The Rural Funds Group (ASX: RFF) share price has dropped to $1.75, is it a buy?
Rural Funds Group is a real estate investment trust (REIT) that focuses purely on renting out agricultural property. It is unique as it's the only pure-farmland REIT on the ASX.
There are a number of reasons why I like Rural Funds Group, here are just a few:
Diversified farms and tenants
Rural Funds has a great diversification strategy by having a multitude of different farm types in its portfolio. It has almond, macadamia, cotton, cattle, vineyard and poultry farms.
Nearly all of its tenants are either listed entities or run by the same management that operate Rural Funds Group, which is called Rural Funds Management Ltd. Two of its ASX-listed tenants include Select Harvests Limited (ASX: SHV) and Treasury Wine Estates Ltd (ASX: TWE).
Rental indexation
Rural Funds Group has rental indexation built into all of its farm rental contracts in one way or another. CPI and CPI linked indexation make up 49% of revenue, 7% of revenue is CPI with market review, 11% of revenue is fixed indexation at 2.5% per annum, 29% of revenue is fixed indexation at 2.5% with market review and 4% of revenue isn't linked to indexation.
This gives management, shareholders and tenants certainty about what the rental income will be from all of its farms. This allows it to make accurate predictions about what the adjusted funds from operations (AFFO) and the distribution will be in the short-term future.
Growing stream of income
The built-in increases to the revenue allow management to steadily grow the distributable profit to shareholders.
Rural Funds has grown its annual distribution every year since it listed in 2014 and management has already pencilled in a 4% increase for FY18's distribution
Considering that the trailing yield is currently 5.39%, this is a nice yield to start with.
Time to buy?
Management expect the AFFO (the net rental profit) to be 12.42 cents per unit for FY17. This suggests that Rural Funds Group is trading at 14x FY17's estimated rental cash earnings. I think this is a reasonable price to pay for what could be the best REIT on the ASX with a solid income stream.
