Bedrock

The fund’s exposure remains heavily weighted toward Residential and Industrial land and civil construction loans (75%), with an additional 15% invested in Industrial built-form loans. These loan types are preferred in the fund due to their typically lower complexity and reduced risk. The fund has no investments in residential built-form loans.

The fund’s returns outlook remains strong, with a solid pipeline of loan opportunities being originated by the Ark team, and noting all Bedrock’s investments being prepaid-interest loans with minimum interest rates.

Please contact us if you have any questions with regards the Ark Bedrock Mortgage Fund.

January is typically a quiet month in Commercial Real Estate and so it proved in 2025, with minimal change to the Bedrock portfolio.

January ’25 did see the Bedrock fund maintain its consistent, predictable performance with another return of 11.25% annualised, extending its long run of delivering a return of 11.25% or higher.

The fund’s diversity metrics were maintained, with the portfolio comprised of investments in 25 loans to 18 borrowers, in 8 regions, 6 states, and in loans spanning the Industrial, Residential, Retail and Medical sectors. With aggregate investments of $65.2m, the average loan size is $2.6m.

The fund’s investment sectors are heavily weighted to Residential and Industrial, at 96% in aggregate. The predominant loan purposes is land or civil construction loans (77%), with 18% industrial built form loans, together the Manager’s favoured loan types in the current environment. The fund has no investments in residential built-form loans.

The outlook for the fund’s returns continues to be strong, noting all Bedrock’s investments are prepaid-interest loans, and minimum interest rates.

This is the fund’s 13th month since inception and the fund’s 13th monthly return of 11.25% or higher, providing fund investors with excellent highly predictable, diversified-risk returns. The fund’s diversity metrics, the key focus of the Fund Manager and the broader Ark team remain strong, including; 25 loans (24 loans in Nov23) to 18 borrowers (17 borrowers in Nov23), in 8 regions, 6 states, and in loans spanning the Industrial, Residential, Retail and Medical sectors.

Nearly 84% of all loan investments are in Land or Land + Civil Construction loans, the space the Manager sees as the lowest risk part of the Development curve.

We believe the Fund’s return outlook remains strong, noting all Bedrock’s investments feature prepaid borrower interest and minimum interest rates, which is valuable in the event RBA rates fall. We look forward to Bedrock continuing to deliver the returns our investors have come to expect and rely upon as we enter 2025.

The November 2023 return, at an annualised 11.26%, is consistent with the returns achieved in the previous 11 months, making it 12 consecutive months within the band of 11.25% to 11.35%. The fund’s diversity metrics remain strong, with 24 loans, 17 borrowers, 9 regions, 6 states and territories, and loans spanning the Industrial, Residential, Retail, and Medical sectors.

Investments made during the month included two new loan facilities: a residential land investment in Margaret River, WA, and, in a first for the fund, a high-end residential investment property in New Farm, Brisbane.

The fund’s return outlook remains strong, with all investments featuring prepaid borrower interest, interest rate floors, and an average loan term to expiry of just over 9 months.

The October month saw the Bedrock fund deliver a return at 0.96% (11.26% annualised), extending to 11 months the run of returns within the band 11.20% to 11.35%. The annualised year-to-date Bedrock return is a healthy 11.33%.

We understand that the diversity of the Fund’s investments is key for our unitholders, and we actively manage the fund to ensure we deliver that diversity. At the end of October the fund’s diversity is demonstrated by its 23 unique loans, 16 borrowers, and 8 separate regions in 6 states, and loans spanning the Industrial, Residential, Retail and Medical sectors. The portfolio’s largest single exposure is just 11% of the portfolio.

The Outlook for returns remains strong, noting that all Bedrock’s investments feature interest prepaid by the borrower, and an average loan term to expiry of 11 months.

September 2024 Update

September 2024 saw Ark Capital’s Bedrock fund (the “Fund”) maintain its record of consistency, with another strong monthly return at 0.93% (11.27% annualised). This is the 10th straight month the Fund has delivered a return within the band 11.20% to 11.35%, a record of consistency our unitholders tell us they very much appreciate. The annualised year-to-date (and inception-to-date) Bedrock return is a healthy 11.32%. Funds under management rose to $48.5m at the end of the month, with an expected $5.0 million of units to be issued in October 2024 pushing Bedrock over the $50 million mark for the first time.

The diversity of the Fund’s investments, a key focus of the Fund Manager and broader Ark team has been improved throughout the month, with the portfolio now comprised of 22 unique loans to 14 borrowers, across 9 different regions in 6 states, and spanning Industrial, Residential and Commercial loans. The portfolio’s largest exposure to a single borrower is 14% and the maximum single loan exposure is also 14%… metrics we expect to improve further as the Fund grows.

Land and civil construction loans, which we very much see as the lower end of the risk spectrum continue to make up the bulk of the portfolio at 88% of the total, with the remaining 12% invested in commercial and industrial built-form loans.

There were two significant additions to the portfolio in September, namely a $2m investment in an industrial built-form construction loan in the northern suburbs of Adelaide, and a $2.9m investment in a residential land bank loan in the ACT. There were several other “re-weightings” between existing loans during the month, to better balance the portfolio. The average loan-to-value ratio (LVR) reduced slightly to 63.6%.

The Development Landscape

Last month we provided commentary on the pressures facing property borrowers in various states and development sectors (most notably in Victoria and NSW) and noted that for some time now Ark has placed its investment focus on South Australia, South East Queensland, Western Australia and the ACT. It follows that of the pipeline of opportunities for the Fund the majority are in these locations. Ark Capital continues to receive applications for, and conduct detailed due diligence on potential development loans in Victoria and NSW, with only a small number in these states being assessed as creditworthy in recent times.

We reiterate something we have been saying for many months now, that Ark and the Fund’s preferred loan types are the lower-risk land and civil construction loans, where we (and our advisors) see less trouble amongst construction companies engaged by our borrowers. We also continue to see value in industrial built-form construction loan projects, where construction is typically more straight forward, time to complete shorter and regulation less onerous.

What impact will interest rates “higher for longer” this have on the Ark Bedrock Fund?

With the political volleyball that interest rate setting has become and the ongoing media speculation around interest rates, it is important that our investors understand Ark’s approach to interest rates.

For several years now the interest rate on most Ark Capital loans has included a minimum or floor interest rate (typically the RBA cash rate plus a margin) set at inception of the loan, whilst being variable if rates rise during the loan term. This obviously gives investors comfort that the real value of their investment returns will be maintained even in arising rate environment. Ark Bedrock, investing exclusively as it does in loans written by Ark Capital’s Ark Wholesale Mortgage Fund enjoys the benefits from this “ratchet” feature, and whilst not guaranteed to always be the case, this clause is typically standard in Ark Capital loans.

Outlook for Bedrock

The Ark Wholesale Mortgage Fund, into which Bedrock makes all its loan investments has a strong pipeline of potential loans for settlement in the coming months. The Fund Manager remains confident as existing investments mature and new investor funds are received that there will be sufficient investment opportunities to maintain both portfolio quality and high cash utilisation, enabling Bedrock to continue delivering consistently 11%+ returns in the medium term.

August 2024 Update

August 2024 saw Ark Bedrock deliver another strong return of 0.95% (11.25% annualised). Funds under management (FUM) rose by $2.7 million, ending August at $43.7 million, with an additional $3.0 million received for unit issuance in September. The year-to-date (and inception-to-date) Bedrock return is 11.35% annualised. At the end of August, the portfolio comprised 20 unique loans to 13 borrowers across 9 different geographies in 6 states/territories, spanning 3 different development sectors and 3 different loan types. Land and civil construction loans continue to make up the bulk of the portfolio at 91.7% of the total, with the remainder invested in commercial and industrial built-form loans.

There were two notable changes to the portfolio in August, with $4m invested in a civil construction loan for a residential land subdivision in Burpengary East, Brisbane, and a reduction of $1.25m in a residential land banking loan in Ballarat, regional Victoria. The average loan-to-value ratio (LVR) increased slightly to 63.9%.

The Development Environment

In recent months, we have provided commentary on the pressures facing property borrowers in various states and development sectors (most notably in Victoria and NSW, specifically in built-form projects). Ark has maintained its focus toward geographies such as South Australia, South East Queensland, and Western Australia, where the development sectors have been displaying more favourable investment conditions with strong demand and supply metrics. We have also discussed Ark’s response in terms of the types of loans we are issuing, with a focus on lower-risk land and civil construction loans. Furthermore, we have emphasised our commitment to providing a truly diversified investment portfolio in Bedrock, recognising that many investors have chosen Bedrock due to the risk-reducing benefits of diversity. Pleasingly, we continue to achieve this. All of these messages remain relevant as we move forward.

It is becoming increasingly apparent, however, that lenders who typically offer larger loans for built-form construction projects are beginning to compete more in our mid-market, land, and civil works space, and in the geographies we have been active in. This is leading to increased competition for higher-quality investments, and we expect that this, along with forecasts of lower future RBA rates, may have a downward impact on new loan interest rates and, consequently, returns to the fund. We view this competitiveness as part of the cycle, something Ark’s loan origination team, with its extensive experience across numerous credit cycles, has encountered multiple times before. During competitive cycles, our focus on due diligence discipline is even more critical, micro-analysing loan projects, scrutinising the stability of contractors engaged by the borrower, and thoroughly understanding the value of the security we are accepting. In these environments, Ark’s leadership team is content to hold capital on the sidelines rather than deploy it into loans with unacceptable risk/return metrics. We anticipate that when the challenges impacting built-form construction loans dissipate, many of the lenders currently entering our space will likely shift back up the “loan size” curve into their traditionally core lending projects.

Defaulting Loans and Transparency

Ark dedicates significant time and resources to loan management, which typically gives us the advantage of identifying problem loans or delayed projects at an early stage. Our Executive Directors’ experience as property developers, combined with their extensive market knowledge, enables Ark to proactively address potential issues and work on solutions before they fully emerge. Importantly for our investors, in the event we need to enforce a loan, we are workout specialists capable of identifying and bringing to the table multiple repayment options. This contrasts with other lenders who might simply seize and sell the security property, writing off any shortfall and negatively impacting investors.

Much has recently been written in the media about “secrecy,” “opaqueness,” and “private lenders with problem loans,” with calls (often by the large banks) for greater regulation in the Private Credit space. Ark expects that ASIC will respond to this by imposing greater regulation, oversight, and transparency in the real estate private debt sector in due course, and to an extent welcomes it. Ark takes an “investor first” approach to all our decisions and continues to build on and invest in our compliance, governance, and management processes and structures, to ensure that communication and transparency with our investors and stakeholders are at the forefront of everything we do.

Outlook for Bedrock

The Ark Wholesale Mortgage Fund, into which Bedrock makes all its syndicate investments, has a strong pipeline of potential loans for origination and settlement in the coming months. As existing investments mature and new investor FUM is received, the Fund Manager remains confident that there will be sufficient investment opportunities to maintain both portfolio quality and high cash utilisation in the Fund, enabling Bedrock to continue delivering consistent 11%+ returns to investors in the medium term.