June 13, 2023

Merricks Capital Partners Fund Portfolio and Market Update May 2023


The Merricks Capital Partners Fund (the Fund) returned 0.7% in May and 10.2% on an annualised basis since inception. Underlying loan performance returned 91bps for the month, with floating rate loans benefiting from cash rate increases in New Zealand (+0.25bps) and Australia (+0.25bps). The Fund’s credit default swaps and FX hedging detracted 15bps as credit spreads pulled back sharply in the last week of May with a bipartisan agreement to the US debt ceiling limit reached.

The global macro investing environment remains highly uncertain despite the US debt ceiling agreement. The US saw some positive news, inflation fell below 5% for the first time in two years (12 months to April) (Bloomberg). While domestically, Australia’s headline inflation climbed to 6.8% in April, exceeding economist forecasts and the March reading of 6.3%. Bond markets reacted sharply to the inflation data, with yields on AUS 2yr bonds increasing by 51bps (3.55% from 3.04% a month ago) (Bloomberg), indicating that bond markets now expect rates to stay ‘higher for longer’. Higher rates and persistent market volatility increase the systematic risk in credit markets and highlight the importance of the Fund’s cost-effective credit insurance.

In May, the Fund settled three new investments. The first is a new loan amalgamating three existing commercial real estate facilities and taking an additional $15m of borrower security to reduce the LVR to 63%. The second is a 0.9% of FUM allocation for a senior land facility in Morisset, NSW. The site has development approval for an 11-unit industrial goods site. The third settlement is a 2.4% of FUM allocation for a borrower acquiring the iconic Lindrum Hotel site in Melbourne’s CBD East End that has development approvals. The weighted average of May settlements is forecast to return investors 11.3% IRR (after fees and costs) at an LVR of 65%. One loan was repaid in May, an $8m loan funding a New Zealand commercial real estate development north of Auckland.

During the month, the Fund’s $23m investment in the Melbourne Place Hotel project successfully gained approval for Merricks Capital to enter into a Deed of Company Arrangement (DOCA) to obtain control over the project’s development going forward. The expected economic returns of the project are currently forecast to provide a full return on total debt to the Fund via sale of the debt or property. Merricks Capital will manage the project’s delivery in partnership with a highly qualified project management team with leading hospitality and hotel experience. As a sector, hotel performance in Australia’s capital cities continues to strengthen as domestic tourism levels remain high and average room rates rebound to pre-pandemic levels. In March, hotel occupancy rates reached 77% in Melbourne and 85% in Sydney (STR).

Two agricultural loans received property sale contracts during the month as part of structuring upcoming loan exits; one sale contract for $30m on Riverina assets that will result in full repayment of the $29m facility and the other contract for $16m on land in Western Australia that will be a partial repayment and reduce that facility’s ongoing LVR to below 40%.

Over $900m of new opportunities across residential, commercial mixed-use, residual stock, horticulture and specialised infrastructure are currently in due diligence. We continue to be highly selective around capital deployment, with funding demand outpacing supply across the market.

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