Ares Management Corporation (ARES) Earnings Call Transcript & Summary

Okay. Great. Thanks. Good morning, everybody. We're going to move on to our next session. It is my pleasure to welcome Jarrod Phillips, CFO of Ares Management. With over $340 billion in assets under management, Ares has consistently been one of the fastest organically growing companies within our coverage with a stated objective of 20-plus percent annual fee-related earnings growth. While the firm's expertise are deeply rooted in private credit, which I'm sure we'll get to talk a lot about today. Ares' been expanding into real estate, private equity and secondaries over the years to really round out the firm's offering and ultimately would gives the firm durable 20-plus percent earnings growth. So thank you for being here. Looking forward to talking private credit and everything else.

Yes. Great to be here, and thanks to all of you for coming.

Great. So why don't we start there? A couple of questions on credit business, not surprisingly, given the tone at the conference and obviously the time of the year, we've seen lots of volatility. Obviously, the markets have been pretty challenging. As one of the largest private credit managers in the world, what's your outlook for credit market performance over the next 12 to 18 months? And maybe just hit on how Ares' credit portfolio is positioned to deal with potentially slower economic growth and pressure on margins?

Well, I think what's been pretty interesting so far this year is our portfolio at the asset levels performed very well. Year-over-year, EBITDA has grown by double digits as is at the ARCC portfolio, which is you can take a look at and they're great proxy for the remainder of the direct lending portfolio. And we also are under 2% nonaccrual. So we're very well positioned at the current, which maybe is a little bit different than you're hearing on the media or a broader commentary. So we like the performance of our assets so far. And as we look out into 2023 and we think about, well, how will rising interest rates impact the portfolio, how it would impact the private credit market more generally? What we see is, ultimately, there'll be a point where there could create some liquidity pressures for certain companies. And in those cases, as a private credit manager and especially as a private credit manager where you have more control over the credit, you can then start to work with that company on solutions. And that's one of the advantages of a company using the private credit market, [indiscernible] a single manager. It allows them to negotiate with that manager. And by having funding sources such as long-term locked up capital in a fund or long-dated debt that might be associated with that fund, it does allow you to be very patient with that credit. And so in a rising rate environment, you may make the decision that some of that interest rate increase will go to pick that really becomes a shift of equity to debt when we think about it. So there's always an equity investor that sits below this debt, and that kind of movement is really how those 2 things will shift to allow that company during that period of liquidity stress to regain its footing and perform well. Also, the sponsor, so about 70-plus percent of our book is sponsor-backed. The sponsors are often willing to step in and provide those liquidity needs so as not to essentially hand over that company to the lender. And ultimately, that is the thesis that we saw play out on both sides during COVID. So at the beginning of COVID and then a lot of people remember, there was no cash coming in for certain companies. They're -- at the same time, we had a very large sponsor-backed portfolio. We worked to pick certain positions, and we work with the sponsors to provide cash infusions there. So with a lot of dry powder still on the sponsor level, they're not going to walk away from assets that at underwriting or at the beginning of this year, we were at about a 45% LTV. So that meant there was 55% of the enterprise value of that company in equity. So they're not willing to essentially walk away from that. So as we look out over the next 12 to 18 months, I think we feel very well positioned. There will certainly be some volatility, and there will certainly be some companies that struggle. But when you sit in the senior most part of the capital structure. And when you have a number of these solutions and a number of these levers to pull, we feel very good about where we're at as a private credit manager.

Staying on the credit -- private credit side of the topic here, let's talk a little bit about deployment. We've seen really step function higher in private credit participation over the course of 2022. And there's a number of reasons for that. And obviously, banks retrenching is a big part of it, and it's a theme that we've kind of continue to come back to, right? And it feels like every time there is a meaningful market dislocation, private credit gain share and then that share tends to stabilize. So do you anticipate the gains you and some of your peers seeing over 2022 are getting sustainable and then again, the kind of continuation of that structural shift? And ultimately, how are you thinking about deployment into 2023?

Sure. I'd say a lot of the gains will stay. That's going to be the market and geography, based largely. So that will be a little bit more individualized in terms of what happens there. But a lot of folks began to access the private credit markets when they couldn't access the public market. When they go back and they had the opportunity, I think they all have learned from access in the private credit markets and some of the advantages that I just talked about. A single lender is a bought deal, so you have surety of execution, the ability to just negotiate out of a bad time and not have someone that might sell your loan immediately at the first sign of trouble, those are advantages that they get. And that's why typically, when they've come to the private credit market, at least some portion of their borrowing has stayed with the private credit market. Now the United States has been going in that direction for a longer period of time. So there's a much higher penetration of private credit managers in that space. Europe is a place where we're very well positioned, but it is still about 50% banked. And as the banks have retrenched, that's given us the opportunity to take some of that business, which I think that's where I was describing geographies, you might have an opportunity to keep even more of it. And then in Asia, what you've seen is that market is not very mature at all. So there is a lot of room for private credit growth there that is still primarily a banked region. So as that region matures in terms of private equity transactions, in terms of regulation and what they're able to do, there's going to be a lot more opportunity there for credit managers to gain share and maintain share.

Got it. And with respect to deployment, 2022 has been a fairly busy year if things have slowed down a little bit, to one of the points you mentioned earlier, 70% of the business for sale. It's sponsor-backed, the sponsors are not deploying capital. It's obviously making a problem for you guys to put capital to work. So how do you put that together in the context of potentially more credit dislocations? And I mean you're kind of crystal ball, do you deploy more capital in '23 than you did in '22?

So I'd say there's a few different factors at play, right? The first one is really about 50% of the book is coming from lending to existing borrowers. So you're refinancing as they're growing, as I mentioned, we had double-digit EBITDA growth in the ARCC portfolio. As they grow their EBITDA, they may have a need for greater leverage. They may decide that they want to open up a new doctor's office in a new location or something like that, that requires more leverage. So you do have that small growth that comes from that. It may still be a sponsor-backed. So the lack of sponsor activity doesn't necessarily permit all the way to that level where there still is activity that's occurring. When we take a look at what's happened this year, there's been a lot less gross originations because rates have obviously been increasing. So you're not seeing as many people actively refinance. But the net numbers have still held up fairly well. What you have seen is a tightening of covenants, a clarity on the definition of EBITDA, you've seen a higher credit quality borrower that's come to the market, maybe a larger company size, I would say, as well. As we look into 2023, with a more stabilized interest rate environment, if the market has a better feel for what overall the interest rates will be over a medium term, maybe you have a flattening out as opposed to what we've seen this year, which has just kind of been straight up on the curve that you'll have people then more willing to enter into transactions. So as you look at the back half of 2023, the hope is, is that you'll have that more stable view that will allow more transactions to occur. And I think as you're approaching that stable view of what interest rates may ultimately be, you may see some people decide that they're going to refi or do other types of transactions within that period too, to take advantage of it. But then that transaction volume picks up. And ideally, that could lead to an attractive deployment situation.

Got it. What about the other flip of the coin and talk about fundraising and private credit. It's been busy. But for the better part of the last decade plus, we've been operating in a super low interest rate environment where the returns you're getting in private credit were substantially higher than, again, the liquid markets. That is obviously exchanged. You can get to mid-single-digit returns in liquid [ IG ] and high single digit and liquid high yield. Is that still an attractive place to be for institutions and retail? And I guess how do you think about this paradigm shift with respect to continued uptick in private credit?

So first, my liquid credit colleagues would be upset with me if I didn't mention that we had $40 billion of liquid of credit funds as well. But we do have the ability to go there. But in terms of private credit, actually, at today's rates and with spreads widening to where they're at, we're able to originate loans that are in the double digits in terms of returns. And I think that actually...

That's levered, unlevered?

That's unlevered, yes. And I think actually, what has worked to our advantage over the last couple of years or the last 10 to 15 years, as you noted, is that more people have come into the space. So more institutions understand the risk that they're getting paid for and they're ultimately then able to maintain or actually increase in some cases, their allocation to private credit, understanding that they will get a higher rate than they may necessarily get in the liquid credit space. And really, I think what it allows them to do is maybe take more risk off on the higher levels, especially as those rates increase in the private credit side.

Yes. Let's talk a little bit about fundraising broadly and kind of expanding the lens outside of just private credit, but for the whole franchise. So you guys are in kind of earlier stages of your next flagship cycle. I think the official target you have out there is $45 billion in total capital raised, including leverage in this kind of period. Given the changes in the marketplace we've seen, how are you thinking about sizing various strategies? And how are you thinking about the opportunity set that sort of gives you confidence around that $45 billion?

Yes. Sure. We have seen in the marketplace, the denominator impact for private equity, right? We didn't have a private equity fund that was in the market fundraising, but we certainly heard it from our peers. And as we talk to LPs, we understand the constraints that they've had. We have not experienced that on the credit side or on the real estate side as we've gone out to fund raise. And there's obviously, you want to make sure you're generating returns. And as we look at this vintage, what we just talked about is that we're going to have a private credit vintage that is originating at over 10% return. So this is a very attractive time for people to come in. That's a very nice selling point to come into the private credit vintage. And the nice thing about private credit is, it is consistently returning capital and it's not episodic. So you know that there's a maturity date of these loans, you know that there's interest that's being paid on these loans. So there is cash that is coming back to the investors. And then they don't have to put out their cash immediately upon fundraise. They're going to put it out as we deploy it. So they have this ability to fund their future investment with their current investment as it's paying off with more surety than they might have in private equity, which certainly causes some of that denominator effect as you have those values increase, but you have no capital return to the investor. So in looking at what we're raising over the next 6 or so months, what we're launching over the next 6 or so months, we've obviously talked to our LP base, we've looked at the returns of the prior vintages, we've looked at the pipeline that we have available to us, and we obviously share that pipeline that it's looking good to those investors so that they understand that they won't just be sitting on a commitment. It's important for them to be able to deploy some as well. That all gives us assurances that we will be able to raise within those targets. And those targets aren't grossly inflated or adjusted from what the prior vintages were. So we're very excited about all of the strategies that we have coming into market. And with our European direct lending, with our senior direct lending, with our alternative credit funds entering the market, we think this is a great time for that particular vintage. Even our private equity fund, and we spent a lot of time talking about the denominator effect in this answer, that has the ability to flex into distressed for control, which is really core to how that fund strategy launched. So this is a great time for that fund. And if you look at historically in those vintages, our best returns actually came in the credit crisis as we were deploying in that distressed for controlled manner. So we're very excited about all the funds coming to market. We think it is a really good time for those ones to be investing. That's frankly 1 of the nice thing about institutionally-led products as well as the capital kind of comes when it's the best time to invest and allows you to get good returns as a result.

Right. Well, we didn't set up -- set this up this way, but it is a nice way to start talking about retail, which might not always react in the way you sort of just described, right? So when we think about your retail franchise with the 2 non-traded REITs, they've held up incredibly well all year with respect to both performance and the flows that you're generating. Clearly, there's been more challenges in the industry. We've seen redemptions accelerate from a number of the larger competitors. Maybe give us an update on what's going on with both gross sales and gross redemption side of things at both AREITs, and then we'll go from there.

Yes. So AREIT and AIREIT are 2 nontraded. We have about $14 billion there, $9 billion and $5 billion between the 2 funds. Ultimately, we just put out an 8-K at both funds to say that there's been no gates that we have actually seen net sales over October, November. So we've continued to see inflows at those funds, whereas I know there's a number of others who may have been talking about gates and redemptions. So we feel very happy with the position that we're in there. I think there's some uniqueness to those products. One of the main unique parts of those products is that they both have a 1031 Exchange capability, meaning that an investor that has some rental properties, and it was maybe looking to sell, can sell those rental properties and take that cash and put it directly into the REITs and not have to pay taxes on that as long as they hold those REITs for 2 years. So ultimately, that makes a very sticky investor and over the last 12 months, about 50% of the funding for those REITs has come from that type of exchange. So that, I think, is a real -- and it's a great dynamic. The RIAs love it. Our investors love it because it does allow them to avoid taxes for a long period of time and create diversification. Both of those funds have performed very well over the last 12 months. What we've seen there is because we're really focused on developing that we're able to have leases that are in line with the current market. And if you look at some of the facts that we've put out over the last couple of quarters, you've seen that we've had lease increases that have increased dramatically, sometimes as much as over 40%. We've had vacancy at all-time lows. So we're at 90% to 99% leased in all of these products, and that's allowed us to have an inflation hedge, and it's allowed us to have some support against the increase in cost of capital that we've seen across that. But there also has been a lack of transactions in the real estate space. And I think that's what's really important as you're talking about valuation to what drives valuation. So without significant transactions, you do have a harder time valuing it. So you really are focused on, well, what is my current lease rate, what am I ultimately going to realize?

Well, let's unpack that a little bit because as we've all been spending more time with various disclosures from nonpublic REITs. When I look at the 2 products that you guys manage, the cap rates that you guys are using currently are roughly in line, maybe even actually a little bit lower than they were at the beginning of the year. We're just kind of intuitive, which is given what happened with rates and obviously what happened with public REIT valuations. So walk us through the logic there? And is there a risk that potential hits to performance that could come from higher rates will slow down the pace of sales?

Sure. Cap rates are going to be -- they're not going to be uniform across the board, right? They're going to be dependent on the type of asset and the market that the asset is in. Area like the Sunbelt has still seen very strong demand for industrial products for warehouses. So there's going to be an asset type that you have to factor into that in a geography that you're factoring into it and being in Tier 1 cities and having that type of product, I think, is very important when you're considering any impact to your cap rates. Ultimately, there's always an impact they can have it, but the mitigant that you have. And again, as you're developing your asset and you're leasing your asset along the way, as long as you're able to keep it at a increasing leases as time goes by, increasing the amount of lease that you're getting as well as making sure that you're minimizing vacancies, those things can offset an increase in cap rate. However, if those things were to go down or if cap rates were to rise dramatically based on sales that you were seeing in that region or for that asset type. All those things could have a negative impact on your pricing. And I think certainly, as you look at publicly traded REITs, maybe that's the thesis people have as they're driving the prices of those down, and that could be causing on that dislocation.

Yes. Yes. Let's kind of take a little bit of a step back, but staying with retail. You guys have clearly pretty ambitious plans for retail as a segment broadly. And you've launched a couple of products there. You talked about launching additional products, targeting retail, both on the credit side as well as in the secondary side of things. Given what's going on right now, how big of a concern that there is a contagion effect from some of the bigger product that it could sort of spoil the party for, a lot of other managers to sort of try to break into retail? And maybe an update on where you are with various products and platforms in that journey?

Sure. I think as we look out at that market, the retail market has a very high demand long term, I believe, for it. This may slow it down. This desire to have it though, I think is still very strong. I think ultimately, they are looking for more products that they can diversify their risk. I think having more players within, whether it's the REIT space or the BDC space or other types of assets within that nontraded space actually benefits the consumer and people are looking for that so that they're not just selling one singular product. I think that's the same thing when you think about just ourselves as a company. And as we go out and launch product, we want to have a diversified product slate that the retail investor can access. I don't want to overemphasize the importance of retail because I did mention earlier how important institutional is to us and having those ability to launch large commingled funds. But retail, I think, will continue to grow and will continue to have a nice pace over the long term. But you will have some slowing as people understand exactly how to respond to this type of market to how to respond to when these when these gates are met. I think a bigger risk would be if you saw someone who entered into a gate that wasn't kind of the regulatory 5% gate. If they were to establish that, and they said, "Hey, we're just looking at our first quarter, and we've mismanaged our portfolio, we don't have the liquidity to meet any redemption". I think that's where you would really have an issue. The fact is that these products are designed to be long-term held in order not to have that market fluctuation in price, people want to be able to transact and now you have to have those gates. So that's the way it's set up. I think people are beginning to understand that product. Just like we talked about earlier, as more investors understood the alternatives in private debt. We've seen more players in it and just an overall better understanding. I think the same thing will happen here. A lot of what you have to do when you go out and sell these products is education of the RIA. And how does the product work and what's the suitability and ultimately, why would they want to invest in this product. And a lot of those RIAs, they won't invest in a publicly traded REIT or they won't invest in publicly traded BDC. They have a strategy that says it will only be this type of asset. So it is a way of giving them access. And I think that there will continue to be demand for that.

Yes. Great. Fair enough. Let's spend a couple of minutes on your secondaries business. And on the last call, you talked about the growing deal pipeline in the secondaries both from a GP side and LP side of things as kind of both sides of that coin, try to manage the liquidity. Is there not demand on the fundraising side of things to meet that supply? And how do institutional investors think about secondary business in the context of just private markets? Is it a separate bucket? Do they think of that as private equity? Do the same headwinds like denominator effect, et cetera, could impact allocations in the secondary, so there might be enough opportunities to invest, but supply might not be there?

It's tough to say because I think each investor is a little bit different, but some investors do regard it along with the strategy. So if we say that it's infrastructure, secondary, they might put it in their infrastructure bucket and other people may put it in a separate secondaries bucket. The thing about secondary is it is much later in life in terms of when it's making the investment. So it is monetizing at a faster rate. That's one of the reasons that we had a lot of strong conviction in releasing the private markets fund in April, which is a nontraded retail product that does secondary investments because you're able to monetize more quickly and more frequently. So ultimately, what we've seen in the past in talking to our colleagues in the secondaries group is that the LP demand for secondary transactions, not the investor side, but the deal flow side, that really generally lags and when we've seen it in historical circumstances. It's about a 6- to 9-month lag. So we still haven't seen as much of that LP-led secondary business kick up. The GP led I think is where we've seen more in the current space as GPs are looking for different options to monetize parts of their portfolio, return capital to deal with things like their denominator effect. So overall, I think when you look at our business and you see our private markets fund that we have an infrastructure fund, a real estate fund and our private equity, along with the ability to launch a credit funds through that secondaries platform that combines our credit expertise with their secondaries platform, there will be ultimately more than enough funding to support those GP- and LP-led transactions on the secondary side.

Got it. Okay. Let's shift gears a little bit and maybe put on your CFO hat as opposed to the strategic hat on for a second. Let's talk about fee-related earnings and a couple of other things here. So one is, as I mentioned earlier, Ares has been consistently one of the highest FRE growing companies that we cover, north of 20% per year as your kind of stated target. As you look out into 2023, maybe can you help unpack some of the key sources of growth and maybe hit on areas that could do a little bit better than that and areas where you can kind of see risk to growth?

Sure. Looking out into the future, obviously, we talked about the fundraising on those flagship funds. The nice thing about credit is as we launch a new fund, that pays on deployment, so credit almost -- a large percentage of our assets pay on deployed capital. So as they're deploying, there's not a step down in the prior fund. So when you're paying on committed, typically what happens is committed comes online and the prior vintage steps down at some percentage, and it might step down to also been on invested as opposed to committed and it is going down after that. When you're paying on deployed, it's kind of deployed across the board, right? So as we deploy, we're going to be stacking essentially those vintages of funds because we'll have all the prior vintages plus the current vintage that we were deploying into. So deployment of what we have now certainly drives a lot of the assurances over the targets that we've laid out. And really, that pace and speed of deployment is what could governs when exactly we hit those targets along the way. So that's a number that we always focus on. And when you look at historically where we're at, if you maybe go back 2017, 2018, 2019, our pace of deployment on shadow AUM, that was in that 18- to 24-month time frame. I think we hit a peak at in 2021 of about like 11 months, would have been our deployment to our shadow AUM, look like that's how fast we would deploy it. I don't think that we're going to see it that fast. I think we're going to be in that 18- to 24-month bucket, which is much more typical. But that deployment really is the governor, so even more so in credit than fundraising because of that stacking factor, you really -- as long as you're deploying, you just would be fundraising faster behind it to maintain that pace. But that's really the thing that we look at. We look at where our shadow AUM is now. And frankly, if we didn't raise another dollar and we just focused on that deployment, that was averaging to about 20% to 25% of our revenue right there. So that will certainly help. As we deploy that, that also helps with margin expansion. We talked a lot about this year being a year of investment. We knew we had these comment funds coming on. So that means both front and back office had to be hired up and prepared for new larger fund sizes as well as, I think, just a reconciliation of bringing on 4 entities, where can we centralize, how can we automate, what changes can we make to make our business more efficient? So we knew that we would have moderated growth in our margin. But we do think as we deploy, especially out into '24 and '25 that we'll have growth related to just the deployment and expansion of the platform.

Got it. So acceleration of that FRE margin into '23 is what we should think about. What are the unique aspects of the model? And you've been certainly highlighting that, I think, since the Investor Day, is this concept of European waterfall performance fees for a number of your credit strategies. And just to run through some of the numbers here, you talked about $100 million or so in net PRE coming through in 2023 and then $200 million coming through in 2024 as those kind of funds...

Yes. Just related to your European model.

Just related to your European model, exactly. So how quickly do you think the cash flows could ramp from there, right? Because that business is much bigger than that sort of $300 million that you talked about collectively over 2 years. And then as a follow-up to that, that almost feels FRE like nature to the cash flows. How are you thinking about deploying that back? Should we think about higher dividend payout effectively or something along those lines?

Sure. Look, it's something that I think is really exciting because it hasn't really been seen in the alt space before. I know there's been other players that have had European style waterfalls, but to have it in a traditional credit product, where it wasn't episodic in nature, I is what makes this so intriguing because it's going to create stable, predictable growth of this PRE stream. So ultimately, when you're talking about that $300 million, that's really based on funds today based on the ultimate values that they're recorded at as of 9/30. So that's a part of our net accrued our net accrued is recorded as if liquidated. So that means if you just calculated the fair values today, we sold all the assets, how much promote would come to the house. We know that as of today, with rising interest rates, that our interest rate is actually ticking along higher than the hurdle rate. So for these assets, there is some component of fair value that gets baked into that accrued. Now it's not a massive shift in that fair value, but there is a small element of it. And ultimately, they're going to mature at par. So you'll have that maturity at par with an interest rate that ticks along above the hurdle rate, allowing us to grow ultimately what today's vintages are able to earn in terms of PRE or carried interest. So that $100 million will be kind of the first bit in 2023 that we see come through as the underlying portfolio's assets mature and because the interest rates have ticked up enough, they're going to cross over the preferred return that needs to be paid before the European waterfall starts. So then you'll have that fund, and this is really the first vintage of things like our senior direct lending fund that started largely in 2017 and 2018. So then you have your second vintage that will start, and our second vintage is we're larger than our first vintages. So ultimately, you'll be able to map out, and those vintages are currently deployed now and again, earning interest at a higher level than the hurdle rate, those will ultimately start to pay once that first group's European waterfall has fully paid out. That second vintage will start to pay, creating that stable predictable growth in European waterfalls, which again, I think is new to the industry and goes right along with what we've talked about with FRE for all these years is that because of our deployment based management fees, we've had stable predictable growth in management fees and therefore, FRE. This is going to give us that ability to show that within PRE as well. So even in time frames where there's not a lot of private equity monetization we'll still be able to count on these private debt monetizations because of just the natural interest payment and maturity of that portfolio.

Yes. Yes. And that second vintage dynamic that you just described, could that start to contribute in '24 as well? Or too early to know?

I think it's too early to know because there'll still be some left over in the first vintage, right? So as we -- I think the last time we've mapped it out fully, you'd go back to our Investor Day, which is coincidentally right here in this room, back a couple of years ago. And you could map out exactly what we said then, which at that time, and we've watched on since then, we had $1.5 billion related to European waterfalls that we believe ultimately could be earned from funds that were outstanding at that period. So again, that wasn't an as-liquidated number like I just talked about, which you can see on our balance sheet, but that was our estimate based on the funds that it existed at that time, based on the interest rates, by the way, that we had in place with that.

Got it. Okay. All right. We got a couple of minutes left on the clock. So I want to maybe check in with you on any sort of last-minute thoughts related to the fourth quarter, any P&L items. The only ones that I have in my notes that you guys sort of flagged those around fee-related performance revenues, you said it's going to be above what it was last year. So any updated thoughts on that? And again, any other items, whether it's expenses or revenues that's kind of were flagging before year end?

Sure. FRPR, it crystallizes in Q4 for the majority of the assets that pay that really comes out of real estate and credit. And if you look at real estate, that is a publicly disclosed number. You can see that as of 10/31, what was reported on AREIT and AIREIT, it was about $162 million related to that. We are entitled to 100% of that this year as last year, we were only entitled to 50% of that is part of the transaction. Then we also have the credit side of things. Now we have seen tailwinds from increases in interest rates. However, that portfolio adjusts to those interest rates in about 3- to 6-month increments. So the large majority of that portfolio doesn't get the full benefit of an interest rate increase as it happens that bleeds in over time. However, when spreads widen, it does have a bit of a fair value impact to that. So if a spread widens 25 basis points, that's -- if you think about a 3-year duration or more, that will have an impact to the fair value. And as we think about spread widening of about 100 basis points, that can lead to about a $10 million to $15 million reduction in the overall FRPR. So that's something that needs to be considered there. And both of those come in with predefined compensation levels that are below the 40% margin. They do create a drag on the overall year-end margin. So I think that's another important thing to consider. But yes, we do believe that number will be higher than prior year was. And certainly, the rising interest rates, we will see a tailwind from that into future periods as those price levels have adjusted and those ultimately, will pay off at par. So it's really just a timing difference in when the credit side of FRPR is recognized.

Right. And to your point, the higher rates haven't really caught on in Q3, Q4 numbers so that's next year, right?

That's right.

All right. We got a couple of minutes or actually a couple of seconds left, but we can maybe over a minute. Any questions from the audience? Well, we're going to stay on time then.

Great.

Thanks, Jarrod.

Thank you so much for having me. Thanks, everyone, for being here.

Thanks for being here. Appreciate it.