Monthly Listed Investment Trust Report – May 2024

This story features QUALITAS REAL ESTATE INCOME FUND, and other companies. For more info SHARE ANALYSIS: QRI

Download related file: IIR-Monthly-LMI-Update_-7-May-2024

A Listed Investment Company (LIC) is a listed investment vehicle that offers investors access to a diversified portfolio of shares in other companies also listed on the stock market.

Note: For comprehensive comparative data tables for LICs and ETFs please see attached.

We only display the two opening stories from the Monthly Update. See the Report attached for more.

Qualitas Real Estate Income Fund ((QRI))
During the month, we completed a review of Qualitas Real Estate Income Fund. QRI is a listed investment trust (LIT) that listed on the ASX in November 2018.

QRI invests in the Qualitas Wholesale Real Estate Income Fund (“Sub-Trust”), which in turn provides direct and indirect exposure to a portfolio of secured commercial real estate (CRE) loans, predominantly in Australia with up to 20% of the portfolio able to be invested in New Zealand. QRI Manager Pty Ltd (the “Manager”) is the Investment Manager of the Trust.

The Manager is a wholly owned subsidiary of Qualitas Limited ((QAL)), an ASX-listed real estate investment management firm with approximately $8 billion funds under management. The Trust has a target distribution return of RBA Cash Rate + 5.0%-6.5%p.a (net of fees and expenses) and pays distributions monthly.

An investment in the Trust is suitable for those investors that are seeking a regular monthly income stream with the potential to generate attractive risk-adjusted returns compared to traditional fixed income investments such as government bonds and term deposits. The Trust has provided low levels of capital volatility since listing with the NAV remaining around the listing NAV of $1.60 per unit. Capital volatility is expected to remain low, subject to no impairments being incurred.

The Trust has the potential to diversify an investors fixed income exposure with the Trust’s portfolio having no correlation to the domestic equity market and provides a different risk/return profile to publicly traded bonds. While loans are short-term in nature, the underlying investments are considered illiquid.

The LIT structure provides investors liquidity through the secondary market, offering investors the ability to access the underlying investments without having their capital locked up, which can be the case for unlisted fund offerings in this asset class. The Trust is the only LIT that provides exposure solely to the CRE debt market. While other LITs provide some exposure to the CRE debt market, it is part of a broader portfolio. The portfolio is actively managed and the short-term nature of the loans means that capital will be recycled regularly. As such the income received, while will be provided on a monthly basis, will be dependent on the portfolio composition at any given time.

IIR maintained its Recommended rating for QRI. QRI is the only LMI on the market that provides exposure solely to CRE debt and therefore provides a unique investment option for those investors seeking exposure to an alternative fixed income product. The portfolio has delivered improved returns with the Trust benefiting from the increased interest rate environment and has delivered strong risk-adjusted returns with no impairments being experienced in the portfolio to date, resulting in the NAV remaining stable.

The Trust has made a number of positive changes since listing, including changing the distribution target to more appropriately reflect potential returns and then subsequently aligning the portfolio with the target distribution yield with the portfolio now essentially fully exposed to floating rate loans, and moving the portfolio from indirect to predominantly direct loan exposure. In terms of meeting the target distribution yield objectives, the Trust has largely achieved this objective on a monthly annualised basis however has consistently been at the low end of the range.

We view the risk in the portfolio to have increased with an increased exposure to mezzanine debt albeit the mezzanine debt levels are within the target range and were coming from a low base, however the mezzanine loans represent most of the construction exposure and are concentrated to a small number of loans. The Manager has grown AUM substantially over the last five years and has maintained a low level of default events with no capital impairments. With slowing
global growth and the prospect of sticky inflation, we view credit risks to be elevated in the current environment which may result in an increased number of workouts required in the portfolio.

While credit risks are elevated and the portfolio allocation to mezzanine loans has increased, the portfolio remains predominantly exposed to senior loans which provide an additional layer of downside protection.
A copy of the review can be accessed from the Manager or the IIR website.

LMI Market News
Platinum LICs Undertaking Strategic Review
Platinum Capital Limited ((PMC)) and Platinum Asia Investments Limited ((PAI)) announced they will be undertaking a strategic review of the options available to address the discount to NTA. The strategic reviews come after the Manager announced a broader product review in February 2024 as the Manager undergoes a significant shake up given the continued outflows in FUM.

The strategic reviews will be looking at options to build scale and/or convert to an open-ended structure which would allow investors to trade at NAV.

The persistent relative underperformance of the Manager’s strategies has seen the Manager experience significant outflows. The exodus from the Manager has been reflected in the share prices of the LICs. The flow of funds is typically driven by performance, whereby during periods of strong performance managers will typically experience net inflows while periods of sustained underperformance will typically result in net outflows.

In November 2023, we published reviews for PAI and PMC. In the PMC report we undertook an analysis of the excess NTA return compared to the benchmark since listing over rolling 3 year periods. The analysis determined that the share price typically trades at premiums during periods of relative outperformance and a discount during periods of relative underperformance.

Sustained underperformance of the portfolio of PAI and PMC relative to the respective benchmarks has resulted in the companies trading at elevated discounts for prolonged periods of time.

The strategies implemented for PAI and PMC are also offered in ETMF structures – Platinum International Fund ((PIXX)) and Platinum Asia Fund ((PAXX)). Whether PAI and PMC seek to transition shareholders into the relevant ETMF structures or whether they seek to roll them into an unlisted structure is yet to be determined.

The PIXX and PAXX ETMFs have also been impacted by the exodus from the Manager. The below chart shows the number of units on issue for PAXX and PIXX over the four years to 31 March 2024. The units on issue for both ETMFs have been in a steady state of decline over the period with the number of units on issue declining by 31.2% for PAXX and 21.1% for PIXX.

For more: see the report attached.

Independent Investment Research, “IIR”, is an independent investment research house based in Australia and the United States. IIR specialises in the analysis of high quality commissioned research for Brokers, Family Offices and Fund Managers. IIR distributes its research in Asia, United States and the Americas. IIR does not participate in any corporate or capital raising activity and therefore it does not have any inherent bias that may result from research that is linked to any corporate/ capital raising activity.

IIR was established in 2004 under Aegis Equities Research Group of companies to provide investment research to a select group of retail and wholesale clients. Since March 2010, IIR (the Aegis Equities business was sold to Morningstar) has operated independently from Aegis by former Aegis senior executives/shareholders to provide clients with unparalleled research that covers listed and unlisted managed investments, listed companies, structured products, and IPOs. IIR takes great pride in the quality and independence of our analysis, underpinned by high caliber staff and a transparent, proven and rigorous research methodology.

INDEPENDENCE OF RESEARCH ANALYSTS

Research analysts are not directly supervised by personnel from other areas of the Firm whose interests or functions may conflict with those of the research analysts. The evaluation and appraisal of research analysts for purposes of career advancement, remuneration and promotion is structured so that non-research personnel do not exert inappropriate influence over analysts.

Supervision and reporting lines: Analysts who publish research reports are supervised by, and report to, Research Management. Research analysts do not report to, and are not supervised by, any sales personnel nor do they have dealings with Sales personnel

Evaluation and remuneration: The remuneration of research analysts is determined on the basis of a number of factors, including quality, accuracy and value of research, productivity, experience, individual reputation, and evaluations by investor clients.

INDEPENDENCE – ACTIVITIES OF ANALYSTS

IIR restricts research analysts from performing roles that could prejudice, or appear to prejudice, the independence of their research.

Pitches: Research analysts are not permitted to participate in sales pitches for corporate mandates on behalf of a Broker and are not permitted to prepare or review materials for those pitches. Pitch materials by investor clients may not contain the promise of research coverage by IIR.

No promotion of issuers’ transactions: Research analysts may not be involved in promotional or marketing activities of an issuer of a relevant investment that would reasonably be construed as representing the issuer. For this reason, analysts are not permitted to attend “road show” presentations by issuers that are corporate clients of the Firm relating to offerings of securities or any other investment banking transaction from that our clients may undertake from time to time. Analysts may, however, observe road shows remotely, without asking questions, by video link or telephone in order to help ensure that they have access to the same information as their investor clients.

Widely-attended conferences: Analysts are permitted to attend and speak at widely-attended conferences at which our firm has been invited to present our views. These widely-attended conferences may include investor presentations by corporate clients of the Firm.

Other permitted activities: Analysts may be consulted by Firm sales personnel on matters such as market and industry trends, conditions and developments and the structuring, pricing and expected market reception of securities offerings or other market operations. Analysts may also carry out preliminary due diligence and vetting of issuers that may be prospective research clients of ours.

INDUCEMENTS AND INAPPROPRIATE INFLUENCES

IIR prohibits research analysts from soliciting or receiving any inducement in respect of their publication of research and restricts certain communications between research analysts and personnel from other business areas within the Firm including management, which might be perceived to result in inappropriate influence on analysts’ views.

Remuneration and other benefits: IIR procedures prohibit analysts from accepting any remuneration or other benefit from an issuer or any other party in respect of the publication of research and from offering or accepting any inducement (including the selective disclosure by an issuer of material information not generally available) for the publication of favourable research. These restrictions do not preclude the acceptance of reasonable hospitality in accordance with the Firm’s general policies on entertainment, gifts and corporate hospitality.

DISCLAIMER

This publication has been prepared by Independent Investment Research (Aust) Pty Limited trading as Independent Investment Research (“IIR”) (ABN 11 152 172 079), an corporate authorised representative of Australian Financial Services Licensee (AFSL no. 410381. IIR has been commissioned to prepare this independent research report (the “Report”) and will receive fees for its preparation. Each company specified in the Report (the “Participants”) has provided IIR with information about its current activities. While the information contained in this publication has been prepared with all reasonable care from sources that IIR believes are reliable, no responsibility or liability is accepted by IIR for any errors, omissions or misstatements however caused. In the event that updated or additional information is issued by the “Participants”, subsequent to this publication, IIR is under no obligation to provide further research unless commissioned to do so. Any opinions, forecasts or recommendations reflects the judgment and assumptions of IIR as at the date of publication and may change without notice. IIR and each Participant in the Report, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any opinion contained in the Report is unsolicited general information only. Neither IIR nor the Participants are aware that any recipient intends to rely on this Report or of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether opinions or recommendations (if any) contained in this publication are appropriate to their investment objectives, financial situation or particular needs before acting on such opinions or recommendations. This report is intended for the residents of Australia. It is not intended for any person(s) who is resident of any other country. This document does not constitute an offer of services in jurisdictions where IIR or its affiliates do not have the necessary licenses. IIR and/or the Participant, their officers, employees or its related bodies corporate may, from time to time hold positions in any securities included in this Report and may buy or sell such securities or engage in other transactions involving such securities. IIR and the Participant, their directors and associates declare that from time to time they may hold interests in and/or earn brokerage, fees or other benefits from the securities mentioned in this publication.

IIR, its officers, employees and its related bodies corporate have not and will not receive, whether directly or indirectly, any commission, fee, benefit or advantage, whether pecuniary or otherwise in connection with making any statements and/or recommendation (if any), contained in this Report. IIR discloses that from time to time it or its officers, employees and related bodies corporate may have an interest in the securities, directly or indirectly, which are the subject of these statements and/or recommendations (if any) and may buy or sell securities in the companies mentioned in this publication; may affect transactions which may not be consistent with the statements and/or recommendations (if any) in this publication; may have directorships in the companies mentioned in this publication; and/or may perform paid services for the companies that are the subject of such statements and/or recommendations (if any). However, under no circumstances has IIR been influenced, either directly or indirectly, in making any statements and/or recommendations (if any) contained in this Report. The information contained in this publication must be read in conjunction with the Legal Notice that can be located at http://www.independentresearch.com.au/Public/Disclaimer.aspx.

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