Rural Funds Group share price grows 2.5% on a mixed report

Credit: Keith Weller

The Rural Funds Group (ASX: RFF) share price is up 2.5% at the open after it reported its half-year result for the six months to 31 December 2017 today.

Rural Funds Group is the only real estate investment trust (REIT) that invests purely in agricultural property.

Below are some of the highlights compared to the prior corresponding period.

Property revenue increased by 23% to $24.14 million due to rent on development capital expenditure, rent from new acquisitions and the lease indexation.

However, total comprehensive income decreased by 15.5% to $16.75 million and earnings per unit (EPU) decreased by 23% to 6.58 cents. These statistics include unrealised gains (and losses) on property values, which were lower in this period.

Total adjusted funds from operations (AFFO) increased by 21.94% to $15.41 million. AFFO is a metric used to measure cash flow from operations, essentially the net cash rental profit.

However, AFFO per unit decreased by 4.76% due to the issue of new units as part of the $78.6 million entitlement offer which was used to fund the Natal acquisition and reduce debt.

Management reaffirmed the AFFO per unit forecast of 12.7 cents for FY18, which represents an increase of 2.42% over FY17’s AFFO result. AFFO per unit is predicted to be higher in the second half of FY18 due to revenue from the Natal acquisition and the Murrumbidgee high security water allocation sales.

The distribution per unit forecast was reaffirmed at 10.03 cents for FY18, which will be a 4% increase compared to FY17’s distribution. This means the AFFO payout ratio is predicted to be 79% in FY18.

Management also gave guidance that the FY19 distribution per unit will be 10.43 cents, representing a further 4% increase. Rural Funds has a long-term target of increasing the distribution by 4% each year.

Rural Funds reported that gearing was 37%, which is within its target range of 30% to 40%.

The weighted average lease expiry declined from 13.2 years at the end of FY17 to 12.5 years at 31 December 2017, which still provides long-term stability and is one of the highest in the REIT sector.

Rural Funds leadership reaffirmed the ongoing management of the existing portfolio and expansions through acquisitions is the focus. This should lead to earnings and distribution growth, better diversification, improved liquidity and lowering operating costs per unit.

Foolish takeaway

This report wasn’t as exciting as previous ones, but I thought it was a decent one considering the confirmed guidance of AFFO per unit growth in FY18 and further distribution growth in FY19.

I don’t think that the Rural Funds share price is going to grow as strongly in the future as it did in the past, but continued AFFO and distribution growth should grow the share price over the long-term. I’m a happy shareholder and will hold for a long time to come.

Rural Funds is currently trading with a distribution yield of 4.92% for FY18 and 5.11% for FY19. I think it looks like a solid long-term buy for income seekers.

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