Good morning and welcome to the financial results presentation for the Rural Funds Group for the full year ended 30 June 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 via the methods that have just been outlined by the operator. I'll now hand over to our first presenter.
Good morning, everyone. I will present the financial results for the year before handing over to David Bryant, who will provide a portfolio and strategy update. Firstly, by way of summary, from an earnings perspective, as I'll detail on the next few slides, FY 2025 has been a positive period for the group. Net property income is up 9%, revenue from farming operations have reverted from loss-making to a profit, and AFFO is up compared to the prior period, a slight improvement on guidance. From a balance sheet perspective, gearing has increased marginally, primarily from income-generating CapEx deployed on development assets. In line with our intention to bring gearing back towards the target range, RFF divested $89 million of assets in line with book values, including $19 million, which settled after 30 June. Leasing activity during the period included those mentioned in the first half, which included eight properties being leased.
These and other activities contributed to maintaining RFF's long WALE of 13.9 years, which supports providing stable income generation to our investors. Now moving to the financial results in more detail. The first slide of this section provides a more detailed analysis of RFF's key earning drivers for the period. Net property income from leased assets increased 9%, up $8 million to $95 million. This increase is mainly due to the additional rent being generated from the lease of macadamia orchards, which are being developed. Also contributing to this was annual lease indexation mechanisms. Net farming income, that is, the operating result of approximately 16% of the assets which are operated by RFF, provided a positive contribution for the period, having incurred a loss on the prior period. This result is largely due to an improvement in agricultural commodity prices.
We have observed 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. Adjusted funds from operations, the net cash earnings measure of the group, increased by 4.5% compared to the prior period and slightly exceeded half-year forecasts. Earnings, including non-cash items, were lower than the prior corresponding period. The current period result was mainly due to mark-to-market of interest rate swaps, as well as higher property valuation movements in the prior period compared to a relatively flat property revaluations in FY 2025. Finally, on this page, RFF paid four distributions during the year, totaling $0.1173 per unit, in line with forecasts. The payout ratio of 102% reflects a greater AFFO generation during the period, and for the third consecutive year, the payout ratio has improved.
Now looking at the balance sheet, assets increased marginally during the period through the deployment of development CapEx, despite some divestments. The adjusted NAV per unit at 30 June was down from $3.14 per unit to $3.08 per unit, mainly because of the mark-to-market of interest rate swaps. Gearing increased marginally by less than 1%, despite the capital deployed for the macadamia developments during the period. This was largely because of the prior mentioned divestments. While gearing ended the period at 39.3%, the sale of some unleased water entitlements settled after the reporting period brings pro forma gearing largely in line with the prior period. Additional asset sales are planned for FY 2026 as we continue to balance the capital requirement of the group. This next page provides more detailed analysis of property valuation movements that have occurred within RFF over the past 12 months.
RFF has a policy to independently revalue all assets at least once every two years. During the year, 68% was subject to independent valuations, resulting in an increase of $15 million, or 1.2%. On the remaining portion of the portfolio, directors' valuations have been applied in line with standard practice. This includes a Yilgah almond orchard, which is being prepared based on unencumbered methodology, as the property is subject to a market rent review. Looking now at the capital management aspects of the group. During the period, RFF's core syndicate debt facility had a scheduled refinance, including an $80 million increase to the limit for CapEx requirements, offset by amortization on the fixed facility.
As noted during the first half presentation, during the period, RFM suspended the distribution reinvestment plan as the dilution from issuing new units at a significantly discounted price to book value was deemed not to be in the best interest of investors. Furthermore, the group does not require additional equity, given the sufficient debt funding arrangements that have been outlined. The core facility remains within all covenants, including LVR, which decreased during the period from 48% to 46% compared to a covenant of 60%, and ICR, which improved to 2.2x compared to a covenant of 1.5x . Taking into account the fixed facility and interest rate hedges, 69% of RFF's debt was fixed at 30 June, with $90 million of additional forward start date hedges entered into during FY 2025. Overall, the finance facilities provide sufficient headroom for upcoming CapEx. I'll now hand over to David.
Good morning, ladies and gentlemen. This page provides an overview of the Rural Funds Group assets and lessees. The strategy for RFF, which is owned by approximately 20,000 retail investors and a number of institutions, is to generate capital growth and income from developing and leasing agricultural assets. Lessees include high-quality agricultural businesses and institutional-grade investors, as shown on the right of this page. A significant strategy to generate additional returns for investors includes productivity development and higher and better use conversions. Consistent with this approach, RFM has been developing macadamia orchards, which has increased the value and revenue generation from this sector. The macadamia lease is also contributing to the long-weighted average lease expiry of RFF, which is 13.9 years. Overall, 84% of the assets are leased, and lease agreements include a range of indexation mechanisms.
During the first half, several leasing transactions were completed and are again summarized on the page. Lease maturities in FY 2026 will be managed through a combination of asset sales, processes, or releasing of those assets. This next slide outlines the completion of the development phase of 3,000 hectares of macadamia orchards, which are leased to a global institutional investor. In Maryborough and Bundaberg, 1,600 hectares of orchards have been developed, with minor tree plantings to occur shortly with the transition into spring. A residual 2,000 hectares of sugarcane properties in Maryborough will be held for future development or may be sold. In Rockhampton, 1,400 hectares have been developed. Residual areas will provide up to 1,000 hectares of additional macadamia development in the area.
The macadamia lease is forecasted to generate a revenue of $20 million in FY 2026, an increase of 18% on FY 2024, following the deployment of additional CapEx throughout the year. Revenue is forecast to continue to increase as smaller amounts of CapEx are incorporated into the lease for initial orchard maintenance costs over the next four years. With the completion of the leased macadamia developments, RFM has progressed with the development of two other assets. Firstly, the next stage of macadamia orchards on Rookwood Farms. The benefit of commencing this development, whilst unleased, is that it provides future AFFO generation through operating or leasing, and it improves the utilization of the new water supply infrastructure constructed in that area. Development of the cattle and cropping property Kaiuroo has also commenced. A 5,400 megaliter water storage is nearing completion, which will support 375 hectares of irrigated cropping area.
The planting of a cotton crop is expected to occur in the following months, providing forecast revenue for RFF in FY 2026. As highlighted in the Kaiuroo example, a distinguishing feature of agricultural property is that it can generate income from operations despite being unleased. This slide shows a number of the properties which are unleased, but the majority of which will contribute to the earnings of RFF. The underlying commodity prices for macadamias and cattle improved significantly over the past two years, with the cotton price in line with the long-term average. The final page in this section provides an update on some of the sustainability initiatives which are being undertaken by RFF, and importantly, how we are using technology to drive both sustainability and productivity gains. Now moving to RFF forecasts and a conclusion. For the 2026 financial year, we forecast AFFO of $0.1107 per unit.
We also expect distributions to remain constant, resulting in a payout ratio of 100% for the period. Major priorities for the year include the continued staged development of Rookwood Farms and Kaiuroo, as well as non-core asset sales. Finally, we wish to extend an invitation to all investors to attend our roadshow, which will be conducted during October. We look forward to meeting you in Melbourne, Sydney, Brisbane, or Canberra. Please register your interest to attend via the details on the screen. I'll now invite questions from attendees.
Thank you. We will now conduct a question and answer session. As a reminder, for those joining via teleconference to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Finally, for those joining via the webcast, to ask a question, please type it into the box and click submit. There may be a short pause as attendees register their questions. We will now take our first question from the line of Cody Shield from UBS. Please ask your question, Cody.
Good morning, David and team. Thanks for the time. Just on FY 2026 CapEx, I can see estimates were for $40 million in 2026 at the half. It's now expected to be around $100 million. Is that spend going to be matched up with divestments, or are you going to let gearing run a touch higher?
Thanks for that. It's Tim speaking. It will be matched up with divestments. We've identified some assets which we wish to sell, and we're running through that process. We anticipate that any of that CapEx in FY 2026 will be offset by equivalent divestments.
Okay, great. How should we be thinking about the return on that spend in 2026, 2027?
The two things we're spending capital on are the development of the Kaiuroo property. It's been converted from a cattle property into an irrigated cotton property. We will get our first cotton crop planted on that property this calendar year. We expect to see additional FFO coming from that cotton property this calendar year. In terms of the additional macadamias that we're developing, we will develop them up and seek a lessee, and hopefully, you know, that process can occur quite quickly. If not, there will be no FFO generation from the macadamia developments in this financial year.
Okay, sure. Maybe just one more on 2026 guidance. It looks like, you know, low to mid-teens revenue growth for 2026, but then AFFO guidance is only 2% higher year on year. Can you just, you know, give me a read on some of the moving parts there for 2026?
For FY 2026, we've assumed that interest rates, we only have one more cut, and that's for six months of the financial year. We've also had a slight reduction in the forecast rent on one of our almond orchards that's currently subject to a rent review. That has reduced our forecast guidance slightly. Beyond that, you know, we're forecasting about 2% AFFO growth. If that rent hadn't come off on that orchard, it would have been closer to the 4%. However, because of that, we're forecasting only 2% AFFO growth this financial year.
Okay, that's clear. Thanks, guys.
Thank you. As a reminder, before we take our next question, it will be star one one if you wish to ask a question. We'll now take our next question from James Druce from CLSA. Please go ahead, James.
Yeah, hi, good morning, David and Tim. I was just interested in your comments. I think you said you're looking at selling Maryland. Can you just dig into that, please?
That's Tim speaking again. I'm not sure what Maryland is. No, we're not looking at selling that because we don't own it. Maybe you're referring to some of the Maryborough sugar assets. There are a few that we have identified that aren't suited to a macadamia future development. We are selling a couple of those assets, and that's progressing, but they're not significant amounts of land that we're selling. It's just a little bit around the edges, and that will happen this calendar year.
What is the quantum of that, how much are we thinking about?
The quantum's probably about $10 million. It's not significant, but that will hopefully occur this calendar year.
Stretching out to FY 2027, you'd be using, you do have to execute on some asset sales, but if you didn't execute on asset sales, you'd be using most of your debt, I suppose, debt capacity this year. Are you guys planning on picking up those debt facilities that are due to accommodate that, or what happens in FY 2027 if we can't get those asset sales away? Do you just have to cut CapEx? How do we sort of think about that scenario?
Yeah, good eye, James, David Bryant speaking. Probably the largest of the assets that we've got held for sale at the moment is some high security water entitlements on the Murrumbidgee River. The quantum of that is approximately $55 million. It's about $55 million. Then we've got a couple of cattle properties that we're well advanced on executing. We've got inspections going on and that type of thing. We've got a lot of confidence about executing asset sales over the next 12 months that would fund things. If not, we've got other levers that we could pull on, such as holding back CapEx if needs be.
Yeah, that's right. Importantly, all of the CapEx in FY 2026 is fully funded through the debt facilities we have. Our LVR is sitting at about 46% at 30 June. That's against the covenant of 60%, so there is a lot of headroom. We could also look to just increase the facility if needed if the asset sales didn't occur, but as David said, we're very confident in them occurring.
Okay, one more if I may. Can you just comment on sort of the outlook for asset base now? We've got other asset classes. We've turned the corner on the up again. Can you just comment on how you're seeing your portfolio?
Yeah, James, when you're talking about asset classes, you're referring to other property sectors?
Yeah, other just real estate in general. If you look across the board, real estate's heading up. I know agriculture's a little bit different, but just your view on asset values over the next 12 months would be good.
Yeah, okay. Look, I don't see any major increase in agricultural asset values, basically because they did not retract and in fact probably advanced during the last, advanced substantially during the last four or five years. We'd need to see some improvement in commodity prices over and above where we are. I think there's a few charts on the 10-year commodity prices for macadamias, cotton, and cattle in the presentation that sort of gives you a feel for things. There's good upside, I believe, in almond prices. They've had a run, pulled back a bit, but the outlook for the U.S. crop is perhaps not what people thought. There's good upside there. Macadamia prices are continuing to increase. Cattle prices are looking very good. Cotton prices are steady.
In most of our sectors, I think we can see good prospects for the commodity prices, but I wouldn't be seeing that flowing through to land values over the next year, just simply because we've run so hard.
Yeah, okay, fair enough. Thank you.
Thank you. There are no further phone questions at this time. I'll hand it back to the room for questions from the webcast.
Okay. Yeah, ladies and gentlemen, David Bryant speaking. We'll just move through some written questions. I'll handle the first one, which is a question, and I'll paraphrase the question. It's a question regarding the impact of the tariffs that we're seeing that have come from the Trump administration in the U.S. A one-word answer is confusion. Perhaps I'll give you an anecdote. Australia has not been adversely impacted in the macadamia market, but South Africa, a larger producer of macadamias now than Australia, has had a 30% tariff imposed on their exports of macadamias into the U.S. The U.S. is a notoriously price-sensitive macadamia consumer, and we would see that that would adversely impact the U.S. to Australia's advantage. However, Australia has historically enjoyed a premium in the price that we obtain for our macadamias.
It's seen as a better origin, and there are many buyers that pay more for us for Australian macadamias. In fact, given the amount we're producing, we are unlikely to actually ship any to the U.S. or major quantities. At the prices we would be charging, the U.S. consumer may not be wishing to pay. There's just a lot of moving parts, and that's just one of the commodities. We've got a similar question about the impact of U.S. meat coming into Australia, which is part of a trade deal that's been recently negotiated, which is a relaxation of Australia's importation of U.S. beef based on traceability. We do not believe there will be any impact of that, or it'll be very minor. The U.S. is a lower-cost beef producer than the U.S.
We also supply a predominantly grass-fed product, which is very different in nature and in flavor to a feedlot-fed product. For that reason, we don't see that there's going to be much Australian consumer demand for their product. Particularly, it's going to be more expensive. In the meantime, Australian exports of beef to the U.S. are still very strong, partly because of those two attributes that I highlighted: price and the way the animal is reared. In the U.S., or in relation to beef, I should say, we're not seeing major changes yet. I will add that the U.S. beef herd has moved from a destocking stage to a rebuilding stage, and that will likely lead to increasing beef prices in the U.S. They've also got import restrictions on Mexican beef, so further pressure on beef prices in the U.S. That's likely to be a good opportunity for Australian producers.
We've got another question, which I'll hand over to him for in relation.
Thanks, David. Yeah, question regarding our expectation with cattle property rents going forward. During the gone financial year, we had three cattle properties that underwent rent reviews. Those rents are up about 30% as a consequence of those rent reviews on a four-year basis. That was on the back of, as David explained, some very significant capital growth that we saw on cattle assets. We think that will plateau going forward. We won't see the same increases, but with these rent reviews, a lot of these cattle properties are playing catch-up. I think we will still see some increases in FFO being generated through the market rent reviews. However, it won't be as significant as what we've seen over the last five years.
There's another question here regarding potential for wind farm or solar generation on our assets. Yes, I do see potential. We have one of our assets, Cerberus, that does have a wind farm currently located on it, and it generates income from that wind farm. We have various people doing proposals on other assets. We've got a large land holding and a lot of land that is suited, but it all depends on what financial benefit we can generate for our investors. We'll wait and see.
David Bryant, back again, there's a very pertinent question here, which is what actions do you feel management can take to try and close the gap between the share price and the NTA? The gap's been significant for a couple of years now. The causes of that gap, I think I'll try and articulate that first.
I think investors would be discounting the RFF and hence the discounted trading price based on the payout ratio, based on the level of gearing of the fund, and based on the growth in funds from operations. I've outlined those in ascending order. First of all, the payout ratio. The payout ratio is back to 100% or forecast to come back to 100% this year, which is favorable. Our modeling suggests that will improve in future years. The next aspect, as I said, was gearing. The gearing is forecast to remain static, and we'll be managing that gearing with asset sales. I think that the gearing aspect of that discount will not be great going forward.
The most significant thing, as I said, is growth in FFO, and that has been slow over the past few years, partly because we've transitioned from some higher FFO-generating assets and recycled that capital into lower FFO assets that have higher rates of growth, but also because we've pursued development of macadamia orchards that have a lead time before they generate large amounts of FFO. That's coming through now. There is no doubt that the 2% FFO growth, I think it's 1.7% this year, is unsatisfactory. We believe that in future years, we can deliver further FFO growth and that that will close the gap. Why do I believe, or why is our modeling telling us that?
It's because if we look at the $1.9 billion of assets that we manage, and we look at the rents and the lease terms that we have, when we put all of that together and use reasonable assumptions regarding interest rates, then we can see FFO growth coming through. It's the indexation mechanisms in our rental agreements that will drive that, but it will be dependent on interest rates to a significant extent. This year, in that forecast of 1.7% FFO growth, we only have one cut. I think the market is forecasting further cuts. The fund and the assets and the FFO growth are not completely dependent on monetary policy and interest rates. It's the underlying lease clauses and the underlying value of those assets and the commodities that they produce that drive growth in income from these assets over the very long term.
I'm sorry, that's a bit of a long answer, but I suppose what I'm trying to convey is that this is not an overnight fix. I think we're on the road to closing that gap or started on the journey to closing that gap. Over the medium to long term, we're confident that this book of assets that we've got will deliver the FFO growth that's necessary to see a recovery in our trading price. Now we've got one more question. Bear with me a moment while we just absorb it.
I might pass to Daniel.
Daniel Yap speaking here. We've got a question regarding swap valuations and where interest rates are currently decreasing, the impact that that will have on swap valuations and NTA. RFF is currently held interest rate swaps at 30 June, and they were valued at approximately $18 million at the year-end in an asset position. What does tend to happen with this? The swap valuations are based on interest rate swap markets, looking at forward swap rates. A decrease in the forward market does tend to have a decreasing impact on the valuation of the swaps. That will result in a decrease in NTA. The revaluation is not FFO. However, what will happen as interest rates go down, of course, is that there will be interest cost savings, which will increase FFO. The second part of the question asked about swap expiry.
We have a weighted average hedge maturity of three and 3.4 years, and we've included our hedge profile in the presentation. That's on page 12.
The last question we have here is a question about whether we would diversify into cocoa farming or the production of cocoa. I'll use that question. I think it's a good question. It's pretty topical at the moment. I'll use it just to make some comment more generally about what we are doing or seeing in relation to other areas of investment in agriculture. Firstly, to cocoa, it's highly labor intensive. We would be very, very hesitant about investing in a highly labor intensive crop. Investors over the years would have heard me comment on our focus on being involved in commodities where we have a comparative advantage in production. Labor intensive industries is not one of those areas. It's unlikely that we would invest in it for that reason. There's a second reason.
This is quite important, and it cuts to the investigation of other commodities at this time, that given the gap between our NTA and where our shares are trading, it's unlikely that we would be applying capital to new endeavors, highly unlikely, because the capital could be better used in a number of ways, including debt reduction, for example. It's pretty much steady as she goes in terms of exploring new commodities for the time being. I think that concludes the questions and really good questions. I thank the audience for both attending and for your questions. We look forward to talking to you once again in six months' time. I'll also repeat, we have this investor roadshow. It'd be lovely to meet you all if time permits. If we happen to be passing through one of those four cities, please take the opportunity to come and say hello.
Until next time, thank you very much, everybody.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your line.