Specialist commercial property lender ThinkTank has launched two mortgage funds, offering investors the choice of monthly income streams from first and second mortgage portfolios.
ThinkTank has been in the market since 2006 and has originated $1.3 billion of secured commercial loans since then. Its target market is small and medium businesses.
Its current portfolio is worth $770 million, with an average loan size of $665,000.
All ThinkTank mortgages are floating rate loans, set at a margin over the bank bill swap rate. Current yields on its funds are 5.33 per cent net of fees for the first mortgage portfolio, Income Bonds, and 8.55 per cent net of fees for the second mortgage portfolio, High Yield Bonds.
Since the start of the year the 90-day bank bill swap rate has gone up by 25 basis points. Investors in the ThinkTank funds will have exposure to future bank bill rate increases.
Each fund includes a loss provision to cover defaults – 1 per cent of the loan pool for Income Bonds and 2 per cent of the loan pool for High Yield Bonds.
ThinkTank chief executive Jonathan Street says: “Of the $1.3 billion we have originated we have had losses of just over $1 million, and those losses were restored.
“We have a conservative approach. We do not do development loans, land banking or anything with environmental issues.”
The funds are open to wholesale and sophisticated investors, with a minimum investment of $10,000. Funds must be invested for a minimum term of one year. The management fee is 70 basis points and there are no entry or exit fees (there is a 2 per cent fee for redemptions within 12 months).
Both funds have income reinvestment options. ThinkTank has seeded the funds with $20 million of assets.
For a long time, mortgage trusts were popular with investors looking for income above TD rates but they suffered a liquidity crunch during the GFC. When Treasurer Wayne Swan introduced a guarantee on bank deposits there was a rush to safety and mortgage trust managers could not meet redemption demands.
Many mortgage funds were frozen and a number were wound up. Investors drifted away from the sector.
Street says there has been a revival in the past few years, with several groups, such as La Trobe Financial attracting strong flows into mortgage funds.
“The funds have more appropriate risk structures and managers have been more proactive about support and protection,” Street says.
On the question of liquidity, Street says the average loan is 3.5 years and the “recycle rate” is high. The high-yield loans are over shorter terms.
Street has spent 25 years in the finance industry, working at NAB, Rothschild Asset Management, Cargill Financial Markets and Accenture before co-founding ThinkTank.
Last month, mortgage aggregator AFG announced that it had acquired 30 per cent of ThinkTank and would distribute its loans through its network of 2900 mortgage brokers.
“AFG is a conservative organisation and its investment is a validation of our business model. They see an opportunity for growth in commercial loan origination and we see an acceleration in our growth profile,” Street says.