Hi Motley Fool Readers,
Below I’m going to reveal a little known, one-of-a-kind, ASX listed company.
You’ll likely be surprised to learn the company is in agriculture. But I assure you this business is rather unique, and you’ll probably be interested in its 7% yield.
As Australia’s only ASX-listed agricultural property trust, it’s an investment with a difference.
The World Needs To Eat
According to the UN Food and Agriculture Organisation, global food production must double by 2050 to feed the world’s growing population. This must be achieved while arable land is in decline, particularly in developed countries.
Urbanisation, salinisation, desertification, and general overuse all contribute to decreasing either the total area of arable land available, or the productivity of land in use.
Add to that the suggested impacts of climate change and shifts in water availability, and you can see a compounding challenge ahead for food and fibre production.
The growing world population means much needs to be achieved with a shrinking, finite arable resource base. As my farming father says, “they’re not making any more land”. All of this combined must have upward pressure on quality farmland prices over the long term.
If you can spot an investment thesis here, but don’t know the first thing about farming, allow me to introduce you to a property trust with a difference.
This property trust owns a diverse portfolio of agricultural assets worth over $260 million. Property and infrastructure comprise 54% of the portfolio, biological assets (plants and livestock) 26%, water entitlements 15%, and the final 5% are in other assets.
The company’s property portfolio is predominantly in poultry farms, vineyards and almond orchards. Its recent expansion efforts have focused on almond orchards.
This comes as no surprise given the drought crippling California (home to 80% of global almond production), benefiting Australian companies like Select Harvests (ASX:SHV). It’s likely this company will invest further in almonds.
Exposure, without the risk
The company we’re talking about is Rural Funds Group (ASX:RFF).
Interestingly, RFG owns and leases its assets, rather than operating them. It thereby avoids much of the volatility and uncertainty of agricultural commodity prices.
Similar to commercial or industrial property, RFG’s leases are largely ‘triple net’, meaning the tenant is responsible for property expenses over and above rent fees. Tenants include one of Australia’s largest poultry producers, Baiada, as well as ASX-listed companies Select Harvests and Treasury Wine Estates (ASX:TWE).
RFG’s weighted average lease expiry sits at 12.9 years, but a proposed almond orchard deal with Olam Australia looks set to extend this to 15.7 years. Each lease contains an indexation clause (generally around inflation), plus market review mechanisms.
The business pays quarterly distributions. The 2016 forecast distribution of 8.93 cents per share implies a yield of around 7% on current prices, with the potential for further long-term capital appreciation. (Australian agricultural land prices have appreciated at around 5% per annum for the past 30 years.)
Rural Funds Group is Australia’s only listed diversified agricultural property trust, consequently the investment and the asset class is unfamiliar to many investors. It’s widely accepted that agricultural assets have a low correlation to more popular asset classes, therefore providing a strong portfolio diversification opportunity.
Add to that, the proximity of Australia’s vast land mass to Asia’s booming middle-class, and imminent free trade agreements, puts our country in the box seat to play a leading role in feeding Asia and the rest of the world in the twenty-first century.
Australia’s efficient production, relatively low price of arable land, reliable rule of law, security of title, transparent and (usually) stable government combine to make it an attractive place to invest in agriculture.
Coupled with its attractive yield, that makes Rural Funds Group an easy way to own your own piece of quality Australian farmland.
That said, because its share price has had a strong run lately, RFG doesn’t offer the compelling value it once did… unlike our latest Motley Fool Share Advisor recommendation.
Myself and Scott Phillips have discovered an even cheaper company, one that’s trading on a forecast gross (fully franked) dividend yield of 9%.
To instantly find out the name of this dirt cheap company, and to ensure you receive our incredibly popular “Income Extra” feature this coming Thursday, simply click here to subscribe to Motley Fool Share Advisor.
With subscriptions currently on offer at a 50% discount, I’m confident you won’t be disappointed.
Donny Buchanan owns shares of Rural Funds Group