The Rural Funds (ASX:RFF) share price has gone up 20% in 2021. Is it still a buy?

Rural Funds has performed strongly this year. Is it a buy?

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The Rural Funds Group (ASX: RFF) share price has risen by 20% over 2021. It has been a market-beating performance by the real estate investment trust (REIT) considering the S&P/ASX 200 Index (ASX: XJO) has only risen by 10.5% over the same time period.

Rural Funds is an agricultural farmland REIT which owns a diverse portfolio across almonds, macadamias, cattle, vineyards and ‘cropping’ (sugar and cotton).

What has been influencing the Rural Funds share price in 2021?

Rural Funds has seen a steadily climb of its share price over the last ten months. Indeed, it has gone up more than 30% since 24 February 2021.

A few months ago the business released its FY21 result which showed growth of the distribution for investors and an increase of the underlying value.

FY21 saw the pro forma net asset value (NAV) rise by 13% to $2.20. It generated 11.9 cents of adjusted funds from operations (AFFO) per unit – the rental profit – and paid a distribution per unit of 11.28 cents, which was an increase of 4%.

Management have a goal of increasing the Rural Funds distribution by 4% per annum. Rural Funds has guided another 4% increase in FY22 to 11.73 cents per unit.

The Rural Funds share price has continued to rise as it announced more acquisitions.

Recent acquisitions

On 8 November 2021, it announced that it was buying properties including a 1,917 hectare cattle and cropping property and a 4,130 hectare cropping property. Included with those acquisitions it bought were 20,733 ML of water entitlements which it plans to use to improve the productivity of the properties, including expanding irrigated cropping areas and pasture improvement.

It also announced the acquisition of two macadamias orchards totalling 475 hectares of land, located in Queensland. These mature orchards immediately added to income generation but still have the potential for improved yields and expansion of the planted area.

The above acquisitions led to Rural Funds changing its FY22 AFFO forecast to 11.8 cents per unit.

On 29 November 2021, Rural Funds announced that it had exchanged contracts for a 27,879 hectare cattle and cropping property aggregation. There is potential here for productivity improvements, according to Rural Funds. This acquisition came with 12,448 ML of water entitlements, which Rural Funds plans to use to improve the productivity, including expanding irrigated cropping areas and increasing the cattle carrying capacity through pasture improvement and additional water points.

Earlier this week, Rural Funds proposed the idea of increasing the guarantee to J&F. The guarantee currently generates a return of between 9.73% to 11.25%. If the guarantee is increased from $100 million to $132 million, the FY22 AFFO guidance will be increased to 11.9 cents per unit.

What to make of the Rural Funds share price?

The broker UBS has noted the recent acquisitions and thinks that it will add to earnings by around 8% by FY24.

However, the UBS rating on Rural Funds is only ‘neutral’ at the moment after the strong price run. The price target is $2.78, so the broker is expecting the Rural Funds share price to drop by just over 10% over the next year.

Should you invest $1,000 in Rural Funds right now?

Before you consider Rural Funds, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Rural Funds wasn't one of them.

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*Returns as of January 13th 2022

Motley Fool contributor Tristan Harrison owns RURALFUNDS STAPLED. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended RURALFUNDS STAPLED. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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