QRI Quarterly Update, March 2021

Company Presentations

Qualitas Real Estate Income Fund (ASX:QRI) Global Head of Real Estate & Co-Founder Mark Fischer, Director, Real Estate Nick Bullick and Director, Strategy Yin-Peng Chiew present the 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. The Qualitas team and I are pleased to present the QRI March 2021 quarterly review.

Nick Bullick: Hi, I’m Nick Bullick, a Director within the Real Estate Investment Team at Qualitas and the portfolio manager of QRI. My team is responsible for origination and execution of CRE loans.

Yin-Peng Chiew: Hi, I’m Yin-Peng Chiew, Director of Strategy at Qualitas and I am responsible listed fund product strategy, marketing and investor relations.

Mark Fischer: During the March quarter, market conditions were favourable and we experienced very strong borrower demand which fuelled our CRE debt pipeline which now stands at $475m. We continued to leverage our sophisticated borrower network to access a broad spectrum of compelling CRE debt opportunities that replenished our pipeline following deployment. We are pleased that the improving market sentiment coupled with our ongoing efforts as a Manager to improve secondary demand has resulted in QRI’s unit price trading at or above par. Given our strong CRE debt pipeline, the Trust’s fully allocated portfolio position, and favourable unit price trading, we sought to raise additional capital and successfully closed a $54m private placement which provided an opportunity to diversify and introduce new wholesale investors onto the register, further supporting liquidity. The Trust is now $415m in size and as of the date of this release, is fully allocated to investments that we currently anticipate settling in upcoming months. As expected after the holiday period, investment activity was quieter and we settled 3 loan extensions totalling $21m whist reallocating and reinvesting $49m of returned capital from loan repayments and fund redemptions. Based on the current loan portfolio, accounting for the recent $54m placement capital raised and subject to no unexpected repayments, the Manager expects that the strong fully allocated capital position of the Trust will underpin a consistent level of distributions to investors of at least 6.00% p.a. until June 2021.

We are pleased to report that the Trust’s investment objectives of target return, portfolio diversification and capital preservation were all met. We continue to deliver consistent and attractive risk-adjusted returns for a 34 loan portfolio that is predominantly senior first mortgage. The distribution return of 6.32% p.a. for the quarter was in the upper band of the Target return range. The loan portfolio is performing, and we currently have no concerns. No impairments or interest arrears and a conservative weighted loan to value ratio of 61%, resulting in a stable NAV position for the Trust.

We now move to the Market and fund performance update for a more in-depth look into the March quarter.

Nick Bullick: We remain positive on the market generally given the Australian economic recovery is underway and overall, we expect stable CRE debt market conditions in the short to medium term. Strong borrower demand for credit continues as a result of the retreat by the APRA regulated banks from CRE lending. The RBA is keeping interest rates on hold which is favourable for asset valuations. However, we recognise that we are at the bottom of the interest rate cycle and are keeping a close watch on long term base funding rates. As base rates increase, this generally has the effect of increasing market pricing within the CRE debt market. We draw your attention to our current sector outlook, noting that QRI will invest in all 5 of these sectors. Whilst there are neutral and increased risks to navigate for office, retail and accommodation sectors post the height of COVID-19, we always take a common-sense approach to investing ensuring we are accepting an appropriate level of risk for the return.

Alternative lending continues to be in high demand as bank appetite remains subdued and borrowers take advantage of their full lending capacity during this period of strong CRE investment activity. Because of these reasons we believe that attractive risk adjusted CRE debt returns will continue as borrowers are willing to pay a premium to secure funding for their strategic projects. Asset valuations are currently relatively stable, and properties are performing and are supported by low interest rates. This is a positive for the equity buffer within the security property that sits behind each loan, meaning risk of impairment is low.

Yin-Peng Chiew: We would like to take the opportunity to recap on the Trust’s trading performance since inception which was just over 2 years ago. Since the IPO in November 2018, the Trust’s unit price was trading for the most part, at a premium to the net asset value of $1.60. Like all credit listed investment trusts, the Trust’s unit price was impacted upon the onset of COVID-19 in March 2020, creating a significant but temporary dislocation between market values and actual loan asset values. We sought to ensure investors understood that the Trust’s net asset value remained stable since the IPO and during the COVID-19 period, with no impairments recorded. We also moved to monthly individual asset reviews and weekly NAV reporting to increase transparency. Following improving market sentiment coupled with our ongoing efforts as a Manager to increase secondary demand through direct marketing to investors, leading CRE debt education and increased investor communication, we are now pleased to see that this has resulted in QRI’s unit price trading at or above par.

QRI’s performance remains strong for the first quarter of 2021 with a 5.87% p.a. net return and a stable 6.32% p.a. distribution return for the March quarter. The 12-month returns have been maintained at above 6% p.a. consistently month to month, that is, achieving returns at the upper band of the Target Return. Based on the current loan portfolio, accounting for the recent $54m placement capital raised and subject to no unexpected repayments, the Manager expects that the strong fully allocated capital position of the Trust will underpin a consistent level of distributions to investors of at least 6.00% p.a. until June 2021.

On this slide we demonstrate the portfolio composition as of 31 March and on a proforma basis, reflecting the impact on the $54m Placement and a new sizeable $83.5m senior investment loan, which both settled in April. On a proforma basis, the Trust is 92% deployed and the remaining cash is fully allocated to new investments expected to settle from now to June 2021. Investment loans are now sitting at approx. 45%. As the fund is now larger at $415m, there will be some cost efficiencies, and we expect a slight improvement of management expenses as a percentage of net asset value over time. The Trust is predominantly invested in senior loans with a circa 7% exposure to direct mezzanine construction loans on a proforma basis. As we seek to increase mezzanine exposure targeting 15% in the medium term, this is likely to be accretive to Trust returns.

Nick Bullick: As a result of strong borrower demand, our CRE debt pipeline increased from $400m last quarter to now $475m. Our pipeline reflects a number of compelling opportunities across all sectors of the property market. It is important to note that our pipeline number is dynamic and loans that are deployed are continually replenished and topped up with new opportunities. Our approach to active and ongoing origination through our sophisticated borrower and broker networks ensures that we can efficiently deploy available capital and minimise cash drag.

In this section we will go into more granular detail of the invested loan portfolio as of 31 March 2021.

We continue to stay within our PDS portfolio and Manager key targets noting that these stats demonstrate actual 31 March position. Qualitas fund investments has now reduced to 19% of total capital following the $44.4m unit redemption in the Qualitas Senior Debt Fund. We are comfortable with a lower level of indirect exposure of loans via the wholesale funds. We seek more flexibility and control in the portfolio composition by investing in direct loans going forward. I draw your attention to investment loans which has temporarily decreased to 28% however as explained previously, on a proforma basis has returned to approx. 45% as a result of a sizeable $83.5m investment loan settled in early April. In the medium term we continue to target 15% direct exposure to mezzanine loans which we believe is appropriate at this point in the cycle however we will not be rushed and the trust will only invest in the right opportunities.

As of 31 March, the Trust’s portfolio composition remained relatively consistent with last quarter. We also demonstrate on this slide the proforma impact of the $54m Placement and the $83.5m new senior investment loan settled in April. On a proforma basis, the Trust is 92% deployed and the remaining cash is fully allocated to new investments, and investment loans are now sitting at approximately 45% of the portfolio.

The loan portfolio metrics also remained relatively consistent with last quarter. The portfolio continues to be predominantly invested in Qualitas core markets of Melbourne, Sydney and Brisbane equating to 95% of the invested portfolio. We don’t see this changing significantly in the medium term.

As per our latest monthly asset review, we have no impairments or arrears on QRI loans. Arch Finance note interest continues to be serviced and therefore no impairment is required. In respect of the underlying Arch Finance loan pool, arrears is very low at 0.5% out of a total of 214 loans. In terms of assessing our impairments, we have significant equity buffer in our security properties, most of our loans contain sponsor guarantees and interest reserves and we undertake regular revaluation of our security.

Senior investment loans temporarily decreased to 28% as of 31 March due to the redemption of units in the Qualitas Senior Debt Fund, a repayment of a material investment loan and consistent amortisation of residual stock loans. However, post 31 March, a $83.5m senior investment loan was settled in April taking the proforma weighting of investment loans to approx. 45%. The weighted average LVR has also reduced from 61% last quarter to 57% due to repayments.

The senior construction loan portfolio did not materially change from last quarter and all loans are performing to schedule. We do expect to be fully repaid on two construction loan during the June quarter and these funds will likely be reinvested into residual stock loans currently in our pipeline.

Senior land loans increased to 29% as a result of an increase and extension of two existing loans. The weighted average LVR increased from 63% last quarter to 66% due to slight increase of leverage of the newly extended loans.

The mezzanine construction loan portfolio remained stable, with no material updates. We are pleased that all loans are performing to schedule.

The Arch portfolio of 200+ loans is performed well, recording very low arrears this quarter which has not impacted interest servicing of the notes. Arrears reduced from 2% last quarter to 0.5% as a result of full loan recovery and repayment achieved on the two loans which Arch Finance enforced security. I will now hand back to Mark to wrap up our quarterly update.

Mark Fischer: We now conclude the QRI March quarter presentation with our final wrap up. Qualitas has a commitment to investors to provide the highest level of transparency to QRI’s portfolio and performance and we have proven this by delivering quality and frequent investor communications during the challenging COVID-19 period. Global credit markets continue to be impacted by COVID-19 however QRI continues to perform to expectations, delivering on its investment objectives. We are pleased to see investors increasingly seeking private debt investments such as QRI which offers attractive risk-adjusted returns where interest rates are at all-time lows. As a leading investment manager in CRE debt, we are passionate in educating our investors in this specialised asset class. We thank you for your time.