Qualitas Real Estate Income Fund (ASX:QRI) Quarterly Update, December 2021

Company Presentations

Qualitas Real Estate Income Fund (ASX:QRI) Co-Founder and Global Head of Real Estate Mark Fischer and Director, Listed Funds and Strategy, Corporate Development, Yin-Peng Chiew, present the group's December 2021 quarterly update.

Mark Fischer:
Hello, I am Mark Fischer, Co-Founder of Qualitas and Global Head of Real Estate, responsible for leading the Qualitas Investment Team across both real estate debt and equity investments.

On behalf of the portfolio manager Nick Bullick, I will be co-presenting the QRI December 2021 quarterly review alongside Yin-Peng Chiew, Director of Listed Funds & Strategy.

We remain positive on the CRE debt market and anticipate the Australian economic recovery despite the continuing setbacks from COVID-19.

As the competitive landscape for private debt increases and pricing compresses, we remain disciplined with investment selection.

The December quarter was one of the busiest investment periods of the year leading up to the holidays. We were able to leverage this and achieve strong deployment outcomes for the trust.

We invested in 16 new loans totalling $96m loans, both new and extended, and were repaid on $65m worth of loans.

We are pleased to advise that as of 31 December, we have deployed and allocated 70% of the $172m of new capital raised from the Entitlement Offer and is on track to fully invest this capital by April 2022.

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

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

The distribution return for the quarter and the financial year was 5.10% p.a. and 5.71% p.a. respectively.

We do note that returns are generally trending lower as a result of increased credit supply and competitive pressures across the CRE debt market.

The Trust is also in the process of investing the capital raised from the Entitlement Offer and the Trust capital is 75% invested. We continue to review our loans on a monthly basis 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 CRE debt market and QRI’s performance for the December quarter.

According to the recent RBA Financial Stability Review, non-bank debt financing now represents 10% of the financial system in Australia, an increase from 7% a year ago.

This demonstrates that non-bank lenders market share has increased and based on this proportion and the APRA reported bank CRE debt exposures of $381m, we estimate the size of the CRE debt market to have grown to $424Bn.

The CRE debt market is not only growing by 2-5% annually, but the market share of non-banks is also growing as banks continue to pull back.

For every 1% of market share that non-banks pick up, that’s approx. $4Bn of capital going into that segment.

We have a positive outlook on the CRE debt market and anticipate the Australian economy to recover from the recent setbacks due to COVID-19.

Generally, we have been seeing improving business activity across all CRE sectors and this will be further supported by the borders now reopened and the return of migration.

The low cash rate continues to underpin CRE debt demand and uphold security property values.

The Trust would benefit from rising interest rates and the short duration of the portfolio would provide the flexibility to reprice loans at the prevailing interest rates and convert to floating rates.

The market for alternative lending and credit supply remains strong and there are increasing competitive pressures to navigate.

We continue to search for the best risk adjusted returns for investors and we believe Qualitas is well positioned in the Australian market due to our long-standing local presence and deep borrower relationships built on trust and repeat lending over many years.

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.

I will now handover to Yin to present the more salient details of the QRI performance and portfolio.

Yin-Peng Chiew: Thanks Mark.

As a manager we continue to support QRI’s unit price.

We are committed to educating the market on CRE Debt and how it can benefit investor portfolios especially those seeking alternative income.

Thought leadership and our CPD wealth advisor modules are key strategies to encourage liquidity along with dedicated marketing efforts which includes specialist CRE debt education materials and content.

We not only continue to aim for solid portfolio and fund performance but also to be transparent with what is in the portfolio which supports a stable NAV position.

We are pleased to have achieved strong deployment outcomes for the trust and as of 31 December, of the $172m of new capital raised from the Entitlement Offer, 70% has been deployed and allocated as of 31 December 2021.

In December we also achieved three new loan mandates totalling $159m across investment and land loans of which credit assessment is being progressed for the allocation of Trust capital.

Based on this position, we remain on track to fully invest the new capital by April 2022 which is within the 6 month target period for the deployment timeframe indicated in the PDS.

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

We currently have a good level of exposure to investment loans at 43% and have also focused on more conservative exposures to land loans and construction loans.

On this slide we demonstrate the portfolio composition as of 31 December 2021.

The key changes to the portfolio from last September quarter is that there is increase geographic diversification with 15% allocation to ACT and SA, and lower allocation to VIC.

All other metrics on LVR, loan maturity, total loans remain relatively the same.

The cash position of the fund reflects the uninvested cash from the new capital raised and also loan repayments.

I will now provide an overview of two new loans that we invested in during the December quarter.

One new loan was a $52m senior investment residual stock loan of which QRI had $42.8m allocation. This loan financed 134 newly completed residential apartments in Canberra ACT at an LVR of 70%. The borrower had an excellent track record of project delivery and lending, and this loan represented the 6th transaction undertaken by Qualitas with this high calibre borrower.

Another loan settled was a senior construction loan of $41.8m of which QRI had an $20.9m allocation. This loan financed the construction of a boutique residential development in a blue-ribbon Sydney suburb on the lower north shore. The loan was funded with 75% presales debt coverage and the sponsor is a proven developer with an excellent track record of property development spanning over 30 years.

Despite the impact of COVID-19 continuing, we feel the Australian economy is resilient and we remain positive on our CRE debt investment opportunities.

Most importantly we are pleased to continue to provide QRI investors with attractive risk-adjusted returns in a low interest rate environment

This now concludes the December quarter presentation and we thank you for your time.


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