Qualitas Limited (QAL) Earnings Call Transcript & Summary

Good morning, everybody, and welcome. I'm Andrew Fairley, the Chair of Qualitas and -- or actually the independent chair of Qualitas and it's 10:00. And on that basis, there's a quorum present, and I'm wanting to now declare the 2023 AGM of Qualitas open, and to welcome you all, and to particularly thank Alberto and Bart for your hosting us here today. I particularly want to acknowledge that we are meeting on the traditional lands of the Bunurong people of the Kulin Nation, and to pay respects to elders, past and present and to other elders from any communities that are joining us either here or online and to celebrate the continuing connection of the Bunurong people to country and culture. We're pleased to be able to hold this meeting as a hybrid meeting so that shareholders and their proxies are able to present either here or remotely using the virtual meeting technology. We have made every effort to ensure that all shareholders and their proxies enjoy the similar opportunity to participate today whether they're actually joining us here or online. And that includes in asking questions either from the floor or through the platform, as well as voting using our electronic voting card. I'll talk a little bit later about how we go through that voting process. But let me first introduce the Board of Qualitas who oversee and steward this company. Let me start with our Group Managing Director, Andrew Schwartz, and Co-Founder, Andrew; Brian Delaney, who is a Non-Executive Director and the Chair of our Capital Advisory Group; JoAnne Stephenson, an Independent Non-Executive Director and Chair of the Audit Risk and Compliance Committee; Mary Ploughman, the Independent Non-Executive Director and Chair of the Nominations, Remuneration and Governance Committee, who's, as you're aware, coming up for election today; and Michael Schoenfeld, who is, again, a Non-Executive Director -- Independent Non-Executive Director and Chair of our Investment Committee. I'm pleased we've also got some of our key executives here with us. We've got Mark Fischer, who's our Global Head of Real Estate and Co-Founder, welcome, Mark; Philip Dowman, our CFO; and Kathleen Yeung, our Global Head of Corporate Development. Welcome to you all. Also joining us is Luke Sullivan, our partner from KPMG, representing the external auditor. Terrie Morgan, our Company Secretary, is here and sitting at the table with me and she'll be reading out any written questions that come through and any reading out the proxies that we've received online. I also want to welcome our Qualitas employees that are here or are watching this online. It's great to have your interest in the AGM. Thank you for being part of this. The agenda for the meeting today is that I'll give the Chairman's address. I then ask Andrew Schwartz to -- the Group Managing Director, to give an update on the operational and the strategic developments of the business. After that, I will conduct the formal items of business as set out in the Notice of Meeting that has been circulated to you as shareholders. And then we will open -- following that, we'll open the meeting for questions on general or discussions on general business. But before I commence to give my Chairman's address, I wanted to make a few comments about the procedures that we have for voting and submitting questions. Voting today on all resolutions specified in the Notice of Meeting is conducted by way of a poll. Shareholders had the option of casting their vote before the meeting or appointing a proxy, attorney or a corporate representative to do so on their behalf. If you haven't done so, you can vote at today's meeting in person. If you're attending here or -- and you do that by completing the yellow voting card that you received as you came in through the door. If you're a shareholder joining us virtually, you can vote at any time during the meeting using the electronic voting card that you received after clicking the Get a Voting Card button. Voting is now open and you may vote at any time during the meeting, and we will close 5 minutes after the formal items of business have been completed. There's a timer at the top of the online meeting platform that will count down to the close of voting. And the final voting results will then be released to the market and posted to the Qualitas website later today. During the formal business section of the meeting, I'll take questions from the floor followed by questions online. Any shareholders that are attending online can submit written questions during the meeting by clicking the Ask a Question button and then typing their question and following the prompts. Relevant written questions will be read out loud to the meeting by Terrie, our Company Secretary, and I encourage you to submit any questions as soon as possible. If you have difficulty using the virtual meeting platform, please check the online portal guide that's available on the Qualitas website. If we receive multiple similar questions, then we'll aggregate them into one or choose to answer the broadest question that then covers all of those other ones that relate to it. We'll make every attempt to answer questions today. But if time constraints prevent us from doing so, we will provide responses to any unanswered question by posting them to the Investor Centre on the website after this meeting. In the unlikely event we experience any technical difficulties in the broadcasting of this AGM to shareholders, we will pause the meeting and aim to recommence at the earliest opportunities. And if the problems persist, then I'll make a judgment about whether or not we can proceed. And I will let you know just what the decision is based on advice from our technical experts at the back of the room. If we have to adjourn the meeting, we'll make an announcement to the ASX with all the relevant details. Link Market Services, our share registry provider, and they're conducting the poll today, and Andrew Farrell is the returning officer for the meeting. I now propose to move to my comments in my address today. It's really been another year of growth and momentum for Qualitas as we celebrate our 15th anniversary. It also represents the first full year as a listed entity and pleasingly, as reported at our full year results in August, we have delivered another strong full year result. Andrew Schwartz will talk more about that. It's worth reflecting on how the company has transformed and grown since it was founded in 2008. The Qualitas Group commenced business in the depth of the global recession, a time that while challenging, offered immense investment opportunities. Today, the group is one of the leading Australian alternative real estate investment managers. Our position is demonstrated by our enviable track record having financed assets with a combined value of over $21 billion across all real estate sectors, with significant capital from institutions -- institutional investors overseas. Across 17 active funds since inception, we've achieved a 15-year compound annual growth rate in our FUM, of approximately 37%, and recently, our FUM, funds under management increased to $8 billion. We remain cognizant of the micro and macroeconomic backdrop and have built a reputation based on disciplined investment approaches. With global markets impacted by heightened inflation and interest rates, it's important to note that the Australian financial system remained strong and resilient and well placed to support economic activity in these current challenging economic and financial environments. The Australian Prudential Regulatory Authority, APRA, has rigorous capital provisioning requirements, which have contributed to Australia's stable and transparent regulatory environment. That's played an integral role in attracting international investors to allocate capital in Australia, particularly during periods of elevated global market volatility. As traditional sources of finance continue to retreat and market conditions create a greater need for flexible capital solutions from financiers with in-depth local knowledge, we're confident of our ability to be able to achieve further growth through continued investment, performance and client-led product innovation. Importantly, this growth that we have experienced has been underpinned by our unwavering focus on risk, sound corporate governance and forensic financial oversight. We believe it's these practices regularly reviewed to strengthen and evolve as we needed to, that have held us in good stead, helped build our reputation and ultimately rewarded our investors and shareholders. We mentioned at last year's AGM that we're in the process of establishing an ESG advisory group. I'm pleased to report that during the year, we did establish that group comprising specialists in ESG issues to help shape best practice and guide us as we embed ESG considerations across parts of the Qualitas Group. Using its charter, the advisory group provides advice on strategy -- on ESG strategy, policy, development, risks and opportunities and we'll report progress against these strategic priorities that the Board and the group assesses are appropriate. Equally, it will advise the company on how we can best leverage our strengths to maximize our impact and influence positive ESG outcomes with borrowers and partners. Also at last year's AGM, we noted that we started work on our Reflect Reconciliation Action Plan. And I'm pleased to say that, that's been launched following approval from Reconciliation Australia. We continue to believe that our success since the company's establishment is a true reflection of the commitment of our team, their levels of engagement and of our 5 core values, which they uphold, being respect, integrity, collaboration, excellence and entrepreneurship. In short, a defining factor in our past and future success is the culture and values that are exemplified by every member of the Qualitas team. As the business grows, so does our need to attract and retain top-class talent in a very competitive market. Our remuneration policy is focused on aligning rem with the key strategic drivers of the business and the creation of sustainable value for our fund investors over the long term. We continue to review and assess the effectiveness of our remuneration framework and policies to ensure they remain appropriate for Qualitas, market competitive and align with shareholder expectations. Our rem report, which is in the Annual Report on Pages 31 to 42, provides a comprehensive review of the rem outcomes and the incentive structures that we have established. On behalf of the Board, I thank the Qualitas team for their commitment, their enthusiasm, and their really hard work in achieving what we have achieved over the last 12 months. Once again, your efforts have contributed hugely to our success. In closing, I extend my sincere appreciation and thanks to my fellow Qualitas Board members. The depth of experience that is reflected regularly in their guidance and their advice and their insights has been a huge assistance to me in the role that I play. This stewardship contributes really significantly to the way in which we run the business and the results that have come out for this year. And now I want to invite Andrew Schwartz, our Group Managing Director and Co-Founder, to give more detail on our progress and talk a little bit about our operational success. Andrew.

Thank you. As Andrew mentioned, FY '23 was Qualitas' first full financial year as a listed entity, marking the group's 15th year anniversary. I'm extremely proud of what the team has achieved to get us here and our potential as we move forward. Since the IPO, our focus has been on 3 key areas of growth: growing top line funds management revenue, improving scalability through larger investments and mandates, and the strategic use of balance sheet capital to aid the growth of the platform. These objectives were well progressed in FY '23. Market conditions over the past year will be remembered as a turbulent period generally, with tightening financial conditions, elevated inflation and concerns over distress in the real economy. This backdrop and the increased hesitancy of traditional funding sources to deploy capital in the commercial real estate sector benefited the Qualitas Group. As highlighted by our group growth since inception have most recently illustrated in our strong FY '23 financial results. I was pleased to report another year of high-quality earnings as our platform continues to scale through growth and total FUM. Turning to FY '23 performance. In FY '23, we reported Funds Management segment revenue of $44.1 million, demonstrating significantly increased quality of earnings. The Funds Management segment normalized EBITDA margin increased from 34% in FY '22 to 45% in FY '23, excluding the less uniform contribution from performance fees. Principal income increased by 273%, driven by increasing utilization of the balance sheet. The final fully-franked dividend of $0.055 per share brought the total dividend for the year to $0.075 per share. The strong execution of our strategy was demonstrated by the step change in our FUM growth, along with another record year of capital deployment that was driven by macroeconomic tailwinds and selective key investment thematics. FUM increased by 88% to $8 billion as at October 2023 and $3 billion was deployed in FY '23. We have remained disciplined in our investment deployment with our proven risk management framework, ensuring consistency in the evaluation of risks. Our view is that when investing, risk management extends to managing and reducing environmental risks. For example, we know that residential property contributes to greenhouse gas emissions with an estimated over 10% of Australia's total carbon emissions from this sector. So we are integrating ESG factors into the new product development initiatives, and we'll continue to look for other ways to invest responsibly. We ended the year with a cash balance of $192 million, well positioned to take advantage of opportunities that may arise and providing the flexibilities to support the new fund growth through co-investment and fund underwriting and bridging activities. The strong growth of our FUM has primarily been driven by the significant interest in the Australian commercial real estate, private credit and build-to-rent sectors from institutional investors. Off the back of this growth, we'd outlined our medium- and long-term growth initiatives on our recent Investor Day, and our team is focused on executing these growth plans. In summary, we believe Qualitas is in an enviable position in the Australian CRE alternative financing space. Our FUM growth, investor commitments, strong balance sheet are anticipated to provide both earnings stability and growth potential into FY '24 and beyond. Now turning to our business update. Our team is structured to focus on distinctive credit and equity strategies across 4 thematics: private credit, BTR, inflationary hedge and opportunistic. Private credit was a standout strategy in terms of deployment under the current macroeconomic environment. In FY '23, 100% of our deployment was in private credit. And so far, in this financial year, it is clear that trend will continue. Our deployment pipeline is at the 16th of October 2023, which was our Investor Day, was $2.3 billion, of which 96% is in senior credit. Since that day, we've had more transactions mandated, and we are at the preliminary stage of assessing those opportunities. It is worth noting that a larger proportion of the pipeline investments are mandated versus investment committee approved and closed transactions. These investment opportunities are subject to due diligence and investment committee approval. Our teams are focused on deploying fund investor capital while maintaining an uncompromising approach in risk assessment and due diligence. Some of these investments may not meet our screening requirements or could be delayed in settlement. We are committed to finding investments with the most attractive, risk-adjusted returns for our fund investors. We recently increased investment in our origination teams across Sydney and Melbourne. The benefit from these increases in resources are yet to be realized. We are confident that our investor-led approach, deep origination network in Australia and access to significant institutional capital will continue to drive deployment during volatile market periods where liquidity is at a premium. Now turning to outlook and guidance. As we look ahead at the rest of FY '24 and beyond, we see several reasons why we believe there will be significant opportunities for Qualitas. First, we had $2.3 billion in dry powder following 2 significant mandate announcements in August 2023, shortly followed by an additional $530 million activated commitment in the Qualitas Private Income Credit Fund announced in October 2023. This new FUM underpins our earnings growth potential and provides the opportunity to build on our momentum with sponsors where we can deliver capital with certainty for the investments that we like. Next, we continue to see an increasing allocation from institutional capital into the CRE private credit. Offshore institutional investors recognize the tailwinds, see the Australian multi-dwelling sector particularly private credit and build-to-rent, as an attractive segment for their capital. This is evidenced by the new commitments Qualitas has recently announced. And finally, our continued growth is expected to be supported by the resilience and ongoing demand in the multi-dwelling residential sector over the medium term. Given these opportunities and based on no material adverse change in the current market conditions, we again reaffirm our market guidance for this financial year of between $37 million and $41 million in net profit after tax and earnings per share of between $0.0875 per share and $0.097 per share. We are all extremely proud of the business that is being built up over the last 15 years, and I thank you all for your continued support. That concludes my Group Managing Director report.

Thank you, Andrew. Just to clarify that was -- the guidance was before tax, I think, and it was up on the screen as before tax, not after tax. So thank you for that address, Andrew, and really helpful to have an update on just how the organization is progressing, which takes me to move to the formal items of business. The Notice of Meeting was lodged with the ASX on the 23rd of October '23, and that notice is available on the Qualitas website in the Investor Centre section. So I propose to take the notice of meeting as read. Each of the resolutions which is set out in that NOM is to be considered as an ordinary resolution and passed by a simple majority of votes cast by shareholders, both present and -- in person and proxy that are entitled to vote. We'll display the votes of shareholders and the proxies received prior to the meeting following discussion of each item of business. And for all items of business in accordance with any voting exclusions, that apply to each resolution, undirected proxies that have been given to me or indeed any of my co-directors will be voted in favor of those items. I remind you that voting has opened and will close 5 minutes after the formal items of business are completed. The results of today's meeting will then be released to the ASX and also placed on our Qualitas website. I want to remain -- I want to remind shareholders attending online that written questions can be submitted during the meeting by clicking on the Ask a Question button, and I encourage shareholders who have questions to submit them as soon as possible. Shareholders and proxies attending here today are given the opportunity to ask a question as each item comes up. We'll address questions on the resolutions as we proceed through each of the items. And then any general questions will be addressed at the end of the meeting under the general business section. I'll take all questions in the first instance from the room and direct questions -- and online, and I'll direct those questions to the appropriate member of the Board of Management or answer them myself. The first item of business is to receive and consider the financial report of the company and its controlled entities, and the reports of the directors and the auditor for the year ended 30 June 2023. This is an item of business that is for discussion only as the Corps Act does not require a vote. The annual financial report, director's report, auditor's report are contained in the company's 2023 annual report, which was released to the market on the 23rd of October and can be found on our website. As I said before, Luke Sullivan is with us, from KPMG, and is available to respond to any questions which are relevant to the conduct of the audit and the preparation of the -- and the content of the independent auditors report and the independence declaration. I now invite questions from shareholders on this item of business. Are there any questions in the room? Terrie, any questions online in relation to this?

No. We have not received any questions, Andrew.

Thank you. Then let's move to the next item of business. Item 2 is to adopt the remuneration report for the year ended 30 June 2023. The Board submits this remuneration report to shareholders for your consideration and approval. The rem report is set out on Pages 31 to 42 of the Annual Report, and it sets out the remuneration policy -- policies of our company and reports on the remuneration arrangements that are in place for the key management personnel during the 2023 financial year. The Corporations Act requires companies to put the remuneration report to a non-binding vote to enable shareholders to voice their views on matters included in the report. I invite questions from shareholders on this item of business, noting that aspects of the remuneration report are also the subject of a further resolution later in the meeting. Are there any questions? Terrie, are there any questions online?

No, we have not received any questions.

No? Thank you. Proxy votes received for this resolution are displayed on the screen. I now put the following resolution to the meeting that the remuneration report of the company, which forms part of the director's report for the financial year ended 30 June 2023 be adopted. If you haven't done so already, please complete your voting card for this item now. [Voting]

Then I move to Item #3. We're asking in this item for shareholders to consider any thought passing a resolution on the reelection of Independent Director -- Non-Executive Director, Mary Ploughman. Item 3 involves the reelection for Mary, and she was a point -- a background, she was appointed to the Board in 2021, in conjunction with Qualitas' successful IPO almost 2 years ago, and its ASX listing. She will retire in accordance with the company's constitution and being eligible offers herself for re-election. I want to now invite Mary to have a few words in support of her re-election. Mary?

Thank you, Andrew. I'm honored to stand before you today and present myself for the reelection as a Non-Executive Director of Qualitas. Since my appointment as a director in November 2021, I have proudly served shareholders in this role and as Chair of the Nomination, Remuneration and Governance Committee. In terms of my background, with an economics degree, my focus has been on structured finance and more specifically, securitization. I was made a fellow of the Australian Securitization Forum, and I'm an associate of the Securities Institute of Australia. My executive career spanned 30 years, covering roles in leadership, financial services, structured finance securitization, capital markets, governance and risk management. I spent 16 years at Resimac Group, an Australian non-bank lender and for the final 5 years of that held the role of joint CEO. Prior to Resimac, I worked in senior structured finance roles at Price Waterhouse Coopers and Macquarie Bank. My key technical focus in my career has been structured finance with a focus on securitization. In my role as joint CEO at Resimac, I focused on leadership, governance and risk management. My Board level background includes deep experience across financial services, infrastructure and not for profit. I'm currently the Chair of Plenti Group Limited, a Non-Executive Director at Prosper Group Limited, the Chair of Pitcher Partners and a senior adviser with Gresham Partners. I believe the breadth of skills and experience gained across my executive and Board roles over many years provides me with the depth of experience and capabilities to serve shareholders well and make a strong contribution to the Qualitas business. I'd like to take this opportunity to thank all shareholders, my Board colleagues and the management team at Qualitas. With your support, I look forward to continuing in my role as a Non-Executive Director and serving all stakeholders as we progress through the next exciting phase of Qualitas growth. Thank you.

Can I add here that the directors, other than, of course, Mary, unanimously recommend that shareholders vote in favor of this resolution. So I now ask shareholders to ask any questions on this item. Are there any questions? Terrie, are there any questions online?

No, we have not received any questions.

Proxy votes received for this resolution are displayed on the screen. I now formally move the resolution by poll for Mary Ploughman reelection as set out in the notice of meeting. If you've not already done so, please complete your voting card for this item. [Voting]

So let me move now to Item #4. This concerns the approval of the allocation of loan shares to Andrew Schwartz, the Group Managing Director. The company proposes to grant loan shares to Andrew Schwartz as a long-term incentive under the new loan plan. Full stop, some will recognize a very similar motion at last year's AGM. The long-term incentive opportunity being awarded is $1.53 million. As a loan will need to be repaid under the terms of the grant the company has had the arrangement valued by an independent valuer as outlined in all of the explanatory notes that go with this loan share arrangement. Loan shares may be delivered to him under the loan plan either by issuing the shares or by ensuring that we have purchased the shares on market. While the company has not yet made any decision about the way in which these new shares will be acquired to satisfy the delivery of the loan shares we still require shareholder approval under ASX listing Rule 1014 to provide us with the flexibility to issue new shares if we so determine. So I now invite shareholders to ask any questions in relation to this item. Are there any questions? Any questions online?

No. No questions online.

The proxy votes received for this resolution are displayed on the screen. I propose to put the resolution set out to a vote by poll. If you've not already done so, please complete your voting card for this item. [Voting]

With the finalization of those specific matters, we now have an opportunity for shareholders to ask general questions. Are there any general questions that shareholders wish to ask? In the room? Online?

We have not received any questions.

Well, on the basis that there are no further -- there are no questions, not no further questions, I declare the Annual Meeting of Qualitas closed. And on behalf of the Board, thank you to all of our shareholders, both here and online for making time to attend this Annual General Meeting today. We really appreciate your ongoing support and loyalty and look forward to sharing with you a rewarding year ahead. Thank you.