This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below
Qualitas - a recent IPO but a long history of property development finance
Qualitas is an alternative lender, with a 14-year history, with 4 key segments
Private Credit (generally first-ranking debt)
Opportunistic funds (generally mezzanine, preferred equity or special situations)
Long WALE (inc. Food Infrastructure fund)
Build-to-Rent; as shown in the cover photo
Note - $QAL also have a loan book called Arch Finance which produces a small/stable set of income
A reminder of the FUM/deployment growth below
Whilst this an impressive story - they are not the only operator in this space, with others such as private locals (e.g. MaxCap, Pallas), listed locals (e.g. $CHC & $CNI to some extent) and global (e.g. BX, Ares etc) competing in Australia
Why Development Finance is not a commodity product like home loans
If you have ever obtained development finance, even on a relatively uncomplicated property deal, there are a few things that make it different from other loans:
If a lender has the in-house expertise to assess your development, the funding approval process and risk pricing are generally more efficient
The lender's behaviour when a development faces adversity (e.g. forbearance or step-in rights) really matters
There is a bigger perpetuation of goodwill in this ‘tight-knit’ community (i.e. mezz/dev funders who burn a developer lose business quicker than other types of lenders)
Typical lenders are penalised for providing these kinds of loans either due to the level of pre-sales or LVR/LTC
As a consequence, this was always the stomping ground for family offices/HNW until it became more of an institutionalised product in Australia
1H'23 Results - Dry powder is great; Op Leverage is less so
For me the clear takeaways were:
Mkt outlook: Less seasoned development funders are retreating from this market. So they intend on accessing an increased share of the dev funding market
Dry powder: They sit on >$980m of undeployed FUM (as shown by Qualitas' large cash balance of c.$180m)
Deployment was back-ended: 40% of their FUM was deployed in Dec'22 (so late in the year) so these fees should trickle forward next HY
Still medium-to-large borrowers: The average development loan size is $70m (i.e. mid-sized deals)
QRI = 700bps over BBSY: Balance sheet deals they warehoused for $QRI generate a yield of 9.9% (vs. >15% for the more opportunistic deals)
Slowly getting scale: They are finally getting some scale whereby, not all of their FUM is paid away in employee costs. As shown below, operating margins are now c.45% and 90bps of active FUM is employee costs
20% of PF goes to employees: People are the cornerstone of their business, so let's not forget that $QAL needs to adequately incentivise employees with their PFs
Valuation - 25x Run-rate EBITDA seems too high
Qualitas has a market cap of $820m of which has:
$350m of investments on the balance sheet (excluding the working capital used to run the business)
Discounting back the $80m of 'theoretical value' of future PF, one could potentially assume there is c.$45m of embedded PF
This ascribes a valuation of the FUM platform of c.$425m.
Assuming modest growth in FUM (e.g. c.10%) FY24 Revenue = $38m
Net of 45% margin = $17m EBITDA
Overall - today implies a 25x forward EBITDA multiple which is too high unless they can either
Generate >10% FUM growth in the immediate term
Generate >45% Op margin noting most fund managers can achieve run-rate op margin of c.60%
Conclusion – Valuing a company like $QAL is more of a momentum play on their FUM growth than pure valuation. As recent $MFG shareholders will note - funds management is very much about momentum.
Nonetheless, I do not see the appeal in paying 25x recurring EBITDA. To put this into context you could get Ares (24x), BX (22.5x), BAM (25x) or Stepstone (21.5x) NPAT and these fund managers carry materially larger diversification
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