The Merricks Capital Partners Fund (the Fund) returned 0.7%* in July and 10.1%* on an annualised basis since inception. The Fund declared a 4.0% distribution at 31 July, which will be paid mid-August.
In July, bond yields consolidated lower amid optimism over potential rate cuts as we entered Q3. Softer than expected Australian Q2 inflation data (0.8% QoQ CPI Trimmed Mean) reduced the risk of higher forward rates on our senior secured debt portfolios. This easing trend was also observed in the EU, Canada, and US with the Fed pricing in 85bps of rate cuts for 2024. ASX finished higher for the month with CDS hedging cost at -12bps in July (FX hedging cost -2bps). Despite this, macro risk signals intensified, with a rapid contraction in the equity risk premium. Consequently, the Fund maintains macro credit hedging positions to mitigate systematic credit uncertainty. One new loan settled during the month, a 0.4% allocation to the Fund ($5.0m) to facilitate a property acquisition for an irrigated cropping business in the Riverina, NSW. The loan is secured against five contiguous farms totalling 3,068ha growing rice, soybeans, and popcorn during summer and wheat and barley during winter. The facility has a peak LVR of 57% and is forecast to generate an investor return of 11.8% IRR (net of fees and costs).
One loan fully repaid during the month, a 2.5% allocation ($30.6m) secured against 10 properties in Auckland, New Zealand (NZ). The property portfolio consisted of six commercial assets with a mix of fully leased retail and office tenants, two small commercial warehouses, and two future commercial development sites. The borrower refinanced the loan facility to an alternate lender at the expiry of the loan term and delivered investors a net IRR of 10.4%. This repayment reduces the Fund’s NZ exposure from 35% to 32% and based on further expected loan repayments happening in August this is expected to be 27% by end of next month.
During the month, the Fund increased its allocation to an existing loan with the settlement of additional properties. The loan has been structured to have interest recognised at repayment in contrast to other loans in the Fund which have monthly accruals. This loan has ability to capture significantly higher interest rates should the borrower deliver on milestones. The complexity of the security including agriculture and residential real estate, as well as mining interests put Merricks Capital in a unique position to underwrite this loan. Due to the uncertainty of this upside, it is deemed prudent to only recognise the interest upon exiting the loan in Q1 2025. The sizing of the loan at 2.6% of the Fund ($32.5m) is appropriate and we do not expect to enter other loans with deferred interest recognition.
Over the next six months, the Fund will continue to see office exposure decrease by 10-15% as existing loans mature, and residential asset exposure increases by approximately 10% as development drawdowns increase on committed apartment projects. We’re currently evaluating $750m in new investment opportunities across residential, commercial mixed-use, mixed farming, dairy, and specialised processing assets and expect the Fund to remain fully deployed for 2024.
*These returns are stated net of fees and costs
