The Merricks Capital Partners Fund (the Fund) returned 0.6%* in September and 10.1%* on an annualised basis since inception.
While the RBA held rates, markets are still pricing in 80bps cuts over the next year. The Fund’s macro credit hedging cost was higher in September due to semi-annual contract rolls (CDS -8bps). Higher FX hedging cost this month (-6bps ) was attributed to the mark to market of flattening AUDNZD forward curve driven by aggressive rate cuts expectation by RBNZ. In the long run, the reversal on AUDNZD forward rates will allow the Fund to capture higher performance on NZ loans over time given the positive FX carry (rate differential to hedge NZD back to AUD).
Performance for the month was impacted by recognising the cost associated with the sale of Happy Valley Nutrition by the Administrator and the ongoing decision to not accrue interest with funds
deployed in association with the completion of Melbourne Place Hotel. The construction of the hotel has run 12 months behind schedule but pleasingly is expected to hit practical completion at the end of October, allowing the hotel to open in November. There are ongoing discussions with potential purchasers which would release significant capital to redeploy more productively. It is anticipated that a sale process will recover all principal and 4-5% effective IRR during the life of the loan. Whilst these two loans have been challenging it highlights that in the odd case when the manager has to enforce on real estate-backed credit, the downside risk can be limited to a lower IRR during the life of the loan as opposed to any principal impairment.
During the month, the Fund received a NZD$7.2m repayment (0.5% fund allocation) from the 51 Albert Street, Auckland (30 apartments and Indigo Hotel) loan facility following the settlement of 16 presold apartments in the mixed-use residential and hotel development. A further six apartments are scheduled to settle in October with a full repayment on track for mid-2025. Whilst this development was also dramatically delayed by COVID era related build challenges the effective interest rate on this loan will be well above expectations.
We are currently assessing $750m in new investment opportunities across the residual stock, hotel, meat & livestock and horticulture sectors. In the residential space, we are in advanced due diligence on our first loan in the emerging build-to-rent (BTR) sector after monitoring broader market acceptance of the product by institutional buyers and tenants. The project is located in inner-city Melbourne and local market conditions are very supportive. The loan is expected to deliver a net return of 11% to investors and will fund the construction of 348 residential apartments across two 14-story towers. Each tower will feature amenities spread across six podium levels, including ground-floor retail spaces.
*These returns are stated net of fees and costs
