Liquid agri REIT awaits unit price rise

Twenty five percent of Rural Funds Group’s units have changed hands since the real estate investment trust (REIT) listed on the Australian stock exchange in February, according to David Bryant, managing director at Rural Funds Management, the agri REIT’s manager.

The level of liquidity is promising, particularly as it includes new interest from institutional investors, but the unit price will need to rise further before the REIT can raise new capital to attract larger institutions, according to Bryant.

“We have been meeting a lot of institutional investors, particularly those interested in small cap stocks,” he told Agri Investor. “Most of these investors would prefer to wait for an equity raising before investing in the fund, as this would enable them to acquire a meaningful parcel of stock. ”

“In my mind, the REIT will need to be three times larger to achieve the liquidity that larger investors require.”

Rural Funds Group was listed by way of introduction on ASX on February 14 at a unit price of A$0.75 and closed on Tuesday at A$0.90, but Rural Funds Management will not raise any new capital and dilute existing investors until the unit price trades even higher.

“We need to be trading up a bit and time will manage that but we also need to find the right investment opportunities and I would rather not grow the fund at all if we can’t find the right opportunities,” he said. “The advantage of being listed is that you have all the time in the world because there is no end date.”

Commonwealth Bank of Australia equity analysts put an overweight price target of A$1 on the REIT in May.

Rural Funds Management merged three existing private retail funds to create the A$250 million ($234 million; €172 million) REIT. Ninety percent of the 2,500 investors across the three funds, mostly individuals close to retirement age, approved the decision by vote; up to 10 percent of them wanted a liquidity event but the remainder were happy to maintain their commitments and some even increased them.  The REIT was listed by way of an introduction; no new capital was raised.

The REIT is 100 percent buy-and-lease investments, so before its creation the operating assets of the poultry fund were transferred to a special purpose vehicle.

“Real assets like agriculture impose a steep learning curve for investors and the last thing they need is a proposition that lacks clarity,” said Bryant. “For this reason we decided to keep things simple with the buy-and-lease model.”

“The skills we bring to managing capital are in property management, not the management of farming operations, which is the responsibility of our lessees,” he added. “This model is more easily scalable which will provide returns without taking weather or commodity price risks.”

The funds have been returning distribution yields of around 9 percent annually, although the capital appreciation of the land, an expected kicker in most primary production agri investments, is not a given on all the properties; the infrastructure on the poultry farms actually decreases in value over time.

The poultry assets account for 47 percent of the REIT; the vineyards 14 percent; the almonds orchards 31 percent and the remainder is invested in other assets such as cash.