Rural Funds Management Limited (RFM) as responsible entity for the Rural Funds Group (RFF) is convening a general meeting so that you may consider changes to your investment in RFF. For important information please read below.
RFF Stapling and Constitutional Amendments
1. Why are we being asked to vote?
RFM as the Responsible Entity would like to make some changes to the Rural Funds Group (RFF or the Fund). In order for Unitholders to consider the changes the Responsible Entity has convened a meeting on 8th October 2014. Two resolutions will be considered at that meeting.
2. What changes are being proposed?
The first resolution considers the adoption of a new Constitution.
The rules that set out the management of RFF and its relationship with Unitholders, are contained in the Constitution. The current RFF Constitution was suitable while RFF operated in the unlisted environment, but it requires significant updating now that RFF is listed on the ASX.
In addition, the Responsible Entity is recommending that RFF assets be held in two trusts, and that the units in these two trusts are stapled. This change, known as stapling, is included in the new changes to the new RFF Constitution.
It is proposed a new trust called RF Active will hold the small amount of “active” or operating assets, whilst the vast majority of RFF’s assets, known as passive assets, remain in RFF.
The separation of active assets and passive assets into separate trusts allows each trust to adopt a different risk profile and be treated differently for taxation purposes. This structure is consistent with the structure adopted by many listed real estate investment trusts (REITs) where development or operating assets are contained within one structure and the passive leasing assets are contained in a separate but stapled structure.
The final change as set out in resolution 2 is a change to the Responsible Entity’s fees. The Responsible Entity is seeking to remove the Acquisition Fee it is entitled to charge that is contained in the current Constitution and replace it with a Termination Fee. Details of this fee change are contained in questions 14 and 15.
3. Why are RFM’s Directors recommending we vote in favour of the Resolution 1?
The Directors believe it will be beneficial for Unitholders if a new updated Constitution is adopted and RFF adopts a stapled security structure. The new Constitution provides for more efficient operation in the listed environment. The stapled structure separates the passive assets and the operating assets into separate entities. This separation allows the entity which holds the passive assets which comprise a majority of the assets of the stapled group to continue to adopt a flow through tax treatment. This structure will allow Unitholders to continue to receive distributions from RFF on a pre-tax basis.
The Directors are not able to provide a recommendation regarding Resolution 2 as this resolution considers fees payable to RFM as Responsible Entity.
4. What is a stapled security?
Stapled securities are created when the securities from two separate investment vehicles such as two trusts, or say, a company and a trust are contractually bound together so they cannot be bought or sold separately.
In this case, a stapled security will consist of one of your existing RFF units contractually bound to one RF Active unit. This means if the first resolution is passed you will continue to hold the same number of RFF units, but for each RFF unit you hold, a unit from RF Active will be bound to that RFF unit.
As the holder of a stapled security you will be a Unitholder in both RFF and RF Active in the same proportion as you are currently a Unitholder in RFF. You will be entitled to attend meetings of RFF and RF Active, receive financial statements and distributions of income and capital from both RFF and RF Active in the same proportion that you currently receive from RFF.
The combined group will be known as the Rural Funds Group. The Rural Funds Group will trade on the ASX as RFF.
5. What is RF Active?
RF Active is a new trust that has been established to house the small amount of active assets, being units in RFM StockBank currently owned by RFF and plant and equipment used for farming recently owned by the Fund.
6. Will this change my investment value?
No. No significant assets are being bought or sold outside of the Fund thus the stapling will not change the net asset value of your units.
7. Will my number of RFF units change?
No. You will receive one unit in RF Active for every unit you currently hold in RFF. That is, if you hold 100 units in RFF before stapling you will receive 100 units in RF Active and these will be stapled.
8. Will I still get distributions?
Yes. RFF will continue to pay quarterly distributions.
9. Do both Resolutions need to be approved to proceed?
No. Only Resolution 1 must be approved for the stapling to proceed.
10. What is the process if Resolution 1 is approved?
If Resolution 1 is approved, Rural Funds Group will adopt the new updated Constitution. Following this, and so that the stapling can take effect, all Unitholders will receive a notional distribution of $0.01 per RFF unit which will used to automatically subscribe for units in RF Active. Each Unitholder will receive one unit in RF Active for each unit they currently hold in Rural Funds Group.
As the final step, Rural Funds Group will be renamed Rural Funds Trust. This change of name is proceeding so the stapled group moving forward can adopt the name Rural Funds Group.
Each unit in RF Active will be stapled to a unit in Rural Funds Trust (formerly Rural Funds Group). The Stapled units will be listed on the ASX and trade as RFF.
11. Will trading be suspended during the allotment period?
The last day of trading for existing RFF units is expected to be 9 October 2014. Trading of stapled securities will begin on 10 October 2014 on a deferred settlement basis. RF Active units will be allotted on 15 October 2014 with statements mailed to Unitholders by 21 October.
Units can be bought and sold during the deferred settlement period (10 – 21 October), however settlement will not occur until normal trading recommences on 22 October 2014.
12. What is the process if Resolution 2 is approved?
The Rural Funds Trust constitution and the RF Active constitution will be amended to remove the acquisition fee currently payable to Rural Funds Management and include the termination fee that is payable to Rural Funds Management.
13. Will my HIN/SRN change?
No. The new stapled units will be issued under your existing HIN/SRN.
14. What is the termination fee proposed?
A termination fee is proposed to replace the acquisition fee currently payable under the Fund’s constitution. The acquisition fee is 2% of the total purchase price of any assets acquired by the Fund. The termination fee is equal to 1.5% of the gross asset value of the Fund.
15. When is a termination fee applicable?
The termination fee would be payable to RFM only in the event that it was removed as Responsible Entity of the Fund, other than for failing to properly perform its duties.
The Fund is the Responsible Entity’s major client and if it was removed as Responsible Entity it would mean that the business would have to downsize accordingly. The fee would be applied to cover the costs of paying out office equipment, leases, staff redundancies and similar expenses.
16. Do I have to pay the termination fee?
The termination fee will not be deducted directly from your account however it is payable from the Fund’s assets.
17. Will the Stapling mean I have extra record keeping requirements?
Boardroom Limited manages the unit registry for the Fund and will continue this role after stapling. Boardroom will issue a new holding statement by 21 October for the Stapled Securities and this will detail your holding in Rural Funds Trust and RF Active. You will receive a consolidated tax statement and distribution statements throughout the year.
18. What is the tax treatment of distributions from the Rural Funds Group?
A stapled security is made up of a unit from Rural Funds Trust (previously RFF) and RF Active. Each trust is expected to attract different taxation treatment.
The vast majority of earnings will flow from the Rural Funds Trust (previously RFF). The revenue stream of this entity is passive in nature being predominately rental income. Any distributions are expected to continue to be made on a pre-tax basis. This means that each Unitholder will include their share of the Fund’s net taxable income in their assessable income each year.
Distributions paid by RF Active are expected to be taxed at the corporate tax rate which is currently 30% before being distributed to Unitholders. These distributions may or may not be franked. The tax consequences of distributions made by RF Active are determined at the time of distribution.
Full details regarding taxation information will be supplied with each Unitholder’s annual taxation statement. If you are unsure about how this applies in your own personal circumstances you should contact your professional taxation adviser.
19. Who will manage the Stapled group?
RFM currently manages RFF and will manage the stapled group as Responsible Entity.
20. What is the net asset value (not market value) of the Stapled Securities?
The net asset value of the Stapled Securities is $137.5million or $1.17 per unit based on the 30 June 2014 audited financial statements.
21. How will Stapled Securities be traded?
After stapling the units will trade as Rural Funds Group under the ASX code RFF.
22. What changes are being made to the Constitution?
The current Constitution of the Fund was prepared over 10 years ago and on the basis the Fund was not listed on ASX. The purpose of Resolution 1 is to update the Fund Constitution to make it more consistent with a listed Real Estate Investment Trust (REIT) constitution and give effect to the stapling.
Other than as set out in Resolution 2 (termination fee) there is no change in the current fee structure as a result of the proposed changes under Resolution 1.
A summary of the changes in the Constitution are contained in the Explanatory Memorandum on pages 11-21.
23. What is happening with Foreign Members?
Due to the costs of compliance it is prohibitive to make the stapling offer to RFF Unitholders who reside in countries outside, Australia, New Zealand, Malaysia, Hong Kong and the United Kingdom. Where units are held by Foreign Members, the Responsible Entity will appoint a Sale Nominee to receive the distribution from the Fund, subscribe for RF Active units, and once stapling is completed sell the Stapled Securities and then remit the proceeds to the Foreign Members. As at 30 June 2014 Foreign Members represented less than one third of one percent or 0.32% of the total units on issue.
Dispatch of Notice of Meeting, Explanatory Memorandum and Product Disclosure Statement to Members - 15 September 2014
Last date for lodgement of proxy forms - 6 October 2014 (by 10am AEDT)
Meeting of RFF Members - 8 October 2014 (10am AEDT)
If Resolution 1 is approved
Last day of ASX trading of Fund units - 9 October 2014
Deferred settlement trading of Stapled Securities begins - 10 October 2014
Record Date – Last date for registration of transfers of Fund units - 14 October 2014
Stapling commencement date – New RF Active units allotted - 15 October 2014
Dispatch of holding statements for Stapled Securities - 21 October 2014
Stapled Securities commence trading on a normal (T +3) settlement basis -22 October 2014
25. Why do the management costs in the RF Active PDS in section 5.10 appear higher than normal?
The combined group has an annual management cost of 2.25% per annum.
RF Active has been established to house the very small amount of active assets owned by the combined group. Due to its very small size and gearing level, the management costs are 8.42% p.a. when measured on the net asset value of RF Active which is approximately $1m.
26. What happens if resolution 1 is not approved?
If Resolution 1 is not approved the Fund will continue in its current form and the Responsible Entity will continue to manage the Fund for the benefit of Members.
27. What happens if Resolution 1 is approved and Resolution 2 is rejected?
If Resolution 1 is approved and Resolution 2 is rejected, the Fund constitution will be amended and the stapling will proceed as outlined in the Explanatory Memorandum. However the Acquisition fee will remain in the Constitution and the Termination fee will not be inserted as outlined in the Explanatory Memorandum on page 21.
28. How do I vote?
A proxy form is included in the package that was mailed to Unitholders on 12 September. You should complete the form, sign where indicated and return the form by mail, email or fax by 10am on Monday 6th October 2014. If you need assistance with the form, please contact RFM Investor Services on 1800 026 665.