Rural Funds Group (ASX: RFF) has announced the details regarding its acquisition and capital raising.
There are several elements to the deal:
Feedlot acquisitions
Rural Funds is acquiring five Australian feedlots and associated cropping land for $52.7 million from JBS Australia.
According to Rural Funds, the facilities it's acquiring has a combined capacity of 150,000 Standard Cattle Units, which represents approximately 15% of Australia's lot fed cattle capability.
Finance lease
Rural Funds also said it wound go into a finance lease with JBS for a term of 10 years with CPI indexation. The lease contains a call option for JBS to buy the feedlots back, and a put option for RFF to sell the feedlots to JBS, at year 10.
Guarantee
Rural Funds will also provide a limited guarantee of $75 million to J&F Australia Pty Ltd that currently acquires cattle for JBS Feedlots. J&F will become a wholly-owned subsidiary of Rural Funds Management (RFM), the manager of Rural Funds Group, however JBS will retain the day-to-day management of both the feedlots and cattle acquisitions for the feedlots.
JBS Obligations
The Australian parent of JBS Australia, Baybrick Pty Ltd, has guaranteed the obligations to Rural Funds Group and RFM. Baybrick has net assets of $2.3 billion and owns Primo Smallgoods. Baybrick's parent owner, JBS, is the largest global protein processor and has a market capitalisation of approximately $8.9 billion on the Brazilian stock exchange.
David Bryant, the Managing Director of Rural Funds Management said "The strategic partnership announced today provides Australia's largest meat processor a consistent supply of grain fed cattle. In turn, the Rural Funds Group has introduced to its portfolio, a substantial and highly capable new counterpart, that will contribute to growth of fund assets and income."
The Capital Raising
Rural Funds is looking to raise $149.5 million through an equity raising and then commit $127.7 million of that to the investments that I wrote about above. Rural Funds also mentioned that it will "allocate" the cash for funding the Comanche purchase it announced two months ago for $16.6 million.
Eligible unitholders will be able to subscribe for 3 new units/shares in Rural Funds Group for each 10 they currently own at a price of $1.95 each.
This price is a 5.8% discount to the currently-halted share price of $2.07 and represents a distribution yield of 5.3% on the guided FY19 distribution of 10.43 cents per unit.
Rural Funds also provided guidance that the adjusted funds from operations (AFFO), or net rental per unit/share, will be 13.2 cents in FY19. The REIT will maintain its payout ratio at 79%.
These transactions will increase the pro-forma adjusted net asset value per unit as at 31 December 2017 to $1.67 and reduce pro-forma gearing to 24%.
Trading of Rural Funds shares will recommence on Friday. The retail entitlement offer will open on 18 July 2018 and close on 1 August 2018.
Should you enter the offer?
RFM, together with Chairman Guy Paynter and Director Mike Carroll, holds around 3.9% of the REIT and has committed to taking up the full entitlement which is around $5.8 million. However, Managing Director David Bryant, who holds 1% of the REIT, will not be taking part.
The offer of $1.95 is still priced at a 16.8% premium to the pro-forma adjusted net asset value per unit. This is quite pricey considering asset prices are already elevated due to low interest rates.
If the share price stays at $2.07 or increases then it's an opportunity to pick up shares at a discount to the recent share price.
For retirees or people just focused on income I think this is a good offer to take part in. However, investors looking to beat the market should at least wait until the end of July to see if the share price drops below the offer price. I will probably take part, but I will also wait until the end of July to see what happens.
