I think that the Rural Funds Group (ASX: RFF) share price is a buy for income. There has been some insider buying.
Insider buying
Rural Funds announced this morning that Michael Carroll has indirectly bought another 124,862 Rural Funds shares at a price of $2 per unit. That increases his total holdings from 84,734 units to 209,596 units. So he has significantly increased his holding.
That means his total holding is now worth $415,000 at today's Rural Funds share price.
It's always a good sign when people buy shares in their business on the market.
Why I think Rural Funds is a buy for income at today's share price
Rural Funds is an agricultural real estate investment trust (REIT). It owns a variety of different types of farms including cattle, cotton, vineyards, almonds and macadamias.
In this COVID-19 era things are looking tough for the REIT industry with some of them decreasing the value of their properties and tenants negotiating lower rent.
Typically REITs are attractive income investments because they usually generate attractive monthly rental income, leading to steadily growing profits and distributions. I'm not sure that retail REITs and office REITs can be relied on for growing distributions this year.
Rural Funds seems to be in a much better position. Its farms are leased to good operators which are leaders in their field. Some of its tenants include Olam, Select Harvests Limited (ASX: SHV), JBS, Australian Agricultural Company Ltd (ASX: AAC), Treasury Wine Estates Ltd (ASX: TWE) and Queensland Cotton.
Aside from the initial selloff in March 2020, Rural Funds' share price has recovered back to the pre-coronavirus price with its rental earnings unaffected. This allowed Rural Funds to reaffirm its FY20 adjusted funds from operations (AFFO) per unit of 13.5 cents. Stability in this uncertain time is very valuable.
Income potential
Rural Funds aims to increase the distribution by 4% per annum. The REIT achieves this growth through two main avenues. It has rental indexation built into all of its rental contracts which are either a fixed 2.5% increase or linked to CPI inflation, plus market reviews.
The other avenue for growth is productivity improvement investing. Currently 18 of the 38 properties owned by Rural Funds are undergoing development improvements with the aim of improving future income potential. It also should lead to valuation increases. Rural Funds only pays out about 80% of its cash net rental profit each year, allowing the other 20% to be reinvested into productivity improvements.
Rural Funds has guided that the FY21 distribution will be 11.28 cents per unit. At the current Rural Funds share price, this equates to a FY21 distribution yield of 5.7%.
I think there's a lot of income visibility considering Rural Funds has a weighted average lease expiry (WALE) of 11.5 years.
There is potential for further growth if Rural Funds can identify any acquisitions, particularly ones which may benefit from productivity improvements or conversion to higher and better use.
Time to buy shares?
I think at this share price Rural Funds is a very good pick for income investors with a solid starting distribution yield.
In terms of total returns, I like to buy shares when they're trading at close to the net asset value (NAV) or even a discount.
The Rural Funds adjusted NAV, which includes water entitlements at market value, was $1.84 at 31 December 2019. That means the share price is at a 7.6% premium, but I think the NAV will have risen since then, particularly with how low the RBA interest rate is. Who knows when we'll see interest rate rises again?
Rural Funds looks like it'll be a solid long-term buy today, particularly for income investors.
