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Rural Funds responds to scathing Bucephalus report

In morning trade the Rural Funds Group (ASX: RFF) share price has rebounded slightly after its management team responded to a second scathing research report.

In morning trade the agriculture-focused property group’s shares have climbed 4% to $1.69.

What did Rural Funds announce?

Last week Bucephalus Research alleged that Rural Funds’ assets were being inflated through financial engineering and creative accounting and labelled the company as a Ponzi scheme that could collapse at any time.

This sent the Rural Funds share price crashing lower, leading to it  recording a decline of 19% over the final two days of the week.   

This morning the embattled property group responded to the research house’s report and advised that it “remains of the opinion that the claims are substantially similar to those made in recent documents and again rejects the claims made in the Bucephalus Document.”

The company then picked out a number of specific claims to refute. These include:

“The [JBS] deal allowed RFM to use RFF money to take a 100% equity stake in J&F at no cost. This gives RFM any upside, and a 1% fee the credit instrument issued to RFF, leaving RFF exposed to the downside.”

The company advised that “This statement is false and misleading” and pointed investors to its Retail Offer Booklet and Explanatory Memorandum issued in July 2018.

The Bucephalus report also claimed that Rural Funds is booking assets expenses as asset improvements.

Management responded by saying that the “statement is false and misleading” and that “costs may only be capitalised in the event that they result in future economic benefits to the asset. RFF capitalises costs relating to capital improvements on the properties. These capitalised costs attract additional lease revenue and have been audited by PricewaterhouseCoopers.”

And in response to the company being labelled a Ponzi scheme, management dismissed this and stressed that only cash generated from leasing assets are used for distributions to unitholders.

It said: “RFF has raised capital to acquire new income generating assets. Investor distributions are funded by cash, which is generated by leasing assets, not from capital raised from investors. RFF’s FY19 adjusted funds from operations payout ratio was 78%, which means distributions are sufficiently covered by operating cash flows with surplus cash flow to reinvest or reduce debt.”

The company concluded by reiterating that each released document is false, misleading, and speculative, and encouraged investors to consider carefully the full rebuttal of these claims.

It also reminded investors that Rural Funds Management “has commenced proceedings in the Supreme Court of New South Wales to demonstrate the false and misleading character of the Bonitas allegations, which allegations have been slavishly repeated by Bucephalus.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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 Scott Phillips.

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