The Rural Funds Group (ASX: RFF) share price has been falling in recent times. With the ASX dividend share getting close to a 52-week low, this could be an opportunistic time to invest.
Rural Funds is a real estate investment trust (REIT) that owns a portfolio of farms across Australia. It has 68 properties located in multiple climactic zones. Those assets are spread across cattle, vineyards, almonds, macadamias and cropping (sugar and cotton).
Why is the Rural Funds share price dropping?
Rising interest rates may be impacting the underlying value of Rural Funds, or at least impacting investor sentiment.
Warren Buffett, a legendary investor, once said about interest rates:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
I'm not exactly sure what the prices of farms will do from here.
We've already heard from Centuria Industrial REIT (ASX: CIP) – which owns warehouses – that its portfolio valuations were down a little but rental growth was supportive.
In FY22, which was the 12 months to 30 June 2022, Rural Funds saw a 24% increase of the adjusted net asset value (NAV) to $2.69, which is the underlying capital value of the ASX dividend share. That implies the current Rural Funds share price is at a 9% discount to this. But, that was before many of the many interest rate rises this year.
The underlying value of the business also includes the fair value of water entitlements.
Increasingly attractive
While the exact underlying value of Rural Funds is up for debate, the distribution yield that it's paying is worth knowing.
The business is expecting to pay a total distribution of 12.2 cents per share in FY23 after its latest 4% annual distribution increase. The FY23 distribution yield is therefore projected to be 5%, which seems attractive even in this higher interest rate environment.
Rural Funds continues to develop its portfolio. For example, it recently announced a 40-year lease with The Rohatyn Group for 3,000 hectares of macadamia orchards forecast to be developed by 2024. A key feature of the lease is an annual indexation within the 1.5% to 2.5% range, plus a profit share above a certain threshold for the duration of the lease.
The ASX dividend share continues to invest in productivity improvements, such as increasing water storage, increasing irrigation area and installing flood protections.
With some of the rental income linked to inflation, investors could see a boost in rental growth during this elevated inflation period.
We all need to eat food, so the underlying demand for produce from farms is likely to be solid. But, it's the tenant that has to deal with the issues relating to operational farming.
Rural Funds share price snapshot
Rural Funds has dropped 23% in the year to date, and it's down almost 10% in the month of December to date.
