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Merricks Capital Agriculture Credit Fund Portfolio and Market Update – October 2023

The Merricks Capital Agriculture Credit Fund (the Fund) returned 0.9%* in October and 10.0%* on an annualised basis since inception.

The Fund was fully deployed during the month with cash <5% of FUM. One new loan settled during October, a 3.8% allocation to the Fund secured against South Australian cropping and grazing assets. The loan facilitated the acquisition of a new grazing property and is structured to reduce debt via condition subsequent asset sales. The loan is expected to return an investor IRR of 11.1% and peak LVR of 47%, with a closing LVR of 29% in 24 months’ time at expiry.

We continue to closely monitor rural land prices. It’s our view that property prices will correct 5-10% from 2022 highs, based on our observed loan book transactions and 1H 2023 having the lowest volume of rural sales in 28 years (Rural Bank). With the weighted average LVR of our agricultural loans at 57%, we’re confident that there’s sufficient equity buffer to navigate any asset price corrections for our loans over the next 12-18 months. For 2024, the Fund’s performance is forecast to deliver investors a 6.5% premium to current 10yr bond rates (approx. 10.7%), returning an equity-like risk premium while taking significantly less risk.

Borrowers seeking to recapitalise balance sheets by transacting rural properties via Sale and Leaseback continues to be popular. Currently 5 of the 21 loans in the Fund have real estate agents engaged to deliver this outcome. The popularity of this strategy shows a willingness from institutional capital, both foreign and domestic, to own the land on key production assets while taking a longer-term view around seasonal outlook than our transitional senior loan capital (1-3 year facility duration).

The Fund’s opportunity pipeline for target sectors increased by $120m during October. There’s significant demand to fund property acquisitions with potential borrowers seeing value at lower price points than 2022 highs and across specialised industrial supply chain assets where working capital has been challenged with inflationary pressures such as labour and commodity inputs. Due diligence continued across $200m of new loan investments with a weighted average LVR of 57% and an investor IRR 11.2%..

*These returns are stated net of fees and costs

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