RFF.AXRFF.AXASX
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Operator: Good morning, and welcome to the Rural Funds Group Half Year Results Presentation and the Half Year Ended 31 December 2025. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to James Powell, General Manager of Investor Relations. Sir, please go ahead.
James Powell: Good morning, and welcome to the financial results presentation for the Rural Funds Group for the half year ended 31 December 2025. Presenting today is David Bryant, Managing Director; Tim Sheridan, Chief Operating Officer; and Daniel Yap, Chief Financial Officer. After the presentation, we have allowed time to take questions from attendees who can submit a question by typing into the question box and clicking submit. For those dialing in today, to ask a question, please dial star 1 when prompted, and I'll now hand over to our first presenter. Tim?
Tim Sheridan: Good morning, everyone. I will present the financial results for the half before handing over to David Bryant. The first half of FY '26 has been a positive period for the group. Net property income is up 7% and Gearing has reduced on a pro forma basis and FY '27 CapEx is significantly lower compared to the past several years. Independent valuations and asset sales continue to confirm RFF's asset values and both adjusted funds from operations, AFFO, and distributions are on track to achieve full year guidance. Now moving on to the financial results in more detail. The first slide of this section details RFF's key earnings drivers for the period. Net property income from leased assets increased by $3 million to $49 million. The 7% increase is mainly due to additional rent being charged from the development of leased macadamia orchards as well as annual indexation mechanisms that occur in all of our leases. Net farming income represented $1.1 million, mainly derived from favorable dryland cropping and cattle results on Kaiuroo. While this result is an improvement on the prior corresponding period, the second half contribution of this segment is forecast to be significantly higher following the harvest of macadamia and cotton crops. From an expense perspective, fund expenses were in line with the prior period. However, interest on debt increased by $4 million. This was largely due to a decrease in the interest that is able to be capitalized, reflecting the completion of various asset development programs. These results provided net cash earnings or adjusted funds from operations of $21.5 million or $0.55 on a per unit basis. Importantly, AFFO is on track to achieve full year forecast, noting the expected second half skew in farming income. After adding noncash items, earnings of $44 million or $0.113 per unit was generated in first half '26. This is compared to $13 million for the prior period. The favorable result driven by positive revaluations on interest rate swaps as well as the gain on the sale of water entitlements. Finally, on this page, RFF paid 2 distributions during the half totaling $0.0587 per unit, which is in line with forecast. Now looking at the balance sheet. Assets increased marginally during the period as a consequence of development capital expenditure. The adjusted NAV per unit at 31 December was $3.10 per unit, a minor increase of $0.02 per unit, reflecting the mark-to-market of interest rate swaps. Pro forma gearing remained largely unchanged at 39.1% despite $70 million of development CapEx being deployed during the period. This CapEx was funded from the sale of 2 surplus sugarcane properties and excess water entitlements. These transactions demonstrate RFM's commitment to fund capital expenditure with asset sales and ultimately bring RFS gearing back towards the target range of 30% to 35%. Further to this, additional asset sales are expected during the balance of this financial year. This next page provides additional detail of property valuation movements that have occurred within RFF over the past 6 months. Independent valuations were a range for 25% of assets which were in line with book values and consistent with our policy to independently revalue all assets at least every 2 years. On the remaining portion of the portfolio, directors' valuations were applied. The movement in this segment mainly reflects the depreciation of bearer plans in line with accounting standards. Further evidence to support asset valuations is the divestment of farms, which have occurred at or above book value. 2 sugarcane farms were sold for 10% above their book value and water entitlements sold at their adjusted book value. Water is held at cost in the statutory accounts in line with accounting standards. And therefore, this sale provided a substantial gain as they were sold at approximately 2.5x their purchase price. Looking now at the capital management aspect of the group. During the period, RFF's core syndicated debt facility went through a scheduled refinance, providing a tenor extension and an improvement in the bank margin. The core facility remains well within all covenants, including the loan-to-value ratio and ICR. Despite our intention to fund development, capital expenditure program with asset sales, we note that the facility does have sufficient headroom to fund committed CapEx for FY '26 and '27, if necessary. Forecast FY '27 committed capital expenditure compared to the prior 3 years is detailed on this page. It highlights that RFF is now past its peak CapEx requirement for intensive asset development programs with significantly lower forecast CapEx to occur in FY '27. The debt facility is 60% hedged with a reasonable level of hedging locked in through to FY '29. The portion of hedging may also increase as asset sales are completed and debt is reduced, positioning the fund well in the event of any future increases in interest rates. I'll now hand over to David. Thank you.
David Bryant: Good morning, ladies and gentlemen. I'll provide a portfolio and strategy update for the Rural Funds Group. Starting this section is a photograph of the Queensland property Kaiuroo, shown in the image or the first stage developments, which were detailed in the prior results presentation and are now complete, including pumping infrastructure, a water storage and irrigated cropping area. Similar developments will be inducted on different locations on Kaiuroo over the next 18 months. Once fully developed, this property will be more profitable and more attractive to potential lessees. Kaiuroo serves as a useful example of the broader strategy for the Rural Funds Group to generate higher returns through asset developments using RFM's farm development expertise while maintaining a majority of lease income from a diversified portfolio of agricultural assets. The various metrics on this page provide evidence of this approach. Looking more closely at the leasing revenue of the group as at the 31st of December, 83% of RFF's assets were leased for a weighted average lease expiry of 13.2 years. The largest lessees are shown on the left of this page and include high-quality institutional grade counterparts. Revenue is also diversified by agricultural sector and indexation mechanisms. As noted at the start of this section, the Rural Funds Group seeks higher returns through asset development opportunities. Assets in this category are presented on this page and include those being held for potential future development currently under development and properties for which the developments have been completed. Overall, these assets represent $342 million or 17% of the portfolio. Importantly, the majority of these assets are able to be operated by RFF and contribute farming income. Two sectors providing a material contribution to farming income in FY '26, our macadamias and cropping. Macadamia orchards on 2 aggregations will be harvested over the coming months and the harvest of irrigated cotton fields will occur over April and May on Kaiuroo and on Lynora Downs. Turning to additional income-producing opportunities for the Rural Funds Group. RFM will shortly provide documentation for unitholders to approve a further increase to the J&F guarantee. The guarantee is a security arrangement, which supports the cattle finance facility for the Rural Funds Group lessee, JBS, and has been in place since 2018. As a result of growth in JBS' business, increases to the J&F guarantee have been previously approved by unitholders in 2020 and 2022, shown in the chart in the top left. Unitholders will be asked to vote on 2 increases, the second being contingent on asset sales, which ensures that RFF's pro forma LVR does not increase. Importantly, the increases to the J&F guarantee are accretive to RFF providing up to an additional $0.01 per unit of AFFO on a full year basis, assuming the approved increases are fully utilized. Documentation is expected to be provided to unitholders in March '26, and a separate investor webinar will be held to provide more details on the resolutions. Finally, the last page of this section summarized the sustainability updates, which were provided in the FY '25 annual report, including emissions, which have been disclosed by the group for several years. Now moving to the outlook and conclusion. In summary, the results presented today represent a business as usual set of disclosures. We have made some progress on asset sales, but intend to do more as evidenced by our clear statements that capital expenditure programs will be funded by asset sales. Capital management is ongoing with appropriate debt headroom and hedging in place. And finally, guidance is reaffirmed both for AFFO and distributions. Following the retail investor road show RFM held last year, we are offering our retail investors the opportunity to participate in an asset tour at a Victorian vineyard in late 2026. If this is of interest, I encourage you to register via the QR code or directly with our Investor Services team. Thank you for listening, and I now invite questions from attendees.
Operator: [Operator Instructions] Our first question will come from the line of Cody Shield with UBS.
Cody Shield: Just firstly, on the $80 million of asset sales you look to do as part of the J&F guarantee piece. What kind of assets would you be looking to divest there? And what kind of time line would you be looking to achieve that in?
Tim Sheridan: Cody, it's Tim speaking. It's further water sales. So we still have some high security water entitlements which haven't been sold, and it's a couple of the low-yielding cattle properties. So asset sales, additional asset sales, they're well progressed. We're targeting selling approximately $200 million worth of assets over the next, call it, 12 months, and they're just all processes are ongoing for those.
Cody Shield: Okay, that's clear. And then just on the scheduled refinance, could you provide some flavor on where the overall margins were prior to this and where they sit now?
Daniel Yap: Cody, it's Daniel here. So we went through the refinance back in November and December last year. So we did see some savings in margins compared to the previous tranches. So we're probably seeing about 5 to 10 basis point decreases on those respective margins.
Cody Shield: Okay. Daniel, maybe just the last one for me on just where yield is sitting across the book and what you're seeing in the way of transaction evidence?
Tim Sheridan: So we've offloaded about $65 million worth of assets in the past 6 months. They have all occurred at or above book value. So we sold a few sugar can farms, which were at about a 10% premium to book value all the water is transacted at book value, the adjusted book value because water is held at cost. And then beyond that, the process we're going through to sell some cattle assets, we're confident that we will achieve book values on those. So I think it's -- we're not seeing any significant increases in asset values, what we're seeing a bit of a plateauing, but it's really supporting our asset base.
Operator: Our next question comes from the line of James Ferrier with Canaccord Genuity.
James Ferrier: Just a follow-up from the first question around the asset divestments associated with the J&F guarantee increase. You've got that $34 million of New South Wales River water contracted to divest in the second half. Is that included in the $80 million? And I guess you could add on Cobungra, which is in the market that probably gets you 80% if those 2 assets qualify?
Tim Sheridan: Thanks, James. It's Tim. So at the full year results, we had flagged that we were going to sell $200 million worth of assets. We're now targeting at selling $260 million worth. So we've increased it because we still want to get our gearing back towards the target range of 30% to 35%. And so that we've sold $60 million during the period, we still have about $20 million, call it $22 million of high security water that has not yet been sold. We will look to sell that. And then beyond that, we've got Cobungra, which is on the market, and we have some other cattle assets we're looking at.
James Ferrier: Yes. Understood. Okay. And so based on those plans, the gearing would reduce to that 30%, 35% range?
Tim Sheridan: Yes, it would still be towards the upper end on a pro forma basis, so call it 35%, certainly won't get the 30%. That's on the basis that we do the J&F increase. Initially, that J&F increase that we're proposing, we're only looking to take that to $160 million. We're seeking approval to $200 million, but that will occur over time.
James Ferrier: Okay. On Slide 15 with respect to the development portfolio there, what's the implied yield on those assets as it sort of stands within the FY '26 guidance? I mean, some of those assets would be are applicable to no income?
Tim Sheridan: That's right. If we look at the ones that we're operating, so our farming income for the first half was about $1 million. On a full year basis, we're expecting that to grow to just over $5 million. So the ones that we're operating, we're anticipating to generate $5 million of farming income. And then you can divide that by the asset they use to give you the yield. But we're forecasting about a $4 million income from farming in the second half. So $1 million in the first and then $4 million in the second half.
James Ferrier: Okay. That's helpful. And what's the outlook as it stands today? What's the outlook in terms of your leasing or divesting some of those assets?
Tim Sheridan: Yes. So with Kaiuroo, so Stage 1 is completed. We still got to do Stage 2 of the developments. That will occur over the next or call it, 18 months, 12 to 18 months depending on the wet season and rain. So Kaiuroo would then be fully developed at the end of that. In terms of the Macadamia, that 670 hectares we're planning, it will be fully planned by the end of this financial year. So then it's developed and ready to lease out. They're probably the 2 most significant in terms of when they are actually leased out. It depends when we can find the right or the right counterparty at the right rate. So that may take more time.
James Ferrier: Yes. Understood. And then last question for me just on the proposed increase in guarantee previously increased that instrument in the past. What's interesting from my perspective is that we've got some pretty extreme volatility in cattle prices over the past 5 years or so. And I'm interested in what you've had around the variability in the income stream to RFF through that period. What sort of variability you've seen from JBS as the operator through that price volatility period?
Tim Sheridan: Yes. It's a good question. Because of the structure of that transaction, we have seen no -- we haven't seen any variability in returns. So that guarantee is providing about a 10.5% cash yield on it, no variability. It's been we simply pay a fee based on guaranteed earnout. What is happening because of the increase were seeing in cattle prices and because of demand for Australian beef, JBS is simply wishing to feed more cattle and the purchase of those cattle is costing them more. So that is why they're seeking an additional guarantee amount. In terms of the counterpart, JBS, they've been fantastic. It's a highly acquisitive transaction for RFF with a strong counterpart.
Operator: Our next question on the line of Thomas Ryan with Moelis Australia.
Thomas Ryan: Just a question on yields in general across each of the segments. Could you just talk through where you're still finding that that's too low? And just noting your words, how you presented these in your reports just in terms of those assets that you might look to divest outside of the $80 million?
Tim Sheridan: Yes. Slide 29 is probably illustrates this best. So where we've got natural resource. So these are cattle properties or dryland cropping properties. They have relatively low yields. So call it a 5% -- we can get about a 5% lease rate. That suggest a backdrop of interest rates at, call it, 5.8%. So those types of assets at the moment on a fully levered basis that's accretive to earnings. But because the gain in cattle land base has been so significant over the last 4 years, it's hard to see that cap rate of, call it, 5% increasing. And it's hard to see the capital growth being as significant as it has been. So they're the types of assets we're looking to divest. On the left -- on the things like the J&F guarantee or the permanent planning, they all have much higher cap rates and much more long-dated leases. So we don't see any variability in those lease rates and those assets are all accretive based on current interest rates.
Thomas Ryan: And just one more question on your hedge profile. It hasn't really changed from the full year. Can I just get a clarification over how you can see that going out for the outer years and also be sort of the state of your existing facilities and how you're thinking about the headroom?
Daniel Yap: Yes. It's Daniel here. So we are continuing to monitor the hedging market on a regular basis. At this stage, we are approximately 60% to 70% hedged. Particularly with asset sales in the pipeline, that could potentially increase. But we are looking for opportunities in the mid- to long term sort of period where rates come back to -- or hopefully come back to what we said we would target. So it is something that we'll continue to monitor as we look to extend our hedging profile.
Thomas Ryan: And just the last question if I may. Just noting the result from TWA the other week. How are you thinking about their opinion in general?
David Bryant: We don't think about them at all because we're not investing any more money in them. I mean it's an industry that's probably got 25% overcapacity globally and that is going to take capacity destruction to reduce the oversupply, and it's going to take time for consumption to increase very slowly. So that industry is going through a very deep cycle. Our vineyards, they're performing very well. We've got the leases that we renewed them last year such that now, I think we've got 13 years to lease expiry. The assets are performing very well for treasury. They're part of their core brands, particularly the high-end brands. So we're very relaxed about continuing to own those assets. There's indexation clauses in them. And in 13 years' time, I hope for the sake of everybody in the wine industry, that it's through the cycle.
Tim Sheridan: And I'll just add those in any make up 5% of our forecast revenue. So it's quite a small segment.
Operator: Our next question comes from the line of James Druce with CLSA.
James Druce: Sorry if this has already been addressed but across the real estate sector, we've seen bank margins come in quite considerably over the last 6 to 12 months, we've seen sort of 20 to 30 basis points improvement. I appreciate you guys didn't have anything expiring for a couple of years but is there -- and you probably have done some recently as well, but can you just talk to what margins are doing for you and any opportunity that you have there?
Daniel Yap: It's Daniel here. So we have been going through an annual refinancing cycle for each of our tranches. So we just went through one of the -- refinance one of our tranches. As part of that, we did see margins come back. But I previously quoted that margins came back about 5 to 10 basis points from the previous margin, which was 2 years ago. So what we'll see as we look to refinance at the end of this calendar year is hopefully a continuation of the decrease in margins.
James Druce: Okay. And do you have a feel for what it is compared to where? I mean are you still looking for another 10 basis points or I mean what can you kind of see in there?
Tim Sheridan: After your comments, James, we'll try and seek another 30 basis points. I think I mean that we see another 10, at least on another on 35, but that's 12 months away.
Operator: Thank you. I'd like to hand the conference to James Powell for web Q&A.
James Powell: Thank you. Just a reminder to our unitholders that have dialed into the presentation this morning, that we'd encourage you to submit a question via the question box which you should be able to see at the bottom screen, and there's a Submit button as well as sometimes falls outside of the aperture. So scroll down and hit Submit so we will answer your question as they come in. We have had a few which is coming already from ours. So I'll hand over to David in the first instance to respond to them.
David Bryant: Thanks, James. There's a few questions that -- there's some very good questions here actually. But anyway, I'll start with the first one, which is why is the dividend the same each year despite net profit being different each year. So our dividend is driven by our FFO, so the amount of cash that we generate each year as distinct from profit. And the distinction -- if you go to Page 7 in the presentation, the distinction is best drawn by looking at earnings for the half year, which was $44 million and FFO for the half year was $21 million. So you've got a big disparity. What you'll see, if you go back through the years is the FFO has been largely consistent but flat. whilst the earnings has been generally significantly higher than the FFO. The difference is explained by noncash items, and it's normally in 90% of the times, it's the property valuations, the revaluations of property, and we've experienced really strong capital growth over the past, I suppose, 5 or 6 years. And that's why the earnings has been high, but it's been moving around because it depends on the valuation cycle, depends on the capital growth and so forth. But the FFO is really the cash we collect minus the expenses. And that stayed fairly consistent, but flat largely. So there's the distinction. And now that leads me to the next question, which it's a very good question, so good, in fact, that we've had it from 3 different people so far this morning, and that is when are we going to increase distributions? The answer is -- one of the question has made the very good point that if we -- is it closing the gap between our share price and NTA, why is that gap there and that perhaps increasing distributions would close that gap. So when are we going to increase distributions? The answer is when FFO increases. When is FFO going to increase? It started to increase. We've got to the point now where our FFO and our distributions are roughly the same, so that we've got about 100% payout ratio. We are achieving growth in income from indexation clauses and a range of other things. We're achieving growth in income, so that growth in FFO, I should say. And so we would expect continued FFO growth. Once we get to 95% or below payout ratio, in other words, once we can get our FFO, so it's higher than our distributions, then we'll have room to move with increasing distributions. Look, I reckon that that's more than 12 months away. But I would hope, but I can't -- it's impossible to be certain because there's a lot of moving parts to this more than 12 months away, but less than 2 years away. But the moving parts that are perhaps obvious to you all, but I won't labor the point here, but the moving parts, of course, are interest rates in particular. And then just the various volatility that you have when you're renting things out, generally, you get the rent, and we would expect that would always be the case, and we would get indexation as well. That's a long answer to 4 questions. So thanks for your patience. Just one moment, we'll just absorb another question here is if asset development drives growth, how does that reconcile with a marked reduction in CapEx? So yes, there's been a marked reduction or there is forecast to be a marked reduction in CapEx because we have not been putting more -- acquiring more assets for development because we have fully utilized the balance sheet capacity. In other words, we've got enough gearing. We don't want any more gearing or any more debt, particularly with higher interest rates and just -- and what is prudent. So that is what's capped the development pipeline. However, what you'll see that we're doing is selling some assets to pursue growth by wanting to finance more cattle in feedlots. So there's more than one way to skin a cat without getting fair in your mouth. And so we're going to drive growth through a different strategy in this higher interest rate environment, and that is by increasing our allocation of capital to the livestock business. I think that's all of our questions. And so I'll say thank you very much for your attendance and for your interest in the Rural Funds Group, and we look forward to continuing the journey over the coming year. Thank you.
Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.