Rural Funds hits back at short seller Bonitas

Australia's most experienced agricultural fund manager has entirely rejected claims made by a Texas-based short seller whose report into the company sent its shares into freefall yesterday.

Bonitas Research, an entity set up by Glaucus Research founder Matthew Wiechert who was responsible for similar attacks that prompted the downfall of Blue Sky Alternative Investments and sandalwood producer Quintis, made numerous allegations against Rural Funds Group (ASX: RFF)

These allegations included claims RFF inflated reporting of its rental revenue from almond growers, and that the fund was used as a vehicle to "siphon" money to its manager Rural Funds Management (RFM).

The American company also claimed RFF's assets should only be worth half the $532 million as reported for 31 December 2018.

The results of Bonitas' self-described activism weren't pretty here in Australia, with RFF losing $335 million in value after its shares fell.  This represented 42 per cent of the farmland owner's market cap, and prompted a trading halt. 

RFF waited almost an hour after ASX trading had closed before issuing its rebuttal today, hitting back at Bonitas over nine specific statements.

"RFM rejects entirely the unfounded allegations of financial impropriety and irregularity contained in the Document and is obtaining legal advice in respect of those matters," the company said, noting it had engaged Ernst & Young to independently investigate. 

UPDATE: Rural Funds founder: "I will be buying shares"

One of the more explosive claims in the document was the allegation RFF had "fabricated" rental income of $28 million from its two largest third-party lessees, almond producers Select Harvests (ASX: SHV) and Olam Orchards.

Business News Australia has reached out to both these growers for comment but is yet to receive a response.

RFM says the claims about lessee rental payment discrepancies and an inflation of net asset values are incorrect.

"The Bonitas reading of the accounts of third-party lessees is mistaken. All rental income recorded in RFF accounts, including that relating to third-party lessees is accurate," the company replied.

"RFF's accounts are audited and are an accurate record of the financial performance and financial position of RFF."

In its report, Bonitas had slammed RFF's auditor PricewaterhouseCoopers (PwC) for missing what it saw to be issues with the business' assets.

"Another ineffable fun fact: PwC audited RFF, SHV, RFM, and each of RFM Related Funds yet failed to catch RFF Management including fake rental income on RFF's reported financial statements," the US fund said.

The short seller also questioned RFF's and RFM's handling of a transaction in relation to a cattle property.

"RFF's largest nefarious transaction appeared as an undisclosed dividend recapitalization of RFM's newly acquired cattle asset, J&F, which included a A$ 30 million special cash dividend paid to RFM financed by borrowings backstopped by RFF's A$ 75 million financial guarantee to J&F," Bonitas said in the report.

In its response, RFF also said this statement was incorrect.

"The ending capital structure of J&F and the guarantee were exactly as described to investors in the equity raising document and the member meeting documentation provided in July 2018," the company said.

"The guarantee was considered fair and reasonable by an independent expert and due to its related party nature, approved by RFF unitholders.

"RFM did not benefit from a $30m special dividend, rather it was repaid $30m it outlaid to acquire J&F."

RFF has also hit back at Bonitas over claiming a $14.5 million loan to an RFM-related macadamia lessee "inexplicably did not appear on the lessee's balance sheet".

"The RFF 31 December 2018 accounts contained a table formatting error in Note E2, p31. The table incorrectly lists a loan to the 2007 Macgrove Project of $14.463m," RFF responded.

"The correct figure is $0.008m. This error is confined to this table only and does not flow through to, or alter, the accuracy of RFF's 31 December 2018 Financial Statements."

Another issue raised by Bonitas, in reference to $14.5 million

The Bonitas report alleged an "incestuous" relationship exists between RFF and Rural Funds Management (RFM), claiming this amounted to conflict of interest between the two.

It pointed out RFM's largest shareholder (78 per cent) and managing director David Bryant is also a director at RFF, in which he holds 4.31 per cent.

Bonitas also noted the overlap for Guy Paynter as RFM non-executive chairman and RFF director, and Michael Carroll as RFM non-executive director and RFF director and audit committee chairman.

"If you were in RFF Management's shoes, which entity would you care about? Which entity would you work for? The entity that you own shares of and pays you compensation? Or would you prioritize the entity that you barely own that pays you zero compensation?" Bonitas asked.

"To us, this immediately appeared as a clear conflict of interest between the incentive structures of RFF Management versus RFF minority shareholders.

"We highlight two specific transactions that appear to have resulted in A$ 45 million in cash into RFM and RFM Related Funds for the exclusive private benefit of RFF Management."

The report also sought to raise doubts with regards to Carroll's position as a director at Select Harvests (ASX: SHV) in addition to his roles at RFF and RFM.

RFF was dismissive of Bonitas' conflict of interest allegations.

"RFM is the responsible entity of RFF and holds an Australian Financial Services Licence authorising it to operate RFF," the company said.

"RFF does not have a board of directors. This structure is common amongst Australian REITs and other managed investments."

The final point RFF addressed was Bonitas' encouragement of "those with authoritative power" to contact David Bryant's former company secretary Andrea Lemmon, who it claims "abruptly resigned in August 2018 after 21 years of working with David Bryant since RFM was founded in 1997".

"Andrea Lemmon was a former director of RFF and RFM and involved as the spokeswoman featured in numerous RFF capital raising promotional videos," Bonitas said, but did not elaborate further.

However, RFF rebuts the 'abrupt' nature of the resignation, claiming Lemmon advised David Bryant of her plan to retire in 2015.

"Andrea and other RFM staff then planned and managed her succession over a two-year period preceding her retirement in October 2018. Andrea continues to hold a significant unitholding in RFF," the company said.

Business News Australia