RURAL FUNDS GROUP
ANNUAL REPORT
for the year ended 30 June 2017
Rural Funds Group (ASX: RFF) stapled group comprising:
Rural Funds Trust ARSN 112 951 578 and
RF Active ARSN 168 740 805
Responsible Entity: Rural Funds Management Limited
ACN 077 492 838 AFSL 226701
Issued on: 27 September 2017
CONTENTS
Letter from the Managing Director
Corporate governance statement
ASX additional information
Investment strategy, FY17 results
highlights and Fund overview
Financial statements
2
5
25
28
32
LETTER FROM THE
MANAGING DIRECTOR
Dear Unitholder,
We are pleased to present to you the accounts for the Rural Funds Group (ASX: RFF) for the year ended 30 June 2017
(FY17).
RFF at 30 June 2017
RFF ended the financial year in a good financial position. Funds from operations slightly exceeded forecast at
12.5 cents per unit and distributions per unit (DPU) of 9.6 cents were paid to investors, representing an 8% growth
on the prior year. Gearing at the end of the period of 29% was at the lower end of the target range, positioning the
fund to pursue acquisitions.
RFF now has a low payout ratio of 80%, designed to support DPU growth target of 4% p.a. The weighted average
lease expiry (WALE) of 13.2 years provides a long term contracted lease income stream.
Review of financial year 2017
In July 2016, RFF raised $61 million through a non-renounceable Entitlement Offer. The proceeds, in combination
with debt and retained earnings, were used to fund the purchase of three Queensland cattle properties and the
associated breeding herd. This included two breeding properties, Mutton Hole and Oakland Park, situated near
the Gulf of Carpentaria, for $18.4 million, and Rewan Station, a high value backgrounding and finishing property
located near Rolleston in central Queensland, for $31.6 million.
The proceeds also contributed to the funding of the Kerarbury orchard expansion at Darlington Point, NSW and
the purchase of three macadamia orchards near Bundaberg, Queensland, which were initially debt funded.
In December 2016, RFF purchased a 9,549 megalitre Murrumbidgee River high security water entitlement
for $34.4 million. This transaction represents one of the largest trades of Murrumbidgee River high security
water entitlements. Rural Funds Management (RFM) will seek to lease the water on a long-term basis as part
of a horticultural development. In the interim, revenue will be generated from the sale of the annual water
allocations from FY18.
Also in December 2016, RFF purchased the 4,880 ha cotton property ‘Lynora Downs’ for $26.5 million. Located 130 km
south of Emerald, Central Queensland, the asset diversified RFF into a new sector and supports the climatic
diversification strategy of the Fund.
Following the debt funded acquisition of the water entitlements and cotton property, RFF completed a $78.6 million
Entitlement Offer in June 2017 reducing gearing to 29%.
The 2018 financial year
In FY18, RFM, your Fund’s manager, will pursue acquisitions in the cattle and cotton sectors. RFF entered both
sectors in FY17, and it is possible additional assets can be acquired that complement the Fund.
The acquisition of the three Queensland cattle properties by RFF, and operation of these properties by the lessee,
has confirmed an investment strategy whereby underutilised assets can be made more productive, and in time,
more valuable.
Since acquiring the properties, stocking rates have increased such that they now carry 27% more stock than their
initially assessed capacity. In addition, RFF has funded improvements on these assets, including additional water
infrastructure and pasture improvement, with the aim of further improving carrying capacity – expenditure that
accrues additional rent. It is anticipated that this investment will increase carrying capacity by 25%, and in time
these productivity gains will be reflected in the property valuations.
2
Productivity gains generated by good management and targeted capital improvements are most achievable on
assets that are predominantly natural resource based. For this reason, RFM is observing that natural resource
predominant assets tend to present opportunities for a greater total return than infrastructure type assets in
the current market.
This strategy of increasing productivity is underpinned by a manager who has operational knowledge in the
sectors in which assets are leased. RFM will seek to leverage this understanding of the management of cattle
and cotton properties to repeat this strategy of acquisition and development in FY18.
While increased asset values are positive, this does not immediately translate into increased income for RFF
unitholders. This is because contracted lease payments do not increase until the valuation of the property
increases and a rent review is completed – generally at the fifth anniversary of the lease. For this reason,
this investment strategy should produce shorter term increases in asset values, followed by longer term
increases in rental income.
RFM will continue to work closely with its lessees to manage RFF’s current portfolio of assets. A key part of
ongoing management is the identification and funding of development and capital expenditure programs. It is
expected that RFF will spend $81 million on capital development over the next three years. This expenditure,
occurring on assets in all sectors in which RFF owns properties, aims to make the properties more productive
for the lessee and attracts rent as it is deployed.
In conclusion, during this current financial year RFF will see expansion of its asset base and revenues due to
existing capital expenditure programs, possible increases in asset values and contractual rental indexation
mechanisms. This growth will be funded by cash retained after payment of distributions. RFF has sufficient
additional funds to complete an acquisition in the cattle sector and RFM will continue to investigate further
opportunities that can enhance the financial performance and diversity of the Fund.
Yours faithfully,
David Bryant
Managing Director
Rural Funds Management Limited
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 3
“...RFM IS
OBSERVING THAT
NATURAL RESOURCE
PREDOMINANT ASSETS
TEND TO PRESENT
OPPORTUNITIES FOR
A GREATER TOTAL
RETURN...”
CORPORATE GOVERNANCE
STATEMENT
Definitions
AFSL
ASIC
ASX
Australian Financial Services Licence
Australian Securities and Investments Commission
Australian Securities Exchange or ASX Limited
Corporations Act
Corporations Act 2001
Rural Funds Group (the Fund) is listed on the ASX and is a stapled entity comprising Rural Funds Trust and
RF Active, both registered managed investment schemes under the Corporations Act. Units in Rural Funds Trust
are stapled to units in RF Active. Rural Funds Management Limited (the Responsible Entity) is the Responsible
Entity for the Fund and has established and oversees the corporate governance of the Fund. The Responsible
Entity holds an Australian Financial Services Licence (AFSL) authorising it to operate the Fund. It has a duty
to act in the best interest of unitholders of the Fund. The Fund has a compliance plan that has been lodged
with ASIC and a copy of the compliance plan can be obtained from ASIC or by contacting the Responsible Entity.
The Responsible Entity publishes a number of its corporate governance related policies on its website at:
http://ruralfunds.com.au/rural-funds-group/about/corporate-governance/
The Board takes its corporate governance responsibilities seriously. The Board is comprised of four directors
and has a mix of the experience and skills necessary to oversee the corporate governance requirements of the
Responsible Entity. This ensures the Responsible Entity operates with integrity, is accountable and acts in a
professional and ethical manner. The Board works together and its collective ability facilitates effective decision
making to lead a viable, profitable and efficient business.
To the extent that they are applicable and appropriate for the Fund, the Responsible Entity has adopted and
complies with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations
3rd Edition. In accordance with ASX Listing Rule 4.10.3, set out below are the ASX Corporate Governance
Council’s eight principles of good corporate governance, and the extent to which there is compliance with
the recommendations for each principle. The statement has been approved by the Board of the Responsible
Entity and applies to the period 1 July 2016 to 30 June 2017 (“Statement Period”).
At the time of printing this statement, there have been no material changes to the corporate governance
policies and practices since 30 June 2017.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 5
“...THE RESPONSIBLE
ENTITY OPERATES
WITH INTEGRITY,
IS ACCOUNTABLE
AND ACTS IN A
PROFESSIONAL AND
ETHICAL MANNER.”
6
PRINCIPLE 1
Lay solid foundations for management and oversight
A listed entity should establish and disclose the respective roles and responsibilities of its board and management
and how their performance is monitored and evaluated.
ASX
RECOMMENDATION
FUND’S RESPONSE
1.1
The business of the Fund is managed under the direction of the Board of the
Responsible Entity comprising:
>
Chair: Guy Paynter (independent non-executive director)
> Managing Director: David Bryant
> Non-Executive Director: Michael Carroll (independent non-executive director)
> Non-Executive Director: Julian Widdup (independent non-executive director)
The conduct of the Board is governed by the Constitution of the Fund and the
Corporations Act. The broad functions and responsibilities of the Board are
set out in sections 2.3 – 2.4 of the Corporate Governance Charter. The specific
responsibilities are set out in section 2.5.
The Board has delegated responsibility for the day-to-day management of
the Fund to the Managing Director of the Responsible Entity. The delegations
are outlined in the Corporate Governance Charter. The Managing Director,
David Bryant, is responsible for financial; continuous disclosure and compliance
oversight; media and analyst briefings and responses to member questions; and
ensuring the Board is provided with information to make fully informed decisions.
The Constitution of the Fund is available by contacting the Responsible Entity.
The Corporate Governance Charter is available on the Responsible Entity’s website.
As an externally managed scheme, recommendation 1.2 does not apply to the Fund.
All directors of the Responsible Entity receive letters of appointment setting out the
key terms and conditions of their appointment.
All executives of the Responsible Entity enter into an employment agreement setting
out the key terms and conditions of their employment including a position description,
duties, rights, responsibilities, remuneration and entitlements on termination.
The Company Secretary of the Responsible Entity is accountable to the Board, through
the Chair, on all matters to do with the proper functioning of the Board. As stated in
the Corporate Governance Charter, the Company Secretary reports directly to the
Managing Director.
1.2
1.3
1.4
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 7
ASX
RECOMMENDATION
FUND’S RESPONSE
The Responsible Entity has a diversity policy, which is reviewed annually with any
changes approved by the Board. The policy provides the framework by which
the Responsible Entity actively manages and encourages diversity and inclusion.
It recognises that its employees are one of its greatest assets and it has a range of
employees with skills and capabilities that ensure the ongoing strength, continuity
and stability of the Responsible Entity. The policy addresses issues of diversity
in developing selection criteria, skills mix and process when recommending
candidates for appointment to the Board. Additionally, the Responsible Entity seeks
to attract a diverse pool of suitably skilled candidates for available positions within
the organisation. Due to the size of the Responsible Entity’s Board and its senior
management team, and the limited turnover of personnel at this level, it has not
set quantitative gender diversity objectives. The Responsible Entity will endeavour
to maintain, or improve, its current level of gender diversity as senior management
vacancies arise. A copy of the policy is available on the Responsible Entity’s website.
The Responsible Entity’s senior executive team includes one female executive
(out of a total of four executives). Of the 82 staff, 30.4% are female.
The performance of the Board, its committees and individual directors is outlined
in the Corporate Governance Charter.
The performance of individual Board members is reviewed annually in accordance
with the timelines outlined in the Responsible Entity’s Performance Management Policy.
The performance of senior executives is formally reviewed annually, in accordance
with the timelines outlined in the Responsible Entity’s Performance Management
Policy. The annual process reviews each individual’s past performance,
their achievement of key performance indicators over the previous 12 months,
sets key performance indicators for the coming 12 months, and identifies training
and development opportunities. The formal process provides an opportunity for
the senior executive and the Managing Director to focus solely on performance
and development. Informal reviews providing feedback about key projects are
conducted on an ongoing basis.
1.5
1.6
1.7
8
PRINCIPLE 2
Structure the board to add value
A listed entity should have a board of an appropriate size, composition, skills and commitment to enable it
to discharge its duties effectively.
ASX
RECOMMENDATION
FUND’S RESPONSE
2.1
2.2
2.3
As an externally managed scheme, recommendation 2.1 does not apply to the
Fund. Additionally, due to the small size of the Responsible Entity’s Board, it is
usual that all of the Board members are involved in the full spectrum of discussion
and decisions on matters. As a result, they bring the full complement of skills
and experience available to address matters as they arise. If, and when gaps are
identified, external advice is sought from senior consultants such as specialist tax,
legal or business advisers to address any skills gaps.
As an externally managed scheme, recommendation 2.2 does not apply to the Fund.
The Responsible Entity Board comprises four members, three of whom are
independent non-executive directors.
DIRECTOR
COMMENCEMENT
INDEPENDENT
David Bryant
17 February 1997
Guy Paynter
15 April 2010
Michael Carroll
15 April 2010
Julian Widdup
17 February 2017
No
Yes
Yes
Yes
Guy Paynter is an Independent Director,
holds the role of Chair of the Board and is
a member of the Audit Committee and
Remuneration Committee.
Guy Paynter is a former director of broking firm JB Were
and brings to the Responsible Entity more than 30 years of
experience in corporate finance. Guy is a former member of
the ASX and a former associate of the Securities Institute of
Australia (now known as the Financial Services Institute of
Australasia). Today, Guy is Chair of Bill Peach Group Limited
(previously known as Aircruising Australia Limited).
Guy’s agricultural interests include cattle breeding in the
Upper Hunter region in New South Wales.
Guy holds a Bachelor of Laws from the University of Melbourne.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 9
ASX
RECOMMENDATION
FUND’S RESPONSE
2.3 continued
David Bryant is the Managing Director.
David holds 79.08% of shares on issue in the Responsible
Entity.
David Bryant established RFM in February 1997 and
since that time has led the team that is responsible for
the acquisition of large-scale agricultural property assets
and associated water entitlements. As at 30 June 2017,
RFM manages over $640 million of agricultural assets.
On a day-to-day level, David is responsible for leading the
RFM Executive, maintaining key commercial relationships
and sourcing new business opportunities. David holds a
Diploma of Financial Planning from the Royal Melbourne
Institute of Technology (RMIT) University and a Master of
Agribusiness from The University of Melbourne.
Michael Carroll is a Non-Executive Director
and is the Chair of the Audit Committee
and the Remuneration Committee.
Michael Carroll serves in a board and advisory capacity for
a range of agribusiness entities. Michael is a Director of
Tassal Group Ltd, Select Harvests Ltd, Paraway Pastoral
Company and Sunny Queen Ltd. Former board positions
include the Australian Farm Institute, Warrnambool
Cheese & Butter Factory Company Holdings Ltd, Meat &
Livestock Australia, Queensland Sugar Ltd, the Gardiner
Dairy Foundation and Rural Finance Corporation of Victoria.
Michael has senior executive experience in a range
of companies, including establishing and leading the
National Australia Bank Agribusiness division.
Michael holds a Bachelor of Agricultural Science
from La Trobe University and a Master of Business
Administration (MBA) from the University of Melbourne’s
Melbourne Business School. Michael has completed the
Advanced Management Program at Harvard Business
School, Boston, and is a Fellow of the Australian Institute
of Company Directors.
10
ASX
RECOMMENDATION
FUND’S RESPONSE
2.3 continued
Julian Widdup is a Non-Executive Director
and is a member of the Audit Committee
and Remuneration Committee.
Julian Widdup is a former executive of infrastructure
investment management companies, Palisade Investment
Partners and Access Capital Advisers (now Whitehelm
Capital) where he was responsible for the acquisition
and asset management of major infrastructure assets,
risk management, portfolio construction, institutional
client management and overseeing all aspects of
investment operations.
Previously Julian had worked with Towers Perrin (now Willis
Towers Watson) as an asset consultant, the Australian
Bureau of Statistics and the Insurance and Superannuation
Commission (now APRA).
Julian brings extensive experience to the RFM Board,
having previously served as a director of Palisade
Investment Partners, Darwin International Airport,
Alice Springs Airport, NZ timberland company Taumata
Plantations Limited, Regional Livestock Exchange Investment
Company, Merredin Energy power generation company,
Victorian AgriBioscience Research Facility, Casey Hospital
in Melbourne and Mater Hospital in Newcastle.
Julian holds a Bachelor of Economics from the Australian
National University, is a Fellow of the Institute of Actuaries
of Australia and a Fellow of the Australian Institute of
Company Directors.
Further information on the composition of the Responsible
Entity’s Board, executive management and asset and
business management profiles; and the skills, knowledge
and experience of the individual members can be found
on the Responsible Entity’s website.
The independence of the Non-Executive Directors has
been ascertained in compliance with the Corporations Act
and the ASX Listing Rules, and there are no other factors
which might reasonably be seen as undermining their
independence. All directors must declare actual or potential
conflicts of interest and excuse themselves from discussions
on issues where an actual or potential conflict of interest
arises. The directors’ interests and any subsequent changes
have been disclosed to the ASX. The Responsible Entity
directors are subject to director rotation consistent with
the Responsible Entity’s constitution.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 11
ASX
RECOMMENDATION
FUND’S RESPONSE
As an externally managed scheme, recommendation 2.4 does not apply to the
Fund; however, as outlined in 2.3, the Responsible Entity’s Board is comprised
of a majority of independent directors.
As an externally managed scheme, recommendation 2.5 does not apply to the Fund;
however, Independent Non-Executive Director, Guy Paynter, holds the role of Chair
of the Responsible Entity.
As an externally managed scheme, recommendation 2.6 does not apply to the
Fund; however, any new directors would be provided with an induction relevant
to the Responsible Entity and the Fund. Additionally, directors are provided with
opportunities to develop and maintain their skills and knowledge, through both
formal and informal training and networking opportunities.
2.4
2.5
2.6
12
PRINCIPLE 3
Act ethically and responsibly
A listed entity should act ethically and responsibly.
ASX
RECOMMENDATION
FUND’S RESPONSE
3.1
The Responsible Entity has adopted a Directors’ Code of Conduct (the Code) that
sets out the minimum acceptable standards of behaviour. The Code seeks to give
directors guidance on how best to perform their duties, meet their obligations
and understand the company’s corporate governance practices. The Code focuses
on directors’ obligations to comply with codes and law, their general duties,
their application of business judgement, the application of independent and
sound decision making, confidentiality, improper use of information, cooperation,
personal interests and conflicts, conduct and complaints.
In addition to the Directors’ Code of Conduct, the Responsible Entity has a general
Code of Conduct that is applicable to directors and all staff. The Corporate Governance
Charter which includes the Directors’ Code of Conduct is available on the Responsible
Entity’s website.
Both codes are reviewed annually to ensure that they remain current and relevant.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 13
PRINCIPLE 4
Safeguard integrity in corporate reporting
A listed entity should have formal and rigorous processes that independently verify and safeguard the
integrity of its corporate reporting.
ASX
RECOMMENDATION
FUND’S RESPONSE
4.1
The Board of Directors of the Responsible Entity has established an Audit Committee.
The purpose of the Audit Committee is to assist the Board in overseeing the integrity
of financial reporting, financial controls and procedures in respect of the Fund as well
as the independence of the Fund’s external auditors.
The Audit Committee is comprised of three members, all of whom are non-executive
independent directors. An independent director, who is not the Chair of the Board
of the Responsible Entity, is Chair of the Committee. The relevant qualifications and
experience of the members is available on the Responsible Entity’s website.
The Audit Committee will routinely invite other individuals to attend meetings,
including executive management and management members of the Responsible
Entity and the Auditor of the Fund. The Audit Committee and invitees will review
the financial reports and provide commentary to the Board as required.
Three meetings of the Audit Committee were held in relation to the accounts
during the Statement Period. The Audit Committee ordinarily holds two meetings
per year, or more if required.
The Audit Committee has a formal charter that details the roles and responsibilities
of the Audit Committee and its obligations to report to the Board. The charter
sets out the powers of the Audit Committee, the meeting procedure framework,
the process for selection of external auditors and audit planning. The Audit
Committee charter can be found in Schedule 1 of the Corporate Governance
Charter on the Responsible Entity’s website.
4.2
The Board has received a declaration from the Managing Director and the
Chief Operating Officer that, in their opinion:
>
>
>
>
the financial records of the Fund have been properly maintained in accordance
with section 286;
the financial statements and notes referred to in paragraph 295(3)(b)
for the financial year comply with the accounting standards;
the financial statements and notes give a true and fair view of the financial
position and performance of the entity; and
the opinion has been formed on the basis of a sound system of risk management
and internal control which is operating effectively.
As an externally managed scheme, recommendation 4.3 does not apply to the Fund.
The Fund has not held an Annual General Meeting during the Statement Period.
4.3
14
PRINCIPLE 5
Make timely and balanced disclosure
A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable
person would expect to have a material effect on the price or value of its securities.
ASX
RECOMMENDATION
FUND’S RESPONSE
5.1
The Responsible Entity has adopted a Continuous Disclosure Policy that applies to
all directors and employees of the Responsible Entity. The policy is available on the
Responsible Entity’s website.
The policy reflects the desire to promote a fair market in the Fund’s units, honest
management and timely, full and fair disclosure. It complies with the disclosure
requirements of the ASX and explains the Fund’s disclosure obligations, the types
of information that need to be disclosed, and identifies who is responsible for
disclosure. It also explains how employees of the Responsible Entity can contribute.
The policy underlines the Board’s commitment to ensuring that unitholders are
provided with accurate and timely information about the Fund’s activities.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 15
PRINCIPLE 6
Respect the rights of security holders
A listed entity should respect the rights of its security holders by providing them with appropriate
information and facilities to allow them to exercise those rights effectively.
ASX
RECOMMENDATION
FUND’S RESPONSE
The Responsible Entity is a boutique fund and asset manager specialising in the
rural property sector. The Responsible Entity was established in 1997 to provide
retail investors with an opportunity to invest in Australian rural assets.
The management team includes specialist fund managers, finance professionals,
horticulturists, agricultural managers and livestock managers. This team provides
the Responsible Entity with the specialised skills and experience required to
manage the agricultural assets.
The Responsible Entity also utilises the best available consultants and supporting
resources to achieve desired outcomes and has a substantial network available to
ensure that, where appropriate, tasks can be outsourced.
The Responsible Entity has the primary responsibility for managing the Fund on
behalf of unitholders.
Information about the Responsible Entity, the Fund, and corporate governance
practices and policies is available on the Responsible Entity’s website.
The Responsible Entity’s website has information available to unitholders to facilitate
two-way communication. The investment products tab on the website provides a
link to the Fund’s website which provides a Fund overview, sector, asset and lease
information, strategy and investment process, financial information, key documents,
news and announcements and details about how to contact the Responsible Entity
and the Registry.
In addition, unitholders are encouraged to contact the Responsible Entity using any
of the following methods:
Email: investorservices@ruralfunds.com.au
Website: https://ruralfunds.com.au/contact-us/
Phone: 1800 026 665
Fax: 1800 625 518
By visiting the Responsible Entity’s office: Level 2, 2 King St, Deakin ACT 2600
From time to time, the Responsible Entity arranges tours of the assets of the Fund.
Unitholders are invited to attend these tours. Additionally, unitholders are welcome
to make their own arrangements to visit the assets by contacting investor services
by any of the methods mentioned above.
6.1
6.2
16
ASX
RECOMMENDATION
FUND’S RESPONSE
6.3
6.4
As an externally managed scheme that does not hold periodic meetings,
recommendation 6.3 does not apply to the Fund. However, if the Responsible Entity
was required to hold a Unitholder meeting, it could use a web-conferencing and/or a
teleconferencing facility for remote Unitholders along with an online polling system
provided by the Registry, enabling Unitholders to vote online at any meeting.
The Responsible Entity encourages all investors to communicate with it and with
the Fund’s registry (Boardroom Pty Limited) electronically; however, the Responsible
Entity continues to communicate with any investor via traditional methods
(mail and phone) when appropriate.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 17
PRINCIPLE 7
Recognise and manage risk
A listed entity should establish a sound risk management framework and periodically review the
effectiveness of that framework.
ASX
RECOMMENDATION
FUND’S RESPONSE
The Responsible Entity has not established a risk committee. Due to the size of the
Board and the nature of the business, the Board has determined that risk oversight
should be managed by the full Board. The Board has ultimate responsibility for
overseeing the risk management framework and for approving and monitoring
compliance with the framework. The Board receives monthly reports on all
material business risks in relation to the Fund, including a report on all risks rated
extreme or high. The ongoing management of identified risks is undertaken by the
relevant executive and/or asset managers of each business area, who report to the
Board on the effectiveness of control measures.
The Responsible Entity has established a Risk Management Policy which documents
the Responsible Entity’s policy for the oversight and management of material
business risks. It ensures that risks are identified and assessed, and that measures
to monitor and manage each of the material risks are implemented. The Risk
Management Policy is based on standards set out in the International Standards
ISO 31000:2009.
The Risk Management Policy is available on the Responsible Entity’s website.
The Responsible Entity’s risk management framework is reviewed annually, or more
often if there has been a change in the relevant legislation or in business
requirements. An annual risk review was performed during the Statement Period.
The annual risk review requires each risk owner to review each risk and assess
whether the existing risk rating is appropriate. This results in all risks being re-evaluated.
In some cases, the risks may be re-rated and the residual risk amended depending
on changes in the likelihood of the risk occurring, the consequence if the risk did
occur, and the effectiveness of control measures in place.
7.1
7.2
18
ASX
RECOMMENDATION
FUND’S RESPONSE
7.3
7.4
The Responsible Entity has an Internal Compliance Committee that provides
assistance to the Board in evaluating the risk management framework and material
business risks on an ongoing basis. Whilst not an internal audit committee,
this Committee reports to the Board quarterly and may make recommendations
to the Board for changes to processes and systems to ensure compliance with legal
and regulatory requirements.
The Internal Compliance Committee was comprised of:
>
Executive Manager Funds Management
> Manager Corporate Services
>
>
>
>
>
>
Financial Controller
Client Services Supervisor (until 23 February 2017)
Senior Fund Administrator (from 11 May 2017)
Compliance Officer
Business Manager – Rural Funds Group, Almond and Macadamia Projects
(invitee)
Business Manager – RFM StockBank, RFM Poultry, Cattle JV and Cotton JV
(invitee)
> National Manager Cropping and Livestock (from 2 February 2017) (invitee)
> National Manager Cattle (from 7 November 2016) (invitee)
This broad representation of roles on the Committee ensures it is fully
informed of matters, and there is sufficient skills and experience among
its members to make decisions as necessary.
The Responsible Entity is committed to undertaking the Fund’s business activities
in a responsible and ethical manner and ensuring that it remains sustainable.
Environmental, social and governance (ESG) issues are embedded in many of its
policies and procedures and are considered when making investment decisions.
RFF’s core activity is the leasing of agricultural land, water and infrastructure, and
thus the Fund is largely passive in nature. Lessees are required to adopt practices
that retain or improve the integrity of the Fund’s assets.
The information presented below details the Responsible Entity’s consideration
of those ESG matters of greatest materiality to the Fund and its investors.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 19
ASX
RECOMMENDATION
FUND’S RESPONSE
7.4 continued
Environment
Management
of natural
resources,
including water
resources
RFF is the owner of a quality portfolio of Australian
agricultural assets and the stewardship of these assets is of
critical importance to the performance and growth of RFF.
RFF’s properties are leased to operators who are required
to use best practice agricultural production methods when
operating the properties.
Wherever practical, the Fund will:
> monitor industry developments and adopt farm
management practices that incorporate the latest
research findings and technologies, to minimise
environmental impacts and better utilise the natural
resources;
> maximise water use efficiency through the utilisation
of modern, well managed irrigation systems;
>
>
>
>
ensure water management practices take account of
water quality and minimise run-off;
use communication technologies to access water use
data remotely, that assists to optimise water use;
adopt nutrient management practices which improve
long term soil health and ensure that pest and weed
management requiring the use of chemicals, occurs in
a safe and environmentally responsible manner; and
ensure that lessees and staff understand and are
focused on sustainable farming principles and
adhere to environmental legislation and regulations.
RFM monitors the impact of climate change on RFF’s portfolio
of assets and has implemented a climatic diversification
strategy. The strategy promotes the acquisition of assets
across different growing regions and asset classes. A Climate
Diversification Discussion Paper was released to the ASX on
20 June 2016.
RFM regularly reviews assets and infrastructure to identify
more efficient technologies to reduce RFF’s energy consumption
and carbon footprint. RFF’s assets in the cattle and poultry
sectors have achieved savings from solar technologies.
Other examples of energy savings are the RFF almond and
macadamia assets which benefit from technology that
measures tree sap flow, resulting in energy savings through
the delivery of exact water requirements water.
Climate change
Energy use
20
ASX
RECOMMENDATION
FUND’S RESPONSE
7.4 continued
Social
Community
engagement
Human capital
management
Community engagement is an integral part of RFM’s
corporate culture and is key to maintaining the support
of the communities where RFF owns assets. RFM’s first
preference is to seek potential personnel with suitable skills
and expertise from local communities, for employment and
contracting opportunities in the areas where it operates.
In addition to being an employer in various areas of rural
and regional Australia, RFM regularly provides support via
donations, labour and other means to local community
organisations.
As RFF does not directly employ staff, RFM is responsible for
human capital management associated with the management
and operation of the Fund. RFM has implemented a range
of policies in relation to its management of human capital,
including: Code of Conduct, Environmental, HSE (Health,
Safety and Environment), Incident Management, Diversity,
and Equal Employment Opportunity. The aim of these
policies is to create a safe, diverse and equitable work place.
The Responsible Entity takes its obligations under Workplace
Health and Safety legislation seriously and has an extensive
HSE management system implemented to educate personnel
and protect them from harm. The RFM Board receives a
monthly report on workplace health and safety issues and
incidents. RFM also periodically reviews arrangements with
contractors to determine if practices and standards meet
legislative requirements and contractual obligations.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 21
ASX
RECOMMENDATION
FUND’S RESPONSE
7.4 continued
Social continued
Animal welfare
Governance
Corporate
governance
22
RFF owns properties that are leased to entities where
cattle and chicken production occur. RFM has policies and
procedures with respect to animal treatment and welfare
while they are under the control of RFM and its employees.
The following information is provided about the cattle and
chicken growing sectors.
Poultry:
>
>
The birds produced at RFF’s poultry sheds are accredited
under the RSPCA’s Approved Farming Scheme Standards
— Meat Chickens. Ongoing compliance with the Standards
is monitored through RSPCA audits, with each farm being
audited twice each year, in addition to random audits.
Chickens are raised in large sheds with prescribed
stocking densities and the freedom to express normal
behaviours in accordance with the RSPCA’s Standards.
Cattle:
RFF’s cattle properties comprise an integrated breeding
to finishing operation and the lessees have adopted and
practise “low stress” stock handling methods. Fattened
animals are generally sold domestically, to either a
processor or feedlot. A small proportion of the cattle may
not be suited to being finished and may be sold to the live
export market. In FY17 live export sales represented less
than 10% of all sales.
RFM as Responsible Entity, has primary responsibility
for the management of RFF on behalf of its Unitholders.
The Board takes its corporate governance responsibilities
seriously. The Board, which has a majority of independent
directors, including an independent Chairman, is comprised
of four directors with the experience and skills necessary
to oversee the corporate governance requirements of the
Responsible Entity.
The Board works together, and their collective ability
facilitates effective decision making to lead a viable,
profitable and efficient business.
In addition, RFM has established an Internal Compliance
Committee (ICC) which reports to the Board monthly.
The ICC monitors and reports on compliance with RFM’s
AFSL and compliance program to ensure that it is effective
in meeting RFM’s compliance requirements. The ICC also
provides a supporting role to the Compliance Officer.
The members of the Committee are structured to include
representation from different business units to ensure
compliance monitoring and review are well embedded
across RFM.
ASX
RECOMMENDATION
FUND’S RESPONSE
7.4 continued
Governance continued
Conflicts of
interest and
related party
transactions
RFM manages a number of entities, including in its role
as Responsible Entity for six funds. Where related party
transactions occur between RFF and another RFM managed
entity, they are subject to the RFM Conflict of Interest
Management Policy.
RFM’s responsibilities and contractual obligations are
set out in the Fund’s Constitution, the Corporations Act
and in the Responsible Entity’s AFSL. As Responsible
Entity, RFM must always act in the best interests of
the Unitholders, and if there is a conflict between the
Unitholder’s interest and its own interests, it must give
priority to the Unitholders’ interests.
RFM has also established protocols, including appointing
separate personnel to act for each entity with separate
external advisers.
To monitor compliance with these obligations, the RFM
Board receives a monthly written report from the RFM
Compliance Officer, who reports on Responsible Entity
compliance, conflicts of interests and related party
transactions.
RFM employees are obligated to conduct themselves
according to the standards set out in the RFM Code of
Conduct, the Corporate Governance Charter and other
related policy documents. This means that our employees
conduct themselves with integrity, and in compliance with
legislative requirements and our internal policies and
procedures. Employee performance is monitored through a
combination of ongoing informal reviews and formal annual
reviews. RFM’s recruitment process includes reference
checking of all potential employees, as well as national
police checks and bankruptcy checks for sensitive roles.
We believe that acting ethically while doing business must
underpin our approach.
Ethical conduct
by staff
The Responsible Entity manages the above risks in accordance with its Risk
Management Policy available on the Responsible Entity’s website.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 23
PRINCIPLE 8
Remunerate fairly and responsibly
An externally managed listed entity should clearly disclose the terms governing the remuneration of the
Responsible Entity.
ASX
RECOMMENDATION
FUND’S RESPONSE
8.1
The Responsible Entity has adopted the ASX’s alternative recommendations for
externally managed entities and provides the following details governing the
remuneration to the Responsible Manager:
>
>
>
Fund Management Fee – up to 1.0% p.a. of the gross asset value of the Fund;
Asset Management Fee – up to 1.0% p.a. of the gross asset value of
the Fund; and
Termination Fee – 1.5% of the gross asset value of the Fund.
The fees listed above represent the maximum allowed under the Fund’s Constitution.
At present, the Responsible Entity charges total fees (fund management and asset
management fees) of 1.05% of the gross asset value of the Fund.
The Board of Directors of the Responsible Entity established a Remuneration
Committee on 17 February 2017. The purpose of the Remuneration Committee is
to advise on remuneration and issues relevant to the remuneration policies and
practices for senior executives and non-executive directors.
The Remuneration Committee is comprised of three members, all of whom are
non-executive independent directors. An independent director, who is not the
Chair of the Board of the Responsible Entity, is Chair of the Committee. The relevant
qualifications and experience of the members is available on the Responsible
Entity’s website.
The Remuneration Committee will routinely invite other individuals to attend meetings,
including executive management and management members of the Responsible
Entity. The Remuneration Committee and invitees will review the remuneration and
diversity report and provide commentary to the Board as required.
One meeting of the Remuneration Committee was held in relation to remuneration
during the Statement Period. The Remuneration Committee ordinarily holds two
meetings per year, or more if required.
The Remuneration Committee has a formal charter that details the responsibilities of
the Remuneration Committee and its obligations to report to the Board. The charter
sets out the powers of the Remuneration Committee and the meeting procedure
framework. The Remuneration Committee charter can be found in Schedule 2 of
the Corporate Governance Charter on the Responsible Entity’s website.
Refer to 8.1
Refer to 8.1
8.2
8.3
24
ASX ADDITIONAL
INFORMATION
Additional information required by the ASX Limited (ASX) Listing Rules and not disclosed elsewhere in this report
is set out below. This information is effective as at 14 September 2017.
(a)
Distribution of Equity Securities
HOLDING SIZE
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
UNITHOLDERS
CLASS
1,670
3,168
1,727
3,169
184
Ordinary fully stapled securities
Ordinary fully stapled securities
Ordinary fully stapled securities
Ordinary fully stapled securities
Ordinary fully stapled securities
(b)
Substantial unitholders
The number of substantial unitholders and their associates are set out below:
UNITHOLDER
NUMBER OF UNITS
%
J P Morgan Nominees Australia Limited
38,861,088
HSBC Custody Nominees (Australia) Limited
19,365,019
Netwealth Investments Limited
14,718,201
15.258
7.603
5.779
(c)
Holders of less than marketable parcels
The number of holders of less than marketable parcels, being $500 based on the ASX unit closing price of $2.27
as at 14 September 2017 is set out below:
NUMBER OF UNITHOLDERS
NUMBER OF UNITS
151
3,565
(d)
Voting rights
The voting rights attaching to the ordinary units, set out in Section 253C of the Corporations Act 2001, are:
i. on a show of hands, each member of a registered scheme has 1 vote; and
ii. on a poll, each member of the scheme has 1 vote for each dollar of the value of the total interests
they have in the scheme.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 25
(e)
Twenty largest unitholders at 14 September 2017
UNITHOLDER
NUMBER OF UNITS
%
J P Morgan Nominees Australia Limited
38,861,088
15.258
HSBC Custody Nominees (Australia) Limited
19,365,019
Netwealth Investments Limited
14,718,201
Citicorp Nominees Pty Limited
Rural Funds Management Ltd
Argo Investments Limited
9,248,062
9,110,507
5,407,750
Netwealth Investments Limited
4,071,711
National Nominees Limited
3,334,544
Bryant Family Services Pty Ltd
2,151,404
BNP Paribas Noms Pty Ltd
1,437,901
Sccasp Holdings Pty Ltd
1,279,287
One Managed Investment Funds Limited Folkstone Maxim
A-Reit Securities A/C Level 11
900,000
BNP Paribas Nominees Pty Ltd
881,665
Boskenna Pty Ltd
814,696
Bond Street Custodians Limited
601,049
Wf Super Pty Ltd
Noeljen Pty Ltd
592,566
547,617
Brispot Nominees Pty Ltd
544,248
Mrs Jocelyn Alleyne Besly
528,831
Bond Street Custodians Limited
481,119
7.603
5.779
3.631
3.577
2.123
1.599
1.309
0.845
0.565
0.502
0.353
0.346
0.320
0.236
0.233
0.215
0.214
0.208
0.189
(f)
On-market buy-back
As at 14 September 2017, RFF confirms there is no on-market buy-back facility in operation.
26
(g) Material lease details subsequent to listing rule 10.1 waiver
RFM provides the following disclosure subsequent to listing rule 10.1 waiver (WLC140177-002).
Further details of all leases are contained in the FY17 Financial Results Presentation provided to
the ASX on 22 August 2017.
LESSEES:
AETL AS CUSTODIAN AND
RFM AS RESPONSIBLE
ENTITY RFM ALMOND
FUND 2006
AETL AS CUSTODIAN AND
RFM AS RESPONSIBLE
ENTITY FOR RFM
ALMOND FUNDS
2007 & 2008
AETL AS CUSTODIAN AND
RFM AS RESPONSIBLE
ENTITY FOR RFM POULTRY
Area:
272 hectares of
almond orchards
279 hectares of
almond orchards
303,216 sq metres
of poultry sheds
Property and
location:
Mooral, Hillston NSW
Mooral, Hillston, NSW
Expiry:
30-Jun-26
2-Jul-28
13 farms (134 sheds)
Griffith, NSW, and 4 farms
(20 sheds) Lethbridge, VIC.
Weighted average lease
expiry 15-Jan-23
FY18 forecast
rent:
$1.6m
$2.0m
$10.7m
Capital
commitments:
Capex required to meet
orchard development
requirements and
replacement capital
items on account of
lessor, both subject
to additional rental.
Capex required to meet
orchard development
requirements and
replacement capital
items on account of
lessor, both subject
to additional rental.
R&M and ongoing capital
expenditure on account
of lessee
Indexation:
2.5% per annum
2.5% per annum
65% of CPI capped at 2%
Payment
frequency:
Annually in October
Quarterly in advance
Quarterly in advance
Securities exchange
The Trust is listed on ASX. ASX reserves the right (but without limiting its absolute discretion) to remove
Rural Funds Trust (RFT), or RF Active (RFA) from the official list if any of their securities cease to be
“stapled” together, or any securities are issued by RFA which are not stapled to equivalent securities in RFT,
or any securities are issued by RFT which are not stapled to equivalent securities in RFA.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 27
Investment strategy
RFM’s investment strategy for RFF focuses on the management of the
existing portfolio and expansion through acquisitions. This strategy has the
aim of increasing; earnings and distribution growth, sector and climatic
diversification, liquidity and scale.
Lessees
Climatic zone
Sector type
RFM Poultry (NSX: RFP) 21%
Olam Orchards Australia 26%
RFM Almonds 7%
Select Harvests (ASX: SHV) 18%
Treasury Wine Estates (ASX: TWE) 7%
RFM Macadamias 2%
Cattle JV 8%
Cotton JV 4%
Other 6%
Southern 81%
Northern 14%
Other 4%
Infrastructure predominant 48%
Natural resource predominant 48%
Other 4%
EPU and DPU (cents)1
22.5
EPU
DPU
16.7
8.4 8.59
8.93
9.64
FY15
FY16
FY17
Liquidity (units traded – mil)
76.3
65.5
22.6
FY15
FY16
FY17
Fund overheads per unit
(cents)
0.023
0.018
0.012
FY15
FY16
FY17
1 Earnings per unit (EPU) and Distributions per unit (DPU). EPU calculated as Total Comprehensive Income / weighted average units.
FY17 results highlights
Key financial metrics
EPU driven by AFFO (adjusted funds from
operations) growth and revaluations of
almond orchards and vineyards.
AFFO growth of 34.4% primarily
a result of almond developments
and market rent reviews.
EPU 16.71 cents1
AFFO 12.51 cpu2
DPU 9.64 cents
Balance sheet metrics
Adjusted total assets increased
primarily due to: almond developments;
acquisitions in the cattle and cotton
sectors; and revaluations.
Gearing reduction provides balance sheet
capacity to pursue future acquisitions.
$587.5m adj. total assets3
Debt
$167.7m
FY18 forecasts
Payout ratio 80% providing funding
for capex, which attracts additional
lease income.
DPU in line with annual growth target
of 4%.
AFFO 12.5 cpu
DPU 10.03 cents
Capital management
Syndicated debt facility incorporating a
limit and tenor increase and interest
cost reduction.
Term debt facility $250m
Term debt drawn
$164.5m
QUARTERLY
DPU FREQUENCY
77%
AFFO PAYOUT
RATIO
$1.58
ADJ. NAV
PER UNIT
28.5%
GEARING
4.0%
FY18 DPU
GROWTH
5.0%
FORECAST YIELD4
53.5%
DEBT
HEDGED
4.08%
12 MTH
INTEREST RATE
1 EPU calculated as Total Comprehensive Income / weighted average units.
2 Cents per unit.
3 Adjusted assets incorporates most recent independent property valuations, inclusive of water entitlements.
4 FY18 forecast DPU of 10.03 cents divided by 14 August 2017 closing price of $2.01.
Fund overview
Rural Funds Group
Rural Funds Group (RFF) is an agricultural real
estate investment trust (REIT) which owns a
diversified portfolio of high quality Australian
agricultural assets that are leased to experienced
agricultural operators (tenants). Assets are
diversified across six agricultural sectors and
leased to a range of ASX-listed and privately
owned lessees.
Investment approach
RFM has outlined a number of principles which
underpin its approach to the assessment of new
investments:
> Maintain REIT structure, with direct
agricultural risks borne by tenants
rather than RFF;
>
>
>
>
>
Acquire quality assets, leased to
suitable tenants;
Enhance sector diversification to achieve
a suitable balance between infrastructure
predominant and natural resource
‘growth’ assets;
Strategic investment in different climatic
zones to increase geographic diversification;
Identify investments which may benefit
from productivity capex to deliver asset
value growth, rental growth, and improve
counterparty profitability over time; and
Invest in sectors where RFM has direct
operational knowledge.
Cattle
Properties:
Value:
Lessee:
WALE:
FY18 f’cast rent:
% of FY18 revenue:
3
$54.5m
Cattle JV
9.0 yrs
$4.2m
8%
Vineyards
Properties:
Value:
Lessee:
WALE:
FY18 f’cast rent:
% of FY18 revenue:
7
$46.8m
TWE
8.9 yrs
$3.5m
7%
Poultry
Properties:
Value:
Lessee:
WALE:
FY18 f’cast rent:
% of FY18 revenue:
17 farms
(154 sheds)
$85.7m
RFM Poultry
10.3 yrs
$10.7m
21%
Cotton
Properties:
Value:
Lessee:
WALE:
FY18 f’cast rent:
% of FY18 revenue:
1
$27.8m
Cotton JV
4.8 yrs
$2.1m
4%
Macadamias
Properties:
Value:
Lessee:
WALE:
FY18 f’cast rent:
% of FY18 revenue:
3
$8.9m
2007 Macgrove
Project & RFM
12.7 yrs
$0.9m
2%
Almonds
Properties:
Value:
Lessee:
WALE:
FY18 f’cast rent:
% of FY18 revenue:
4
$311.2m
SHV, Olam,
RFM Almond
Schemes & RFM
16.4 yrs
$25.3m
51%
2
1
1
1
3
5
4
13
1
1
4
Rural Funds Group
Number of properties:
35
Value1:
Sectors:
Weighted Average
Lease Expiry (WALE)2:
$534.9m
6
13.2 years
FY18 forecast rent3:
$46.7m
1 Includes water entitlements held at fair value.
2 2017 lease expiries weighted by forecast FY18 rental income, expressed in years from 30 June 2017.
3 Excludes plant & equipment lease income.
* Shaded areas in map denote different climatic zones. Source: Bureau of Meteorology (BOM).
32
FINANCIAL
STATEMENTS
for the year ended 30 June 2017
Rural Funds Group (ASX: RFF) stapled group comprising:
Rural Funds Trust ARSN 112 951 578 and
RF Active ARSN 168 740 805
Responsible Entity: Rural Funds Management Limited
ACN 077 492 838 AFSL 226701
Rural Funds Group
Corporate Directory
Registered Office
Responsible Entity
Directors
Company Secretaries
Custodian
Auditors
Share Registry
Bankers
Level 2, 2 King Street
DEAKIN ACT 2600
Rural Funds Management Limited
ABN 65 077 492 838
AFSL 226701
Level 2, 2 King Street
DEAKIN ACT 2600
Ph: 1800 026 665
Guy Paynter
David Bryant
Michael Carroll
Julian Widdup
Andrea Lemmon
Stuart Waight
Australian Executor Trustees Limited
ABN 84 007 869 794
Level 22, 207 Kent Street
SYDNEY NSW 2000
PricewaterhouseCoopers
One International Towers Sydney
Watermans Quay
BARANGAROO NSW 2000
Boardroom Pty Limited
Level 12, 225 George Street
SYDNEY NSW 2000
Ph: 1300 737 760
Australia and New Zealand Banking Group Limited (ANZ)
242 Pitt Street
SYDNEY NSW 2000
Rabobank Australia Group
Darling Park Tower 3
201 Sussex Street
SYDNEY NSW 2000
Stock Exchange Listing
Rural Funds Group units (Rural Funds Trust and RF Active form a
stapled investment vehicle) are listed on the Australian Securities
Exchange (ASX)
ASX Code
RFF
34
Rural Funds Group
Directors’ Report
30 June 2017
Rural Funds Group (RFF or the Group) comprises the stapled units in two Trusts, Rural Funds Trust (RFT) (ARSN
112 951 578) and RF Active (RFA) (ARSN 168 740 805) (collectively, the Trusts). The Directors of Rural Funds
Management Limited (RFM) (ACN 077 492 838, AFSL 226701), the Responsible Entity of Rural Funds Group
present their report on the Group for the year ended 30 June 2017.
In accordance with AASB 3 Business Combinations, the stapling arrangement referred to above is regarded as a
business combination and Rural Funds Trust has been identified as the parent for the purpose of preparing the
consolidated financial report.
The Directors’ report is a combined report that covers both Trusts. The financial information for the Group is taken
from the Consolidated Financial Statements and notes.
Directors
The following persons held office as Directors of the Responsible Entity during the year and up to the date of this
report:
Guy Paynter
David Bryant
Michael Carroll
Julian Widdup
Non-Executive Chairman
Managing Director
Non-Executive Director
Non-Executive Director (appointed 15 February 2017)
Principal activities and significant changes in nature of activities
The principal activity of the Group during the year was the leasing of agricultural properties and equipment. The
Group is a lessor of agricultural property with revenue derived from leasing almond orchards, macadamia orchards,
poultry property and infrastructure, vineyards, cattle properties, cotton properties, agricultural plant and equipment,
and water rights.
The following activities of the Group changed during the year:
The Group purchased three cattle properties, Rewan, Mutton Hole and Oakland Park, in central and far north
Queensland, leased to Cattle JV Pty Limited (CJV), a wholly owned subsidiary of RFM.
The Group purchased Lynora Downs, a 4,880 hectare cotton property located in Central Queensland. Cotton
JV Pty Limited, a joint venture between RFM and Queensland Cotton Corporation Pty Limited (a subsidiary of
Olam International Limited), operates and has leased Lynora Downs for a period of five years, with an option
to extend for a further five years; and
The Group acquired a 9,549 megalitre (ML) high security Murrumbidgee River water entitlement which will
generate revenue through the sale of annual water allocations until it is required for future horticultural
developments.
Operating results
The consolidated net profit after income tax of the Group for the year ended 30 June 2017 amounted to $43,326,000
(restated 2016: $483,000 loss). The consolidated total comprehensive income of the Group for the year ended 30
June 2017 amounted to $34,238,000 (2016: $34,774,000).
The Group holds investment property, bearer plants and derivatives at fair value. After adjusting for the effects of
fair value adjustments, depreciation, impairments and one-off transaction costs during the year the profit before tax
would have been $25,599,000 (2016: $14,342,000) representing adjusted funds from operations (AFFO).
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 35
Rural Funds Group
Directors’ Report
30 June 2017
Adjusted funds from operations (AFFO)
Net profit before income tax
Change in fair value of investment property
Change in fair value of plant and equipment - bearer plants
Change in fair value of interest rate swaps
Depreciation and impairments
Gain on sale of assets
Share of net profit of associate attributable to change in fair value of
investment property
One-off transaction costs
AFFO
AFFO cents per unit
2017
$'000
45,167
(17,191)
2,498
(5,311)
1,568
(33)
(1,099)
-
25,599
12.51
Restated
2016
$'000
439
(3,343)
9,029
7,116
939
(290)
-
452
14,342
9.26
Having eliminated fair value adjustments and one-off transaction costs, the adjusted funds from operations (AFFO)
effectively represents funds from operations from the property rental business.
Financial position
The net assets of the consolidated Group have increased to $357,678,000 at 30 June 2017 from $207,864,000 at
30 June 2016.
At 30 June 2017 the Group had total assets of $543,003,000 (2016: $379,039,000).
At 30 June 2017, the Group held total water entitlements (including investments in Barossa Infrastructure Limited
(BIL) and Coleambally Irrigation Co-operative Limited (CICL)) at a book value of $121,469,000 (2016:
$69,534,000). Independent valuations as at 30 June 2017 were received on the established almond orchard
properties and vineyards that attribute a value to the water entitlements held by the Group. The Directors consider
that these valuations remain reasonable estimates of the fair value at 30 June 2017 and on this basis the fair value
of water entitlements at 30 June 2017 was $166,012,000 (2016: $97,949,000). The value of water entitlements is
illustrated in the table below:
Intangible assets (water entitlements)
Investment in CICL
Investment in BIL
Total book value of water entitlements
Revaluation of water entitlements per valuation
Adjusted total water entitlements
2017
$'000
108,738
12,222
509
121,469
44,543
166,012
2016
$'000
59,691
9,334
509
69,534
28,415
97,949
36
Rural Funds Group
Directors’ Report
30 June 2017
Financial position (continued)
Adjusted net asset value
The following depicts the net assets of the Group following the revaluation of water entitlements comprising
intangible assets and investments in BIL and CICL per these valuations.
Net assets per Consolidated Statement of Financial Position
Revaluation of water entitlements per valuation
Adjusted net assets
Adjusted NAV per unit
Significant changes in state of affairs
2017
$'000
357,678
44,543
402,221
1.58
2016
$'000
207,864
28,415
236,279
1.43
In July 2016, the Group successfully completed a non-renounceable rights issue of $61,000,000 (1 new unit for
every 4 existing units) in order to fund the acquisition of three cattle properties, as well as macadamia orchards
located near Bundaberg, QLD, which were acquired in March 2016, and an additional 1,000 hectares of almond
development at the Kerarbury property.
In July 2016, the Group negotiated an increase to its debt facility from $147,500,000 to $200,000,000.
In July and August 2016 the Group acquired three cattle properties: Rewan, a 17,479 hectare cattle finishing
property near Rolleston, QLD and two breeding properties, Oakland Park and Mutton Hole, located near the Gulf
of Carpentaria in far north Queensland and comprising a combined area of 225,800 hectares. The properties and
livestock has been be leased for ten years to Cattle JV Pty Limited, a wholly owned subsidiary of RFM.
In December 2016, the Group acquired a 9,549 megalitre (ML) high security Murrumbidgee River water entitlement.
The acquisition represents one of the largest ever sales of high security Murrumbidgee River water entitlements
and will provide a cornerstone resource for future horticultural developments. In the interim, the Group will generate
revenue from the sale of annual water allocations.
In December 2016, the Group acquired Lynora Downs, a 4,880 hectare cotton property located in Central
Queensland. RFM and Queensland Cotton Corporation Pty Limited, a subsidiary of Olam International Limited,
have established a joint venture, Cotton JV Pty Limited, which leases and operates Lynora Downs for a period of
five years, with an option to extend for a further five years.
In December 2016, the Group negotiated an increase to its debt facility from $200,000,000 to $250,000,000 along
with a one year extension to the facility expiry, now being December 2019. Concurrent to this process, the debt
facility was syndicated with Rabobank Australia Group (Rabobank) with existing financier Australia and New
Zealand Banking Group Limited (ANZ).
In June 2017, the Group successfully completed a non-renounceable rights issue of $78,623,000 (2 new units for
every 9 existing units), in order to reduce gearing and create balance sheet capacity to further build the Group’s
portfolio of quality agricultural assets. The equity proceeds raised were also applied against the debt drawn to
acquire the Lynora Downs cotton property and a parcel of Murrumbidgee River high security water entitlements,
both of which were acquired using debt in December 2016.
In the opinion of the Directors, there were no other significant changes in the state of affairs of the Group during
the year.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 37
Rural Funds Group
Directors’ Report
30 June 2017
Property leasing
At 30 June 2017 the Group held 35 properties as follows:
17 poultry farms (303,216 square metres);
3 almond orchards (2,414 planted hectares);
1 almond orchard under development (2,500 planted hectares at completion);
7 vineyards (666 planted hectares);
3 macadamia orchards (259 planted hectares);
3 cattle properties (243,300 hectares).
1 cotton property (1,038 irrigable hectares)
During the year ended 30 June 2017, the properties held by the Group recorded a fair value of investment
properties increment of $17,191,000 (2016: $3,343,000) and a fair value of bearer plants decrement of
($11,687,000) (2016: $26,495,000 increment).
Almond orchards
Established almond orchard properties (including water entitlements) are located near Hillston, NSW and are
leased to tenants who make regular rental payments. On these properties, 2,414 hectares (2016: 2,414 hectares)
are applied to almond growing: 1,006 hectares (2016: 1,006) at Yilgah, 808 hectares (2016: 808) at Mooral and
600 hectares at Tocabil (2016: 600). The full almond area is under lease to the following tenants:
Select Harvests Limited (SHV) 1,221 hectares (2016: 1,221);
RFM Almond Fund 2006 (AF06) 272 hectares (2016: 272);
RFM Almond Fund 2007 (AF07) 73 hectares (2016: 73);
RFM Almond Fund 2008 (AF08) 206 hectares (2016: 206);
Olam Orchards Australia Pty Limited (Olam) 600 hectares (2016: 600);
Rural Funds Management Limited (RFM) 42 hectares (2016: 42).
The Group underwent a rent review for the properties leased to Select Harvests Limited which was effective from
1 July 2016.
The Group had two almond orchards which are under lease to Olam. Tocabil was leased to Olam in March 2015.
The full 600 hectares of almond orchard at Tocabil is established and fully leased. The Kerarbury property was
leased to Olam from September 2015. A 2,500 hectare almond orchard is being developed in accordance with the
lease of this property.
For its almond orchards the Group owns water entitlements of 77,922ML (2016: 59,985ML). During the year, a
total of 17,937ML (2016: 26,766ML) of water entitlements were purchased. At 30 June 2017 no deposits were paid
for an additional water entitlements (2016: 6,591ML).
For its almond orchards the Group also owns 21,430ML (2016: 21,430ML) of water delivery entitlements.
Poultry property
The poultry property and infrastructure held by the Group includes 17 poultry growing farms located in Griffith,
NSW and Lethbridge, VIC and 1,432ML of water entitlements (2016: 1,432ML). Leases are in place with RFM
Poultry, a scheme managed by RFM, for 100% (2016: 100%) of the poultry property and infrastructure, with
remaining lease terms between 7 and 19 years. The poultry growing operations are performed by RFM Poultry
which is contracted with Baiada Poultry Pty Limited and Turi Foods Pty Limited.
Vineyards
The vineyard properties held by the Group include seven vineyards, with six located in South Australia, in the
Barossa Valley, Adelaide Hills and Coonawarra regions, and one located in the Grampians in Victoria. For its
vineyards, the Group owns 936ML of water entitlements (2016: 936ML). All vineyards are leased to Treasury Wine
Estates and produce premium quality grapes. Six of the vineyards are leased until June 2026 and one is leased
until June 2022.
38
Rural Funds Group
Directors’ Report
30 June 2017
Property leasing (continued)
Macadamia orchards
Established macadamia orchards located near Bundaberg, QLD are leased to the following tenants:
2007 Macgrove Project (M07) 234 hectares (2016: 234);
Rural Funds Management Limited (RFM) 25 hectares (2016: 25).
Cattle property
Cattle properties held by the Group comprise a total of 243,279 hectares and are leased to Cattle JV Pty Limited,
a wholly owned subsidiary of RFM, for ten years. Rewan is a 17,479 hectare cattle finishing property located near
Emerald, QLD. Oakland Park and Mutton Hole are neighbouring breeding properties near Normanton, QLD with a
combined total of 225,800 hectares.
Cotton property
A 4,880 hectare cotton property was acquired during the year and is located near Emerald, QLD. 18,487ML of
water entitlements were acquired with the property. The property is leased to Cotton JV Pty Limited (CotJV), a joint
venture between RFM and Queensland Cotton Corporation Pty Limited (a subsidiary of Olam International Limited),
for five years.
Other activities
The Group held a 33.50% stake in RFM StockBank (2016: 33.50%), a scheme managed by RFM, which operates
a livestock leasing business. Under the livestock leasing operation, RFM StockBank retains ownership of the
livestock and leases them to farmers in return for a placement fee which is similar to interest, and an upfront fee
from the livestock agent. RFM, as Responsible Entity for RFM StockBank, has commenced the windup of RFM
StockBank. A final capital return was paid to investors on 9 August 2017.
Agricultural plant and equipment with a net book value of $5,127,000 (2016: $4,178,000) is owned by the Group
and leased to AF06, AF07, AF08, M07, Cotton JV and Cattle JV.
Breeder assets with a net book value of $10,953,000, acquired during the year, are leased to Cattle JV Pty Limited.
The Group sold its 8.96% interest in Perth Markets Limited (PML), a stapled entity which owns the Market City site
in Canning Vale, WA. RFF acquired 5,275,000 PML securities at $1 per security in February 2016, and sold them
during March 2017 at $1.147 per security.
Banking facilities
At 30 June 2017 the core debt facility available to the Group was $250,000,000 (2016: $147,500,000), with a drawn
down balance of $164,500,000 (2016: $146,500,000). The facility limit was increased to $250,000,000 in December
2016 with a one year extension to the facility expiry, being December 2019. Concurrent to this process, the debt
facility has been syndicated with Rabobank Australia Group (Rabobank) selected as part of a syndicate with
existing financier Australia and New Zealand Banking Group Limited (ANZ). At 30 June 2017 RFF had active
interest rate swaps totaling 53.5% (2016: 60%) of the drawn down balance to manage interest rate risk.
Distributions
Distribution paid 29 July 2016
Distribution paid 28 October 2016
Distribution paid 31 January 2017
Distribution paid 28 April 2017
Distribution declared 7 June 2017, paid 31 July 2017
Cents
per unit
2.2325
2.4100
2.4100
2.4100
2.4100
Total
$
3,691,602
4,986,940
4,996,810
5,006,323
6,130,580
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 39
Rural Funds Group
Directors’ Report
30 June 2017
Earnings per unit
Net profit after income tax for the year ($'000)
Weighted average number of units on issue during the year
Basic and diluted earnings per unit (total) (cents)
Indirect cost ratio
43,326
204,617,207
21.17
The indirect cost ratio (ICR) is the ratio of the Group’s management costs over the Group’s average net assets for
the year, expressed as a percentage.
Management costs include management fees and reimbursement of other expenses in relation to the Group, but
do not include transactional and operational costs such as brokerage. Management costs are not paid directly by
the unitholders of the Group.
The ICR for the Group for the year ended 30 June 2017 is 3.29% (2016: 2.43%). The ICR for the year has been
impacted by costs associated with the rights issue completed in July 2016 and June 2017.
Matters subsequent to the end of the year
No matter or circumstance has arisen since the end of the year that has significantly affected or could significantly
affect the operations of the Group, the results of those operations or the state of affairs of the Group in future
financial years.
Likely developments and expected results of operations
The Group expects to continue to derive its core future income from the holding and leasing of investment property,
bearer plants and water entitlements. Management is continually looking for growth opportunities in agricultural
and related industries.
Environmental regulation
The operations of the Group are subject to significant environmental regulations under the laws of the
Commonwealth and States or Territories of Australia. Water usage for irrigation, domestic and levee purposes,
including containing irrigation water from entering the river, water course or water aquifer are regulated by the
Water Management Act 2000. Water licences are leased to external parties who are then responsible to meet the
legislative requirements of these licences. There have been no known significant breaches of any environmental
requirements applicable to the Group.
Units on issue
254,380,898 units in Rural Funds Trust were on issue at 30 June 2017 (2016: 165,357,290). During the year
89,023,608 units were issued by the Trust (2016: 33,215,055) and nil (2016: nil) were redeemed.
Indemnity of Responsible Entity and Custodian
In accordance with its constitution, Rural Funds Group indemnifies the Directors, Company Secretaries and all
other officers of the Responsible Entity and Custodian when acting in those capacities, against costs and expenses
incurred in defending certain proceedings.
Rounding of amounts
The Group is an entity to which ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191
applies and accordingly amounts in the consolidated financial statements and Directors' report have been rounded
to the nearest thousand dollars.
40
Rural Funds Group
Directors’ Report
30 June 2017
Information on Directors of the Responsible Entity
Guy Paynter
Qualifications
Experience
Special responsibilities
Directorships currently held in other
listed entities and during the three
years prior to the current year
David Bryant
Qualifications
Experience
Non-Executive Chairman
Bachelor of Laws from The University of Melbourne
Guy Paynter is a former director of broking firm JB Were and brings to
RFM more than 30 years of experience in corporate finance. Guy is a
former member of the Australian Securities Exchange (ASX) and a former
associate of the Securities Institute of Australia (now known as the
Financial Services Institute of Australasia). Guy is also Chairman of Bill
Peach Group Limited (previously known as Aircruising Australia Limited).
Guy's agricultural interests include cattle breeding in the Upper Hunter
region in New South Wales.
Member of Audit Committee and Remuneration Committee
RFM Poultry
Managing Director
Diploma of Financial Planning from the Royal Melbourne Institute of
Technology and a Masters of Agribusiness from The University of
Melbourne.
David Bryant established RFM in February 1997 and since that time has
led the team that is responsible for the acquisition of large scale
agricultural property assets and associated water entitlements. RFM
manages over $600 million of agricultural assets. On a day-to-day level,
David is responsible for leading the RFM Executive, maintaining key
commercial relationships and sourcing new business opportunities.
Special responsibilities
Directorships currently held in other
listed entities and during the three
years prior to the current year
Managing Director
RFM Poultry
Michael Carroll
Qualifications
Experience
Special responsibilities
Directorships currently held in other
listed entities and during the three
years prior to the current year
Non-Executive Director
Bachelor of Agricultural Science from La Trobe University and a Masters
of Business Administration from The University of Melbourne's Melbourne
Business School. Michael has completed the Advanced Management
Program at Harvard Business School, Boston, and is a Fellow of the
Australian Institute of Company Directors.
Michael Carroll serves a range of food and agricultural businesses in a
board and advisory capacity. Michael is on the boards of Tassal Group
Limited, Select Harvests Limited, Paraway Pastoral Company, Sunny
Queen Pty Limited, and the Gardiner Dairy Foundation. Michael also has
senior executive experience in a range of companies, including
establishing and leading the National Australia Bank (NAB) Agribusiness
division.
Chairman of Audit Committee and Remuneration Committee
Michael is on the Board of Tassal Group Limited, RFM Poultry and Select
Harvests Limited.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 41
Rural Funds Group
Directors’ Report
30 June 2017
Information on Directors of the Responsible Entity (continued)
Julian Widdup
Qualifications
Experience
Special responsibilities
Directorships currently held in other
listed entities
Directorships held in other listed
entities during the three years prior
to the current year
Non-Executive Director
Bachelor of Economics from the Australian National University. Julian is
a Fellow of the Institute of Actuaries of Australia and a Fellow of the
Australian Institute of Company Directors.
Julian brings extensive experience to the RFM board having previously
served as a director of Palisade
Investment Partners, Darwin
International Airport, Alice Springs Airport, NZ timberland company
Taumata Plantations Limited, Regional Livestock Exchange Investment
Company, Merredin Energy power generation company, Victorian
AgriBioscience Research Facility, Casey Hospital in Melbourne and
Mater Hospital in Newcastle.
Member of Audit Committee and Remuneration Committee.
RFM Poultry
None noted
Interests of Directors of the Responsible Entity
Balance at 30 June 2015
Additions
Balance at 30 June 2016
Additions
Balance at 30 June 2017
Guy Paynter
Units
382,156
David Bryant Michael Carroll
Units
-
Units
3,656,191
151,100
533,256
281,440
814,696
3,987,152
7,643,343
4,034,839
11,678,182
-
-
19,389
19,389
Company Secretaries of the Responsible Entity
Stuart Waight and Andrea Lemmon are RFM’s joint company secretaries. Stuart joined RFM in 2003, is a Chartered
Accountant and is RFM’s Chief Operating Officer. Andrea has been with RFM since 1997 and is RFM’s Executive
Manager Funds Management.
Meetings of Directors of the Responsible Entity
During the financial year 16 meetings of Directors (including committees of Directors) were held. Attendances by
each Director during the year were as follows:
Directors meetingsp
Audit Committee
meetings
Remuneration Committee
meetings
Guy Paynter
David Bryant
Michael Carroll
Julian Widdup
No. eligible
to attend
16
No.
attended
15
No. eligible
to attend
1
No.
attended
1
No. eligible
to attend
1
No.
attended
1
16
16
7
16
14
7
-
1
1
-
1
1
-
1
1
-
1
1
42
Rural Funds Group
Directors’ Report
30 June 2017
Non-audit services
During
PricewaterhouseCoopers for compliance audit services provided.
the year ended 30 June 2017
fees of $6,369 (2016: $6,121) were paid or payable
to
Auditor’s independence declaration
The auditor’s independence declaration in accordance with section 307C of the Corporations Act 2001 for the
year ended 30 June 2017 has been received and is included on page 44 of the financial report.
The Directors’ report is signed in accordance with a resolution of the Board of Directors of Rural Funds
Management Limited.
David Bryant
Director
21 August 2017
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 43
Auditor’s Independence Declaration
As lead auditor for the audit of Rural Funds Group for the year ended 30 June 2017, I declare that to
the best of my knowledge and belief, there have been:
(a)
no contraventions of the auditor independence requirements of the Corporations Act 2001 in
relation to the audit; and
(b)
no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Rural Funds Group and the entities it controlled during the period.
CMC Heraghty
Partner
PricewaterhouseCoopers
Sydney
21 August 2017
PricewaterhouseCoopers, ABN 52 780 433 757
One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001
T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
44
Rural Funds Group
Consolidated Statement of Comprehensive Income
For the year ended 30 June 2017
Revenue
Other income
Management fees
Property expenses
Finance costs
Other expenses
Share of net profit - equity accounted investments
Gain on sale of assets
Depreciation and impairments
Change in fair value of plant and equipment - bearer plants
Change in fair value of investment property
Change in fair value of interest rate swaps
Net profit before income tax
Income tax expense
Net profit/(loss) after income tax
Other comprehensive income:
Revaluation (decrement)/increment - bearer plants
Revaluation decrement other
Income tax relating to these items
Other comprehensive income/(loss) for the year, net of tax
Total comprehensive income attributable to unitholders
Total comprehensive income for the year attributable to
unitholders arising from:
Rural Funds Trust
RF Active (non-controlling interest)
12
7
24
24
7
30 June
2017
$'000
Note
Restated
30 June
2016
$'000
6
41,573
26,549
72
(4,393)
(1,473)
(7,891)
(2,494)
1,304
33
(1,568)
(2,498)
17,191
5,311
45,167
(1,841)
43,326
76
(3,165)
(1,256)
(5,612)
(2,763)
61
290
(939)
(9,029)
3,343
(7,116)
439
(922)
(483)
(9,189)
35,524
-
101
(9,088)
34,238
(14)
(253)
35,257
34,774
34,131
107
34,238
34,644
130
34,774
Earnings per unit
Basic and diluted earnings per unit from continuing operations:
Per stapled unit (cents)
Per unit of Rural Funds Trust (cents)
Per unit of RF Active (cents)
26
26
26
21.17
21.12
0.05
(0.31)
(0.39)
0.08
Refer to note 2 for details of restatement as a result of the amendments made to Accounting Standards AASB
116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants.
The accompanying notes form part of these financial statements.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 45
Rural Funds Group
Consolidated Statement of Financial Position
As at 30 June 2017
Restated
2016
Restated
2015
$'000
$'000
2017
$'000
Note
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Other current assets
Total current assets
Non-current assets
Investments accounted for using the equity method
Financial assets
Plant and equipment
Plant and equipment - bearer plants
Investment property
Intangible assets
Deferred tax assets
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Interest bearing liabilities
Income tax payable
Distributions payable
Total current liabilities
Non-current liabilities
Interest bearing liabilities
Other non-current liabilities
Derivative financial liabilities
Deferred tax liabilities
Total non-current liabilities
Total liabilities (excluding net assets attributable
to unitholders)
9
10
13
15
14
11
11
12
16
3,838
4,608
1,800
3,034
7,239
2,501
10,246
12,774
712
2,729
307
3,748
3,903
617
3,153
-
23,916
5,127
121,193
273,783
108,738
9,041
10,078
4,178
113,206
67,581
168,951
142,379
59,691
1,120
28,965
2,317
21,22
-
532,757
543,003
366,265
248,915
379,039
252,663
17
18
25
18
19
20
21,22
5,138
3,204
-
6,368
14,710
6,920
3,030
-
3,901
13,851
2,038
657
29
2,947
5,671
164,500
146,500
91,451
1,634
3,878
603
1,634
9,190
-
1,553
2,048
-
170,615
157,324
95,052
185,325
171,175
100,723
Net assets attributable to unitholders
357,678
207,864
151,940
Total liabilities
543,003
379,039
252,663
Refer to note 2 for details of restatement as a result of the amendments made to Accounting Standards AASB
116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants.
The accompanying notes form part of these financial statements.
46
Rural Funds Group
Consolidated Statement of Financial Position
As at 30 June 2017
NET ASSETS ATTRIBUTABLE TO
UNITHOLDERS
Unitholders of Rural Funds Trust
Issued units
Asset revaluation reserve
Accumulated profit
Parent entity interest
Unitholders of RF Active
Issued units
Accumulated profit
Non-controlling interest
Restated
2016
Restated
2015
$'000
$'000
2017
$'000
Note
252,880
134,110
111,711
24
27,575
73,860
36,663
35,218
1,406
37,427
354,315
205,991
150,544
3,066
297
3,363
1,683
190
1,873
1,323
73
1,396
Total net assets attributable to unitholders
357,678
207,864
151,940
Water entitlements are held at cost in the Consolidated Statement of Financial Position in accordance with
accounting standards. Refer to note 5 for disclosure of the Directors’ valuation of water entitlements, which are
supported by independent property valuation.
Refer to note 2 for details of restatement as a result of the amendments made to Accounting Standards AASB
116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants.
The accompanying notes form part of these financial statements.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 47
Rural Funds Group
Consolidated Statement of Changes in Net Assets Attributable to Unitholders
For the year ended 30 June 2017
2017
Balance at 1 July 2016
Restated
Other comprehensive income
Total other comprehensive
income
Profit before income tax
Income tax expense
Total comprehensive income for
the year
Issued units
Units issued during the year
Issue costs
Total issued units
Note
Issued
units
Retained
earnings
Asset
revaluation
reserve
Total
Non-
controlling
interest
Total
$'000
$'000
$'000
$'000
$'000
$'000
134,110
35,218
36,663 205,991
1,873 207,864
-
-
-
-
-
-
-
(9,088)
(9,088)
(9,088)
(9,088)
-
-
(9,088)
(9,088)
45,050
(1,831)
-
-
45,050
(1,831)
117
45,167
(10)
(1,841)
43,219
(9,088)
34,131
107
34,238
140,577
(5,264)
135,313
-
-
-
- 140,577
1,420 141,997
-
(5,264)
(37)
(5,301)
- 135,313
1,383 136,696
7
23
23
Distributions to unitholders
25
(16,543)
(4,577)
-
(21,120)
-
(21,120)
Balance at 30 June 2017
252,880
73,860
27,575 354,315
3,363 357,678
2016
Restated
Balance at 1 July 2015
Other comprehensive income
Total other comprehensive
income
Profit before income tax
Income tax expense
Total comprehensive income for
the year
Issued units
Units issued during the year
Issue costs
Total issued units
Distributions to unitholders
Balance at 30 June 2016
Note
Issued
units
Retained
earnings
Asset
revaluation
reserve
Total
Non-
controlling
interest
Total
$'000
$'000
$'000
$'000
$'000
$'000
111,711
37,440
1,406 150,557
1,383 151,940
-
-
-
-
-
-
-
35,257
35,257
35,257
35,257
388
(1,001)
-
-
388
(1,001)
-
-
51
79
35,257
35,257
439
(922)
(613)
35,257
34,644
130
34,774
36,449
(1,661)
34,788
(12,389)
134,110
-
-
-
(1,609)
35,218
-
-
-
-
36,449
(1,661)
34,788
(13,998)
36,663 205,991
368
(8)
360
-
36,817
(1,669)
35,148
(13,998)
1,873 207,864
7
23
23
25
Refer to note 2 for details of restatement as a result of the amendments made to Accounting Standards AASB
116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants.
The accompanying notes form part of these financial statements.
48
Rural Funds Group
Consolidated Statement of Cash Flows
For the year ended 30 June 2017
Note
Cash flows from operating activities
Receipts from customers
Payments to suppliers
Interest received
Finance costs
Net cash inflow from operating activities
32
Cash flows from investing activities
Payments for acquisition of macadamia leasing business
Payments for investment property
Payments for bearer plants
Payments for intangible assets
Payments for financial assets
Payments for plant and equipment
Payments for deposits
Payments for equity accounted investments
Proceeds from sale of investment property
Proceeds from sale of assets
Proceeds from sale of / Distributions from equity accounted
investments
Distributions received
2017
$'000
48,600
(13,672)
95
(8,109)
26,914
-
(87,641)
(19,673)
(49,758)
(13,882)
(1,788)
-
-
-
60
10,345
11
2016
$'000
29,255
(9,492)
80
(5,612)
14,231
(7,291)
(23,275)
(13,606)
(30,381)
(9,359)
(1,760)
(2,242)
(5,275)
1,162
348
234
11
Net cash outflow from investing activities
(162,326)
(91,434)
Cash flows from financing activities
Proceeds from issue of units
Proceeds from borrowings
Repayment of borrowings
Distributions paid
Net cash inflow from financing activities
Net increase in cash and cash equivalents held
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
9
136,696
18,174
-
(18,654)
136,216
804
3,034
3,838
35,148
58,079
(657)
(13,045)
79,525
2,322
712
3,034
The accompanying notes form part of these financial statements.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 49
Rural Funds Group
Notes to the Financial Statements
30 June 2017
1
General information
This financial report covers the consolidated financial statements and notes of Rural Funds Trust and its
Controlled Entities including RF Active (Rural Funds Group, the Group or collectively the Trusts). Rural
Funds Group is a for profit entity domiciled in Australia. The Directors of the Responsible Entity authorised
the Financial Report for issue on 21 August 2017 and have the power to amend and reissue the Financial
Report.
Items included in the financial statements of each of the Group entities are measured using the currency
of the primary economic environment in which the entity operates (functional currency). The consolidated
financial statements are presented in Australian dollars which is the parent entity’s functional and
presentation currency.
The separate financial statements and notes of the parent entity, Rural Funds Trust, have not been
presented within this financial report as permitted by amendments made to the Corporations Act 2001.
Parent entity information is included in note 34.
2
Summary of significant accounting policies
Basis of preparation
The accounting policies that have been adopted in respect of the financial report are those of Rural Funds
Management (RFM) as Responsible Entity of the Trusts.
The Trusts have common business objectives and operate as an economic entity collectively known as
Rural Funds Group.
The financial statements are general purpose financial statements that have been prepared in accordance
with Australian Accounting Standards, Australian Accounting Interpretations, and other authoritative
pronouncements of the Australian Accounting Standards Board, the Corporations Act 2001 and the Trusts’
Constitution. The report has been prepared on a going concern basis.
The financial statements and notes comply with International Financial Reporting Standards as issued by
the International Accounting Standards Board. The significant accounting policies used in the preparation
and presentation of these financial statements are provided below and are consistent with prior reporting
periods unless otherwise stated. The financial statements are based on historical cost, except for the
measurement at fair value of selected non-current assets, financial assets and financial liabilities.
As permitted by ASIC Corporations (Stapled Group Reports) Instrument 2015/838, issued by the
Australian Securities and Investments Commission, these financial statements are consolidated financial
statements and accompanying notes of both Rural Funds Trust and RF Active.
Principles of consolidation
The consolidated financial statements include the financial position and performance of controlled entities
from the date on which control is obtained until the date that control is lost.
Intragroup assets, liabilities, equity, income, expenses and cash flows relating to transactions between
entities in the consolidated Group have been eliminated in full for the purpose of these financial
statements.
Appropriate adjustments have been made to the controlled entity’s financial position, performance and
cash flows where the accounting policies used by that entity were different from those adopted by the
consolidated entity. All controlled entities have a 30 June financial year end.
50
Rural Funds Group
Notes to the Financial Statements
30 June 2017
2
Summary of significant accounting policies (continued)
Principles of consolidation (continued)
Controlled entities
In accordance with AASB 3 Business Combinations, Rural Funds Trust is deemed to control RF Active
from the stapling date of 16 October 2014. Rural Funds Trust is considered to be the acquirer of RF Active
due to the size of the respective entities and as the stapling transaction and capitalisation of RF Active
was funded by a distribution from Rural Funds Trust that was compulsorily used to subscribe for units in
RF Active.
Associates
Associates are entities over which the Group has significant influence but not control or joint control,
generally accompanying a holding of between 20% and 50% of the voting rights. Investments in
associates are accounted for using the equity method of accounting, after initially being recognised at
cost.
The Group's share of its associates’ post-acquisition profits or losses is recognised in profit or loss, and
its share of post-acquisition other comprehensive income is recognised in other comprehensive income.
The cumulative post-acquisition movements are adjusted against the carrying amount of the investment.
Dividends or distributions receivable from associates are recognised as a reduction in the carrying amount
of the investment.
Business combinations
Business combinations are accounted for by applying the acquisition method which requires an acquiring
entity to be identified in all cases. The acquisition date under this method is the date that the acquiring
entity obtains control over the acquired entity.
The fair value of identifiable assets and liabilities acquired are recognised in the consolidated financial
statements at the acquisition date.
Goodwill or a discount on acquisition may arise on the acquisition date, this is calculated by comparing
the fair value of the consideration transferred and the amount of non-controlling interest in the acquirer
with the fair value of the net identifiable assets acquired. Where the consideration is greater than the
identifiable assets, the excess is recorded as goodwill. Where the net assets acquired are greater than
the consideration, the measurement basis of the net assets are reassessed and then a discount on
acquisition recognised in the Consolidated Statement of Comprehensive Income.
All acquisition-related costs are recognised as expenses in the periods in which the costs are incurred
except for costs to issue debt or equity securities.
Any contingent consideration which forms part of the combination is recognised at fair value at the
acquisition date. If the contingent consideration is classified as equity then it is not remeasured and the
settlement is accounted for within equity. Otherwise subsequent changes in the value of the contingent
consideration liability are measured through the statement of comprehensive income.
Comparative amounts
Comparative amounts have been restated to reflect changes in accounting standards relating to bearer
plants, as disclosed in the Plant and equipment – bearer plants section of note 2 to the financial
statements.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 51
Rural Funds Group
Notes to the Financial Statements
30 June 2017
2
Summary of significant accounting policies (continued)
Revenue
Revenue is recognised when the amount of the revenue can be measured reliably, it is probable that
economic benefits associated with the transaction will flow to the entity and specific criteria relating to the
type of revenue as noted below, have been satisfied.
Revenue from the leasing of investment property, water rights, bearer plants, property, plant and
equipment and infrastructure, where the Group is a lessor, is recognised in income over the lease term
on an accruals basis. The respective leased assets are included in the Consolidated Statement of
Financial Position based on that nature.
Interest revenue is recognised using the effective interest rate method.
All revenue is stated net of the amount of goods and services tax (GST).
Income tax
The charge for current income tax expense is based on the profit adjusted for any non-assessable or
disallowed items. It is calculated using the tax rates that have been enacted or are substantially enacted
by the balance sheet date.
Deferred tax is accounted for using the balance sheet method in respect of temporary differences arising
between the tax bases of assets and liabilities and their carrying amounts in the financial statements.
No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding
a business combination, where there is no effect on accounting or taxable profit or loss.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is
realised or liability is settled. Deferred tax is charged/credited in the income statement except where it
relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly
against equity.
Deferred income tax assets are recognised to the extent that it is probable that future tax profits will be
available against which deductible temporary differences can be utilised.
The amount of benefits brought to account or which may be realised in the future is based on
management’s judgement, the assumption that no adverse change will occur in income taxation
legislation and the anticipation that the consolidated group will derive sufficient future assessable
income to enable the benefit to be realised and comply with the conditions of deductibility imposed by
the law.
Goods and services tax (GST)
Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except
where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO).
Receivables and payables are stated inclusive of GST.
The net amount of GST recoverable from, or payable to, the ATO is included as part of trade and other
receivables or payables in the consolidated statement of financial position.
Cash flows in the consolidated statement of cash flows are included on a gross basis and the GST
component of cash flows arising from investing and financing activities which is recoverable from, or
payable to, the taxation authority is classified as operating cash flows.
52
Rural Funds Group
Notes to the Financial Statements
30 June 2017
2
Summary of significant accounting policies (continued)
Cash and cash equivalents
Cash and cash equivalents comprises cash on hand, demand deposits and short-term investments with
less than 3 months of original maturity which are readily convertible to known amounts of cash and which
are subject to an insignificant risk of change in value.
Bank overdrafts also form part of cash equivalents for the purpose of the consolidated statement of cash
flows and are presented within current liabilities on the consolidated statement of financial position.
Trade and other receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost less
an allowance for doubtful debts.
Collectability of trade receivables is reviewed on an ongoing basis. Individual impairment is identified at a
counterparty specific level following objective evidence that a financial asset is impaired. This may be
after an interest or principal payment is missed or when information comes to hand that would indicate an
inability to meet repayments. An allowance for doubtful debts is established when there is objective
evidence that the Group will not be able to collect all amounts due according to the original terms of
receivables. The amount of the allowance is the difference between the asset's carrying amount and the
present value of estimated future cash flows, discounted at the originally assessed effective interest rate
and taking into account the amount of security held. The amount of the allowance is recognised in the
income statement.
Debts which are known to be uncollectible are written off when identified. Write-offs are charged against
accounts previously established for impairment allowance or directly to the income statement.
Where the debt is in relation to amounts due on almond groves and the impact of non-payment would
result in the cancellation of the almond grove rights, which would revert to the Group, then the impairment
provision is measured against the value of the rights that would be obtained by the Group.
Intangible assets
Water rights
Permanent water rights and entitlements are recorded at historical cost less accumulated impairment
losses. Such rights have an indefinite life, and are not depreciated. The carrying value is tested annually
for impairment as well as for possible reversal of impairment. If events or changes in circumstances
indicate impairment, or reversal of impairment, the carrying value is adjusted to take account of impairment
losses.
Financial instruments
Financial instruments are recognised initially using trade date accounting, i.e. on the date that the Group
becomes party to the contractual provisions of the instrument.
On initial recognition, all financial instruments are measured at fair value plus transaction costs (except
for instruments measured at fair value through profit or loss where transaction costs are expensed as
incurred).
a. Financial assets
Financial assets are divided into the following categories which are described in detail below:
loans and receivables; and
financial assets at fair value through profit or loss.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 53
Rural Funds Group
Notes to the Financial Statements
30 June 2017
2
Summary of significant accounting policies (continued)
Financial instruments (continued)
Financial assets are assigned to the different categories on initial recognition, depending on the
characteristics of the instrument and its purpose. A financial instrument’s category is relevant to the way
it is measured and whether any resulting income and expenses are recognised in profit or loss or in other
comprehensive income.
b. Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are
not quoted in an active market. They arise principally through the provision of goods and services to
customers but also incorporate other types of contractual monetary assets.
After initial recognition these are measured at amortised cost using the effective interest method, less
provision for impairment. Any change in their value is recognised in profit or loss.
Discounting is omitted where the effect of discounting is considered immaterial.
Significant receivables are considered for impairment on an individual asset basis when they are past due
at the reporting date and when objective evidence is received that a specific counterparty will default.
The amount of the impairment is the difference between the net carrying amount and the present value of
the future expected cash flows associated with the impaired receivable.
For trade receivables, impairment provisions are recorded in a separate allowance account with the loss
being recognised in profit or loss. When confirmation has been received that the amount is not collectable,
the gross carrying value of the asset is written off against the associated impairment provision.
Subsequent recoveries of amounts previously written off are credited against other income in profit or
loss.
In some circumstances, the Group renegotiates repayment terms with customers which may lead to
changes in the timing of the payments, the Group does not necessarily consider the balance to be
impaired, however assessment is made on a case-by-case basis.
c. Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets:
acquired principally for the purpose of selling in the near future;
designated by the entity to be carried at fair value through profit or loss upon initial recognition; or,
which are derivatives not qualifying for hedge accounting.
The Group has some derivatives which are designated as financial assets at fair value through profit or
loss.
Assets included within this category are carried in the consolidated statement of financial position at fair
value with changes in fair value recognised in finance income or expenses in profit or loss.
Any gain or loss arising from derivative financial instruments is based on changes in fair value, which is
determined by direct reference to active market transactions or using a valuation technique where no
active market exists.
54
Rural Funds Group
Notes to the Financial Statements
30 June 2017
2
Summary of significant accounting policies (continued)
Financial instruments (continued)
d. Financial liabilities
Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the
instrument. All interest-related charges are reported in profit or loss are included in the income statement
line items "finance costs".
Financial liabilities are classified as either financial liabilities ‘at fair value through profit or loss’ or other
financial liabilities depending on the purpose for which the liability was acquired. Although the Group uses
derivative financial instruments in economic hedges of interest rate risk, it does not hedge account for
these transactions.
The Group‘s financial liabilities include borrowings and trade and other payables, which are measured at
amortised cost using the effective interest rate method.
All of the Group‘s derivative financial instruments that are not designated as hedging instruments in
accordance with the strict conditions explained in AASB 139 Financial Instruments: Recognition and
Measurement are accounted for at fair value through profit or loss.
e. Impairment of financial assets
At the end of the reporting period the Group assesses whether there is any objective evidence that a
financial asset or group of financial assets is impaired.
f. Financial assets at amortised cost
If there is objective evidence that an impairment loss on financial assets carried at amortised cost has
been incurred, the amount of the loss is measured as the difference between the assets carrying amount
and the present value of the estimated future cash flows discounted at the financial assets original
effective interest rate.
Impairment on loans and receivables is reduced through the use of an allowance account, all other
impairment losses on financial assets at amortised cost are taken directly to the asset.
Plant and equipment
Classes of plant and equipment other than bearer plants are measured using the cost model as specified
below.
The asset is carried at its cost less any accumulated depreciation and any impairment losses. Costs
include purchase price, other directly attributable costs and the initial estimate of the costs of dismantling
and restoring the asset, where applicable.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will flow to the
Group and the cost of the item can be measured reliably. The carrying amount of any component
accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are
charged to profit or loss during the reporting period in which they are incurred.
The depreciation rates used for each class of depreciable asset are shown below:
Fixed asset class:
Capital works in progress
Plant and equipment
Motor vehicles
Depreciation rate:
Nil
3-16 years
6-16 years
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 55
Rural Funds Group
Notes to the Financial Statements
30 June 2017
2
Summary of significant accounting policies (continued)
Plant and equipment (continued)
At the end of each annual reporting period, the depreciation method, useful life and residual value of each
asset is reviewed. Any revisions are accounted for prospectively as a change in estimate.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are
included in profit or loss. When revalued assets are sold, it is Group policy to transfer any amounts
included in other reserves in respect of those assets to retained earnings.
Plant and equipment - bearer plants
Amendments to AASB 116 Property, Plant and Equipment and AASB 141 Agriculture distinguish bearer
plants from other biological assets. Bearer plants are solely used to grow produce over their productive
lives and are seen to be similar to an item of machinery. They will therefore now be accounted for under
AASB 116 Property, Plant and Equipment.
The Group’s wine grape vines, almond trees and macadamia trees qualify as bearer plants under the new
definition in AASB 141 Agriculture. As required under the standards, the change in accounting policy has
been applied retrospectively to the earliest period presented in the financial statements. As a
consequence, the vines and trees were classified to property, plant and equipment effective 1 July 2015
and prior year financial statement balances restated with the fair value at 1 July 2015 adopted as the cost
base of the asset.
The bearer plants continue to be measured at fair value, any increase in the carrying amount above cost
is recognised in asset revaluation reserve, and any decrease in the carrying amount below cost is
recognised in profit and loss. The financial effect of this change is shown in the table below.
Consolidated Statement of
Comprehensive income (extract)
As originally
stated
For the year ended
Increase/
(Decrease)
Change in fair value of biological assets
Net profit before income tax
Income tax (expense)/benefit
Net profit after income tax
Other comprehensive income
Total comprehensive income
Earnings per unit (cents)
30 June
2016
$'000
26,495
35,963
(1,175)
34,788
(14)
34,774
22.46
$'000
(35,524)
(35,524)
253
(35,271)
35,271
-
(22.77)
Restated
For the year
ended
30 June
2016
$'000
(9,029)
439
(922)
(483)
35,257
34,774
(0.31)
56
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RURAL FUNDS GROUP ANNUAL REPORT 2017 | 57
Rural Funds Group
Notes to the Financial Statements
30 June 2017
2
Summary of significant accounting policies (continued)
Investment property
Investment properties, comprise land, buildings and integral infrastructure including irrigation and
trellising.
Investment properties are held for long-term rental yields and are not occupied by the Group. They are
carried at fair value and changes in fair value are presented in the income statement.
Leases
Leases of fixed assets or biological assets where substantially all the risks and benefits incidental to the
ownership of the asset, but not the legal ownership, are transferred from the lessor, are classified as
finance leases.
Lease payments for operating leases, where substantially all of the risks and benefits have not been
transferred from the lessor, are charged as expenses on a straight-line basis over the life of the lease
term.
Lease incentives under operating leases are recognised as a liability and amortised on a straight-line
basis over the life of the lease term.
Provisions
Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events,
for which it is probable that an outflow of economic benefits will result and that outflow can be reliably
measured.
Provisions are measured at the present value of management's best estimate of the outflow required to
settle the obligation at the end of the reporting period. The discount rate used is a pre-tax rate that reflects
current market assessments of the time value of money and the risks specific to the liability. The increase
in the provision due to the unwinding of the discount is taken to finance costs in the income statement.
Provisions for distributions
Provision is made for the amount of any distribution declared, being appropriately authorised and no
longer at the discretion of the Group, on or before the end of the reporting period but not distributed at the
end of the reporting period.
Borrowing costs
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying
asset are capitalised as part of the cost of that asset. All other borrowing costs are recognised as an
expense in the period in which they are incurred.
Earnings per unit
Basic earnings per unit are calculated on net profit attributable to unitholders of the Group divided by the
weighted average number of issued units.
Interest bearing liabilities
Interest bearing liabilities are initially recognised at fair value less any related transaction costs.
Subsequent to initial recognition, interest bearing liabilities are stated at amortised cost. Any difference
between cost and redemption value is recognised in the statement of comprehensive income over the
entire period of the borrowings on an effective interest basis. Interest-bearing liabilities are classified as
current liabilities unless the Group has an unconditional right to defer the settlement of the liability for at
least twelve months from the balance sheet date.
58
Rural Funds Group
Notes to the Financial Statements
30 June 2017
2
Summary of significant accounting policies (continued)
Issued units
Ordinary units are classified as liabilities in accordance with AASB 132 Financial Instruments:
Presentation. Incremental costs directly attributable to the issue of ordinary units and unit options which
vest immediately are recognised as a deduction from net assets attributable to unitholders, net of any tax
effects. There is no equity relating to the Group.
Rounding of amounts
The Group is an entity to which ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument
2016/191 applies and accordingly amounts in the consolidated financial statements and Directors' report
have been rounded to the nearest thousand dollars.
Parent entity information
The financial information of the parent entity, Rural Funds Trust, disclosed in note 34 has been prepared
on the same basis as the consolidated financial statements, except as set out below.
Investments in subsidiaries and associates
Investments in subsidiaries and associates are accounted for at historical cost less any accumulated
impairment. Distributions received from equity investments are recognised in the parent entity’s profit or
loss when its right to receive the distribution is established.
New accounting standards and interpretations
Standard Name
Effective
date for
the Group
Requirements
Impact
AASB 15 Revenue
from contracts with
customers
1 Jan 2018 Recognise contracted
AASB 16 Leases
1 Jan 2019
revenue when control of a
good or service transfers to a
customer. The notion of
control replaces the existing
notion of risks and rewards.
Introduces a single lease
accounting model and
requires lessees to recognise
on the balance sheet an asset
(right of use) and a
corresponding liability (lease
commitment) for leases with a
term of more than 12 months.
It is not expected that this
standard will have a material
impact on the Group.
There is no impact on
reported financial position or
performance expected for the
Group as it is a lessor in
nature.
There are no other standards that are not yet effective and that would be expected to have a material
impact on the entity in the current or future reporting periods.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 59
Rural Funds Group
Notes to the Financial Statements
30 June 2017
3
Significant accounting judgements, estimates and assumptions
The preparation of the financial statements requires management to make judgements, estimates and
assumptions that affect the reported amounts in the financial statements. Management continually
evaluates its judgements, estimates and assumptions in relation to assets, liabilities, contingent liabilities,
revenue and expenses. Management bases its judgements, estimates and assumptions on historical
experience and on other various factors it believes to be reasonable under the circumstances, the result
of which form the basis of the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions and conditions
and may materially affect financial results or the financial position reported in future periods.
Management has identified the following critical accounting policies for which significant judgements,
estimates or assumptions are made.
Valuations
Directors obtain independent valuations where appropriate. Directors have considered independent
valuations and market evidence where appropriate to determine the appropriate fair value to adopt.
Independent property valuations were obtained for almond orchard properties, from independent valuer,
CBRE Valuations Pty Limited in June 2017. Independent property valuations were obtained for vineyard
properties from independent valuer, Gaetjens Pickett Valuers in June 2017. Independent property
valuations were obtained for the cattle properties situated near the Gulf of Carpentaria in Queensland
from independent valuer, Herron Todd White in June 2017.
Independent valuations were completed for properties within the last 12 months for the Central
Queensland cattle and cotton properties and the Tocabil almond orchard property. CBRE Valuations Pty
Limited completed the valuation on the cattle property in December 2016, and the cotton property in
October 2016. Colliers International Consultancy and Valuation Pty Limited completed the valuation on
the Tocabil property in November 2016. The Directors have concluded that there has been no material
change to the industry and geographical conditions in which the independent valuers previously assessed
these assets. Valuations have not been commissioned for the year end and as such, Directors’ valuations
have been adopted for these properties in the financial statements.
Independent valuations were not completed during the year for the poultry property and infrastructure and
the macadamia orchard properties. The poultry property and infrastructure have not been independently
valued due to the Directors adopting a more conservative view in line with assumptions applied with those
assets. The macadamia orchard properties have not been independently valued due to the value of the
assets and as there has been no material change to the industry and geographical conditions of the
properties in which the independent valuers previously assessed these assets. Directors’ valuations have
been adopted for these properties in the financial statements.
The Group’s properties, including those under development, are valued at fair value excluding the value
of water rights. Water rights are treated as intangible assets, which are held at historical cost less
accumulated impairment losses. The valuation model used judgement by using discount rates,
capitalisation rates and comparable sales in calculating the values and allocating those values over
investment property and bearer plants.
Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and
suitable taxable profits will be available in the future against which the reversal of temporary differences
can be deducted. To determine future taxable profits, reference is made to the latest available profit
forecasts. Where the temporary differences are related to losses, relevant tax law is considered to
determine the availability of the losses to offset against the future taxable profits.
Recognition therefore involves judgement regarding the future financial performance of the particular legal
entity or tax group in which the deferred tax asset has been recognised. Historical differences between
forecast and actual taxable profits have not resulted in material adjustments to the recognition of deferred
tax assets.
60
Rural Funds Group
Notes to the Financial Statements
30 June 2017
3
Significant accounting judgements, estimates and assumptions (continued)
Valuation of Barossa Infrastructure Limited and Coleambally Irrigation Co-operative Limited
shares
The shares in Barossa Infrastructure Limited (BIL) and Coleambally Irrigation Co-operative Limited (CICL)
have been valued using the number of megalitres of water that the Group is entitled to under the BIL and
CICL schemes as supported by an external valuation on an 'in use' basis, or at initial cost. These methods
are used due to a lack of evidence of trading in BIL and CICL shares.
4
Working capital
The deficiency in working capital at 30 June 2017 is due to the timing of distributions. Based on the
forecast cash flows, the Group believes it can pay all of its debts as and when they fall due.
5
Segment information
The Group operates in one operating segment (2016: one segment), being the holding and leasing of
agricultural property and equipment.
Water rights and entitlements
The Board reviews the business based on the internal and external valuations of its properties.
Permanent water rights and entitlements are held at historical cost less accumulated impairment losses.
The book value of the water rights (including investments in BIL and CICL) at 30 June 2017 is
$121,469,000 (2016: $69,534,000).
In June 2017 independent property valuations were performed by CBRE Valuations Pty Limited on the
almond orchard properties that attribute a value to the water entitlements held by the Group. The Directors
consider that these valuations are reasonable estimates of the fair value at 30 June 2017. These
valuations value the water rights at 30 June 2017 at $166,012,000 (2016: $97,949,000) representing a
movement in the value of the water rights above cost of $44,543,000 (2016: $28,415,000).
The following is a comparison of the book value at 30 June 2017 to an adjusted value based on the
Directors' valuation of the water rights.
Per Statutory
Consolidated
Statement of
Financial
Position
Revaluation of
water
entitlements
per Directors'
valuation
Adjusted
Consolidated
Statement of
Financial
Position
$'000
$'000
$'000
10,246
532,757
543,003
14,710
170,615
185,325
357,678
1.41
-
44,543
44,543
-
-
-
44,543
0.17
10,246
577,300
587,546
14,710
170,615
185,325
402,221
1.58
Assets
Total current assets
Total non-current assets
Total assets
Liabilities
Total current liabilities
Total non-current liabilities
Total liabilities (excluding net assets
attributable to unitholders)
Net assets attributable to unitholders
Net asset value per unit ($)
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 61
Rural Funds Group
Notes to the Financial Statements
30 June 2017
6
Revenue
Rental revenue
Interest received
Total
7
Income tax expense
The major components of income tax expense comprise:
Current tax
Deferred tax
Adjustments in respect of current income tax of previous years
Adjustments in respect of deferred income tax of previous years
Income tax expense/(benefit) reported in the Statement of
Comprehensive Income
Income tax expense is attributable to:
Profit from continuing operations
Total
2017
$'000
41,479
94
41,573
2017
$'000
-
2,021
-
(180)
1,841
1,841
1,841
Deferred income tax expense/(benefit) included in income tax expense comprises:
Decrease in deferred tax assets
Increase/(decrease) in deferred tax liabilities
Total
1,120
721
1,841
Amounts charged or credited directly to equity
Capitalised issue costs
Change in fair value taken through asset revaluation reserve
Total
2017
$'000
(16)
(101)
(117)
Numerical reconciliation of income tax expense to prima facie tax payable
Accounting profit before tax from continuing operations
At the statutory income tax rate of 30% (2016: 30%)
Tax effect of amounts that are not deductible/(taxable) in
determining taxable income
Adjustments in respect of tax of previous years
Imputation credits received
Total
2017
$'000
45,167
13,550
(11,504)
(180)
(25)
1,841
2016
$'000
26,469
80
26,549
Restated
2016
$'000
-
957
(29)
(6)
922
922
922
2,332
(1,382)
950
Restated
2016
$'000
(6)
253
247
Restated
2016
$'000
439
132
884
(35)
(59)
922
62
Rural Funds Group
Notes to the Financial Statements
30 June 2017
7
Income tax expense (continued)
From 1 July 2014 both Rural Funds Trust and RFM Chicken Income Fund (a subsidiary of Rural Funds
Trust) are flow through trusts for tax purposes. As a result, it is no longer probable that a lax liability will
be incurred in these entities in relation to future sale of assets for a gain or through trading.
Franking credits
At 30 June 2017 there are $156,000 of franking credits available to apply to future RF Active income
distributions (2016: $59,000).
8
Remuneration of auditors
During the year the following fees were paid or payable for services provided by the auditor of the Group:
PricewaterhouseCoopers Australia:
Audit and review of financial statements
Compliance audit
Total
9
Cash and cash equivalents
Cash at bank
Total
Reconciliation of cash
2017
$
250,637
6,370
257,007
2017
$'000
3,838
3,838
2016
$
210,508
6,121
216,629
2016
$'000
3,034
3,034
Cash and cash equivalents reported in the Consolidated Statement of Cash Flows are reconciled to the
equivalent items in the Consolidated Statement of Financial Position as follows:
Cash and cash equivalents
3,838
3,034
10
Trade and other receivables
Current
Trade receivables
Sundry receivables
Receivables from related parties
Total
2017
$'000
1,756
1,175
1,677
4,608
2016
$'000
6,056
433
750
7,239
Trade receivables are non-interest bearing and are generally on 30 day terms.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 63
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1
Rural Funds Group
Notes to the Financial Statements
30 June 2017
12
Investment property
Opening balance
Acquisitions
Additions
Change in fair value
Disposals
Total
2017
$'000
168,951
64,452
23,189
17,191
-
273,783
2016
$'000
142,379
1,116
23,275
3,343
(1,162)
168,951
Amounts recognised in profit and loss
Rental income from investment property, bearer plants and
water entitlements
Change in fair value
39,077
17,191
25,319
3,343
Direct operating expenses incurred during the year that did not generate rental income amounted to
$97,000 (2016: $100,000).
Leasing arrangements
Minimum lease payments receivable under non-cancellable operating leases of investment properties,
bearer plants, plant and equipment and water rights not recognised in the financial statements, are
receivable as follows:
Within one year
Later than one year, but not later than five years
Later than five years
Total
13
Other current assets
Prepayments
Deposits
Deposits - water purchases
Total
44,683
204,238
547,107
796,028
2017
$'000
401
1,399
-
1,800
35,318
156,153
458,560
650,031
2016
$'000
118
1,066
1,317
2,501
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 65
Rural Funds Group
Notes to the Financial Statements
30 June 2017
14
Financial assets
Non-current
Investment - BIL
Investment - CICL
Investment - RFM Poultry
Finance Lease - Breeders
Investment - Macadamias Processing Co
Total
2017
$'000
509
12,222
130
10,953
102
23,916
2016
$'000
509
9,334
133
-
102
10,078
Coleambally Irrigation Co-operative Limited (CICL) is Australia's fourth largest irrigation company and is
wholly owned by its farmer members. CICL's irrigation delivery system delivers water to 400,000 hectares
of area across the Coleambally Irrigation District, in the Riverina, near Griffith, NSW.
15
Investments accounted for using the equity method
RFM StockBank Perth Markets Limited
2016
$'000
2016
$'000
2017
$'000
2017
$'000
Summarised financial information for
associates
Summarised balance sheet
Total current assets
Total non-current assets
Total current liabilities
Total non-current liabilities
Net assets
568
-
(568)
-
-
14,670
-
(3,053)
-
11,617
-
-
-
-
-
6,714
135,014
(2,506)
(81,777)
57,445
Reconciliation to carrying amounts
Opening net assets
Net assets at date of gaining significant influence
through:
- Initial equity issue
Profit for the period
Distributions paid during the period
Other comprehensive income
Distributions provided for
Disposal of interest in Perth Markets Limited
during the year
Closing net assets
Group's share in %
Group's share in $'000
Carrying value of investment
11,617
11,643
57,445
-
238
(11,406)
-
(449)
-
-
33.50%
-
-
588
-
-
(614)
-
24,027
(3,471)
3,077
-
-
(81,078)
11,617
33.50%
3,894
3,894
-
0.00%
-
-
56,416
1,029
-
-
-
-
57,445
8.96%
5,147
5,147
66
Rural Funds Group
Notes to the Financial Statements
30 June 2017
15
Investments accounted for using the equity method (continued)
RFM StockBank Perth Markets Limited
2016
2017
2017
2016
Summarised statement of comprehensive income
Revenue
Profit from continuing operations
Other comprehensive income
Total comprehensive income
$'000
$'000
$'000
$'000
741
239
-
239
2,328
588
-
588
11,303
24,027
3,077
27,104
5,764
1,029
-
1,029
Distributions received or receivable from associate
4,018
173
323
-
The Group sold its 8.96% interest in Perth Markets Limited (PML), a stapled entity which owns the Market
City site in Canning Vale, WA. RFF acquired 5,275,000 PML securities at $1 per security in February
2016, and sold them during March 2017 at $1.147 per security.
RFM, as Responsible Entity for RFM StockBank, has commenced the windup of RFM StockBank. A final
capital return was paid to investors on 9 August 2017.
There are no commitments or contingencies relating to investments accounted for using the equity
method.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 67
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1
Rural Funds Group
Notes to the Financial Statements
30 June 2017
17
Trade and other payables
Trade payables
Accruals
Sundry creditors
Total
18
Interest bearing liabilities
Current
Equipment loans (ANZ)
Total
Non-current
Borrowings (ANZ)
Borrowings (Rabobank)
Total
2017
$'000
1,087
1,375
2,676
5,138
2017
$'000
3,204
3,204
2016
$'000
659
694
5,567
6,920
2016
$'000
3,030
3,030
105,280
59,220
164,500
146,500
-
146,500
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 69
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70
Rural Funds Group
Notes to the Financial Statements
30 June 2017
18
Interest bearing liabilities (continued)
Loan amounts are provided at the Bankers’ floating rate, plus a margin. For bank reporting purposes,
these assets are valued at market value. Refer to note 5 for Directors’ valuation of water rights and
entitlements.
Borrowings
At 30 June 2017 the core debt facility available to the Group, and due to expire in December 2019, was
$250,000,000 (2016: $147,500,000). As at 30 June 2017 RFF had active interest rate swaps totalling
53.5% (2016: 60%) of the drawn down balance to manage interest rate risk.
Loan covenants
Under the terms of the borrowing facility, the Group is required to comply with the following financial
covenants:
maintenance of a maximum loan to value ratio of 50%;
maintenance of net tangible assets (including water entitlements) in excess of $200,000,000; and,
an interest cover ratio for the Group not less than 2.75:1.00.
Rural Funds Group has complied with the financial covenants of its borrowing facilities during the year.
19
Other non-current liabilities
Lessee deposits
Total
20
Derivative financial instruments
Non-current
Interest rate swaps
Total other liabilities
2017
$'000
1,634
1,634
2017
$'000
3,878
3,878
2016
$'000
1,634
1,634
2016
$'000
9,190
9,190
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 71
Rural Funds Group
Notes to the Financial Statements
30 June 2017
21
Deferred tax
Deferred tax liabilities
Plant and equipment - bearer plants
Plant & equipment
Fair value investment property
Gross deferred tax liabilities
Set off of deferred tax assets
Net deferred tax liabilities
Deferred tax assets
Investments
Legal costs
Other
Unused income tax losses
Gross deferred tax assets
Set off of deferred tax liabilities
Net deferred tax assets
2017
$'000
4,103
1,936
1,519
7,558
(6,955)
603
227
36
53
6,639
6,955
(6,955)
-
2016
$'000
3,513
2,381
515
6,409
(6,409)
-
227
80
21
7,201
7,529
(6,409)
1,120
The deferred tax assets include an amount of $6,955,000 (2016: $7,200,000), which includes $6,615,000
(2016: $7,151,000) of carried forward tax losses of the RFM Australian Wine Fund. The Group has
concluded that the deferred tax assets will be recoverable using the estimated future taxable income
based on budgets and the contracted cash flows of the subsidiary. The losses can be carried forward
indefinitely and have no expiry date.
22
Recognised tax assets and liabilities
Current income tax
Deferred income tax
Opening balance
Credited/(charged) to income
Credited to equity
2017
$'000
-
-
-
2016
$'000
(29)
29
-
Closing balance
Tax expense/(credit) in the Consolidated Statement of Comprehensive
Income
Amounts recognised in the Consolidated Statement of Financial Position:
Deferred tax asset
-
-
Deferred tax liability
2017
$'000
1,120
(1,841)
118
(603)
1,841
2016
$'000
2,317
(950)
(247)
1,120
922
-
(603)
1,120
-
72
Rural Funds Group
Notes to the Financial Statements
30 June 2017
23
Issued units
Units on issue at the beginning of the year
(thousands)
Units issued during the year (thousands)
Distributions to unitholders
2017
2016
No.
165,357
$'000
135,793
No.
132,142
$'000
113,034
89,024
-
136,696
(16,543)
33,215
-
35,148
(12,389)
Units on issue at the end of the year
254,381
255,946
165,357
135,793
The holders of ordinary units are entitled to participate in distributions and the proceeds on winding up
of the Group. On a show of hands at meetings of the Group, each holder of ordinary units has one vote
in person or by proxy, and upon a poll each unit is entitled to one vote.
The Group does not have authorised capital or par value in respect of its units.
24
Asset revaluation reserve
Opening balance
Bearer plants revaluation
Net decrement in financial assets
Total comprehensive income
Income tax applicable
Closing balance
25
Distributions
The Group paid and declared the following distributions in the year:
Distribution paid 29 July 2016
Distribution paid 28 October 2016
Distribution paid 31 January 2017
Distribution paid 28 April 2017
Distribution declared 7 June 2017, paid 31 July 2017
26
Earnings per unit
Per stapled unit
Net profit after income tax for the year ($'000)
Weighted average number of units on issue during the year
Basic and diluted earnings per unit (total) (cents)
2017
$'000
36,663
(9,189)
-
(9,189)
101
27,575
Cents
per unit
2.2325
2.4100
2.4100
2.4100
2.4100
Restated
2016
$'000
1,406
35,524
(14)
35,510
(253)
36,663
Total
$
3,691,602
4,986,940
4,996,810
5,006,323
6,130,580
2017
Restated
2016
43,326
204,617,207
(483)
154,854,317
21.17
(0.31)
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 73
Rural Funds Group
Notes to the Financial Statements
30 June 2017
26
Earnings per unit (continued)
Per unit of Rural Funds Trust
Net profit after income tax for the year ($'000)
Weighted average number of units on issue during the year
Basic and diluted earnings per unit (total) (cents)
Per unit of RF Active
Net profit after income tax for the year ($'000)
Weighted average number of units on issue during the year
Basic and diluted earnings per unit (total) (cents)
2017
Restated
2016
43,219
204,617,207
(613)
154,854,317
21.12
(0.39)
107
130
204,617,207
0.05
154,854,317
0.08
27
Capital commitments
Significant capital expenditure relating to the Kerarbury almond development, contracted for but not
recognised as liabilities is as follows:
Bearer plants
Investment property
Intangible assets
Total
28
Fair value measurement of assets and liabilities
Fair value hierarchy
2017
$'000
26,265
42,024
16,032
84,321
Restated
2016
$'000
67,955
33,039
39,655
140,649
This note explains the judgements and estimates made in determining the fair values of the financial
instruments that are recognised and measured at fair value in the financial statements. To provide an
indication about the reliability of the inputs used in determining fair value, the Group has classified its
financial instruments into the three levels prescribed under the Australian Accounting Standards.
AASB 13 Fair Value Measurement requires all assets and liabilities measured at fair value to be assigned
to a level in the fair value hierarchy. The level in the fair value hierarchy is determined having regard to
the nature of inputs used to determine fair value. The hierarchy is as follows:
Level 1
Level 2
Level 3
Fair value based on unadjusted quoted prices in active markets for identical assets or
liabilities that the entity can access at the measurement date (such as publicly traded
equities).
Fair value based on inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly or indirectly.
One or more significant inputs to the determination of fair value is based on
unobservable inputs for the asset or liability.
74
Rural Funds Group
Notes to the Financial Statements
30 June 2017
28
Fair value measurement of assets and liabilities (continued)
Financial assets and liabilities
Fair value hierarchy
2017
Recurring fair value measurements
Financial assets
Equity securities (listed)
Equity securities (unlisted)
Total
Financial liabilities
Derivatives
Total
2016
Financial assets
Equity securities (listed)
Equity securities (unlisted)
Total
Financial liabilities
Derivatives
Total
Level 1
$'000
Level 2
$'000
Level 3
$'000
Total
$'000
130
-
130
-
-
133
-
133
-
-
-
-
-
-
12,833
12,833
3,878
3,878
-
-
-
-
-
9,190
9,190
-
9,945
9,945
-
-
130
12,833
12,963
3,878
3,878
133
9,945
10,078
9,190
9,190
The Group’s policy is to recognise transfers into and out of fair value hierarchy levels at the end of the
reporting period. There were no transfers in the current year (2016: nil).
Valuation techniques used to determine fair values
Specific valuation techniques used to value financial instruments include:
the use of quoted market prices or dealer quotes for similar instruments;
the present value of the estimated future cash flows based on observable yield curves to determine
the fair value of the interest rate swaps; and,
discounted cash flow analysis to determine the fair value of the remaining financial instruments.
All of the resulting fair value estimates are included in level 1 or 2 except for unlisted equity securities
which are level 3, where the fair values have been determined based on present values and the discount
rates used were adjusted for counterparty or own credit risk.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 75
Rural Funds Group
Notes to the Financial Statements
30 June 2017
28
Fair value measurement of assets and liabilities (continued)
Financial assets and liabilities (continued)
Fair value measurements using significant unobservable inputs (level 3)
The following table presents the changes in level 3 items for the years ended 30 June 2017 and 30 June
2016:
Unlisted equity securities
Opening balance
Additions
Losses recognised in other comprehensive income
Closing balance
Valuation inputs and relationship to fair value
2017
$
9,945
2,888
-
12,833
2016
$
520
9,437
(12)
9,945
Description
Investment in BIL
Investment in CICL
Investment in MPC
Closing balance
Fair
value
$'000
509
12,222
102
12,833
Unobservable
inputs
Range of
inputs
Relationship of
unobservable
inputs to fair
value
Price of water entitlements
Price of water entitlements
+/- 10%
+/- 10%
+/- $50,000
+/- $121,000
Price of macadamias
+/- 10%
+/- $10,000
-
-
-
The Group’s investment in Macadamia Processing Co. Limited is held at cost.
Non-financial assets
Fair value hierarchy
This note explains the judgements and estimates made in determining fair values of the non-financial
assets that are recognised and measured at fair value in the financial statements. To provide an indication
about the reliability of the inputs used in determining fair value, the Group has classified its non-financial
assets and liabilities into the three levels prescribed under Australian Accounting Standards as mentioned
above. At 30 June 2017 all non-financial assets are level 3.
76
Rural Funds Group
Notes to the Financial Statements
30 June 2017
28
Fair value measurement of assets and liabilities (continued)
Non-financial assets (continued)
2017
Investment properties
Almond orchard property
Poultry property and infrastructure
Vineyard property
Macadamia orchard property
Cotton property
Cattle property
Plant and equipment - bearer plants
Almond orchard
Vines
Macadamia orchard
Total non-financial assets
Restated
2016
Investment properties
Almond orchard property
Poultry property and infrastructure
Vineyard property
Macadamia orchard property
Plant and equipment - bearer plants
Almond orchard
Vines
Macadamia orchard
Total non-financial assets
Level 3
$'000
Total
$'000
95,605
83,011
25,435
2,015
24,157
43,560
95,285
19,789
6,119
394,976
58,329
86,011
23,156
1,455
89,614
17,449
6,143
282,157
95,605
83,011
25,435
2,015
24,157
43,560
95,285
19,789
6,119
394,976
58,329
86,011
23,156
1,455
89,614
17,449
6,143
282,157
The Group’s policy is to recognise transfers in to and transfers out of fair value hierarchy levels as at the
end of the reporting period. There were no transfers between levels for recurring fair value measurements
during the year.
Valuation techniques used to determine level 3 fair values
Directors obtain independent valuations where appropriate. At the end of each reporting period, the
Directors update their assessment of fair value of each property, taking into account the most recent
independent valuations. The Directors determine a property’s value within a range of reasonable fair value
estimates.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 77
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*
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 79
Rural Funds Group
Notes to the Financial Statements
30 June 2017
28
Fair value measurement of assets and liabilities (continued)
Valuation processes
Directors obtain independent valuations where appropriate. Directors have considered independent
valuations and market evidence where appropriate to determine the appropriate fair value to adopt.
The main level 3 inputs used by the Group include discount rates and capitalisation rates estimated in the
respective valuations based on comparable transactions and industry data. Changes in level 3 fair values
are analysed at each reporting date during the valuation discussion between management and external
valuers. As part of this discussion management presents updated model inputs and explains the reason
for any fair value movements.
29
Financial risk management
The Group is exposed to a variety of financial risks through its use of financial instruments. This note
discloses the Group‘s objectives, policies and processes for managing and measuring these risks. The
Group‘s overall risk management plan seeks to minimise potential adverse effects due to the
unpredictability of financial markets.
The Group does not speculate in financial assets.
The most significant financial risks which the Group is exposed to are described below:
Specific risks
Market risk - interest rate risk and price risk
Credit risk
Liquidity risk
Financial instruments used
The principal categories of financial instrument used by the Group are:
Trade receivables
Cash at bank
Bank overdraft
Trade and other payables
Floating rate bank loans
Interest rate swaps
Financial risk management policies
Risks arising from holding financial instruments are inherent in the Group’s activities and are managed
through a process of ongoing identification, measurement and monitoring.
The Responsible Entity is responsible for identifying and controlling the risks that arise from these financial
instruments.
The risks are measured using a method that reflects the expected impact on the results and net assets
attributable to unitholders of the Group from changes in the relevant risk variables. Information about
these risk exposures at the reporting date, measured on this basis, is disclosed below.
Concentrations of risk arise where a number of financial instruments or contracts are entered into with the
same counterparty, or where a number of counterparties are engaged in similar business activities that
would cause their ability to meet contractual obligations to be similarly affected by changes in economic,
political or other conditions.
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9
2
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 81
s
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R
Rural Funds Group
Notes to the Financial Statements
30 June 2017
29
Financial risk management (continued)
Liquidity risk and capital management (continued)
The Responsible Entity of the Group defines capital as net assets attributable to unitholders. The Group's
objectives when managing capital are to safeguard the going concern of the Group and to maintain an
optimal capital structure.
The Group is able to maintain or adjust its capital by divesting assets to reduce debt or adjusting the
amount of distributions paid to unitholders.
Interest rate swaps held for hedging
Interest rate risk is managed by using a floating rate debt and through the use of interest rate swap
contracts. The Group does not speculate in the trading of derivative instruments.
Interest rate swap transactions are entered into by the Trust to exchange variable and fixed interest
payment obligations to protect long-term borrowings from the risk of increasing interest rates. The
economic entity has variable interest rate debt and enters into swap contracts to receive interest at
variable rates and pay interest at fixed rates.
The notional principal amounts of the swap contracts approximates 53.5% (2016: 60%) of the Group's
drawn down debt at 30 June 2017.
At balance date, the details of the interest rate swap contracts are:
Maturity of notional amounts
Settlement - between 0 to 3 years
Settlement - 3 to 5 years
Settlement - greater than 5 years
Total
Effective average
interest rate payable
Balance
2017
%
3.40
2.70
3.19
2016
%
3.44
-
3.42
2017
$'000
35,000
15,000
38,000
88,000
2016
$'000
75,000
-
13,000
88,000
82
Rural Funds Group
Notes to the Financial Statements
30 June 2017
29
Financial risk management (continued)
Interest rate swaps held for hedging (continued)
The following interest rate swap contracts have been entered into at 30 June 2017 but are not yet effective.
Maturity of notional amounts
Settlement - between 3 to 5 years
Settlement - greater than 5 years
Total
Effective average
interest rate payable
Balance
2017
%
-
3.04
2016
%
2.50
3.10
2017
$'000
2016
$'000
-
100,000
100,000
10,000
75,000
85,000
The net gain recognised on the swap derivative instruments for the year ended 30 June 2017 was
$5,311,000 (2016: $7,116,000 loss).
At 30 June 2017 the Group had the following mix of financial assets and liabilities exposed to variable
interest rates:
Cash
Interest bearing liabilities
Total
2017
$'000
3,838
(164,500)
(160,662)
2016
$'000
3,034
(146,500)
(143,466)
At 30 June 2017, 1.91% (2016: 2.03%) of the Group’s debt is fixed, excluding the impact of interest rate
swap contracts.
Credit risk
The maximum exposure to credit risk (excluding the value of any collateral or other security) at balance
date to recognised financial assets is the carrying amount, net of any provisions for impairment of those
assets. This has been disclosed in the Consolidated Statement of Financial Position and notes to the
financial statements.
Credit risk for derivative financial instruments arises from the potential failure by counterparties to the
contract to meet their obligations.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 83
Rural Funds Group
Notes to the Financial Statements
30 June 2017
29
Financial risk management (continued)
Market risk
Interest rate risk (sensitivity analysis)
At 30 June 2017, the effect on profit before tax and equity as a result of changes in the interest rate, net
of the effect of interest rate swaps, with all other variables remaining constant, would be as follows:
Change in profit before income tax:
Increase in interest rate by 1%
Decrease in interest rate by 1%
Change in equity:
Increase in interest rate by 1%
Decrease in interest rate by 1%
30
Key management personnel
Directors
2017
$'000
10,395
(11,525)
10,395
(11,525)
2016
$'000
6,556
(7,221)
6,556
(7,221)
The Directors of RFM are considered to be key management personnel of the Group. The Directors of
the Responsible Entity in office during the year and up to the date of this report are:
Guy Paynter
David Bryant
Michael Carroll
Julian Widdup (appointed 15 February 2017)
Interests of Directors of the Responsible Entity
Units in the Group held by Directors of RFM or related entities controlled by Directors of RFM as at 30
June 2017 are:
Balance at 30 June 2015
Additions
Balance at 30 June 2016
Additions
Balance at 30 June 2017
Guy Paynter
Units
382,156
151,100
533,256
281,440
814,696
David Bryant Michael Carroll
Units
3,656,191
3,987,152
7,643,343
4,034,839
11,678,182
Units
-
-
-
19,389
19,389
84
Rural Funds Group
Notes to the Financial Statements
30 June 2017
30
Key management personnel (continued)
Other key management personnel
In addition to the Directors noted above, RFM, as Responsible Entity of the Group is considered to be key
management personnel with the authority for the strategic direction and management of the Group.
The constitutions of Rural Funds Trust and RF Active (the stapled entities forming the Group) are legally
binding documents between the unitholders of the Group and RFM as Responsible Entity. Under the
constitutions, RFM is entitled to the following remuneration:
Management fee: 0.6% per annum (2016: 0.6%) of the gross value of Group assets; and,
Asset management fee: 0.45% per annum (2016: 0.45%) of the gross value of Group assets.
Compensation of key management personnel
No amount is paid by the Group directly to the Directors of the Responsible Entity. Consequently, no
compensation as defined in AASB 124 Related Party Disclosures is paid by the Group to the Directors as
key management personnel. Fees paid to RFM as Responsible Entity are disclosed in note 31.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 85
Rural Funds Group
Notes to the Financial Statements
30 June 2017
31
Related party transactions
Transactions between the Group and related parties are on commercial terms and conditions.
Responsible Entity (Rural Funds Management) and related entities
Transactions between the Group and the Responsible Entity and its associated entities are shown below:
Management fee
Asset management fee
Total management fees
Expenses reimbursed to RFM
Expenses reimbursed to RFM Poultry
Expenses due to Murdock Viticulture
Distribution paid/payable to RFM
Total amount paid to RFM and related entities
Rental income received from RFM Almond Fund 2006
Rental income received from RFM Almond Fund 2007
Rental income received from RFM Almond Fund 2008
Rental income received from RFM
Rental income received from RFM Farming Pty Limited
Rental income received from Cattle JV
Rental income received from Cotton JV
Rental income received from RFM Poultry
Rental income received from 2007 Macgrove Project
Rental income received from RMA Macadamias
Finance lease income from Cattle JV
Expenses charged to RFM Poultry
Distribution received/receivable from RFM Poultry
Distribution received/receivable from RFM StockBank
Water sale proceeds from RFM Almond Fund 2006
Water sale proceeds from RFM Almond Fund 2007
Water sale proceeds from RFM Almond Fund 2008
Water sale proceeds from RFM
Water sale proceeds from RFM Farming Pty Limited
Interest income from Cattle JV
30 June
2017
$'000
1,883
2,510
4,393
2,491
229
-
834
7,947
2,029
606
1,549
336
148
2,694
991
10,520
744
290
790
1
14
4,018
44
12
34
7
30
9
30 June
2016
$'000
1,809
1,356
3,165
2,231
-
199
376
5,971
1,945
588
1,498
372
390
-
-
10,449
140
-
-
54
14
234
59
16
44
9
52
-
Total amounts received from RFM and related entities
24,866
15,864
Murdock Viticulture is a vineyard manager 28% owned by RFM.
86
Rural Funds Group
Notes to the Financial Statements
30 June 2017
31
Related party transactions (continued)
Debtors (including finance lease receivable)
RFM Farming Pty Limited
RFM
RFM Macadamias Pty Limited
2007 Macgrove Project
Cattle JV
Cotton JV
Total
Creditors
RFM
Total
2017
$'000
27
3
-
345
11,770
485
12,630
2017
$'000
472
472
Entities with influence over the Group
Rural Funds Management Limited
Interest in related parties
RFM StockBank
RFM Poultry
Units
8,632,418
Units
3,897,259
108,615
2017
%
3.39
2017
%
33.50
1.58
Units
5,153,833
Units
3,897,259
108,615
2016
$'000
3
41
20
538
-
-
602
2016
$'000
153
153
2016
%
3.12
2016
%
33.50
1.58
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 87
Rural Funds Group
Notes to the Financial Statements
30 June 2017
32
Cash flow information
Reconciliation of net profit/(loss) after income tax to cash flow from operating activities:
Net profit/(loss) after income tax
Cash flows excluded from profit attributable to operating activities
Non-cash flows in profit
Share of net profit - equity accounted investments
Change in fair value of bearer plants
Change in fair value of investment property
Change in fair value of interest rate swaps
Depreciation and impairments
Gain on sale of assets
Distributions received
Changes in operating assets and liabilities
(Increase)/decrease in trade and other receivables
Decrease in other assets
Increase/(decrease) in trade and other payables
Decrease in deferred tax asset (net)
Net cash inflow from operating activities
2017
$'000
43,326
Restated
2016
$'000
(483)
(1,304)
2,498
(17,191)
(5,311)
1,568
(33)
-
2,618
701
(1,782)
1,824
26,914
(61)
8,776
(3,343)
7,116
939
(290)
(36)
(4,510)
48
4,878
1,197
14,231
88
Rural Funds Group
Notes to the Financial Statements
30 June 2017
33
Events after the reporting date
No matter or circumstance has arisen since the end of the year that has significantly affected or could
significantly affect the operations of the Group, the results of those operations or the state of affairs of the
Group in future financial years.
34
Parent entity
The individual financial statements of the parent entity, Rural Funds Trust, show the following aggregate
amounts:
Statement of Financial Position
ASSETS
Current assets
Non-current assets
Total assets
LIABILITIES
Current liabilities
Non-current liabilities
Total liabilities (excluding net assets attributable to
unitholders)
Net assets attributable to unitholders
Total liabilities
Statement of Comprehensive Income
Net profit after income tax
Other comprehensive income for the period, net of tax
Total comprehensive income attributable to unitholders
2017
$'000
9,977
499,645
509,622
11,126
170,013
181,139
328,483
509,622
37,386
(8,850)
28,536
Restated
2016
$'000
13,285
340,371
353,656
10,578
157,324
167,902
185,754
353,656
(1,365)
34,664
33,299
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 89
Rural Funds Group
Directors’ Declaration
30 June 2017
In the Directors of the Responsible Entity’s opinion:
1
The financial statements and notes of Rural Funds Group set out on pages 45 to 89 are in
accordance with the Corporations Act 2001, including:
a.
b.
complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory
professional reporting requirements; and
giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its
performance for the financial year ended on that date; and
2
There are reasonable grounds to believe that the Group will be able to pay its debts as and when they
become due and payable.
Note 2 confirms that the financial statements also comply with International Financial Reporting Standards as
issued by the International Accounting Standards Board.
The Directors have been given the declarations by the persons performing the chief executive officer and chief
financial officer functions as required by section 295A of the Corporations Act 2001.
This declaration is made in accordance with a resolution of the Board of the Directors of Rural Funds Management
Limited.
David Bryant
Director
21 August 2017
90
Independent auditor’s report
To the stapled security holders of Rural Funds Group
Report on the audit of the financial report
Our opinion
In our opinion:
The accompanying financial report of Rural Funds Trust (the Registered Scheme) and its controlled
entities (including RF Active) (together Rural Funds Group, or the Group) is in accordance with the
Corporations Act 2001, including:
(a) giving a true and fair view of the Group's financial position as at 30 June 2017 and of its
financial performance for the year then ended
(b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
What we have audited
The Group financial report comprises:
the consolidated statement of financial position as at 30 June 2017
the consolidated statement of comprehensive income for the year then ended
the consolidated statement of changes in net assets attributable to unitholders for the year then
ended
the consolidated statement of cash flows for the year then ended
the notes to the consolidated financial statements, which include a summary of significant
accounting policies
the directors’ declaration.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for the audit of the financial
report section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Independence
We are independent of the Group in accordance with the auditor independence requirements of the
Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical
Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant
to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities
in accordance with the Code.
PricewaterhouseCoopers, ABN 52 780 433 757
One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001
T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 91
Our audit approach
An audit is designed to provide reasonable assurance about whether the financial report is free from
material misstatement. Misstatements may arise due to fraud or error. They are considered material if
individually or in aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial report.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an
opinion on the financial report as a whole, taking into account the geographic and management
structure of the Group, its accounting processes and controls and the industry in which it operates.
The structure of Rural Funds Group is commonly referred to as a “stapled group”. In a stapled group
the securities of two or more entities are 'stapled' together and cannot be traded separately. In the case
of the Group, the units in Rural Funds Trust have been stapled to the units in RF Active. For the
purposes of consolidation accounting, Rural Funds Trust is 'deemed' the parent and the consolidated
report reflects the consolidation of Rural Funds Trust and its controlled entities, including RF Active.
Materiality
For the purpose of our audit we used overall Group materiality of $3.5 million, which represents
approximately 1% of the Group’s net assets.
We applied this threshold, together with qualitative considerations, to determine the scope of our audit
and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on
the financial report as a whole.
We chose Group net assets because, in our view, it is the benchmark against which the financial position of
the Group is most reliably measured.
We used a 1% threshold based on our professional judgement, noting it is within the range of commonly
acceptable thresholds.
Audit scope
Our audit focused on where the Group made subjective judgements; for example, significant accounting
estimates involving assumptions and inherently uncertain future events.
The audit of the group was performed by a team primarily in Sydney which included individuals with industry
expertise and valuation experts.
92
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in
our audit of the financial report for the current period. The key audit matters were addressed in the
context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters. Further, any commentary on the outcomes of a
particular audit procedure is made in that context. We communicated the key audit matters to the
Audit Committee.
Key audit matter
How our audit addressed the key audit matter
Valuation of investment properties
(Refer to note 3, 12) $273.8m
Investment properties are carried at fair value.
All agricultural assets, which comprise investment
properties, bearer plants, and water entitlements have
been externally valued in the last 12 months, with the
exception of the Poultry property and infrastructure
and the macadamia orchard properties which were
externally valued at 30 June 2016. The directors
monitor and update the key inputs of the valuation
model and consider whether any significant market
indicators suggest that the valuation has changed and
as such an updated external valuation is needed.
Key variables in the valuation model included discount
rates, capitalisation rates, passing rents and
comparable sales. Factors such as prevailing market
conditions, and the individual nature, condition,
location and the expected future income of these
properties impacted these variables.
This was a key audit matter because of the:
size of the investment property balance in the
consolidated statement of financial position
quantum of revaluation gains that could directly
impact the consolidated statement of
comprehensive income through the net fair value
gain/loss of investment properties
inherently subjective nature of investment
property valuations due to the use of assumptions
and estimates in the valuation model
sensitivity of valuations to key
inputs/assumptions in the model such as the
discount rate and capitalisation rates.
We compared a sample of inputs used in the valuation
model, such as rental income and lease terms, to the
relevant tenancy schedules and lease agreements.
We compared the market rents, discount rates and
capitalisation rates used in the valuation models for a
sample of investment properties to an acceptable range
which we determined based on benchmark market
data. Where the rates used fell outside of our
anticipated range, we discussed the rationale
supporting the rates applied in the valuation with
management and obtained supporting documents for
the rationale provided.
Where an external valuation of investment properties
was obtained:
We assessed the competency, qualifications,
experience and objectivity of any external valuers
used by the Group.
We read the valuers’ terms of engagement - we
did not identify any terms that might affect their
objectivity or impose limitations on their work
relevant to the valuation.
We inspected the final valuation reports and
agreed the fair value as per the valuation to the
value recorded in the Group’s accounting records.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 93
Key audit matter
How our audit addressed the key audit matter
In addition to the audit procedures described in the
Valuation of investment properties key audit matter,
we performed the below procedures, amongst others,
with respect to the value of bearer plants.
We reperformed the calculation of the fair value of
bearer plants, by deducting the fair value of land and
infrastructure and water entitlements from the fair
value of the agricultural asset.
In respect of the fair value of water entitlements, we
agreed the volume of water to water
entitlements certificates
agreed the water rate to market rates as
quoted by the external valuers engaged to
value the agricultural assets.
We evaluated the directors’ estimation of the fair value
of land and infrastructure by, for example, considering
comparable sales transactions.
We considered whether the methodology used to
determine the value of bearer plants was in line with
the requirements of Australian Accounting Standards.
Valuation of bearer plants
(Refer to note 11) $121.2m
The Group’s bearer plants include almond trees,
macadamia trees and wine grape vines, which are
classified as Plant and equipment and carried at fair
value.
The valuations described in the Valuation of
investment properties key audit matter above are
determined for the agricultural assets as a whole. The
valuers also determine the value of the investment
property and water entitlements in isolation. As a
result, the directors determine the fair value of bearer
plants as the residual value after deducting the fair
value of land and water entitlements from the value of
the agricultural assets. The fair value of water
entitlements are determined based on the volume of
water and the market rates for water. For reference,
water entitlements are carried at historic cost and
assessed for impairment annually.
This was a key audit matter because of the:
size of the bearer plants on the consolidated
statement of financial position
quantum of revaluation gains that could directly
impact the consolidated statement of
comprehensive income through the net fair value
gain/loss of bearer plants
inherently subjective nature and sensitivity of the
valuations due to the use of assumptions and
estimates as described in the Valuation of
investment properties key audit matter.
Related party transactions
(Refer to note 31)
The Group’s Responsible Entity, along with other funds
for which it is the Responsible Entity, are considered
related parties of the Group. Key transactions with
these parties include:
Lease of investment properties, land, building
and plant and equipment
Lease of bearer plants
Lease of cattle for breeding
Lease of water entitlements.
We obtained an understanding of the Group’s
processes for identifying related parties and
related party transactions, through discussions
with management.
For significant contracts entered into during the
year, we verified that the transactions were
approved in accordance with internal procedures
including involvement of key personnel at the
appropriate level by inspecting relevant
supporting documents.
94
Key audit matter
How our audit addressed the key audit matter
Management fees
Asset management fees
Distributions from investments
Recharge of operating expenses
We considered the related party transactions to be a
key audit matter due to the influence of related parties
on the Group, as well as the potential impact of these
transaction on the results of the Group. Additionally,
because of their nature, they are pervasive and material
to the presentation of and disclosures within the
financial report.
For a sample of lease income received during the
year, we agreed the lease income to the relevant
supporting documents including the lease
agreements and evaluated the directors’ assertion
that the transactions were at arm’s length by
comparing the transactions to the market data
which was used by the external valuers in their
valuation of the related investment property.
For management and asset management fees, we
compared the rates used to determine fees to the
rates disclosed in the prospectus documents for
the related funds.
We discussed the related party transactions with
management to obtain an understanding of the
business rationale for the transactions.
For a sample of related party agreements, we
assessed the rights and obligations of the parties
as per the terms and conditions of the agreements
and, taking these into account, whether the
transactions were recorded appropriately by the
Group.
We assessed the adequacy of the disclosures in
Note 31, of related party relationships and
transactions in light of the requirements of
Australian Accounting Standards.
Other information
The directors of Rural Funds Management Limited (the Responsible Entity of the Group) (the
directors) are responsible for the other information. The other information included in the Group’s
annual report for the year ended 30 June 2017 comprises the Directors' Report, and ASX additional
information (but does not include the financial report and our auditor’s report thereon), which we
obtained prior to the date of this auditor’s report. We also expect information to be made available to
us after the date of this auditor’s report, including Letter from the Managing Director and Corporate
governance statement.
Our opinion on the financial report does not cover the other information and accordingly we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent
with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially
misstated.
RURAL FUNDS GROUP ANNUAL REPORT 2017 | 95
If, based on the work we have performed on the other information that we obtained prior to the date of
this auditor’s report, we conclude that there is a material misstatement of this other information, we
are required to report that fact. We have nothing to report in this regard. When we read the other
information not yet received as identified above, if we conclude that there is a material misstatements
therein, we are required to communicate the matter to the directors and use our professional
judgement to determine the appropriate action to take.
Responsibilities of the directors for the financial report
The directors of the Company are responsible for the preparation of the financial report that gives a true
and fair view in accordance with Australian Accounting Standards and Corporations Act 2001 and
for such internal control as the directors determine is necessary to enable the preparation of the
financial report that gives a true and fair view and is free from material misstatement, whether due to
fraud or error.
In preparing the financial report, the directors are responsible for assessing the ability of the Group to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors of the Responsible Entity either intend to
liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with the Australian Auditing Standards will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial report.
A further description of our responsibilities for the audit of the financial report is located at the
Auditing and Assurance Standards Board website at:
http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our
auditor's report.
PricewaterhouseCoopers
CMC Heraghty
Partner
Sydney
21 August 2017
96
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