On Thursday, RFM Poultry investors voted to wind up the leases as part of Rural Funds Group’s $72 million sale of the assets and operations to ProTen, a private poultry company that already owns chicken farms around Griffith.
Rural Funds Group says there are better returns in cattle than in chicken housing, and plans to use the sale to pay down group debt.
It has also entered into options over three Western Australia capital properties for $22.6 million. RFM Poultry investors will receive 80¢ a unit as part of the deal.
The sale of the poultry shed assets is also a significant way for the fund to rebut short sellers’ claims that its asset valuations are inflated, as they are being sold close to book value.
But it hasn’t convinced Rural Funds Group’s many critics.
Shareholder’s strong objections
Both Bonitas Research, which Rural Funds Group is taking to court for “loss and damage” after its initial report sent shares tumbling 42 per cent, and Bucephalus Research Partnership, have issued reports claiming the company is overvaluing its assets, short on cash flow and with a heavy reliance on related party rents.
In its report, Bucephalus singled out the proposed chicken farms sale, saying Rural Funds Group had to sell it or it would have risked eroding value to the group, as keeping the farms would have required a rent cut. The report also noted that Rural Funds Group only talked about the asset value, but not the business value, of RFM Poultry, adding that had the assets been better maintained, rents and profits “would have presumably been lower”.
Both Bucephalus and Bonitas are raising concerns from the perspective of Rural Funds Group shareholders.
But this transaction has also attracted strong criticism from a 19.5 per cent shareholder in RFM Poultry, who was buying shares as recently as last month.
Kaizen Capital, a little-known fund run by Sydney-based Connor Grindlay, sent a 17-page letter to the group in late November, outlining its concerns with the proposed wind-up and saying it planned to vote against the deal.
On Thursday, at a meeting in Canberra, Kaizen Capital voted its shares against the resolution. But some 65 per cent of votes cast were in favour of the resolution, with 35 per cent against.
RFM said of the 975 unit holders, 510 voted, a higher-than-average turnout for a register mainly dominated by retail shareholders.
So why is Kaizen so against the sale?
What it’s really saying is that RFM Poultry investors have been disadvantaged, as Rural Fund Group and the privately owned Rural Funds Management have acted in their own best interests, charging above-market rents, failing to fulfil lease terms and raking in management fees at the same time as the chicken operator’s profits have fallen.
Simply, Grindlay says RFM Poultry’s assets are being sold too cheaply and the structure for the fund is flawed, and open to serious conflicts of interest.
Even a spokesman for the landlord, responsible entity and the tenant, admits the structure does mean there is potential for conflict, but he says it’s carefully managed and the directors act in the best interests of all parties.
At the centre of the Kaizen claim is that Rural Funds Group – as the company that leases the assets to RFM Poultry – hasn’t given rent relief or kept up with structural improvements required under the lease agreement.
Kaizen argues this is because of a conflicted structure, which means both the lessee and the lessor are owned and operated by the same people, a structure which he says disadvantages RF Poultry.
Asset value ‘not the right measure’
Chickens are more sensitive than they look.
Shed temperatures have to be carefully managed: 32 degrees is optimal until about day 30 of their lives, when the temperature is then reset to 20 degrees.
That sounds straightforward, but what it means in practice is that sheds need constant maintenance and improvement.
A leak in the ventilation systems can throw out the temperature, as can any other number of small issues.
Under the terms of the RFM Poultry lease agreement with Rural Funds, RFM Poultry can request an annual rent review if its “chicken growing gross margin” is materially and permanently changed.
If the lessee and lessor can’t agree on a new rate, it needs to go to an independent expert for a resolution, the agreement says.
Bucephalus Research report has also raised concerns about the RFM Poultry wind-up. “We think they sold RFP because keeping the business viable would have required a rent cut, undermining the capital value,” the report says.
In particular, Kaizen is questioning why RFM Poultry isn’t splitting out the value of the contracts with Baida, the chicken processor, from the plant and equipment.
That company has valued the assets at $5.6 million, or above the 77¢ per unit net asset value as at June 2019, and much higher than the forecast 46¢ per unit at June 2020.
But Kaizen says net asset value isn’t the right measure of these sort of assets, which should also include the present value of the rental agreements, and contracts with Baida.
Kaizen also notes RFM Poultry’s capital expenditure has increased $730,000 in one year, up 33 per cent, which it says raises the question of whether RFM Poultry has been overpaying for capital expenditure that should have been done by Rural Funds Group.
Under the terms of the lease, RFM Poultry as the operators are responsible for repairs and maintenance while the landlord Rural Funds Group wears the structural capital expenditure.
All this matters, because Kaizen argues that Rural Funds Group has failed to invest in structural maintenance.
Despite one investor’s very public concerns with the RFM Poultry wind-up, the deal will go ahead. But in this long-running battle between short sellers, some investors and a company that maintains the critics have it wrong, it will be interesting to see if any other issues pop up around this group of farm owners and operators.