Company Interview / Quality FUM growth for Qualitas

Andrew Schwartz, CEO of Australian real estate investment company Qualitas (ASX: QAL), highlights the company's significant growth over the past year, despite challenging market conditions. With a notable 46% increase in funds under management reaching $8.9 billion, the company also saw a 55% rise in net capital inflows. Andrew confidently outlines the company's future plans for expanded investments, specifically within the residential construction realm.

Extending his perspective on the impact of oscillating interest rates, Andrew cites investor interest in credit margins over the risk-free rate as a notable factor for continuance in the real estate market. He also points out the increasing acceptance of real estate private credit in the marketplace, which he says can act as a buffer against equity valuation volatility often impacted by rising interest rates.

With his broad outlook on the state of the Australian market, Andrew underlines the essential need for capital in the residential sector of Australian real estate due to the imbalance in supply and demand driven by migration. He highlights the success and potential in Qualitas' (ASX: QAL) discerning model in serving investors despite a saturated demand on their capital, which has led to the company seeing great opportunities. Finally, Andrew asserts his and Qualitas' (ASX: QAL) readiness to continue sacrificing the capital availability risk premium for their investors into the future.

Full unedited transcript below:

0:11

Australian alternative real estate investment company quality has posted full year funds under management of $8.9 billion, up 46% on full year 23. It's also delivering a record 2.8 billion in net capital inflows, up 55%. Confident that it will continue to grow in the coming year, aiming to invest in new projects, especially in the residential construction sector. For more on the results, quality CEO Andrew Schwartz joins me now. Andrew. Hi. Thanks so much for joining us. Buyers, just in your words, what were some of the highlights of the year?

0:42

I think we had both a really strong year, both by way of the actual deployment of capital, but also capital raising in our funds. And as you just pointed out, you know, we did report this morning $8.9 billion of total funds under management, a year end, which was up 46%. We're really pleased with the result overall. We further reported net profit before tax of 39 million, up 27%. Deployment up 40%. Capital raised up 55%. You know, these are not small numbers in the context of I think most people would agree, a more difficult time in the real estate industry. Qualités really continued to perform and show growth during the year. Yeah, as you say, difficult market conditions. What's the outlook for full year 25?

1:35

Look, I think we're still we're still growing as a as an organization. You know, real estate private credit is gaining more more and more acceptance in the marketplace. I'm often asked the question, you know, why is private credit really, really gaining that momentum? And it's been a tough year for investors who hold equity in real estate. Interest rates, as you know, have risen some 400 basis points. Yeah, it's played with equity valuations. And a lot of our investors, who are predominantly large global institutions, have invested heavily in the office sector, industrial sector, retail sector and credit. Is this shining light that provides buffering of volatility against equity revaluation. So I think it's just gained favour because of the rising interest rates, but also the fact that it offers protection from what has been quite substantial movements in in equity valuations. So a difficult capital raising market.

2:35

Um you talked a little on, on how you perform despite all of that. What sort of challenges do you expect moving forward or how are you sort of moving to hedge? I guess some of these challenges

2:47

are the big the big question for investors often in real estate credit is, you know, which why are interest rates moving? And I think that for us, you know, it's less about trying to predict the actual next call by the reserve Bank on whether interest rates might go up or down as as the next rate movement is to, uh, the fact that they're oscillating around current current levels and therefore, you know, the ability of those that borrow money for real estate purposes, bearing in mind where our wholesale lenders, you know, we're not doing any mum and dad lending to, you know, people with mortgages, house loans, you know, we're providing loan facilities predominantly to large users and investors in, in real estate, commercial real estate, including residential development. So I think it's about the movement of interest rates. And for our investors who are very sophisticated, they really focus on on the credit

3:46

margin over the risk free rate, which is really the better question to ask is, you know, which way a credit margins moving, and is risk premiums continuing to hold up in the outlook which which is our view. And in terms of, I guess, just greater awareness of the asset class as well. How how deep is the private credit market in terms of whether or not you can see sustainable growth?

4:12

Yeah. Interesting question because I've been espousing the virtues of private credit for some 16 years, but it's certainly in the last, uh, you know, a few months has really been gaining a lot of media attention and is very popular at the moment. But but I think it's it's here to stay as, uh, a reliable asset class within real estate, you know, people, investors and globally have really come to understand the virtues of the Australian market. A lot of what we invest in is in the residential market, particularly, uh, approximately 80% of everything we do, uh, is in residential. And the reason we favor the residential sector is the fact that you've got quite large, uh, supply and demand imbalances, underpinned by the migration story, which I'm sure a lot of the listeners fully understand. And there's just critical capital that's required to build apartments and houses more generally

5:12

for the growing population of Australia. So I think it's a long term story, despite the fact that it's gained a lot of media attention. I certainly don't think it's a here and now moment in time. I do believe it's a long term story. Andrew, I read that you pass on something like 95% of the deals that cross your desk. Just talk us about how you conduct due diligence and what you look for in a deal.

5:35

Yeah. Well, that that that is a true statement. And we are one of the largest debt providers for real estate in the country, obviously outside of the four major trading banks. And we do offer large check sizes for significant projects, and we're able to provide a tailored solution with quite a wide product offering that goes, you know, well beyond the narrow product set that traditional financiers can offer. And as a result of that, you can imagine, you know, we have very significant demand on our capital. You know, Australia continues to experience a shortage of real estate, debt capital for new projects. And and Qualités is a very well understood brand by significant developers in the market who need our type of capital. So we do see a lot of opportunity. You know, our model is really there to serve our investors. We're

6:35

looking for specific things, investments in the market that meet our funds at any particular point in time. And really, as a result of that, you know, we can be very discerning and I think very disciplined in respect of what we take on board it.

6:52

Now, you started this company or course was started during the GFC. So you know a little bit about starting in difficult times. Um, tell us about how you're sort of seeing the overall macroeconomic picture now and how weathered you might be if there is a black swan event?

7:09

Well, yeah, I certainly, you know, I'm coming up to my literally 40th year in, uh, finance. And that's predominantly been in real estate. So I've certainly seen a lot of a lot of different cycles from high interest rates to low and also with liquidity, you know, times in the market where there's been very high levels of liquidity and other times where there's been low levels of liquidity. And I think that, you know, we deliberately started the firm in 2008, in the eye of the GFC storm, because there's an inverse relationship to the availability of capital and the risk premiums that our investors earn in moments of time where capital is running short. I think that for the last at least decade, we've been, you know, through a cycle where, uh, there's been, uh, significant interest in real estate. But I would say that it's been interesting for the equity side of real estate. Um, just just given, uh, contracting interest rates and the

8:09

fact that you've had revaluation in a positive sense in respect of asset values and against tighter cap rates, I think in the outlook period. Uh, my personal view is that we've been through a 400 basis point rise in rates, which has led to, uh, equity, real estate equity. Uh revaluing. In a in a negative sense. I don't think we're going to see another rise of that magnitude in the market. Uh, and I do think that in terms of, uh, equity recalibration events where, you know, the market, the industry generally is probably through the worst of it. But what the period of time did is it open the eyes of the world's largest institutional investors as to how attractive Australia is in respect of private credit and the need for this type of capital in the market, where an environment where the banks have really dominated providing real estate credit and alternative lenders

9:09

such as qualities have been lesser understood and known. But that's changed. And certainly institutional investors really love this space. They're backing our firm substantially with new commitments. I mean, we had our best record capital raising as a result of that. So I think that the economic cycle has really played to our favour. And I see, I don't think shy of a black swan event as your question asked, shy of a black swan event. I don't think that is going to change. I think we can expect to continue to have continued support. All right. And a good forecast for the next financial year. You've also forecast for year dividend per share, in line with the target dividend payout ratio between 50 to 95%. That's quite a wide range. Um but tell us how confident you are of achieving that.

9:59

Uh, well, you know, one, uh, can never say you're 100% confident of achieving your, your guidance because obviously there are factors outside of your control that determine ultimately where you land as a company and what earnings you receive. The qualities IPO in 2021. And I think that what we have demonstrated since we iPod is that we do what we say we're going to do, and we deliver on the outcomes that we've set ourselves. We didn't consider guidance lightly. It's just it's not a number that we just throw out there and, you know, hope for the best. You know, we carefully study the underlying assumptions that make up our our guidance for the year ahead. And we're going to be head down and working hard to close out every one of those assumptions and achieve the result we can. So commitment is 100% to achieving it. And you know, that's what we're going to be working hard to do.