RFNDF (RFNDF) Q4 2026 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the Rural Funds Group FY '26 Financial Results Presentation. [Operator Instructions] I would now like to hand the conference over to James Powell, General Manager, Investor Relations, Corporate Affairs.

Good morning, and welcome to the financial results presentation for the Rural Funds Group for the full year ended 30 June 2026. My name is James Powell, General Manager of Investor Relations, and I'm joined today by 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 via the methods outlined by the operator, and we encourage our unitholders to participate. Firstly, a brief introduction. The following slide highlights RFF's strategy to generate income and capital growth from developing and leasing agricultural assets, which will be a reoccurring theme in today's presentation. Also throughout the presentation, most metrics will be presented on a pro forma basis, adjusting for contracted asset sales announced in July. On this basis, the portfolio represents $1.8 billion of high-quality agricultural assets that are mainly leased to a majority of corporate and institutional lessees. Looking at the other attributes of RFF. The fund provides investors with quarterly distributions generated from a diversified portfolio of assets, both by sector and climatic zone, which are leased for an average weighted average lease expiry of almost 15 years. Leases are generally triple net and include a range of indexation mechanisms, providing structural rental growth. A range of other portfolio metrics are presented on the left-hand side of this page. This next page provides a summary of the results highlights for FY '26. We are pleased to confirm that FY '26 AFFO and distributions are in line with prior forecasts. At our last results, we outlined a commitment to our investors to identify assets to reduce gearing and improve AFFO and earnings. And shortly, we will provide details on $315 million of contracted divestments, which have achieved these objectives as well as providing other portfolio benefits, which are summarized also on this page. I'll now hand over to Tim Sheridan to present the FY '26 financial results in more detail.

Thank you, James. Good morning, everyone. Over the next few slides, I'll present the financial results for the financial year ending 30 June 2026, providing a summary of earnings, balance sheet and valuation movements for the Rural Funds Group. The first slide of this section provides a more detailed analysis of RFF's key earnings drivers for the period. Net property income from leased assets increased 6%, up $5 million to end the period at over $100 million of net property income. The increase is mainly due to additional rent being generated from the lease of macadamia orchards, which are being developed as well as annual lease indexation mechanisms. Net farming income, that is the operating result on approximately 16% of the assets, which are operated by RFF, provided a positive contribution for the period and an increase on the FY '25 result. This was driven by higher cotton yields on operated cropping properties compared to forecast. Offsetting these results, there has been a decline to the 2026 macadamia price from $4.25 per kilo to $3.80 per kilo. This information was received at the end of July, which has caused a reduction to the accrued result from this segment. Overall, we have recorded a greater contribution to farming income in the second half, in line with the timing of various crop harvests as foreshadowed in the half year results. From an expense perspective, fund expenses were largely in line with the prior period. However, interest on debt increased by $4.6 million, largely due to a decrease in the interest that is able to be capitalized, reflecting the completion of various asset development programs. Adjusted funds from operations, the net cash earnings measure of the group, increased to $45.4 million or $0.117 per unit, in line with forecast. Earnings for the group, which includes noncash items such as asset revaluations and mark-to-market of interest rate swaps, were significantly higher than the prior corresponding period at $124 million or a $100 million increase on the prior year. The principal drivers were revaluation gains for asset sales, which have been contracted at premiums to book values. Finally, on this page, RFF paid 4 distributions during the year, totaling $0.1173 per unit, in line with forecast. The payout ratio of 100.6% reflects the greater AFFO generated during the period and the third consecutive year, the payout ratio has improved. Consistent with prior presentations, the next page presents a summarized balance sheet adjusted for the carrying values of water entitlements within the fund. The table also includes a pro forma column so that we can present the 30 June balance sheet, including the $255 million of asset sales, which were announced in July this year. Some of these assets are yet to settle. However, all contracts are now unconditional. My comments will refer to the pro forma numbers as this is a better reflection of the fund status. The remainder of the presentation will also just refer to pro forma numbers, as James had outlined. During the period, RFF contracted the divestment of 6 properties and 8,754 megaliters of water entitlements. Collectively, these assets were sold at an average premium of 17.9% to their prior book values. The purpose of these asset sales was threefold: to fund forecast development expenditure, to reduce gearing back to within the target range and to improve the balance sheet flexibility for the group. Adjusted total assets reduced by $150 million or 7.3% to approximately $1.9 billion. This incorporates $300 million of asset divestments, partly offset by $150 million of property valuation movements. Those valuation movements were primarily associated with capital expenditure on macadamia and cropping developments that occurred during the period. Adjusted NAV per unit increased from $3.08 to $3.22 per unit, an increase of $0.14 or 4.5%. The most significant balance sheet change is in the debt. Interest-bearing liabilities were reduced from $862 million to $607 million as the proceeds from the announced sales are applied to debt repayment under the pro forma. As a result, gearing reduces from 39.8% at 30 June to 31.8%. That brings gearing comfortably back within the target range of 30% to 35%. The balance sheet is, therefore, better positioned at the end of this program. We have funded the development activity, increased the NAV per unit and reduced debt and restored financial capacity for the group. This slide provides additional detail on the portfolio valuations as evidenced by the recent transactions. Independent valuations were completed for 60% of the portfolio, representing approximately $1.2 billion of asset independent valuations across cattle, almonds, macadamias, cropping, vineyards and water entitlements. Those independent valuations were broadly in line with existing book values, producing a negative revaluation movement of approximately 0.5%. This is consistent with RFF' policy to independently value assets at least once every 2 years. Directors' valuations were applied to the remaining $795 million of the portfolio. Across the total portfolio, the revaluation movement was a positive 1.8%. The primary contributor to this was the gain on the contracted asset sales. The divestments evidence is particularly important. RFF contracted $317.5 million of asset sales at an average premium of approximately 18% to book value. Within that total, 4 cattle properties were contracted for $234 million at an average premium of 25%. Water entitlements totaling 8,754 megaliters were contracted for $74.4 million, broadly in line with the adjusted book value. Two sugarcane properties were sold for $6.3 million at an average premium of 11%. The overall conclusion is that independent valuations remain broadly supported of carrying values by actual transactions, particularly the cattle property sales have occurred at a meaningful premium to those values. This provides tangible market evidence supporting RFF's adjusted NAV. Looking now at the capital management aspect of the group. During the year, RFF completed the scheduled refinance of its syndicate debt facility, including a 2-year extension of the tenor of a $410 million tranche. Following asset sales, this facility was reduced by $60 million in July 2026 and the facility limit is expected to reduce further as the remaining asset sales settle. On a pro forma basis, RFF has total facilities of $891 million and drawn debt of $590 million. This provides approximately $301 million of undrawn headroom compared with $46 million at 30 June '25. This pro forma headroom is more than sufficient to fund the $47 million of committed capital expenditure forecast for FY '27. And therefore, the facility limit is expected to reduce further after the asset sales settle. The reduction in forecast capital expenditure from $116 million in FY '26 to the forecast $47 million in FY '27 reflects the fact that the major development program are now either complete or well progressed. This is an important transition for the group. The portfolio is moving from a period of relatively intensive development expenditure towards a lower level of capital committed expenditure. The key banking covenants remain comfortably within their limits. The pro forma loan-to-value ratio is 43.7% against a covenant of 60%. The interest cover ratio is 3.26x against a covenant of 1.5x. The weighted average cost of debt for FY '26 was 4.69% compared with 4.79% in FY '25. Following the asset sales, a significant 82.3% of debt is hedged or fixed on a pro forma basis. The average hedge maturity at 30 June 2026 is 3.3 years. Taken together, these metrics demonstrate that RFF has sufficient liquidity to meet committed development capital expenditure and substantial covenant headroom. This final slide provides more detail on the maturity profile of the facilities and interest rate hedges. The chart on the left-hand side provides detail of the debt facility limit and expiries, which I've noted on the prior slide. On the right-hand side, the chart shows the interest rate hedging profile. Approximately $409 million is hedged in FY '27 and $410 million is hedged in FY '28, reducing gradually thereafter as individual hedges mature. The weighted average hedge rate is approximately 2.7% in FY '27, falling to around 2.2% in FY '31 and FY '32. These hedges exclude the applicable bank margin but provide visibility and protection over RFF's base interest rate costs. The key message is that the combination of reduced gearing, 82% fixed debt, $308 million of headroom and strong banking covenants provide a sound position for the Rural Funds Group. This leaves RFF fully funded for its committed capital development expenditure program and it's better placed to manage interest rates and refinance risk while retaining balance sheet flexibility. I'll now hand over to David Bryant to provide a portfolio and strategy update.

Good morning, ladies and gentlemen. This is David Bryant speaking. Moving now to the portfolio and strategy update. This section focuses on RFF's management plans for agricultural assets. The image on this slide shows one such example with the developed water storage that supports an irrigated cropping area at the Kaiuroo aggregation in Central Queensland. The development program at Kaiuroo is being conducted in multiple stages and is designed to expand irrigated cropping areas with a particular focus on the grow-on cotton production system, which generated very good cotton yields on 2 other cropping properties, Yarra and Lynora Downs, as highlighted earlier in the presentation. This is a good example of RFM's strategy in practice, identifying assets where productivity can be improved such as by investing in water and cropping infrastructure and creating the potential for higher income and long-term growth. Another good example of this strategy is Rewan, one of RFF's first cattle property acquisitions purchased in FY '16 for $31 million. In June '23, RFF acquired Wyseby to aggregate with Rewan. And as recently announced, this aggregation has now been sold. Sale outcome was supported by a combination of higher land values and productivity improvements led by RFM. Those improvements included pasture improvement, increased cultivation area and additional water points, all targeted at lifting the income earning capability and value of the property. Rewan was initially leased to an RFM subsidiary, while development works commenced and a long-term third-party lessee was identified. In 2019, it was leased to Australian Agricultural Company for 10 years at a value of $43 million, representing a 38% uplift on the purchase price. With the settlement of the Rewan sale shortly, the asset has generated a 22% internal rate of return and sale proceeds 46% above book value. This case study demonstrates 2 important points from farm development, the potential for improved leasing outcomes and higher total returns. As outlined by Tim Sheridan, a significant feature of the financial results is the contractual divestment of $315 million of assets in FY '26. These sales are in addition to $57 million of assets sold in FY '25, providing a total of $373 million of assets sold over the past 2 years. The majority of the assets sold to water entitlements and cattle properties. These divestments have been achieved at an average 15% premium to prior book values, providing further support for RFF's asset valuations and adjusted NAV. Importantly, the water was surplus to portfolio requirements and not part of leases to RFF's existing properties. These water entitlements were progressively sold, achieving 134% premium to the purchase price. While delivering good capital growth for RFF, the income from annual water allocation sales has been modest in recent years and below RFF's cost of debt. Using the proceeds from the sale to repay debt improves AFFO. Similarly, the cattle properties achieved an average premium of 102% on their purchase prices. The farms sold, Rewan, Cobungra, Wyseby and Cerberus, were selected for divestment because many of the productivity improvements that RFM set out to achieve at acquisition are largely complete. Their sales allow RFF to realize the value of carrying out these improvements as well as to capitalize on the broad-based capital growth within this sector, which is unlikely to be as high in the next 10 years as it was in the prior decade. For this reason, additional asset sales are planned during FY '27 as it is prudent for RFM to recycle capital from assets that have performed very well into acquisitions that have potential for more accretive going forward. As well as being one of the first cattle properties acquired by RFF, Rewan was also one of the first natural resource predominant assets acquired by the group, targeting higher capital growth through productivity improvements. This marked the start of a period of numerous similar acquisitions by RFF. The benefits of this strategy started to emerge in FY '21 with higher earnings being generated by RFF. In fact, in 5 out of the past 6 years, RFF has generated over $0.30 per unit of earnings, much of it from capital growth. This significant capital growth in net assets when combined with the total distributions paid to investors since listing have created an internal rate of return of 17% over the past 12 years. I'll now provide an update on 2 key developments that are ongoing, Rookwood Farms and Kaiuroo. At Rookwood Farms, an additional 694 hectares of macadamias are being planted, which is presently not subject to a lease. Planting is expected to be completed this calendar year, and RFM is working to identify a lessee for this new planting in the same way as the previous 3,000 hectares were leased. Development work is also underway on the Kaiuroo property in Central Queensland. In the north of the aggregation, irrigation development is underway. There's 380 hectares of irrigated cropping area supported by a 5,400 megaliter water storage, which are complete and contributed to the FY '26 AFFO. Stage 2 includes a 3,600 megaliter water storage and 120 hectares of pivot irrigated cropping area. This is expected to be completed over the next few months and is forecast to generate AFFO in FY '27 through the planting of annual crops. The development of Stage 3 will also commence shortly, which includes another water storage and irrigated cropping areas. These developments are targeting AFFO generation in FY '28, providing a path to greater income generation from Kaiuroo over the next 2 years. Once fully developed, RFM will seek a lessee for this asset. This slide brings the development and operated asset pipeline together in one table. The key message is that farm development provides greater income and capital growth potential to the Rural Funds Group. Farms can also be operated to generate income while they're being developed for leasing. The final page of this section highlights sustainability updates and emission disclosure published in the FY '26 annual report. For the first time, RFM has released the annual report at the same time as the broader financial results as we prepare our process for mandatory climate reporting in future years. Various sustainability initiatives are being undertaken by RFM, and we've presented case studies on how we are using technology and other advancements to drive both sustainability and productivity gains, which may be of interest to unitholders. One such technology is autonomous vehicles. The image on this slide shows an autonomous tractor mowing the grass area between tree rows in a macadamia orchard. Following a successful trial, RFM plans to acquire additional units for both Maryborough and Fitzroy orchards with further deployment expected during 2027. This is an example of how RFM is applying technology in this case on behalf of the TRG lessee to improve productivity and operational efficiency across the portfolio. For FY '27, RFF forecasts AFFO of $0.117 per unit and distributions of $0.1173, both unchanged from FY '26. The absence of growth in AFFO is disappointing and primarily reflects revised forecast from operated farms, but the most significant impact is derived from the lower macadamia price, which was advised to growers at the end of July. Additional factors include a forecast yield reduction on dryland wheat and chickpea crops in Central Queensland, influenced by dry seasonal conditions. And lastly, additional tax, albeit this will attract franking credits, which may be distributed to investors. The forecast distribution of $0.1173 per unit represents a payout ratio of 100% and a forecast distribution yield of 5.4% based on the closing price of $2.18 per unit. Looking ahead, RFM remains focused on completing development activity and increasing the fund's capacity to pursue opportunities that support earnings. Before closing, we would also like to highlight the upcoming retail investor asset tour following feedback from our unitholders during the retail investor roadshow held last year. Unitholders are invited to attend the tour of the Rosebank Vineyard in Victoria's Grampians region on October 1, 2026. The tour will depart from Melbourne and unitholders can scan the QR code to register their interest or e-mail our investor services team. For those who can't travel to Melbourne, we will endeavor to arrange tours in other states in the future. Now I'll invite questions from attendees.

[Operator Instructions] And your first question comes from Mithun Rathakrishnan of CLSA.

Just on the Rookwood leasing, so the 600 hectares unleased, I appreciate you provided some timing on completions. Just how do the lower macadamia prices affect the current leasing conditions with the potential tenants? Do you see any challenges here on completion just to secure a long WALE tenant at good pricing?

Thanks for that. It's a good question. I mean the lower macadamia prices would be a deterrent for people buying or leasing mature orchards at this point in time for obvious reasons. They're just going to generate less revenue while we move through the cycle. But macadamias are an agricultural commodity. They move in cycles, more of a sine wave than the sort of annual volatility that you get from annual crops. So what we'll see in this cycle is probably a few years of lower pricing, and it will work its way back up as demand increases, substitution encourages greater use and also supply will diminish as older orchards are not renewed. So we would expect that over the next few years, we'll start to see an increase in the price and the prospects for the leasing will probably improve and coincide with the time when the orchards are at that sort of 3- to 4-year phase and ready for a handover to a lessee.

Yes. Okay. That's good color. And just another question. I can see that you've got pro forma headroom roughly $300 million, and you cited around $47 million of CapEx in 2027. Are you able to provide some color on how that additional balance sheet capacity will be deployed, maybe some timing or just a steer on the near-term outlook?

No, I'm sorry, we can't for a range of reasons, I suppose. We can see some opportunities, and we don't want to telegraph them to the market. We can see some good opportunities. But needless to say that the capacity will not be wasted. It will be deployed one way or another with the object of increasing the FFO generation per unit. And that's the absolute priority. The result or the forecast that we've given, the guidance we've given just now is a disappointment to us, but we think there's opportunities to lift that during the coming -- during this financial year.

[Operator Instructions] And your next question comes from the line of Cody Shield of UBS.

Just a question on CapEx. So I can see you've got the FY '27 number there. But how should we kind of think about the CapEx into the medium term? I mean, is it reasonable to assume it should sit around a similar level to '27? Or do you think it will be lower?

Thanks, Cody. I think it will continue to decline. So you could probably assume about $30 million in '28 and then declining to minimal CapEx by FY '30. So just a gradual decline.

Got it. That's great. And then just on the FY '27 AFFO number. Can you provide a bit of a steer on what kind of headwind the macadamia price and the yield reduction caused just in terms of the cents per unit? Like where would that have been had that not happened?

Yes, it's a good point. It would have been much closer to about $0.125 per unit had we not have had the macadamia price reduction and the impact of some dryland crops in Central Queensland that haven't performed as well because of the dry season.

And there are no further verbal questions at this time. I'll now hand back to James Powell to address any webcast questions before heading to closing remarks.

Thank you, operator. [Operator Instructions] We have started to receive a few questions through from unitholders, so I'll just pause momentarily and answer those shortly.

Again, it's David Bryant here. There's some questions here from Gus Roberts. The first question is the observation, which is entirely correct, that AFFO distributions have been flat for the past 5 years. And now that we've now got the macadamia headwind with a drop in prices, and then the question is what changes the growth trajectory from here and how confident are you? So there's a range of factors that have kept AFFO flat for 5 years. Partly, it's the big development program we've had, partly it's the increase in the interest rates. But those things are -- the large development program has, largely speaking, come to an end. The interest rates, well, they're looking like they may go higher yet. We have -- what will drive our AFFO growth going forward is indexation clauses in our leases, rent reviews in our leases and then the completion of the assets that we are operating and developing prior to them being leased out. At the moment, this year, I think about 10% of our AFFO is generated from operational assets. They're primarily macadamia orchards, 1,000 hectares of mature macadamia orchards and then some cotton farms. We would expect that they will provide greater AFFO in future years in the event that they're not leased out. If they're leased out, then that would also contribute to an increase. The reason why we would expect they would supply greater AFFO is I'll speak to the macadamias first. We will see some yield improvements in those mature orchards as some pruning and rejuvenation of these mature orchards starts to flow through. And then we will, in time, expect over the next few years, a recovery in macadamia prices as supply and demand or -- as low prices make high prices. In other words, supply slows down, demand picks up and so forth. That's a typical commodity price behavior. But in addition to that, we've got some balance sheet capacity. We do see opportunity, and we think that we might be able to find opportunities that are very AFFO accretive. But time will tell most probably within the next 12 months as to what we can achieve on that front. So yes, I mean we are very frustrated by the lack of AFFO growth over the last number of years, and we're going to do something about it. The second question from Gus is the J&F guarantee, which has stepped up from $120 million to $200 million. Can you talk us through what's driving that increase and whether there's a natural ceiling? Or is this likely to keep growing? What's driving it is the shift in the Australian cattle industry to a greater production of grain finished cattle. And what I mean by grain finished cattle is the cattle are typically bred on breeder farms and then they're grown out to a weight of about 350 kilos at which point they're sold to feedlots. They're then fed for 100 days and then that produces a better quality product in a number of regards. And there was a newsletter article that I wrote on this, I think, 6 months ago, which I'd urge you to seek out and explains it in more detail. But the -- our international markets prefer cattle that are grain finished. It turns the fat from -- the intramuscular fat and the surface fat from an orange color to a white, and that's preferenced by Australian consumers and international consumers. It's actually taking away the pigments or carotene that's found in grasses. And so the grain takes that out of the animal and improves the presentation. It also takes away a cooking smell that is not liked in Asian markets. So the grain finishing removes that cooking smell that a pure grass-fed product would have. And then next, it actually smooths out the production system for the abattoirs or for the meat processors and marketers. So the whole industry is modernizing and internationalizing and to do this it needs more grain finished cattle. Added to that is the big increase in demand for Wagyu cattle, and they're finished on grain for 400 days. So if you can imagine, you've got a long-term resident in a motel and some short-term residents and there's no vacancies. And so there is actually very -- there continues to be increased demand for this type of product. And so we would expect to see the J&F guarantee grow somewhat into the future as that very well-run business expands.

At this stage, we don't have any further questions either on the line or in written form. So we'd just like to thank you for joining us for the webinar. And as per previous results, if you do have any questions subsequent, please don't hesitate to contact our Investor Services team who are only too happy to help. Thanks very much.

This does conclude our conference for today. Thank you all for participating. You may now disconnect.