Qualitas Reports Strong FUM Growth Expected to Continue

22 February 2023

Qualitas presented its financial results for the six months to 31 December 2022 revealing a record capital deployment of $1.76b and continued growth in FUM and earnings.

Group Managing Director and Co-founder Andrew Schwartz said “During 1H23, we grew FUM by $1.5 billion from both existing and new investors which includes three large new mandates. We have experienced strong deployment primarily attributed to traditional financiers retreat from the commercial real estate (CRE) sector, which allows us to be cautious and selective in our investment decisions. We have sought to maximise invested capital via new warehouse facilities, utilising the strength of the Qualitas balance sheet to optimise the invested capital for our funds and to benefit from the deployment opportunities currently presenting.

Scalability of our platform is evidenced by the significant increase in the average gross investment size. Qualitas’ ability to transact at these investment sizes has enabled us to attract and finance premium opportunities not accessible to other market participants, providing us with a very strong competitive advantage in both debt and equity financing.”

Total FUM rose from $4.3 billion in FY22 to $5.8 billion in 1H23, representing a 35% increase on FY22 and a compound annual growth rate (CAGR) of 38% since Qualitas’ inception in 2008. Qualitas now manages 16 active funds across CRE private credit and equity strategies, including the ASX-listed Qualitas Real Estate Income Fund (QRI).

Strong growth momentum of FUM demonstrates the platform’s scalability, translating into the expansion of Group EBITDA margin, on a pre performance fee basis, by 6% on 1H22 to 44%.

The market expects interest rates to continue to rise in the first half of 2023. The lagged impact on CRE is likely to be seen in the second half of the calendar year, and could lead to further withdrawals of liquidity in the market and asset value recalibration. The observed easing of construction cost increases should assist developers with restarting projects that may have been put on hold.

As an experienced investor throughout the cycle, Qualitas is expected to benefit from these conditions.

Mr Schwartz said “CRE private credit is gaining momentum particularly with offshore institutional capital providers, given the benefits of a rising interest rate environment. The sector also provides shelter from the impact of inflation. Our funds and balance sheet capital returns can both benefit from rising interest rates.

Qualitas’ range of private credit, build to rent, inflationary hedge and opportunistic investment thematics illustrates the flexibility and resilience of our business model through market cycles”, said Mr Schwartz.

“The current market conditions that have seen the moderating of competition, coupled with the increased hesitancy of traditional funding sources to deploy capital in the CRE sector, will continue to be favourable to Qualitas as it encourages ongoing demand for our funds at attractive risk adjusted pricing. As an innovative, experienced, and well-capitalised CRE investment manager, we believe we are strongly positioned to select the very best investment opportunities.

Institutional investors are seeking to increase allocations to private credit, and we believe wholesale and retail will follow suit. We expect continued strong FUM growth, building on the increasing interest of both domestic and offshore investors seeking to reallocate their portfolios towards alternative investments and specifically to CRE.”

Qualitas reaffirms no change to FY23 guidance:

1H23 Qualitas Group Highlights:

Net Profit After Tax (NPAT) of $10.7 million, up 117% on 1H221
Pro forma Net Profit Before Tax (NPBT) of $14.6 million, down 11% on 1H222
Group EBITDA2 of $16.0 million, down 10% on 1H22
Excluding performance fees, Proforma NPBT2 and Group EBITDA2 up 77% and 66% respectively on 1H22
Funds management fees of $20.7 million, up 21% on 1H22
Earnings Per Share of 3.6 cents, up 1.9 cents on 1H22
Net cash position of $122 million at 31 December 2022

1H23 Qualitas Funds Management Highlights:

Committed funds under management (FUM) of $5.8 billion, up 36% on 1H22
$1.76 billion of capital deployed, up 68% on 1H22
Average gross investment size3 of $71 million, up 54% on 1H22

1H23 Financial and operational performance

A combination of significant growth in FUM to $5.8 billion and record deployment of capital drove a 21% increase on 1H22 in funds management revenue to $20.7 million.

Contributing to this result was a significant increase in Other Income of $7.5 million, up from $1.2 million on 1H22, due to increasing returns from underwriting.

The timing of performance fee revenue impacted both operating funds management EBITDA, which was $13.4 million (compared to $15.5 million in 1H22) and total normalised Group EBITDA (including the contribution from direct lending segment Arch Finance and Peer Estate), which was $16.0 million (compared to $17.8 million in 1H22).

Net performance fees declined from $9.0 million in 1H22 to $1.5 million in 1H23, mainly driven by timing of the relevant fund’s maturity.

The pool of theoretical embedded future performance fees for the period of 7 years from December 2022 has increased to c.$80 million, from c.$75 million in August 2022. This estimate is based on deployed capital only.

Earnings Per Share increased to 3.6 cents from 1.7 cents in 1H22.

The Company retained significant net cash holdings of $122 million. In addition to this, there is $107m deployed in warehousing as at 31 December 2022, providing flexibility to re-deploy in co- investment opportunities driving further FUM growth and/or bridging investment opportunities for new or existing funds.

Funds platform and deployment momentum

Total FUM rose from $4.3 billion in FY22 to $5.8 billion in 1H23, representing a 35% increase on FY22 and a compound annual growth rate (CAGR) of 38% since Qualitas’ inception in 20086. Strong growth momentum of FUM once again proves the platform’s scalability, translating into the expansion of Group EBITDA margin, on a pre performance fee basis, by 6% on 1H22 to 44%.

As 40% of capital deployed in 1H23 was achieved in the month of December 2022, the flow on benefits to funds management fee revenue and Group EBITDA margin is anticipated in 2H23.

Qualitas achieved a record six month capital deployment of $1.76 billion, up 68% on 1H22.

Qualitas now manages 16 active funds across CRE private credit and equity strategies, including the ASX-listed Qualitas Real Estate Income Fund (QRI).

Environmental, Social and Governance (ESG)

Qualitas is pleased to have established the Qualitas ESG Advisory Group. This group will help shape ESG best practice within the Company, identify and report progress against objectives, and advise how Qualitas leverages its strengths to influence positive ESG outcomes with borrowers and partners.

The Company has been conditionally endorsed by Reconciliation Australia for its Reflect Reconciliation Action Plan, in addition to renewal by Climate Active as a carbon neutral organisation for 2021-2022.

Outlook

Such an environment is expected to favour Qualitas as an experienced investor throughout the cycle, with a strong track record of disciplined investment selection and due diligence, and an ability to critically evaluate risks and develop plans to mitigate any changes in risk profile. We continue to be cautious in our investment selection with heighted focus on asset management.

Other elements of the macroeconomic environment will likely provide strong tailwinds for continued growth, including the ongoing housing supply shortage in Australia and a return to pre- COVID levels of overseas migration.