RURAL FUNDS GROUP — Investor Presentation 2021

Jun 29, 2021

Newsletter EDITION 15, JUNE 2021

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Disclaimer and important information

This publication is not an offer of investment or product financial advice. Rural Funds Management Limited (RFM), ABN 65 077 492 838 AFSL No. 226701, has prepared this publication based on information available to it. Although all reasonable care has been taken to ensure that the facts and opinions stated herein are fair and accurate, the information provided has not been independently verified. Accordingly, no representation or warranty, expressed or implied, is made as to the fairness, accuracy or completeness or correctness of the information and opinions contained within this document. Whilst RFM has taken all reasonable care in producing the information herein, subsequent changes in circumstance may at any time occur and may impact on the accuracy of this information. Neither RFM, nor its directors or employees, guarantee the success of RFM’s funds, including any return received by investors in the funds. Past performance is not necessarily a guide to future performance. The information contained within this document is a general summary only and has been prepared without taking into account any person’s individual objectives, financial circumstances or needs. Before making any decisions to invest, a person should consider the appropriateness of the information to their individual objectives, financial situation and needs, and if necessary seek advice from a suitably qualified professional. Financial information in this publication is as at 31 December 2020, unless stated otherwise.

RFM is the Responsible Entity and Manager for Rural Funds Group (ASX: RFF). RFF is a stapled entity incorporating Rural Funds Trust ARSN 112 951 578 and RF Active ARSN 168 740 805. Australian Executor Trustees Limited is the custodian for the Rural Funds Group. To read more about their privacy principles, please visit www.aetlimited.com.au/privacy.

Image: Water storage at Lynora Downs, central Queensland, March 2021. Cover image: Sorghum crop at Lynora Downs, central Queensland, March 2021.

Table of contents

The rise and rise of Australian farmland David Bryant, RFM Managing Director

Rural Funds Group (ASX: RFF) update: productivity and valuations

Tahen project update

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Image: Moving cattle at Comanche, Rockhampton, central Queensland, May 2021.
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The rise and rise of Australian farmland

David Bryant, Managing Director

Understanding the impact that capital growth has on your investment in the Rural Funds Group (RFF), will give you a better appreciation of how your investment will serve your needs over time. This article discusses capital growth in rural land and the impact it has on RFF.

Australian farm values have been increasing relatively quickly, driven by a period of generally rising commodity prices and record low interest rates. During calendar year 2020, national farm values rose 12.9%, according to the Australian Farmland Values report[1] . This figure was derived from 8,187 property transactions, covering 8.2 million ha worth a combined $10 billion.

Figure 1 sets out the annual compound growth rates for Australian farms over the past 20 years. These returns are based on around 200,000 transactions worth around $150 billion. What is evident from the table is that capital growth rates in rural land have

because capital gains that accrue on the farms held by RFF become retained profits which are added to the net assets of the fund. From an accounting and valuation perspective, these capital gains add to the net asset value (NAV) per unit, which is often a useful metric for analysing aspects of a listed business.

been very high across the whole country over the past two decades. As a consequence of the 20-year compounding national growth rate, farm values have increased fourfold in that time. This has significantly increased the wealth of Australian farmers and those who have invested in rural land.

The rate of capital growth is important to RFF investors. This is

While an increased NAV is a useful

Figure 1: Compound annual growth rates, Australian farmland

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1 Year 5 Years 20 Years
Queensland 11.8% 6.6% 8.8%
New South Wales 15.6% 12.2% 8.1%
Victoria 6.9% 11.1% 7.2%
Tasmania 25.3% 9.5% 8.1%
South Australia 10.9% 13.2% 7.2%
Western Australia 19.3% 8.9% 6.2%
National 12.9% 10.6% 7.6%
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Increased valuations are evidence ~~“~~ of underlying businesses capable of generating increased profits and sustaining reasonable increases in rent.

validation of the trading price of your shares, there is a more fundamental change occurring as the underlying value of RFF’s farms increases in value over the long term. Increased valuations are evidence of underlying businesses capable of generating increased profits and sustaining reasonable increases in rent. In other words, increasing values are evidence from the real-world, that farm businesses are increasing their profits through the combination of rising commodity prices and increased productivity.

A secondary consequence of rising farm values is the increase in equity that is produced and retained in RFF. This can be put to work by using prudent debt levels to fund the acquisition of new assets, which in turn contributes additional income and capital growth over time. With time, this process compounds to become a significant portion of the investment return that can accrue to long-term investors.

The large increase in the value of

Australia’s agricultural asset base can be explained by three factors. Firstly, over the past 20 years, interest rates have declined. Secondly, since the year 2000, the prices paid to farmers for the commodities they produce have improved. Thirdly, productivity gains have increased the output and efficiency of farms, meaning they now produce more income per hectare.

Over the past two decades, the variable interest cost on a loan to buy a farm has reduced from 8% to 2%. This large reduction equals a rate of decline in borrowing costs of 7% per annum, which is about the same rate of capital growth recorded nationally in Figure 1. This reduction does not fully explain the high capital growth rates, because farmers typically only operate with gearing of about one third. For this reason, the contribution to capital growth from commodity prices and productivity improvements should be examined.

Something that Figure 1 does not record is the more recent surge in

prices for specific agricultural assets. Small farms located near large cities are changing hands at twice the price of a year ago. Regional towns near these cities are now filling with black German SUVs on Friday evenings, while rural real estate agents complain about the lack of farms to sell. In the Southern Highlands of NSW, price expectations of some vendors have tripled compared to pre-COVID-19 values.

Far from the madding crowd, in central and north Queensland, RFF has acquired 47 farms over the past five years, at a cost of $292 million. Farm values in this important agricultural region have risen at a compound rate of 10.5% per annum over that time. Cattle farms purchased by RFF have risen in value. For example, Rewan, which was acquired by RFF in 2016 at a value of $4,250 per head of carrying capacity, was valued in December 2020 at $6,700 per head. Comanche, purchased in 2018 at $5,500 per head, was valued at $7,000 per head in June 2020. These increases in

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Image: Centre pivot irrigation at Comanche, central Queensland,
May 2021
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value over these periods have been around 12.5% per annum.

historically high price driven by low cattle numbers here in Australia and a surge in demand internationally. While it might take a couple of years, it is expected that prices will decline, which is why the table includes lower prices.

In recent months, the combination of high cattle prices and low interest rates, has seen farms sell at prices up to 100% higher than the values discussed above. The buyers of these assets are not well-funded city types, but farmers dependent on cattle sales, and many cattle producers wonder if it is sustainable.

The horizontal axis of Figure 2 presents the productivity of a cattle farm, based on the daily weight gain of the livestock. This factor will vary over the short term based on seasons, but over the long term, this measure of productivity is determined by the skill of the manager and quality of the farm.

Figure 2 attempts to answer

this question by considering the profitability of a farm, excluding financing costs. The numbers are quoted as a profit per adult equivalent, which is explained in the table, but is essentially the profit per head of cattle carrying capacity. The table examines the profitability of a cattle operation based on two important variables: productivity and commodity price. Cattle are currently selling at $4 per kg liveweight – an

Looking at the results presented in this table for a $3.50 per kg sale price, it is evident that there is a wide variation in financial results. A farm producing a daily weight gain of 0.4 kgs per day, will make less than half the money than a farm producing 1 kg per day. In the world of cattle

farming, this wide variation in financial results is common. At high levels of productivity, the sudden surge in farm values is probably sustainable even with a retraction in cattle prices. At low levels of productivity, recently purchased farms will probably need to be sold.

Setting aside the recent surge in some areas, the capital growth of farmland over the past two decades has been impressive and understandable. But what does the future hold? The tailwind of declining interest rates will not be there, as the global economic recovery seems underway. Commodity prices will most likely increase in nominal terms and perhaps in real terms as increasing urbanisation and economic growth in Asia drives demand for higher quality commodities. Productivity will need to increase, since agriculture must feed more people with better diets, and it will do so as new technologies are deployed and more capital is invested. For these reasons, farm values will generally go up over the long term.

This article has discussed the three factors driving the impressive capital gains achieved in agricultural assets over the past two decades. The first two, interest rates and commodity prices, are beyond the control of even good managers. The third factor, productivity, is actually a product of good management. It is the result of good managers managing good assets.

Figure 2: Cattle farm profitability per adult equivalent[2]

Average Daily Gain (kg/hd/day)

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0.2 0.4 0.6 0.8 1
$3.00 $49.35 $215.25 $337.95 $426.61 $490.75
$3.25 $69.96 $251.57 $385.91 $482.95 $553.16
$3.50 $90.57 $287.90 $433.86 $539.29 $615.57
$3.75 $111.19 $324.22 $481.81 $595.64 $677.97
$4.00 $131.80 $360.54 $529.77 $651.98 $740.38
Cattle Price ($/kg)
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“

Productivity is actually a product of good management. It is the result of good managers managing good assets.

Image: Aerial of the Geier vineyard, Barossa valley, South Australia, Janary 2021 Newsletter by Rural Funds Management - 7 -

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Image: Brahman cattle, Comanche, central Queensland, May 2021.
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Rural Funds Group (ASX: RFF) update: productivity and valuations

water, cattle were simply not grazing adequately over the total pasture area.

Comanche is a 7,600 ha cattle backgrounding property located 65 radial kilometres west of Rockhampton. The property receives weaners, which are young cattle of around 175 kg. The weaners are onsold once they reach approximately 400 kg. In this scenario, the operator is seeking to maximise the number of weaners and their daily weight gain. Since purchasing Comanche in 2018, RFF has funded numerous improvements which aim to achieve these outcomes.

Rural property values are enjoying beneficial tailwinds of low interest rates and higher commodity prices. In the previous article in this Newsletter, David Bryant considered how operators can sustainably fund the acquisition of farms despite the recent increases in asset values. One factor – improving farm productivity – was considered in some detail.

To improve pasture utilisation, RFF will fund 30 additional water points. Water from the river will be pumped to ‘header’ tanks then reticulated to the new water points providing an efficient and reliable water supply. Various water points will also be equipped with remote monitoring technology to improve efficiencies and reduce labour requirements.

This article describes specific RFF productivity improvements which benefit both operators and investors, and how they are captured in the valuation process.

Cropping areas will be supported by a recommissioned irrigation pivot and three new large pivots. This infrastructure will enable the ongoing cultivation of 280 ha of forage crops. Figure 1 shows the impact of this productivity development.

Comanche has a mix of highly productive soils, which support pastures on which cattle graze. However, the property had a lack of irrigation infrastructure and water points. Reluctant to leave drinking

Productivity and profitability productive soils, which support and three new large pivots. This Higher agricultural valuations are pastures on which cattle graze. infrastructure will enable the ongoing evidence of the underlying operations However, the property had a lack of cultivation of 280 ha of forage crops. being capable of generating irrigation infrastructure and water Figure 1 shows the impact of this increased profits. This is important points. Reluctant to leave drinking productivity development. for RFF investors, as operators (or lessees) fund their rent commitments from current or retained profits. This article describes specific ~~“~~ Favourable seasons or commodity productivity improvements on RFF prices, while they remain, can improve farm profitability. An additional way to increase farm properties which benefit both operators profitability is to increase its productivity. Comanche, an and investors, and how they are captured RFF cattle property in central Queensland, provides a case study. in the valuation process.

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Figure 1: Centre pivot irrigation at Comanche

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The above image shows a recently installed pivot at Comanche (left) and forage sorghum growing under the pivot (right). Centre pivots are irrigation systems which irrigate crops in a circular pattern and are capable of applying water and fertiliser. This type of irrigation system is efficient and effective as it can apply a precise amount of water calibrated to the needs of the crop. Most systems have the capability of delivering up to 16mm per day.

In addition to the irrigated cropping area, RFF has funded the development of 500 ha for dryland cropping which will focus on suitable species such as oats, lablab, and forage sorghum.

Ongoing improvements to pasture quality will also be a focus, as well as introducing improved pasture species, particularly legumes. Legumes have a dual purpose of improving pasture quality and capturing nitrogen to improve soil health.

The development of irrigated and dryland areas, improved pasture area and additional water points will increase cattle-carrying capacity and average daily weight gains. Figure 2 shows the extent of improvements which have been, or are planned to be, implemented on Comanche.

Valuation process

Improved productivity is a driver for higher profitability and contributes to higher valuations; all being equal, a more productive property is more valuable to both operator and owner. RFM has a policy to independently value each asset at least every two years. Figure 3 lists the period in

Figure 2: Productivity improvements on Comanche

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N
Existing water points
Dryland cropping
Added water points
Centre pivot irrigation
Planned water points
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Figure 4: Valuation firms

Figure 3: Details of RFF property valuations[1]

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Valuation date
Property by sector Valuation Valuer
(reporting date)
Almonds
Yilgah, NSW Jun-2020 $ 105.0m JLL
Tocabil, NSW Jun-2020 $ 47.0m JLL
Kerarbury, NSW Jun-2020 $ 223.0m JLL
Cattle
Rewan, QLD Dec-2020 $ 50.4m JLL
Mutton Hole, QLD Jun-2019 $ 8.7m CBRE
Oakland Park, QLD Jun-2019 $ 5.4m CBRE
Natal Aggregation, QLD Dec-2019 $ 63.7m JLL
Comanche, QLD Jun-2020 $ 22.0m CBRE
Cerberus, QLD Jun-2020 $ 13.8m CBRE
Dyamberin, NSW Jun-2020 $ 13.9m Colliers
Woodburn, NSW Jun-2020 $ 7.3m Colliers
Cobungra, VIC Jun-2019 $ 35.0m Colliers
Petro Farm, High Hill & Willara, WA Jun-2020 $ 21.5m JLL
JBS feedlots QLD & NSW Oct-2018 $ 53.4m Purchase price
Wattlebank, QLD Jun-2020 $ 1.8m CBRE
Homehill, QLD Jun-2020 $ 12.1m CBRE & Purchase price
Yarra, QLD Jun-2020 $ 6.2m CBRE
Cropping
Lynora Downs, QLD Jun-2019 $ 33.1m CBRE
Mayneland, QLD Jun-2020 $ 17.5m JLL
Maryborough (22 properties), QLD Dec-2020 $56.4m CBRE
Macadamias
Swan Ridge, QLD Dec-2019 $ 6.4m Colliers
Moore Park, QLD Dec-2019 $ 4.0m Colliers
Bonmac, QLD Dec-2019 $ 2.9m Colliers
Cygnet, QLD Oct-2019 $ 1.6m Purchase price
Swan Ridge South, QLD Mar-2020 $ 1.6m Purchase price
Nursery Farm, QLD May-2020 $ 2.2m Purchase price
Riverton, QLD Nov-2020 $ 6.5m Purchase price
Stoneleigh, QLD Dec-2020 $6.6m Purchase price
Maryborough (3 properties), QLD Dec-2020 $ 18.3m CBRE
Vineyards
Kleinig, SA Jun-2019 $ 22.7m Colliers
Geier, SA Jun-2019 $ 28.2m Colliers
Dohnt, SA Jun-2019 $ 1.0m Colliers
Hahn, SA Jun-2019 $ 4.9m Colliers
Mundy and Murphy, SA Jun-2019 $ 3.8m Colliers
Rosebank, Vic Jun-2019 $ 3.4m Colliers
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CBRE (www.cbre.com.au)

CBRE Group Inc. (NYSE: CBRE) is the world’s largest commercial real estate services and investment firm, with 2020 revenues of $23.8 billion and more than 100,000 employees (excluding affiliate offices).

Colliers (www.colliers.com.au)

Colliers (NASDAQ, TSX: CIGI ) operates in 67 countries and has more than 15,000 employees providing advice to real estate occupiers, owners and investors. Colliers has annualised revenues of $3.0 billion and $40 billion of assets under management.

JLL

(www.jll.com.au)

Jones Lang LaSalle Incorporated (NYSE: JLL) is a global commercial real estate services company providing investment management services worldwide, has more than 90,000 employees in 80 countries, and revenue of $16.6 billion.

reviews the work and co-signs the completed report. More information on three of the valuation firms which have recently prepared reports for RFF’s assets, is presented in Figure 4.

particular asset over a period greater than five years.

which independent valuation reports were last prepared for each property.

RFM engages a range of global The valuation reports are prepared real estate service companies who in accordance with recognised are qualified in preparing valuation international valuation standards with reports for numerous property certified valuers. For example, when classes including agriculture. RFM preparing valuations, at least one will also generally rotate valuers, so qualified valuer physically inspects the same party is not used to value a each asset; a second qualified valuer RFF investors can be ~~“~~ optimistic about benefitting from rising agricultural asset values as well

The valuation reports are prepared in accordance with recognised international valuation standards with certified valuers. For example, when preparing valuations, at least one qualified valuer physically inspects each asset; a second qualified valuer

Productivity, valuations and investment performance

Given RFF’s valuation policy, various assets within the portfolio are expected to be revalued each financial half-year, resulting in an updated adjusted net asset value (NAV). Valuations will take into account future lease income, comparable sales data and profitability metrics.

The benefit of productivity improvements is not just reflected in valuations and RFF’s NAV. They also have the potential to benefit

as RFM’s strategy of improving the productivity of suitable assets. Newsletter by Rural Funds Management - 10 -

Figure 5: Historical performance metrics (inc. FY21f)[2]

Total shareholder return 304% (RFF) vs. 75% (index).	NAV growth reflecting productivity and development gains.	AFFO growth in excess of distribution growth target	Distribution growth of at least 4% per annum.

immediate, and future, cash generation by the Group. This is because firstly, the capital which RFF provides to fund the productivity improvements usually attracts additional rent as that capital is deployed. Secondly, leases for assets which have the ability to have their productivity improved typically have a market rent review mechanism which monetises any valuation increase.

For these reasons, investors can be optimistic about the long-term benefits of RFM’s strategy of improving productivity and asset values.

Figure 5 shows RFF’s track record in growing cash generated by the Group (measured by adjusted funds from operations, or AFFO), distributions and adjusted NAV.

Image (left): Mungbeans under pivot irrigation, Lynora Downs, central Queensland, March 2021.

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Image: The sun sets while staff measure the rate of water moving off the fields, Tahen, Battambang
prefecture of Western Cambodia, April 2021.
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Tahen project update In May 2019, RFM committed to providing resources to establish an agricultural project in the Cambodian village of Tahen, approximately 350km north west of the capital Phnom Penh.

agricultural land was affected with 120,000 ha being completely destroyed.

The second year of RFM’s three-year a continual challenge to maintain Tahen Project has concluded, with security of our crops and equipment. with 120,000 ha being completely many team members reflecting and destroyed. commenting on the challenges faced With a growing COVID-19 backdrop, over the past twelve months. the second extraordinary event This flooding event caused major The year was marred by two occurred as heavy rain caused issues at the Tahen farm, with the rice extraordinary events. Firstly, destructive flooding across planted on our newly laser levelled Cambodia, which had contained the the country. The UN office for fields, and the fields themselves, COVID-19 virus relatively well early Coordination of Humanitarian severely impacted. Around 100cms of in 2020, experienced multiple and Affairs estimated approximately water remained on the fields for more lasting outbreaks later in the year 800,000 people across Cambodia’s than one week, causing widespread resulting in longer term lockdowns 19 provinces, were affected by the damage across the farm and to the with severe economic hardship floods. The Ministry of Agriculture homes of our farm staff. Although experienced across the country. The estimated that 310,000ha of our farm produced a higher yield result of this economic contraction led to rising levels of crime and domestic (family) violence issues, with the impacts of unemployment ~~“~~ approximately 800,000 people and unrest felt across the country. across Cambodia’s 19 provinces Our Project has been fortunate in that RFM has made available were affected by the floods. resources to fence a significant

Our Project has been fortunate in that RFM has made available resources to fence a significant part of the land where the Project operates, however there remains

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Animal production at the Tahen Project has seen several improvements over the past year. Mortalities of goats and cattle have reduced, with better control of feeding, tidiness and cleanliness of pens and successful fattening. In addition, to reduce the possibility of theft, our 34 goats and 8 cows now have identity tags.

than neighbouring plots, production was well below expectations with the huge quantity of water causing the rice plant to lodge, and the grain itself to develop mould.

Once the water subsided, it was evident that the massive volume of water, and our inability to pump the water away from the fields, had eroded the land development done earlier in the year. Whilst disappointing, this event gave team members the opportunity to see first-hand how we could improve our irrigation and drainage design.

Consequently, we re-engaged the land development contractors, with the laser levelling team returning to Tahen last month. Our fields have now been redeveloped and we are looking forward to seeing the results of the rice crop to be planted in June 2021.

The goats are released each day and a field rotation system for foraging has been established to provide a sustainable food source for the goats, while protecting the Project’s crops. The floor of the goat shed has been raised to enable easy cleaning, promoting a cleaner environment for these animals.

~~“~~ Our team of approximately 16 farmers and administrators continue to benefit and learn from the Tahen Project funded by RFM.

Our cattle team is growing in confidence. Several workshops have been held, organised by the RFM funded Australian agronomist. The workshops have focused on creating a self-sustaining feed supply based on using our ground cover crops. A systematic approach to fattening the cattle has been established based on corn, banana stems, rice powder, sesame sugar and forage and roadside vegetation.

The banana and mango farms, covering 4 ha and 5.6 ha respectively, continue to thrive. These are low value, low maintenance crops with production contributing only a small amount to the economic outcome of the project, but a large amount to knowledge and capacity building at Tahen.

At the banana farm, a groundcover of peanut was planted in a portion of the farm to prevent soil erosion and weeds, with the added bonus of providing nitrogen to the bananas. Other ground cover crops planted at the banana farm include turmeric, finger roots, cow pea and crotalaria.

As we move into the last year of the Project, we continue to build capacity at a local level. On farm, workshops in pest identification and management, basic soil science, organic fertiliser production and other topics were undertaken. In the office, a different approach was taken with English classes, team building activities and communication skills training offered. Our team of approximately 16 farmers and administrators continue to benefit and learn from the Tahen Project funded by RFM.

Likewise at the mango farm, Chinese ginger root bulbs, cow pea and crotalaria were planted intra row. These crops will improve the soil structure and provide the basis for our cow ration.

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About Rural Funds Management

Rural Funds Management Limited (RFM) is one of the oldest and most experienced agricultural fund managers in Australia. RFM has a 24 year history and operates from a head office in Canberra, and offices in Sydney and Queensland. The company employs more than 100 staff in fund and asset management activities.

Established in 1997, RFM manages approximately $1.4b of agricultural assets. This includes three investment funds for which RFM is the responsible entity. Assets are located across New South Wales, Queensland, South Australia, Western Australia and Victoria.

The Rural Funds Group (RFF) is RFM’s largest fund under management. RFF is an ASX-listed real estate investment trust and owns a $1.1b portfolio of diversified agricultural assets including almond and macadamia orchards, premium vineyards, water entitlements and cattle and cropping assets.

RFM’s company culture is informed by its long-standing motto of “Managing Good Assets with Good People”. Scan the QR code to learn more.

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Newsletter references

The rise and rise of Australian farmland

1. Australian Farmland Values 2021, Rural Bank, a division of Bendigo and Adelaide Bank Ltd, April 2021 afv-national-2021.pdf (ruralbank.com.au)

2. This is a representation of a hypothetical cattle enterprise using various assumptions for operating and overhead costs.

Rural Funds Group (ASX: RFF) update: productivity and valuations

1. Where no independent valuation has been conducted since acquisition, the purchase price and acquisition date has been listed. JBS Feedlots are not independently valued in financial statements as they are accounted for as a finance lease and are measured at amortised cost. Homehill includes an additional area purchased in December 2020 for $4.3m.

2. Adjusted NAV and trading price are at relevant financial year end except $2.01 (as at 31 December 2020) and $2.42 (as at 17 March 2021 closing price). Compound annual growth rate (CAGR) calculated daily (1 July 2014 to 17 March 2021). Total unitholder return assumes RFF dividends are reinvested. Index return S&P/ASX 300 A-REIT Accumulation Index.

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TO BE FORMATTED

“ RFF has capacity to fund the initial [macadamia] developments while, importantly, continuing to fund unitholder distributions.

Image: Cotton bales, Mayneland, central Queensland, March 2021. Newsletter by Rural Funds Management - 15 -

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Rural Funds Management Limited ABN 65 077 492 838 AFSL 226 701

Level 2, 2 King Street Deakin ACT 2600 Locked Bag 150 Kingston ACT 2604

T 1800 026 665 W www.ruralfunds.com.au E investorservices@ruralfunds.com.au E adviserservices@ruralfunds.com.au

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