By Larry Schlesinger, Australian Financial Review, Jul 16, 2023 – 2.55pm
Merricks Capital, the non-bank lender backed by Melbourne’s wealthy Liberman family, expects to raise up to $500 million to expand its agricultural real estate lending amid a pullback from the big banks.
But even as it does so, the lender will take a more conservative approach as drier weather looms for farmers, executive chairman Adrian Redlich says.
The Merricks Capital Agriculture Credit Fund, which launched in 2021 to provide capital for farm acquisitions, returned 10.8 per cent in the 2023 financial year, including a distribution of 8 per cent.
That was higher than the 9.8 per cent the fund has returned on an annualised basis since inception as it benefited from rising interest rates and less competition from banks and other non-banks.
“Based on the current opportunity set, we could raise an extra $500 million and maintain our returns and quality [of our loan book],” Mr Redlich told The Australian Financial Review.
The fund had 21 loans on its books last month worth just under $400 million. Its two biggest exposures were horticulture and meat and livestock.
About $190 million of new loans are now in due diligence. The lender is favouring sectors near the bottom of the cycle but expected to rise again, such as avocados, macadamias and almonds.
Across its Agricultural Credit Fund and its diversified Partners Fund, Merricks has just under $1 billion invested in agriculture credit, of which 80 per cent to 90 per cent is farm-backed.
A big factor driving investor appetite for its agricultural credit fund is the poor performance of more traditional asset classes such as the office market, where values have taken a battering.
“We are getting lots of requests from investors who are more comfortable with agriculture than commercial real estate, where they already have a lot of exposure,” Mr Redlich said.
“Agriculture is a good [portfolio] diversifier and there is not the same fear around agriculture as there is around commercial property.”
In addition, Mr Redlich said the agricultural credit books of the big banks were “absolutely full”, providing the opportunity for Merricks to expand its offering and capture more market share.
“Banks in terms of their exposure [to agricultural real estate] are at their limit. Their books have grown so much because prices have gone up a lot,” he said.
Weathering a drought
While Merricks was keen to increase its real estate-backed lending to farmers, in the past 12 months it had adopted a more conservative approach to lending as capital growth and returns started to ease back and drier El Nino conditions returned, he said.
This more conservative approach had primarily been through deleveraging, with average loan-to-value ratios falling from 65 per cent 56 per cent.
“This is a reflection of us looking through the cycle and the need [for our borrowers] to be more durable,” Mr Redlich said.
“We need to make sure our borrowers can endure a drought, not because we think there is a problem, but because we want them to succeed.”
Highlighting its desire to back farmers in sectors at the bottom of the cycle, the Agricultural Credit Fund last month settled a loan that funded an avocado producer based in Blackbutt in southern Queensland buying a neighbouring avocado farm.
The new property will double the business operations and allow packing of their own produce. The three-year loan has a forecast total net return of 11.4 per cent.
The lender has also financed a number of downstream agricultural assets such as ports, processing facilities and logistics.
One example of this was Merricks’ provision of a debt facility to acquire and upgrade a large-scale milk processing plant near Warrnambool in Victoria, he said.
In December 2021, the agricultural credit fund provided a $40 million senior credit facility to refinance a South Australia port used to export commodities such as grain.
