NZL - NZ Rural Land Co IPO

[Snoopy]

Thanks Ferg for all that good work
There has been a lot of these type of investments over the years and the most pertinent Q is as you say is
Who benefits?

A short précis on a talk given by Cameron Bagrie is here

https://coastandcountrynews.co.nz/ne...ed-future.html

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The high proportion of interest-only loans in the dairy industry, compared to other sectors, is an area where farmers can expect to continue to see change.

“Low interest rates have been distorting the price of risk, and as a result risk has been mispriced. Lending standards have been tightened, and this will continue.”

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The way I read they article, the banks have been far too "gung ho" about lending to the dairy industry and want to wind back their exposure.

Enter NZ Rural Land Co. to take some of that rural land off their books. I don't like that 'risk continues to be mispriced' comment though. I think Cameron is saying dairy farm prices are too high.

Mind you others have said the same about real estate in general, and yet this in particular has fed into incredible value opportunities becoming apparent in the retirement village sector (apparently). So I guess if house prices are destined for a steep rise forever, exactly the same applies to farm land?

SNOOPY

[kiora]

Its more about returns have been very modest rather than farm prices been overvalued. Sort of smoke & mirrors
All complicated by who is going to lease their farms LONG term and pay 4.5% ROR?
When typical return on farmer owned operations of only 3-4%?
Leasee can't secure over land, just stock plant & equipment
No leasee no return
What are interest rates going to do long term? Up or down?
What effect will this have on this vehicle?
Farm sale prices have been flat lining for 12 years and yes rural land prices are due/overdue for a rise

[Ferg]

Some good questions and comments. As kiora mentioned, it won't take much of a change in interest rates to harm the financials and covenants. I suspect the vendors of the farms will be the initial tenants.

Any "window dressing" of revaluations will add to the NAV which will add to the management fees, both in cash and shares. I suspect the revaluation will go into an asset revaluation reserve - whilst it might be there for "comprehensive income" it won't be part of retained earnings.

From my brief skim read of the prospectus, all rates and other operational outgoings (including water & maintenance) are to be borne by the tenant. I also think any capex is pre-agreed with the leasee. I reckon the farms are being purchased off the intended tenants, hence due diligence is important to avoid any deferred capex/maintenance traps. NZRLC will want to protect themselves from that so the purchase and lease agreements will be full of all sort of clauses for the benefit of NZRLC, which is a risky proposition for the tenant.

That leads me to my next questions which Snoopy touched on. If the banks are nervous about historic interest only loans in the farming sector, does that mean NZRLC only has a small window of interest only? If so, debt repayments will consume a large proportion of future FCF which will hamstring any dividend returns. If not, then that doesn't solve the issue for the bank of the capital not being repaid. Some interesting quotes from the prospectus have been pasted below* which convinces me this is a play for a major bank (BNZ?) to offload some distressed dairy debt onto shareholders.

I see NZRLC will not draw down the full debt facility (p44) - they want to leave some covenant headroom (debt <= 30% of total assets). So this may leave around $2m headroom on the facility - this doesn't significantly change my previous analysis.

So who are the potential vendors of the 19 farms? Are they farms with distressed debt brought to NZRLC by the banker? The prospectus mentioned 19 opportunities, but these are scattered around the country including Southland and Canterbury which, I'm lead to believe, are not naturally good for dairy. Some more disclosure is needed around how these opportunities were identified and any links between the various Management Co Directors and the banker they have in mind (my bet is BNZ given there is more than one connection). If these opportunities were found by the advisors, that is a very scatter gun approach rather than focussing on good dairy country like Taranaki and Waikato.

Qui bono? The farmer gets out of his financial pickle, the bankers reduce their risk, the management agreement is a bed of clover - all paid for by the shareholders.

NB : from here: https://www.nzx.com/announcements/361572 I see the ALF loan will convert to equity so my previous analysis does not change.

*Banking quotes from the prospectus:
p19 "lending appetites have changed within the banking sector and lending is now significantly constrained, particularly to the dairy sector."
p19 "Debt per kgMS has grown from NZ$9.48 in 2003 to NZ$21.99 in 2019."
p20 "Banks are increasingly requiring principal repayments on dairy sector debt"
p20 "More Dairy Farm Balance Sheets are Currently Stressed"
p20 "24% to 30% of New Zealand Dairy farms are classed as highly indebted resulting in a “distressed debt” market size of between NZ$9.94 billion to NZ$12.42 billion"
p20 "High Debt-to-Income farms are struggling to service debt despite strong milk prices"
p24 banks have been "tightening credit to dairy farmers"
p45 "From the rental income NZRLC receives it intends to meet its operating costs, service bank debt and pay dividends." So there is no interest only loan for NZRLC.

In conclusion, this feels like a play for a banker to offload their debt and risk to shareholders. What will be interesting to know is which bank benefitted from the sale and lease-back of each property. I ask again, who are the Directors working for?

[kiora]

In my view an equity partnership is a better vehicle to invest in the rural sector as all the stake holders are better aligned but even with EP there is a lot of snake oil
The major downside of EP is the lack of liquidity for exiting partners
http://www.stuff.co.nz/business/indu...-raising-money
There has been more interest in horticulture EP in the last few years as the returns have been a lot higher (25% for cherries?) than pastural farming or dairying

I wonder how this is living up to its promises
https://www.myfarm.co.nz/central-cherry-orchard

And then there is Rocket apples, hops and kiwifruit

[RTM]

Thanks for this Ferg and others. I to have received several invitations to invest, had not intended to and the comments above confirm my decision.

[Nigel]

I hold ALF and am more comfortable being on that end of the equation. 5 million shares at $0.50, and if NZRLC goes ahead, a good stream of fees in perpetuity. ALF still has a market cap of only $12m, is profitable and pays a dividend.

[nztx]

Has anyone compared a lucky fortunate shelling out 4.5% on a farm lease to NZRL (likely more on top)
and not enjoying ownership / gains on it for the duration

WITH

The same Lucky Fortunate instead Buying the Sticks & perhaps paying (I dont know what rural lending rates look like)
but lets guess - 3% say - with ingoing Deposit / initial ingoing seeing help from wider family resources up to fair deposit ?


Presumably extras / outgoings in turn see the lucky fortunate in future leasing NZRL Dirt being hit over the head with
a Long Batton to cough up, in the same way as if he owned the block (with a large mortgage)

Based on this -

Who in their right mind would be wanting to LEASE some Dairy dirt for 10 YEARS from NZRL ?

Am I missing something here ?

Let's face it - NZRL buying farms with no-one wanting to Lease them = Scheme No work

NZRL not buying Farms because No Farmer interest in future leases of them = Scheme No work either

NZRL offering extra long term incentives to Farmers to make Leasing more attractive = Scheme No Work well either

(How thin are NZRL's margins after those huge management & other fees again ? )


Obviously ALF really like the scheme - and may also get to potentially clip the ticket in multiple ways via other
livestock & other activities they operate..

Many could be forgiven for having reservations on whether NZRL will actually fly or founder or even taxi on the runway;
or indeed wind up costing occupants in a number of different sets of seats a good sting in the tail & disappointment ..

When erecting structure made from stack of cards, always prudent to ensure bottom cards do what is intended

Does the NZRL Scheme actually pass the test ?

Does anyone know ? or are the eager punters all throwing bucks in the air on no NZRL Projected figures in hope ?

In any event - why is ALF's "arrangement" suggesting it allows for withdrawal / refunds - you name it, if the grand
scheme of things doesn't happen ? .. surely they should have more faith in things than that, before expecting & directing
further stakeholder funds raised along with ALF resources to be thrown at NZRL ?

[Snoopy]

Has anyone compared a lucky fortunate shelling out 4.5% on a farm lease to NZRL (likely more on top)
and not enjoying ownership / gains on it for the duration

WITH

The same Lucky Fortunate instead Buying the Sticks & perhaps paying (I don't know what rural lending rates look like)
but lets guess - 3% say - with ingoing Deposit / initial ingoing seeing help from wider family resources up to fair deposit ?


Based on this -

Who in their right mind would be wanting to LEASE some Dairy dirt for 10 YEARS from NZRL ?

Am I missing something here ?

What you are missing is that, pre-Covid at least, the market for farms in some regions was so bad that there were no sales at any price. Banks were under pressure from their Australian parent banks to wind back rural lending, and most importantly get those farmers to pay back some principal as well as interest. So no new finance was available at all - cash buyers only - which obviously severely restricted the pool of buyers and froze the market. That means purchasing a farm for almost all was not an option.

A leaseholder does not have any obligation to repay principal. So there is likely a cashflow advantage for the lessee. A ten year lease is probably a good thing as it likely will ensure you have at least a few very good years across the commodity cycle and you can't be thrown off 'your' land by some Johnny come lately wanting to jump in on your lease as the commodity cycle turns.

SNOOPY

[WAIKEN]

i agree with you Snoopy.
I know a number of diary farmers well. They have all made tens of millions in profits and capital gains over the past 30 years and expect to continue that wealth accumulation. They all have a problem of getting market value for their enterprises when wanting to retire.
The 20 million dollar plus farms are increasingly going to corporates. NZRL is a unique corporate structure removing the operating risk.
Over time they will purchase other types of land use as forestry and horticulture.
In the long run many of their properties near growing population centres are likely to be able to be subdivided.
NZ has a growing population. Land is a scarce commodity.
I believe this is a very clever structure which will give a good dividend return and excellent capital gains in the long run for those wanting a smaller slice of the rural money pot. Clever ideas often appear simplistic eg Trademe or Facebook.
The Aussie banks don't give a toss about their own farmers let alone Kiwi farmers. They will provide a steady stream of well priced land for NZRL

[kiora]

If they are buying dairy farms why are they not putting on 50% sharemilkers.
A far better return I would have thought?