Qualitas Limited (QAL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Qualitas Limited Fiscal Year 2023 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Schwartz, Group Managing Director and Co-Founder. Please go ahead.

Good morning, and welcome to the Qualitas financial year '23 results presentation. I'm Andrew Schwartz, Group Managing Director and Co-Founder of Qualitas. Presenting with me today is Kathleen Yeung, Global Head of Corporate Development; and Philip Dowman, our Chief Financial Officer. Firstly, I'd like to acknowledge the traditional custodians of the lands that I'm presenting from today, the Wurundjeri people of the Kulin nation. I would also like to acknowledge the traditional custodians of the lands from which those joining virtually are on. We pay our respect to elders, past, and present. I'll be starting today's presentation with some comments on the year just past, followed by an update on the market drivers that continue to provide the tailwinds for commercial real estate, private credit. I'll then provide an overview of the full year results, followed by an update of our Funds Management business. We've made significant inroads in our ESG initiatives, and Kathleen will provide an update on progress over the year. Philip will then discuss our FY '23 financial performance. I will then conclude the formal part of today's call with our FY '24 outlook, and we welcome the opportunity to take any questions. Starting on Slide 4. FY '23 is the first full financial year of Qualitas as a listed entity, and 2023 also marks our 15-year anniversary. I'm proud of what the team has achieved to get us here, and continues to achieve. Since the IPO, we've been focused on 3 key areas of growth, growing top line funds management revenue, improving scalability through larger investments and mandates, strategic use of balance sheet capital to aid the growth of the platform. These objectives were well progressed in FY '23. Our FUM has increased by approximately 80% since IPO, reaching $7.5 billion today with another record year of deployment totaling $3 billion. These factors are reflected in the substantial growth in recurring earnings and operating margin expansion. Since 30 June last year, we have raised net $3.3 billion in committed capital. This is primarily driven by significant interest in the Australian CRE private credit, and BTR sectors from institutional investors. These 2 strategies will continue to accelerate the growth of our platform over the near term, along with our brand, scale, and strong track record of performance. During the year, we've made significant progress on our ESG initiatives, including integration of ESG considerations into new product development, and the establishment of our ESG Advisory Group. With the announcement yesterday of the additional $700 million commitment from the Abu Dhabi Investment Authority, plus the recently announced additional $750 million from an institutional investor. Our investors have entrusted us with $2.3 billion of dry powder. This, combined with our strong balance sheet is anticipated to provide both earnings stability and growth potential into FY '24 and beyond. The next 2 slides outline the macroeconomic backdrop to our FY '23 performance, and our outlook for FY '24. The 2 key takeaways for Qualitas are; we anticipate increasing allocation from institutional capital into commercial real estate private credit, and we expect the multi-dwelling residential sector to remain resilient, and exhibit strong growth over the medium term, underpinned by long-term undersupply. Global CRE private credit is a $259 billion AUM market and has been growing at a very impressive 19% CAGR over the last 10 years. We believe this growth will accelerate further from here for 3 main reasons. LPs are under-allocated to private credit relative to their targets, attractive returns in CRE private credit, delivering unlevered yields of between 9% and 10% for senior debt. The regulatory changes and general risk of sentiment we are observing with the traditional financiers have led to diminishing availability of credit in commercial real estate. The chart on the right shows the traditional financiers reducing their residential and development loan books over the last 18 months, which implies there may be a widening opportunity for alternative financiers to step in, and fill a gap in the supply of credit to the sector. Today, we are seeing more quality developers using private credit for its flexibility, which is unmet by traditional financing solutions. Traditional borrowers who in the past would have only absorbed debt capital, from the traditional financiers today much better understand the benefits of the alternative sector, both in terms of volume of capital, and flexibility. This could be a more permanent shift in a borrower appetite for such flexible capital, as they recognize groups such as Qualitas have significant capital to deploy in the right transactions. We, alongside our investors recognize the tailwinds in the sector, and have positioned our portfolios to take advantage of further dislocation in liquidity in the CRE sector. Private credit now represents 78% of our $7.5 billion FUM today. We think it's the best investments are made in a risk-off environment with tightening liquidity. I'll now turn to Slide 7. This past year has been a turbulent period in markets generally with elevated inflation, and interest rates, and concerns over to stress in the real economy. Investors are focused on the impact of these factors on the commercial real estate sector. This is part of the reason why we didn't make a single investment in equity in the last year. We remained nimble, and agile in our funds management approach through maintaining a credit portfolio of short-tenured lines. Acknowledging headwinds in certain subsegments within CRE, we pivoted our portfolio to the residential real estate sector, which is anticipated to remain resilient, and exhibit growth over the medium term. Despite a slowing economy, inflation and wage growth remains elevated, and our view is that interest rates are likely to be higher for longer. In itself, rising rate is not necessarily a negative for the Australian residential market, which is much more influenced by supply and demand factors. Australia has seen these market conditions before, where multi-dwelling residential value increased rapidly, due to supply shortages despite consecutive rate hikes. As shown in the top left chart, in the late 1980s, residential asset values increased by 34% as the cash rate also increased by 7.6%. This occurred between January 1988 and November 1989, and apartment prices largely retained its gains in the following years. The average vacancy rate across all capital cities at that time, was around 2.7% during the period as shown in the bottom left chart. Today, we are seeing a much more entrenched supply issue in Australia as the current vacancy drops to around 1.2% as of March 2023, well below the 3% benchmark representing the long-term equilibrium. This is occurring at the same time, we're experiencing a strong surge in migration, which has and will further deteriorate ongoing housing supply and demand imbalance. As overseas migration exceeds pre-COVID-19 levels, and anticipated to remain strong, Sydney, Melbourne and Brisbane are expected to acquire an additional 143,000 apartments between 2023, and 2025 to meet estimated demand just to keep vacancy at the current levels. These factors, when combined with record construction cost growth led to increases in off the plan apartment sale prices. As replacement value, and demand continues to rise, developers are restarting projects that may have been put on hold. In our view, the current macroeconomic backdrop creates conditions ripe for the next phase of growth in apartment prices, and will underpin sustained rental growth over the medium term. Currently, the residential sector represents 71% of our invested fund, which positions us well amidst an adverse investment environment, particularly in the CRE sector. Turning now to the FY '23 result highlights on Slide 8. We are pleased to report our FUM has increased to $7.5 billion as at current date, representing 80% growth from IPO and 77% growth on FY '22. Although Qualitas always shown an ability to maintain significant growth rates whilst maintaining discipline, much of our more recent growth is attributable to the IPO, having capital for underwriting and also co-investment. Staff retention has been enhanced through being a public company. As I noted earlier, we have raised a record net $3.3 billion over the last 14 months. This is a significant amount of fresh capital, especially given the past year has generally been a softer capital raising environment globally, which once again highlights the strength, and scalability of our platform. Strong FUM growth is matched by a significant increase in deployment backed by market megatrends and selective key investment thematics. Our FY '23 deployment was purely in private credit with 85% in residential private credit, of which 95% is in senior debt with substantial equity buffers. The pool of theoretical embedded future performance fees for the period of 7 years from June 2023 to June 2030 is not materially different to what we disclosed at the half year, which was estimated at approximately $80 million. This estimate is based on deployed capital only. The quantum of unrecognized future performance fees attributable to private credit funds has increased over the last 12 months driven by 100% deployment in private credit. This is offset by a reduction in the estimated pool of unrecognized future performance fees from our equity funds. This revised estimate considers our current view of future market conditions, especially equity valuations, and future cap rates, which can potentially cause delays in the realization of assets, and the value at which we can realize these assets. The total pool of theoretical embedded future performance fees is subjective, and based upon assumptions, that by their very nature, are uncertain. I'm now turning to Slide 9. Qualitas Group recorded funds management revenue of $44.1 million for FY '23, up 25% on FY '22, driven by a step change in FUM growth and deployment. Alongside this growth, the quality of these earnings has significantly improved as they're driven by core FUM earnings as opposed to performance fees. Our principal income reached $15.9 million, up 273% on FY '22 attributed to strategic utilization of the balance sheet for underwriting and the availability of the IPO proceeds. These factors, combined with increasing efficiency in the platform translates to a 101% increase in the funds management EBITDA, pre-performance fees for the financial year. Funds management EBITDA margin pre-performance fees was up 11% on FY '22. We saw a decrease in base management fees and transaction fees as a percentage of average invested FUM in FY '23 driven by changing product and investor mix. We took advantage of the large-scale institutional capital, albeit at slightly lower fees compared to our averages, knowing we could drive up operating efficiency, through greater scale. This is evident from our increasing EBITDA margin. Normalized net profit before tax of $31.1 million is in line with guidance, and 9% lower than FY '22 due to lower performance fee accruals in FY '23, compared to the prior year. However, as noted earlier, the underlying core business has shown strong growth on a pre-performance fee basis. Normalized net profit before tax, pre-performance fees grew by 88% on prior year. We continue to be disciplined in our deployment, and maintained an unwavering focus on quality. This is evidenced through the strong quality across our portfolios. As of today, we have no impairments in our credit portfolios. Moving now to some highlights against our strategic initiatives, and I'm turning to Slide 10 to discuss our FUM growth. The additional commitment from ADIA referenced earlier means that they will now invest a total of $1.4 billion in the Qualitas Diversified Credit Investments. Following the initial investment of $700 million around this time last year. It also means ADIA can now exercise its options at their discretion at the agreed strike price of $2.50, to acquire approximately 22.8 million Qualitas shares, representing a 7.2% stake post issuance of new shares. This commitment from one of the world's largest investors represents their conviction in our platform, and its growth trajectory. In the event that ADIA exercises their options in Qualitas, we would be delighted to welcome them as a major shareholder in our company. We have built an excellent relationship with ADIA, and I believe they will add significant value to our long-term growth ambitions. Similarly, the $750 million additional commitment from an institutional investor in the Qualitas Construction Debt Fund II demonstrates their belief in not only the investment opportunity presenting in Australia, but also our track record, fund governance and risk management processes. These new commitments have put us in an enviable position in the Australian CRE alternative financing space. We now have $2.3 billion in dry powder heading into FY '24, ready to deploy in a measured way, and capitalize on future market dislocation. We believe listed retail and wholesale investors will follow closely behind institutional investors, recognizing the benefits of CRE private credit. Slide 11 shows our record deployment over the past year. Around 54% was in total return credit, predominantly construction credit-focused deployment, of which 91% was in senior credit. This is a tactical area for us, as we continue to see outsized return opportunities, to provide financing at conservative levels against quality sponsors. Our debt and equity skill set enables us to reverse the capital stack, and position the business through different market cycles. As we progress into FY '24, the deployment mix is heavily weighted to private credit, driven by tailwinds outlined earlier in the presentation. The significant increase in the average size of our investments has improved the efficiency of the platform. The final point, I want to highlight is the continued strategic deployment of balance sheet capital for future growth. Funds deployed in underwriting positions in FY '23 delivered a weighted average yield of 9.2% against an average RBA rate during the year of 2.9%. As of today, we have $138 million committed in underwriting positions. Our listed private credit fund, QRI, has remained fully invested since the establishment of the Qual underwriting facility in December last year, delivering an average distribution of 8.5% in the second half of '23, and is now classified as an MREIT and eligible for ASX300 and ASX300 A-REIT index inclusion, subject to meeting relevant thresholds, and decision by S&P. If QRI's added to the ASX300 coupled with being Australia's only MREIT -- this should both assist in future capital raisings for this fund given its unique status. We've also allocated additional $20 million in co-investment commitment into existing funds. Slide 13 provides an overview of our funds management platform today. 78% of our FUM is in private credit, underpinned by favorable market condition, and it being the most dominating thematic requested from institutional investors. Over the past year, we've invested in our platform across new product development initiatives, and distribution capability. And we'll continue to expand our platform under the 4 key investment themes shown on the slide. We are launching our Built-to-Rent III fund and the Qualitas Tactical Credit Fund, which has a similar thesis to our existing opportunity funds, but focus on opportunistic credit investments. Moving to Slide 14. Whilst institutional inflow drove growth in our platform over the past year, our listed retail, and wholesale channels remain a key pillar in our distribution network. Of the new capital raised since 30 June, 2022, 89% is for private credit, of which 90% is to invest exclusively in funds under our total return credit strategy, a sector presenting compelling risk-adjusted investment opportunities. The pie charts at the bottom highlight our ability to consistently attract, and convert new capital into long-term strategic partnerships, with the ability to invest across strategies, and in increasing quantum. Turning to Slide 15. Turning to Slide 15. The key highlight here is that we have built a business that is supported by significant predictable recurring revenue. 65% of our FUM is in closed-ended funds with over 5 years duration at inception. 30% is in open-ended funds with long-dated redemption windows or is an ASX-listed structure. As I noted earlier, the key objective is to match fund capital with fund asset duration. I will now hand over to Kathleen to speak about our ESG vision and progress for FY '23.

Thanks, Andrew, and good morning. Over the past year, we progressed from developing our ESG policy, which articulates our beliefs, framework, and commitments to implementing several sustainability focused initiatives to drive long-term value. Firstly, on the environment, we've continued to expand on the initiatives that we believe can make a real impact in driving change across the property industry, and increasing investment in projects with strong sustainability outcomes. Our initiatives include updating our ESG rating tool, with a significantly increased focus on the environmental credentials of our investments, and progress on our low carbon emissions product strategy, incorporating low emissions principles targeted at residential given it's one of the largest emitters of CO2. On the social front, we've continued our efforts to recognize, and implement changes towards investment of Aboriginal and Torres Strait Islander people. We work together as a business to deliver the first quality reflect Reconciliation Action Plan or reflect RAP, which we launched after a sealing final endorsement from reconciliation Australia. We are early in our escalation journey. However, our RAP is an acknowledgment of our attentions and initial steps towards strategically setting reconciliation commitments. Our ongoing commitment to embedding ESG considerations across the country, and -- across the company and in our investment decision means we will strengthen and evolve our policies and tools over time. To help us on this journey during the year, we established our ESG Advisory Group. The ESG Advisory Group comprising specialists in ESG has been established to help shape, best practice within the company, and help guide in our ESG objectives. Looking forward, we're looking to expand our views to reporting infrastructure to meet reporting expectations of both domestic, and offshore investors and the regulators. We have a continued focus on our social initiatives, including our charitable engagements and partnerships, and executing on our goal of 40/40/20 gender diversity in our workforce. And finally, we're looking to implement a Modern Slavery policy. I'll now pass to Philip to speak further about our financial results.

Thank you, Kathleen, and good morning. I'm pleased to report another year of high-quality earnings as our platform continues to scale through growth in total funds under management. Growth in funds under management has resulted in net funds management contribution, up 34% to $18.8 million compared with $14 million achieved in FY '22 with continued improvement in our core funds management gross operating margin to 42% from 40% in the previous year. As noted, the contribution from net performance fees, was significantly less in this financial year at $3.2 million, compared with $19.4 million in the previous year. All of our performance fees are payable at the end of their fund life or at set intervals. And as such, the actual performance fees are not earned evenly over time. Accordingly, and under our performance fee policy, less performance fee revenue has been recognized this year, due to slower progress on exit of our near-term maturity funds. As Andrew has already mentioned, our estimated pool of theoretical embedded future performance fees for the period of 7 years from June '23 to June 2030 is not materially different to what we disclosed at half year, which was estimated at $80 million. The quantum of unrecognized future performance fees attributed to the private credit funds has increased over the last 12 months, driven by our 100% deployment in private credit. This is offset by a reduction in the estimated pool of unrecognized future performance fees from our equity funds. The total pool of theoretical and embedded future performance fees are subjective, and by its very nature is based on future events, which are uncertain. However, while the net performance fee contribution was subdued, compared to FY '22, we have seen significant growth in earnings on our principal income as we put our IPO funds to work through co-investments, and underwrite to support fund transactions. Principal income for FY '23 was $15.8 million, up $11.6 million from just $4.2 million earned in FY '22. Benefiting from higher interest rates, and continued use of balance sheet funds to underwrite transaction flow for our income credit funds. The other segment of our business is our finance, our direct lending business. Arch Finance remained relatively consistent compared to FY '22, contributing $3.9 million to normalized EBITDA fans in the previous financial year. Our corporate costs were higher for full year '23, largely reflecting a full 12 months of trading post IPO, compared to FY '22, which was for just 6 months. The significant cost drivers' year-on-year were insurance costs, marketing and travel-related post COVID, and higher professional fees incurred as a listed entity. Overall, our normalized EBITDA was $33.9 million, which was 7% lower than FY '22. However, when looking at core underlying contribution, excluding the less uniform contribution from performance fees, FY '23 was up 78% at $30.7 million from $17.2 million achieved in FY '22. Statutory NPAT as reported is $22.5 million for the period, up 19% on the prior financial period, which included one-off listing costs. Our final fully franked dividend of $0.055 per share has been declared, and will be paid in early October. This equates with the interim dividend of $0.02 per share earlier this calendar year to a yield of 3% on the IPO issue price of $2.50. I will now review our strong operating performance in more detail. Our Funds Management segment has delivered strong and consistent revenue growth throughout FY '23, as seen as the table on the slide. Total fund management revenue was up 25% to $44.1 million with strong growth in transaction fees following a record year for deployment. Importantly, core employee costs of $25.4 million in FY '23 were at a slower rate than revenue, leading to the improved gross operating margin of 42%. We have made -- investments across our distribution, investment, and portfolio management teams in the second half of FY '23, as we gained greater line of sight into FY '24, and the additional dry powder. The full year cost of these hires will come through in FY '24. Our approach to performance fee recognition remains prudent, and the gap between fund performance fee expense, and what is recognized in our corporate revenue has remained largely unchanged, pending asset realizations, which are expected later this financial year. When looking at our operating efficiency, we closely watch our operating margin and fees as a percentage of our -- average invested funds. The strong growth in large institutional mandates has placed some short-term pressure on our top line fees as a percentage of average invested fund. But the scale efficiencies of this growth is coming through strongly in our operating margins, excluding performance fees. On this basis, I'm pleased to report that our funds management operating margin has improved by 11% from 34% to 45% in FY '23. This is a key measure that we are very focused on continuing to improve as we convert our considerable dry powder into new invested fund. Turning to the next slide. Principal income continues to grow with our additional balance sheet liquidity arising from the IPO. In FY '23, $15.9 million was earned through the ability to underwrite investment assets on behalf of our funds especially the recently structured liquidity facility to support investment flows into our flagship credit income strategies. Our ASX-listed QRI fund and the unlisted wholesale Qualitas Senior Debt Fund. A key feature of our use of balance sheet is how funds are able to be recycled with positions held for relatively short periods. Of the $427 million of underwrites put in place throughout the year, $333 million was recycled within the period, benefiting our funds through being fully invested throughout the year. The Arch Finance business maintained a steady contribution to the overall result at $3.9 million, notwithstanding increased competitive pressures and a reduction in the volume of loans outstanding as at balance date. Turning now to the operating performance. As noted earlier, our average invested fund has grown by 49% to $2.95 billion over FY '23. With continued growth in our average invested fund, operational efficiency has continued to improve. As displayed on the chart, there has been a decline in base management, and transaction fees as a percentage of average invested fund, with this decline reflecting the change in investor and product mix. The scalability of our business is evidenced by the decline in employee cost as a percentage of FUM to 0.9% of average invested fund compared to 1.5% in the previous financial year. Our core recurring funds management revenue and principal income has grown at 44% CAGR over the last 2 years. Turning now to our balance sheet. The main change is in the reduction in cash and cash equivalents from FY '22 to now, through a number of short-term underwrites and longer-term co-investments, which are classified as either loans receivable or investments in our accounts as a balance date. The current cash balance of $192 million remains well positioned to take further advantage of opportunities that may arise in both our credit, and equity investment streams, and providing the business with the flexibility to support new fund growth through co-investment, and fund underwriting, and bridging activities. As Andrew noted earlier, we remain focused on the continued strategic deployment of these proceeds in an orderly way. I will now hand back to Andrew.

Thanks, Philip. And now turning to the outlook for financial year '24. It is clear that Qualitas has made a strong start on the capital raising side, and we are very much looking forward to the rest of the year. FY '24 represents a unique period of time for [indiscernible] for a number of reasons. Firstly, we have $2.3 billion in dry powder, which underpins our earnings growth potential over the next 12 months. Momentum continues to build upon itself. As amongst local borrowers, we are known to be able to deliver capital for those investments that we like. We continue to see increasing borrower demand for our capital. And whilst our model is not to pursue every last opportunity, it is comforting to see firsthand the demand. The markets are ripe for our type of capital. Residential vacancy rates are at historical lows, employment markets are at historical highs, immigration and population growth have strongly rebounded. And for the first time in 18 months, we are seeing genuine, and natural green shoots appearing in the new project market as the rise in off the plan prices, together with more moderated increases in construction prices, rends us some initial projects as feasible. I would be happy to expand upon this in the Q&A. Notwithstanding the above tailwinds, we remain cognizant of the macroeconomic backdrop, and we have built a reputation based on disciplined investment. I believe that this is why we've built such a strong, and substantial relationships with some of the largest global investors. We're not about to lose the trust placed in our platform and continued disciplined investment should lead to greater capital in years to come. As Philip noted earlier, we've invested in our platform in the latter half of FY '23 as we gained greater line of sight on our capital mandate. These costs will come through in FY '24. We monitor our cost base carefully with a focus on our operating margin growth. Significant growth in our strategic long-term capital sources in private credit has led to a skew in our product and investor mix. A more recent mandate favor 33.32 performance fees as opposed to upfront transaction fees. So this will create a lag effect, albeit favorable in future periods, assuming Qualitas continues to perform. We are also taking a more conservative view of Arch Finance, expecting its contribution, to decrease as we continue to see the small ticket end of the commercial mortgage market experiencing significant competition over the past 12 months. It is with this lens, we've provided our financial year '24 guidance of net profit before tax in the range of $37 million to $41 million, and FY '24 earnings per share range of $0.0875 to $0.0970 per share. In assessing our guidance, we've assumed that FY '24 will be a year of similar performance fees relative to FY '23. And therefore, given the guidance is at a higher level, we are expecting quality of earnings to shine through. We have also assumed that our key investor channel for the year ahead continues to be the institutional market, providing volume of capital, which is positive for our efficiency gains. Against this backdrop, we anticipate our company to continue its solid growth rate, showing an increased net profit before tax of between 19% to 32% on last year assuming our guidance can be achieved. To those on the call and online, thank you again for listening to our results presentation, and we're now happy to take questions. Thank you.

[Operator Instructions] The first question today comes from David Pobucky with Macquarie.

So just the first one on guidance. Guidance is a little softer than the market had expected. And thanks to some of the color that you just provided in terms of the composition. I mean, is there any conservativeness within that? If you could just provide a bit more color, please, that would be helpful?

Yes. Thanks, David. Look, I think for us, it's still very early in the year for us to really be sort of providing a more certain guidance. So, we're really doing it literally being 7 weeks into the year. I think that, it is based on assumptions that we feel are achievable. If your question is risk on the upside of guidance, I would say, for us, it will really depend on our ability to have quicker deployment relative to our base set of assumptions. As Philip and I both noted, performance fee levels in this year's guidance. So as in FY '24 guidance are very similar to FY '23. I think that to the extent we were to accelerate our asset sales at fund levels, could potentially provide upside to the performance fees that we're assuming, and also just greater capital availability to deploy. So notwithstanding, we've got very significant dry powder. In fact I'd -- go as far as saying to the best of my knowledge, probably more than any other Australian local manager. I would say that upside to further capital during the year will sort of give us greater firepower for disciplined deployment as well. So, I think they are the variables. But at the moment, being 7 weeks into the year, that's the best estimate we can provide. Philip, do you want to add to that in any way?

No, I think that you summarized it very well.

Thanks.

And just the second line in terms of deployments, you hit $3 billion in FY '23, like you mentioned, a significant amount of dry powder there. Would you mind providing a bit more color in terms of deployment opportunities that you're currently seeing and expectations over the coming 12 months, please?

Thanks, David. I think we're seeing very positive signs again in the market. At one level I don't want to overstate exactly the status of projects in the market. But certainly, I feel we're heading into a more favorable environment in FY '24 relative to FY '23 for a range of reasons that if you want, I can further explain. But if you look at our numbers, and the various public statements we made over the course of FY '23. We've noted that it was approximately $3 billion of total deployment for all of FY '23. And of that, we closed $1.7 billion in the first half of the year. Of that $1.7 billion, we also noted last year that $600 million was in respect of a very significant transaction that we were also public on, which is the AURA investment by Aqualand. And so that somewhat skewed those first half numbers. So just to recap on that. We closed $1.7 billion in the first half, of which $600 million was in one single transaction. So you could say, even on a normalized basis, circa $1.3 billion for the half year. Now if I look at where we are right at the very moment. We're currently -- and bear in mind, we're only 7 weeks into the year. We currently got line of sight on $1.4 billion right at the moment. So of those amounts were closed transactions or IC approved, ready to close the $550 million. These are sort of rounded numbers, $550 million mandated investments that we've not yet taken through investment committee. We're sitting on $731 million and potential investments that we think we are very highly likely to be mandated on $112 million. Now that all totals $1.4 billion in the first 7 weeks. So you can see by every count, we're proving up to be right at the moment, at least, a very strong outlook for deployment. It compares favorably to the -- what we did in the entire first half of '23. And in fact, I would say, compares very favorably to all of FY '23. So I think deployment is shaping up well. But I say that with the caveat -- we are only 7 weeks into the year as well.

And just one last one, if I may. One for Philip. It's an accounting question. I might take it offline. But look, the D&A and the interest expense line item in the presentation of $2.765 million -- is there a reconciliation of that somewhere in the account? Just trying to tie that to the net interest income of the $18.6 million doing the accounts, please?

Yes. The main differences will be the treatment of Arch on consolidation in the stat accounts versus our market presentations where we show Arch as an EBITDA figure. So happy to take that offline, but it will be related to the Arch segment reporting.

The next question comes from Olivier Coulon with E&P Financial Group.

Just on the -- yes, performance fee assumptions. So you effectively have assumed a flat performance fee in FY '24 relative to FY '23. I think previously you were kind of expecting a bit of a step-up in FY '24. Is that predominantly just slower realization of that equity fund?

Yes exactly. So, we've got a range of different embedded performance fees that are sitting in our various funds. I think for us at any point in time, it's really about saying when is, the most opportune time to really maximize for the investors in the particular fund. At the moment, a lot of those performance fees are really sitting in more of our equity-based funds. And that's really got to do with the cycles that those investments were written in, and timing relative to what has been a real push into private credit over, the last couple of years. And so look, we've really just had regard for exactly when we feel will be the right time to crystallize. So, I think we've taken a relatively conservative view on the performance fees. As I said earlier, to David's question, I think that there is some potential for upside on the fees that we're putting forward. But equally, I think foremost, it's about maximizing the outcome for our LP investors at the fund level, and really taking advantage of exactly when the right time is to crystallize it. So that's probably the best I can describe it, back to you.

And is the bulk of the expected performance fees in the coming 12 months expected to be from credit funds?

No. No, it's some -- I'll hand it to Philip. But I'd say the very -- look, it is a mix overall, but I think I would say it's skewed to more of our equity funds, but there is some debt fund performance fees coming through as well. Philip, you might want to just add to that.

Yes, and not to contradict my CEO, but there is actually a little bit more assumed coming through the credit funds just because of the current times -- of the various assets. It is still a mixture, but there is some stronger flow from the credit fund.

And, sorry, just on the investment team step up in capability, can you provide a dollar amount or percentage of funds management, the impact of that step-up. It sounds like we might have a bit of a breather this year relative to '23 in terms of the pace of that increase in operating margin. Is that fair to assume?

Yes. Look, that is fair to assume the growth from 34% to 45%, and the operating margin once the of the big change, we don't expect it to step up at that level again into FY '24. So, there will be a moderation in the rate of improvement in the operating margin, but we still expect some modest operating margin improvement as we continue to scale the business.

Okay. No, I appreciate. And then any rough kind of estimate you can give us on, I guess, the drag or benefit that Arch and the, co-invest and underwriting segment is going to provide in FY '24. It seems like you're stepping up your underwriting efforts in this year, but you're probably not going to get the full benefit of where you're kind of guiding to now, which I think you've got $150 million of capacity. And then Arch presumably is going to continue to kind of step down from that second half run rate on the lower book size?

Yes. Olivier, you're exactly right. Both of your statements are correct.

And, sorry, just a last one from me. Just on deployment seasonality. I mean it sounds like you've got overall a pretty good line of sight on deployment and a large percentage, large amount of deployments. Is it expected to be a bit more back-end weighted this year relative to the quite first half-weighted deployment in FY '23?

I think it will follow a very similar pattern to what we saw in FY '23. First half is always quite a strong half for us, because property markets, and I think you know the pending property markets generally shuts down from the third week of December until the end of January. And then people take some time in February to literally get back into it. So I feel overall, in many ways, the first half, generally, you've just got more operating months than you do relative to the second half. As I said earlier as well, we are -- I don't want to overstate this next comment, but we are seeing the green shoots of more favorable dynamics, particularly in that residential apartment off the plan type projects that we have seen construction cost increases moderate from the levels that we'd seen a year ago. We've certainly seen some quite healthy price rises in off the plan sales. And if you take all the various factors in a relative basis, a lot more projects that are being presented to us are now looking, to be more feasible than they were 12 months ago. And obviously, 12 months ago was a good record year of deployment for Qualitas as well. So I think we've got better market conditions, improving market conditions, and sort of taking a view based on those aspects as well.

[Operator Instructions] The next question comes from Liam Schofield with Morgans Financial.

Andrew, just a quick question, firstly, on deployment. How is that average check size and deal quantity sort of changing through time? What does it look like over, I suppose, the past year? And what are those expectations going forward? And then just on warehousing income, those loan receivables, they're sort of unchanged, they call it $90 million. What does that sort of look like going forward? Is this a stable state of loan receivables or do you think that, that could grow?

Okay. I might take on the check size question and pass your second question on receivables to Philip. On the check size, we've reported are pretty consistent over the last 6 months or so at approximately -- I think the number was $72 million. And that excludes the AURA transaction, because if we include that, our average check size worth $100 million. So, I think that particular number, you need to really view in the context of there was a significant lumpy transaction in the first half of '23. So, we've been tracking about $70 million. I think that in terms of the outlook on that particular amount. I don't think, we're going to necessarily see the same rises that, we saw in previous periods where our check size was going up by 25%, 30%. I do think there's a little bit of potential upside on that particular check size number. Again, early in the year, to really make that particular call. Certainly, our investment team are very conscious of check size because it drives a lot of our efficiency metrics in terms of how many times we're taking things through the Qualitas' platform for approval and asset management, monitoring and the like. But I think if you continue to work off that $70 million check size that probably is a reasonable assumption. Philip, maybe you want to answer Liam's second question around receivables.

So Liam, can you just repeat the receivables question, please?

Yes. So those loan receivables, so what are for the take -- the asset side of warehousing income unchanged half-on-half at $90 mill. So should we think of that as a fairly stable state? Or is there capacity to grow that if warehousing income is really, to me, a function of that average loan receivable balance?

Yes. No -- we would expect that balance to increase over time. We are the liquidity facility, for example, which we put in place in December for QRI and our senior debt fund. We're finding that is getting greater utilization. So on average, we should be able to increase, the loan receivables balance over time.

The next question comes from Olivier Coulon with E&P Financial Group.

Just another one from me. So you pointed out impact on reduced transaction fees. We obviously saw that step down in '23 versus the run rate that you've historically seen, and I understand that you've got a large mandate that doesn't pay those. Can we assume that there's a further step down in FY '24? And then, I guess, what's the expectation beyond that, when that investor is largely expected to have been fully deployed? And then when can we see an offsetting contribution from performance fees?

Thanks, Olivier. The first up, I would say that the transaction fees as a percentage of average invested fund, I wouldn't see actually declining much further. It is a mix question. And when we look at our current dry powder, the mix is not dissimilar to the previous year. So that particular should stabilize. In terms of -- sorry, the second part of your question?

Yes. I guess when -- obviously, you'd probably prefer that they just keep deploying and getting bigger and bigger with you, but assuming that what you think they're likely to end up signing up with the current kind of fee structure, when should we kind of see a return to the type of levels of transaction fee revenue through your FUM that we used to see in FY '22 and before that?

Yes. No, that -- sorry, that was a good question. So look, we deploy very quickly, as you can see, given the record level of deployment in FY '23 and the strong pipeline that Andrew outlined already in FY '24. So this is not an elongated process. We would get to a steady state into FY '25 through to FY '26. And the last question you asked around performance fees. That particular mandate does have a lower performance fee commencing after 3 years. And so that will start to influence our results from FY '26 onwards.

There are no further questions at this time. I would now like to hand the call back over to Mr. Schwartz for closing remarks.

Thank you. What I'd like to do is, firstly, just thank the staff of Qualitas for what was a really solid financial year 2023. Also I just take the opportunity to thank my Board, our LP investors in our various funds, but also, of course, the shareholders of Qualitas as the public company. To the extent anyone's got any further questions, please reach out to me or any member of the team, and we certainly thank everyone for their time on this call this morning and wish everybody a good day. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.