Thank you for standing by, and welcome to the Qualitas Limited Fiscal Year 2023 results briefing. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Andrew Schwartz, Group Managing Director and Co-founder. Please go ahead.
Good morning, welcome to the Qualitas financial year 2023 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 on 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 passed, followed by an update on the market drivers that continue to provide the tailwinds for commercial real estate private credit. I'll 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. Kathleen will provide an update on progress over the year. Philip will discuss our FY 2023 financial performance. I will conclude the formal part of today's call with our FY 2024 outlook. We welcome the opportunity to take any questions. Starting on slide four, FY 2023 is the first full financial year of Qualitas as a listed entity. 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 three 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 2023.
Our FUM has increased by approximately 80% since IPO, reaching AUD 7.5 billion today, with another record year of deployment totaling AUD 3 billion. These factors are reflected in the substantial growth in recurring earnings and operating margin expansion. Since June 30 last year, we have raised net AUD 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 two 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 AUD 700 million commitment from the Abu Dhabi Investment Authority, plus the recently announced additional AUD 750 million from an institutional investor, our investors have entrusted us with AUD 2.3 billion of dry powder. This, combined with our strong balance sheet, is anticipated to provide both earning stability and growth potential into FY 2024 and beyond. The next two slides outline the macroeconomic backdrop to our FY 2023 performance and our outlook for FY 2024. The two 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 three 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-off 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 this 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 have sought 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 the 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 AUD 7.5 billion FUM today. We think the best investments are made in a risk-off environment with tightening liquidity. I'll now turn to slide seven.
This past year has been a turbulent period in markets generally, with elevated inflation and interest rates and concerns over distress 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 loans. Acknowledging headwinds in certain sub-segments 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 rates 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. 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 require 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 2023 result highlights on Slide eight. We are pleased to report our fund has increased to AUD 7.5 billion as at current date, representing 80% growth from IPO and 77% growth on FY 2022. Although Qualitas has always shown an ability to maintain significant growth rates while 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 AUD 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 fund growth is matched by a significant increase in deployment, backed by market megatrends and selective key investment thematics. Our FY 2023 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 seven years, from June 2023 to June 2030, is not materially different to what we disclosed at the half year, which was estimated at approximately AUD 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 a 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 nine. Qualitas Group recorded funds management revenue of AUD 44.1 million for FY 2023, up 25% on FY 2022, driven by a step change in fund growth and deployment.
Alongside this growth, the quality of these earnings has significantly improved, as they are driven by core fund earnings as opposed to performance fees. Our principal income reached AUD 15.9 million, up 273% on FY 2022, 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, translate 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 2022. We saw a decrease in base management fees and transaction fees as a percentage of average invested fund in FY 2023, 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 AUD 31.1 million is in line with guidance and 9% lower than FY 2022, due to lower performance fee accruals in FY 2023 compared to the prior year. 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, I'm turning to slide 10 to discuss our fund growth. The additional commitment from ADIA, referenced earlier, means that they will now invest a total of AUD 1.4 billion in the Qualitas Diversified Credit Investments, following the initial investment of AUD 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 AUD 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 AUD 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 AUD 2.3 billion in dry powder heading into FY 2024, 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 traverse the capital stack and position the business through different market cycles. As we progress into FY 2024, 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 2023 delivered a weighted average yield of 9.2% against an average RBA rate during the year of 2.9%. As of today, we have AUD 138 million committed in underwriting positions. Our listed private credit fund, QRI, has remained fully invested since the establishment of the Qualitas underwriting facility in December last year, delivering an average distribution of 8.5% in the second half of 2023, and is now classified as an MREIT and eligible for ASX 300 and ASX 300 A-REIT index inclusion, subject to meeting relevant thresholds and decision by S&P. If QRI is added to the ASX 300, 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 AUD 20 million in co-investment commitment into existing funds. Slide 13 provides an overview of our funds management platform today. 78% of our fund is in private credit, underpinned by favorable market conditions, 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 four key investment themes shown on the slide. We are launching our Build-to-Rent three fund and the Qualitas Tactical Credit Fund, which has a similar thesis to our existing opportunity funds, but focused 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, reoccurring revenue. 65% of our FUM is in closed-ended funds with over five 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 2023.
Thanks, Andrew, and good morning. Over the past year, we've 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 the betterment of Aboriginal and Torres Strait Islander people.
We worked together as a business to deliver the first Qualitas Reflect Reconciliation Action Plan, or Reflect RAP, which we launched after receiving final endorsement from Reconciliation Australia. We are early in our reconciliation journey. However, our RAP is an acknowledgement of our intentions 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 decisions, 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 us in our ESG objectives. Looking forward, we're looking to expand our ESG reporting infrastructure to meet reporting expectations of our 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. 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 Yeung. 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 AUD 18.8 million, compared with AUD 14 million achieved in FY 2022, 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 AUD 3.2 million, compared with AUD 19.4 million in the previous year. All of our performance fees are payable at the end of their fund's life or at set intervals. 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 maturing funds. As Andrew has already mentioned, our estimated pool of theoretical embedded future performance fees for the period of seven years, from June 2023 to June 2030, is not materially different to what we disclosed at half year, which was estimated at AUD 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 embedded future performance fees is 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 2022, we have seen significant growth in earnings on our principal income as we put our IPO funds to work through co-investments and underwrites to support fund transactions. Principal income for FY 2023 was AUD 15.8 million, up AUD 11.6 million from just AUD 4.2 million earned in FY 2022, 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 Arch Finance, our direct lending business. Arch Finance remains relatively consistent compared to FY 2022, contributing AUD 3.9 million to normalized EBITDA, the same as in the previous financial year.
Our corporate costs were higher for full year 2023, largely reflecting a full 12 months of trading post IPO, compared to FY 2022, which was for just 6 months. The significant cost drivers year-over-year were insurance costs, marketing and travel related post-COVID, and higher professional fees incurred as a listed entity. Overall, our normalized EBITDA was AUD 33.9 million, which was 7% lower than FY 2022. When looking at core underlying contribution, excluding the less uniform contribution from performance fees, FY 2023 was up 78% at AUD 30.7 million, from AUD 17.2 million achieved in FY 2022. Statutory NPAT is reported as AUD 22.5 million for the period, up 19% on the prior financial period, which included one-off listing costs.
A final fully franked dividend of AUD 0.055 per share has been declared, and will be paid in early October. This equates with the interim dividend of AUD 0.02 per share earlier, this calendar year, to a yield of 3% on the IPO issue price of AUD 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 2023, as seen as the table on the slide. Total funds management revenue was up 25% to AUD 44.1 million, with strong growth in transaction fees following a record year for deployment. Importantly, core employee costs of AUD 25.4 million in FY 2023 were up 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 2023, as we gained greater line of sight into FY 2024 and the additional dry powder. The full year costs of these hires will come through in FY 2024. 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.
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%- 45% in FY 2023. This is a key measure that we are very focused on continuing to improve as we convert our considerable dry powder into new invested funds. Turning to the next slide, principal income continues to grow with our additional balance sheet liquidity arising from the IPO. In FY 2023, AUD 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 AUD 427 million of underwrites put in place throughout the year, AUD 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 AUD 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 AUD 2.95 billion over FY 2023. 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 costs as a percentage of fund 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 two years. Turning now to our balance sheet. The main change is in the reduction in cash and cash equivalents from FY 2022 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 AUD 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. Now turning to the outlook for financial year 2024. 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 2024 represents a unique period of time for our firm for a number of reasons. Firstly, we have AUD 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. 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, renders 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. We have built a reputation based on disciplined investment. I believe that this is why we've built such a strong and substantial relationships to some of the largest global investors. We're not about to lose the trust placed in our platform. 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 2023, as we as we gained greater line of sight focus on our operating margin growth. Significant growth in our strategic long-term capital sources in private, as opposed to upfront transaction fees. This will create a lag effect, albeit favorable in future periods, assuming Qualitas continues to perform. We're 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 that's experiencing significant competition over the past 12 months. It is with this lens, we've provided our financial year 2024 guidance of net profit before tax in the range of AUD 37 million-AUD 41 million, and FY 2024 earnings per share range of AUD 0.0875-AUD 0.0970 per share.
In assessing our guidance, we've assumed that FY 2024 will be a year of similar performance fees relative to FY 2023, and therefore, given the guidance is at a higher level, we're expecting quality 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%-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. We're now happy to take questions. Thank you.
Thank you. If you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you are on a speakerphone, please pick up your handset to ask your question. The first question today comes from David Poburky with Macquarie. Please go ahead.
Good morning, Andrew, Philip, and Kathleen. Hope you're well. Can you hear me okay?
all good, David. Thank you.
Great. Thank you. Thanks for taking my question. Just the first one on, on guidance. Guidance is a little softer than the market had expected, and thanks for some of the color that you just provided in terms of the composition. Yeah, I mean, is, is there any conservativeness within that? If you could just provide a bit more color, please, that'd be helpful.
Yeah, thank, thanks, David. look, I think for us, it's, it's still very early in the year for us to really pre... You know, sort of providing, you know, a, a more certain guidance. We're really doing it, literally being 7, 7 weeks in, into the year. I think that, you know, it is based on assumptions that we feel are achievable. You know, if your, if your question is, you know, risk on the upside of guidance, I would say, you know, for us, it will really depend on our ability to have quicker deployment relative to our base set of assumptions. You know, as Philip and I both noted, you know, performance fee levels in, in this year's guidance, so as in FY 2024 guidance, are very similar to FY 2023.
I think that, you know, to the extent we were to asset sales at fund levels, you know, could potentially provide upside to the performance fees that we're assuming, and also, you know, just greater capital availability to deploy. So not- notwithstanding, you know, 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, you know, sort of give us greater firepower for disciplined deployment as well. So, you know, I think they're the variables, but, you know, at the moment, being seven weeks into the year, that's the best estimate we can provide. Philip, do you wanna add to that in any way?
No, I think that summary has it very well. Thanks.
Thanks, Andrew. Just the second one, in terms of deployments, you hit AUD 3 billion in FY 2023. 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, I think we're seeing very positive signs again in the market. You know, at one level, I don't want to overstate, you know, exactly, you know, the status of, of projects in the market, but certainly I feel we're heading into a more favorable environment in FY 2024 relative to FY 2023, for, for a range of reasons that if you want, I can, I can further explain. If you look at our numbers and, you know, the various public statements we made over the course of FY 2023, you know, we've noted that it was approximately $3 billion of total deployment for all of FY 2023, and of that, we closed $1.7 billion in the first half of the year.
Of that AUD 1.7 billion, we also noted last year that AUD 600 million was in respect of a very significant transaction that we were also public on, which is the Aura investment by Aqualand. You know, that somewhat skewed those first, first half numbers. Just, just to recap on that, you know, we closed AUD 1.7 billion in the first half, of which AUD 600 million was in one single transaction. You could say, you know, even on a normalized basis, circa AUD 1.3 billion for the half year. If I look at where we are, you know, right at the very moment, we've currently... bear in mind, we're only seven weeks into the year. We've currently got line of sight on AUD 1.4 billion right at the moment.
Of, of those amounts, we're closed transactions or IC approved, ready to close, the AUD 550 million. These are, these are sort of, rounded numbers. AUD 550 million, mandated investments that we've not yet taken through investment committee, we're sitting on AUD 731 million, and potential investments that we think we are very highly likely to be mandated on, AUD 112 million. That all totals AUD 1.4 billion in the first seven weeks. 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, you know, what we did in the entire first half of 2023, and in fact, I would say compares very favorably to all of FY 2023.
I think deployment is shaping up well, but I say that with the caveat of where we are only seven weeks into the year as well.
Thank you, Andrew. Just one last one, if, if I may, one for Philip. It's an accounting question we might take offline. Look, the DNA and the interest expense line item in the presentation of AUD 2.765 million, is there a reconciliation of that somewhere in the account? Just trying to tie that to the net interest income of AUD 18.622 in the accounts, please.
Yeah. 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. Happy to take that offline, but it will be related to the Arch segment reporting.
Okay, great. Thank you. Good luck in the next 12 months, guys.
Thank you, David.
The next question comes from Olivier Coulon with E&P.
Thanks for taking my question. Just on the, you effectively have assumed a flat performance fee in FY 2024 relative to FY 2023. I think previously you were kind of expecting a bit of a step up in FY 2024. Is, you know, that predominantly just slower, slower realization of that, that equity fund?
Yeah, exactly. We've got a range of different embedded performance fees that are sitting, sitting in our various funds. I think for us, at any point of time, you know, it's really about saying, you know, 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. You know, that's really got to do with, you know, the cycles that those, those investments were written in and timing relative to, you know, what has been a real push into private credit over, over the last couple of years. Look, we've really just had regard for exactly when we feel will be, will be the right time to crystallize.
I think we've taken a relatively conservative view on the, on the performance fees. As I said earlier to David's question, I, you know, I think that there is some potential for upside on the fees that we've been, you know, we're putting forward. Equally, I think, you know, foremost, it's about maximizing the outcome for our Long-Term investors at the fund level and really taking advantage of, you know, exactly when the right time is to, to crystallize it. That's probably the best I can describe it. Back to you.
Yeah. Okay. Is, is the bulk of the expected performance fees in the coming 12 months expected to be from, you know, credit funds?
No, no, it's,
No, it's still equity.
Maybe I'll hand it to Philip as well. I'd, I'd say, the very... Look, it is a mix overall, but I, but I think I would say it's skewed to more of our, our equity funds, but there is some debt fund performance fees coming through as well. Philip, you might wanna just add to that.
Yeah, not, not to contradict my, my CEO, but there is actually a little bit more assumed coming through the credit funds, just because of the current time, time for the exit of the various assets. It is still a mixture, but there is some stronger, stronger flow from the credit funds.
Okay. Just on the investment team step up in capability, can you provide a, you know, dollar amount or % of, funds management, you know, the impact of that step up? It sounds like, you know, we might have a bit of a, breather this year relative to 2023 in terms of the pace of that, increase in operating margin. Is that fair to assume?
Yeah. Look, that, that is fair to assume. The, the growth from 34%- 45% on the operating margin was a real step change. We don't expect it to step up at that level again into FY 2024. There will be a moderation in the rate of improvement in the operating margin. We still expect modest operating margin improvement as we continue to scale the business.
Okay. No, appreciate it. You know, any rough kind of estimate you can give us on, I guess, the drag or benefit that Arch and, you know, the co-invest and underwriting segment is going to provide in FY 2024? It seems like you're stepping up your underwriting efforts in this year, but you're probably not gonna get the full benefit of where you're kind of guiding to now, which I think you've got AUD 150 million of capacity. Arch, Arch presumably is gonna need to kind of step down from that second half run rate on the lower book size.
Yep. No, you're, you're, exactly right. Both, both, of your, your statements are correct.
Okay. Appreciate it. Just a last one for me, just on deployment seasonality. I mean, it sounds like you've got overall a pretty good line of sight on deployment, you know, a large percentage, large amount of deployments. Is it expected to be a bit more back-end weighted this year relative to the, you know, quite first half weighted deployment in FY 2023?
I, I think it'll follow a very similar pattern to, you know, what we saw in FY 2023. First half is always, you know, quite a, quite a strong half for us because, you know, property markets, and I, I think you know this, but in property markets, you know, generally shuts down from the 3rd week of December till the end of January, and then, you know, people take some time in February to literally get back into it. I feel overall, in many ways, the first half, you know, generally you've just got more operating months than you do relative to, to the second half.
As I said earlier as well, you know, 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, you know, we have seen construction costs, increases moderate from levels that we'd seen one year ago. We've certainly seen, some quite healthy, price rises in off the plan sales. You know, 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. Obviously, 12 months ago was a good record year of deployment for Qualitas as well.
I think we've got better market conditions, improving market conditions, and, you know, I'm sort of taking a view based on, on that- those aspects as well.
Okay. I appreciate that. Thanks. I might get back in the queue.
Thank you.
Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. The next question comes from Liam Schofield with Morgans Financial. Please go ahead.
Good morning, guys. Can you hear me there?
All clear, Liam.
Perfect. Andrew, just a quick question, firstly, on deployment. How is that average cheque size and deal quantity sort of changing through time? What does it look like over, I suppose, the past year, and what, what are those expectations going forward? Just on warehousing income, those loan receivables, they're sort of unchanged at, call it AUD 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, I might take on the cheque size question and pass your second question on receivables to Philip. On the cheque size, we've reported a pretty consistent over the last six months or so at approximately, I think the number was AUD 72 million. That excludes the Aura transaction, because if we include that, our average cheque size was AUD 100 million. 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 2023. We've been tracking about AUD 70 million.
I think that, you know, in terms of the outlook on that particular amount, I, I don't think we're gonna necessarily see the same rises that we saw in previous periods where, you know, our cheque size was going up by 25%, 30%. I do think there's a little bit of potential upside on that particular cheque size number. Again, early in the year to really make that particular call. Certainly, our investment team are very conscious of cheque size because it drives a lot of our efficiency metrics in terms of, you know, how many times we're taking things through the Qualitas platform for approval and asset management and monitoring and the like. But I think if you continue to work off that AUD 70 million cheque size, that, that probably, you know, is a reasonable assumption.
Philip, maybe you wanna answer Liam's second question around receivables?
Yep. Liam, can you just repeat the receivables question, please?
Those loan receivables, what I sort of take to be the asset side of warehousing income, unchanged half on half at AUD 90 million. Should we think of that as a fairly stable state, or is there capacity to grow that, you know, if, if warehousing income is really, to me, a function of that average loan receivable balance?
Yeah. No, that, 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, and our Senior Debt Fund, we're finding that is getting greater utilization. On average, we should be able to increase, the loan receivables balance, over time.
Thanks, guys.
The next question comes from Olivier Coulon with E&P Financial Group. Please go ahead.
Hi, guys. Just another one from me. You pointed out impact on reduced transaction fees. We obviously saw that step down in 2023 versus, you know, the run rate that you've historically seen. You know, 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 2024, and then, I guess, you know, what's the expectation beyond that when that investor, you know, 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 mixed question, and when we look at our current dry powder, the mix is not dissimilar to the previous year. That particular should stabilize. In terms of, sorry, the, the second part of your question?
Yeah, I guess, I guess when, you know, obviously, you'd probably prefer that they just keep deploying and getting bigger and bigger with you. But, assuming that, you know, what you think, they're likely to end up, signing up with their current kind of fee structure, when, when should we kind of see a return to the type of levels of transaction fee revenue to relative to FUM that we, you know, used to see in FY 2022 and before that?
Yep. No, that's. Sorry, that was a good question. Look, we deploy very quickly, as you can see, given the, you know, record level of deployment in FY 2023 and the strong pipeline that Andrew outlined already in FY 2024. This is not a elongated process. We would get to a steady state into FY 2025 through to FY 2026. The last question you asked around performance fees, that particular mandate does have a flow of performance fees commencing after three years, and so that will start to influence our results from FY 2026 onwards.
Okay. Okay. That's perfect. Thanks for the color. Really appreciate that.
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, just take the opportunity to thank my board, our LP investors in our various funds, but also, of course, the shareholders of Qualitas, 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.