Farm syndicator MyFarm sees pre-tax annual returns of up to 12% including some capital gains

By Gareth Vaughan

Farm syndicator MyFarm is putting proposals together that forecast annual returns to investors of up to 12% per annum before tax, including some capital growth.

MyFarm director Andrew Watters told interest.co.nz that although this was down on the more than 17% annual returns MyFarm had delivered in the years leading up to 2008 which included "quite a lot" of capital growth based on rising farm prices, the current forecasts also included some capital growth assumptions.

"We’re putting proposals together that forecast 10-12% returns (per annum) made up of 7-9% cash and a bit of capital growth based off productivity gains," Watters said. "Everyone, whether they liked it or not, was on a capital gain bandwagon pre-recession. Post recession everybody’s looking for dividends."

MyFarm currently runs about 30 farms at a cost structure of between NZ$3.50 and $4 a kilogramme of milk solids, Watters said, adding costs were a bit higher this year due to storms and higher sharemilker returns due to increased dairy payouts.

"We’re getting income of around NZ$7 (per kilogramme of milk solids) for the cashflow year," Watters, who is himself a Wairarapa dairy farmer, said. "The surpluses are somewhere between NZ$2.50 and NZ$3.50 depending on the farm."

Major farm buyer, Crafar interest

Farm sales data obtained by interest.co.nz shows MyFarm bought at least eight farms last year, including five deals that were finalised in December alone, for a total of NZ$73.4 million. Of the farms bought, seven were either dairy farms or will become part of dairy farms, one was a sheep farm, and six were in Southland and two in Canterbury.

The farms MyFarm buys have generally been impacted by "life type issues" such as deaths and divorces, or where another purchaser hadn’t been able to close the deal, said Watters.

MyFarm hadn't bought any farms in mortgagee sales, Watters added, suggesting banks were more inclined to appoint receivers who were "very difficult to deal with and not particularly responsive."

For example, MyFarm had "played a small part" in the Crafar farms tender process, run by receiver KordaMentha, which hadn't seemed "all that motivated to sell" some of the farms.

MyFarm would possibly still be interested in "one or two" of the Crafar farms and Watters suggested KordaMentha would have been able to sell several of the Crafar farms by now if it had been more inclined to sell the farms off piecemeal.

Instead, KordaMentha struck a deal conditional on Overseas Investment Office approval to sell 16 of the Crafar farms to Chinese firm Natural Dairy. This was blocked by the Government just before Christmas as was a retrospective bid by Natural Dairy's sister company UBNZ Assets Holdings, which bought four other Crafar farms last February.

The Crafar farms collapsed into receivership in October 2009 owing about NZ$216 million to lenders Westpac, Rabobank and PGG Wrightson Finance after interest.co.nz revealed animal welfare issues at the farms.

Millions of dollars raised from 'eligible' investing members of the public

Watters says MyFarm will have raised about NZ$44 million from the public over the past year assuming its latest offer, Peaks Dairy which is forecasting annual pre-tax cash returns of 8%, manages to successfully raise NZ$7.5 million. He expects the offer to close within the next few weeks, after failing to do so by its initial December deadline.

That NZ$44 million is close to the total amount of money raised in the two sharemarket floats last year - candle maker Ecoya and DNZ Property Fund - which combined raised about NZ$52.2 million.

The Peaks offer is for a dairy conversion in Canterbury. Up to 25 investors are being sought to tip in NZ$250,000 each. As with most property syndication offers the MyFarm offers don't require MyFarm to issue a prospectus but investors must be "eligible" - effectively wealthy and well informed - as defined by the Securities Act.

Watters said MyFarm's investors' in 2007-08 were dominated by dairy farmers looking to leverage their so-called "lazy equity" and invest in farm syndicates. Now they're more likely to be repeat investors, retired farmers who sold at or near the peak of the market three or four years ago and want to get back in at lower prices, sheep farmers looking to diversify their investment away from just sheep and beef, wealthy New Zealanders, ex-pat Kiwis, and some overseas investors. German company Aquila Capital also has some "small shareholdings" in a number of MyFarm syndicates, Watters added.

Watters said MyFarm's "dairy equity partnership model" leverages its directors' knowledge. "But rather than using our own money and taking big risks to do it, we’re using other people’s money," said Watters.

He suggests 1 or 2 cents in every investment dollar could be invested in agriculture. "And there are not many mechanisms to do that."

"With the commodity price boom, dairy being a pretty good product and in high demand, maybe that 1 or 2c will become 2 or 3c," Watters added.

'Conservative' use of debt; 'Good relationships' with ASB, Westpac and the National Bank

MyFarm's latest investment will be funded with debt to the tune of 21%. In the past the firm has typically used 35% debt, Watters said.

"We’ve hardly noted any changes in bank finance or bankers views of us and our proposals," he added. "We received good loan proposals from Westpac, ASB and the National Bank for Peak (he wouldn't say which bank MyFarm was ultimately likely to borrow from). We have good relationships with all of them and have banked with all of them."

MyFarm hadn't experienced problems accessing debt because banks saw the firm as a "good client with a conservative balance sheet and good track record." Meanwhile, Watters estimated MyFarm only used vendor finance it about one in 10 deals.

'Good time to buy'

Now was a good time to buy farms with prices below average levels relative to historic income. That said, Watters acknowledged the rural sector and dairy industry in particular was heavily weighed down by debt.

The latest Reserve Bank data shows rural sector debt at NZ$48.030 billion in November, up slightly from NZ$48.017 billion in October and up NZ$723 million, or 1.5%, from NZ$47.307 billion in November 2009.

"If debt levels are $21-$22 per kilogramme of milk solids produced, (then) if they got down to $17-$18 the industry would be in a lot better heart," said Watters.

As for farm prices he said MyFarm reckons in Southland they probably bottomed out in 2009 and since then have increased by between 1% and 3%.

"Our expectation is that the market will be flat."

The December farm sales figures from the Real Estate Institute of New Zealand (REINZ) show 30 dairy farms sold in December, almost matching the 31 dairy farms sold in the six months from June to November last year. It was the most dairy farms sold in one month since 41 in May 2008. REINZ said a total of 96 farms were sold in December, up from 93 in December 2009 but down from 128 in December 2008.

REINZ rural market spokesman Peter McDonald told interest.co.nz that banks were back in the market helping finance deals for the more well to do buyers and vendor finance was helping get smaller deals over the line. McDonald said he wasn't aware either of banks owed money by a vendor specifically helping buyers with finance or of any mortgagee sales in December.

"The larger, well established people are getting good support from the banks. It’s the ones at the bottom end of the market that are struggling. That’s where the vendor finance is playing a part," said McDonald.

REINZ said from NZ$968,500 at the end of November last year, the national median farm sale price rose to NZ$1,150,000 for the three months to December 2010. That's a 15% increase on the median of NZ$1,000,000 for the last three months of 2009, but still well below the median of NZ$1,525,000 for the equivalent period in 2008.

Securities Commission urges caution on property syndicates

Responding to a Securities Commission warning about property syndication, notably that they can be an illiquid investment and difficult for punters to exit, Watters acknowledged there was "no doubt" there was less liquidity than in a lot of other investments.

"So people need to be aware of that when they go into them and understand it’s a longer term investment."

He estimated MyFarm investors wanting out should be able to sell within three to six months.

 "We've got five or six share sales at the moment across our syndicates and we would expect to be able to transact all those this year, most within the syndicate but some external share purchases as well."

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