Murdoch (00:03.222)
Adrian Redlich, welcome to the Rite of Change with York Wealth Management.

Adrian Redlich (00:08.249)
Hey Murdoch, happy to be here and having a chat today.

Murdoch (00:12.46)
always a bit of fun. Adrian, why don't we kick things off like we always do and tell everyone a little bit about who Adrian is and how you got into the wild world of financial markets.

Adrian Redlich (00:23.195)
Sure. I've been in financial markets 30 years now. Started my career in Melbourne where Merricks is currently based, and the majority of the Merricks team is based. And started with a business that was bought by Merrill Lynch and so started my life as a sell side research analyst covering hard asset industry. So agriculture, mining, other related things for five, six years.

And probably the best thing that happened to me at that time as a young sell -side research analyst was the decline in commodity markets because a lot of my competition disappeared. And so as a young, relatively young person, sort of talking about extractive industries in the early mid -90s as commodity prices plummeted, lot of the senior people were weeded out and disappeared. so it, you know, being in the right place at the right time gave me a great opportunity and

Fortunately with Merrill Lynch, they gave me the opportunity to work around the world in Hong Kong in a more straight research strategy macro role and then into New York around 2000 running a group called global valuation and analytics and pension endowment strategy. So I moved from being a sort of a focusing on individual assets companies to more macro and then portfolio management. And then in 2005,

joined Citadel Investment Group in Chicago. And so that was probably transformative for me, changed my life. I think it's fair to say, you know, it's one of the best multi -strat's hedge funds of all time. Only there for a number of years, but changed my life in terms of really opened the vision to what's possible and being surrounded by super, super smart people. And then life.

changed again in 2007, two small kids decided to come back to Australia and looked around and really, Alternates didn't exist in Australia in any major shape or form. And coming from a big hedge fund, I thought, well, the only way to do this is to have a multi -strat and we launched Merrick's Capital, backed by the Lieberman family, myself and 12 staff. And from day one started investing in

Adrian Redlich (02:50.171)
Long short equity, private credit, commodity trading and direct ownership of hard assets, particularly farmland and on occasions mines, probably overly ambitious at the time to be honest, but that was 17 years ago and I think we've evolved over that time, but that's the background.

Murdoch (03:16.546)
Yeah, it's pretty interesting. I love asking that question because it's never a straight line, is it? And I've always found like, you know, even when I was a sure -on partner, some of the best advisors I've ever seen, or people that run money, they didn't even think they would be where they are. They always started somewhere else, went out, got a whole bunch of experience, and then kind of the random path got them there, and then the happiest Larry and the phenomenal what they do. Isn't it interesting how we all land in the app?

Adrian Redlich (03:40.091)
Yeah, I think, I think everything is, always a combination of luck and opportunity and a bit of skill set and the times that we live in. think too many people place too much credit into rock star managers or advisors and not being able to disaggregate the cycle and being in the right place at the right time. And so, you know, our job in this industry is always

We can outperform a little bit and cheat risk a little bit. That compounding effect is there, but you know, there's too much, too, too much weight placed on the right cycle at the right time. so, you know, in, terms of building a business, I think the big change and having been through those, that journey over the last three decades was really about trying to disaggregate things into partly identify where do you truly have a skill or the people around you have a skill.

Where do you truly have a better mousetrap that can do things that others can't? And how many times can you do it independently? That's the crux of portfolio management, to break things into, the independence with the last bit is actually, so it's not all one big bet. And the skillset is people talk about, like, how really, how much skill do you have? then just how scalable is it? How much friction is there? All those sort of things.

Yeah, that's not where I started, you know, in 1993, you sort of sat and go, I better go and get on a light plane, which Merrill Lynch kindly funded and fly out to visit a mine somewhere and just find the the best equity investment or the best credit investment. And that was what it was all about. But it was actually, you know, that's when you're at the bottom of the food chain and you work your way up to trying to build something that's repeatable and sustainable for people.

Murdoch (05:34.446)
This is gonna be a fun conversation. I can feel it already. And the other thing, why don't we begin with who's Merricks as well. And the other, for a lot of people that have been listening, we've had a number of great guests on. Kevin's been on from PM Capital. Carlin's been on from Murray Dulling Water Basin. And the other thing which is quite interesting with Merricks now is you've just done a deal. You've, I mentioned those two funds. They've also joined, previously joined Regal. So you've also crossed the divide and

Join Regal as well, I hear.

Adrian Redlich (06:06.459)
We have. as of July 9th, Merrick's Capital was taken over by Regal, but for the shareholders of Merrick's Capital was effectively joining the partnership in large part, swapping our shares in Merrick's for shares in Regal Partners, the listed company. And so after 17 years, know, these things always big decisions. but at the core of it, why do we do it is really

three or four key reasons. One, there's 44 staff members at Merricks and the pathway for those staff are much, much bigger within a regal context. There's broader opportunities and also is allowed to equitise every one of those staff members. So every staff member has effectively equity incentive in regal partners. So they're aligned. Not only every staff member basically gets a big part of their bonus in

the Merricks Capital Funds, so they're always aligned with investors, but to equitise people to give them a pathway. I think the second reason is, I touched on Citadel before, but trying to create a multi -strat, which tried to do in isolation at Merricks, and we run $3 billion at Merricks Capital, but now as part of Regal Partners, it's $16 .5 billion. We're, think, one of the leading alt shops in the country. I don't think we're sort of...

that's over chest beating in saying that not everything's perfect, but it's, you know, it's definitely, think at the forefront, but trying to recreate what I experienced at the likes of a Citadel. and that is if you can surround yourself with super smart people and there's no doubt, you know, that some of the headline talent, you know, obviously Phil King, Paul Moore, et cetera, being, you know, spending my time with, with them. And I spend, you know, have a monthly meeting with

Phil and Paul and others, have a CIO meeting and sort of starting to evolve that thought sharing process. But the depth, you know, of almost 200 staff members and attracting the best talent, being surrounded by super smart people, he's really good, but you know, some of the other incredible people there, think, you Brendan's actually without, you know, sounding like, blowing smoke up my new boss, but it's, he's, he's, I think a really talented CEO and

Adrian Redlich (08:31.909)
there's a big difference between being a good investor and a good CEO and a good CEO. And that differentiation is really important. so, and the people under Brendan, you know, in terms of the risk people, the treasury people, the engagement with clients, the structures. And I think, think scale is, important to get that right, but you don't want to dilute the smart people by stretching them too far over too many different things. And so I think we've got, I'm

Pretty hopeful, a good balance with someone like Paul running international equities. Phil's very focused on long short equities and some pre IPO deals. The Merrick's team and also taking in the regal private credit guys, very focused on that direct bilateral lending and really taking advantage of where the banks continue to retreat. Clearly, you've got the Kilter and Argyle guys now focused on water.

and, and also agriculture. so, you know, there's lots of synergies across the group and yet I think tourists, one of the leaders globally in providing credit to long -term credits to mining development companies. So surrounded by lots of smart people, a great ecosystem. and I think for investors, it's sort of, if I get hit by a bus, you know, I've got a deep team, but there's more smart people around it. So it's just more resilience to everything we do and, portfolios.

Yeah. Driven by great performance at different times, but resilience also in the more challenging times. And so I think we're set up for both opportunity and resilience.

Murdoch (10:11.992)
For an advisor, what's happening in the market now is it's just making their lives easier. I wouldn't agree. And what I mean by that is these mega firms where you have multiple different strategies or different strategies to offer to an investor, there's essentially the ability just to say hypothetically just use regal, you know what mean? And then across all cycles essentially, and I actually quite like that because it's where's the puck going, right? It's getting to where the puck's going.

having the ability to essentially pivot with these cycles for NASA classes. One may work now, the other one may not, and vice versa. I quite like that. It's great for families to have that access. Wouldn't you agree?

Adrian Redlich (10:53.767)
I think so. think, you know, it's different, different types of funds and structures for different needs. I think there's, you know, there's people who want to construct, you know, want to construct their own portfolio as very specific needs. And I think a diversified firm allows them to cherry pick that, you know, whether it be, you know, wanting to be very specific and invest in a private credit fund that only does agriculture or invest in a pre IPO equity funds, which

Phil is running or to be specific parts of international equities, or there's the ability to partner with a group with Regal, which really excites me, which is, think the growth is going to be in our multi -strat type offerings, which allows us to move capital more fluidly and quickly to where there's dislocation and opportunity set. And that is always, and so I think garnering that trust over time and that's been

as I mentioned, you know, the, when I look at Citadel, the multi -strat, that's where a lot of the resilience and opportunity comes from. You want your manager incentivized to actually withdraw or reduce exposure to an asset class at the right time. There's always an agency issue that you face that we all face with our financial advisor or with our fund manager is.

you know, that person is trying to run a business and you want to make sure they're highly incentivized to be as solely focused as possible on just the performance of that money and meeting the criteria. And I think if you have a trusted partner that is in a better position to move capital out of asset classes and help you move it to where there's better opportunity sets, that's a more ultimate relationship. And so I think that's the other.

the other aspect of it to be part of a group where you say, look, I we should be reducing exposure in residential, commercial construction real estate and we should be moving it into agriculture. Yeah, it's one micro sort of cosmic at different times. That's something we experienced two years ago when we were looking at high risk around builders going bus. You shouldn't be having a lot of credit there. You should move into.

Adrian Redlich (13:07.923)
It's just an example. You want your manager and your financial advisor to have that flexibility. That's a key, key element of it. You know, I said at the beginning, ultimate investing is a combination of, of skill, but how many different buckets of money can you apply that skill to without diluting that skill? Right. That's sort of the, because that's what diversification is, right? That's the free lunch in.

in investing, right? Non -correlated returns in theory under stress and market stress as we find some of these things a bit more correlated than we thought, but still the principle still stands.

Murdoch (13:47.438)
Last regular question, this is just for me, does that mean that Merrick's funds are now part of RF1 or becoming part of RF1? Because RF1 is essentially like, as you mentioned, all encompassing if you just want to buy a regular all in one place. Is that what you're referring to or do you just mean like you now have options to choose to?

Adrian Redlich (14:07.066)
Yes,

Adrian Redlich (14:11.355)
I think at this point in time, RF1 includes some of the regal private credit opportunities, which is run by Jacob, who works closely with me now, Jacob and Gavin. And so it does include some of the private credit opportunities. At this point, it doesn't include the MERICs funds or opportunities. And whilst there's not a definitive plan going forward, we're certainly discussing that and

RF1 is focused on the best opportunities within the regular universe. So if they're the best opportunities, they'll be in RF1. I think that's the driver, you know, there's no, there's no structural limitation to it. It's more, is it the best opportunity? Then it will go in RF1.

Murdoch (14:57.836)
that's good to know. thanks for that. But with Merricks, you've touched on it a couple of times. What does Merricks actually do?

Adrian Redlich (15:08.155)
Yeah. So Merricks these days, and we really pivoted around 2015 -16, is a lender against hard assets. So we, in large part, take a mortgage over a commercial real estate, a farm, a power plant, a port, and lend money at, on average, a 60 % loan to value ratio against those assets. They're bilateral loans in large part, where we...

originate the loan like a bank would. We then spend six, seven weeks going through due diligence and sometimes six months and lend to a borrower to usually add value to that asset in one shape or form. And so we're lending equity because all our funds are largely unlevered. So people invest equity in our funds and unlike a bank who then takes deposits and finances their book and is highly leveraged.

we're lending equity, so unlevered balance sheet to borrowers in the commercial real estate, agriculture, infrastructure, power sectors. And so in large part, we're like a bank in the sense that we have a first mortgage. Some of the structures have some complexity to them, but in large part, it's very simple. And to be honest, it's been...

Yeah, it's been a bit of a gift in terms of the sector tailwinds. Yeah, as I said, in 2015, 16, we had a number of reserve bank sort of regulation shifts. had APRA, who's the bank regulator, sort of shift the construct of, you know, making it more challenging for banks to lend as they had been for the prior 20 years. And the way that I kind of differentiate between private credit and banks,

Banks are super highly leveraged. The regulator is sitting there and saying, you're super highly leveraged. have to be, and you hold Australia's deposits. And in the case of Reserve Bank of New Zealand, because we're active in New Zealand, you hold Australian and New Zealanders deposits and cash. We are, you have to be implicitly conservative. There's whether it's an explicit or implicit underwrite by the, you know, the government and the banks keeping them solvent. therefore, you know, for in exchange for that.

Adrian Redlich (17:32.407)
support and underwrite, you're going to have to be conservative, more and more conservative. And that's why want the things the banks are really struggling for earnings growth, for credit growth, because they're dealing with that regulatory regime that's making them more conservative. And what we're finding is that Australia is moving the way of UK, US, the rest of the world, where alternate capital provides credit, so lending, not just equity.

to different borrowers that their needs are differentiated. banks need to be interest coverage and service abilities paramount because the banks borrow $13, $14 for every dollar of equity they have. So therefore, unless they get instant cashflow, they can't pay their depositors and they can't pay their bonds, et cetera. Private credit is more able to be structured. So what we do at Merricks, we have some diversified funds. It's the Merricks Capital Partners Fund.

which is sort of, you know, participates in all the loans that we do across diversified sectors. We have a number of institutional mandates, some that just do commercial real estate, some that just do agriculture. And then we have the agricultural credit fund, which is also available to wholesale investors like our partners fund that specialises in the agri -supply chain. And so we manage within the Merricks construct around $3 billion of funds that are predominantly wholesale funds.

partnering with advisors and their clients. And we're trying to play a part in people's portfolios, whether it somewhere on average, two to four percent, two to four to five percent of someone's portfolio. And really what we're doing when I boil it down is having come from the equity space as well as credit space, we look at something and say, is it a very resilient asset value that we're lending to?

And would we lend someone 60 cents in the dollar of that asset value with a high degree of certainty that not only we're getting their, principal back, we're going to get the interest back. and we're going to help them transition their asset. And the reason I keep mentioning growth capital and transition is generally those borrowers are paying us double digit interest rate. So nine, 10, 11%, much higher than they would a bank. When someone's paying you more, they need to be using that money to add more value.

Adrian Redlich (19:59.481)
And so generally, we're helping, if it's in the case of a farmer, might be they're planting trees, those trees may not come into full development for two, three, four, five years. So cashflow could be two years away, three years away. Can't service bank interest, but clearly as the trees grow and that asset matures, it becomes much more valuable. So the loan value is well supported, but we can structure something for that borrower, whether it be

partly paying interest, partly capitalizing the interest and paying it once the trees mature. And so we just have more flexibility. But in large part, we're like a bank. We lend, but we lend to spaces which aren't suited to bank credit.

Murdoch (20:44.142)
What's the mechanics with the fund? How much money in each fund? How's the performance been? Do you expect that to continue with potentially the interest rate cuts that are pending? What's the fees in the fund? What's the mechanics of the funds?

Adrian Redlich (21:03.419)
Yeah, sure. It's good. Good question. this I'll talk about the Merrick's Capital Partners Fund and the Agri Credit Fund, where they're the two wholesale funds that are available. Each each fund holds a diversified pool of loans. The Agri Credit Fund tends to be more concentrated by obviously by industry. A number of loans holds about 30 odd loans with the biggest loan.

in the Agri -Credit Fund might be as much as 10 % of the portfolio, but on average you're at 2 -3 % of the portfolio. The Partners Fund holds 60 or 70 loans at any one time. Partners Fund is around 1 .3 billion in size. Agri -Credit is a little less than half a billion in size. The Agri -Credit Fund has generated in recent years between 10 and 11 % returns.

for the next 12 months, expect that to be, you that's, you know, in terms of what we're generating from our book at this point in time. And we're seeing a lot of opportunity and we'll talk about the agri cycle in a moment, the forward, we see the banks retreating again now at the moment from the space. And so there's lots of, lots of opportunity. The partners fund tends to generate a slightly lower return for...

around for the 12 months to June 30, it was nine and a half percent return. And the reason it's slightly lower return is we do hedge the portfolio with some macro insurance in terms of we buy put options on credit markets. And one of the reasons is that we think with bigger exposure to commercial real estate, our biggest risk with all these portfolios where you have diversified loans is that if the economy was to implode,

that creates a lockup and a freeze. So it's more about liquidity. You want to have lots of liquidity. And when we've done the work analyzing credit funds over time, it's usually the underlying assets and collateral is good. It's just making sure you've got lots of liquidity to solve any problems and make sure your borrowers remain in good shape. And so we do something that's unique. We have a hedge in that portfolio. And so it costs between 50 to 80 basis points a year on average.

Adrian Redlich (23:24.891)
So the performance tends to be a little lower. In terms of the historic returns, we've been in that high single digit, low double digit range for the last.

the last seven, eight years, it was a little lower. We were sort of run rating around 8 % when rates were at zero. As rates have headed up, we've been able to the underlying portfolio generate 10, 11%. We've probably moved our portfolio to take slightly lower risk dances rates went up. That's simply because when you're lending against hard assets, so...

real estate in its broadest description, if I call a power plant is real estate, a farm, et cetera, real estate. The income coming off those assets doesn't change dramatically just because interest rates move. Just because interest rates move, yes, you can charge a higher rate because banks are charging higher rates, but it doesn't mean your borrower can necessarily service it because the income that comes out of a hotel doesn't necessarily change because interest rates are higher.

In fact, it's quite perverse. They might actually go down because consumers under a bit more pressure. And so what we sort of find is that our borrowers are more able to pay an absolute interest rate, to be honest, more often than one that's just relative to interest rates. having said that, over 80 % of our book is floating. So it does float with rates. where we price risk is that as interest rates go up, we find

Yeah, the quality of our borrowers actually has improved dramatically because people, super high quality borrowers are willing to pay a much higher absolute rate because the alternatives aren't there. So I think we've sort of moved the less construction risk during the COVID period and as rates started to rise and that was more because we saw a risk around development and construction. Those loans tend to earn higher returns.

Adrian Redlich (25:27.707)
in the 2017 -18 -19 period, we probably had more exposure to construction risk, less so in recent years. So the portfolio construct has sort of moved and shifted. We've been able to lend against completed apartment buildings where there might be 50 or 100 unsold apartments there and been able to achieve 8, 9 % return at a 65 %...

loan to value. So very boring asset class. all know that residential stock or supply of housing apartments super tight. So to be able to lend at a conservative leverage level and earn a great return is a better risk adjusted return than maybe at 9 % is much better risk adjusted return than lending a construction loan where you're earning 12. So it's always about that balance of like, what's the best risk adjusted return and where does the risk sit?

But generally we say to our investors that conservatively we think we can pay an 8 % yield each year. So we can underwrite at that level. And the returns we've been well and truly exceeding those for a period of the last eight years.

Murdoch (26:43.564)
I really, really, really want to a lot of time on the Agriculture Credit Fund. But before I do, before I forget, you mentioned with the Capital Partners Fund, CBD, construction loans. I'm just curious to your thoughts on what's currently happening in the property market. know you're all in, as long as they pay the bills and everyone's fine. Happy days. But I'm just curious to hear.

you know, what do you think is currently happening with it with the CBD is that still potentially a problem and people starting to come back. The other assets that you know, we quite like have been the line industrial warehouse is a huge boom on the M1 of Queensland way going right now, you switch your at large, it just massive North Harbour all that place. The other assets that I'd like land subdivision. Essentially building

cities, towns, and the other thing as well, I heard someone make a comment regarding, you know, the delivery centers, the dispatch centers for Amazon, those warehouses, which, you know, have been amazing since COVID, but I heard in China, we have a 24 hour cycle, you buy Amazon against Didor, apparently it's nearly two hours now, right? So it just makes me wonder whether or not, you you take these Amazon or Chemist warehouses, you know, distribution like hubs, are they gonna start building more, you know, in the suburban areas? So you have...

I'm just wondering, I'm just curious, because you guys essentially see what's happening, right? So I'm just curious.

Adrian Redlich (28:09.679)
Yeah, I was in, yeah, we do. And we tend to see at both ends of the spectrum. We tend to see with borrowers who are looking to sell assets or something that on occasion are forced to sell assets, right? Because things are challenged or difficult. So we see at the tail end, they've either created some value in their selling and what the demand is, or they're challenged because...

Murdoch (28:18.349)
Yeah.

Adrian Redlich (28:37.467)
things didn't turn out how they like and they can't hold the assets so they'll sell it. Then we see at the other end, we see the buyers coming to us for pre -funding so they can put in an offer to buy an asset or develop an asset. So we tend to see that both the buyer and the seller quite early on in that cycle. I think we've got a market in real estate, is the two -speed market, is not going to be, well, it's probably three -speed.

Data centers and industrial assets have been super hot sectors, well chased. There's a shortage of industrial space. Industrial rent has been rising astronomically in terms of what people are paying on a per square meter basis. It is driven by sort of distribution centers, e -commerce and the like. But it's also very well supported by institutional money. Yeah, it's very well. And the yields and the returns are low.

to reflect that there's a lot of money chasing that space. Data centers are the same. We're quite actively involved in the power sector as well. we know that probably we're gonna go from almost zero to somewhere eight to 10 % of all Australians power is gonna go into data centers. And with the proliferation of AI and like is gonna be a major step change.

And there's lots of things to discuss around that.

Murdoch (30:06.893)
think you just, yeah, if we go down that path, I'm gonna start asking you about uranium and nuclear energy and look at the grid over the states. you know, we'll be here all day, but God, it's such an interesting topic.

Adrian Redlich (30:11.887)
Yeah, we can... and I...

Adrian Redlich (30:18.221)
It is. Well, we see those things early, but let's just sort of touch on those three, I said the sort of three speed. Yeah, no, three speed. It's sort of super hot in industrial and data centers. Banks are all over us. People are providing very cheap, very tight loans. The returns are not particularly attractive for lenders. And so, yes, we like the theme and we'll plan it in parts where we can.

Murdoch (30:23.576)
Sorry, I gotta be distracted.

Adrian Redlich (30:45.509)
but there's not really a dislocation where there's the ability to lend in large parts. then you have at the other end of the spectrum, you have retail, which two, three years ago, retail was under real pressure and everyone thought that e -commerce would destroy all of retail. And we've found big box retail and certain regional, where there's sort of, you know, whether it be a spotlight and a chemist warehouse and the Bunnings and the auto cheap and

have gone in that retail has actually performed really well. And you talked about along the L one, we're funding something in Morissette at the moment, just north of Sydney. exactly that, you know, it's going to be a, it's a bunning side. It's going to be a lot of retail. Its performance is outstanding and the developers have done a great job. And that that's the type of development we like, but it's probably that crossover point where retail is a bit hard.

because consumer cycle, also uncertainty around specialty retail, but generally the theme is really good. And so that's a really good place to lend. similarly hotels sit in that middle camp, you know, hotels obviously had a difficult COVID, but the structural demand for hotels remains good. You know, there's, not really a step change in, in hotels. The one thing we do see in sort of CBD hotels is

The cost to deliver a hotel now to build a new hotel is probably increased 20, 30, 40%. So new. And the reason I mentioned with hotels, you think about how many bathrooms there are in every, you know, in a hotel. That's a very expensive exercise. It's one of the most expensive builds, right? Because you've got intricate plumbing, hospitality. So it's a very intensive build compared to an office, which is sort of a big sort of cold shell structure.

generally, that gets built. But so that middle ramp of sort of certain types of retail, certain types of residential. And the reason I put residential in that middle camp, other than the super white hot camp, because residential, there's a, there's a massive shortage of supply. We know that which makes it a white hot sector, but the affordability of residential is problematic. And so we're not seeing a lot developed or sold and you know, it's, it's the affordability. So.

Adrian Redlich (33:07.643)
residential as a lender is a great place to be because you're lending at 65 % loan to value. We're not sitting here assessing is, is, know, is a new apartment worth $2 million? we get comfort that it's definitely worth $1 .2 million in Sydney and maybe $800 ,000 in Brisbane or, Melbourne in terms of the lending attachment point for a nice apartment. don't have to really speculate on, whether the equity value is

It's that place where you're lending, where it's a little bit hard. and it's not just open slather from sort of banks and super funds, throwing money at sectors. It's probably in that those sectors where there's some grind to it. and then you have the, sectors which are really been challenged and it used to be retail and say less so now with, certain parts of retail.

Office clearly sits in that camp. And I would say for us in the last three years, that's probably described as Office and New Zealand. New Zealand had real issues as a small economy. was the Reserve Bank there was very aggressive in tightening much more so than Australia. And so it's put a lot of pressure on the economy. Office is the other area where we're looking at structurally, know, are certain precincts and assets impaired.

What I would describe office sort of in multiple sort of stages, if you're in certain precincts within office, such as the docklands of Melbourne, those assets are in their long -term future is structurally under enormous pressure, very difficult to see. Melbourne in general, what happened in COVID period and post -COVID period is extremely challenged.

And I think that's not dissimilar to as many cities you sort of see around the US. So we actually have almost no office exposure in Melbourne, as an example, because you do that structural work. And again, when you're a relatively small player at three, four billion dollars, you're trying to pick the eyes out of things. We're not a bank. Banks, all four of our banks lend in excess of a trillion dollars each. They are the market. They're everywhere. And we can pick the eyes out of it. But when we look at Sydney,

Adrian Redlich (35:31.159)
If you're in the northern part of the CBD in Sydney, between that Martin Place precinct and Circular Quay, the demand is good. And if you're in an ESG friendly building, so it needs to be a building that meets the modern expectations of maybe no gas into the building, it's all electrified, six star neighbors rating, so very green building, has great amenity for end of trip facilities for staff.

those buildings have actually leased up really well. Now there's no question that the yield they sell on or the capitalization rate as it's known has moved from super tight levels when money was free at zero to, know, we were seeing buildings trade on a 4 % yield. And today, you know, we're sitting here with a 3 .9 % 10 year bond yield. Why would you buy a building for 4 % yield if you can invest in a 10 year bond at that rate? So we've seen that move from 4 % cap rate

for the best buildings out to five, five and a half. That's a 20 % going from four to 5 % yield is a 25 % reduction in value. And so we've seen the cap rates push valuations down by 25 % on the high quality buildings. And on the lesser quality buildings, we've seen that cap rate expand from sort of high falls out to six and seven. So you've seen a 35 % reduction in the valuation just driven on yield. Now in the reasonable precincts,

and I can give you an example, 32 York street in Sydney, very specific example. It's a building that we funded. It's just hit practical completion. two weeks ago, it's a really interesting case study of what's going on in development. the builder had lots of issues, like it was a challenging building. It was delayed, maybe almost 10 months. So time actually was the problem. The cost to deliver it was, was much greater for the

the sponsor, but the yield coming out of the building, the effective yield when we underwrote the deal was nine and a half million dollars of income expected to come out of the asset and it ended up being 11 and a half million. And so what it's telling you for the right buildings, the income despite, and that's effective income after incentives and like the right assets built in the right place, we've actually seen a lot of rental inflation. So it's, it's not as simple to say all offices.

Adrian Redlich (38:00.603)
you know, is in a terrible place. If you pick the eyes out of it. So the income is 20 % higher. The cap rate expected or the price, the yield it would trade on is certainly probably taking the price down 25%. So net net, you know, for the, for the owner, the price expectations are still down five or 10%. But, you know, offices, it's, we've actually seen really good demand for the asset and it's a beautiful building. And so I think

picking the eyes out and renting, sorry, lending money to the right office has its place in the portfolio. Again, if you're at a 65 % loan to value, you're not taking that equity risk. And as you would expect, that borrower has to pay a lot more than they used to for the funding for an office. So partly we can see you just don't want to be in certain precincts because we're just not sure the future use of those precincts. In other precincts, the demand is extremely good.

and so lending in those areas, we're getting, you know, paid very well in terms of the interest we're receiving. and the underlying support for those assets continues to be relatively robust. And so that's the beauty of being a lender. You know, you're not sitting there trying to, debate. I buying something and is the price going to go up by five or 10 % a year? You're just sitting there and saying, is it going to fall by 35 %? And as long as it doesn't fall by 35%.

we will get our capital and our interest back. And so it's a very good space to be in. You sleep very well at night with the, looking at lending against the individual assets. The risk to everything always as an investor is not around individual assets. If you've got 60 loans within a portfolio, if one of them has a bit of a problem and you're earning 10 % overall in your overall portfolio, maybe you

impair the portfolio by 20 basis points, like 0 .2%. Investors still going to earn 10%. It's that if, if we have a systematic meltdown in the economy and credit, how, you know, assets tend to lock up and freeze up. And that's what we're trying to manage always is and set investor expectations appropriately that if we have a lockup in the economy, private credit funds are not ATMs. They're not fixed income funds. They're not cash management trusts.

Adrian Redlich (40:27.963)
you're earning a nine or 10 % return, that's outperforming the equity market. So of course you're taking risk. And I'll say that again, Murdoch, of course you are taking risk. And it's something I say to investors all the time. I think, you know, I've moved all my money personally out of equities, out of other asset classes, structurally into this space, because I think earning nine or 10 % compounding it,

I don't think there'll be a financial advisor out there that would sit there with cash rates of sort of four saying in a modest risk portfolio that you can compound 10%. I think they're sitting there and saying.

Murdoch (41:05.89)
it's equity based returns for essentially potentially taking less risk. And then as you pointed out, location, location, location, all I'm hearing is, you know, pick the eyes out of me. It's just like what's the expression of property? Location, location, location.

Adrian Redlich (41:18.395)
And that's true. so one of the things that we have to do, and I mentioned this about Regal as a group, is the ability to move between different asset classes to take advantage of where there's a scarcity of capital. And it's true within sub -portfolio. So AMerricks Fund is we're across different sectors, which is what differentiates us to other commercial real estate lenders.

in Australia in terms of private credit funds, we're in agriculture, we're in power sector, we're in the mining sector, we're in office, we're in retail, because we want to, unless you've got that ability to move, you know, if you, if you raise money and say, I'm just lending to commit to residential development, and it's quite easy to raise that money, because I can tell a fantastic story right now about migration and the scarcity of housing and the very attractive story, but

There's no diversification. It's just one big bet. If it's just all a residential lending portfolio, it's one big bet on the housing sector. And when it goes bad, it will all go bad. And when it goes well, it will all go well. And that's fine. Maybe Murdoch City in your seat as the financial advisors, you can use size that appropriately. If your clients, say, well, only put 1 % into this fund because it's all one big bet. Whereas with the Merrick's funds, we try and make sure it's not one big bet.

Murdoch (42:44.022)
makes sense but I really want to discuss agriculture is the back of my mind but then you just mentioned the power grid again and you know I just like I know it's though you know Australia follows the US but I just find it amazing I read a headline saying that the governor of California is advising people not to charge their Tesla's because there's a heat wave coming in the grid kind of handler meanwhile there's you know all these ESG incentives I think even for the tax business last year you know if you purchased

Adrian Redlich (42:47.009)
Yes.

Murdoch (43:12.056)
Tesla was an electrical vehicle inside my company, you get a tax break, but you go buy a diesel motor, great car, that will last a long period of time, there was nothing. I'm just curious, and then I was speaking with a number of other managers who point out that Australia would never entertain the idea of nuclear energy, but then there's other parts of the world essentially saying that if we don't use nuclear energy for the grid, then essentially we can't handle the growth -threatening AI. And the other one that popped up

in my mind, hugely discussed many times before has been the flagging of private going after energy grid that's directly attached to essentially nuclear power reactor. Wasn't it Amazon that essentially bought, you know, the data center right next to the nuclear. Like, I'm just, you see this happening in the world in order to handle the grid. Meanwhile, Australia is saying we're not going to touch it, but how can we go in electrical based future?

Adrian Redlich (44:01.861)
Sure.

Adrian Redlich (44:05.167)
Well, I had to.

Murdoch (44:12.044)
I'm just getting mixed messages. What do you think? You're the one lending in this space. I'm just curious.

Adrian Redlich (44:16.315)
Yeah. Well, I had an interesting week last week. We're financing the development of a solar farm and the gas -fired power plants in and around Darwin. So two, renewable and the gas -fired power plant is a more efficient, know, it uses 35 % less gas than the existing gas -fired power plants. So we see it as a, you know, it's a transitional assets, both those ESG.

Yeah. ESG theme behind it. And the same time I visited Jabiru, the range uranium mine last week, which has been closed. again, for lots of, you know, part of that, it's in World Heritage Park in, in Kakadu, but it's at one point it was providing 10 % of the world's uranium out of, out of that part of the world. you know, there's a real juxtaposition there, but a couple of things I have a, as someone that's been quite active in financing lots of

these mines, lithium mines, power plants, different parts of the continuum. Quite simply, I'm a believer in climate change is real. And it's just as simple as if we just keep burning coal and doing things, it's not great for the environment. I don't think you have to be a rocket scientist to work that out. What the impact is and how quick, difficult to assess. So we need to do things about it.

But what I would say is what makes no sense in Australia is that we ship billions of dollars of LNG out of this country and we have gas -fired power plants sitting in Darwin, where there's a number of new data centers wanting to be built with the power price in Darwin that's through the roof. Yet you've got one of the biggest LNG exporters in the Darwin Harbor in terms of with Ixis, we're sending gas to Japan and Korea.

Murdoch (46:08.878)
Well, Tan Boran

Adrian Redlich (46:14.479)
Well, possibly. Yeah. But again, you know, the challenges there because they're, political as well as just getting up and running, right? In terms of the acceptance of who's going to take gas and how you're going to use it and those sorts of things. So it's challenge. We're making our life difficult in this country where, where if we really want my, I have a simple view. If we wanted to make life easier, we would actually stop exporting as much and we wouldn't have to stop a lot. The price of coal, gas, et cetera, would go through the roof.

globally, everyone else's price would go up. We'd have a little bit more here domestically. We would push our own prices down. We would focus on a transition. If you want to stop climate change globally, if you push the global price of coal up dramatically, it will have an impact. If you strand Australian industry in itself, it will have no impact, but it would just condemn us. so unfortunately, we're going into a cycle where China is dramatically slower and we've

Yeah, I think most people investing feel like we've dodged the bullet because we haven't seen a dramatic impact yet on markets here. But China is in dramatic slowdown. We're seeing it with commodity prices. We're going to see, I think, the second half this year, continued weakness.

Murdoch (47:27.828)
Even with China, the slowdown, as in India, with the iron oil taking up a large part of that demand as well.

Adrian Redlich (47:34.999)
But it doesn't, it just doesn't meet, you you're talking about dramatically different magnitudes of order. the change, again, we're talking about a cyclical element, but coming back to the transition, and we see it's, you know, we're just, as we look at financing different elements of the power sector, we're very actively doing due diligence on, you know, different renewable energy.

sources and batteries and different things and they all make sense, but the certainty in this country makes it challenging to there. So I think it's problematic, but I actually more optimistic. It could be fixed. It could be fixed. Governments could fix it and it sits squarely with them and the leadership. But yeah, in large part we can fix it, but the one thing is it makes no sense to completely destroy our own industry whilst we...

extractive industries just decole up and gas and send it overseas where we're effectively burning many, many multiples of what we burn here domestically and not solve for that. So if you wanted to have an impact globally, that's where you would have an impact. The mining sector and the oil and gas would be very unhappy with me saying that because it's naturally, you know, they're intending to do that. But we could fix the issue in terms of financing of

gas power plants or coal power plants. It's almost impossible to finance a coal power plant now. And we don't have any of that funding in our book. doesn't meet, you know, doesn't meet our criteria unless that coal provider can show they're actually adding scrubbers and sort of environmental safety nets to it. Gas we will fund because we see it as important transitional, you know, part of reducing

the carbon footprint and everyone's got their view and it's actually quite a lucrative area to lend to because banks are confused whether they can or can't lend in that space.

Murdoch (49:40.706)
banks are confused. It's just think that statement says it says it perfectly. I think is yeah, a lot of people are confused. Because you know, you see with this growth cycle happening, you know, how can you provide the power required to essentially sustain the graph and the output we're saying like, just doesn't make sense.

Adrian Redlich (50:01.007)
Yeah, look, it's a challenge. And I think everyone's got a view and it's more, but we can solve a lot of the problems domestically, but it can't be going cold turkey on these things and pretending there's a solution by solving with solar and wind. as again, an active player in the solar finance side of things, it's a difficult asset. And unfortunately, for a lot of people that have

put good money into solar from the equity side. They haven't, I don't believe, you know, the grid has done the right thing by them. They've encouraged them to build and then they can't take the power. And so ultimately we need to solve for those things and we'll work through it. But I think just cognizant of time, I did want to talk about agriculture a little bit.

Murdoch (50:50.914)
Yeah, no, no, please, please. I'm giving examples. I've got a lot of friends, family, my dad, fourth generation farmers, know, in Perth. To give you an idea, they got a chemical build, nine million dollars wheat, barley, canola, et cetera. And then we got a lot of family, friends. One family in particular is into Wagyu. I just looked at the cattle on the picture. Like, know, heavily into Australian Wagyu cattle is booming.

There is the entire conversation about you know farm to play it think they're only can sell a wagon can of like two grand which makes no sense when you walk into these You know phenomenal places and why these two roof? I'm just I'm just or you get the pineapple farmers the banana farmers you got you know even when had colon on discussing and you mentioned the trees like you know The almond farmers, so I'm just very curious and I'd like to learn more about you when this when I'm speaking to my friends family and clients that are

in this space, one of the biggest things I keep hearing is essentially their asset rich cash flow poor. how, I suppose, can America's help families or business owners in the farming agriculture space that are asset rich cash poor essentially achieve what they're looking for? I suppose that's kind of how I'm thinking about it from my side of the.

Adrian Redlich (52:06.619)
Yeah, so we love agriculture as a lender. We historically, when we started America's 2007 and 2008, coming off the back of some major droughts on the east coast of Australia, we bought lots of farms and we just felt for our investors, we couldn't get diversification and scalability. think farming is still, it's unlike other commodity.

industries, agriculture is still quite a small scale, it's hard to get mega scale. And so we felt the one the best way we could get exposure to it was more by lending, we get more diversification, it builds a better portfolio. And then also post the Royal Commission into banking practices as they related to farming, change the nature of how banks would engage, there was clearly some

So a few practices there that needed to be changed, but also it put banks in a position where they became extremely conservative about how they would interact with the farming sector. on a more conservative basis that they knew they could, you know, it would become close to riskless. And so it created a big dislocation. We like farming because we're lending unlevered And so it can be more durable.

In a sense, not always having, we sometimes can structure deals with farmers where we'll charge them an interest rate, but part of our interest rate could be capitalized until they develop maybe some new orchards or they put in place new pivots in terms of irrigation or their herd grows or matures. And so we can time the cashflow more suited to the farming cycle.

And so I think that's an important piece, whereas the banks have no choice but to collect interest on a monthly basis, which doesn't relate to the farming cycle. The second reason we love agriculture is that we think as a lender, commercial real estate probably suffers in a hyperinflation period. Interest rates are going to go up. The rental yield coming out of a lot of commercial real estate won't be able to support necessarily the higher interest rates.

Adrian Redlich (54:28.377)
what we saw during the higher inflationary periods the last couple of years is that commodity prices tend to go up. Farmers actually made more money, not less. And so their earnings were more correlated with higher interest rates. So their ability to service that the longer term was actually tied to it. So as part of a diversified lending portfolio, agriculture actually

Murdoch (54:55.022)
you

Adrian Redlich (54:56.589)
Ironically does well when interest rates go up in terms of serviceability, other parts of the lending book struggle more. And so we like that diversification. We also like that, you know, that old adage that they're just not making any more land. You know, we and so lending against land in particular, where there's no depreciating assets sitting on top of the land, we think, you know, is a good place to lend and it endures. But. You know, there's.

There's very few alternatives in Australia. National Australia Bank, by far the biggest lender in the country of the sector. Rabobank, probably number two. The other commercial banks are active, but not in the same way. Alternatives outside of a few private credit funds such as ourselves are far and few between. And so we think the sector will grow, but when you have limited competition, it means that we're probably able to earn

a little more than we should on a risk adjusted basis when we lend into the sector. So it's a good place to be. And I think for lot of our investors, they go to sleep at night feeling sort of comfortable that ultimately we're lending against land at a modest loan to value ratio. And so the implicit underlying collateral there is very good. And so in general, it's truism for our entire portfolio that we tend to lend against hard assets.

we're not speculating on corporate earnings, you know, because I think even lending in the corporate space. And so a lot of the corporate lending around the world that's proliferated in private credit has been financing of private equity buyouts. They're lending to corporates, you lending to big sponsors that buy, you know, corporates and their cashflow lending. It's not been the area that we have been focused on. you know, we're never, we're never going to have an asset that's a zero.

Even if the loan goes bad, so unlike investing in equities, unlike investing in corporate credit, even if there's a problem with the borrower, that land is always going to be worth a substantial amount. And so it means the downside in our portfolio is quite limited. And so it's one of the things we really like in particular about agriculture.

Murdoch (57:15.118)
Well, that makes sense. But the other question I had is since agriculture is a price taker, they don't really set the price. How do you lend to essentially with an asset that you don't know where you're to be able to sell it for? Like 12 to whatever the period of time is later. I know you can hedge and everything, you know, how do you...

Adrian Redlich (57:29.967)
Yeah.

Yeah, it's a good question. So we tend to prefer to lend to agriculture when rainfall has been average to pour and when commodity prices are mid cycle or at the bottom of the cycle. And I'll give you example of that. We had very significant exposure within our portfolio to dairy farmers in 2018, 2019, 2020. We were coming off the back of a very low milk price.

And one of things we know about agriculture is that low commodity prices are generally the solution for low commodity price, meaning, you know, they tend to starve off supply. Unlike oil and gas or mining, the cycles in agriculture are quite quick because the world adjusts quite quickly, you know, because you're talking about annual production cycles or daily production cycles. Milk price is low. saw farmers leaving the land. We saw dairy herds being culled and we saw

shift and a change. And so we had almost a quarter of a billion dollars of exposure to lending to dairy farmers. And the cycle turned. And to be honest, the milk price went a lot higher than we had anticipated. But during that 2021, 22, 23 period, dairy farms became super profitable and either sold or refinanced to the banks. And so we were repaid almost

entirely out of that sector and we didn't feel like we wanted to compete at the top of the cycle. And what we chose to do is actually at that point move downstream. We financed a number of dairy processes who were really suffering because the milk price was very high. So we may have lent them $50 million, but they had a $250 million factory where earnings became anemic, but the replacement cost of that factory was through the roof. we tend to be more focused on replacement cost of the assets.

Adrian Redlich (59:29.787)
and having a view on the cycle. And so we don't really like lending. We didn't really lend to the cattle sector in a big way when the cattle price went to $10 a kilo. And then we did lend a bit more in the last six months, the cattle price fell to $4 a kilo and is now back to six, which is probably a reasonable, healthy price. So I think part of the art here is,

in agriculture lending at a time when prices are mid cycle or low cycle, not at the top of the cycle. And in our view, banks tend to lend more close to the top of the cycle in agriculture because the cash flow looks so good and the interest serviceability looks so good that we see their books grow quite dramatically. And it's fair when we look at the APRA data of agricultural lending from banks, banks...

at peak commodity prices of 2022 and 23 and near perfect rainfall on the east coast of Australia increased their agri lending quite dramatically. We would argue it probably the wrong time. We shrunk our agri lending in our diversified book and made room to increase that lending now. And so we actually see, we actually see now is a good time to be lending as things start to normalise. And so what it allows you to do

is to take a... yeah, you can take a somewhat counter -cyclical view and that's... that counter -cyclical view usually means the borrower is willing to pay a little bit more and you're entering the cycle at a more protected point.

Murdoch (01:01:10.55)
Fascinating, we can be here talking all day. Well, Andrew, it's been great having you on. If anyone wants to learn more about America's capital, how can they find you?

Adrian Redlich (01:01:18.872)
They can go to the americscapital .com website or they could go to the Regal Partners website. Alternatively, we're very active on LinkedIn. We tend to post weekly commentary as well at America's Capital LinkedIn page.

Murdoch (01:01:38.55)
was brilliant. I really, really enjoyed that. All right, agent, thank you very much, you told them and I hope you have a great day.

Adrian Redlich (01:01:43.609)
Yeah, pleasure. Thanks for speaking to me,

Murdoch (01:01:46.542)
Take it easy.