Qualitas Limited (QAL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Qualitas Fiscal Year 2024 Results Briefing. [Operator Instructions] I would now like to turn the conference over to Mr. Andrew Schwartz, Group Managing Director and Co-Founder. Please go ahead.

Thank you, and good morning. Welcome to the Qualitas 2024 Full Year Results Presentation. I'm Andrew Schwartz, Group Managing Director and Co-Founder of Qualitas. Presenting with me today, I have Mark Fischer, Global Head of Real Estate and Co-Founder; Kathleen Yeung, Global Head of Corporate Development; and Philip Dowman, Chief Financial Officer. Firstly, I'd like to acknowledge the traditional custodians of the lands 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 where you are participating. We pay our respects to elders past and present. Firstly, turning to Slide 3. I'll start our presentation with the highlights from the full year results and some of the key competitive advantages of Qualitas. I will then take a deeper dive into the Qualitas performance, the market environment and strategic outlook. Mark will then provide an update on our Funds Management business. Kathleen will present an update on our ESG platform and initiatives, and Philip will take us through our financial results in greater depth. I'll conclude the formal part of today's call by making some comments on the outlook for FY '25 and then welcome the opportunity to take any questions. Turning to Slide #4. FY '24 was another milestone year for Qualitas. Record high capital raising and deployment activity have generated significant momentum for FY '25. This is reflected in our guidance for FY '25. Our key FY '24 highlights include significant demand for global alternative investment strategies. Commercial real estate private credit continued to be a standout due to the attractive risk premiums it offers. Experienced high-quality managers are taking market share from new entrants. This is evident from our record year of capital raising with $2.8 billion of net inflow. Our strongest deployment to date of $4.2 billion was achieved in what was a challenging market environment. This resulted in significant growth in our fee earning FUM and increased future earnings capacity from the $1.4 billion of undrawn construction credit. The higher Funds Management EBITDA margin provides scope to increase our investment in people and technology to support our next phase of growth. We continue to optimize our balance sheet efficiency. Co-investment relative to FUM has been actively managed lower from our previous expectation, therefore, providing capital efficiency. We are seeking new channels to optimize balance sheet returns. Over the past 12 months, there's been much discussion on private credit managers and its growing popularity. However, we believe it's important to distinguish between managers and specifically their relative competitive advantages. In this regard, I would like to discuss 8 key advantages of the Qualitas platform, some of which I believe are unique to our firm. Firstly, is our ability to attract large-scale capital from a sticky investor base. This gives us a volume advantage in terms of larger deal sizes. Large deal sizes attract premium investor returns over other groups. Second, we have 18 active funds, which provide for diversification of real estate strategies. The advantage of our platform is to traverse the life cycle of property. This allows us to be a whole of capital life solution for our partners and borrowers. Third is our institutional Funds Management model. We're not a broker or a syndicator of loans, so we don't need to return capital when a loan is repaid. Also, we don't raise capital for each investment we make. Some of the funds earned fees notwithstanding, we may be in cash. This means we are less anxious to invest. This is very different to a debt syndication business, also known in the industry as raising capital on a deal-by-deal basis. Fourth is that we don't rely on leveraging our credit funds to boost fund returns or fund management earnings. We don't have an asset and liability mismatch, which means our business is more resilient in times of volatility. Fifth is our discretionary approach in Funds Management. We make investment and asset management decisions as manager in the best interest of our investors. Sixth is that our dry powder comes with no cost of capital unless it is deployed. This allows us to make considered investment decisions without feeling pressured by a burn rate on capital. Seventh is our mixed fee structure. We earn fees based on a range of factors depending on the fund, but includes fees on committed capital, allocated capital and gross asset value. This means our earnings are not entirely driven by deployment activity. Finally, we are one of the pioneers of CRE private credit in Australia. We have deep origination network with local market experience investing through multiple property and credit cycles. Culminating and being recognized as Firm of the Year: Australia in the 2023 PERE Awards, one of the leading publications dedicated to the global private capital industry. Each of these building blocks takes years of effort and diligence to assemble, and I'm thankful for the team we have at Qualitas who have contributed to our success. Now moving to Slide 7. As the fast-growing Funds Management business, capital raising underpins our success and deployment support earnings growth. During FY '24, we excelled in both. Our fee earning FUM was up 40%, reaching $6.8 billion. Growth was underpinned by strong deployment in private credit with increasing investment check sizes. Looking further, the residential sector with its robust investment fundamentals remains our choice for deployment. 62% of all total deployment was in construction credit. And outside of the traditional financiers, we are one of the largest providers of this critical capital required in Australia. The pool of theoretical embedded future performance fees over the next 7 years to August 2031, is estimated at $75 million, similar to the number at the half year. Increases in private credit funds future performance fees are offset by a reduction from our equity funds. We will provide further insight on this later in the presentation. Moving to Slide #8. In FY '24, we achieved significant double-digit growth across high-quality earnings. Our recurring earnings streams, Funds Management revenue grew by 22%. Our principal income rose 47% as we heavily focus on balance sheet returns and continue to [ see ] this as a significant opportunity for future growth. As the chart shows, these earnings combined almost doubled over the last 2 years. Our Funds Management EBITDA margin reached 51.7%, exceeding our stated goal of 50%. This highlights the increasing earnings stability and resilience of our platform and our focus on careful cost measures. Elevated deployment and fundraising activity meant more balance sheet capital was utilized for longer-term investments. Demand for underwriting declined as we have good reserves of dry powder. Slide 9. Strong deployment and outperformance in our private credit strategies have reduced the volatility of unrecognized performance fee pool. As I mentioned earlier, we've estimated unrecognized performance fees at $75 million. This is based on deployed capital in private credit and equity funds. The contribution from private credit funds increased to 47% of the total pool in August 2024, compared to 17% in August 2023. Performance fees from credit funds benefit from a more stable performance fee realization profile due to borrower equity buffers. Our institutional private credit mandates with back-ended fee structures are expected to deliver more regular performance fees. Looking at the chart on the right-hand side, our FY '24 net profit before tax of $39 million includes a $6.1 million reversal of net performance fee revenue, which is due to a decline in the mark-to-market valuation of assets in equity funds. This was offset by an $8.5 million in net performance fee revenue accrued predominantly from private credit funds. Turning to Slide #10. Our balance sheet continues to support our co-investment into Funds Management business in FY '24. Co-investment as a proportion of FUM is below 3%. Of this, $110 million is drawn and $155 million is committed but undrawn. At balance date, we have $209 million to deploy into more accretive short-term investments. We are aiming to co-invest in select credit transactions. This means investing into our deal flow while the balance sheet transitions into a more stable co-investment drawn phase. The next few slides outline some of the macro trends and tailwinds we are experiencing. Turning to Slide 11. During FY '24, we saw a stabilizing interest rate environment with mounting speculation on the next move by central banks. Our view has been and continues to be that an elevated interest rate environment will persist in Australia. In this environment, investors are focused on receiving appropriate credit margin over the risk-free rate. Short-term changes in interest rates are unlikely to change their asset allocation strategy. Private credit is now better understood and accepted as an attractive asset class within the real estate industry. An alternative scenario of more rapid rate cuts, which suggests we're heading into a recession. This is not a Qualitas house view to be clear. However, should this occur, we expect higher market volatility across all asset classes with a widening of credit spreads. This will present opportunities, which we are well placed to capitalize on. Today, we are well positioned for a variety of economic scenarios. Approximately 78% of our total invested FUM is in senior debt with significant equity buffers. 77% of our invested FUM is in the residential sector, which at the present time is more sensitive to supply and demand imbalances than interest rates. Rate cuts are more likely to trigger an increased investment pipeline for Qualitas as we would expect more projects to be feasible and investor appetite is likely to return. Slide 12 shows the opportunities in CRE private credit in Australia. Qualitas operates in a large and growing addressable market. Based on our estimates, financing of between $204 billion and $253 billion over the next 4 years is needed in the residential development sector. At this level, current record low vacancy rates would simply be just maintained. This level of funding represents up to 56% of traditional financiers exposure to the entire commercial real estate sector. We are well positioned to capitalize in this market with our access to institutional capital. The chart on the right shows global investors are increasingly focusing on transparency, track record and reputation when selecting managers. There is a notable bifurcation amongst private credit managers with larger, more experienced firms at the expense of new entrants. Moving to Slide 13. We have conviction in the investment fundamentals of the Australian residential sector as it experiences one of the biggest dislocations in funding availability. Here's why. Traditional financiers exposure to residential and land combined declined in March 2024 quarter for the first time since COVID-19, as shown in the chart on the left. The chart on the right shows land values and construction costs have escalated significantly. Our view is that the actual number of developments financed by traditional financiers declined significantly more than the 2% depicted. Although the number of feasible projects are down due to the above factors, Qualitas is experiencing a solid volume of high-quality investment opportunities. We have demonstrated our ability to write large checks and tailored solutions meeting the needs of borrowers. Our addressable market is large. And to date, we continue to be a small part, meaning we have significant room to grow. The depth of the market allows us to be extremely selective in what we ultimately invest in. On that note, I will now pass to Mark Fischer to provide an update on our Funds Management platform.

Thank you, Andrew, and good morning, everyone. Our platform is well positioned against the medium-term economic backdrop with our strategy set up to capitalize on robust investment fundamentals for private credit and residential real estate. The success and resilience of our platform is highlighted by the ongoing growth and performance of our private credit strategies in particular. These credit strategies continued to deliver attractive returns for fund investors. And as of 20 August 2024, there were no interest arrears or impairments in any of the credit portfolios. During FY '24, in our equity strategies, we remain focused on asset management of the existing portfolio while starting to see the beginning of the next cycle. We selectively made investments and took the opportunity to enhance our equity investment team. We were delighted during the year when our achievements were recognized by a leading global industry publication for private real estate markets, PERE. As Andrew highlighted earlier, Qualitas was awarded Firm of the Year: Australia in the PERE 2023 Awards, and we also ranked first in Australia, second in Asia Pacific and 14th globally in PERE's RED 50 list, which is based on real estate, private credit capital raised over the 5 years to the end of 2023. Looking at our peers on this list, we are incredibly proud to be named amongst these leading global fund managers. The next 2 slides show the growing momentum in our platform, focusing on both our ability to attract long-term scalable capital as well as deploying this into high-quality transactions. At the end of FY '24, our total FUM was $8.9 billion, representing a CAGR of 37% since our inception in 2008. Demonstrating our ongoing ability to raise capital across various channels through the cycle, new capital commitments came from existing institutional investors committing approximately $1.8 billion to scale existing flagship funds, a mandate of $550 million from a new global institutional investor based in North America, and retail and wholesale investor channels providing a total of $285 million increasing FUM in our ASX listed flagship fund for Qualitas Real Estate Income Fund as well as the Qualitas Senior Debt Fund. These significant achievements during the year demonstrate the virtuous cycle we are seeing in the platform. Our strong reputation and close relationships with investors drive the ongoing organic fund growth. This differentiates us from new managers seeking to enter the private credit space as large investors continue to concentrate their capital to larger managers with strong track record of deploying at scale. Turning to Slide 17. Our record deployment this year of $4.2 billion was a 40% increase on FY '23 and saw the continued increase in our average investment size hitting $80 million on average for FY '24. Pleasingly, we furthered our ability to make large-scale investments. During FY '24, we made 6 investments with a check size of over $150 million each; and 3 investments exceeded $240 million each, including a large construction loan of $585 million. We are one of just a few parties with the ability to provide capital solutions of this size to borrowers. During the year, we saw a focus of our deployment on construction loans as we begin to feel the start of the new residential development cycle with this theme continuing into our FY '25 early pipeline. We were also successful in the year in transacting on large loans in the income credit strategy, including providing residential residual stock loans on construction projects where we were the incumbent financial. Later in the year, we saw the reactivation of our equity investment strategies with small but important deployment made in both the income and total return equity strategies totaling $135 million of deployment across 3 investments. Moving now to Slide 18. We undertook some strategic portfolio repositioning during the year, which resulted in a level of churn in our credit portfolios as we focused on maintaining the quality of our portfolio in an elevated interest rate environment. The successful completion of the AURA by Aqualand project also saw the roll-off of this large construction loan, but pleasingly, we were successful in retaining an exposure by way of a residual stock loan. Overall, our net deployment after repayments increased by 22% in FY '24, reaching $1.9 billion. This represented a 40% growth in fee earning FUM, and we intend to scale deployment to match the growth of fee earnings FUM in line with our committed FUM. Active management of the portfolio and some shorter-duration investments resulting in churn allowed us to remain agile in managing risk in the current credit cycle. This also provides the opportunity to receive transaction fees, revised pricing of returns as well as the ability to generate performance fees linked to exits. Finally, it's worth reinforcing that a key advantage and differentiator of our institutional platform at Qualitas is that typically we do not need to return capital to investors when an investment is repaid, allowing us to recycle into new investments. We generate transaction fees for each new deployment within the same fund without the need to raise new capital and incur the costs associated with this. This advantage allows us to scale the platform and generate fee revenue momentum whilst actively managing investment risk. I will now pass to Kathleen to provide an update on our ESG initiatives.

Thanks, Mark, and good morning. Progressing on our stated ESG initiatives remains a focus for the team. As an investment platform, our key initiatives relating to the environment is to support low-carbon building through the Qualitas low-carbon debt fund, an impact-driven credit funds focused on the decarbonization of the residential building sector. Put simply, we aim to provide borrowers with more flexible terms and pricing if they meet the investment criteria, including heightened sustainability requirements. At the corporate level, we have retained our carbon neutral certification for full year '23, which is a look-back certification by Climate Active. As we're currently being assessed for full year '24, we look forward to reconfirming our certification status later in the year. On the social front, we continue to further our commitment to reconciliation and are in the process of advancing to an innovate Reconciliation Action Plan or RAP, which follows on from our reflect RAP. We have a genuine and authentic intent to deepen our relationships with First Nations' people and our staff are very engaged in this regard. We continue to support our community partners who are working to address systemic issues surrounding youth homelessness and youth mental health. From a governance perspective, we're very pleased with the results of our first UNPRI assessment, where we achieved 5 stars for our private debt initiatives, and we're currently incorporating feedback from this assessment into our asset management plans where it makes sense to do so. I'll leave it there for today, and I'll now hand over to Philip to talk through the financial results in more detail.

Thank you, Kathleen, and good morning. I am very pleased to report another strong period of growth in the Qualitas Funds Management business. As Andrew and Mark have highlighted, the strong core drivers of fundraising and deployment have resulted in a normalized NPAT of $27.3 million, up 25% on the corresponding period of $21.9 million. The key components of the strong results are the 24% growth in net funds management revenue to $23.3 million and a 47% increase in income earned on our balance sheet investments. The increase in these metrics is a direct result of the $4.2 billion of deployment and continued growth in new capital available for investment over the course of the year. The operating efficiency of the Qualitas platform is evidenced by the increase in the group EBITDA margin to 50% and an increase from the 46% in the prior corresponding period. Moving to Slide 22. This slide puts into perspective the strong gains made in FY '24 and the underlying drivers of growth going forward, reconciling the flow of invested capital between committed FUM, fee earning FUM and invested FUM. Just breaking these down a little further, committed FUM represents the committed capital from investors. Fee earning FUM represents the amount of committed FUM that is earning base management fees and is allocated to investments but may or may not yet be drawn. Invested FUM represents funds currently deployed and drawn, which carries the highest fee load to Qualitas. So in other words, invested FUM underpins current earnings while our current earnings capacity, while fee earning FUM underpins future earnings capacity. While end-of-period invested FUM has only grown by 13%, fee earning FUM has increased by 40% over the period and committed FUM by 46% compared with June '23. The skew towards construction financing and our deployment has a lagged effect on our invested FUM as construction loans draw over a 2- to 4-year construction period. The extent of undrawn construction loans at June was $2.4 billion, which will progressively draw over FY '25 and FY '26, increasing invested FUM. Future earnings will also be a function of this increase in invested FUM as well as the conversion of the current $1.5 billion of dry powder being committed FUM still available to be deployed as of June '24. Moving to Slide 23. Looking now in more detail at the Funds Management segment. We achieved 35% growth in total Funds Management EBITDA reaching $40 million with a 37% increase in transaction fees achieved from our record deployment and 47% increase in the contribution from our principal investments, largely through increasing returns from higher drawn co-investments for the period. Our net performance fee contribution for the year was down $800,000, reflecting strong growth in performance fees earned on our credit FUM, partially offset by a net reversal of performance fees accrued on our equity funds due to lower valuations. Pleasingly, growth in corporate costs was a modest 8%, helping to underpin an expansion in the core Funds Management EBITDA margin to 52%, up from 46% in the prior corresponding period. We remain focused on achieving further scale benefits as we invest in additional capacity to take full advantage of the available growth opportunities. Moving to Slide 24. As previously highlighted, growth in our principal income was 47%, underpinned by the continued deployment of our co-investment capital and continued opportunities to earn underwriting income from support of our deployment pipeline when needed. The contribution to our results from Arch Finance, our small ticket direct lending business was $1.6 million, down from $3.9 million in FY '23. While over the year, the loan portfolio was down 13%. The portfolio decline has slowed and stabilized in the second half, down just 2% since December '23. Management has been focused on reducing the cost base as evidenced by an 11% decline in operating expenses for the period for the Arch business. as well as enhancing the competitiveness of loan origination, which is showing early signs of success. Moving to Slide 25. The operating margin of the business has improved materially over the course of FY '24 with scale benefits of larger average deal size being a key driver of this efficiency. While base management fees as a percentage of invested FUM has declined to 1% from 1.1% over the period. This was expected and is representative of the skew towards larger institutional capital mandates as represented by the 84% share of our FUM from institutional investors. Notwithstanding the lower gross base management fee margin, increasing deployment has underpinned stronger transaction fee revenue, which held at 0.4% total deployment. With prudent investments and additional capacity, we have been able to achieve a material improvement in the overall operating margin to 52% for the core Fund Management segment, inclusive of performance fee contribution and 49% excluding any performance fee contribution. Moving to Slide 26. The Qualitas balance sheet remains exceptionally strong with $194 million of cash and cash equivalents reported as at 30 June. We have investments of $110 million compared to $38 million at June '23, which highlights the increase in drawn co-investments and fund investments that have been achieved over this financial year. During the second half, we also cash received circa $13 million of previously accrued performance fees through the successful monetization of one of our credit funds. We remain focused on the continued strategic deployment of our balance sheet capital in an orderly way. I'll now hand back to Andrew for his closing remarks.

Thanks, Philip. Now turning to our outlook statements for FY '25. We are well positioned for the year ahead. We have $1.4 billion undrawn construction credit, not earning full management fees, which will underpin revenue growth this financial year, $1.5 billion of dry powder and expanded investment platform and a performing portfolio. We anticipate that the reoccurring base management fees and principal income will continue to drive earnings growth in FY '25. Having recognized the opportunity in front of us, we're increasing our investment in people to support our next phase of growth. These costs will come through in FY '25, although we'll maintain a very careful eye on our margins. It is with this lens that we've provided our FY '25 guidance. Net profit before tax in a range of $49 million to $55 million and FY '25 earnings per share range of $0.115 to $0.1291 per share. Key variables to this guidance are the drawdown profile of the undrawn construction credit, the timing and quantum of deployment and maintenance of our performance fee assumptions. I continue to believe that one of the greatest differentiators is our people and our culture. As always, I'm very proud and grateful for their hard work and dedication of the Qualitas team. I'm also deeply appreciative of our investors, continuing your support for our company. To everyone on the call or online, thank you again for listening to our results presentation. This concludes the formal part of our presentation, and we're now happy to open for questions. Thank you.

[Operator Instructions] And our first question today will come from David Pobucky with Macquarie Group.

Congratulations on the result. Just the first question on the guidance, please, and thanks for providing some of those key variables that drive the guidance range. But perhaps if you'd be able to delve a bit deeper into it, particularly on the deployment side, what's your expectation on deployment over the coming 6 months to 12 months, please?

David, it's Mark speaking. The strong pipeline has started early in the year, and our total pipeline that we are sitting on as at today in financial year '25, it's about $1.7 billion in total. This compares to about $1.4 billion at the same equivalent point in the last year. We have closed about $215 million to date in this financial year. But I think pleasingly, there's momentum in what we're seeing. So in addition to the secured pipeline that we have under mandate at the moment, there is somewhere between $400 million to $500 million of other transactions that we are very active on that are yet to be mandated and I'm confident we'll start to see that fill up the pipeline. Perhaps one other point I'll leave you with on this is we're starting to see the large investments are becoming a bit of the norm now in the pipeline. Some of the astute borrowers are acknowledging the benefits of having a single financier in a transaction as opposed to having to syndicate loans amongst multiple banks.

I appreciate the color...

Anything Andrew or Philip, that you'd like to add to that?

I guess, David, as well, I'd say that in terms of the bigger picture in the market, we are -- and I say this in a sort of early stage. We are seeing green shoots coming through the market. Whereas FY '24 was really dominated by projects that were less feasible because -- particularly in places like Melbourne is a good example where realization values haven't really caught up to create project feasibility. I think over the last few weeks, there's real tangible evidence of developers being able to achieve the realization rates that it requires in this higher construction costs environment that we find ourselves. So from that point of view, it feels like we should be more -- receiving more volume of transactions just because I think more things were getting done in the market over the next 12 months relative to the last 12 months.

I appreciate that. And just the second question on your $18 billion medium-term FUM target. Maybe if you could just talk to your level of confidence in achieving that versus a year ago and some of the line of sight that you have on achieving that growth, please?

I'd say no change from where we were 12 months ago to the extent that we've got a very, very significant momentum in our business. Clearly, that comes through our numbers. If you look at the amount of fund that we raised, the amount that we deployed, these are not small numbers that we're announcing to the market this morning about the totality of our growth. Now our -- pleasingly, our funds are performing really well. Our credit investors are receiving good risk premiums in terms of the funds underlying performance, and they're extremely supportive of what we're doing. Now you saw that during the year in terms of the one we can be more public about being [ RDR ] and their increased commitment to our firm, we did announce during the year -- and I just repeated in my presentation, the North American fresh mandate that we've got. We've certainly got more inquiry from some of the world's largest investors who see what the Qualitas performance is in our track record and are getting behind us. So I think that we felt really positive about it last year. I think we continue to feel really positive about it this year. I mean, obviously, I can't give budgets and guidance on that point, other than say it is our light on the hill. And certainly, I think we're on that journey, and it feels really positive in respect of what we're actually achieving by way of the people, the deployment and the fund returns to get us to that $18 billion number.

Congratulations again on the results and good luck for the coming 12 months.

Thanks, David. Appreciate the questions as well.

And our next question will come from Liam Schofield with Morgans.

Just 2 quick questions. Firstly, more just generally on deployment. If we go back to May, you sort of had $3 billion odd approved with the pipeline pushing for -- you've delivered [ 4.2 ]. Do you think that you can grow this deployment sort of year in, year out? Or does the velocity of loans sort of mean that it tapers off? So firstly, on deployment. And then secondly, on principal income, can you just talk about the interplay between dry powder and principal income? And how does that move around when new mandates come on board?

Thanks, Liam. I'll take the first question in relation to deployment. So as I mentioned in my presentation, we do believe that we can continue to grow the deployment to match the growth in the committed FUM coming through in the business. One thing we are clearly observing is that our capacity to write larger loans is being recognized by the borrower market. I stated it again in the presentation that we are one of just a few people that can continue to do that. And as we're starting to see our average investment size increase, I think that results in efficiency within the investment team and our origination efforts put towards deployment. So I would expect to continue to see strong growth in the deployment figures. But also, what I would note as well is that's part of the reason why investors are responding favorably to the firm as well. Large-scale investors making large-scale capital commitments need confidence that the platform they're investing with can deploy that capital in a prudent and timely manner. And I think we're starting to see that be responded to by investors.

Liam, it's Philip here. In regards to dry powder and our principal income and deployment, you're exactly right. As our dry powder is actually invested, it will increase our drawn co-investment, which will, in turn, increase our principal income earnings. The other factor that we should not lose sight of is that with the construction loans being undrawn at $2.4 billion as at 30 June. As those construction loans draw, they will also increase our invested capital and drawn co-investments. But Andrew, do you want to make any other comments on that?

Yes. Liam, firstly, thanks for the question. The couple of other points I'd make around it is that, as I said in the presentation, we've worked hard to really optimize balance sheet efficiency. So we've worked hard to try and minimize co-investment where we can. So we can really stretch the balance sheet further in terms of the operating leverage within the balance sheet. So in terms of the definition of operating leverage, really the amount that we're using in the balance sheet relative to third-party external funds. So that clearly comes through the numbers. The other point I'd make is we do see a role for the transition of the balance sheet from where it is at the moment to the date that it does actually get fully absorbed by all of our funds, which is really the maximum point of efficiency. And to that extent, and as we've put into the formal part of the investor presentation, we're looking at taking smaller positions side-by-side into some of the actual deal flow. We're originating excellent investment opportunities, and whilst we're waiting for the balance sheet to be fully optimized. There's no reason why Qualitas can't be using some of that balance sheet to invest alongside some of the funds. So I think that, that's a thing that the market should expect from us over the next 12 months as well to really drive balance sheet earnings even further from where they have been up until now.

Is that a difference from sort of warehousing loans before they go into a fund?

I think it's very similar in concept. So warehousing is really underwriting the ultimate loans before the third-party capital pool is raised. But this is more saying Qualitas itself is sitting on cash, which we recognize. And therefore, how do we get the best efficiency out of it. And the good part about our actual investments is the durations are relatively low, something Mark touched on in his discussion around the fact that we're able to review where we are in the credit cycle and asset values and it's a really good way to do that is make sure that your durations are relatively short, not get caught up in long-dated assets that have more market volatility. So given our durations are short, there's no reason why Qualitas is sitting in cash. We shouldn't be sort of investing a little bit of that alongside the funds whilst we're transitioning to be fully absorbed into co-investment. So that's an active work stream within the firm.

[Operator Instructions] Our next question will come from Olivier Coulon with E&P Financial.

Just on the guidance range. In terms of the factors that would [ enable ] you to get to the top or the bottom end of that range, what are those? And then I suppose, have you weighted those at all in terms of, to the downside or upside?

Thanks, Olivier. I'll ask Philip to address that.

Thanks, Olivier. Look, the comments are as presented today, really, deployment timing, deployment quantum and also to a lesser extent, the mix of deployment across our different sources of capital. They have the opportunity to either accelerate our core base management fee, transaction fee revenue, which pushes us to the top end of the range. Any slowdown in deployment in the early part of the year will tend to bring us back towards the middle or lower end of the range.

And have you seen any, I suppose, delay in that today? I mean, now it's only the 21st of the second month of the fiscal year. So bit early to tell...

Yes. It is early in the year, but I think I outlined, we have transactions for the financial year '25 under mandate and already closed in that vicinity of $1.7 billion. And I mentioned that there's transactions being worked on in the amount of an incremental $400 million to $500 million in addition to that. So I think the early momentum in that is good for the year of acknowledging we're only a handful of weeks into the year. Transaction timing and closing is always variable. There's a lot of diligence and process that goes into every investment the firm makes. So a little bit difficult to be precise on timing, but the momentum of the team being out there generating opportunities that suit our funds and what those investors are looking for is indeed strong.

Okay. Just also on the undrawn construction credits. So obviously, that's lifted by close to $0.5 billion or $600 million from the first half to the second half, which kind of represents a fairly large revenue stream that you're not currently capturing in the current fiscal year. I mean, is there a view as to when that undrawn component, I suppose, maxes out? Because I would forward if you significantly increased your deployment into construction as a percentage of your overall deployments, you're possibly carrying a larger percentage of the loans undrawn than you normally would, if that makes sense?

Yes. I'll let...

A more mature portfolio would have a mix of stuff that's drawn and undrawn right, if you see what I mean?

No, you're exactly right, Olivier. And we certainly see that narrow over time the numbers at 30 June are somewhat elevated with the volume done in the latter part of the year, and we would see that narrowing as the year progresses.

Yes. Okay. And then just a final one for me. Just on performance fees. So I appreciate the additional color on the split between the credit funds and the equity funds for the unrealized performance fees or expected performance fees, obviously, suggest that the momentum in building those performance fees and eventual realization for the P&L is lifting pretty rapidly. I was just wondering, is there more color that you can give us on, I guess, the expectation for the next 2 years or so as some of those large credit funds that you've started in the last 2 years, get to the point where it's very unlikely that the IRR is below the hurdle rate?

Yes. Okay. I think there was -- it's Andrew here. I think there was quite a bit in that question or sort of 2 or 3 questions in the question. But I'll start by saying that there's less volatility in credit fund performance fees relative to equity funds because obviously, with credit funds, you're making an investment pursuant to a loan agreement that has very specific requirements of the borrower. So you have good line of sight over what your returns are and you have security that assist in creating buffers underneath you to help ensure that to the maximum possible you do earn those particular returns. And you also know when you're going to exit because there's an agreed repayment date. So that gives rise. All those things give rise to an IRR, the quantum of the return and the timing of the exit in itself creates an IRR and then you've got security sitting behind you as well. If you compare that to equity performance fees, it is about enhancing the underlying value of assets. But you've also got the added issue of changes in market cap rates and valuations. And so some of that, as you've seen in the industry more generally, particularly in this reporting season is outside the control of managers where it is a third-party influence. So I think that we would say at a headline level, just less volatility in regards to credit-based performance fees and, therefore, gives rise to more comfort in respect of earning of those particular performance fees. The other comment I'd make on your question, which is really the second part of it is, we have seen an unprecedented rate increase in interest rates, something that we haven't seen in Australia for a very long period of time. And a lot of -- one's views on equity valuations really goes to what your view is in respect of future interest rate movements and whether you're likely to see another 400 basis point increase or substantial increase in interest rates from where we are at the moment. So as we said in our discussion, the house view of Qualitas is probably rates will stay higher for longer. I think that they'll probably oscillate around the levels we're in at the moment. But I think we'll see less cap rate volatility on asset valuations relative to what we saw in the previous period. So I'd like to think that -- in terms of negative revaluations that the worst is behind the industry. And therefore, equity valuations will be more supported in future periods. But I think the really pleasing part about Qualitas, and this should be absolutely shining now through our results is just how strong the private credit thematic is because of the buffers you have against the movement in equity valuations. And hence why our investors are contributing more and more capital to Qualitas because their portfolios are quite substantial in terms of office, industrial and retail, and they're loving the private credit space because of these equity buffers that they have. So I think that's our way of really saying to the market that less volatility and growing levels of comfort in respect of these debt performance fees. I hope that addresses the question.

Yes.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Schwartz for any closing remarks.

Thank you. I would like to take the opportunity to personally thank the Qualitas Board, my entire leadership team and all of the employees of Qualitas who literally turn up each and every day, and they show a very strong level of commitment and dedication to our company. I'd also like to take the opportunity of thanking the shareholders for your continued support. We are really proud of the achievements that we deliver at Qualitas. We'll continue to be focused and give our utmost efforts to FY '25. On that note, I'd like to wish everyone a pleasant day on this call, and that formally concludes our entire presentation. Thank you.

And this will conclude today's conference. Thank you for participating. And at this time, you may now disconnect your lines.