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PMAC Trust - Provides Exposure to a Diversified Portfolio of Loans to Commercial Borrowers

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PMAC Trust (“the Trust”) was established as an unregistered managed investment
scheme in December 2015. The Trust is issued issued by Primary Securities Ltd, who acts
as Independent Trustee and managed by Private Mortgages Australia Pty Ltd (“PMA’” or
“the Manager”). The Trust provides exposure to a diversified portfolio of loans to commercial
borrowers, which are used either for property development or business related purposes.
Irrespective of the use of borrowed funds, all loans are secured by either registered first
mortgages (R1M) or, less frequently, registered second mortgages (R2M) over the borrower’s
property as opposed to being secured by cashflows and/or the assets of a particular
business. As such, the risk of an impairment on loan principal and across the portfolio as
a whole is broadly a function of property market price risk and loan-to-value ratios (LVRs).
In this respect, the Manager has a strong historic track-record, having recorded a loss on
principal equal to 0.1% of the total loan book at the time over its five year track-record. The
Trust has a target allocation of 70% R1M; 25% R2M; and a 5% cash allocation. As a 30
September 2020, The portfolio consisted of a $13.1m loan book consisting of 26 outstanding
loans with an average size of $0.41m, a weighted average LVR of 65.4%, and a portfolio split
of 72% registered first mortgages (R1M), 13% registered second mortgages (R2M) and
15% in cash. The weighted average loan maturity is a short 8.2 months. The Trust aims to
pay distributions on a quarterly basis. There is no explicit target return, but implicitly it is circa
at the 9% p.a. level. Since its inception in 2015, the Trust has delivered a 11.54% annualised
return to 30 September 2020, net of all fees.
INVESTOR SUITABILITY
IIR has for some time now viewed Australian private debt as offering one of the most
attractive risk-adjusted returns profiles. It is also one of the few asset classes where the
skillset of the manager can actually demonstrate the managers capacity to ‘preserve investor
capital’. The Trust is an attractive income play and also a thematic play on the continuing
evolution of the Australian non-ADI lending market. Non-ADI (private debt) lenders continue
to take an increasing share of the overall market due to the unwillingness / inabilities of banks
to extend certain loans in the wake of tighter macro-prudential and Covid-19 related workload
pressures. The situation, tied with the Manager’s ability to execute loans in a rapid and
borrower customised manner presents an opportunity for the Manager to earn and pass on
excess returns to investors. From a risk spectrum, we view the investment strategy as being
at the low, low-moderate end of the spectrum based on adequate portfolio diversification, the
Manager’s prudent and thorough loan and risk management processes, and the nature of the
collateral tied with prudent LVRs (even more so given the short duration of the loans). While
private debt as an asset class can have liquidity constraints, the short duration loan profile tied
with loan repayment date diversification across the loan book supports the quarterly liquidity
profile of the Trust. In a world of historically low term deposit rates and ongoing dividend
deterioration risk, we continue to view private debt, and including the Trust, as a very attractive
alternative for income seeking investors. IIR has also written extensively about Covid-19 and
private debt and see it more an opportunity than a risk for select investment managers.
RECOMMENDATION
IIR ascribes a “RECOMMENDED” rating to the PMAC Trust. The Trust is based on a simple
and straightforward investment strategy and objective. And by ‘simple’ we do not mean
that in a derogatory way. In contrast, simplicity when has strategy has delivered on or
exceed performance objectives can be a solid positive. And the strategy has delivered. The
Trust is managed by an experienced team and a manager with an established history in the
property sector. The Manager has delivered on its performance objective on its existing loan
book, which augurs well for future investors given IIR’s conviction in team and process. Our
major criticism of the Trust is the very high level of fees. IIR recognises lower FUM managers
warrant higher fees from a viability perspective, and commend the Manager for recently
implementing a FUM threshold MER reduction plan.