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Merricks Capital Partners Fund Portfolio and Market Update December 2022

The Merricks Capital Partners Fund returned 0.9% in December and 9.7% for the 2022 calendar year. Underlying loan income performed strongly for the month, 1.0%, with floating rate loans continuing to pass through rising interest rates in Australia and New Zealand. We have transitioned to floating rate loans over the past year. Approx. 70% of our loans now incorporate floating rates, up from approx. 26% at the start of 2022. Credit markets were relatively neutral with the Fund’s Credit Default Swaps detracting 0.1% from performance. The Fund declared a 4.0% distribution for the six months to 31 December 2022.

Rising interest rates in 2022 pushed Australian and New Zealand residential property prices down, with CoreLogic reporting a 5.3% fall nationally across Australian housing in 2022 and further declines expected until central bank rates peak. Within the Merricks Capital Partners Fund, 9 of 55 loans have exposure to residential real estate assets, representing approximately 15% of FUM. Borrower equity represents approx. 36% of the asset value on residential loans with a weighted LVR of 64%. Commercial Real Estate (CRE) asset prices are also demonstrating weaker market demand, with buyers waiting to see if yields increase to match higher interest rate levels. Our view in early 2022 was that CRE asset values across Australia and New Zealand would decline 20-25% from January 2022 peaks.

Two new loans settled in December, a $31m allocation to the Fund financing a 12-month residual stock facility in Box Hill, Melbourne, and a $19m allocation financing a residential property project on the Gold Coast. One loan repaid in full during December, a total loan facility of $82m funding a mixed-farming enterprise in the Riverina region of NSW, the Merricks Capital Partners Fund’s allocation was $46m. Two years of high-yielding cotton crops and strong commodity prices for cotton and beef allowed the borrower to refinance 12 months ahead of loan maturity to a retail bank. The investor IRR was 11.3% (net of fees).

We commence 2023 with $180m of agriculture credit opportunities under term sheet and a total of $746m of commercial real estate investments in due diligence and moving towards financial close.

 

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