New Zealand Rural Land Co: NZX Latest IPO
The latest IPO to the New Zealand Market, the New Zealand Rural Land Company (“NZRLC”) is currently building its book as it moves towards initial Listing date 18th December.
NZRLC is looking to acquire rural land throughout New Zealand, which it will then in turn lease back to Farmers to operate, essentially becoming a Landlord. Its current cap raise target is set at $75 million to a maximum of NZD$150 Million at a fixed price offer of $1.25 per share. The Offer Closes on Friday (11 December) and is being led by Jarden. What this listing will do is provide investors with exposure to rural land and its capital gain increases. It will also receive monthly rental payments with a targeted lease yield of 4.5%, it will not purchase land until agreements are in place with large scale dairy farm tenants, so no risk of untenanted properties.
A number of factors are currently benefiting NZRLC, which include underlying commodity prices, tenants are able to achieve a good farmgate milk price, which in turn should positively effect land prices in the sector. But Milk prices are cyclical and will not always be strong.
By NZRLC account existing owner-operator dairy farm balances sheets are relatively stressed with debt-to-asset growing from 42% in 2009 to 52% in 2018 (with ~24-30% of Dairy farms now classed as highly indebted). The thought that these farmers would move to a lease property seems contradictory to there business model, if milk process are good and subsequent land price increase continues, surely these balance sheets will move to a more stable position in the short to medium term naturally.
New large scale farm purchases are becoming harder, locally banks are reducing credit appetite for rural lending to operators, and the Overseas investment office have significantly reduced foreign ownership in the area so this will play into the favor of NZRLC, and while this is the first operator to list on the NZX in the area, there are other players, Rural equities which trades in the USX (unlisted Stock Exchange), at a current share price of $5.08 NZD, currently has a holding of 17 properties, not all dairy, comprising of over 6,500 hectares. While private company Dairy Holdings Limited, claim to have over 59 dairy farms currently.
This is hard to look past from our perspective, NZRLC assets will be managed by New Zealand Rural Land Management Limited, which is in essence is the directors of the listed companies (50%) and 50% Allied Farmers (ALF.nz, currently trading at $0.70 NZD)
This separate management company will charge the listed company a number of fees, made up of, Management fee 0.5% annually, a Transaction fee of 1.25% at both acquisition and divestment, a $30,000.00 lease fee for each lease entered into by NZRLC and a 10% performance fee in increase in net asset value (NAV).
So, we thought we would run some numbers:
According to a REINZ press release in November 2020 “The median price per hectare for all farms sold in the three months to October 2020 was $28,399”* with the average dairy farm size being 133 hectares. If we ignore any costs NZRLC might incur to upgrade or get the property tenantable, our purchase price for the average Kiwi Dairy Farm is
$ 3,777,067.00 NZD Income at stated lease yields of 4.5% $ 169,968.02 (gross p.a.) Less:
Transaction Fee of 1.25%: $ 47,213.34
Management Fee 0.5% (NAV) Annually: $ 18,885.34
Lease Fee: $30,000.00
Total Fees paid $96,098.67 (representing a total charge of 2.543%)
This is clearly rough data but does provide you with an outline of what to expect from the company in the future, then consider they will also reap 10% of any capital gains in asset value, which over a 10-year lease period could be significant income for the management company annually.
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