The ASX passive income stock Rural Funds Group (ASX: RFF) could be one of the most underrated businesses in Australia within the S&P/ASX 300 Index (ASX: XKO).
I'm not expecting it to generate massive capital growth in the next year or two, but the farmland real estate investment trust (REIT) looks like a great buy right now.
There are two reasons why I think it's a great buy today, so I'm going to outline them below.
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Strong income potential
Owning REITs is a great way to own commercial property, receive passive income and potentially see capital growth too.
The business hasn't given investors a payment cut since it started paying to investors more than a decade ago. Most of those years saw the business increase its distribution by 4% per year. Despite the headwind of higher interest rates, it has been able to maintain its payout at 11.73 cents per unit in the last couple of financial years.
The business is expecting to maintain its annual payout at 11.73 cents per unit in FY26, which translates into a distribution yield of 5.8%.
I like that the ASX passive income stock has a weighted average lease expiry (WALE) of more than a decade, as it means the business has rental income locked in for a long time, giving both security and visibility for investors.
Additionally, I like that the business has a diversified farming portfolio across a number of sectors including cattle, almonds, macadamias, vineyards and cropping. Diversification is both a powerful way to reduce risks and find other opportunities.
Finally, I like that the business has rental growth built into most of its contracts, with those either being fixed annual increases or the growth is linked to inflation, plus market reviews.
Very undervalued?
One of the most useful ways to roughly value a REIT is based on the net asset value (NAV). That tells investors what its business is worth including the property values, the loans, cash and so on.
We can't truly know what the properties are worth exactly unless Rural Funds actually sells them, so the NAV is just an approximate value that is updated every six months.
The latest update from the business was its FY26 half-year result, which noted that the ASX passive income stock's adjusted NAV per unit was $3.10.
At the current Rural Funds unit price, it's trading at a 35% discount to that latest value, at the time of writing, which makes me think this is a great time to buy for the long-term.
