RURAL FUNDS GROUP — Management Reports 2014

May 6, 2014

Rural Funds Group (RFF)

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ASX Release

7 May 2014

Subject: Newsletter to Investors

Attached is the April 2014 Newsletter to Investors.

About Rural Funds Group (RFF) ARSN 112 951 578

RFF owns a diversified portfolio of high quality Australian agricultural assets. RFF’s investment objective is to generate a stable income stream derived from leasing its assets to suitable counterparts and capital growth through any appreciation in the value of those assets. Rural Funds Management Ltd (RFM) is the responsible entity of RFF.

For further information:	For media enquiries:	For investor relations enquiries :
David Bryant	Stuart Waight	James Powell
Managing Director	Chief Operating Officer	Investor Relations & Distribution Manager
Rural Funds Management	Rural Funds Management	Rural Funds Management
T 02 6203 9704	T 0419 126 689	T 0420 279 374
E DBryant@ruralfunds.com.au	E SWaight@ruralfunds.com.au	E JPowell@ruralfunds.com.au

Edition 1 April 2014

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Welcome

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Dear investor,

Welcome to the first edition of our Newsletter.

Following the listing of the Rural Funds Group, we have simplified our communications to investors by reducing the number of funds that we report on and reducing the frequency of the Newsletter to two editions per year. These changes are intended to improve clarity and reduce cost. The new format will report on two funds: The Rural Funds Group, a fund listed on the ASX, and StockBank which is an unlisted fund.

The Newsletter will provide investors with relevant commentary on RFM investments and outline key dates for each Fund as well as practical information such as relevant contact information and how to trade securities.

We will continue to incorporate a main article in each edition to provide you some insight into the sector and investment environment in which we operate. In this first edition I present a comparison of the agriculture property leasing sector to commercial property leasing and indicate the scope of the opportunity for the Rural Funds Group and its investors.

As always, we welcome feedback from investors and encourage you to contact our investor services team should you have any comments.

I hope you find the Newsletter informative.

David Bryant

Managing Director Rural Funds Management

2 | News from Rural Funds Management Ltd | April 2014

RFF Market Perspectives

David Bryant, Managing Director

The Australian commercial property sector is well serviced with fund managers and investment funds designed to meet the needs of tenants and investors. In contrast the agricultural sector, though of comparable scale, has only one fund designed for this purpose: the Rural Funds Group (RFF).

A calculation of the total value of Australia’s investment grade commercial property indicates that this asset class has a total value of around $280 billion. This figure was derived from national data relating to floor area multiplied by market values per square metre. Investment grade properties in this case, were properties valued greater than $10 million. Figure 1 sets out this data and demonstrates that the level of institutional ownership is on average 70%, with the balance owned privately. Interestingly, retail property is 95% institutionally owned, while industrial property has a lower level of investor ownership (47%), though this figure is changing rapidly with the expansion in number and scale of Real Estate Investment Trusts (REITs) focusing on this segment.

Figure 1: Summary of the Australian property investment market[1]

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Property investment Institutionally owned Market coverage by
market size total value property total value institutional investors
AU$b AU$b
Core Property Sector
Office Investment Market 111 63 56%
Retail Investment Market 112 106 94%
Industrial Investment Market 55 26 47%
Total 280 195 70%
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While the application of an investment grade threshold skews the data to a certain extent, these statistics relating to commercial property are interesting for two reasons. Firstly, if 70% of these properties are owned by investors, it means that at least 70% of these assets are leased by tenants. Therefore, leasing commercial property is a very common practice among Australian businesses. Reasons why businesses lease premises, rather than own them

include the flexibility that leasing provides as business space requirements expand or contract.

Leasing, rather than ownership also allows a business to more efficiently use its scarce capital. Rather than tying up equity in a building that could be rented for say 10%, many business owners choose to invest the money into expanding their business operations, where they may hope to make a return of 20%.

1 Higgins Dr D.M., Australian Commercial Property Investment Market: Styles, Performance and Funding, Australian Centre for Financial Studies, Melbourne, 2013

April 2014 | News from Rural Funds Management Ltd | 3

Academic research on the performance of listed companies, verifies that leasing is good for business[2] . A study of 2,343 listed UK companies over a 13 year period, revealed that companies lease property to reduce their debt, to finance growth prospects, and to conserve liquidity, namely cash. Companies that leased real estate were found to generate higher returns than those that did not, with the optimal ratio of leasing being 65% of a company’s total property requirement.

The second reason why the data in Figure 1 is interesting is that it demonstrates a large commercial property funds management sector. The middle column shows that $195 billion of Australia’s investment grade commercial property is managed by property fund managers. Of this amount, $89 billion is owned by REITs whose securities are traded on the ASX, $90 billion is owned by wholesale funds typically targeting large superannuation funds, and the remaining $16 billion is owned by property syndicates, that would tend to be owned by retail investors and their self-managed super funds.

From this statistical snap shot of Australia’s commercial property, a picture emerges of a funds management sector that has grown to meet the needs of business. The success of this sector could not have occurred unless it delivered a product that both improved the bottom line and flexibility of businesses, while simultaneously delivering investment returns that satisfied the expectations of investors. In this respect a property fund manager is straddling two markets: the rental market for tenants, and the equity market for owners.

An analysis of these two markets and how they relate to agriculture reveals a very different picture – and an opportunity.

Australian agriculture utilises 405 million hectares of land, which is 53% of the country’s total land area. The industry is relatively fragmented with 120,000 businesses reporting that farming is their principle business. RFM has estimated that the total value of≈the land and improvements of these businesses is just over $200 billion[3] .

Added to this are substantial processing and infrastructure assets, typically owned by food processors and agricultural commodity marketers, whose total assets add tens of billions to the value of the agricultural property sector.

The threshold for investment grade agricultural assets is probably lower at around $5 million. This is because a property of this value is economically viable on a standalone basis, and could be efficiently managed and leased out by a fund manager. Possibly one third of Australia’s farms would qualify as investment grade based on this criterion, while almost all processing assets tend to exceed this value threshold. Therefore the total value of investment grade assets in Australian agriculture is of the order of $150 billion, making it a larger sector than either the office, retail or industrial property sectors detailed in Figure 1.

The total value of investment grade assets in Australian agriculture is of the order of $150 billion, making it a larger sector than either the office, retail or industrial property sectors.

Despite the scale of the agricultural sector, it is estimated that only 4% of agricultural property in Australia is leased compared to around 40% for the US and many European countries. Why is Australia’s leasing rate so low, and why has there been no equivalent emergence of property fund managers facilitating property leasing?

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2 Lasfer, M., Why do companies lease real estate assets?, Cass Business School, London, 2005

3 While the Australian Bureau of Statistics (ABS) publishes data on the numbers and types of agricultural enterprises, there is little data available on the actual capital value of the industry. RFM has attempted to calculate this figure through a range of techniques such as obtaining data on the size of the national beef herd and multiplying this by the typical price paid for sufficient land to carry one cow. The same technique was used for sheep, with adjustments made in both cases for the lower feed requirements of non-breeding livestock. In the case of cropping, RFM analysed grain production, the area planted and applied a land value adjusted for productivity. Similar techniques were repeated for the major agricultural industries covering nearly 80% of the total farm population.

4 | News from Rural Funds Management Ltd | April 2014

RFF has become Australia’s first agricultural REIT to serve Australian farm businesses and meet the expectation of its owner: the RFF unitholders.

The main reason is the relatively low lease rentals paid by broadacre[4] farm enterprises.

Broadacre farms can be leased at a rental yield of 5% of the capital value of the farm. This compares with an office building in the centre of our cities that would lease on a yield of 6-7%, and industrial warehouses on the fringe of our cities that lease for around 9%. On the surface then, leasing commercial property would appear more attractive.

However higher lease rentals on commercial property may be due to the depreciation occurring on the structure or building that makes up the majority of a commercial property asset value. As the building ages, obsolescence will one day necessitate either the demolition or major upgrade of the building, and this comes at a cost that should be considered throughout the lifecycle of the

asset. In contrast to commercial property, broadacre farms have much lower levels of depreciating infrastructure installed on them. In fact modern cropping properties often have no fences, no buildings and just a few dirt access roads.

As a consequence the asset is an almost pure natural resource with no wasting infrastructure detracting from long term returns.

While broadacre lease rentals may not be diminished by depreciation, the fact remains that the net yield generated by these assets is too low to compete with the investment yields historically generated by fund managers of commercial property. The Rural Funds Group (RFF) has addressed this dilemma by accumulating a mix of agricultural assets, that include the natural resources of land and water, but also substantial infrastructure capable of generating higher yields. As a consequence of this asset mix, RFF is able to distribute investment yields that exceed the majority of REITs.

RFF then is uniquely placed. Just as commercial property fund managers have provided a service that assists Australian business, while meeting the expectations of their investors, RFF has become Australia’s first agricultural REIT to serve Australian farm businesses and meet the expectation of its owner: the RFF unitholders.

Figure 2: Spectrum of investment opportunities

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Infrastructure predominant Natural resources predominant
Steel Concrete Copper High density polyethylene (HDPE) Irrigated infrastructure Fencing Improved pasture Soil Water
eg processing structure Infra- Poultry farms and other tree Almonds orchards non-premiumVineyards geographic Vineyards premium croppingIrrigated Dairy non-irrigatedCropping Grazing entitlementsWater
or storage nuts indication
High income 12% 7.5% Low income 5%
Low growth -2% 2.5% High growth 5%
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4 The term broadacre describes less intensive enterprises such as livestock grazing and cropping. These contrast with intensive enterprises such as vineyards, almond orchards and poultry farms.

April 2014 | News from Rural Funds Management Ltd | 5

Rural Funds Group (RFF) Update

ARSN: 112 951 578

RFF was formed as the result of the December 2013 merger of three unlisted funds managed by RFM.

The new, diversified entity comprises assets within three main agricultural sectors leased to high quality tenants, including two ASX-listed companies. Figure 1 below describes RFF’s assets:

Figure 1: RFF Assets

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Rural Funds Group Responsible Entity Rural Funds Management
Poultry Almond orchards Vineyards Other
infrastructure
– 2 core properties – 6 vineyards in SA and 1 – Plant and equipment
– 17 chicken growing in VIC
farms in NSW/VIC – Water rights – Olive properties
– 31 Dec 2013 property
– 154 sheds – 31 Dec 2013 property valuation: $36.9m – Cotton properties
valuation: $84.7m
– Cash & receivables
– 31 Dec 2013 property – Leased to Treasury
– Leased to Select
valuation: $99.3m Harvests / RFM Wine Estates – $26.4m in gross assets
– Leased to RFM Poultry Almond Schemes – All property, plant and
(off-take with Baiada) equipment leased to a
range of counterparts
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The merger proposal received overwhelming support and was viewed by Unitholders as a mechanism to strengthen their investment by providing a sustainable liquidity solution, greater access to capital markets and diversification amongst other benefits.

RFF commenced trading on the ASX on 14 February 2014 and very quickly confirmed that listing provided a successful liquidity mechanism for our Unitholders with a turnover of 11.5% of total units on issue in the 11 trading days until the end of February and 13.57% to the end of March.

“Providing liquidity for our investors was fundamental to the proposal put to Unitholders in forming RFF. It is gratifying the process has been successful in achieving this primary aim”, said David Bryant.

“RFF has traded in a range of 72 cents to 89 cents since listing. We are now focused on growing RFF awareness in the listed marketplace with the aim of increasing the trading price.”

Key to increasing the profile of RFF in the listed environment has been the initiation of research coverage, which in the first instance was undertaken by financial services firm Taylor Collison (report on RFF available at www.ruralfunds.com.au ).

On 27 February 2014, RFF reported its first half year accounts as a listed entity for the six month period ending 31 December 2013. As part of its service to Unitholders, RFM made the presentation and accompanying audio available for download on the RFM website.

6 | News from Rural Funds Management Ltd | April 2014

The half year accounts presentation highlighted key attributes of RFF including improved banking terms, the diversification of our tenants (see figure 2 below), expected distribution yield (forecast 8.6% for FY2015) and an attractive weighted average lease term of 13 years (see figure 3 below).

Later in the calendar year, RFM will seek Unitholder approval to amend RFF’s constitution to reflect the listed environment it now operates in, and to align the structure of RFF with other REITs. Specifically RFM is recommending that RFF adopt a “stapled security” structure which would provide Unitholders with flow through taxation treatment on the majority of assets owned by RFF. More information will be provided to investors as it becomes available.

Figure 2: Tenant portfolio diversification by FY14 revenue

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RFM Poultry (NSX: RFP) 47%
Select Harvests (ASX: SHV) 17%
RFM Almond Funds 14%
Treasury Wine Estates (ASX: TWE) 14%
StockBank 3%
Other 5%
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Figure 3: Lease expiry profile based on FY14 revenue

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$6m
$5m
$4m
$3m
$2m
$1m
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037
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April 2014 | News from Rural Funds Management Ltd | 7

Looking ahead, RFM’s strategy is focused on improving market awareness, cost control and ongoing assessment of additional agricultural leasing opportunities.

Key Portfolio & Financial Statistics – as at 31 December 2013

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Total Assets $247m
Net Asset Value (NAV) $118m
NAV per unit $1.01
Loan to Security Ratio (LSR) 41%
Forecast FY 2015 yield at NAV 8.55%
Weighted Average Lease Expiry (WALE) 13 years
Forecast 6 months ending 30 June 2014 distribution per unit 4.26 cents
Forecast FY2015 distribution per unit 8.59 cents
Forecast FY2015 payout ratio 90%
Number of properties 27
Occupancy rate 100%
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Upcoming Key Dates

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Quarterly distribution announcement June 2014
Full year results announcement August 2014
Quarterly distribution announcement September 2014
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RFF Investment Profile

RFF is structured as a specialised real estate investment trust that owns a diversified portfolio of high quality Australian agricultural assets primarily including mature almond orchards and associated water entitlements, commercial scale poultry growing infrastructure and premium vineyards and livestock all of which are leased to suitably qualified and experienced agricultural operators (or tenants).

RFF’s investment strategy is to deliver a stable income stream from leasing assets and capital growth through the appreciation in the value of RFF’s assets.

RFF benefits from strong industry dynamics with growth in Australian agriculture driven by increasing world population growth, the emerging Asian middle class and global constraints in the supply of agricultural land.

8 | News from Rural Funds Management Ltd | April 2014

RFM StockBank Update

ARSN: 153 436 803

During 2013 StockBank raised over $5 million from retail investors increasing the size and geographic diversification of the Fund.

As a consequence of the increased scale, RFM has focused on growing the number of livestock agents we engage with, and increasing the number of sheep within the StockBank portfolio.

Livestock agents are key to StockBank’s model as their skills and expertise are used to identify suitable farmers (Operators) to lease livestock. StockBank’s leasing model continues to be well received with 80% to 90% of Operators repeating a leasing transaction.

“Sourcing new agents helps StockBank diversify our Operator base and ensure the Fund is not overly reliant on the performance or financial capacity (in the event of a shortfall) of any one Operator” said David Thomson – Business Manager, StockBank.

The move to increase sheep numbers within StockBank has been well timed with very positive lamb market fundamentals. Drier conditions have resulted in cheaper lambs and higher sales revenues from finished animals. A more stable food supply, backed by feed lots, has assisted StockBank Operators in benefiting from improved sales margins. Figure 1 below illustrates recent finished lamb prices compared to previous years.

While cattle prices have remained slightly lower as result of drier weather, the finished price of cattle has provided profit opportunities for Operators with access to feed or pasture.

Rainfall in February and the first week of March provided relief to stocking pressure in many cattle and sheep regions. Conditions have been tougher in Queensland with dry conditions continuing and StockBank’s flexible leasing model has allowed the Fund to decrease its exposure to this region in response.

Market fundamentals for StockBank have remained strong. Overseas demand for cattle and sheep have hit record highs with new Australian export records set in February. Beef and veal exports exceeded 100,000 tonnes by shipping weight (SWT) and lamb exports surpassed 19,000 tonnes SWT.

A lower Australian dollar greatly improves Australian beef’s competitive position in international markets. China in particular is emerging as a large market for Australian red meat with increasing demand and trading volumes.

Figure 1: Eastern States Trade Lamb Indicator (ESTLI)

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600
550
500 2012
2013
450
2014
400
350
300
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
¢/kg cwt
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April 2014 | News from Rural Funds Management Ltd | 9

Key Portfolio & Financial Statistics – as at 31 December 2013

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Total Assets $11.7m
Net Asset Value (NAV) $11.3m
NAV per unit $1.01
10,971 leased
6mth cattle turnover 5,655 sold
16,033 remain
31,571 leased
6mth sheep turnover 11,250 sold
37,765 remain
Change in livestock placements Growth of 45% from $7m to $10.1m
New South Wales: 10,882 cattle, 21,813 sheep
Victoria: 1,428 cattle
Livestock locations
South Australia: 873 cattle
Queensland: 294 cattle
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Upcoming Key Dates

Half-yearly distribution record date 30 September 2014

StockBank Investment Profile

StockBank is a liquid, alternative investment fund that StockBank receives payment upon the sale of livestock aims to provide investors with a reliable yield by financing calculated as a fixed return on capital regardless of the acquisition of livestock that are leased and grown out livestock sale price, weight gain or mortality rates. by Operators on a portfolio of diversified properties.

10 | News from Rural Funds Management Ltd | April 2014

About Rural Funds Management

AFSL: 226 701

RFM is an experienced fund and asset manager that specialises in Australian agriculture.

RFM manages a diverse portfolio of large-scale farming and agricultural enterprises for investors who seek the opportunity to diversify their portfolios away from the traditional equity and property markets. Our primary assets are in land, water, infrastructure, poultry, cattle, sheep, viticulture, cotton and almonds.

agricultural assets under management in New South Wales, South Australia, Victoria and Western Australia.

RFM is one of the oldest and most experienced managers of agricultural assets in Australia. In addition to RFM’s corporate office located in Canberra, RFM has offices in Sydney, Melbourne and Western NSW and employs more than 60 staff in fund and asset management activities.

Established in 1997, RFM is the responsible entity for seven agricultural investment funds and as of 30 December 2013, had approximately $308m of

Contact Details

Level 2, 2 King St Deakin ACT 2600

T 1800 026 665

E investorservices@ruralfunds.com.au

E adviserservices@ruralfunds.com.au

F 1800 625 518

Share Registry

Boardroom Limited Pty Ltd Level 7, 207 Kent Street Sydney, NSW, 2000

T 1300 737 760

E enquiries@boardroomlimited.com.au

F 1300 653 459

To make an investment

Rural Funds Group (ASX: RFF) is a listed investment. StockBank operates as an unlisted fund (APR Code: RFM0009AU).

To make an investment in RFF please contact your broker or financial adviser.

Provide us your email address

We use email to communicate with our investors. Please take the time to contact our Investor Services team and provide your email address so that you don’t miss out on any important information.

To make an investment in Stock Bank please contact your financial adviser or RFM.

April 2014 | News from Rural Funds Management Ltd | 11

Rural Funds Management Limited Locked Bag 150 KINGSTON ACT 2604 ABN 65 077 492 838 AFSL 226 701 Telephone +61 2 6203 9700 Telephone (Investor Services) 1800 026 665 Telephone (Adviser Services) 1300 880 295

DIRECTORS OF RURAL FUNDS MANAGEMENT LIMITED Guy Paynter David Bryant Michael Carroll

Facsimile 1800 625 518 Email investorservices@ruralfunds.com.au Email adviserservices@ruralfunds.com.au

Disclaimer

Rural Funds Management Limited (RFM) 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, 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 circumstances may occur at any time 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. When deciding if any RFM investment is suitable for your needs and circumstances, obtain a copy of the relevant Product Disclosure Statement issued by RFM. 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.

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