Is the Rural Funds Group (ASX: RFF) share price a buy after it reported its half-year result for the six months to December 2018?
As a reminder, Rural Funds is a real estate investment trust (REIT) that owns farmland and leases it to high-quality tenants.
Rural Funds reported that its adjusted funds from operations (AFFO), the net rental, per unit increased by 7% to 6.4 cents. Total earnings per unit grew by 17% to 7.73 cents – this measure includes the benefit of property revaluations.
For the half-year, the Rural Funds distribution was 4% higher to 5.22 cents.
At December 2018, the Rural Funds property portfolio now has a weighted average pro forma lease expiry of 11.4 years. It has 49 properties spread across six agricultural sectors (cattle, poultry, vineyards, cotton, almonds and macadamias) and many climactic zones.
In terms of its balance sheet Rural Funds had pro forma gearing of 33%, which is in the middle of its target range of 30% to 35%. Rural Funds has forecast capital expenditure of $51.2 million to the end of FY20 to attract additional rent.
Rural Funds did announce that its term debt facility limit has been increased and tenor extended to include expiries in two tranches, a $200 million three-year facility which expires November 2021 and a $100 million five-year facility which expires in November 2023.
Rural Funds also said that it has increased the frequency of rent reviews following new (mostly cattle) acquisitions and it is targeting continued geographic, climactic and sector diversification.
Rural Funds Guidance
Rural Funds re-iterated its guidance for FY19 of AFFO of 13.2 cents per unit and a distribution of 10.43 cents per unit, which is an increase of 4% compared to FY18.
Rural Funds also announced its distribution guidance for FY19. The REIT guided another 4% distribution increase to 10.85 cents per unit and is in line with the growth target.
Is Rural Funds a buy?
Based on a share price of $2.20, it's trading on a FY20 forward distribution yield of 4.9%. This was a solid and dependable result. However, it's trading at a premium of more than 25% to the underlying net asset value (NAV) per unit.
I think Rural Funds is one of the best options for reliable income on the ASX, but the current premium seems to be expensive for investors wanting strong total returns. I look forward to buying more on any material share price weakness.
