The Australian stock Rural Funds Group (ASX: RFF) has fallen heavily, down 43% from January 2022. The real estate investment trust (REIT) looks like an excellent buy and hold investment forever, in my view.
The business owns various farms in different sectors around the country, including almonds, macadamias, cattle, and vineyards. I'd say farming is probably one of the most Australian business activities.
Farmland has been a useful asset for thousands of years, and I believe it will continue to be important for the rest of my lifetime. I think it's a great contender for being a listed business for decades to come.
But, its longevity is not what attracts me the most to this Australian stock. There are plenty of factors that appeal to me.
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Large asset discount
I like buying businesses at a healthy discount based on their underlying value.
I've identified that the Rural Funds share price has fallen heavily since its all-time high peak in January 2022. That makes it an interesting investment consideration already, in my view.
Businesses like Rural Funds regularly tell investors what their underlying value is with the net asset value (NAV) figure. The number takes into account the value of farms, the loans, the cash, and other assets and liabilities.
The business reported that its NAV was $3.10 at 31 December 2024, so it's trading at a 42% discount to that number. That's a huge, appealing discount at a time when RBA rate cuts are happening and more seem to be on the way.
RBA rate cuts
The Reserve Bank of Australia (RBA) has already cut the cash rate two times this year, and there are expectations that the RBA could cut rates by a further three or four times over the next year, according to economists.
A rate cut could be very help for Rural Funds' finances for a number of different reasons.
A reduction in interest rates could mean lower debt costs and improved net rental profits for the business, which can lead to higher distributions.
The cuts by the RBA may also help the underlying value of the Australian stock by increasing the value of the properties.
Finally, rate cuts may help close the discount between the unit (share) price and the NAV per unit (of $3.10) if income investors are looking for income alternatives to term deposits and savings accounts.
Rental profit growth and the distribution
It's not just a one-off valuation discount that I'm attracted to.
The business has built-in rental growth because nearly all of its rental contracts with tenants either have a fixed annual increase or the rise is linked to inflation, plus occasional market reviews. This helps the rental income steadily tick higher and could help the distribution grow over the longer term.
With the business trading at such a large discount to its reported underlying value, it offers a pleasingly high distribution yield. It's expecting to pay a cash distribution of 11.73 cents in FY26, which translates into a forward distribution yield of 6.5%.
