The Rural Funds Group (ASX: RFF) share price fell over 40% and then went into a trading halt.
Rural Funds Group is a real estate investment trust (REIT) that owns farms and leases them to tenants. Started in 1997, Rural Funds Group now manages $1.2 billion in agricultural assets across New South Wales, Queensland, South Australia and Victoria.
Why Rural Funds Suffered Today
American-based short-seller Bonitas Research has issued a short seller research report on Rural Funds.
Bonitas is a fairly new short selling firm that was founded by Matt Wiechert, who was the co-founder of Glaucus Research.
The idea of short selling is that you are betting a share price will go down because of a reason, or reasons, not yet appreciated by the market.
Some of the allegations by Bonitas include that it had fabricated $28 million of rental income paid by its two largest third party lessee, that it had overstated its net assets by 100% and that the business’ actual net assets figure only amounted to $268 million at 31 December 2018 which would supposedly put Rural Funds in breach of a recently increased minimum $400 million net asset loan covenant.
Some of the other allegations from the short report were as follows: “RFF’s largest nefarious transaction appeared as an undisclosed dividend recapitalization of RFM’s newly acquired cattle asset, J&F, which included a A$ 30 million special cash dividend paid to RFM financed by borrowings backstopped by RFF’s A$ 75 million financial guarantee to J&F. In addition, RFF’s 1H’19 results disclosed that it was owed A$ 14.5 million from an RFM related party macadamia lessee which inexplicably did not appear on the lessee’s balance sheet.”
Rural Funds’ Managing Direct David Bryant has insisted the allegations of fraud are false and that it will respond to each point and give as much disclosure as it can. A response to the ASX is likely in the next day or two.
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Disclosure: Jaz owns shares of Rural Funds at the time of writing, but this could change at any time.
