Qualitas Real Estate Income Fund (ASX:QRI) Quarterly Update, March 2022


Andrew Schwartz (Group Managing Director and Co-Founder) and Nick Bullick (Senior Director, Real Estate) discuss QRI’s performance and highlight the benefits of QRI as a hedge against rising interest rates and inflation.

Highlights

  • QRI has delivered an attractive distribution return of 5.35% over the last 12 months (LTM) calculated on a LTM average NTA of $1.61
  • Entitlement offer proceeds invested ahead of PDS forecasts, with Trust capital currently 88% invested and the current cash balance fully allocated to new investments
  • Variable rate loans as at 31 March represent 31% of total portfolio, providing interest rate and inflation protection as any increase in the cash rate and/ or risk margins are passed through to the unitholder. This exposure is expected to increase significantly in the next 12 months as the portfolio is of short duration and the vast majority of new loans being written as variable rate meaning the funds interest rate charged to Borrowers will increase with widely expected rises in base interest rates
  • Strong portfolio credit quality maintained, with no impairments or interest arrears experienced since IPO
  • Net Asset Value (NAV) per unit of $1.60 at 31 March 2022

Fund and market update

During the March quarter, QRI continued its strong track record of delivering monthly returns to investors, recording an attractive LTM distribution return of 5.35% per annum to 31 March 2022 based on the LTM average NAV of $1.61 [1]

The portfolio continues to perform in line with its investment objectives, with no loan impairments or interest arrears recorded during the quarter, and at 31 March the Trust’s NAV per unit was unchanged at $1.60.

Investment activity for the quarter comprised 11 new and extended loans totalling $137 million settled and a total of 40 million loans repaid. In addition, QRI is expected to participate in approximately $300 million of new loan mandates which have been generated through the Qualitas network and which are expected to settle in the coming months.

QRI loans are structured to target attractive yield with inflation protection. The short duration of the QRI portfolio allows for re-pricing of loans and the revaluation of loan security. QRI has a fully secured portfolio with an average Loan-to-Value ratio (LVR) of approximately 66%, which provides a significant equity buffer against any reduction property values. In addition, security is further strengthened with 99% of QRI investments subject to personal guarantees as of 31 March 2022.

Interest rates and Trust performance

The Manager believes QRI is well positioned as we enter a period of rising interest rates and inflation because:

  • Increases in the RBA Cash Rate are passed through to borrowers for the Trust’s variable interest rate loans. As at 31 March 2022, 31% of the QRI’s portfolio is loans based on a variable interest rate and this percentage is expected to increase as the weighted loan maturity of the portfolio is 1.2 years and any new loans will be priced on a variable rate base rate;
  • QRI has no borrowings, which means rising interest rates do not impact the Fund’s direct costs, and revenues are expected to increase as interest rate increases are passed through to borrowers on the Trust’s variable rate loans;
  • Historically, risk margins tend to rise in times of market uncertainty and volatility, and QRI is well positioned to capture this upside as its loans have short duration of 1.2 years, allowing for re-pricing of loans and revaluation of underlying real property security; and
  • QRI provides attractive income returns with inflation protection through a fully secured portfolio, an LVR of c. 66%, and a weighted loan maturity which allows for frequent revaluation and re-assessment of returns.

The Manager also notes that rising interest rates may have an impact on the valuation of the underlying real estate security which may have an impact on the returns of the fund.

Summary

QRI is well positioned to navigate a period of rising interest rates and inflation, with a high proportion of variable interest rate loans and a relatively short average loan term. These key factors, combined with the recent widening of credit spreads, is anticipated to benefit the returns generated for QRI investors.

QRI maintains a strong track record of delivering attractive monthly returns and no loan impairments to date [1]. The Manager continues to see a dynamic commercial real estate debt market delivering a strong pipeline of opportunities for QRI. We also remain vigilant with respect to asset management and to our approach to managing risk across the portfolio.

Ends

[1] Past performance is not indicative of future performance

Disclaimer:

This communication has been issued by The Trust Company (RE Services) Limited (ACN 003 278 831) (AFSL 235150) as responsible entity of The Qualitas Real Estate Income Fund (ARSN 627 917 971) (“Trust”) and has been prepared by QRI Manager Pty Ltd (ACN 625 857 070) (AFS Representative 1266996 as authorised representative of Qualitas Securities Pty Ltd (ACN 136 451 128) (AFSL 34224)).

This communication contains general information only and does not take into account your investment objectives, financial situation or needs. It does not constitute financial, tax or legal advice, nor is it an offer, invitation or recommendation to subscribe or purchase a unit in QRI or any other financial product. Before making an investment decision, you should consider whether the Trust is appropriate given your objectives, financial situation or needs. If you require advice that takes into account your personal circumstances, you should consult a licensed or authorised financial adviser.

While every effort has been made to ensure the information in this communication is accurate; its accuracy, reliability or completeness is not guaranteed and none of The Trust Company (RE Services) Limited (ACN 003 278 831), QRI Manager Pty Ltd (ACN 625 857 070), Qualitas Securities Pty Ltd (ACN 136 451 128) or any of their related entities or their respective directors or officers are liable to you in respect of this communication. Past performance is not a reliable indicator of future performance.

The Product Disclosure Statement (“PDS”) and a target market determination for units in the Trust can be obtained by visiting the Trust website www.qualitas.com.au/qri. The Trust Company (RE Services) Limited as responsible entity of the Trust is the issuer of units in the Trust. A person should consider the PDS in deciding whether to acquire, or to continue to hold, units in the Trust.