QRI Quarterly Presentation, June 2021

Company Presentations

Qualitas Real Estate Income Fund (ASX:QRI) Director, Real Estate Nick Bullick presents the June 2021 quarterly update.

Hello, I’m Nick Bullick, a Director within the Real Estate Investment Team at Qualitas and the portfolio manager for QRI and I am pleased to present the QRI June 2021 quarterly review.

During the June quarter the origination of new opportunities continued to be strong and is well diversified across property sectors, reflective of the growing CRE debt market both in demand and supply of credit.

Whilst the alternate lender competition continues to increase and we are starting to see loan pricing compress, we firmly remain focused on ensuring we achieve the best risk-adjusted returns for the Trust with a continued emphasis on Borrower quality.

In addition to the $54m placement closed on 1 April, we raised a further $12.7m of new capital from existing unitholders through a unit purchase plan offer which closed on 29 June and we would like to take the opportunity to thank our existing unitholders for continuing to support QRI.

Investment activity during the quarter was strong and we closed 8 new loans worth $189m which were funded via the capital raise and $98m of repayments.

We elected to fully redeem and exit the $26.5m investment in the Arch Finance notes as to align with our strategy to increase the Trust’s exposure to direct loan investments.

The key benefit of direct loans is the greater flexibility to manage the Trust’s portfolio composition whilst providing greater control over loan assets. Exposure to direct investments has now increased to 86% of the invested portfolio.

The Trust’s investment objectives of target return, portfolio diversification and capital preservation were all met during the quarter.

We continue to deliver consistent returns in a well-diversified loan portfolio that is predominantly senior first mortgage.

The distribution return for the quarter and the financial year was 6.14% p.a. and 6.15% p.a. respectively.

We maintain our loan reviews monthly, and we are pleased to report that the loan portfolio is performing with no impairments recorded or interest arrears resulting in a stable NAV.

We will now look at a more in-depth update on the market outlook and fund performance for the June quarter.

Despite a macroeconomic backdrop of COVID-19 continuing to impact various parts of the country, Australia has generally demonstrated a level of economic resilience as supported by the Government.

We expect to be in a low interest rate environment for some time which will continue to support positive asset yields.

We are seeing no major distress in the CRE debt market and generally these conditions in Australia are more favourable than offshore markets which has led to increased investment activity from both domestic and offshore alternative lenders in recent months.

Our sector outlook has not changed as the same risks remain present and we are comfortable navigating the diverse sector opportunities presented in the market.

We are however seeing more pre-development land loan opportunities as developers secure sites in readiness for the next development cycle. We expect residual stock loan opportunities to reduce over the next 12 months in line with reducing completed apartments across the market. We are closely watching the market more generally in light of the recent lockdowns in Sydney and Melbourne and can confirm there is only a 10% portfolio exposure to construction loans for projects still under construction, which all are located in Melbourne where construction sites have not closed.

The Manager is comfortable that each construction loan has adequate contingencies and equity to cover extended delays from the risk of lockdown should this occur in Melbourne.

As mentioned before, our pipeline is strong at $475m and is well diversified across all property sectors.

Loan pricing has started to compress due to increased competition however we remain disciplined with our investment selection and will not compromise on transactions which present material credit risks, ensuring strong sponsor and property quality.

QRI’s trading performance remained consistent during the quarter and pleasingly continued to trade at a slight premium to its net asset value of $1.60.

We have demonstrated over the past 12 months that we are able to support the unit price during times of volatility and will be actively monitoring markets in light of the ongoing COVID-19 risks.

The Trust’s investment mandate constraints and Manager key targets were all met.

The significant change to focus on is that we are no longer holding Arch Finance notes given its redemption and full exit in June which further reduced our exposure to indirect.

We have been transitioning the portfolio to more direct loan exposure and since June last year, direct loans increased from 45% to 86% of the invested portfolio.

We have achieved this by investing available capital into direct loans and electing to reduce indirect loan investments by part redemption of the Qualitas Senior Debt Fund units and the full redemption and exited of the Arch finance notes.

We also expect to fully exit the Qualitas Land Debt Fund in the September quarter once the final loan repays.

The key benefit of direct loans is the greater flexibility to manage the Trust’s portfolio composition whilst providing greater control over loan assets.

On this slide we demonstrate the portfolio composition as of 30 June 2021 with no material changes other than the redemption and full exit of the $26.5m Arch finance notes.

Please note that the $12.7m of new capital raised from the unit purchase plan settled on 6 July and is not reflected here.

The Trust is 86% deployed and the remaining cash is fully allocated to new investments expected to settle in upcoming months.

We do note that there is a high concentration of loans in the residential sector and located in Melbourne however a large proportion of these are residual stock investment loans which are expected to naturally amortise over the next 6 to 12 months.

We also note the weighted average LVR has increased from 61% to 64% which is largely due to an increase in residual stock loans which we feel is acceptable risk at this point in the cycle.

In summary, QRI continues to perform and meet its investment objectives despite a macroeconomic backdrop of COVID-19 continuing into the foreseeable future.

The alternative lending market continues to grow and QRI is well positioned due to its long-term market presence and deep borrower relationships.

Investors have continued to support QRI given it seeks to offer attractive risk-adjusted returns1 in a low interest rate environment.

As a leading investment manager in CRE debt, we are committed to educating our investors in this specialised asset class.

Thank you.


Ends

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