The Freehold Debt Income Fund

Posted by Omar Khan on Oct 14, 2019, 9:07:53 AM
Omar Khan
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Freehold has launched a new fund that aims to deliver investors an annualised pre-tax return of 7 – 8% p.a. paid monthly*. The fund will primarily have exposure to a diversified portfolio of real estate debt that is secured by Australian real estate across the east coast.

The Fund was launched on the 25th of September 2019 in conjunction with Alceon, one of Australia’s leading corporate real estate non-bank lenders. The new fund is called the Freehold Debt Income Fund (FDIF) and it aims to deliver investors a total annualised pre-tax return of between 7 – 8% p.a. paid monthly*. FDIF will have exposure to a diversified pool of real estate loans that are primarily secured by registered first ranking mortgages held over Australian property. The investments made by the FDIF will primarily facilitate the finance of real estate development, construction and ownership across the east coast of within markets that are underpinned by strong supply and demand .

Investment strategy

FDIF seeks to generate attractive risk-adjusted returns by gaining exposure lending to Australian mid-market real estate companies which finance residential real estate assets primarily in Sydney and Melbourne. It does not lend directly to developers but invests in loans made through special purpose vehicles (SPVs) and funds established by .

Through this method, the FDIF will gain exposure to (Senior Debt Investments) and mezzanine-style loans or preferred equity investments (Intermediate Capital) in real estate opportunities with proven borrowers and where assets are in markets that show strong fundamentals.

FDIF’s Senior Debt Investments broadly cover investment vehicles that hold:

  • Loans secured by first-ranking security where the loan-to-value ratio (LVR) does not exceed 65 percent;
  • Second-ranking tranches of senior loans where the LVR of the tranche does not exceed 55 percent;

 FDIF’s Intermediate Capital broadly covers investment vehicles that hold:

  • Loans secured by second-ranking security (mezzanine facilities).
  • Preferred equity, which is shares in a company that rank in priority to all other classes of shares on issue in the company.

 

Asset allocation

Asset

Target Allocation

Target Range

Senior Debt Investment

70 percent

67- 100%

Intermediate Capital

29 percent

0 – 29%

Cash or cash equivalents

1%

0 – 5%

 

Key investment criteria

  • High Quality Borrowers: qualified, well capitalised and resourced borrowers that can demonstrate a strong track record of successful delivery in their chosen markets.
  • High Quality Management: quality of the borrower’s management team is a prerequisite for investing.
  • Risk Management: Construction delivery risk is further mitigated by focus on funding projects that have planning certainty and fixed price construction contracts.
  • Market Risk: In addition to investing in vehicles that partner with high quality borrowers, the Fund minimises market risk by seeking to ensure:
    • it is investing in good locations;
    • the loans are appropriately secured, primarily via low loan-to-value ; and
    • where the security property is under construction, ensuring that significant pre-sale contracts have been entered prior to funding.

Risk Management and Investment Restrictions

Subject to the exceptions outlined in the Information Memorandum, the FDIF intends to invest within  the following portfolio risk metrics:

  1. maximum dollar weighted average portfolio duration of 24 months;
  2. maximum of 30% of the FDIF's capital exposed to any single loan facility; and
  3. maximum borrowing capacity for the purposes of redemptions of 30% of the Fund's capital, including borrowings of the investment vehicle (i.e., on a look through ).

 Risks

Before deciding whether to invest in the FDIF, it is important that you understand the risks that can affect your investment. All investments are subject to risk, and investments may not perform as expected resulting in a loss of capital or income to investors.  In particular, you should understand that:

1.     the value of your investment may go up and down;

2.     returns are not guaranteed;

3.     you may lose money; and

4.     historical performance is not necessarily indicative of future performance.

We highly recommend you read the FDIF Information Memorandum (IM) in full, especially the Risks section,  as well as the other information contained in the IM before making a decision to invest in the Fund.

I encourage you to get in touch with the Freehold team and request a copy of the IM and latest performance here^. You may also want to subscribe to the FDIF’s monthly investor update here.

If you have any questions, please don't hesitate to reach Omar Khan (Head of Capital)  on omark@freeholdim.com.au, or +61 2 9228 1400.

 

* Please note, this is a target not a forecast.  No returns are guaranteed.
^ Past performance is not a reliable indicator of future performance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Topics: property, residential, debt, income