Qualitas Limited (QAL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Qualitas Limited FY '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Andrew Schwartz, Group Managing Director and Co-Founder. Please go ahead.

Good morning, everyone, and thank you for joining us for the Qualitas Full-Year 2026 Results. My name is Andrew Schwartz, Group Managing Director, Co-Founder of Qualitas. Presenting with me today is Mark Fischer, our Global Head of Real Estate and Co-Founder; and Philip Dowman, our Group Chief Financial Officer. Before we begin today, I would like to acknowledge the traditional custodians of the land from which I'm presenting the Wurundjeri people of the Kulin Nation. I also acknowledge the traditional custodians of the lands from where you're participating today, and we pay our respects to their elders past and present. Turning to today's agenda. I'll begin with the highlights of our FY '26 results. Mark will then take you through our funds management platform and the market backdrop. Philip will then walk you through the financial results in detail, and I'll return to close with our outlook and FY '27 guidance. We'll take questions at the end. So, let me start with the highlights. FY '26 was defined by record deployment. It was a step change in the quality and stability of our earnings base and our ability to achieve higher operating margins. We grew by deploying more capital through larger investments and funds. Specifically, the following numbers are noteworthy. Record deployment of $6.5 billion, up 42% on last year. That contributed to $3.1 billion in net deployment, underpinning strong base management fees and performance fee growth into FY '27. Our early FY '27 momentum is strong, with $1.1 billion in investments already approved by our Investment Committee or closed as of today. That compares to approximately $170 million at the same time last year. Capital deployed and available for deployment is up 21%. Growth is driven predominantly by institutional capital. In this regard, Australia continues to be a destination considered favorably for commercial real estate credit because the risk-adjusted returns are compelling. Qualitas is well established as a manager of choice in this space. Performance fees are also becoming a larger and more predictable part of our earnings. Two of our large credit funds are maturing. Post balance date, we received $19 million in cash from previously accrued performance fees. Combining this amount with $12 million we received in the first half from performance fees, we have now received $31 million in cash from performance fees over the last 12 months to August 2026. And we have exciting new growth levers. Firstly, in June, we established Qualitas Europe through the acquisition of U.K.-based Starz Real Estate, opening our first offshore office. This expands our addressable market by roughly fivefold. Secondly, Arch Finance is gaining momentum into FY '27. And finally, our build-to-rent equity strategy delivered $1 million in net profit before tax, more than doubling its last year contribution. As of today, our credit portfolio is performing well with no impairments, no formal enforcement activity. That is something we're extremely proud of. These FY '26 results highlight what patient, disciplined capital can do. The operating leverage in this platform is clearly visible and accelerating. On the back of that strength and with continued momentum, we are providing FY '27 net profit before tax guidance of $74 million to $80 million, an increase of approximately 17% to 26% on FY '26. Turning to Slide 7. This slide sets out the earnings picture, which highlights consistent growth across fee-related earnings. We're also experiencing significant margin expansion over the last 5 years. Base management and transaction fees have grown consistently and strongly, up 27% and 28%, respectively, from prior period. These are our core reoccurring earnings base. We recently upgraded our Australian funds management EBITDA margin target from above 50% to above 60%. I'm pleased to report we are already at 54%, up from 52% last year. That is driven mainly by larger investments. All of this has been achieved before we rolled out our proprietary AI investment platform and achieved efficiency gains we further expect from this initiative. We have declared a final dividend of $0.0775 per share, and this brings our total FY '26 fully franked dividend of $0.1125 per share, an increase of 13% on last year. We are demonstrating strong earnings growth and growing dividends. Our growth comes down to 2 things: institutional capital and borrowers who keep coming back to us because they know we can deliver at scale. Right now, certainty of financing is everything. One of our observations at present is that liquidity appears to be leaving the market. Some financiers appear to be pulling back. However, it is important for borrowers to have capital certainty. Due to the fact that our funds are mainly closed-ended and backed by institutional capital, we face minimal redemption pressure, which is a genuine competitive advantage. And the numbers tell that story. Fee earning FUM grew 36% to $11.9 billion. We have $2.4 billion of available capital for deployment, taking total capital deployed and available to $14.3 billion, up 21% on last year. 72% of our $6.5 billion deployment came from repeat borrowers, 29% from follow-on investments. These investments require significantly less origination efforts as they represent a facility renewal or where we finance the prior state of development. There are 4 clear reasons we have strong earnings visibility into FY '27. The first is our capacity to grow. Our $2.4 billion of available capital can drive a further 20% growth in fee earning FUM before we raise a single new dollar. Second, a stronger starting position. We enter FY '27 with fee earning FUM 21% above the FY '26 average. That alone supports base management fee growth from day 1. Third, a more productive balance sheet. Drawn co-investment rose 46% to $242 million, underpinning principal income. Our co-investment in our European business acquired at a discount to face value has further upside as these loans repay through FY '27. Fourth, a higher quality performance fee pool. Embedded credit performance fees grew 32% in the second half. The total unrecognized pool now stands at $81 million. The composition has shifted significantly, and credit now represents 78% of that pool, up from 57% 6 months ago. We do point out that the movement in the pool reflects 2 COVID era equity-related funds performing below their hurdle rates. These assets represent around 2% of group FUM. To be very clear, these are performance fees we have not booked through P&L. In fact, 95% were not expected to be realized until FY '30. We remain focused on achieving the best outcome for these investors. Before I hand over to Mark, I would like to briefly outline how we are viewing FY '27. Real estate market sentiment has shifted. This reflects a range of factors, including tax changes and higher interest rates. We expect these dynamics to have an impact on the supply of residential property in Australia. However, as we assess the immediate outlook, we believe it's important to keep in mind several underlying growth drivers that continue to support our positive outlook for FY '27. The underlying housing shortage has not gone away. What we're seeing is a short-term impact on sentiment. However, the low vacancy rates that existed prior to the change in tax policies and rate rises continues to exist and in reality, will only be exacerbated in our view by these recent changes. As a result, this will further deepen the existing housing shortage. At the same time, competition in financing markets has reduced, as in our view, it would appear that a number of platforms have pulled back, supporting our deployment growth. We're also seeing demand for refinancing in non-residential sectors growing. One thing that has not changed is our discipline, and we have clear visibility on our earnings. As I've already said, we have a higher opening fee earning FUM balance from which to derive base management fees, increasing base management fees from construction loans and drawdowns that we committed to in prior periods. We expect margins to further expand through scale and AI, and we're accruing and receiving in cash, a growing stream of credit performance fees. It's also important to note we have exciting growth potentials across our platform [ built ]. Qualitas Europe is expected to grow. BTR equity earnings should grow and Arch Finance is on track to lift profitability from its current run rate. Taken together, these are pillars that underpin our near-term earnings growth and provide us with comfort behind the guidance. We enter FY '27 with our funds in a robust position with no impairments as of the current date, while we acknowledge the changing dynamics in the Australian residential market. Importantly, our funds carry no leverage and have no meaningful redemption rights, providing us with significant resilience and flexibility through what is changing market conditions. As we say in property, time is your best friend, and we've built our funds to stand the test of time through cycles. We believe our funds are well positioned not only to navigate periods of market change, but to also capitalize on opportunities that may emerge from market dislocation and competitor constraints. To explain what those opportunities look like right now, I'll hand over to Mark.

Thanks, Andrew, and good morning, everyone. Over the next few slides, I'll take you through the market backdrop, where the opportunities are and how our funds management platform is positioned to capitalize on them. I'll also provide an update on our funds management business across FY '26 and our pipeline for FY '27. At the Macquarie Conference, we showed our deployment against the interest rate cycle. This one takes a different lens, plotting annual deployment against residential asset values. You can see that we've maintained deployment growth through the cycle. While our deployment isn't solely residential, it shows we've navigated changing residential markets while growing in a disciplined way. Macro changes such as the interest rate cycle and recent federal budget tax changes have created a short-term sentiment shift and reduced buyer activity. So, we're operating in a more challenging market, but some of Qualitas' strongest periods of growth have occurred in markets like this. Historically, periods of uncertainty, declining valuations, tighter liquidity have created some of our best investment opportunities. Qualitas was founded amid the GFC when the environment had similar characteristics. And historically, these are the periods where we have made our best investments. The slide calls out the 5 years since IPO and the market headwinds in each of those years. Our growth over that period shows that we've navigated them while continuing to grow. We saw interest rates begin rising in 2022 alongside significant construction cost escalation. And by 2024, construction insolvencies have peaked and the cash rate had reached its highest level in a decade. Even over the past year, we've had the Middle East conflict. We've had an oil price shock. We've had 3 rate hikes, and we've had budget tax changes, which have all weighed on sentiment. Yet through those headwinds, we've continued to grow the business sensibly. We tripled our average transaction size. We doubled net profit before tax, and we lifted annual deployment to a record $6.5 billion, which is a compound annual growth rate of 35% per annum since FY '22. That consistent growth is not accidental. It's underpinned by the structural thematics that we keep talking about, ones that we believe hold over the long term rather than shifting with short-term sentiment or budget announcement. These include a structural housing shortage that we believe will take decades to resolve. There's also a widening house-to-apartment price gap, which supports apartment demand as affordability deteriorates. We've got growing demand for larger financing solutions as projects get bigger. There is still the structural retreat of traditional financiers from commercial real estate. We have growing institutional allocation to private credit globally, particularly in Europe and Asia Pacific, where we are. And we have the relative resilience of apartment values versus houses through the cycle, with apartment prices showing lower volatility. All of these thematics form the foundation of a business that is built to grow through macroeconomic uncertainty. On the next slide, I want to spend a moment on what has been driving our deployment growth. Our growth is not dependent on volume, but on increasing our average investment size. Between FY '19 and FY '26, deployment grew more than sevenfold, while new investments each year only rose from 28 new investments to 44 new investments. The average investment size grew almost fourfold over that period and nearly doubled in FY '26 alone, including a single $1.2 billion investment. So, while 1 or 2 large investments can move the average in any given year, as we saw in FY '26, the underlying trend still holds. We've scaled through larger, high-quality investments. Why does that matter? If your growth depends on doing more investments, a softer market can force you to take more risk just to maintain volume. But because we focus on the larger end where funding requirements rise as projects grow and costs escalate, we can stay selective since fewer players are able to participate there. The chart on the right of this slide shows this. Over the same period that our deployment grew sevenfold, we saw Sydney residential land costs rise 81%. The number of apartments per project rose 64% nationally and construction costs rose 34%. So the capital required to fund each project has, therefore, risen substantially. And as projects scale, they increasingly require institutional capital, which directly advantages Qualitas. Another point underpinning this is the long-term densification trend, with Australia well behind the rest of the developed world. As our major cities densify, the pipeline of larger complex projects, precisely where Qualitas excels, continues to grow. And I'll talk more about this on the next slide. As construction costs and interest rates have risen, they have disproportionately eroded the feasibility of smaller projects. Larger projects by contrast can absorb fixed costs across a greater scale, and this chart shows a market and structural transition. Since 2015, the total number of residential projects has declined, yet projects exceeding 160 apartments have remained resilient, with their share of total projects tripling. Of course, no participant is immune from a systemic downturn, but larger projects have demonstrated greater resilience through the cycle and are generally backed by higher quality sponsors, and this is exactly where we focus. Projects with more than 160 apartments accounted for 44% of our deployment in FY '26, and this reflects our focus on the larger end, precisely where the market is heading. There are 2 factors that support our market position and continued growth. Firstly, the sponsors behind larger projects have substantial balance sheets. They borrow from both the traditional and the alternative financiers, and they take a long-term view on housing demand and look through short-term sentiment shifts. What they value most, however, is certainty of capital and execution throughout the development cycle, and that is what Qualitas provides. Through every period of elevated uncertainty, our institutional capital in our funds has allowed us to continue deploying into quality investments, giving borrowers the execution certainty that they need when others cannot. Second, larger projects carry greater financing complexity. Typically, they're too large for a single traditional financier and the wholesale and retail-backed platforms. And as a result, on those larger investments, we face less competition. It supports our pricing power and returns for our fund investors. It protects our margins and it attracts more institutional capital to the platform, each of which reinforces the other. These tailwinds support our growth in residential deployment. Whilst acknowledging a portfolio of larger loans carries higher concentration risk, we believe it is more prudent to actively manage a focused portfolio of larger investments that we review every 6 weeks than to monitor hundreds of loans, particularly in the current environment. Now looking beyond residential. We are seeing a growing set of deployment opportunities across non-residential commercial real estate. Traditional financiers have been retreating from commercial real estate for 2 decades, and it has fallen from 20% of their loan books in 2008 to 13% today. At the same time, a wave of refinancing is emerging as loans that were originated in a lower rate environment start to mature. And as the chart on the right of this slide shows, refinancing is expected to be the largest source of financing demand over the coming year. Traditional financiers hold some $400 billion of exposure across retail, office, industrial and other commercial real estate, which is over 4x their exposure to residential and land development. So as this debt matures, it represents a substantial addressable market for us. The final piece is where global private credit capital is moving, and there are 2 shifts working in our favor. The first of those is geographic. North America's share of private credit fundraising has fallen from 61% to 45%, whereas Europe has risen to 43% and Asia Pacific has more than doubled to 12%. This shows capital rotation towards the regions where Qualitas operates. With our acquisition of the Starz platform, we are well positioned to capture this opportunity in Europe and we have progressed investor discussions on that European strategy, which will be a key driver of growth and profitability for the new office. The second shift is by fund size, with capital concentrating heavily amongst the larger managers. Funds of $1 billion or more account for just 17% of private credit managers raising capital, yet they target over 70% of the total capital being raised. Most investors planning a commitment over the next 12 months expect to back just one private credit fund. So when an investor is writing one large check, they choose a manager with scale, with stability and with a proven history, and that is exactly the position that Qualitas holds. Our fund structure reinforces that position. The vast majority of our investors have committed their capital for the long term and cannot withdraw their capital at will. More than 90% of our funds under management sit in permanent or closed-end structures and our credit funds don't have back leverage. Of the 9% considered open-ended, only 1% of total FUM is subject to quarterly redemption. We, therefore, have no material near-term redemption requirements. That puts us in a very different position to many others in the market. It means we can manage our portfolios without interruption from third-party creditors or redemption requests if the economic environment deteriorates. More importantly, it positions us to lean in and take advantage of dislocations. With these market trends as a backdrop, let me turn to our FY '26 deployment, and these dynamics are exactly what shaped both the volume and the composition of what we financed this year. We deployed a record $6.5 billion through fewer investments than the prior year. The mix continued to shift towards larger investments. We had larger investments, we had growing deployment and we had broadly flat headcount. That's the operating leverage that is now reflected in our margins. Across our strategies, construction and income credit grew strongly, and we also deployed into build-to-rent equity and restructuring-led tactical credit opportunities. Our build-to-rent equity platform now has 6 assets, with 2 operational, 1 fully leased and the other leasing ahead of expectation. The strategy is well positioned to benefit from a coming period of accelerating rental growth. We also believe now is a compelling time to invest in income-generating commercial real estate. We recently appointed Jesse Curtis as Head of Direct Real Estate, a significant senior executive addition to the platform. We're progressing fundraising discussions and actively screening new opportunities to invest in that space. In the credit business, our pipeline is building strongly into FY '27, with continued momentum in both the size and the certainty of investments. The closed and Investment Committee approved portion is 6x higher than at the same point last year, which gives us strong confidence in the base management fee growth through FY '27. On the European platform, we are very pleased with the origination capability and quality of the team. And since we acquired the business, they have already identified new investment opportunities. This next slide shows how deployment converts into fee earning FUM and how our existing credit portfolio generates future investment opportunities as developments progress. I want to spend a moment, however, on follow-on investments because they are an important part of our model. These include facility renewals, increases and investments financing the next stage of a project's development. In FY '26, we saw higher renewal activity, and we like to focus on this type of deployment for 2 reasons. Firstly, they carry lower origination costs than new investments. And secondly, they still generate transaction fees for Qualitas, which lifts our margins. So as the platform grows, follow-on investments will remain a key focus for our deployment. That completes our funds management and market update. I'll now hand over to Philip, who will take you through the FY '26 financial results in detail.

Thanks, Mark, and good morning, everyone. I am delighted to report another record financial performance, with normalized net profit after tax of $44.3 million, up 20% on prior year, driven by continued strong growth in our funds management business and disciplined cost management. Statutory net profit after tax was $41.7 million, up 25% on the prior year. There were 3 main drivers of this result. First, funds management earnings strengthened, underpinned by accelerating top line growth and margin expansion, with net funds management revenue up 41% to $38.6 million. Second, there was a significant uplift in transaction fees on the back of record deployment of $6.5 billion and a strong contribution from net performance fees, which rose 70% to $13.7 million. Third, principal income of $30.3 million was down 3%, as higher income from investments were offset by lower cash and underwriting income. As a result, revenue grew faster than expenses, expanding our normalized group EBITDA margin to 52% from 51%. Normalized net profit before tax was $63.4 million, up 20%. Normalized earnings per share rose 19% to $0.147 per share. On the strength of this result, we have declared a fully franked final dividend of $0.0775 per share, bringing the total full year dividend to $0.1125 per share, up 12.5% on FY '25. This underscores the strength of our earnings and of our balance sheet. Looking now in detail at the funds management segment. We achieved 26% growth in total funds management EBITDA at $70.3 million. A particular highlight is the 41% increase in net funds management revenue to $38.6 million as revenue growth materially outpaced employee costs, reflecting the scalability of our platform. Base management fees grew 27% to $62.1 million, and transaction fees grew 28% to $23 million on the back of record deployment. Net performance fee revenue increased by 70%, driven by strong performance across our credit funds. Looking ahead, we expect performance fee revenue to continue to grow as 2 of our construction credit funds are now 4 and 5 years since inception. As these funds mature, we recognize an increasing proportion of a growing performance fee pool accrued within the funds. We also delivered a record funds management gross operating margin of 54%, a clear demonstration of the economies of scale that come with larger investments and up from 52% in the prior year. Corporate costs rose 15%, largely reflecting continued investment in our data platform and AI initiatives. This slide gives some further detail behind the operating margin. The chart on the left shows our funds management gross operating margin. Since listing, headcount growth has remained below FUM growth, with the gap widening materially in FY '26 and driving strong margin expansion. Importantly, we expect our investment in AI to further support operating efficiencies, delivering future margin upside. The chart on the right shows base management fee margins against average fee earning FUM. The compression in management fee margin reflects our institutional deployment mix, with retail and wholesale channels less conducive to capital raising. Our core product fees remain unchanged, and we expect average fees to increase as capital rebalances to broader sources and construction loans continue to draw down. Principal income was broadly flat at $30.3 million, representing an average 9% annualized yield on our balance sheet cash and investments for the period. Turning to Arch Finance. Underlying contribution was $4.3 million, unchanged from FY '25. That result is after adding back a one-off restructuring cost of approximately $600,000. Following the appointment of a new management team in early FY '26, growth is building. The loan book grew to $304 million by June. The business is shifting away from the highly competitive bank-dominated lending market and has established relationships with 3 of Australia's largest loan aggregators with further partnerships expected. We are confident in Arch Finance's market position and expect an improving contribution to the group in FY '27. The Qualitas balance sheet is strong. The increase in balance sheet investment reflects strong deployment, with capital deployed into co-investment and underwriting positions that have supported that deployment. We also deployed circa $36 million of balance sheet capacity into our U.K. platform via acquisition of a fund co-investment and working capital. Despite this deployment, we retained substantial balance sheet capacity to support future co-investments and seed new mandates through the recycling of capital from shorter-term investments. Loan receivables of around $62 million represent underwriting positions in existing funds and voluntary co-invests. Our drawn balance sheet co-investments represent 2% of committed FUM, preserving capacity to seed new mandates while reducing the sensitivity of our balance sheet and earnings to underlying fund performance. For shareholders, our consistent earnings growth, strong balance sheet mean we have adequate capital to pursue value-accretive opportunities and to support co-investment and underwriting while also supporting future dividends. I'll now hand back to Andrew for his closing remarks and our FY '27 guidance. Thank you.

Thank you, Mark and Philip. When considering our FY '27 guidance, we encourage shareholders to balance the more challenging market environment with our discipline. Our objective remains unchanged to generate attractive risk-adjusted returns while protecting capital and position the funds to take advantage of opportunities that typically emerge in a transitioning market cycle. Institutional investors increasingly recognize that in this environment, risk does not need to increase in order to generate attractive returns. As liquidity tightens, certainty of capital becomes more valuable to borrowers. This means we can invest at lower LVRs, with stronger protections. That is a real advantage for Qualitas as our capital does not need to chase risk in order to hit our returns. At the same time, Europe gives us another significant growth opportunity. We can take what we've built in Australia and extend it into a market roughly 5x larger. I intend to devote significant time to building our U.K. and European business while continuing to work closely with our team on institutional capital raising. We are doing that from a position of strength, with our Australian credit business continuing to perform well, supported by the depth and continuity of our management team. The objective is not growth for growth's sake. We want to build an international platform that is entirely consistent with the Qualitas Way. That is our disciplined underwriting, a talented and motivated team, capital preservation, certainty of execution and attractive risk-adjusted returns. In my view, this sets Qualitas up well for many years to come. So with that backdrop, let me now turn to our FY '27 guidance. Net profit before tax of between $74 million and $80 million, representing growth of approximately 17% to 26% on FY '26 and earnings per share of between $0.172 and $0.186, and this excludes any mark-to-market movements on Qualitas co-investments in the Qualitas Real Estate Income Fund, and that funds capital raising costs and any other unforeseen events. We have good visibility on the drivers of that growth. Our FY '27 dividend is expected to remain in line with our target payout ratio of between 50% and 95% of operating earnings. There are a number of factors that may influence the FY '27 outlook, which are set out on the right-hand side of this slide. Our success ultimately comes down to our people. The talent, commitment and collaboration I see across Qualitas every day makes me incredibly proud to lead this organization. To our team, thank you for your dedication. And to our shareholders and investors, thank you for your continued confidence in what we are building. That concludes the formal part of our presentation. We'd now be happy to take your questions. Thank you.

[Operator Instructions] Your first question comes from Olivier Coulon with E&P Financial Group.

Congrats on the great result. And I mean that was a very good run-through of the macro on the deployment environment. I guess maybe for Mark, a question. Given the backdrop that you're seeing on the macro conditions, what sponsors are telling you and what you're seeing from your competitors, like how are you feeling about, I guess, the part of the pipeline that we don't see, which is my understanding, most of it at this point of the year? Because obviously, the total pipeline that you've disclosed is marginally down on FY '25, but I'm aware that, that doesn't include a whole bunch of earlier stage discussions than when you're mandated.

Yes. Thanks, Oli, and good question. One I expected to get asked as well. You're quite right in terms of the pipeline risk. So, we always track what we call a higher conviction pipeline list. And if I talk about how we're seeing that in the market at the moment, we have a lot of activity. Borrowers are active. There are a lot of potential transactions going on. And the interesting thing for us has been that the number of competitors in the market seems to have retreated somewhat as well. And so if I think about what exists beyond what we've talked about today in the presentation, what we talked about today in the presentation are things that are clearly under our control that we think we are going to do. And to your point, there's obviously transactions that we are working on that we have high conviction in that we may or may not do, but the team feel good about. And if I think about that long list of pipeline, it's closer to $3 billion than it is the number that we reported. So, I think what that shows is there's market activity still out there. I think we're seeing less competition for that activity, and we're just being very selective about what we want to do but have high conviction that the market activity is still there. I'm not sure, Andrew, if you wanted to add anything to that question as well.

No, that's good, Mark. Thank you.

No, that's perfect. Maybe just a follow-on question, if I may. So, I mean, the guidance doesn't appear super aggressive in the context that you're likely to get 3% growth just from March, getting to breakeven. And you've obviously got meaningful upside just from the annualization of the closing fee earning FUM and invested capital position. What are you assuming to get to that from a deployment perspective? Do you need to see deployment growth to get to the midpoint of your guidance range?

Yes. I think -- Oli, it's Andrew here. I think that what we've got going in our favor is it's a funds management business that grows year-on-year on where it was. And if you look at our fee earning FUM, we're starting in July about 20% higher than where we were at the same time last year. So, we've already got a very substantial lift just because of our opening fee earning FUM. And then you add to that the fact that we've done a lot of construction loans in the previous period. And every single month for the next year and beyond, those construction loans continue to draw down as well. So, we're able to factor in with high levels of certainty, the fact that we get those extra drawdowns and extra fees because we actually get paid on capital in the ground as the jargon goes. So, that increases our month-in fee loads as well. And then we're able to overlay into that what we think is just a reasonable deployment assumption. And to put your mind at ease, we haven't gone and assumed this massive growth in order to get to this guidance number that we've put out there. We've had regard for the market, and we've not sort of taken this huge leap of faith on a deployment that we don't think we can achieve. So definitely, want to put your mind at ease on that point.

Yes, no, that's perfect. Maybe just a very last one from me. Do you have any profitability from the U.K./European platform assumed in that guidance range? Or have you assumed a broadly neutral contribution?

Thanks, Oli. Broadly neutral contribution is the assumption.

Your next question comes from Elizabeth Miliatis with Macquarie.

First one is just on the funds management margin. I think it's on Page 23. You've got a great chart there of historical revenue growth and employee costs. There's a real big spread this year between revenue growth and the cost growth really being much lower than the revenue growth. How should we think about that cost growth into '27? Are we going to be operating at sort of that lower level?

Look, thank you. Yes, the easiest way to answer that is we are continuing to expect slower cost growth relative to higher revenue growth and therefore, some modest margin expansion.

Is it like -- are you able to give a broad range from a number perspective or just leave it at more qualitative comment?

More qualitative. I mean, it's inbuilt into our guidance.

Liz, sorry, it's Andrew. I think what you're seeing come through as well is really the benefits of efficiency and scale. For a number of years, we've been heavily investing in the platform. And as I announced to the market about 6 or 8 weeks ago, we've also been putting a lot of effort into our AI initiative, our deal room work that the team has been working on. And even in terms of the past period, but I'd also say this in respect of the outlook period as well. I don't think we need to keep growing our overheads, particularly our staff costs anywhere near the rate that we had been doing in previous years. And I think that Qualitas is reaching that level of scale where we do expect our margins to increase. That's why I was very comfortable saying to the market that I thought that we're going to go from above 50% to above 60% over the medium term. And I continue to stand by that conviction level. We're just seeing the efficiencies now coming through the business.

Yes. Got it. And just on the fee margin as well. It was a little weaker. I think it was driven by deal size, but then also a bit of a shift to Insto. How do we think about that going forward? But then, obviously, you keep getting the operating leverage offsetting that?

Yes. I think what's important to take into account when you look at that number, I think you're still on Page 23 and just the base management fee margin that you're looking at there. I think what's important to realize is we wrote a lot of construction loans in the previous period. And the way the fees work on those construction loans is that we basically get paid fees on the amount of capital we've drawn from the loan at any particular point in time. And so this is a really important point to understand that as we continue to fund those construction loans and they get larger every single month, month in, month out, that fee increases relative to the size of the commitment that we've made or our committed fund that we have. And so I wouldn't sort of place too much emphasis on the slope of that curve. I think it is purely a mix issue. And more importantly, it's a timing issue because that reverses out in previous periods as those construction loans continue to draw into the future.

Okay. Got it. And then just one bigger broader question, just from an institutional demand perspective. We've heard that institutional clients are really -- and you made comments about this earlier as well, really starting to push more into Australia or Asia more broadly. They are seeing the best risk-adjusted returns currently, and that's despite all the negative press currently at the moment. What are you seeing from that perspective? And does that mean that regardless of the broader market issues, if you're having your clients give you more money to deploy in this environment that, that should really underpin growth for the next few years?

Yes. Look, I think that what we're seeing is from institutional clients who are very, very sophisticated, what we're seeing is a buildup of interest in Australia because they differentiate between the Australian real estate cycle versus the Australian credit cycle. And they are 2 very different cycles. So, one of the things that you're finding in the market at the moment is that there's a particular focus around the sentiment of real estate, which is coming out of the budget and interest rate hikes. I think many CEOs before me have discussed it in their various earnings calls. But that's the real estate cycle. Institutional capital is looking at the credit cycle. And the credit cycle is all about what is the bank's behavior, what is the more retail-based platforms behavior, where is risk-adjusted returns moving in Australia? What is the ongoing demand for credit that's actually required in Australia? And when you look at those things, we are shining very bright on an international scale for why one should continue to invest. And in fact, this has actually only become a more exciting market for institutional capital. And I don't say this lightly, but we are in very active discussions in respect of re-ups with existing clients and also the creation of new product that we're bringing to the market, all with very large institutions. And for me, it only shows the conviction of the Australian marketplace and we're wholly supported, obviously, from what we're seeing on the ground here.

Your next question comes from Tim Piper with Jarden.

Just the first one on the performance fee outlook. Just there's a bit of noise in there, obviously, from the equity side of things, but you're seeing a very strong uplift in the growth in that pool from the private credit side of things. I think it's up over 30%. There's a couple of big mandates coming up to maturity as well. When we think about the outlook for performance fees now, stripping that equity piece away, I mean, is that giving you greater confidence in the growth profile of performance fees over the next couple of years? And when we look at that sort of 30% up, how do we kind of think about that translating into performance fee growth over the next couple of years?

Thanks, Tim. Great question. And yes, the short answer is we are expecting higher contribution of performance fees in FY '27 and FY '28. The way in which the funds are recognizing the performance fees and Qualitas continues to take a constrained recognition of the fund accrued performance fee. But as those funds mature, Qualitas is able to reduce the amount of constraint we put on that recognition as we move towards the maturity of those funds. So as I said, short answer is we do expect higher contribution in '27 and '28 than we have had in '25 and '26.