January 11, 2024

Merricks Capital Partners Fund Portfolio and Market Update December 2023


The Merricks Capital Partners Fund (the Fund) returned 0.7%* in December and 10.1%* on an annualised basis since inception. The Fund returned net of hedging 10.2%* for 2023 calendar year, and the hedging strategy detracted approx. 1.3% this year. The hedging cost is forecasted at 0.6% as the macro environment settles in calendar year 2024. This strategy added approximately 1% in the prior calendar year.

The US 10-year treasury yields closed the year at 3.9%, more than 100bps lower than the 5% October peak, and credit spreads tightened during December. Lower yields and the likely taming of inflation should see a more stable macroeconomic environment in 2024, all else equal, and drive a significant increase in hard asset transactions from a multi-decade low base in 2023.

One new loan settled during the month with one of Australia’s largest sweet corn and green beans producers. The loan will represent 1.8% of the Fund with an LVR of 52%. The business has farming properties along the east coast of Australia, from Townsville, QLD to Mafra, VIC. This geographic spread protects against specific weather risks and allows the business to supply the major supermarkets year-round. The recent heavy rainfall events in Far North Queensland did not impact the farms. The 18-month loan is forecast to deliver a net IRR of 11.1% to investors.

The Fund portfolio was unaffected by the December rain events on Australia’s east coast. Minor flooding delayed some orchard CAPEX for an avocado producer near Brisbane, however no existing trees were damaged. A farming asset in Bundaberg did experience a one-week delay when harvesting watermelons.

Liquidity and transactions are starting to increase in New Zealand (NZ), with activity for two key loans in the portfolio expected to reduce the Fund’s NZ exposure to less than 30% by 2H 2024. The first loan is the refinance of a Queenstown development site, reducing the Fund’s allocation to this investment from 3.5% to 1.6%, with the residual loan balance secured over commercial real estate assets in Auckland that will settle within six months. The second loan is the Fund’s largest, with an allocation of 7.9% against secured property assets in Mangawhai, New Zealand, 80km north of Auckland, and a property at Jack’s Point, Queenstown. The borrower executed a key Heads of Agreement to sell the site. A real estate fund will purchase the properties worth around $75m by mid-2024. This will reduce the LVR from 55% to less than 40% on residual assets.

The investment pipeline for 1H 2024 is significant, with over $1.3bn in commercial real estate opportunities under review across new residential, residual stock facilities, hotels and mixed-use projects. We are focused on residential investments in the $75–$125m range, particularly in Residual Stock Facilities, apartment construction and retirement villages. We have over $500m of agriculture real estate opportunities across horticulture, pre-farmgate, irrigated cropping, port infrastructure and food processing. The Fund is underweight in agriculture (~20%) and we’re focused on increasing this allocation by ~10% over the next 12 months to maintain diversification of the portfolio at a time when the sector is capital-scarce due to banks being at sector limits.

*These returns are stated net of fees and costs


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