Rural Funds Management
Annual Report 2019

Plain-text annual report

RURAL FUNDS GROUP ANNUAL REPORT for the year ended 30 June 2019 Rural Funds Group (ASX: RFF) stapled group comprising: Rural Funds Trust ARSN 122 951 578 and RF Active ARSN 168 740 805 Responsible Entity: Rural Funds Management Limited ACN 077 492 838 AFSL 226701 Issued on: 30 September 2019 3 RURAL FUNDS GROUP ANNUAL REPORT 2019Front cover: Cotton harvest, Lynora Downs, Rolleston, QLD, March 2019. Mooral almond orchard, Hillston, NSW, April 2019. CONTENTS Letter from the Managing Director Fund overview Investment strategy Corporate governance statement Environmental, Social and Governance responsibilities ASX additional information Financial statements 6 8 10 12 30 36 40 LETTER FROM THE MANAGING DIRECTOR Dear Unitholder, We are pleased to present to you the Rural Funds Group (ASX: RFF, the Fund) Annual Report for the year ended 30 June 2019 (FY19). RFF at 30 June 2019 RFF ended the year with adjusted funds from operations (AFFO) of 13.3 cents per unit (cpu), which represents an increase of 4.7% since FY18. Distributions per unit totaling 10.43 cents were paid from AFFO, which represents a conservative payout ratio of 78%. The adjusted Net Asset Value (NAV) of the Fund increased to $602.6 million(m), or $1.80 on a per unit basis. This equates to a 7.1% NAV per unit increase, when compared to the previous corresponding period. Adjusted total assets increased by $222.2m compared to 30 June 2018, primarily through the acquisition of assets that will be described in greater detail below. The weighted average duration of the leases of the Funds’ assets is 11.3 years. In summary, the results for FY19 are very pleasing in that they are consistent with RFM’s objectives of the Fund; to grow AFFO, maintain distribution growth at 4% and increase diversification and scale. Review of financial year 2019 During July 2018, RFF completed a $149.5m entitlement offer (Entitlement Offer) with proceeds primarily used to fund transactions with JBS Australia Pty Limited (JBS), the country’s largest lot feeder and meat processor. The JBS transactions include the purchase of feedlots from JBS and the provision of a $75.0m limited guarantee that will enable JBS to replace an existing arrangement for the supply of cattle for its grainfed business. The Entitlement Offer also created funding capacity to support several cattle and cotton property acquisitions. The first of these acquisitions, which was described in the Entitlement Offer material, was Comanche. Comanche is a 7,600 hectare(ha) cattle property located in central Queensland. When announcing the purchase, RFM outlined a development program focusing on additional water points, increasing cultivation area and pasture improvements. The aim of the program is to increase the carrying capacity of the property, and ultimately have this increase reflected in a valuation uplift for the benefit of RFF unitholders. Shortly after this, RFM announced the acquisition of Cerberus, an 8,280 ha cattle property located in central Queensland with similar attributes as Comanche. FY19 also saw the establishment of a relationship with another corporate lessee in Stone Axe Pastoral Company (SAP). SAP are a beef company focusing on premium full-blood Wagyu production. The Rural Funds Group acquired and leased three properties to SAP in FY19. The properties; Dyamberin (1,728 ha), Woodburn (1,062 ha) and Cobungra (6,486 ha), are located in New South Wales and Victoria. Similar to the other cattle properties acquired in FY19, these also have development potential to improve productivity. Importantly, all the cattle properties acquired in FY19 are leased for a period of ten years, with a rent review in year five. This lease duration and structure provides a predictable level of income for RFF and the opportunity to monetise growth in asset values at the point of rent review. RFF’s investment in the cattle sector started in 2016, via the purchase of three properties, including one called Rewan. Since Rewan was acquired, capital expenditure and operational improvements have increased both the value and productivity of the property. In July 2019, RFM was pleased to announce the transfer of the lease of Rewan from Cattle JV Pty Ltd (an entity owned by RFM) to the Australian Agricultural Company Ltd (ASX: AAC). This transaction has achieved several benefits. Firstly, the lease brings forward an increase to the income generated by this asset. Secondly, the transaction provides validation of RFM’s productivity development 6 strategy. Thirdly, it introduces another high-quality lessee to the RFF portfolio. Established in 1824, AAC is Australia’s largest integrated cattle and beef producer, operating approximately 1% of Australia’s landmass. AAC is also the oldest continuously operating company in Australia. During the period RFF also acquired Mayneland, a 2,942 ha cotton property in central Queensland, 25kms north of Lynora Downs, another cotton asset owned by the Fund. RFM will operate and lease Mayneland in FY20 to enable development of unutilised water entitlements and to improve economies of scale which will make the asset more financially attractive to third party lessees. Cotton yields achieved in the past year were up to 12.5 bales per ha on Lynora Downs and 15 bales per ha on Mayneland. These record yields support the investment in cotton farms in this region by RFF. Pages 8 and 9 of this Annual Report provides a map of Australia showing the 50 assets which are owned by the Rural Funds Group and includes those expected in settle in the coming months. In summary, the assets acquired during the year, and the ongoing development programs undertaken, strengthened portfolio diversification in terms of sector, geographic and climatic measures. Pages 10 and 11 of this Annual Report provides further detail of the Funds diversification by these measures. Several of the existing properties saw increases from independent valuations during the period. Almond orchards, including the Kerarbury orchard, which consists of 2,500 ha of plantings, received a combined $15.9m valuation increase. Notably too, the vineyards owned by RFF, received valuation increases of $15.8m, representing a 33% increase to their prior values. These assets are primarily located in Australia’s premier wine growing region, the Barossa Valley. Looking ahead to FY20 As part of the full year results presented in August, RFM provided a forecast FY20 AFFO per unit of 14.0 cents. From this AFFO RFF will pay forecast distributions totalling 10.85 cents per unit. This represents a 4.0% increase on FY19 distributions and therefore consistent with the Fund's strategy. RFM will continue to pursue acquisition opportunities driven by structural trends in the Australian agricultural sector. However, the objectives for RFF remain unchanged; investing in assets, and where possible developing those assets, with the aim of achieving consistent distribution growth, diversification and scale. We look forward to providing you with updates as they arise during FY20. As always please don’t hesitate to contact the RFM team should you have any questions about your investment. Yours faithfully, David Bryant Managing Director Rural Funds Management Limited 7 RURAL FUNDS GROUP ANNUAL REPORT 2019Rural Funds Group overview1 Rural Funds Group (RFF) is an agricultural real estate investment trust which owns a diversified portfolio of Australian agricultural assets across six sectors. These assets have long-term leases with experienced agricultural operators. 2 50 assets Climatic zones Summer dominant Summer Uniform Winter Winter dominant Arid 11 3 2 1 1 2 1 3 1 2 5 1 3 1 13 1 1 1 4 1 Climatic zones Summer dominant Summer Uniform Winter Winter dominant Arid 11.3 yrs WALE3 5 vineyards Cattle $274.7m FY19 value 16 cattle properties Poultry 17 poultry farms $75.0m FY19 value Vineyards 7 vineyard properties $64.1m FY19 value 7 lessees $21.5m FY20f rent 1 lessee $10.9m FY20f rent 1 lessee $3.9m FY20f rent 1. 2. Shaded areas denote climatic zones differentiated by rainfall seasonality. Source: Bureau of Meteorology; see RFF Climatic Diversification discussion paper, 20 June 2016. Background picture: Rewan May 2019. Includes Beef City feedlot (settled Aug 2019), Riverina Beef feedlot (expected to settle Dec 2019), Cygnet macadamia development (expected to settle Nov 2019). 2 cattle properties 3 cattle properties 3 cattle properties 2 cotton properties 4 macadamia orchards Climatic zones Summer dominant 3 Summer cattle feedlots 2 cattle properties Uniform Winter Winter dominant 2 cattle feedlots Arid 13 poultry farms 4 almond orchards 1 cattle property 2 vineyards 4 poultry farms Cotton 2 cotton properties $51.4m FY19 value Almonds 4 almond properties $425.9m FY19 value Macadamias 4 macadamia properties $14.4m FY19 value 2 lessees $3.3m FY20f rent 3 lessees4 $33.4m FY20f rent 2 lessees $1.5m FY20f rent 3. 4. Weighted average lease expiry based on FY20 forecast rent. The lease agreements are in place as at 30 June 2020. Includes the merger of 4 lessees effective 30 August 2019. The merged entity is called RFM Almond Fund. Background photo: Rewan, Rolleston, QLD, May 2019. Investment strategy RFM continues to oversee and manage existing assets, including capex and developments, while pursuing new acquisitions with the potential for productivity development. RFM seeks to diversify RFF by sector, asset type and climatic zone. RFM aims to grow distributions by 4% p.a. Agricultural sector1 Climatic zone1 Almonds 42% Vineyards 5% Cattle 27% Cotton 4% Poultry 14% Macadamias 2% Other 6% Southern 79% Northern 21% Asset type1,2 Indexation1 Natural resource predominant 46% Infrastructure predominant 54% Fixed indexation (2.5%): 6% Fixed indexation (2.5%) with market review: 34% CPI and CPI linked indexation: 54%³ CPI with market review: 3% Other: 3% 1. 2. 3. Figures based on FY20 forecast revenue. Assumes: Poultry, feedlots (and guarantee fee) are infrastructure predominant; vineyards, cotton, and, cattle properties are natural resource predominant; almond and macadamia orchards are split equally. CPI linked indexation refers to RFM Poultry which is 65% of CPI capped at 2%. FY19 results highlights Key financial metrics4: Adjusted Funds from Operations (AFFO) increased due to JBS transactions, acquisitions, development capital expenditure, and lease indexation. EPU lower mainly due to $18m non-cash revaluation decrements on interest rate swaps. AFFO 13.3 CPU EPU 10.1 cents Balance sheet metrics: Increase in adjusted total assets of $222m primarily due to acquisitions, capex and revaluations of almond orchards, vineyards and water entitlements. Gearing of 31% remains within target range of 30-35%. Adj. total assets $945.9m⁵ FY19 Debt $291.4m FY20 forecasts: FY20 DPU forecast of 10.85 cents consistent with 4% annual growth target. Represents a forecast payout ratio of 77%. AFFO 14.0 CPU DPU 10.85 cents Capital management: Facility was refinanced in November 2018, with limit increased and split into two tranches of three and five years. Term debt facility $335.0m Term debt drawn $291.4m 10.43¢ DPU 78% AFFO PAYOUT RATIO $1.80 ADJ. NAV PER UNIT 31.2% GEARING 4.0% FY20 DPU GROWTH 5.5% FORECAST YIELD⁶ 55.9% DEBT HEDGED 4.18% EFFECTIVE COST OF TOTAL DEBT 4. 5. 6. Earnings per unit (EPU), distributions per unit (DPU) and cents per unit (CPU). EPU calculated as Total Comprehensive Income/ weighted average units. Adjusted total assets incorporates most recent independent property valuations, including water entitlements, and is adjusted for the independent valuation of water entitlements, which are recognised at the lower of cost or fair value on the balance sheet. FY20 forecast yield based on DPU of 10.85 cents as at 9 September 2019 divided by closing price of $2.00. Background photo: Mutton Hole, Gulf Muster, QLD, June 2018. Geier vineyard, Barossa Valley, SA, March 2019. CORPORATE GOVERNANCE STATEMENT Definitions ASIC ASX RE Australian Securities and Investments Commission Australian Securities Exchange Limited or ASX Limited Responsible Entity Rural Funds Group (the Fund) is listed on the ASX and comprises Rural Funds Trust ARSN 112 951 578 and RF Active ARSN 168 740 805, both registered managed investment schemes under the Corporations Act 2001 (Cth) (the Corporations Act). Units in Rural Funds Trust are stapled to units in RF Active. Rural Funds Management Limited (RFM) ACN 077 492 838 is the Responsible Entity for the Fund and has established and oversees the corporate governance of the Fund. The Responsible Entity holds Australian Financial Services Licence (AFSL) 226701 authorising it to operate the Fund. It has a duty to act in the best interests of unitholders of the Fund. The Fund’s compliance plan has been lodged with ASIC, a copy of which 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 with a mix of experience and skills necessary to oversee the corporate governance requirements of the Responsible Entity. This ensures that 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 profitable, and efficient business. To the extent that they are applicable for an externally managed 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 in this section 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 2018 to 30 June 2019 (Statement Period). The ASX Corporate Governance Council has released an updated version of the Corporate Governance Principles and Recommendations (Fourth Edition) which, for a listed entity, takes effect in the first full financial year on or after 1 January 2020. RFM will report to Fourth Edition principles and recommendations in its annual report for the year ended 30 June 2021. At the time of printing this statement, there have been no material changes to corporate governance policies and practices since 30 June 2019. 14 Lay solid foundations for management and oversight PRINCIPLE 1 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 and 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 oversight, continuous disclosure and compliance oversight, media, analyst briefings, responses to member questions, and for ensuring that 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 senior managers 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. 15 1.2 1.3 1.4 RURAL FUNDS GROUP ANNUAL REPORT 2019FUND’S RESPONSE As an externally managed scheme, recommendation 1.5 does not apply to the Fund. 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 identifying 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 does 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 management includes two female managers (out of a total of 15 senior managers. Of the 162 staff members RFM and its associated entites employ, 27% are female. The Workplace Gender Equality Act 2012 (Cth) applies to RFM as the Responsible Entity employs more than 100 employees in Australia. This is the first financial year that the Responsible Entity has met this threshold. Therefore, the Responsible Entity is now required to report annually to the Workplace Gender Equality Agency (WGEA). The Responsible Entity has advised WGEA of the updated employment figures and is registered to report to WGEA for the periods ending 31 March annually, commencing in 2020. 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 all staff, including senior managers, is reviewed throughout the year, as appropriate, in accordance with the timelines outlined in the Responsible Entity’s Performance Management Policy. ASX RECOMMENDATION (CONT’) 1.5 1.6 1.7 16 Swan Ridge orchard, Bundaberg QLD, 2018. 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 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. External advice is sought from senior consultants including specialist tax, legal or business advisers when required. As an externally managed scheme, recommendation 2.2 does not apply to the Fund. The Responsible Entity Board comprises of four members, three of whom are independent non-executive directors. HOLDING SIZE UNITHOLDERS CLASS David Bryant 17 February 1997 Guy Paynter 15 April 2010 Michael Carroll 15 April 2010 Julian Widdup 15 February 2017 No Yes Yes Yes Guy Paynter is an Independent Non-Executive Director, holds the role of Chair of the Board and is a member of the Audit Committee and the 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). Guy’s agricultural interests include cattle breeding in the Upper Hunter region of New South Wales. Guy holds a Bachelor of Laws from the University of Melbourne. 2.1 2.2 2.3 18 ASX RECOMMENDATION (CONT’) 2.3 continued FUND’S RESPONSE David Bryant is the Managing Director. David holds 77.87% of shares on issue in the Responsible Entity. David Bryant established RFM in February 1997 and since that time has led the team responsible for the acquisition of large-scale agricultural property assets and associated water entitlements. As at 30 June 2019, RFM manages over $1.2 billion of agricultural assets. On a day-to-day level, David is responsible for leading the RFM senior management team, 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 an Independent 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 agribusinesses entities. Michael is the Chairman of Viridis Ag Limited and the Australian Rural Leadership Foundation. Michael is a Director on the boards of Elders Limited, Select Harvests Limited and Paraway Pastoral Company Limited. Former board positions include Sunny Queen Australian Pty Limited, Tassal Group Limited, the Australian Farm Institute, Warrnambool Cheese & Butter Factory Company Holdings Limited, Meat & Livestock Australia, Queensland Sugar Limited, the Geoffrey Gardiner Dairy Foundation and the Rural Finance Corporation of Victoria. Michael’s advisory clients have included government, major banks and institutional investors. He comes from a family who have been involved in agriculture for over 145 years and owns his own property in South West Victoria. Michael has senior executive experience in a range of companies, including establishing and leading the National Australia Bank (NAB) Agribusiness division. Michael worked for several years as a senior adviser in the NAB internal investment banking and corporate advisory team. Before joining the NAB, Michael worked for a range of agribusiness companies including Monsanto Agricultural Products and a biotechnology venture capital company. 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. 19 RURAL FUNDS GROUP ANNUAL REPORT 2019ASX RECOMMENDATION (CONT’) 2.3 continued FUND’S RESPONSE Julian Widdup is an Independent 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. Julian has previously 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, the Casey Hospital in Melbourne and the Mater Hospital in Newcastle. Julian is currently a director of Australian Catholic Superannuation & Retirement Fund, Catholic Schools NSW and Screen Canberra. 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, senior management profiles, and the skills, knowledge, and experience of 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 and ASX Listing Rules. 20 ASX RECOMMENDATION (CONT’) FUND’S RESPONSE 2.4 2.5 2.6 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 are provided with an induction relevant to the Responsible Entity and the Fund. Directors are also provided with opportunities to develop and maintain their skills and knowledge, through both formal and informal training. Rosebank vineyard, Barossa Valley, SA, March 2019. 21 RURAL FUNDS GROUP ANNUAL REPORT 2019PRINCIPLE 3 Act ethically and responsibly A listed entity should act ethically and responsibly. ASX RECOMMENDATION FUND’S RESPONSE 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 including senior managers. 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. 3.1 22 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 4.2 4.3 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 senior management of the Responsible Entity and the Auditor of the Fund. The Audit Committee and invitees review the financial reports and provide commentary to the Board as required. Two meetings of the Audit Committee were held in relation to the accounts during the Statement Period. The Audit Committee ordinarily hold two meetings per year or more if required. The Audit Committee has a formal charter that details its roles and responsibilities 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. The Board of the Responsible Entity has been given declarations by the persons performing the chief executive officer and chief financial officer functions. It is their opinion that the: > Financial records of the Fund have been properly maintained in accordance with section 286 of the Corporations Act > Financial statements and notes, referred to in paragraph 295(3)(b) of the Corporations Act, for the financial year comply with the accounting standards > Financial statements and notes give a true and fair view of the financial position and performance of the entity > 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. 23 RURAL FUNDS GROUP ANNUAL REPORT 2019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 (the 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, identifies who is responsible for disclosure and 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. Lynora Downs, central QLD, July 2019. 24 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 6.1 6.2 The Responsible Entity is one of the oldest and most experienced agricultural fund managers in Australia. 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 and the Fund is available on the Responsible Entity’s website. Information about the corporate governance practices and policies of the Responsible Entity 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 processes, financial information, key documents, news and announcements, and details about how to contact the Responsible Entity and the Unit 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. Additionally, unitholders are welcome to make their own arrangements to visit the assets by contacting Investor Services. 25 RURAL FUNDS GROUP ANNUAL REPORT 2019ASX RECOMMENDATION (CONT’) 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. If the Responsible Entity is 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 Fund's 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 electronically however, the Responsible Entity continues to communicate with investors via traditional methods (mail and phone) when appropriate. Mutton Hole, Gulf Muster, QLD, July 2019. 26 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 7.1 7.2 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 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 managers of each business area, who report to the Board on the effectiveness of mitigation measures. The Responsible Entity has established a risk management policy that 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 31000:2018. 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 substantive change in the risk profile. 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. 27 RURAL FUNDS GROUP ANNUAL REPORT 2019ASX RECOMMENDATION (CONT’) 7.3 FUND’S RESPONSE 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. While not an internal audit committee, the Internal Compliance 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. During the Statement Period, the Internal Compliance Committee comprised: > Executive Manager – Funds Management (resigned as Chair 7 August 2018) > Company Secretary (appointed Chair 7 August 2018) > Financial Controller > National Manager – Human Resources > Senior Fund Administrator > Compliance Officer In addition, the Chief Operating Officer, Business Managers and National Managers are invited to each Internal Compliance Committee meeting. This broad representation of roles on the Internal Compliance Committee ensures it is fully informed of matters and recommendations. 7.4 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 sustainability of the Fund’s assets. In response to disclosing ESG matters for the Responsible Entity with the greatest materiality to the Fund and its investors, please refer to the Environmental, Social and Governance Responsibilities section starting at page 30. 28 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 adjusted gross asset value of the Fund > Asset Management Fee – up to 1.0% p.a. of the adjusted gross asset value of the Fund > Termination Fee – 1.5% of the adjusted 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 adjusted gross asset value of the Fund. For further information on these fees, refer to page 92 for the dollar amounts. The Board of Directors of the Responsible Entity has established a Remuneration Committee. The purpose of the Remuneration Committee is to advise on remuneration and issues relevant to the remuneration policies and practices for senior managers 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. Information on 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 senior management 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 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. 8.2 8.3 As an externally managed scheme, refer to recommendation 8.1. As an externally managed scheme, refer to recommendation 8.1. 29 RURAL FUNDS GROUP ANNUAL REPORT 2019 Mooral almond orchard, Hillston, NSW, January 2019. ENVIRONMENTAL, SOCIAL AND GOVERNANCE RESPONSIBILITIES ASX recommendation 7.4 Commitment and responsibility for implementation RFM, as Responsible Entity for RFF, is committed to sustainable practices that benefit the environment, land management, our staff and our community. These practices are underpinned by RFM’s ESG responsibilities and are reflected in our policies, conduct and community support. Please note that some sections of our ESG statement fall under the corporate governance section, which can be found from page 12. 7.4 Environment Climate change RFM is aware of the potential risks that climate change could present to RFF assets. RFM has committed to a climatic diversification strategy in order to mitigate these risks. This year RFM committed to undergoing a quantification of the primary emissions on specific RFF assets (Carbon dioxide, Methane and Nitrous oxide). Having engaged independent experts, RFM is expected to be able to quantify the emissions from RFF’s assets and undergo infrastructure and practice changes in response. For more information, see Discussion Paper #9 Understanding the drivers of climate change on RFM’s website. Carbon dioxide Through the use of infrastructure such as water pumps, diesel generators and machinery, RFF’s almond orchards, macadamia orchards, vineyards, cotton and poultry assets are producers of carbon dioxide. Steps have been taken by RFM towards reducing emissions on RFF’s assets. Some of RFF’s cattle and poultry farms have benefitted from solar energy installations to offset energy use. RFM has also entered into a feasibility study for one of RFF’s almond orchards to explore the possibility of a future solar energy installation. Methane RFF’s cattle assets are a producer of methane. RFM is investigating the means of quantifying these emissions and exploring ways to reduce them, including pasture improvements and supplementary feeding. Dietary changes have the potential to reduce methane emissions in cattle, as the feed that would have been converted to methane becomes energy for the animal instead. Nitrous oxide Cereal and cotton cropping is a common source of nitrous oxide emissions, mostly through the application of nitrogen- based fertilisers. Waterlogging caused by excessive irrigation is also a source of nitrous oxide emissions. These are issues that best management practice avoids on RFF’s cotton and almond properties, but nevertheless will be the subject of future review and measurement. Management of natural resources RFF owns a portfolio of Australian agricultural assets and the stewardship of these assets is of critical importance to the performance and growth of RFF. RFF’s leases require operators to use appropriate agricultural production methods. 32 Wherever practical, the Fund will: > monitor industry developments and adopt farm management practices that incorporate the latest research findings and technologies to minimise environmental impact, protect biodiversity and better use the natural resources, > maximise water-use efficiency through the use of modern, well managed irrigation systems, > ensure water management practices consider and manage water quality and minimise run-off, > use communication technologies to access water-use data remotely, assisting with optimal water use adopt nutrient management practices that improve long term soil health, > ensure that pest and weed management requiring the use of chemicals occurs in a safe and environmentally responsible manner, and > ensure that lessees and personnel understand and are focused on sustainable farming principles and adhere to environmental legislation and regulations. Best farming practice RFF leases require operators to use appropriate agricultural production methods. These include farm management tactics to minimise environmental impact, protect biodiversity, manage water and sustain soil health. For the full details, see the Environmental Policy located on RFM's website. 7.4 Social Animal welfare Some of RFF’s properties are leased to agricultural producers involved in intensive production, such as broiler chickens and cattle feedlots. RFM has policies and procedures which are explicit about animal treatment and welfare. RFF’s cattle lessees are required to comply with best husbandry and pastoral practice. This is stipulated in leases signed with RFF. Best practice includes low stress handling, disease minimisation and sustainable stocking rates. Most cattle sold by RFF lessees are sold in the domestic market, but a small number may be sold to the live export market. The birds produced at RFF’s poultry sheds are accredited under the RSPCA’s Approved Farming Scheme Standards – Meat Chickens. The RSPCA monitors compliance to these standards by conducting two audits each year, as well as random audits throughout the year. Chickens are raised in accordance with RSPCA standards for prescribed stocking densities. Community engagement An integral part of our corporate culture is to donate to charities and causes that are close to the hearts of our employees, including in the communities in which we operate. Tahen Project Tahen is a village in the Battambang province of Cambodia. RFM has committed $1 million over three years to assist farmers in agricultural practices to improve productivity and commodity diversification. The project aims to provide guidance and education to sustainably and reliably improve production. It is hoped that Tahen will also become a model which could be replicated by other local communities. Additional support RFM has also supported a number of organisations through donations and labour. Further details can be located on the Community Involvement page on the RFM website. 33 RURAL FUNDS GROUP ANNUAL REPORT 2019Our staff As RFF does not directly employ staff, RFM is responsible for staff management associated with the management and operation of the Fund. RFM has implemented a range of staff related policies, including: Code of Conduct, Environmental, Health, Safety and Environment (HSE), Incident Management, Diversity and Equal Employment Opportunity. The aim of these policies is to create a safe, diverse and equitable workplace. RFM takes its obligations relating to Work Health and Safety seriously and has implemented an extensive HSE management system to educate employees and contractors and protect them from harm. The RFM Board receives a monthly workplace health and safety report identifying any issues and incidents. RFM periodically reviews arrangements with contractors to determine their practices and standards meet our safe work practices and expectations, legislative requirements and contractual obligations. RFM is committed to providing employees with ongoing opportunities for HSE training and development. RFM staff are permitted to organise flexible working arrangements, tailored specifically to the needs of the individual. Staff undergoing additional training and development to support their current role are eligible to apply for study leave and flexible working arrangements. 7.4 Governance Corporate governance RFM has established an internal compliance committee (ICC) that reports to the RFM Board of Directors monthly. The ICC monitors and reports on compliance with RFM’s Australian Financial Services Licence (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 ICC is structured to include representatives from different business units to ensure compliance monitoring and review are well embedded across RFM. Conflicts of interest and related party transactions RFM manages a number of entities, including its role as Responsible Entity for four funds. Where related party transactions occur between RFF and another RFM managed entity, they are subject to RFM's Conflict of Interest Management Policy. RFM’s responsibilities and contractual obligations are set out in the Fund’s Constitution, the Corporations Act, the ASX Listing Rules and it's AFSL. As the Responsible Entity, RFM must always act in the best interests of the unitholders, and if there is a conflict between the unitholders’ interests 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 report from the Compliance Officer, who reports on the Responsible Entity's compliance, conflicts of interests and related party transactions. The Board of the Responsible Entity confirms all related party transactions are on an arm's length basis. Ethical conduct RFM seeks to act ethically while doing business and this underpins our approach with all transactions. RFM employees are obligated to conduct themselves in accordance with the standards set out in the RFM Code of Conduct, the Corporate Governance Charter and other related policy documents. Our employees are expected to conduct themselves with integrity, in compliance with legislative requirements and with internal policies and procedures. Employee performance is monitored by management through a combination of ongoing informal reviews. RFM’s recruitment process includes reference checking of all potential employees, as well as national police checks and bankruptcy checks for sensitive roles. RFM’s anti-money laundering and counter-terrorism financing program policy aims to identify, mitigate and manage the risk that the Company or its Officers may unwittingly facilitate money laundering or financing of terrorism. The Responsible Entity manages the above risks in accordance with its Risk Management Policy available on the Responsible Entity’s website. 34 Mutton Hole, Gulf Muster, QLD, June 2018. 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 10 September 2019. (a) Distribution of Equity Securities HOLDING SIZE UNITHOLDERS CLASS 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over 2,977 4,922 2,395 3,458 179 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 The Vanguard Group, Inc Daiwa Securities Group Inc1 Sumitomo Mitsui DS Asset Management Company1 Sumitomo Mitsu Financial Group1 22,238,563 16,815,367 16,808,337 16,808,337 % 8.69 5.02 5.02 5.02 (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 $2.01 as at 10 September 2019 is set out below: There is overlap in the relevant interest of each of these entities. Persons reading the annual report should refer to the applicable substantial holder notices released via the ASX. NUMBER OF UNITS 378,982 NUMBER OF UNITHOLDERS 1,401 1. 36 (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. (e) Twenty largest unitholders at 10 September 2019 UNITHOLDER NUMBER OF UNITS HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Netwealth Investments Limited Citicorp Nominees Pty Limited Argo Investments Limited Rural Funds Management Ltd National Nominees Limited Netwealth Investments Limited One Managed Investment Funds Limited Bryant Family Services Pty Ltd BNP Paribas Nominees Pty Ltd SCCASP Holdings Pty Ltd ABN AMRO Clearing Sydney Nominees Pty Ltd Boskenna Pty Ltd Bond Street Custodians Limited WF Super Pty Ltd BNP Paribas Nominees Pty Ltd Noeljen Pty Ltd HSBC Custodian Nominees (Australia) Limited -A/C2 BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd DRP 54,176,352 44,320,233 14,871,729 13,697,756 12,494,364 11,843,659 9,332,173 3,555,341 2,650,000 2,555,941 2,344,442 1,663,073 1,443,314 1,209,104 781,363 770,335 750,186 711,902 688,143 676,798 % 16.17 13.23 4.44 4.09 3.73 3.53 2.78 1.06 0.79 0.76 0.70 0.49 0.43 0.36 0.23 0.23 0.22 0.21 0.20 0.20 37 RURAL FUNDS GROUP ANNUAL REPORT 2019(f) On-market buy-back As at 10 September 2019, RFF confirms there is no on-market buy-back facility in operation. (g) Material lease details subsequent to listing rule 10.1 waiver LESSEES: AETL AS CUSTODIAN AND RFM AS RESPONSIBLE ENTITY FOR RFM ALMOND FUND AETL AS CUSTODIAN AND RFM AS RESPONSIBLE ENTITY FOR RFM POULTRY Area: 592 hectares of almond orchards 303,216 sq metres of poultry sheds Property and location: Mooral, Hillston NSW Expiry: 2-Jul-28 Capital commitments: R&M on account of lessee. 13 farms (134 sheds) Griffith, NSW, and 4 farms (20 sheds) Lethbridge, VIC. Weighted average lease expiry 15-Jan-23 R&M and ongoing capital expenditure on account of lessee Development and replacement capital items on account of lessor – subject to additional lease income Indexation: 2.5% per annum 65% of CPI capped at 2% Payment frequency: Quarterly and half yearly in arrears Quarterly in arrears Securities exchange The Fund is listed on ASX Limited (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. 38 PAGE LEFT INTENTIONALLY BLANK 39 RURAL FUNDS GROUP ANNUAL REPORT 2019Rewan, central QLD, May 2019. FINANCIAL STATEMENTS for the year ended 30 June 2019 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 Emma Spear Stuart Waight Australian Executor Trustees Limited ABN 84 007 869 794 Level 19, 60 Castlereagh 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 42 1 Rural Funds Group Directors’ Report 30 June 2019 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 2019. 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 Principal activities and significant changes in state of affairs 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, cattle and water rights. The following activities of the Group changed during the year: In July 2018, the Group announced that it had negotiated a transaction involving the acquisition of JBS Australia Pty Limited’s (JBS) five Australian feedlots and associated cropping land for $52.7 million, including stamp duty and the provision of a $75.0 million guarantee to J&F Australia Pty Limited (J&F). The transaction will enable JBS to replace an existing arrangement for the supply of cattle for its grainfed business. The guarantee transaction was subject to RFF unitholder approval as J&F would become a subsidiary of Rural Funds Management Limited on settlement. Approval was granted at the unitholder meeting held in August 2018. During July 2018, the Group also purchased Comanche, a 7,600 hectare (ha) cattle property located in central Queensland for $16.7 million including transaction costs. In August 2018, the Group completed a $149.5 million equity raise to fund the JBS transaction, associated costs, as well as the acquisition of Comanche. The $75.0 million limited guarantee was provided to J&F as part of the JBS transaction in August 2018. In September 2018, the Group purchased Cerberus, an 8,280 ha cattle property located in central Queensland for $10.9 million including transaction costs. The Group also purchased Mayneland, a 2,942 ha cotton property in central Queensland for $17.9 million including transaction costs, inclusive of plant and equipment associated with the property. In October 2018, the Group settled three feedlots, Prime City, Caroona and Mungindi as part of the JBS transaction for $28.7 million including transaction costs. The two remaining feedlots, Beef City and Riverina Beef, remain subject to subdivision approvals related to the on-site processing facilities and are expected to settle during August 2019 and December 2019 respectively. During the month, the Group also purchased Dyamberin, a 1,728 ha cattle property located in the New England region of New South Wales for $14.2 million including transaction costs. In January 2019, the Group purchased Woodburn, a 1,062 ha cattle property located in the New England region of New South Wales for $7.5 million including transaction costs. In March 2019, the Group purchased Cobungra, a 6,486 ha cattle property located in the East Gippsland region of Victoria for $36.9 million including transaction costs. 2 43 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Directors’ Report 30 June 2019 Principal activities and significant changes in state of affairs (continued) The Group negotiated an increase to its syndicated debt facility from $275,000,000 to $300,000,000 in October 2018. As part of this process, the facility was split into two tranches and the term was extended. The syndicated debt facility was increased from $300,000,000 to $335,000,000 in March 2019. A $225,000,000 tranche is due to expire in November 2021 and a $110,000,000 tranche is due to expire in November 2023. In the opinion of the Directors, there were no other significant changes in the state of affairs of the Group during the year. Operating results The consolidated net profit after income tax of the Group for the year ended 30 June 2019 amounted to $33,355,000 (2018: $29,895,000). The consolidated total comprehensive income of the Group for the year ended 30 June 2019 amounted to $33,078,000 (2018: $44,012,000). The Group holds investment property, bearer plants and derivatives at fair value. After adjusting for the effects of fair value adjustments, depreciation, impairments, straight-lining and other unrealised one-off transactions during the year, the profit would have been $43,246,000 (2018: $32,323,000), representing adjusted funds from operations (AFFO). Adjusted funds from operations (AFFO) Having eliminated fair value adjustments and one-off transaction costs, the adjusted funds from operations (AFFO) effectively represents funds from operations of RFF. Net profit before income tax Change in fair value of interest rate swaps Depreciation and amortisation - other Depreciation - bearer plants (Reversal of impairment)/impairment of bearer plants Change in fair value of investment property Change in fair value of financial assets/liabilities Reversal of impairment of intangible assets Straight-lining of rental revenue Interest component of JBS feedlot finance lease Income tax payable on public trading trust - RF Active Gain on sale of assets AFFO AFFO cents per unit 2019 $'000 38,179 18,208 1,230 4,600 (8,854) (8,352) 70 (105) (953) (352) (413) (12) 43,246 13.3 2018 $'000 30,952* 1,956 1,001 4,001* 2,159* (7,398) - (54) - - (277) (17) 32,323 12.7 * Refer to Note A Plant and Equipment – bearer plants for details of restatement. The net assets of the consolidated Group have increased to $525,872,000 at 30 June 2019 from $378,735,000 at 30 June 2018. At 30 June 2019 the Group had total assets of $869,087,000 (2018: $673,808,000). At 30 June 2019, 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 $131,273,000 (2018: $119,657,000). Directors obtain independent valuations on RFF properties ensuring that each property will have been independently valued every two years or more often where appropriate. The Directors have taken into account the most recent valuations on each property and consider that they remain a reasonable estimate. On this basis the fair value of water entitlements at 30 June 2019 was $208,042,000 (2018: $169,498,000). The value of water entitlements is illustrated in the table overleaf: 44 3 Rural Funds Group Directors’ Report 30 June 2019 Financial position (continued) Adjusted net asset value Intangible assets (water entitlements) Investment in CICL Investment in BIL Total book value of water entitlements Revaluation of intangible assets per valuation Adjusted total water entitlements 2019 $'000 118,531 12,222 520 131,273 76,769 208,042 2018 $'000 106,926 12,222 509 119,657 49,841 169,498 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 intangible assets per valuation Adjusted net assets Adjusted NAV per unit Property leasing 2019 $'000 525,872 76,769 602,641 1.80 2018 $'000 378,735 49,841 428,576 1.68 At 30 June 2019 the Group held 47 properties as follows: • • • • • • • 17 poultry farms (303,216 square metres); 3 almond orchards (2,414 planted hectares); 1 almond orchard under development with plantings completed (2,500 planted hectares); 7 vineyards (666 planted hectares); 3 macadamia orchards (259 planted hectares); 14 cattle properties made up of 11 breeding, backgrounding and finishing properties (659,050 hectares) and 3 cattle feedlots with combined capacity of 110,240 Standard Cattle Units; 2 cotton properties (1,434 irrigable hectares). During the year ended 30 June 2019, the properties held by the Group recorded an increment in the fair value of investment properties of $8,352,000 (2018: $7,398,000) and an increment in bearer plants revaluation of $8,579,000 (2018: $11,981,000). Almond orchards The three fully established almond orchard properties (including water entitlements) are located in Hillston, NSW and are leased to tenants who make regular rental payments. These encompass a planted area of 2,414 hectares (2018: 2,414 hectares): • Yilgah 1,006 planted hectares (2018: 1,006); • Mooral 808 planted hectares (2018: 808); • Tocabil 600 planted hectares (2018: 600). 4 45 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Directors’ Report 30 June 2019 Property leasing (continued) These properties are under lease to the following tenants: • Select Harvests Limited (SHV) 1,221 planted hectares (2018: 1,221); • Olam Orchards Australia Pty Limited (Olam) 600 planted hectares (2018: 600); • RFM Almond Fund 2006 (AF06) 272 planted hectares (2018: 272); • RFM Almond Fund 2007 (AF07) planted 73 hectares (2018: 73); • RFM Almond Fund 2008 (AF08) 206 planted hectares (2018: 206); • Rural Funds Management Limited (RFM) 42 planted hectares (2018: 42). The Kerarbury property is located in Darlington Point, NSW and is leased to Olam. The full 2,500 hectares of almond orchard at Kerarbury is planted with a portion of the water delivery infrastructure to be completed. For its almond orchards the Group owns water entitlements of 67,743ML (2018: 65,743ML) comprising groundwater, high security river water, general security river water, supplementary river water, and domestic and stock river water. In addition, the Group owns 21,430ML (2018: 21,430ML) of water delivery entitlements that provide access to water delivery through CICL, with a low annual allocation expected to be provided. 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 (2018: 1,432ML). Leases are in place with RFM Poultry, a scheme managed by RFM, for 100% (2018: 100%) of the poultry property and infrastructure, with remaining lease terms between 5 and 17 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 (2018: 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. Macadamia orchards Established macadamia orchards located near Bundaberg, QLD are leased to the following tenants: • 2007 Macgrove Project (M07) 234 hectares (2018: 234 hectares); and • Rural Funds Management Limited (RFM) 25 hectares (2018: 25 hectares). Cattle property Cattle properties held by the Group comprise of cattle breeding, backgrounding and finishing properties and cattle feedlots. • Rewan located near Rolleston in central Queensland 17,479 hectares; • Mutton Hole and Oakland Park located in far north Queensland 225,800 hectares; • Natal aggregation located near Charters Towers in north Queensland 390,600 hectares; • Comanche located in central Queensland 7,600 hectares; • Cerberus located north west of Rockhampton in central Queensland 8,280 hectares; • Dyamberin located in the New England region of New South Wales 1,728 hectares; • Woodburn located in the New England region of New South Wales 1,063 hectares; • Cobungra located in the East Gippsland region of Victoria 6,500 hectares; and • Prime City, Mungindi and Caroona, 3 cattle feedlots with a combined capacity of 110,240 Standard Cattle Units. 46 5 Rural Funds Group Directors’ Report 30 June 2019 Property leasing (continued) The properties comprise a combined 659,050 hectares and are leased to the following tenants: • Cattle JV Pty Limited, a wholly owned subsidiary of RFM, leasing Rewan, Mutton Hole and Oakland Park; • DA & JF Camm Pty Limited, a member of the Camm Agricultural Group, leasing the Natal aggregation; • Elrose Enterprises Pty Limited, leasing Comanche; • Katena Pty Limited, leasing Cerberus; and • Stone Axe Pastoral Company Pty Limited, leasing Dyamberin, Woodburn and Cobungra. In addition to this, JBS Australia Pty Limited leases the Prime City, Mungindi and Caroona feedlots. The lease arrangement for the Natal aggregation includes a $10 million secured loan provided to the lessee and a $5 million cattle financing facility to fund the purchase of cattle. The lease arrangement for Cerberus includes a $1.6 million cattle financing facility provided to the lessee to fund the purchase of cattle. Cotton property Cotton properties held by the group comprise of: • Lynora Downs, a 4,880-hectare cotton property (1,949 irrigable hectares) located near Emerald, QLD is leased to Cotton JV Pty Limited, a joint venture between RFM and Queensland Cotton Corporation Pty Limited (a subsidiary of Olam International Limited) until April 2022. • Mayneland, a 2,942-hectare cotton property (485 irrigable hectares) located 25 km north of Lynora Downs in central Queensland, is leased to RFM Farming Pty Limited (a wholly owned subsidiary of RFM) until 30 June 2020. A long-term lessee is being sought. Other activities Agricultural plant and equipment with a net book value of $8,537,000 (2018: $5,480,000) is owned by the Group and leased to AF06, AF07, AF08, M07, Cotton JV, Cattle JV and RFM Farming. Breeder assets with a net book value of $14,431,000 (2018: $14,179,000) are leased to Cattle JV Pty Limited. Banking facilities At 30 June 2019 the core debt facility available to the Group was $335,000,000 (2018: $275,000,000), with a drawn balance of $291,445,000 (2018: $269,800,000). The facility is split into two tranches with a $225,000,000 tranche expiring in November 2021 and a $110,000,000 tranche expiring in November 2023. At 30 June 2019, RFF had active interest swaps totaling 55.9% (2018: 40.0%) of the drawn balance to manage interest rate risk. Distributions Distribution paid 31 July 2018 Distribution paid 31 October 2018 Distribution paid 31 January 2019 Distribution paid 30 April 2019 Distribution declared 28 June 2019, paid 31 July 2019 Earnings per unit Net profit after income tax for the year ($'000) Weighted average number of units on issue during the year Basic and diluted earnings per unit (total) (cents) Cents per unit 2.5075 2.6075 2.6075 2.6075 2.6075 Total $ 6,409,935 8,675,317 8,686,568 8,699,809 8,715,923 33,355 326,169,808 10.23 6 47 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Directors’ Report 30 June 2019 Indirect cost ratio 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. 1 The ICR for the Group for the year ended 30 June 2019 is 1.87% (2018: 1.72%). Matters subsequent to the end of the year On 31 July, the Group announced the lease of Rewan to Australian Agricultural Company Limited for 10 years. The lease is subject to approval by the Foreign Investment Review Board (FIRB). The lease rate and terms are consistent with the Group’s existing cattle properties. On 16 August, the Group completed the purchase of the Beef City feedlot for approximately $12.7 million including transaction costs. No other matter or circumstance has arisen since the end of the period 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 334,263,593 units in Rural Funds Trust were on issue at 30 June 2019 (2018: 255,630,515). During the year 78,633,078 units (2018: 1,249,617) were issued by the Trust and nil (2018: 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. 1. The ICR calculated excluded equity raising costs for the year ended 30 June 2019. If equity raising costs are included in the calculation, the ICR for the year ended 30 June 2019 is 2.99%. 48 7 Rural Funds Group Directors’ Report 30 June 2019 Information on Directors of the Responsible Entity Guy Paynter 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's agricultural interests include cattle breeding in the Upper Hunter region in New South Wales. Special responsibilities Member of Audit Committee and Remuneration Committee Directorships currently held in other listed entities and during the three years prior to the current year RFM Poultry David Bryant Qualifications Experience 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. As at 30 June 2019, RFM manages over $1.2 billion of agricultural assets. On a day-to-day level, David is responsible for maintaining key commercial relationships and sourcing new business opportunities. Special responsibilities Managing Director Directorships currently held in other listed entities and during the three years prior to the current year RFM Poultry Michael Carroll Qualifications Experience Non-Executive Director Bachelor of Agricultural Science from La Trobe University and a Master 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 Elders Limited, Select Harvests Limited, Paraway Pastoral Company and Viridis Agriculture Pty Limited. Michael has senior executive experience in a range of companies, including establishing and leading the National Australia Bank (NAB) Agribusiness division. Special responsibilities Chairman of Audit Committee and Remuneration Committee Directorships currently held in other listed entities and during the three years prior to the current year Michael is on the Board of Elders Limited, RFM Poultry, Select Harvests Limited and was a director at Tassal Group Limited. 8 49 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Directors’ Report 30 June 2019 Information on Directors of the Responsible Entity (continued) Julian Widdup Qualifications Experience 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 timberland company Taumata Airport, Alice Springs Airport, NZ 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. Special responsibilities Member of Audit Committee and Remuneration Committee Directorships currently held in other listed entities and during the three years prior to the current year RFM Poultry Interests of Directors of the Responsible Entity Balance at 30 June 2017 Additions Balance at 30 June 2018 Additions Guy Paynter Units 814,696 - David Bryant* Michael Carroll Units 19,389 933 Units 11,678,182 - Julian Widdup Units - - 814,696 244,408 11,678,182 2,736,672 20,322 7,301 27,623 - - - Balance at 30 June 2019 1,059,104 14,414,854 *Includes interests held by Rural Funds Management Limited as the Responsibly Entity. Company Secretaries of the Responsible Entity Stuart Waight and Emma Spear are RFM’s joint company secretaries. Stuart joined RFM in 2003 and is a Chartered Accountant. Emma joined RFM in 2008 and is a CPA. Meetings of Directors of the Responsible Entity During the financial year 15 meetings of Directors (including committees of Directors) were held. Attendances by each Director during the year were as follows: Directors meetings Remuneration Committee meetings Audit Committee meetings No. eligible to attend No. attended No. eligible to attend No. attended 15 15 15 15 14 15 14 15 4 - 4 4 4 - 4 4 No. eligible to attend 1 - 1 1 No. attended 1 - 1 1 Guy Paynter David Bryant Michael Carroll Julian Widdup Non-audit services Fees of $9,425 (2018: $9,425) were paid or payable to PricewaterhouseCoopers for compliance audit services provided for the year ended 30 June 2019. 50 9 Rural Funds Group Directors’ Report 30 June 2019 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 2019 has been received and is included on page 11 of the financial report. 52 The Directors’ report is signed in accordance with a resolution of the Board of Directors of Rural Funds Management Limited. David Bryant Director 27 August 2019 10 51 RURAL FUNDS GROUP ANNUAL REPORT 2019Auditor’s Independence Declaration As lead auditor for the audit of Rural Funds Group for the year ended 30 June 2019, 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. Rod Dring Partner PricewaterhouseCoopers Sydney 27 August 2019 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 Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 11 52 Rural Funds Group Consolidated Statement of Comprehensive Income As at 30 June 2019 Note B2 B2 C3 C3 C2 C6 D1 C3 D1 Revenue Other income Management fees Property expenses Finance costs Other expenses Gain on sale of assets Depreciation and amortisation - other Depreciation - bearer plants Reversal of impairment/(impairment) of bearer plants Change in fair value of investment property Change in fair value of financial assets/liabilities Reversal of impairment of intangible assets Change in fair value of interest rate swaps Net profit before income tax Income tax expense Net profit after income tax Other comprehensive income: Revaluation (decrement)/increment - bearer plants Income tax relating to these items Other comprehensive income for the year, net of tax Total comprehensive income attributable to unitholders Total net profit after income tax for the year attributable to unitholders arising from: Rural Funds Trust RF Active (non-controlling interest) Total comprehensive income for the year attributable to unitholders arising from: Rural Funds Trust RF Active (non-controlling interest) 2019 $'000 66,391 2,541 (8,496) (1,595) (9,985) (3,892) 12 (1,230) (4,600) 8,854 8,352 (70) 105 (18,208) 38,179 (4,824) 33,355 (275) (2) (277) 33,078 32,388 967 33,355 32,111 967 33,078 Restated* 2018 $'000 51,087 1,183 (6,263) (1,383) (9,053) (2,971) 17 (1,001) (4,001) (2,159) 7,398 - 54 (1,956) 30,952 (1,057) 29,895 14,140 (23) 14,117 44,012 29,172 723 29,895 43,289 723 44,012 * Refer to Note A Plant and Equipment – bearer plants for details of restatement. The accompanying notes form part of these financial statements. 12 53 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Consolidated Statement of Comprehensive Income As at 30 June 2019 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) B3 B3 B3 2019 10.23 9.93 0.30 Restated* 2018 11.72 11.44 0.28 * Refer to Note A Plant and Equipment – bearer plants for details of restatement. The accompanying notes form part of these financial statements. 13 54 Rural Funds Group Consolidated Statement of Financial Position As at 30 June 2019 ASSETS Current assets Cash and cash equivalents Trade and other receivables Other current assets Total current assets Non-current assets Investment property Plant and equipment - bearer plants Financial assets Intangible assets Plant and equipment - other Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Interest bearing liabilities Income tax payable Derivative financial liabilities 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) Net assets attributable to unitholders Total liabilities Note F1 F2 F3 C2 C3 C4, E2 C6 C8 F4 E1 D2 E3 E8 E1 F5 E3 D2 2019 $'000 2,588 5,043 1,699 9,330 489,327 172,915 70,447 118,531 8,537 859,757 869,087 6,101 3,832 439 103 8,950 19,425 291,445 2,629 23,938 5,778 323,790 343,215 525,872 869,087 2018 $'000 1,210 5,381 2,918 9,509 357,518 157,239 37,136 106,926 5,480 664,299 673,808 6,128 3,361 277 - 6,633 16,399 269,800 1,634 5,834 1,406 278,674 295,073 378,735 673,808 Water entitlements are held at cost in the Consolidated Statement of Financial Position in accordance with accounting standards. Refer to note B1 Segment information, for disclosure of the Directors’ valuation of water entitlements, which are supported by independent property valuations. The accompanying notes form part of these financial statements. 14 55 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Consolidated Statement of Financial Position As at 30 June 2019 NET ASSETS ATTRIBUTABLE TO UNITHOLDERS Unitholders of Rural Funds Trust Issued units Asset revaluation reserve Retained earnings Parent entity interest Unitholders of RF Active Issued units Retained earnings Non-controlling interest Note F6 2019 $'000 358,269 46,462 114,565 519,296 4,585 1,991 6,576 Restated* 2018 $'000 230,574 46,739 97,310 374,623 3,091 1,021 4,112 Total net assets attributable to unitholders 525,872 378,735 * Refer to Note A Plant and Equipment – bearer plants for details of restatement. The accompanying notes form part of these financial statements. 15 56 Rural Funds Group Consolidated Statement of Changes in Net Assets Attributable to Unitholders For the year ended 30 June 2019 2019 Note Issued units $'000 Retained earnings $'000 Asset revaluation reserve $'000 Non- controlling interest $'000 Total $'000 Total $'000 Balance at 1 July 2018 230,574 97,310 46,739 374,623 4,112 378,735 Other comprehensive income Total other comprehensive income Profit before income tax Income tax expense D1 Total comprehensive income for the year Issued units Units issued during the year Issue costs - - - - - 152,288 (4,948) Total issued units E7 147,340 - - (277) (277) (277) (277) - - (277) (277) 36,799 (4,411) - 36,799 1,380 38,179 (4,411) (413) (4,824) 32,388 (277) 32,111 967 33,078 - - - - - - - 152,288 1,540 153,828 (4,948) (43) (4,991) 147,340 1,497 148,837 (34,778) - (34,778) Distributions to unitholders B4, E7 (19,645) (15,133) Balance at 30 June 2019 358,269 114,565 46,462 519,296 6,576 525,872 - - - 2018 Balance at 1 July 2017 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 2018 D1 E7 E7 Issued units $'000 Restated* Retained earnings $'000 Restated* Asset revaluation reserve $'000 Total $'000 Non- controlling interest $'000 Total $'000 252,880 68,813 32,622 354,315 3,363 357,678 - - - - - - - 14,117 14,117 14,117 14,117 - - 14,117 14,117 29,935 (763) - - 29,935 (763) 1,017 (294) 30,952 (1,057) 29,172 14,117 43,289 723 44,012 2,610 (3) 2,607 (24,913) 230,574 - - - (675) 97,310 - - - - 46,739 2,610 (3) 2,607 (25,588) 374,623 26 - 26 - 4,112 2,636 (3) 2,633 (25,588) 378,735 * Refer to Note A Plant and Equipment – bearer plants for details of restatement. The accompanying notes form part of these financial statements. 16 57 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Consolidated Statement of Cash Flows For the year ended 30 June 2019 Cash flows from operating activities Receipts from customers Payments to suppliers Interest received Finance income received Finance costs Income tax paid Net cash inflow from operating activities Cash flows from investing activities Payments for investment property Payments for plant and equipment - bearer plants (Payments)/proceeds for intangible assets Payments for financial assets Payments for plant and equipment Proceeds from sale of plant and equipment Proceeds from other assets Proceeds from sale of assets Deposits paid Distributions received Note G4 C2 C3 C6 C8 2019 $'000 66,199 (19,144) 83 6,853 (9,985) (277) 43,729 (123,657) (11,697) (11,500) (32,076) (4,277) 50 2,322 - - 31 2018 $'000 55,006 (16,606) 71 1,554 (9,053) - 30,972 (74,470) (28,066) 1,893 (13,275) (1,360) 36 - 9 (1,167) 30 Net cash outflow from investing activities (180,804) (116,370) 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/(decrease) in cash and cash equivalents held Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year F1 148,837 221,646 (199,569) (32,461) 138,453 1,378 1,210 2,588 2,636 105,457 - (25,323) 82,770 (2,628) 3,838 1,210 The accompanying notes form part of these financial statements. 17 58 Rural Funds Group Notes to the Financial Statements 30 June 2019 A. REPORT OVERVIEW 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 incorporated and domiciled in Australia. The Directors of the Responsible Entity authorised the Financial Report for issue on 27 August 2019 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 section G3. Basis of preparation 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. These financial statements are consolidated financial statements and accompanying notes of both Rural Funds Trust and RF Active. 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. The following are areas for which significant judgements, estimates or assumptions are made: Valuation of property related assets Independent valuations on the Group’s properties are obtained, ensuring that each property will have been independently valued every two years or more often where appropriate. Independent valuation reports assess and provide value for properties in their entirety. The independent valuation reports contain information with which judgement is applied to allocate values to investment property, bearer plants and intangible assets. Estimation of useful lives of bearer plants The useful lives of bearer plants have been estimated by assessing industry data. The useful lives of bearer plants are disclosed in Note C3. 18 59 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 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. 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. 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. Comparative amounts Comparative amounts have not been restated unless otherwise noted. Working capital The deficiency in working capital at 30 June 2019 is due to the timing of distributions. Based on the forecast cash flows, the Group believes it can pay all its debts as and when they fall due for at least a minimum period of 12 months from the date of these accounts. The Group has headroom in its bank facility limit of approximately $43.6 million as at 30 June 2019 subject to compliance with the Group’s bank covenants. New and amended standards adopted by the Group A number of new or amended standards became applicable for the current reporting period and the Group had to change its accounting policies: • AASB 9 Financial Instruments, and • AASB 15 Revenue from Contracts with Customers. The adoption AASB 9 and AASB 15 and other amendments did not have any material impact on the financial performance of the Group. Plant and equipment – bearer plants Bearer plants are solely used to grow produce over their productive lives and are seen to be similar to an item of machinery. Under AASB 116 Property, Plant and Equipment bearer plants are initially measured at cost. Bearer plants will then be subject to depreciation over their respective useful lives. 60 19 Rural Funds Group Notes to the Financial Statements 30 June 2019 Plant and equipment – bearer plants (continued) Bearer plants are subject to revaluations based on the Group’s valuation policies. Increases in the carrying amounts arising from revaluation of bearer plants are recognised in other comprehensive income and accumulated in equity under asset revaluation reserve. Revaluation increases which reverse a decrease previously recognised in profit and loss is recognised in profit or loss. Revaluation decreases which offset previous increases are recognised in other comprehensive income in the asset revaluation reserve. Any other decreases are recognised in profit and loss. Restatement: Plant and equipment – bearer plants For reporting periods starting before 1 July 2016, the Group’s grape vines, almond trees and macadamia trees qualified as bearer plants under the definition in AASB 141 Agriculture and were measured at fair value. Subsequent to the changes in accounting standard AASB 2014-6 Amendments to Australian Accounting Standards – Agriculture: Bearer Plants, as at 1 July 2019, the Group has been valuing its bearer plants at fair value at each reporting date and not separately recording depreciation. The company has changed its policy to account for the impact of depreciation. 6 The restatement to account for bearer plant depreciation in the financial year ended 30 June 2018 and prior years and the associated reallocation between other comprehensive income and the profit and loss has no impact on the carrying amount of bearer plants, total assets and net assets of the Group because bearer plants were revalued to their fair value at each reporting date. Accordingly, this restatement has no impact on total comprehensive income of the Group. Nevertheless, the restatement has resulted in the reclassification among components of total comprehensive income and components of net assets attributable to unit holders as presented below: Consolidated Statement of Comprehensive Income (extract) Depreciation – bearer plants Impairment losses on bearer plants Net profit before income tax Income tax (expense)/benefit Net profit after income tax Other comprehensive income Total comprehensive income Per stapled unit (cents) Per unit of Rural Funds Trust (cents) Per unit of RF Active (cents) As originally stated For the year ended 30 June 2018 $'000 - - 37,112 (1,080) 36,032 Comprehensive income Increase/ (Decrease) $'000 (4,001) (2,159) (6,160) 23 (6,137) 7,980 44,012 14.13 13.85 0.28 6,137 - (2.41) (2.41) - Restated For the year ended 30 June 2018 $'000 (4,001) (2,159) 30,952 (1,057) 29,895 14,117 44,012 11.72 11.44 0.28 20 61 RURAL FUNDS GROUP ANNUAL REPORT 2019 1 2 y l u J 1 7 1 0 2 0 0 0 $ ' 3 0 6 3 9 1 , 1 2 1 3 0 0 , 3 4 5 5 2 3 , 5 8 1 8 7 6 , 7 5 3 3 1 8 , 8 6 2 2 6 , 2 3 8 7 6 , 7 5 3 d e t a t s e R - - - - - - 7 4 0 , 5 ) 7 4 0 , 5 ( 0 0 0 $ ' / e s a e r c n I ) e s a e r c e D ( d e t a t s y l u J 1 7 1 0 2 0 0 0 $ ' 3 0 6 3 9 1 , 1 2 1 3 0 0 , 3 4 5 5 2 3 , 5 8 1 8 7 6 , 7 5 3 0 6 8 , 3 7 5 7 5 , 7 2 8 7 6 , 7 5 3 e n u J 0 3 d e t a t s e R 8 1 0 2 0 0 0 $ ' 6 0 4 , 1 9 3 2 , 7 5 1 8 0 8 , 3 7 6 3 7 0 , 5 9 2 5 3 7 , 8 7 3 0 1 3 7 9 , 9 3 7 6 4 , 5 3 7 , 8 7 3 0 0 0 $ ' / e s a e r c n I ) e s a e r c e D ( - - - - - - 4 8 1 1 1 , ) 4 8 1 1 1 ( , 8 1 0 2 0 0 0 $ ' d e t a t s e n u J 0 3 6 0 4 , 1 9 3 2 7 5 1 , 8 0 8 , 3 7 6 3 7 0 5 9 2 , 5 3 7 8 7 3 , 4 9 4 8 0 1 , 5 5 5 5 3 , 5 3 7 8 7 3 , i y l l a n g i r o s A y l l i a n g i r o s A ) t s u r T s d n u F l a r u R f o l s r e d o h t i n u ( i s g n n r a e i d e n a t e R l s r e d o h t i n u o t e l b a t u b i r t t a s t e s s a t e n l a t o T e v r e s e r n o i t a u a v e r l t e s s A s t n a p l r e r a e b - t n e m p u q e i d n a t n a P l y t i l i b a i l x a t d e r r e f e D s t e s s a l a t o T s e i t i l i b a i l l a t o T s t e s s a t e N ) t c a r t x e ( n o i t i s o P i l a i c n a n F f o t n e m e t a t S d e t a d i l o s n o C 9 1 0 2 e n u J 0 3 s t n e m e t a t S i l a i c n a n F e h t o t p u o r G s d n u F l a r u R s e t o N 62 f o s r o t c e r i D e h t s a d e i f i t n e d i n e e b s a h , s t n e m g e s g n i t a r e p o e h t f o e c n a m r o f r e p i g n s s e s s a d n a s e c r u o s e r g n i t a c o l l a r o f l i e b s n o p s e r s i o h w , r e k a m n o s c e d i i g n i t a r e p o i f e h c l a r u t l u c i r g a i g n s a e l d n a i g n d o h l h c a e ) t n e m g e s e n o : 8 1 0 2 ( s t n e m g e s i x s n i t d e n e s e r p s r o t c e s l a r u t l u c i r g a x s i n i y t r e p o r p l s d o h y l t n e r r u c p u o r G e h T . y t i t n E l i e b s n o p s e R e h t , s t n a p l r e r a e b , y t r e p o r p t n e m t s e v n i e d u c n l i s t e s s a y t r e p o r p t n e m g e S . e m o c n i t s e r e n t i d n a e m o c n i e c n a n i f , e m o c n i l t a n e r s e d u c n l i e u n e v e r t n e m g e S . t n e m p u q e i d n a y t r e p o r p t c e r i d n i r o t c e r i d d n a s e i t i l i b a L i . l e v e l e t a r o p r o c a t a d e g a n a m e r a s r o t c e s e s e h t n i d e s i r o g e t a c t o n s t e s s a y t r e p o r p d n a e u n e v e R . t n e m p u q e i d n a t n a p l d n a s t e s s a i . s s a b d e t a d i l o s n o c a n o r e k a m n o s c e d i i g n i t a r e p o f i e h c e h t y b i d e w e v e r e r a e s e h t s a s t n e m g e s l i a u d v d n i i o t d e t a c o l l a t o n e r a s t n e m e v o m n o i t a u l a v e r d n a e u n e v e r l i e b g n a t n i s e s n e p x e t n e m g e S n o i t a m r o f n i S T L U S E R . B t n e m g e S 1 B e h T s t n e m e t a t S i l a i c n a n F e h t o t p u o r G s d n u F l a r u R s e t o N 9 1 0 2 e n u J 0 3 d e t a c o l l a n U a i m a d a c a M n o t t o C s d r a y e n V i y r t l u o P l a t o T 0 0 0 $ ' 0 0 0 $ ' ) 0 0 6 , 4 ( - 1 9 3 , 6 6 6 4 3 , 1 6 6 9 , 6 1 ) 1 8 ( ) 1 0 0 , 4 ( 3 3 4 , 9 1 - - 7 8 0 , 1 5 7 3 2 - 0 0 0 $ ' 4 4 3 , 1 ) 3 4 ( ) 4 4 ( 2 6 2 , 1 0 5 3 , 2 - 0 0 0 $ ' 0 5 2 , 3 0 0 0 $ ' 7 7 7 , 3 ) 0 5 9 ( 0 0 0 $ ' e l t t a C 0 0 0 $ ' - - 7 1 7 0 1 , 8 9 2 6 1 , 0 0 0 $ ' 8 5 6 9 2 , ) 7 0 6 3 ( , s d n o m A l ) 4 3 9 , 1 ( 1 2 6 , 2 1 ) 2 9 9 6 ( , 5 3 3 , 1 7 1 0 2 1 , - 9 6 9 , 1 6 3 6 , 3 ) 0 6 8 ( - - 0 7 6 0 1 , 2 3 7 , 6 0 7 4 , 1 0 6 8 ) 5 5 8 5 ( , 7 1 0 , 5 1 8 5 6 2 , ) 7 9 0 3 ( , 1 9 5 5 1 , e v i s n e h e r p m o c r e h t o d n a s s o l r o t i f o r p o t n o i t a u l a v e r l a t o T s t n a l p r e r a e b - n o i t a i c e r p e D e u n e v e r l a t o T 9 1 0 2 s t n a p l r e r a e b i - n o i t a c e r p e D e u n e v e r l a t o T e m o c n i 8 1 0 2 e m o c n i i e v s n e h e r p m o c r e h t o d n a s s o l r o t i f o r p o t n o i t a u a v e r l l a t o T . e u n e v e r ’ s p u o r G e h t f o % 0 1 n a h t e r o m r o f t n u o c c a h c a e t n e m g e s y r t l u o P e h t n i r e m o t s u c e n o d n a t n e m g e s s d n o m A e h t l n i s r e m o t s u c o w T 2 2 . t n e m e t a t s e r f o s l i t a e d r o f s t n a p l r e r a e b – i t n e m p u q E d n a t n a P A e t o N o t l r e f e R * 63 RURAL FUNDS GROUP ANNUAL REPORT 2019 l a t o T 0 0 0 $ ' 7 1 5 , 1 1 0 7 5 , 7 5 8 7 8 0 , 9 6 8 9 6 7 , 6 7 6 5 8 , 5 4 9 5 3 7 , 9 3 7 0 , 4 6 6 1 4 8 , 9 4 8 0 8 , 3 7 6 9 4 6 , 3 2 7 0 0 0 $ ' 3 6 0 , 6 3 7 1 5 , 1 1 0 8 5 , 7 4 5 6 9 , 6 1 5 4 5 , 4 6 5 3 7 , 9 7 5 2 , 4 3 2 9 9 , 3 4 7 4 6 , 1 9 3 6 , 5 4 3 2 d e t a c o l l a n U s a i m a d a c a M n o t t o C s d r a y e n V i y r t l u o P - 0 0 0 $ ' 4 7 2 , 4 1 4 7 2 , 4 1 2 8 6 5 3 , 4 1 - 0 0 0 $ ' 8 9 3 , 1 5 8 9 3 , 1 5 - 8 9 3 , 1 5 - 0 0 0 $ ' 2 9 3 , 9 5 2 9 3 , 9 5 8 8 6 , 4 0 8 0 , 4 6 - 0 0 0 $ ' 7 8 3 2 7 , 7 8 3 2 7 , 5 9 5 2 , 2 8 9 4 7 , e l t t a C 0 0 0 $ ' 0 0 0 $ ' s d n o m A l 5 7 5 0 5 2 , 2 8 4 3 7 3 , - 5 7 5 0 5 2 , - 5 7 5 0 5 2 , - 2 8 4 3 7 3 , 9 3 4 2 5 , 1 2 9 5 2 4 , n o i t a u a v l s ' r o t c e r i d r e p s t e s s a e l b g n a t n i i f o n o i t a u l a v e R n o i t a u l a v s ' r o t c e r i d t a s t e s s a l a t o t d e t s u d A j s t n u o c c a y r o t u t a t s r e p s t e s s a y t r e p o r p l a t o T s t n u o c c a y r o t u t a t s r e p s t e s s a r e h t O s t n u o c c a y r o t u t a t s r e p s t e s s a l a t o T 8 1 0 2 s t n e m e t a t S l a i i c n a n F e h t o t p u o r G s d n u F l a r u R s e t o N ) d e u n i t n o c ( n o i t a m r o f n i 9 1 0 2 e n u J 0 3 t n e m g e S 1 B s t e s s a t n e m g e S 9 1 0 2 64 0 9 4 , 3 1 3 0 8 , 0 3 1 4 3 , 7 4 5 0 2 8 7 , 1 5 0 0 3 1 , 5 2 9 9 2 3 , s t n u o c c a y r o t u t a t s r e p s t e s s a y t r e p o r p l a t o T - 2 8 0 9 4 , 3 1 2 7 5 , 3 1 - - 3 0 8 , 0 3 3 0 8 , 0 3 - 8 1 5 1 4 3 , 7 4 9 5 8 , 7 4 - 5 9 5 2 , 5 0 2 8 7 , 0 0 8 0 8 , - - 1 5 0 0 3 1 , 1 5 0 0 3 1 , - 0 0 0 5 4 , 5 2 9 9 2 3 , 5 2 9 4 7 3 , n o i t a u a v l s ' r o t c e r i d r e p s t e s s a e b g n a t n l i i f o n o i t a u a v e R l n o i t a u a v l s ' r o t c e r i d t a s t e s s a l a t o t d e t s u d A j s t n u o c c a y r o t u t a t s r e p s t e s s a r e h t O s t n u o c c a y r o t u t a t s r e p s t e s s a l a t o T Rural Funds Group Notes to the Financial Statements 30 June 2019 B1 Segment information (continued) Net asset value adjusted for water rights The chief operating decision maker of RFF assesses the segments on property asset values adjusted for water rights. RFF owns permanent water rights and entitlements which 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. The book value of the water rights (including investments in BIL and CICL) at 30 June 2019 is $131,273,000 (2018: $119,657,000). Independent valuations on the Group’s properties are obtained, ensuring that each property will have been independently valued every two years or more often where appropriate. Independent valuation reports assess and provide value for properties in their entirety. The independent valuation reports contains information with which judgement is applied in order to allocate values to investment property, bearer plants and intangible assets. The Directors have taken into account the most recent valuations on each property and consider that they remain a reasonable estimate and on this basis the fair value of water entitlements before deferred tax adjustments at 30 June 2019 was $208,042,000 (2018: $169,498,000) representing the value of the water rights of $76,769,000 (2018: $49,841,000) above cost. The following is a reconciliation of the book value at 30 June 2019 to an adjusted value based on the Directors' valuation of the water rights which are assessed by the chief operating decision maker. Assets Total current assets Total non-current assets Total assets Liabilities Total current liabilities Total non-current liabilities Total liabilities (excluding net assets attributable to unitholders) Net assets attributable to unitholders Net asset value per unit ($) Per Statutory Consolidated Statement of Financial Position $'000 Revaluation of water entitlements per Directors' valuation $'000 9,330 859,757 869,087 19,425 323,790 343,215 525,872 1.57 - 76,769 76,769 - - - 76,769 0.23 Directors' valuation (Adjusted) $'000 9,330 936,526 945,856 19,425 323,790 343,215 602,641 1.80 24 65 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 B1 Segment information (continued) Adjusted funds from operations (AFFO) The following presents the adjusted funds from operations (AFFO) and provides the reconciliation from AFFO to Net profit after income tax which is assessed by the chief operating decision maker: Revenue Other income Management fees Property Expenses Finance costs Other expenses Straight-lining of rental revenue Interest component of JBS feedlot finance lease Income tax payable on public trading trust - RF Active Adjusted Funds From Operations (AFFO) Change in fair value of interest rate swaps Depreciation and amortisation - other Depreciation - bearer plants Reversal of impairment/(impairment) of bearer plants Change in fair value of investment property Change in fair value of financial assets/liabilities Reversal of impairment of intangible assets Straight-lining of rental revenue Interest component of JBS feedlot finance lease Income tax expense Gain on sale of assets Net profit after income tax AFFO cents per unit B2 Revenue Rental income Finance income Interest received Total 2019 $'000 66,391 2,541 (8,496) (1,595) (9,985) (3,892) (953) (352) (413) 43,246 (18,208) (1,230) (4,600) 8,854 8,352 (70) 105 953 352 (4,411) 12 33,355 Restated* 2018 $'000 51,087 1,183 (6,263) (1,383) (9,053) (2,971) - - (277) 32,323 (1,956) (1,001) (4,001) (2,159) 7,398 - 54 - - (780) 17 29,895 13.3 12.7 2019 $'000 59,103 7,205 83 66,391 2018 $'000 49,462 1,554 71 51,087 The Group’s revenue is largely comprised of income under leases and finance income. All revenue is stated net of the amount of goods and services tax (GST). * Refer to Note A Plant and Equipment – bearer plants for details of restatement. 25 66 Rural Funds Group Notes to the Financial Statements 30 June 2019 B2 Revenue (continued) Rental income arises from the leasing of property assets and operational plant and equipment and is accounted for on a straight-line basis over the period of the lease. The respective leased assets are included in the Consolidated Statement of Financial Position based on that nature. Finance income arises from the provision of finance leases in the form of leased cattle breeders and leased cattle feedlots, provision of financial guarantees and working capital loans and recognised on an accrual basis using the effective interest rate method. Other Income Temporary water sales Other income Total Expenses 2019 $'000 2,427 114 2,541 2018 $'000 1,093 90 1,183 Expenses such as Responsible Entity fees, property expenses and overheads are recognised on an accruals basis. Interest expenses are recognised on an accrual basis using the effective interest method. B3 Earnings per unit Per stapled unit Net profit after income tax for the year ($'000) Weighted average number of units on issue during the year (thousands) Basic and diluted earnings per unit (total) (cents) Per unit of Rural Funds Trust Net profit after income tax for the year ($'000) Weighted average number of units on issue during the year (thousands) Basic and diluted earnings per unit (total) (cents) Per unit of RF Active Net profit after income tax for the year ($'000) Weighted average number of units on issue during the year (thousands) Basic and diluted earnings per unit (total) (cents) 2019 33,355 326,170 10.23 32,388 326,170 9.93 967 326,170 0.30 Restated* 2018 29,895 255,028 11.72 29,172 255,028 11.44 723 255,028 0.28 Basic earnings per unit are calculated on net profit attributable to unitholders of the Group divided by the weighted average number of issued units. B4 Distributions The group paid and declared the following distributions in the year: Distribution paid 31 July 2018 Distribution paid 31 October 2018 Distribution paid 31 January 2019 Distribution paid 30 April 2019 Distribution declared 28 June 2019, paid 31 July 2019 Cents per unit 2.5075 2.6075 2.6075 2.6075 2.6075 Total $ 6,409,935 8,675,317 8,686,568 8,699,809 8,715,923 * Refer to Note A Plant and Equipment – bearer plants for details of restatement. 26 67 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 C. PROPERTY ASSETS This section includes detailed information regarding RFF’s properties, which are made up of multiple line items on the Consolidated Statement of Financial Position including Investment property, Plant and equipment, Plant and equipment – bearer plants, Intangible assets and Financial assets. These asset items generate rental and other property income. C1 RFF property assets Investment property Plant and equipment - bearer plants Financial assets - property related Intangible assets Plant and equipment - other Total C2 C3 C4 C6 C8 Rental income and fair value movements from RFF property assets Rental income from property assets Finance income from property assets Change in fair value of investment property Reversal of impairment/(impairment) of bearer plants Revaluation (decrement)/increment - bearer plants Leasing arrangements 2019 $'000 489,327 172,915 68,260 118,531 8,537 857,570 2019 $'000 59,103 7,205 8,352 8,854 (275) 2018 $'000 357,518 157,239 36,910 106,926 5,480 664,073 2018 $'000 49,462 1,554 7,398 (2,159) 14,140 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 and finance leases of financial assets, are receivable as follows: Within one year Later than one year, but not later than five years Later than five years Total Key changes to the property portfolio during the year: 2019 $'000 65,693 256,907 421,974 744,575 2018 $'000 51,858 243,679 509,219 804,756 • • • • • • • In July 2018, the Group purchased Comanche, a 7,600 ha cattle property located in central Queensland for $16.7 million including transaction costs. In October 2018, the Group settled three feedlots, Mungindi, Caroona and Prime City from JBS for $28.7 million including transaction costs. In September 2018, the Group purchased Cerberus, an 8,280 ha cattle property located in central Queensland for $10.9 million including transaction costs. In September 2018, the Group purchased Mayneland, a 2,942 ha cotton property in central Queensland for $17.9 million including transaction costs. In October 2018, the Group purchased Dyamberin, a 1,728 ha cattle property located in the New England region of New South Wales for $14.2 million including transaction costs. In January 2019, the Group purchased Woodburn, a 1,062 ha cattle property located in the New England region of New South Wales for $7.5 million including transaction costs. In March 2019, the Group purchased Cobungra, a 6,486 ha cattle property located in the East Gippsland region of Victoria for $36.9 million including transaction costs. 27 68 Rural Funds Group Notes to the Financial Statements 30 June 2019 C1 RFF property assets (continued) Valuations Independent valuations on the Group’s properties are obtained, ensuring that each property will have been independently valued every two years or more often where appropriate. Independent valuers engaged hold recognised and relevant professional qualifications with experience in agricultural properties. Independent valuations have been obtained for newly acquired properties prior to acquisition for the year ended 30 June 2019. The following existing properties had relevant independent valuations for the year ended 30 June 2019: Almond properties Vineyard properties Cattle properties Cotton properties Other Kerarbury, Tocabil, Mooral, Yilgah Kleinig, Geier, Dohnt, Rosebank, Mundy and Murphy, Hahn Cobungra, Woodburn, Dyamberin, Cerberus, Comanche, Rewan, Mutton Hole, Oakland Park Lynora, Mayneland Unleased High Security Murrumbidgee Water Directors have considered independent valuations and market evidence where appropriate to determine the appropriate fair value to adopt. The Directors have adopted all valuations from independent valuers in the periods where valuations have been obtained. The exception to this is in relation to certain poultry assets, where the Directors determined a more conservative view was appropriate in line with assumptions applied with those assets. The Directors have deemed that independent valuations were not required on remaining properties as there have been no material changes to the industry and geographical conditions of these properties in which the independent valuers have previously assessed. For these properties, the Directors have performed internal assessments, considering the latest valuation reports, that the fair value is still reflective of the properties at reporting date. The Group’s properties, including those under development, are carried 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. Independent valuation reports assess and provide value for properties in its entirety. The independent valuation reports contain information with which judgement is applied in order to allocate values to their investment property, bearer plants and intangible assets. Where available, each component of the property, meaning the land, the trees, infrastructure and any water assets, will be valued on an encumbered (subject to lease) basis using a discounted cashflow approach from future rents. If this information is not available, the valuation report may provide a summation basis of either the encumbered or unencumbered (not subject to lease) value which can be used to determine the allocation of the components. Judgement is applied as part of these allocations which vary from property to property given the individual circumstances of the leasing arrangements. As a result of significant volatility experienced in the water market for almond properties, the previous allocation technique used, based on the market approach for water, no longer reflected the unencumbered and long term value of water entitlements. The allocation technique was modified to one based on underlying rents. The Directors deem this to be an appropriate allocation technique for each asset category given the change and reflect fair value for each asset category. Significant accounting judgments, estimates and assumptions in relation to valuation of property assets At the end of each reporting period, the Directors update their assessment of fair value of each property, considering the most recent independent valuations. The Directors determine a property’s value using reasonable fair value estimates. The main level 3 inputs used by the Group include discount rates, capitalisation rates, rate per area of land and adult equivalent 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 and during discussions with the independent valuers. Significant judgment is applied in order to allocate values to investment property, bearer plants and intangible assets as disclosed in the independent valuation reports. Independent valuation reports assess and provide value for properties in their entirety. The independent valuation reports contain information with which judgement is applied to allocate values to investment property, bearer plants and intangible assets. The allocation method may change to reflect best estimates of value attributed to each asset class at reporting date. 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. 28 69 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 C2 Investment property 2019 Almond property Cattle property Poultry property Vineyard property Cotton property Macadamia property Total Opening net book amount 118,214 104,897 77,156 25,435 27,131 4,685 357,518 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Acquisitions Additions Amortisation of lease incentives Fair value adjustment - 84,542 13,923 2,873 - (200) - 932 - - 17,879 - 102,421 152 3,184 172 21,236 - - - - (200) 8,352 3,879 1,335 (6,992) 12,064 (1,934) Closing net book amount 136,016 193,447 71,096 37,651 46,260 4,857 489,327 2018 Almond property Cattle property Poultry property Vineyard property Cotton property Macadamia property Total Opening net book amount Acquisitions Additions Amortisation of lease incentives Fair value adjustment 95,605 43,560 83,011 25,435 24,157 2,015 273,783 - 17,257 53,156 3,297 - (133) - - - 5,352 5,017 (5,855) - - - - - 2,440 - 534 - 320 53,156 23,314 - (133) 2,350 7,398 Closing net book amount 118,214 104,897 77,156 25,435 27,131 4,685 357,518 Investment properties comprise land, buildings and integral infrastructure including shedding, irrigation and trellising. Investment properties are held for long-term rental yields and capital growth and are not occupied by the Group. RFF measures and recognises investment property at fair value where the valuation technique is based on unobservable inputs. Changes in fair value are presented through profit or loss in the Consolidated Statement of Comprehensive Income. Capital expenditure that enhances the future economic benefits of the assets are capitalised to investment property. Incentives provided are also capitalised to the investment property and are amortised on a straight-line basis over the term of the lease as a reduction of rental revenue. 70 29 Rural Funds Group Notes to the Financial Statements 30 June 2019 C3 Plant and equipment – bearer plants 2019 Opening net book amount Additions Disposals Depreciation - bearer plants Transfers Fair value adjustment - profit and loss Fair value adjustment - other comprehensive income Bearer Plants - Almonds $'000 129,330 11,470 - (3,607) - 8,313 (280) Bearer Plants - Vineyards $'000 20,898 Bearer Plants - Macadamias $'000 7,011 227 - (950) - 541 5 - - (43) - - - Total $'000 157,239 11,697 - (4,600) - 8,854 (275) Closing net book amount 145,226 20,721 6,968 172,915 2018 Opening net book amount Additions Depreciation - bearer plants - Restated* Fair value adjustment - profit and loss - Restated* Fair value adjustment - other comprehensive income - Restated * Closing net book amount Bearer Plants - Almonds $'000 95,285 26,957 (3,098) (3,584) 13,770 Bearer Plants - Vineyards $'000 19,789 1,109 (860) 785 75 Bearer Plants - Macadamias $'000 6,119 Total $'000 121,193 - 28,066 (43) 640 295 (4,001) (2,159) 14,140 129,330 20,898 7,011 157,239 Bearer plants are solely used to grow produce over their productive lives and are accounted for under AASB 116 Property, Plant and Equipment. Bearer plants are held for long-term rental yields and are not operated by the Group. RFF initially measures and recognises bearer plants at cost. After initial measurement, the Group adopts the revaluation model and bearer plants are carried at fair value less any accumulated depreciation and accumulated impairment losses. Bearer plants are subject to revaluations based on the Group’s valuation policies. Increases in the carrying amounts arising from revaluation of bearer plants are recognised in other comprehensive income and accumulated in equity under asset revaluation reserve. Revaluation increases which reverse a decrease previously recognised in profit and loss are recognised in profit or loss. Revaluation decreases which offset previous increases are recognised in other comprehensive income in the asset revaluation reserve. Any other decreases are recognised in profit and loss. Bearer plants are subject to depreciation over their respective useful lives calculated on a straight-line basis on the carrying amount. Depreciation commences when bearer plants are assumed ready for use and based on the maturity profile. The useful lives used for each class of depreciable asset are shown below: Fixed asset class: Almond bearer plants Vineyard bearer plants Macadamia bearer plants Useful life: 30 years 40 years 45 years At the end of each annual reporting period, the useful life and carrying amount of each asset is reviewed. Any revisions are accounted for prospectively as a change in estimate. * Refer to Note A Plant and Equipment – bearer plants for details of restatement. 30 71 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 C3 Plant and equipment – bearer plants (continued) Bearer plants as stated on a historical cost basis is as follows: Cost Accumulated depreciation Accumulated impairment Net book amount C4 Financial assets – property related Non-current Property related Investment - BIL Investment - CICL Finance Lease - Breeders Finance Lease - Feedlots Cattle Facility - Katena Pty Ltd ATF Schafferius Family Trust Term Loan - DA & JF Camm Pty Limited Other receivables Total 2019 $'000 145,701 (11,328) (2,355) 132,018 2019 $'000 520 12,222 14,431 29,034 1,100 10,000 2018 $'000 134,003 (8,482) (11,449) 114,072 2018 $'000 509 12,222 14,179 - - 10,000 953 - 68,260 36,910 Barossa Infrastructure Ltd (BIL) is an unlisted public Company supplying non-potable supplementary irrigation water for viticulture in the Barossa. The Group holds a minority interest in BIL. Coleambally Irrigation Co-operative Limited (CICL) is one of Australia's major irrigation companies 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. The Group holds a minority interest in CICL. Finance Lease – Breeders is in the form of breeders which have been leased to Cattle JV Pty Limited, a wholly- owned subsidiary of Rural Funds Management Limited, for a term of ten years ending in 2026. Finance Lease – Feedlots is in the form of feedlots leased to JBS Australia Pty Limited (JBS) for a term of ten years ending in 2028 with a repurchase call option exercisable by JBS and a sale put option exercisable by the Group. A $1,600,000 cattle financing facility with a term of ten years was extended to Katena Pty Ltd, the lessee of the Cerberus property to fund the purchase of trade cattle. The balance drawn as at 30 June 2019 is $1,100,000 and is due to be repaid in September 2028. Its fair value approximates carrying amounts. A $10,000,000 secured loan with a term of ten years was extended to DA & JF Camm Pty Limited as part of the lease of the Natal aggregation located near Charters Towers, QLD. The loan is due in December 2027. Its fair value approximates carrying amounts. Other receivables relates to the recognition of operating lease revenue on a straight-line basis in accordance with AASB 16 Leases. Significant accounting judgements in the valuation of Coleambally Irrigation Co-operative and Barossa Infrastructure Limited shares The investments in BIL and CICL are treated the same as water rights, that is, recorded at historical cost less accumulated impairment losses. Finance leases Finance leases are measured at amortised cost. These represent leases of fixed assets or biological assets where all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are substantially transferred from the lessor. 31 72 . e t a i r p o r p p a e r e h w n e t f o e r o m r o s r a e y o w l t y r e v e d e u a v y l t n e d n e p e d n i n e e b e v a h l l i w y t r e p o r p h c a e t a h t g n i r u s n e , i t d e n a b o e r a s e ’ i t r e p o r p s p u o r G e h t n o s n o i t a u a v t n e d n e p e d n I l l e b a r a p m o c n o d e s a b s n o i t a u a v l e v i t c e p s e r e h t n i d e t a m i t s e s e a r t t l n e a v u q e i t l u d a d n a d n a l f o a e r a r e p t e a r , s e t a r n o i t a s i l a t i p a c , s e t a r t n u o c s d i e d u c n l i s t u p n i 3 l e v e l i n a m e h T e r a s e u a v l r i a f 3 l e v e l n i s e g n a h C . y t r e p o r p h c a e f o e u a v l r i a f e h t f o t n e m s s e s s a r i e h t e t a d p u s r o t c e r i d e h t , d o i r e p g n i t r o p e r h c a e f o d n e e h t t A . a t a d y r t s u d n i d n a s n o i t c a s n a r t . s r e u a v l t n e d n e p e d n i e h t h t i i w s n o s s u c s d i g n i r u d d n a e t a d g n i t r o p e r h c a e t a d e s y a n a l : s t n e m e r u s a e m e u a v l r i a f ) 4 E n o i t c e s ( 3 l e v e l g n i r r u c e r n i d e s u s t u p n i l e b a v r e s b o n u t n a c i f i n g s i e h t t u o b a n o i t a m r o n f i e v i t a t i t n a u q e h t s e s i r a m m u s l e b a t i g n w o l l o f e h T o t s t u p n i e l b a v r e s b o n u f o p h s n o i t a l e R i s t u p n i f o e g n a R l e b a v r e s b o n U t a e u a v l r i a F n o i t p i r c s e D . e u a v l r i a f e h t r e w o l e h t , e t a r n o i t a s i l a t i p a c d n a t n u o c s d i e h t i r e h g h e h T 0 0 . 9 - 0 0 . 8 0 0 9 . - 0 0 8 . ) % ( e a r t e u l a v r i a f % 8 1 0 2 % 9 1 0 2 * s t u p n i t n u o c s D i 8 1 0 2 0 0 0 $ ' 4 4 5 7 4 2 , 9 1 0 2 0 0 0 $ ' 2 4 2 , 1 8 2 d e t a g i r r i e g a r e v a r e p e u a v l e h t i r e h g h e h T . e u a v l r i a f a / n . e u a v l r i a f e h t i r e h g h e h t , e r a t c e h 0 0 0 , 8 1 $ e g a r e v a r e p $ e r a t c e h d e a g i r r i t e h t i r e h g h e h t , y t i c a p a c g n y r r a c i l t n e a v u q e i e h t r e w o l e h t , e t a r t n u o c s d i e h t i r e h g h e h T 0 5 . 8 / a n . e u a v l r i a f e h t r e w o l e h t , e t a r n o i t a s i l a t i p a c e h t i r e h g h e h T 0 5 . 5 1 - 0 0 . 1 1 5 9 . 8 1 - 3 2 1 1 . e h t r e w o l e h t , e t a r t n u o c s d i e h t i r e h g h e h T 0 5 . 9 5 7 8 . - 5 2 8 . . e u a v l r i a f . e u a v l i g n y r r a c y t i c a p a c t l n e a v u q e i t e a r n o i t a s i l a t i p a C 6 5 1 7 7 , ) % ( ) % ( e a r t ) % ( e a r t t n u o c s D i t n u o c s D i 3 3 3 6 4 , 1 3 1 7 2 , 6 9 0 , 1 7 2 7 3 , 8 5 0 6 2 , 6 4 t l u d a h c a e r e p e u a v l e h t i r e h g h e h T 0 5 5 , 4 $ - 0 5 6 $ 0 0 5 5 $ , - 0 0 9 $ t l u d a r e p $ 7 9 8 4 0 1 , 7 4 4 , 3 9 1 ) % ( 4 2 . 4 1 - 1 6 8 . 0 0 5 1 . - 0 5 . 8 t e a r n o i t a s i l a t i p a C d r a h c r o d n o m A l y t r e p o r p d n a y t r e p o r p e l t t a C e r u t c u r t s a r f n i d n a y t r e p o r p y r t l u o P e r u t c u r t s a r f n i d r a y e n V i d n a y t r e p o r p n o t t o C e r u t c u r t s a r f n i d e t a l e r y t r e p o r p – s t e s s a l a i c n a n F d n a i s t n a l p r e r a e B , y t r e p o r p t n e m t s e v n I f o t n e m e r u s a e m e u a v l r i a F 5 C 9 1 0 2 e n u J 0 3 s t n e m e t a t S i l a i c n a n F e h t o t p u o r G s d n u F l a r u R s e t o N s t n a p l r e r a e B d n a y t r e p o r p t n e m t s e v n I r e w o l e h t , e t a r n o i t a s i l a t i p a c e h t i r e h g h e h T ) % ( e a r t . e u a v l r i a f e h t 0 0 . 7 0 0 . 7 t n u o c s D i 6 9 6 1 1 , 5 2 8 , 1 1 d r a h c r o i a m a d a c a M . s e u a v l r i a f t c e f f a y l l a i r e t a m t a h t s t u p n i l e b a v r e s b o n u i t n e e w e b s p h s n o i t a e r - r e t n l 7 5 7 4 1 5 , 2 4 2 , 2 6 6 i t n a c i f i n g s i o n e r e w e r e h T * y t r e p o r p l a t o T 2 3 73 RURAL FUNDS GROUP ANNUAL REPORT 2019 l a t o T 0 0 0 $ ' - 5 0 1 0 0 5 1 1 , 6 2 9 6 0 1 , ) 5 5 7 ( 1 3 5 8 1 1 , 6 8 2 9 1 1 , 1 3 5 8 1 1 , l a t o T 0 0 0 $ ' 8 3 7 8 0 1 , 7 - 4 5 ) 3 7 8 1 ( , ) 0 6 8 ( 6 2 9 6 0 1 , 6 8 7 7 0 1 , 6 2 9 6 0 1 , 3 3 7 5 2 4 3 , 5 1 8 r e h t O 0 0 0 $ ' - - - ) 1 2 ( 6 3 2 4 3 , 6 3 2 4 3 , 6 3 2 4 3 , r e h t O 0 0 0 $ ' 6 4 5 - ) 9 7 1 ( 6 7 3 4 3 , - 7 5 2 4 3 , 7 5 2 4 3 , 7 5 2 4 3 , 0 0 0 $ ' - - - - 5 1 8 5 1 8 5 1 8 - - - 0 0 0 $ ' 2 7 6 3 , - 2 7 6 3 , 2 7 6 3 , 2 7 6 3 , 0 0 0 $ ' 0 0 5 - - - - 0 0 5 0 0 5 0 0 5 - - - 0 0 0 $ ' 9 4 0 , 1 - 9 4 0 , 1 9 4 0 , 1 9 4 0 , 1 i s a m a d a c a M n o t t o C s d r a y e n V i y r t l u o P e r u t c u r t s a r f n i 0 0 0 $ ' 8 0 8 7 - - - - 5 1 8 5 1 8 5 1 8 - - - - 0 0 0 $ ' 2 7 6 3 , - 2 7 6 3 , 2 7 6 3 , 2 7 6 3 , 0 0 0 $ ' 0 0 5 - - - - - 0 0 5 0 0 5 0 0 5 - - - - 0 0 0 $ ' 9 4 0 , 1 - 9 4 0 , 1 9 4 0 , 1 9 4 0 , 1 i s a m a d a c a M n o t t o C s d r a y e n V i y r t l u o P e r u t c u r t s a r f n i e l t t a C 0 0 0 $ ' - 8 9 5 , 1 - - - 8 9 5 , 1 8 9 5 , 1 8 9 5 , 1 e l t t a C 0 0 0 $ ' - - - - - - - - - 0 0 0 $ ' s d n o m A l 1 2 5 0 1 1 0 9 , 9 3 3 6 , 6 6 0 6 6 , 6 7 5 1 4 , 7 7 ) 5 5 7 ( 0 6 6 , 6 7 0 0 0 $ ' s d n o m A l - 9 7 1 3 3 3 , 8 6 - ) 9 7 8 , 1 ( 3 3 6 , 6 6 3 9 4 , 7 6 ) 0 6 8 ( 3 3 6 , 6 6 t n u o m a k o o b t e n g n n e p O i t n e r r u c - n o N s n o i t i d d A t n u o m a k o o b t e n g n i s o C l t n e m r i a p m i f o l a s r e v e R s r e f s n a r T t n e m r i a p m i l d e t a u m u c c A t n u o m a k o o b t e N t s o C 9 1 0 2 8 1 0 2 t n u o m a k o o b t e n g n n e p O i t n e r r u c - n o N s n o i t i d d A s r e f s n a r T t n u o m a k o o b t e n g n i s o C l t n e m r i a p m i f o l a s r e v e R t n e m r i a p m i l d e t a u m u c c A t n u o m a k o o b t e N t s o C l s a s o p s D i . s t n e m e l t i t n e d n a s t h g i r r e t a w f o n o i t a u a v l ’ s r o t c e r i D r o f 1 B e t o n o t r e f e R . s t n e m e l t i t n e d n a s t h g i r r e t a w f o p u e d a m e r a s t e s s a l i e b g n a t n I s t n e m e t a t S p u o r G s d n u F l a r u R i l a i c n a n F e h t o t s e t o N 9 1 0 2 e n u J 0 3 s t e s s a e l b g n a t n i I 6 C 74 Rural Funds Group Notes to the Financial Statements 30 June 2019 C6 Intangible assets (continued) 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. C7 Capital commitments Significant capital expenditure across all properties, largely relating to the Kerarbury development, contracted for but not recognised as liabilities is as follows: Plant and equipment - bearer plants Investment property Intangible assets Total Other commitments 2019 $'000 2,409 12,805 1,959 17,173 2018 $'000 13,718 15,250 19,866 48,833 Other significant commitments contracted but not recognised as a liability relate to the provision of the $5.0 million cattle financing facility to DA & JF Camm Pty Limited, the lessee of the Natal aggregation. The facility was not drawn during the year ended 30 June 2019. C8 Plant and equipment – other 2019 Plant and equipment Opening net book amount Additions Disposals Depreciation Closing net book amount Cost Accumulated depreciation Net book amount $'000 5,480 4,277 (38) (1,182) 8,537 12,486 (3,949) 8,537 2018 Plant and equipment Opening net book amount Additions Disposals Depreciation Closing net book amount Cost Accumulated depreciation Net book amount $'000 5,128 1,324 (19) (952) 5,480 8,258 (2,778) 5,480 Total $'000 5,480 4,277 (38) (1,182) 8,537 12,486 (3,949) 8,537 Total $'000 5,128 1,324 (19) (952) 5,480 8,258 (2,778) 5,480 34 75 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 C8 Plant and equipment – other (continued) 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 removing 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 Useful life: Nil 3-16 years 5-16 years 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 and loss. 76 35 Rural Funds Group Notes to the Financial Statements 30 June 2019 D. TAX Since 1 July 2014 both Rural Funds Trust and RFM Chicken Income Fund (a subsidiary of Rural Funds Trust) became flow through trusts for tax purposes. As a result, it is no longer probable that a tax liability will be incurred in these entities in relation to future sale of assets for a gain or through trading. RFM Australian Wine Fund (a subsidiary of Rural Funds Trust) is the head of a separate tax consolidated group, taxed in its own right. RF Active (a subsidiary of Rural Funds Trust) is a public trading trust and is taxed as a company. D1 Income tax expense 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 in 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. The major components of income tax expense comprise: Current tax Deferred tax Adjustments in respect of deferred income tax of previous years Income tax expense reported in the Statement of Comprehensive Income Income tax expense is attributable to: Profit from continuing operations Total Deferred income tax expense included in income tax expense comprises: Decrease in deferred tax assets Increase in deferred tax liabilities Total Amounts charged or credited directly to equity Capitalised issue costs Change in fair value taken through asset revaluation reserve Total * Refer to Note A Plant and Equipment – bearer plants for details of restatement. 2019 $'000 439 4,376 9 4,824 4,824 4,824 - 4,372 4,372 2019 $'000 (15) 2 (13) Restated* 2018 $'000 277 780 - 1,057 1,057 1,057 - 803 803 Restated* 2018 $'000 - 23 23 36 77 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 D1 Income tax expense (continued) Numerical reconciliation of income tax expense to prima facie tax payable Net profit before income tax At the statutory income tax rate of 30% (2018: 30%) Derecognition of tax losses that are no longer available for utilisation Tax effect of profits in non-taxable trusts Previously unrecognised deferred tax asset now recognised Imputation credits received Total Franking credits 2019 $'000 38,179 11,454 - (6,637) 9 (2) 4,824 Restated* 2018 $'000 30,952 9,286 (17) (8,217) 23 (18) 1,057 At 30 June 2019 there are $463,000 of franking credits available to apply to future income distributions (2018: $183,000). D2 Deferred tax and current tax payable Deferred tax liabilities Plant and equipment - bearer plants Plant and equipment - other Fair value investment property Other assets Gross deferred tax liabilities Set off of deferred tax assets Net deferred tax liabilities Deferred tax assets Investments Other Unused income tax losses Gross deferred tax assets Set off of deferred tax liabilities Net deferred tax assets * Refer to Note A Plant and Equipment – bearer plants for details of restatement. 78 2019 $'000 4,046 2,723 4,405 43 11,217 (5,439) 5,778 223 31 5,185 5,439 (5,439) - 2018 $'000 4,127 1,960 1,519 - 7,606 (6,200) 1,406 227 34 5,940 6,200 (6,200) - 37 Rural Funds Group Notes to the Financial Statements 30 June 2019 D2 Deferred tax and current tax payable (continued) Recognised tax assets and liabilities Current income tax Deferred income tax Opening balance (Charged) to income Credited/(charged) to equity Tax payments Closing balance 2019 $'000 (277) (439) - 277 (439) 2018 $'000 - (277) - - (277) Tax expense in the Consolidated Statement of Comprehensive Income Amounts recognised in the Consolidated Statement of Financial Position: 2019 $'000 (1,406) (4,385) 13 - (5,778) 4,824 Restated* 2018 $'000 (603) (780) (23) - (1,406) 1,057 Deferred tax liability (5,778) (1,406) * Refer to Note A Plant and Equipment – bearer plants for details of restatement. 38 79 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 E. CAPITAL STRUCTURE AND FINANCIAL RISK MANAGEMENT RFM, the Responsible Entity of RFF, is responsible for managing the policies designed to optimise RFF’s capital structure. This is primarily monitored through an internal gearing target ratio of less than 35% calculated as interest bearing liabilities on adjusted total assets. The optimal capital structure is reviewed periodically, although this may be impacted by market conditions which may result in an actual position which may differ from the desired position. E1 Interest bearing liabilities Current Equipment loans (ANZ) J&F Guarantee - credit loss allowance Total Non-current Borrowings (ANZ) Borrowings (Rabobank) Total 2019 $'000 3,793 39 3,832 186,525 104,920 291,445 2018 $'000 3,361 - 3,361 172,672 97,128 269,800 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. Credit loss allowance The J&F Guarantee is a $75.0 million limited guarantee provided to J&F Australia Pty Ltd (J&F), a wholly owned subsidiary of Rural Funds Management Limited. From the provision of this guarantee, the Group earns a guarantee fee classified as finance income as noted in B2, paid on a monthly basis. Financial liabilities relate to the credit loss allowance taking into account the likelihood of the financial guarantee to J&F being triggered and its financial impact for the Group. The credit loss allowance is recognised at fair value through profit or loss. As part of this transaction, the Group has contracted to purchase five feedlots from JBS Australia Pty Limited. Three of these feedlots have settled as at 30 June 2019. A fourth feed lot settled on 16 August 2019. The feedlots are classified as a finance lease with a repurchase call option exercisable by JBS and a sale put option exercisable by the Group as noted in C4. Borrowings At 30 June 2019 the core debt facility available to the Group was $335,000,000 (2018: $275,000,000), split into two tranches, with a $225,000,000 tranche expiring in November 2021 and a $110,000,000 tranche expiring in November 2023. As at 30 June 2019 RFF had active interest rate swaps totaling 55.9% (2018: 40.0%) of the drawn down balance to manage interest rate risk. Hedging requirements under the terms of the borrowing facility may vary with bank consent. 80 39 Rural Funds Group Notes to the Financial Statements 30 June 2019 E1 Interest bearing liabilities (continued) Loan covenants Under the terms of the updated borrowing facility, the Group was required to comply with the following financial covenants for the period ended 30 June 2019: • maintain a maximum loan to value ratio of 50%; • maintain net tangible assets (including water entitlements) in excess of $400,000,000; • • a minimum hedging requirement of 40% of debt drawn under the borrowing facility; and an interest cover ratio for the Group not less than 3.00:1.00. Rural Funds Group has complied with the financial covenants of its borrowing facilities during the year. 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 section B1 for Directors’ valuation of water rights and entitlements. Borrowings with Australian and New Zealand Banking Group (ANZ) and Rabobank Australia Group (Rabobank) are secured by: • • a fixed and floating charge over the assets held by Australian Executor Trustee Limited (AETL) as custodian for Rural Funds Trust, RFM Chicken Income Fund, RFM Australian Wine Fund (a subsidiary of Rural Funds Trust) and RF Active; and registered mortgages over all property owned by the Rural Funds Trust and its subsidiaries provided by AETL as custodian for Rural Funds Trust and its subsidiaries. The following assets are pledged as security over the loans: 2019 Mortgage: Leased properties Other assets Equipment loans Total 2018 Mortgage: Leased properties Other assets Equipment loans Total Investment property Water licences Plant and equipment - Bearer Plants Financial assets Plant and equipment TOTAL $'000 $'000 $'000 $'000 $'000 $'000 489,327 84,295 172,915 12,844 - 759,381 - - 489,327 34,236 - 118,531 - - 172,915 57,603 - 70,447 - 8,537 8,537 91,839 8,537 859,757 Investment property Water licences Plant and equipment - Bearer Plants Financial assets Plant and equipment TOTAL $'000 $'000 $'000 $'000 $'000 $'000 355,652 72,669 157,239 12,833 - 598,393 1,866 - 357,518 34,257 - 106,926 - - 157,239 24,303 - 37,136 - 5,480 5,480 60,426 5,480 664,299 40 81 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 E2 Financial assets – other (non-property related) Investment - RFM Poultry Investment - Macadamia Processing Co Limited Investment - Almondco Australia Limited Total 2019 $'000 81 102 2,004 2,187 2018 $'000 124 102 - 226 The Group’s investment in RFM Poultry is held at fair value (level 1 - see section E4). The Group’s investments in Macadamia Processing Co Limited and Almondco Australia Limited is held at fair value. E3 Derivative financial instruments measured at fair value Current Interest rate swaps Total Non-current Interest rate swaps Total 2019 $'000 103 103 2018 $'000 - - 23,938 23,938 5,834 5,834 The Group’s derivative financial instruments are held at fair value (level 2 - see section E4). E4 Fair value measurement of assets and liabilities This note explains the judgements and estimates made in determining fair values of Investment property, Plant and equipment – bearer plants and financial assets and liabilities 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 each item into the three levels prescribed under Australian Accounting Standards as mentioned above. Level 1 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). Level 2 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. Level 3 One or more significant inputs to the determination of fair value is based on unobservable inputs for the asset or liability. RFF’s listed equity investments are level 1. RFF’s financial liabilities, being interest rate swap derivatives are level 2. At 30 June 2019 all non-financial assets are level 3. RFF’s unlisted equity investments, BIL, CICL, MPC and AlmondCo are level 3. 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 (2018: nil). Valuation techniques used to determine fair values Specific valuation techniques used to value financial instruments via level 1 and level 2 inputs include: • • the use of quoted market prices or dealer quotes for similar instruments; the fair value of interest rate swaps is calculated as the present value of estimated future cash flows based on observable yield curves Specific valuation techniques used to value financial assets, investment property and bearer plants via level 3 are discussed in section C5. 41 82 Rural Funds Group Notes to the Financial Statements 30 June 2019 E5 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: • • financial assets at amortised cost; and financial assets at fair value through profit or loss. 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. Financial assets at amortised cost Financial assets held with the objective of collecting contractual cash flows are recognised at amortised cost. After initial recognition these are measured using the effective interest method, less provision for expected credit loss. Any change in their value is recognised in profit or loss. Discounting is omitted where the effect of discounting is considered immaterial. For trade receivables, impairment provisions are recorded in a separate allowance account with the loss being recognised in profit or loss. Subsequent recoveries of amounts previously written off are credited against other income in profit or loss. c. Financial assets at fair value through profit or loss The group classifies the following financial assets at fair value through profit or loss: • • debt investments that do not qualify for measurement at either amortised cost equity investments for which the entity has not elected to recognise fair value gains and losses through other comprehensive income 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 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. 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 and are included in the income statement line item titled "finance costs". Financial liabilities that measured at fair value through profit or loss include the Group’s derivatives. All other financial liabilities are measured at amortised cost. 42 83 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 E6 Financial risk management The Group is exposed to a variety of financial risks through its use of financial instruments. 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: • Market risk - interest rate risk and price risk • Credit risk • Liquidity risk The principal categories of financial instrument used by the Group are: Loans and receivables Finance lease receivables • • • Cash at bank • Bank overdraft • • • Trade and other payables Floating rate bank loans Interest rate swaps a. 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 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. b. Interest rate risk and 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 approximate 55.9% (2018: 40.0%) of the Group's drawn down debt at 30 June 2019. At balance date, the details of the effective interest rate swap contracts are: Average interest rate payable Balance 2019 % 2018 % Maturity of notional amounts Settlement - between 0 to 3 years 2.62 3.40 Settlement - 3 to 5 years Settlement - greater than 5 years - 2.70 3.05 3.08 2019 $'000 25,000 - 138,000 163,000 2018 $'000 35,000 15,000 58,000 108,000 43 84 Rural Funds Group Notes to the Financial Statements 30 June 2019 E6 Financial risk management (continued) b. Interest rate risk and swaps held for hedging (continued) The following interest rate swap contracts that have been entered into but are not yet effective as at 30 June 2019 are: Average interest rate payable 2019 % 2018 % Balance 2019 $'000 2018 $'000 Maturity of notional amounts Settlement - greater than 5 years Total 3.04 3.11 60,000 60,000 110,000 110,000 The net loss recognised on the swap derivative instruments for the year ended 30 June 2019 was $18,208,000 (2018: $1,956,000 loss). At 30 June 2019 the Group had the following mix of financial assets and liabilities exposed to variable interest rates: Cash Interest bearing liabilities Total 2019 $'000 2,588 (291,445) (288,857) 2018 $'000 1,210 (269,800) (268,590) At 30 June 2019, 1.30% (2018: 1.23%) of the Group’s debt is fixed, excluding the impact of interest rate swaps. c. Interest rate risk (sensitivity analysis) At 30 June 2019, 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% d. Credit risk 2019 $'000 14,334 (15,935) 14,334 (15,935) 2018 $'000 11,327 (12,585) 11,327 (12,585) 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 and associated impacts are also managed through security, in the form of guarantees, security deposits and property security in favor of the group. Counterparty credit risk for finance leases have also been assessed and accounted for through the recognition of credit loss provisions. 44 85 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 E6 Financial risk management (continued) e. Liquidity risk and capital management 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 manages liquidity risk by monitoring forecast cash flows and ensuring that adequate headroom on borrowing facilities are maintained. 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. The table overleaf reflects all contractually fixed repayments and interest resulting from recognised financial assets and liabilities as at 30 June 2019. The amounts disclosed in the table are the contractual undiscounted cash flows, except for interest rate swaps and bills of exchange where the cash flows have been estimated using interest rates applicable at the reporting date. 86 45 l a t o T s r a e y 5 r e v O s r a e y 5 o t 3 s r a e y 3 o t 1 r a e y 1 o t s h t n o m 6 s h t n o m 6 n a h t s s e L s t n e m e t a t S i l a i c n a n F e h t o t p u o r G s d n u F l a r u R s e t o N ) d e u n i t n o c ( t n e m e g a n a m k s i r 9 1 0 2 e n u J 0 3 l a i c n a n F 6 E i - 8 1 0 2 0 0 0 $ ' 0 1 2 , 1 1 8 3 , 5 0 0 6 , 3 2 4 5 1 , 4 1 - 5 4 3 , 4 4 8 8 5 , 2 3 4 0 , 5 7 7 4 , 2 2 1 6 1 , 3 1 8 0 9 , 1 7 7 1 , 5 4 8 2 1 , 6 9 6 0 , 4 4 3 8 , 5 1 0 1 , 6 2 8 7 , 4 1 4 0 , 4 2 0 0 5 , 4 9 2 7 6 8 , 4 1 3 1 3 5 , 0 1 3 1 9 7 , 9 4 3 - - - 0 7 4 , 7 1 6 6 0 , 1 1 6 3 5 , 8 2 - - 1 7 2 1 2 2 , 5 2 9 4 , 5 - - 7 8 4 , 6 1 7 8 2 , 1 1 8 6 4 , 1 2 4 2 , 9 2 - - 8 7 1 9 6 2 , 3 2 7 4 4 , 3 2 9 1 0 2 0 0 0 $ ' 8 1 0 2 0 0 0 $ ' 9 1 0 2 0 0 0 $ ' 8 1 0 2 0 0 0 $ ' - - - 2 5 4 , 2 3 2 3 , 1 5 7 7 , 3 - - 4 7 8 0 9 2 9 1 0 2 0 0 0 $ ' - - 0 5 7 6 7 1 6 9 3 , 2 2 2 3 , 3 8 1 0 2 0 0 0 $ ' - - - 2 5 4 , 2 3 2 3 , 1 5 7 7 , 3 9 1 0 2 0 0 0 $ ' - - 0 5 7 6 7 1 6 9 3 , 2 2 2 3 , 3 8 1 0 2 0 0 0 $ ' 9 1 0 2 0 0 0 $ ' - - - 3 1 6 1 2 2 4 3 8 - - 9 9 5 7 8 1 4 4 0 3 8 8 1 0 2 0 0 0 $ ' 0 1 2 , 1 1 8 3 , 5 - 3 1 6 1 2 2 9 1 0 2 0 0 0 $ ' 8 8 5 , 2 3 4 0 , 5 9 9 5 7 8 1 4 4 5 2 4 , 7 1 6 4 , 8 - - 7 0 4 , 1 - 2 2 3 6 7 6 , 1 - 2 7 7 8 4 9 , 1 - - 7 2 6 - - 9 3 6 2 2 5 , 9 6 7 6 2 , 6 8 2 3 6 5 , 8 3 2 7 1 1 , 4 1 9 3 , 3 - 7 1 1 , 4 8 2 1 , 6 1 2 6 - 1 9 3 , 3 1 0 1 , 6 0 1 6 4 6 1 , 1 9 2 9 , 0 7 5 6 2 , 8 8 2 3 8 2 , 1 4 2 4 4 7 , 4 0 3 0 , 4 6 6 8 , 0 1 2 0 1 , 0 1 d t L y t P m m a C F J & A D - n a o L m r e T s r e d e e r B - e s a e L e c n a n F i t d L y t P a n e a K t - y t i l i c a F e l t t a C l a t o T s e i t i l i b a i l g n i r a e b t s e r e t n I l s e b a y a p r e h t o d n a e d a r T s p a w s e t a r t s e r e t n I s n a o l t n e m p u q E i l a t o T s e i t i l i b a i l l i a c n a n F i l s e b a v e c e r i r e h t o d n a e d a r T s t l n e a v u q e i h s a c d n a h s a C s t e s s a l i a c n a n F i 6 4 87 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 E7 Issued units Units on issue at the beginning of the period Units issued during the year Distributions to unitholders Units on issue 2019 2018 No. 255,630,515 78,633,078 $'000 233,666 148,833 No. 254,380,898 1,249,617 $'000 255,946 2,633 - (19,645) - (24,913) 334,263,593 362,854 255,630,515 233,666 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. Voting is determined based on the closing market value of each unit. The Group does not have authorised capital or par value in respect of its 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. E8 Distributions payable Distributions payable Total 2019 $'000 8,950 8,950 2018 $'000 6,633 6,633 88 47 Rural Funds Group Notes to the Financial Statements 30 June 2019 F. OTHER ASSETS AND LIABILTIIES F1 Cash and cash equivalents Cash at bank Total Reconciliation of cash 2019 $'000 2,588 2,588 2018 $'000 1,210 1,210 Cash and cash equivalents reported in the Statement of Cash flows are reconciled to the equivalent items in the Statement of Financial Position as follows: Cash and cash equivalents F2 Trade and other receivables Current Trade and other receivables Sundry receivables Receivables from related parties Total 2019 $'000 2,588 2019 $'000 1,963 1,388 1,692 5,043 2018 $'000 1,210 2018 $'000 2,964 1,030 1,387 5,381 Trade receivables are non-interest bearing and are generally on 30-day terms. 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. F3 Other current assets Prepayments Deposits Total F4 Trade and other payables Trade and other payables Accruals Sundry creditors Total 2019 $'000 1,679 20 1,699 2019 $'000 4,136 1,279 686 6,101 2018 $'000 352 2,566 2,918 2018 $'000 598 780 4,750 6,128 48 89 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 F5 Other non-current liabilities Lessee deposits Total F6 Asset revaluation reserve Opening balance Bearer plants revaluation Income tax applicable Closing balance 2019 $'000 2,629 2,629 2019 $'000 46,739 (275) (2) 46,462 2018 $'000 1,634 1,634 Restated* 2018 $'000 32,622 14,140 (23) 46,739 * Refer to Note A Plant and Equipment – bearer plants for details of restatement. 49 90 Rural Funds Group Notes to the Financial Statements 30 June 2019 G. ADDITIONAL INFORMATION G1 Key management personnel Related parties are persons or entities that are related to the Group as defined by AASB 124 Related Party Disclosures. These include directors and other key management personnel and their close family members and any entities they control as well as subsidiaries and associates of the Group. The following provides information about transactions with related parties during the year as well as balances owed to or from related parties as at 30 June 2019. Directors 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 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 2019 are: Balance at 30 June 2017 Additions Balance at 30 June 2018 Additions Guy Paynter Units 814,696 David Bryant* Michael Carroll Units 19,389 Units 11,678,182 Julian Widdup Units - - 814,696 244,408 - 11,678,182 2,736,672 933 20,322 7,301 27,623 - - - - Balance at 30 June 2019 1,059,104 14,414,854 *Includes interests held by Rural Funds Management Limited as the Responsibly Entity. 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 (2018: 0.6%) of adjusted total assets; and, • Asset management fee: 0.45% per annum (2018: 0.45%) of adjusted total 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 and payable to RFM as Responsible Entity are disclosed in note G2. 50 91 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 G2 Related party transactions 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 2019 $'000 4,855 3,641 8,496 4,068 401 - 1,155 2018 $'000 2,664 3,599 6,263 3,056 - 114 1,122 Total amount paid to RFM and related entities 14,120 10,555 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 2007 Macgrove Project Rental income received from RFM Macadamias Finance income from Cattle JV Interest income from Cattle JV Finance income from J&F Australia Pty Limited Rental income received from RFM Poultry Distribution received/receivable from RFM Poultry Water sale proceeds from RFM Poultry 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 Expenses charged to RFM Farming Pty Ltd 1,533 567 1,602 1,108 1,917 2,933 2,168 767 352 1,243 46 3,818 1,611 565 1,599 992 288 3,448 1,969 757 326 1,321 1 - 10,717 10,670 10 49 3 1 3 1 151 483 14 - 26 7 20 4 51 - Total amounts received from RFM and related entities 29,472 23,669 Murdock Viticulture is a vineyard manager 28% owned by RFM. The terms and nature of the historical transactions between the Group and related parties have not changed during the year ended 30 June 2019. Transactions entered into between related parties during the year have been reviewed. Expenses reimbursed to RFM Poultry relates to the Group’s capital expenditure costs initially incurred by RFM Poultry that were subsequently reimbursed by the Group. Additional rental income received from RFM Farming Pty Limited relates to the Mayneland and Comanche properties which were licensed to RFM Farming Pty Limited during the year ended 30 June 2019. Finance income from J&F Australia Pty Limited (J&F) relates to the $75.0 million limited guarantee provided to J&F, a wholly owned subsidiary of Rural Funds Management Limited. From the provision of this guarantee, the Group earns a guarantee fee classified as finance income. 51 92 Rural Funds Group Notes to the Financial Statements 30 June 2019 G2 Related party transactions (continued) Responsible Entity (Rural Funds Management) and related entities (continued) Expenses charged to RFM Farming Pty Limited relate to the reimbursement of crop costs prior to the Mayneland acquisition. These costs were charged by the Group to RFM Farming Pty Limited as the licensee of the property. Debtors (including finance lease receivable) RFM Farming Pty Limited RFM RFM Macadamias Pty Limited Cattle JV Pty Limited 2007 Macgrove Project Cotton JV Pty Limited RFM Poultry Total Creditors RFM RFM Farming Pty Limited Total Custodian fees Australian Executor Trustees Limited Total Financial guarantee 2019 $'000 213 - 37 15,526 - - 7 15,783 2019 $'000 364 12 376 2019 $'000 250 250 2018 $'000 656 10 30 14,236 70 564 - 15,565 2018 $'000 150 - 150 2018 $'000 215 215 The Group provides a $75.0 million guarantee to J&F Australia Pty Limited (J&F), a subsidiary of RFM. The guarantee enables J&F to supply cattle to JBS Australia Pty Limited for its grainfed business. Entities with influence over the Group Rural Funds Management Interest in related parties RFM Poultry Other 2019 Units 11,843,659 2019 Units 225,529 % 3.54 % 3.28 2018 Units 9,110,507 2018 Units 225,529 % 3.56 % 3.28 Michael Carroll is a director of Select Harvests Limited which leases orchards from Rural Funds Group. This is not a related party as defined by AASB 124 Related Party Disclosure. Transactions are on commercial terms and procedures are in place to manage any potential conflicts of interest. Mr Carroll does not participate in the negotiation of these leases. 52 93 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 G3 Parent entity information RFF was formed by the stapling of the units in two trusts, RFT and RFA. In accordance with Accounting Standard AASB 3 Business Combinations, the stapling arrangement referred to above is regarded as a business combination and the RFT has been identified as the parent for preparing Consolidated Financial Reports. The financial information of the parent entity, Rural Funds Trust 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. 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 2019 $'000 Restated* 2018 $'000 7,631 813,100 820,731 14,662 318,153 332,815 487,916 820,731 26,218 (280) 25,938 10,413 628,856 639,269 12,583 277,267 289,850 349,419 639,269 29,853 14,065 43,918 * Refer to Note A Plant and Equipment – bearer plants for details of restatement. 53 94 Rural Funds Group Notes to the Financial Statements 30 June 2019 G4 Reconciliation of profit to operating cashflow Reconciliation of net profit after income tax to cash flow from operating activities: Net profit after income tax Cash flows excluded from profit attributable to operating activities Non-cash flows in profit (Gain) on sale of assets Depreciation and amortisation - other Depreciation - bearer plants Amortisation of lease incentives Finance income - lease receivable (Reversal of impairment)/impairment of bearer plants Change in fair value of investment property Change in fair value of financial assets/liabilities Reversal of impairment of intangible assets Change in fair value of interest rate swaps Straight-lining of rental revenue Other non-cash items Changes in operating assets and liabilities Decrease/(increase) in trade and other receivables (Increase)/decrease in other assets (Decrease)/Increase in trade and other payables Decrease in tax liabilities Increase in other liabilities Net cash inflow from operating activities G5 Remuneration of auditors 2019 $'000 33,355 (12) 1,230 4,600 200 (352) (8,854) (8,352) 70 (105) 18,208 (953) - 333 (1,103) (27) 4,534 957 43,729 Restated* 2018 $'000 29,895 (17) 1,001 4,001 133 - 2,159 (7,398) - (54) 1,956 - (2,000) (800) 49 990 1,057 - 30,972 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 2019 $ 274,900 9,425 284,325 2018 $ 223,422 9,425 232,847 * Refer to Note A Plant and Equipment – bearer plants for details of restatement. 54 95 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Notes to the Financial Statements 30 June 2019 G6 Other accounting policies Cash and cash equivalents Cash and cash equivalents comprise 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. 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. 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. New accounting standards and interpretations Standard Name AASB 16 Leases Effective date for the Group 1-Jul-19 Requirements Impact a to single recognise on lease Introduces accounting model and requires lessees the balance sheet an asset (right of use) and a corresponding liability (lease commitment) for leases with a term of more than 12 months. is no impact on reported There 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 period. 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. 55 96 Rural Funds Group Notes to the Financial Statements 30 June 2019 G6 Other accounting policies (continued) Provisions (continued) 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. G7 Events after the reporting date On 31 July, the Group announced the lease of Rewan to Australian Agricultural Company Limited for 10 years. The lease is subject to approval by the Foreign Investment Review Board (FIRB). The lease rate and terms are consistent with the Group’s existing cattle properties. On 16 August, the Group completed the purchase of the Beef City feedlot for approximately $12.7 million including transaction costs. No other matter or circumstance has arisen since the end of the period 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. 56 97 RURAL FUNDS GROUP ANNUAL REPORT 2019 Rural Funds Group Directors’ Declaration 30 June 2019 In the Directors of the Responsible Entity’s opinion: 1 2 The financial statements and notes of Rural Funds Group set out on pages 12 to 56 are in accordance with the Corporations Act 2001, including: 42 to 106 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 2019 and of its performance for the year ended on that date; and 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 A 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 27 August 2019 98 57 99 RURAL FUNDS GROUP ANNUAL REPORT 2019100 101 RURAL FUNDS GROUP ANNUAL REPORT 2019102 103 RURAL FUNDS GROUP ANNUAL REPORT 2019104 105 RURAL FUNDS GROUP ANNUAL REPORT 2019Additional Information for Listed Public Entities 30 June 2019 Unitholder information Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below. This information is effective as at 30 June 2019. Distribution of equity securities Analysis of number of unitholders by size of holding: 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Unitholders 2019 2,612 4,558 2,273 3,478 193 RFM considers that there are 336 holders of a less than marketable parcel of units at 30 June 2019. Substantial unitholders The number of substantial unitholders and their associates are set out below: HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Netwealth Investments Limited (Wrap services) Voting rights Ordinary units All ordinary units carry one vote per unit without restriction. Twenty largest unitholders at 30 June 2019 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Netwealth Investments Limited (Wrap services) Argo Investments Limited Rural Funds Management Limited Citicorp Nominees Pty Limited National Nominees Limited eCapital Nominees Pty Limited BNP Paribas Nominees Pty Limited Netwealth Investments Limited (Super Services) Bryant Family Services Pty Limited One Managed Investment Funds Limited SCCASP Holdings Pty Limited AMP Life Limited Morgan Stanley Australia Securities Pty Limited Boskenna Pty Limited Bainpro Nominess Pty Limited Bond Street Custodians Limited WF Super Pty Limited Noeljen Pty Limited Total Securities exchange The Group is listed on the Australian Securities Exchange (ASX). Units held 48,948,715 44,949,850 13,508,131 Units held 48,948,715 44,949,850 13,508,131 12,494,364 11,843,659 9,477,652 8,757,590 5,457,592 4,098,894 3,557,677 2,555,941 2,000,000 1,663,073 1,387,980 1,222,257 1,059,104 1,059,063 781,363 770,335 711,902 176,305,142 % 14.64 13.45 4.04 % 14.64 13.45 4.04 3.74 3.54 2.84 2.62 1.63 1.23 1.06 0.77 0.60 0.50 0.42 0.37 0.32 0.32 0.23 0.23 0.21 52.74 65 106 Rural Funds Management Ltd ABN 65 077 492 838 AFSL 226 701 Level 2, 2 King Street Deakin ACT 2600 Locked Bag 150 Kingston ACT 2604 1800 026 665 1800 625 518 @ investorservices@ruralfunds.com.au www.ruralfunds.com.au 108 

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