sale at the moment. They are approximately $70 million worth of assets. Those processes are ongoing. So we do have some listed at the moment.

Right. No, that's clear. And then just be interested in picking up, I think it was James' question on interest expense, where it sort of sits versus last year, and I think you gave some color around the actual interest rate you assume. But just be interested if there's any changes, for instance, in capitalized interest that we should be thinking about into next year?

As the assets are developed and leased out, capitalized interest no longer occurs. So because a lot of these assets are now -- the developments have been completed, the amount capitalized into next financial year reduces. So yes, there is that small change.

And so what's the sort of headwind in dollar terms into '25?

If the reduction-- so it's about 3…

Be about $2 million.

About $2 million.

The next question is a follow-up from James Ferrier from Wilsons Advisory.

A question on rent reviews. You mentioned in the outcome on the 3 cattle properties inclusive benefiting the FY '24 results. Could you just remind us what's ahead in terms of rent review events in FY '25 and FY '26, please?

Yes. Thanks, James. We have a large cattle property rewon in Central Queensland that's up for renewal this year, a rent review this year. We expect, given that rent was set 5 years early, we expect to see similar levels of uplift on that. Beyond that, I don't think there's any others in FY '25. And going into FY '26. I mean if you look at Slide 24, anything -- they occur every 5 years. So I'll go through but the next significant one is [indiscernible].

At this time, we're showing no further phone questions. I'll hand the conference back to management to address the written questions.

We've got another written question from Larry Schlesinger from the AFR. And I'll just quickly read it out. Could you talk a bit about your investment in Inform Ag, how will its technology be used to improve performance of your Macadamia orchards. Are you looking at investing in other Ag tech businesses? So the way we will use -- the first part of the question is how will we improve our performance in the Macadamia orchards. So we've been installing the Inform Ag equipment. And I'll just describe a little bit what they do. They install a WiFi mesh network across a whole orchard. Now that is actually quite a challenging task because you've got to get WiFi to move through or communicate through thick canopies of macadamia orchards and Inform Ag have created a robust system that addresses that challenge. Once you've got that mesh network in place, you can install a have a piece of equipment that is geo-locating itself, and it can be moving about the orchard and we can know the location of that piece of equipment to an accuracy down to plus or minus 1 centimeter. So it's actually more accurate than your standard GPS. So the sort of equipment that Inform Ag is installing is pretty much high quality off-the-shelf electronic equipment put into robust boxes and then put on site. And it provides us with an enormous amount of additional data regarding the environment, the condition of soils, the Sap flow within trees and information of that nature. It allows us to not just monitor but also forecast the irrigation and fertilizer requirements of trees. And in time, it will allow us to do yield mapping, which is something that's not been available within the horticultural sector because of the problems with -- well, just the technological challenges that hadn't until now, not been sold. So we've worked a great deal with Inform Ag developing pieces of equipment that suit our requirements and for the type of performance that we're trying to achieve. And we made the decision that they could achieve what we want more quickly by investing equity into their business. So the bulk of the capital, that investment has gone actually into the business to assist with its growth. The business, it is not a start-up. It's been going -- actually, a big chunk of the business has been going for 20 years. And it's a profitable business. The profits will grow, we believe, as the business expands. Do we have any intention of investing in any other Ag tech businesses? No, we don't.

I will just remind the attendees that they can submit a question by clicking the hand icon on the screen and we'll just allow at the moment for any other additional questions to come through. Otherwise, I'll pass over to David Bryant shortly for concluding remarks. [Audio Gap]

There's no more questions. So we'll just thank everybody for attending and look forward to talking once again in 6 months, if not before. Thank you.