What is Going on with Rural Funds Group?

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Real Estate Investment Trusts (REITs) are supposed to be one of the more stable investments in the stock market. Their regular and reliable cash flows — typically derived from long term leases — should mean that they are less likely to see a left field event take a hammer to their share price.

However, shareholders in agricultural landlord REIT, Rural Funds Group [ASX:RFF], were left feeling nothing but despair, when its share price fell a whopping 42% in a single day in August. RFF had little choice other than to put its shares into a trading halt.

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What happened?

Up until then, RFF had been one of the steadier REITs on the market. Floating in 2014 at around 80 cents, its share price trebled, hitting a high of over $2.40.

While capital gains are always nice, RFF was also a stock for income investors. Since its float, RFF has paid a steady (and rising) quarterly distribution, generating a handy yield.

All that changed, however, when US-based short seller (and activist), Bonitas Research took a torch to the RFF share price, claiming RFF’s equity was ‘ultimately worthless’. Further, it not only accused RFF of overstating its assets, but also of ‘fabricating’ its profits.

What will happen next?

Fair to say, the short-sell attack by Bonitas Research shook RFF’s management and shareholders to the core. RFF used the trading halt to prepare its fightback, and to get back on its front foot. In a statement released to the ASX, RFF refuted each of the allegations made by Bonitas.

After the trading halt was lifted, RFF’s share price jumped back, opening at around $1.70, trading back above $2 the next day.

Rural Funds Management Limited (RFM) — RFF’s management arm — is seeking legal advice on what to do next. It has also engaged Ernst & Young (EY) to conduct an independent review of RFF’s accounts. When released, that should shed further light on the true value of RFF shares.

However, one question has left observers scratching their heads. To short-sell shares, first you must borrow those shares from someone (or entity) that owns them. That’s because when you sell shares (either from your own holding or short selling), you need to be able to hand them over on settlement day — two days after the transaction.

Who would lend their shares to Bonitas Research, given the damage done to the share price? The fall means they too would have copped it in the neck.

For the moment, the market will await the findings of EY’s report. However, the episode also highlights something the ASX will no doubt be investigating. That is, how do they protect listed companies from such attacks, especially if the claims turn out to be false?

Matt Hibbard,
For, Money Morning

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