Why I’ll take part in the Rural Funds Group capital raising

Credit: Keith Weller

Rural Funds Group (ASX: RFF) is a real estate investment trust that purely focuses on agricultural property.

The share price has come a long way since its first day on the ASX at $0.75, it’s up 133% in just over three years to $1.75.

It has a diverse portfolio of different farm types including almonds, macadamias, cattle, poultry, vineyards and cotton.

Management have been active with acquisitions and capital raisings in the past and this capital raising is another step towards the growth of the business.

What is the offer?

Rural Funds is looking to raise $78.6 million through a 2 for 9 non-renounceable entitlement offer.

The offer price of the new units is $1.70 per unit, which is a 2.9% discount to the current share price of $1.75.

The offer is fully underwritten by UBS AG Australia Branch, Bell Potter Securities Ltd and Wilsons Corporate Finance Ltd.

The retail component of the offer will open to investors on 14 June 2017 and close on 26 June 2017.

Management have provided guidance for FY18 adjusted funds from operations (AFFO) of 12.5 cents per unit and the distribution will be 10 cents per unit. This means the new units will be trading with a distribution yield of 5.9% for FY18.

What the funds will be used for

The funds will mostly be used to pay down $75.6 million of debt on the balance sheet. This will reduce the gearing from 42.7% to 29.5% on a pro forma basis as at 30 April 2017.

Management have a target range for gearing of 35% with flexibility of 5% lower or higher than that.

A cattle property in Queensland was mentioned as the potential next target as part of the release regarding the capital raising.

Should you take part in the capital raising?

The offer isn’t as much of a discount to the share price as previous offers have been. Indeed, the offer is only 2.9% lower than the current share price.

If you don’t really want to buy more shares in Rural Funds then you could give this a miss.

However, I am fan of Rural Funds – it is my favourite REIT by far. A forecast 5.9% yield isn’t the biggest yield around, but if the distribution can keep growing by at least 4% a year then it should be a solid income choice.

There is no rush to accept the offer. The share price could go under the offer price over the next few weeks, in which case it may be better to buy the shares on the market, rather than from the offer directly.

If the share price remains above the offer price then I will most likely take up my allocation.

Foolish takeaway

Rural Funds Group continues to grow in size, I was pleased to read that the payout ratio would remain around 80% for FY18 which should boost earnings and AFFO over the years to come. I’d be surprised if I didn’t end up taking my allocation of units in this offer.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of RURALFUNDS STAPLED. 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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