Why I think income investors should buy Rural Funds Group

Credit: N Sawyer

Rural Funds Group (ASX: RFF) is Australia’s only listed farmland landlord with a market capitalisation of $332 million. In the last two years it’s been on quite the acquisitive streak, now Rural Funds Group has bought another farm.

Management announced that it will buy Lynora Downs, a 4,880 hectare cotton property located in central Queensland. It’s actually quite close to a cattle property bought earlier in the year.

The purchase price is $26.5 million and should settle in late November. It will be funded entirely by debt, Rural Funds Group has negotiated an increase in the bank facility limit.

The cotton farm will be run by a joint venture between Rural Funds Management Limited (the manager of Rural Funds Group) and Queensland Cotton Corporation Pty Ltd a subsidiary of Olam International Limited.

This joint venture will operate the cotton farm for five years, with an option to extend for a further five years.

Rural Funds Group plans to maximise the land by utilising the water entitlements that come with the farm and build additional water storage as well as developing the irrigation. This will cost approximately $5.7 million.

You may have missed the news in October that Rural Funds Group also purchased high-security Murrumbidgee water entitlements. The two acquisitions combined adds over 25,000 ML to its water assets.

Management have confirmed that forecasts for FY17’s adjusted funds from operations of 12.42 cents per unit and distributions of 9.64 cents are unchanged.

This suggests that Rural Funds group is trading with a forecast dividend yield of 6.03%, up from its current yield of 5.56%.

Time to buy?

I think Rural Funds Group is one of the best real estate investment trusts out there with its diversity of farm types and geography.

It’s been successful at growing the distributions and share price since it listed in 2014 and could do so for a long time to come.

Rural Funds Group shares could decline leading up to an expected December Fed interest rate increase. Similar to share price declines with Scentre Group (ASX: SCG) and Westfield Corp Ltd (ASX: WFD). After Christmas could be a good time to buy.

I’ve been a happy shareholder for a while and in time I’ll look to pick up more.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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