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Rural Funds Management: short-sellers ‘play by different rules’ to ASX-listed firms

MD David Bryant tells Agri Investor that a new report by EY confirms that allegations made by Bonitas Research were ‘completely without foundation’.

An EY report commissioned by lawyers acting on behalf of Rural Funds Group has found that accusations made by short-seller Bonitas Research were “not substantiated”.

In a document published on August 6, Bonitas made a series of allegations that Rural Funds Group was quick to dispute. Bonitas was established by Matt Wiechert, a co-founder of Glaucus, the firm that launched a short-selling attack on Blue Sky Alternative Investments in 2018.

Bonitas alleged that Rural Funds Group had included more than A$28 million ($18.8 million; €17.0 million) of fabricated rental income in its reported profits and that it had artificially inflated its financial performance. Bonitas also accused the firm’s management of overstating net asset values by 100 percent.

Rural Funds Group’s share price stood at A$2.35 before the Bonitas attack, dipping to a low of A$1.36 the following day before immediately beginning to recover ground. The share price closed at A$2.17 on August 29.

EY found that the allegations of inflated performance were not substantiated as “the rent received and recognized in the financial statements agrees to the relevant accounting working papers, the executed rental agreements, invoices, and amounts received by Rural Funds Group”.

It also found that the asset values recorded were supported by external valuations obtained by Rural Funds Group.

The firm, which is listed on the Australian Securities Exchange, said it had instructed law firm Clayton Utz to launch legal proceedings against Bonitas for what it called “deliberate and malicious” publication of a document that contained “misleading and deceptive” statements.

David Bryant, managing director of Rural Funds Management – the responsible entity of Rural Funds Group – told Agri Investor it was “distressing” that the firm had been forced to commission a report by EY to rebut the allegations.

“It’s realistic to concede that short sellers have successfully identified shortcomings in other businesses in the past that may not have been obvious from financial statements,” he said. “But having conceded that, the allegations made against us were completely without foundation. They were untruthful and the EY report absolutely confirms that.”

Bryant said ASX-listed companies were “playing by different rules” to short-sellers based outside Australia, such as Bonitas and Glaucus: “We’re obligated to provide responses via ASX releases and we’re subject to the Corporations Act and listing rules, which maintain integrity and a standard of behaviour, whereas the short seller can write anything they wish and exist beyond the reach of the law. That’s a very unfair basis with which to have a debate.

“We felt it was just better to get a conclusive finding of the facts, rather than debate. [We wanted] to take the emotion out of it, take the confusion and the noise out of it, and give people a clear and succinct account of the truth, in a credible fashion.”

He said that if a short seller targeted an agricultural stock because it felt drought would lead to a reduction in earnings, it would be taking a “legitimate” course of action, and this could actually improve the liquidity of the stock and help others to better assess its value. However, he added: “If you’ve got short sellers who are deliberately conducting campaigns that are misleading or deceptive, that’s something that needs to be stopped.”

Kim Morison, managing director of Argyle Capital Partners (rebranded from Blue Sky Water Partners), told Agri Investor this month that Australian agriculture was unsuited to listed vehicles.

Bryant disagreed with this assessment but emphasized that the share market requires consistency. “Our REIT structure gives [investors] that,” he said. “But if you’re going to run a listed business that is not a REIT, or has operational exposure, then the challenge for management is to communicate a proper understanding of the likely volatility to the marketplace so that the business can be valued by shareholders appropriately.”

Rural Funds Group published the EY report alongside its annual results for the 2019 financial year.

The firm reported property revenues of A$66.39 million as of June 30, up 30 percent from the year before. Its adjusted funds from operations stood at A$43.2 million, up from A$32.3 million in 2018.

The firm owns 50 properties across six agricultural sectors: almonds, cattle, poultry, vineyards, cotton and macadamias.

Bryant said the ongoing drought in eastern Australia had made agriculture “hard work” for everyone involved in the sector, but that opportunities still existed for investors.

“I really think there’s been a shift in the understanding of many people involved in the industry and a realisation that climate change is something that has to be considered in business planning,” he said. “My sense is that this has occurred more substantially during this drought than the Millennium Drought.

“But there’s still plenty of farmers out there making money and plenty of assets changing hands. We’re seeing a turnover now in some of the institutional investment, as new investors arrive and some more established investors are choosing to sell their assets and move on to something else as they reach the end of that 10-year investment cycle.”

Bryant added that the firm had no immediate plans for further acquisitions, but that it continued to explore opportunities, with a particular eye on cattle, cotton and macadamia properties.