A recent A$50 million acquisition of three established Queensland rural properties has propelled Rural Funds Management (RFM) into a leading Australian listed cattle and land company. The purchase confirms RFM’s ambition to expand its already diverse portfolio of large-scale farming enterprises and become a major player in the cattle industry.

RFM’s focus is to deliver returns to investors generated from quality management of Australian farmland, rural infrastructure and agricultural operations. Managing Director David Bryant established RFM in 1997 and over the past 19 years has led the company’s growth to where it is today – managing A$500 million of agricultural assets, on behalf of retail and institutional investors, across eight Australian regions, which includes negotiating the acquisition of more than 35 properties and over 70,000 ML of water entitlements.

Regarded as one of the oldest and most experienced agricultural funds management companies in Australia, RFM’s continual growth earnt its 2014 listing of its main investment vehicle – the Rural Funds Group (ASX: RFF), a Real Estate Investment Trust (REIT) which is the product of the consolidation of three separate unlisted funds formed during the preceding 17 years.

When asked what the key to RFM’s ongoing success is, Mr. Bryant told GAI News that the company’s investment structure suited its investors’ needs, of which many have invested with RFM for more than a decade.

“We are recognised as a secure and trusted partner in Australian agriculture because we have a culture and track record of maintaining a close awareness of our investors’ needs,” Mr. Bryant said. “This recognition ultimately culminated in the RFF, a REIT which provides reliable returns in a sector with a reputation of volatility due to commodity price fluctuations and varying climatic conditions.”

RFM’s skill and expertise in Australian agriculture has allowed the company to build a suite of funds providing choice for investors in regards to portfolio composition and risk profile. This skill and expertise stems from the management team’s knowledge and experience gained through managing and developing assets ranging from water to poultry, almonds, macadamias, viticulture, cotton, rural infrastructure, cattle properties and livestock.

The July decision to expand the company’s portfolio of cattle assets in northern Australia led to the RFF’s recent purchase of Rewan station, a 17,500ha property in central Queensland. The A$50 million acquisition, which includes the purchase of two other established breeding properties and 11,000 cattle, cements RFF as the only real estate investment trust in the agricultural sector. The three properties will be leased for 10 years by Cattle JV, a subsidiary of RFM.

The A$50 million acquisition is part of a $125 million RFM expansion that includes a 1,000ha almond orchard development in NSW and three established macadamia orchards in Queensland.

Guiding strategy

When evaluating new sectors, Mr. Bryant says RFM considers Australia’s comparative advantage within that commodity as this is the best indicator of long-term viability in an open economy such as Australia.

“We are also attracted to assets with the potential for productivity improvements,” he said. “Our study of over 100 years of agricultural data reveals that commodity prices have declined in real terms over this period while farm values have appreciated approximately 4.5 percent per annum, and the difference can be largely attributed to productivity gains.

“Our recent expansion into the northern Australian cattle industry is a good example as Australia possesses a comparative advantage in beef and not surprisingly it is one of Australia’s largest and longest surviving agricultural industries. The cattle properties acquired also have the potential of productivity improvements through investment in infrastructure and fodder crops. While these assets are leased by RFF, our investors can benefit from subsequent improvements in capital value, the additional income linked to that growth and improved security through a more profitable lessee.”

Leasing rather than operating properties, where appropriate, is a strategic point of difference for the longstanding company and demonstrates its commitment to reducing volatility of income. According to Mr. Bryant, it is a strategic move that effectively outsources the agricultural and seasonal risk that can detract from earnings.

“In more recent years, we have restructured investments to remove the operational risk by establishing long-term lease arrangements, resulting in stable investment opportunities for our investors,” Mr. Bryant said.

“The three key qualities that we look for in an ideal lessee are an understanding that our asset can provide them with high-quality produce at a low cost of production so they know that they can make money through the cycle; extra processing capacity in that by growing more of a particular commodity, they can get better capacity utilization in their processing plants; and thirdly that they want to secure supply for the marketing division of their business.

“Our lessees invest heavily in marketing their commodities, commanding shelf space and maintaining relationships with retailers. Securing supply, to specification, is a key motivation for our successful lessees.”

Looking forward

Unsurprisingly, the outlook for RFM looks positive as the company continues to seek out new investment opportunities. Mr. Bryant stands by the company’s fitting motto ‘Managing Good Assets with Good People’ as the driving force that will underpin the company’s future growth.

“Good assets deliver our lessees a low cost of production and benefit more significantly from productivity gains, which deliver capital growth and rental indexation for our investors,” he said. “Good people reinforce our sense of integrity, which compels us to remain diligent and to use intelligence and experience in finding opportunity. This integrity also drives our commitment to the owners of our existing funds, and ensuring their ongoing success.

“The outlook for high-quality Australian produce is looking good with the company’s lessees continuing to see a strong demand from China and consequently a rapidly expanding export market for Australia, which will expand even further when China takes on live exports.

“The low Australian dollar, assisted by low interest rates, provides us with a positive tail-wind and if these rates reverse, our underlying assets will provide a natural inflation hedge for our investors. We trade on a 6 percent yield, which is hard to get from a relatively safe investment anywhere else in the world.”

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Melissa Lawrence, GAI News writer