April 12, 2024

Merricks Capital Partners Fund Portfolio and Market Update – March 2024


Liverpool Plains, NSW

The Merricks Capital Partners Fund (the Fund) returned 0.7%* in March and 10.1%* on an annualised basis since inception.

Loan income was 88 basis points (bps), and the Fund’s credit default insurance cost 12bps for the month as credit spreads tightened. FX hedging cost for NZD loans was 6bps for the month due to roll cost. Narrower credit spreads should reduce the costs for the Fund to maintain its credit insurance protection. During the month, bond markets came to terms with a higher for longer rate environment, trimming rate cut expectations from seven cuts to just three for the US in 2024. 10-year bond yields in the US and Australia have found a consolidated range between 3.9% and 4.3% this year, which we see provides some stability in the valuations of long-duration real estate assets. Conversely, New Zealand appears weaker than the US & Australia, marked by a Q4 2023 GDP contraction and entering a double-dip recession, which may well accelerate the need for earlier rate cuts by the RBNZ.

Two new loans were settled during the month. The first was a residential development project site in Castlecrag, Sydney. The 12-month loan represents 1.4% of the Fund and has a 60% LVR covenant with repayment expected when the borrower obtains construction funding for the project. The second settlement was to fund a mixed farming business with four properties in the highly regarded Liverpool Plains region, NSW. The loan represents 0.4% of the Fund and has a 55% LVR covenant, stepping down to 50% by Q3 2024. One loan was fully repaid during the month, a 1.6% allocation in the Fund secured against an operational hotel in Sydney’s CBD. The $242m mixed-use development project, which includes high-end apartments, for which the construction was financed by Merricks Capital in 2018 and after the hotel had operated for 24 months, it was refinanced by a traditional bank. Also significant to the Fund during the month was the Fund’s largest single loan (8.5% of NAV), executing an unconditional contract for more than $80m of property sales that will reduce the effective LVR from 51% to under 40% by July 2024. The New Zealand based commercial real estate investment is secured by multiple properties, including a town centre and residential land development 80km north of Auckland and a land development site in Queenstown.

The residential shortage in capital cities remains a key thematic, and we expect to see our asset exposure over the next quarter increase to this sector from 11% to above 20%. Due diligence progressed on $870m of new investment opportunities across residential, mixed farming, grazing properties, and specialised processing assets.

*These returns are stated net of fees and costs

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