Rural Funds Group (ASX:RFF) reported a “positive period” for the first half of FY2026, with higher net property income, pro forma gearing holding steady despite significant development spending, and management reaffirming full-year guidance for adjusted funds from operations (AFFO) and distributions.
First-half earnings driven by leased assets, with farming skewed to the second half
Chief Operating Officer Tim Sheridan said net property income from leased assets increased by AUD 3 million to AUD 49 million, a 7% rise. He attributed the increase mainly to additional rent from the development of leased macadamia orchards and annual indexation mechanisms across leases.
On costs, fund expenses were in line with the prior period, but interest on debt rose by AUD 4 million. Sheridan said the increase was largely due to a reduction in interest that could be capitalized, reflecting completion of multiple development programs.
RFF generated net cash earnings (AFFO) of AUD 21.5 million, or AUD 0.055 per unit, and Sheridan said AFFO was on track to meet full-year forecasts given the expected second-half farming skew. After non-cash items, earnings were AUD 44 million (AUD 0.113 per unit) for the half, compared with AUD 13 million in the prior period. Management said the higher earnings were driven by positive revaluations on interest rate swaps and a gain on the sale of water entitlements.
RFF paid two distributions during the half totaling AUD 0.0587 per unit, which management said was in line with forecast.
Balance sheet: development CapEx funded by sales; more divestments expected
Sheridan said assets increased marginally due to development capital expenditure. Adjusted net asset value was AUD 3.10 per unit at 31 December, up AUD 0.02 per unit, reflecting the mark-to-market movement in interest rate swaps.
On leverage, Sheridan said pro forma gearing was largely unchanged at 39.1%, even though AUD 70 million of development CapEx was deployed during the period. He said that CapEx was funded by the sale of two surplus sugarcane properties and excess water entitlements, underscoring the fund’s stated plan to fund development with asset sales and move gearing back toward its 30%–35% target range. Management also said additional asset sales were expected during the balance of the financial year.
Regarding valuations, independent valuations were arranged for 25% of assets and were in line with book values, consistent with the policy to independently revalue all assets at least every two years. Directors’ valuations were applied to the remainder, with movements largely reflecting bearer plant depreciation under accounting standards.
Management pointed to transaction evidence as further support for asset values:
- Two sugarcane farms were sold for 10% above book value.
- Water entitlements were sold at adjusted book value; management noted water is held at cost in statutory accounts, and said the sale generated a substantial gain because the entitlements were sold at about 2.5 times purchase price.
Refinancing, hedging, and lower FY2027 CapEx
In capital management updates, Sheridan said RFF’s core syndicate debt facility completed a scheduled refinance, extending tenor and improving bank margin, while remaining within covenants including loan-to-value ratio and interest coverage.
During Q&A, CFO Daniel Yap said the November–December refinancing resulted in margin savings of around 5–10 basis points versus the previous tranches. Asked about broader market margin tightening, Yap said another tranche refinancing is due at the end of the calendar year and management would “hopefully” see continued margin decreases.
Sheridan also said forecast committed CapEx for FY2027 would be “significantly lower” than the prior three years, with RFF now past peak development spending for intensive asset development programs.
On interest rate protection, management said the facility was about 60% hedged through to FY2029. In Q&A, Yap described RFF as “approximately 60%–70% hedged” and said the team continues to monitor hedging markets and may extend the hedging profile, noting asset sales and debt reduction could increase the hedged proportion.
Portfolio strategy: long WALE, development pipeline, and J&F Guarantee proposal
Managing Director David Bryant said Kaiuroo illustrates the group’s strategy: using farm development expertise to drive higher returns while maintaining a majority of income from a diversified leased-asset portfolio. He said the first stage of Kaiuroo developments—pumping infrastructure, water storage, and irrigated cropping area—was complete, with similar developments planned across the property over the next 18 months, which he said should make the asset more profitable and attractive to lessees.
As of 31 December, management said 83% of RFF’s assets were leased, with a weighted average lease expiry (WALE) of 13.2 years, and that the largest lessees included “institutional-grade” counterparties. Bryant also noted revenue diversification by agricultural sector and indexation mechanisms.
RFF’s assets associated with development opportunities—held for potential development, under development, or with development completed—were described as AUD 342 million, or 17% of the portfolio, with management noting many of these can be operated by RFF and contribute farming income.
On farming outlook, management said macadamia orchards across two aggregations would be harvested in coming months, and cotton harvests would occur in April and May on Kaiuroo and Lenora Downs.
RFF also flagged a proposal to seek unit holder approval to increase the “J&F Guarantee,” described as a security arrangement supporting a cattle finance facility for lessee JBS that has been in place since 2018. Bryant said unit holders would be asked to vote on two increases, with the second contingent on asset sales to ensure pro forma loan-to-value ratio does not rise. Management said the increases would be accretive and could add up to AUD 0.01 per unit of AFFO on a full-year basis if fully utilized, with documentation expected in March 2026 and a separate investor webinar planned.
In Q&A, Sheridan said the guarantee has delivered a roughly 10.5% cash yield with “no variability,” because RFF receives a fee based on the guarantee amount. He said JBS is seeking a higher guarantee due to higher cattle prices and demand for Australian beef, and described the counterparty as strong.
Asset sales pipeline, yields, and distributions outlook
In response to analyst questions, Sheridan said further asset sales were “well progressed,” including additional water sales (high-security entitlements) and “a couple of the low-yielding cattle properties.” He said management was targeting about AUD 200 million of asset sales over roughly the next 12 months, and later indicated the target had increased from AUD 200 million to AUD 260 million as RFF continues to work toward the 30%–35% gearing range.
On transaction conditions and yields, Sheridan said recent asset sales totaling about AUD 65 million over the past six months occurred at or above book value, and management was not seeing “significant increases” in asset values, describing conditions as “a bit of a plateauing” but supportive of valuations. He also said lower-yielding natural resource assets such as cattle and dryland cropping properties typically lease around a 5% rate against interest rates around 5.8%, and these were among the types of assets being considered for divestment.
In responses to investor questions, Bryant addressed why distributions appear stable despite earnings volatility, saying distributions are driven by cash generation (FFO) rather than accounting profit, which can be heavily influenced by non-cash property revaluations. On the timing of distribution increases, Bryant said the fund is now at about a 100% payout ratio and expects FFO growth to continue; however, he said an increase would likely occur once the payout ratio reaches 95% or below. He added that this was “more than 12 months away” but “less than 2 years away,” while noting uncertainty due to “moving parts” such as interest rates.
Addressing the expected reduction in CapEx, Bryant said RFF has not been acquiring more development assets due to balance sheet capacity and prudence amid higher interest rates. He said the group intends to drive growth through a different strategy in the current environment by increasing capital allocation to the livestock business, including financing more cattle in feedlots.
About Rural Funds Group (ASX:RFF)
Rural Funds Group is an agricultural Real Estate Investment Trust (REIT) listed on the ASX under the code RFF. RFF owns a diversified portfolio of Australian agricultural assets which are leased predominantly to corporate agricultural operators. RFF targets distribution growth of 4% per annum by owning and improving farms that are leased to good counterparties. RFF is a stapled security, incorporating Rural Funds Trust (ARSN 112 951 578) and RF Active (ARSN 168 740 805).
