I think the Rural Funds Group (ASX: RFF) share price could be worth looking at in this coronavirus selloff.
The farmland real estate investment trust (REIT) has experienced a bit of a selloff just like the share prices of any other business. However, it has no dropped as much – since 21 February 2020 its share price has only fallen by 4%.
There are a few reasons to like Rural Funds is this selloff because of its defensive income:
Contracted income
One of the best parts about a REIT like Rural Funds is that its income is locked in thanks to the contracts with tenants – it doesn't require ongoing new sales like an operating business.
Many of Rural Funds' tenants are very large, listed businesses such as Olam, JBS, Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV). They are the safest, most secure farm tenants you could want.
Not only is Rural Funds' income reliable but it's also growing. A significant part of the growth is due to rental indexation built into the contracts. The income with most farms grows by either a fixed 2.5% per annum, or linked to CPI inflation with market reviews.
It also has a long weighted average lease expiry (WALE) of 11.5 years.
Low gearing
One of the dangers of REITs is if they take on too much debt. Property prices can go up and down, usually up over time, but debt can bring down any business.
Thankfully, Rural Funds keeps a relatively conservative balance sheet with gearing at 26.4% when the target is 30% to 35% which gives room for some acquisitions. Think of how heavily geared residential property investors are.
Productivity investments
Rural Funds Management is very effective at identifying farm opportunities that would benefit from capital expenditure to increase the productivity, value and rental income of the land.
The REIT is doing this particularly well with the cattle properties at the moment, leading to higher rental income over the longer-term. These investments can be made regardless of what's going on with the wider economy. The tenant will appreciate the improved farm.
Foolish takeaway
Rural Funds has provided FY21 distribution guidance of 11.28 cents, which is in line with its annual 4% growth target. It currently has a FY21 distribution yield of 5.6%, which is solid with how low interest rates are. If you just judge a business by its cashflows and distributions, Rural Funds is as solid as ever.
