Rural Funds Group has delivered exceptional operational performance in 1H25, with revenue growing 16.9% to $62.2 million and Adjusted Funds From Operations surging 43.6% to $22.3 million. This positions the company to achieve its FY25 guidance of 11.4 cents AFFO per unit, representing 3.6% growth. The transformative 3,000-hectare macadamia development approaches completion and already contributes 19.5% of revenue through long-term institutional leases.

Management has demonstrated strategic discipline through asset sales, including the 50% divestment of Mayneland and Baamba Plains properties, targeting gearing reduction to the 30-35% range. The company maintains distribution guidance at 11.73 cents per unit for both FY25 and FY26, signaling a transition from growth to income stability as major development projects mature.

Despite strong fundamentals, RFF trades at a substantial 42% discount to adjusted NAV of $3.10, reflecting market concerns about development execution and elevated gearing. The company's diversified portfolio across five agricultural sectors, 13.0-year weighted average lease expiry, and strategic water holdings ($359.5M directors' valuation) provide defensive characteristics and significant embedded value. Key risks include development execution delays, sustained higher interest rates, and climate volatility, though geographic diversification and quality tenant base provide mitigation.

Rural Funds Group (ASX: RFF) is Australia's premier agricultural Real Estate Investment Trust, owning and managing a diversified portfolio of 64 agricultural properties across five key sectors: almonds, macadamias, vineyards, cattle, and cropping. Established as a stapled security incorporating Rural Funds Trust and RF Active, RFF has strategically built its portfolio across multiple climatic zones throughout Australia, creating both geographic and sector diversification.

The company's core strategy involves acquiring, developing, and leasing agricultural properties to generate stable income streams and capital growth. RFF employs a triple-net lease structure for most properties, where tenants bear responsibility for property expenses including maintenance, insurance, and taxes, providing predictable income streams. Approximately 79% of FY25 forecast income is derived from corporate and institutional lessees, including Select Harvests Limited, Olam Orchards Australia, Treasury Wine Estates Limited, and various cattle operators.

The Group's property portfolio spans 4,068 planted hectares of almonds, 3,760 planted and planned hectares of macadamias, 638 planted hectares of vineyards, 717,434 hectares of cattle breeding/backgrounding properties plus five feedlots, and 14,216 hectares of cropping properties. This diversification creates operational resilience against climate and market volatility while positioning RFF to benefit from growing global demand for premium agricultural products.

Rural Funds Group delivered exceptional operational performance in 1H25, with revenue increasing 16.9% to $62.2 million driven by the maturation of macadamia developments and strong leasing activity. Net property income grew 17.3% to $45.5 million, while AFFO surged 43.6% to $22.3 million, positioning the company to achieve its full-year guidance of 11.4 cents per unit.

The dramatic decline in net profit after tax (-72.4% to $12.1 million) primarily resulted from reduced property revaluation gains ($3.8 million versus $71.0 million in 1H24), reflecting the normalization of agricultural property valuations after several years of strong appreciation. This accounting impact does not reflect the underlying operational strength of the business.

Balance sheet metrics remained stable with total assets of $1.90 billion and investment property values increasing 3.9% to $1.04 billion. The company secured leases for eight properties valued at $119 million with a 9.7-year weighted average term, while maintaining its strong tenant profile with 79% of forecast FY25 income from corporate and institutional lessees. Finance costs increased 19.4% to $12.3 million due to higher interest rates, though 73.4% of drawn debt remains hedged with a 4.2-year weighted average duration.

Management reaffirmed distribution guidance at 11.73 cents per unit for both FY25 and FY26, signaling confidence in cash flow stability despite the transition from development-focused growth to income stability. The company has adequate funding with $155.9 million debt facility headroom against $104.6 million committed capital expenditure for 2H25 and FY26.

Our financial forecasts project revenue growth moderating from 4.0% in FY25-26 to 3.0% thereafter, reflecting the transition from development-driven expansion to stabilized CPI-linked rental increases. Revenue is expected to grow from $124.4 million (FY25 run-rate) to $173.5 million by FY30, representing a 5-year CAGR of 3.5%.

EBITDA margins are projected to improve from 52.7% to 58.8% as higher-margin rental income progressively displaces lower-margin farming operations on unleased properties. This margin expansion, combined with declining capital intensity, drives a significant improvement in free cash flow generation from negative $55.4 million in FY25 to positive $56.2 million by FY30.

The most notable feature is the cash flow inflection point in 2H26, when negative free cash flow gives way to sustainable positive generation. This coincides with the completion of major development activities and marks RFF's transition to a mature income-generating phase. By FY29-30, free cash flow stabilizes at approximately 70% of NOPAT, providing a solid foundation for distribution sustainability and potential growth.

Key assumptions include successful completion of macadamia developments on schedule, achievement of target gearing through asset sales, and maintenance of the high-quality tenant base. The forecasts incorporate management's committed capital expenditure of $104.6 million for 2H25 and FY26, with adequate funding through existing debt facility headroom of $155.9 million.

Our valuation employs multiple methodologies with primary emphasis on a modified DCF approach that accounts for both adjusted NAV and projected cash flows. The base case DCF value of $2.02 reflects a 35% discount to the adjusted NAV of $3.10, consistent with current market treatment of agricultural REITs and accounting for development execution risk.

The WACC calculation incorporates a risk-free rate of 4.1%, equity risk premium of 5.5%, and levered beta of 0.85, with additional premiums for size (1.5%) and company-specific risks (1.5%), resulting in a cost of equity of 11.8% and WACC of 9.4%. The terminal value employs a perpetual growth rate of 2.7%, representing long-term inflation expectations and rental escalation mechanisms.

Multiple-based approaches provide supporting evidence, with NTM P/E and EV/EBITDA multiples yielding $1.87-$1.95, closely aligned with current market pricing. The precedent transactions methodology yields $2.64, potentially indicating longer-term upside if development execution proves successful. Our probability-weighted analysis assigns 60% likelihood to the base case, 25% to the bull case, and 15% to the bear case, producing an expected value of $2.01.

Development execution represents the primary risk, with RFF's growth strategy dependent on successful completion of the 3,000-hectare macadamia development. While management reports projects are "on track" despite weather delays, the agricultural nature introduces biological variables and potential cost inflation. Successful execution would establish transformative revenue streams, while delays could impact rental commencement timing.

Gearing above the target 30-35% range creates financial vulnerability amid elevated interest rates. Management has initiated mitigation through strategic asset sales, though execution depends on market conditions with moderating agricultural property valuations. Climate and weather risks affect both development timelines and long-term asset productivity, partially mitigated through geographic diversification and water holdings valued at $359.5 million.

Interest rate exposure is partially hedged (73.4% of drawn debt) but refinancing risk exists for facilities maturing in 2026-27. The company's defensive characteristics include triple-net lease structures, high-quality tenant base (79% corporate/institutional), and long weighted average lease expiry (13.0 years), providing income stability and risk mitigation.