Is the Rural Funds Group (ASX: RFF) share price a buy after its latest acquisition?
Rural Funds Group is a real estate investment trust (REIT), it's the largest agricultural landlord listed on the ASX. It owns a number of farms in different sectors including cattle, poultry, cotton, almonds, macadamias and vineyards.
After the market had closed yesterday it announced it is contracted to acquire 'Cobungra', a 6,486 hectare cattle property in Victoria.
The REIT announced that Stone Axe Pastoral Company, a Wagyu producer that leases two other properties from Rural Funds, has entered into a ten-year lease with a rent review in year five. Management said the lease rate is consistent with existing cattle property leases.
Pleasingly, the property has the potential for productivity enhancements with development capital expenditure attracting additional rent.
The purchase price, excluding stamp duty, is $35 million and will be funded by Rural Funds' debt facility. The property is expected to settle in March 2019.
Is it time to buy Rural Funds?
I believe that Rural Funds is the best REIT on the ASX. Farms don't really deteriorate or need updating in the same way that shopping centres, warehouses or office buildings. Farmland has been useful for hundreds of years and it's easy to see Rural Funds' assets being useful for at least decades ahead.
I like that the tenant takes on all of the operational risk, although Rural Funds owns plenty of water entitlements for tenants to use.
A key attraction about Rural Funds is that it has rental indexation increases built into all of its contracts that are linked either to CPI inflation or a fixed 2.5% increase. This allows Rural Funds to forecast an annual increase of 4% to the distribution, which it has achieved since it listed.
It currently has a distribution yield of 4.7% for FY19 and is trading at a sizeable premium to the underlying assets. I think Rural Funds is a great income choice, but the premium means it may not be great for total returns for now – although it remains to be seen what the new adjusted NTA is in the upcoming half year report.
