The Fund’s loan portfolio remains in a healthy shape after several weeks of communication with borrowers by portfolio managers who were specifically examining for signs of stress.
Pleasing, the trend from last week continues with pre-sold apartment settlements witnessing very few failures; the exception being two retail units in an apartment building that were destined for restaurant use. In particular we have seen surprising demand for completed apartments by owner occupiers in South East Melbourne. The developer of a major land sub-division which is currently financed by the Fund also successfully tested the market by requesting buyers extend the terms of purchase to allow an extension of the facility.
Opportunities are increasingly emerging to refinance completed development projects using residual apartment stock as primary security. New valuations are assessing loan security at significant discount to list prices, and in many cases at or below replacement cost. We expect to deploy more capital into built form assets in the coming months as completed buildings and land contain less risk than construction.
Despite April witnessing near record monthly returns for the Australian equity market we continue to believe lower economic activity, profitability and employment will inflict significant damage on balance sheets of governments, companies and consumers. As a result, we reiterate our core view that “senior debt will be well protected but undiscounted equity in general now offers limited upside”.
With this backdrop our current intention is to:
- Continue lending against assets at conservative LVRs, as we feel the stimulus has averted 30-40% declines in real estate prices but there is no upside to values
- Maintain higher interest rates to take advantage of the limited competition in private markets
Use the bounce in markets to increase our hedge book which will protect against an economic crash, accepting it may have a short term negative impact on Fund performance
- Maintain very healthy cash balances to work our way through any potential delayed or defaulting repayments
- Maintain a preference for financing existing buildings/assets versus construction loans
This week, Merricks Capital has signed two new loan term sheets totalling approximately $50 million of principal to be secured against commercial real estate assets with initial loan to value ranges of 40% and 50% respectively. Importantly both projects are backed by wealthy sponsors. These loans will pass through due diligence in the coming month.
The Merricks Capital Partners Fund continues to perform as expected and our investment strategy remains unchanged.
One small agricultural loan for a Tasmanian horticulture asset closed this week and we expect a lowly geared loan secured by a milk processing facility to close next week. We are still maintaining our cash balance of 15%-20% across the Fund. A negative impact of approximately 0.9% will impact the funds April performance as the value of our portfolio insurance reversed the March gains. The net result for April is still to be determined but accrued interest is likely to be offset by the hedging loss. When March and April are combined performance is in the expected range of 2%.
