Thank you for standing by, and welcome to the Qualitas fiscal year 2024 results briefing. All participants are in 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 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 three. 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 2024 and then welcome the opportunity to take any questions. Turning to slide number 4. FY 2024 was another milestone year for Qualitas. Record high capital raising and deployment activity have generated significant momentum for FY 2025. This is reflected in our guidance for FY 2025. Our key FY 2024 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 AUD 2.8 billion of net inflow. Our strongest deployment to date of AUD 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 AUD 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 eight 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 earn 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 leverage in our credit funds to boost FUM 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 in 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 seven. As a fast-growing funds management business, capital raising underpins our success and deployment supports earnings growth.
During FY 2024, we excelled in both. Our fee-earning FUM was up 40%, reaching AUD 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 seven years to August 2031 is estimated at AUD 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 number eight.
In FY 2024, 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 two 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 nine. Strong deployment and outperformance in our private credit strategies have reduced the volatility of unrecognized performance fee pool.
As I mentioned earlier, with estimated unrecognized performance fees at AUD 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 2024 net profit before tax of AUD 39 million includes a AUD 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 AUD 8.5 million in net performance fee revenue, accrued predominantly from private credit funds. Turning to slide number 10. Our balance sheet continued to support our co-investment into funds management business in FY 2024. Co-investment as a proportion of FUM is below 3%. Of this, AUD 110 million is drawn and AUD 155 million is committed, but undrawn. At balance date, we have AUD 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 2024, 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 would suggest 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 AUD 204 billion and AUD 253 billion over the next four 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 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 twenty August twenty twenty-four, there were no interest arrears or impairments in any of the credit portfolios. During FY 2024, in our equity strategies, we remained 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, PREI. As Andrew highlighted earlier, Qualitas was awarded Firm of the Year Australia in the PREI 2023 awards, and we also ranked first in Australia, second in Asia Pacific, and fourteenth globally in PREI's RED 50 list, which is based on real estate private credit capital raised over the five 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 two 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 2024, our total FUM was AUD 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 AUD 1.8 billion to scale existing flagship funds, a mandate of AUD 550 million from a new global institutional investor based in North America, and retail and wholesale investor channels, providing a total of AUD 285 million, increasing FUM in our ASX-listed flagship fund, the 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 FUM 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 AUD 4.2 billion was a 40% increase on FY 2023 and saw the continued increase in our average investment size, hitting AUD 80 million on average for FY 2024. Pleasingly, we furthered our ability to make large-scale investments. During FY 2024, we made six investments with a check size of over AUD 150 million each, and three investments exceeded AUD 240 million each, including a large senior construction loan of AUD 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 financier. Late in the year, we saw the reactivation of our equity investment strategies, with small but important deployments made in both the income and total return equity strategies, totaling AUD 135 million of deployment across three 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 2024, reaching AUD 1.9 billion. This represented a 40% growth in fee-earning FUM, and we intend to scale deployment to match the growth of fee-earning 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 cost 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 initiative relating to the environment is to support low carbon buildings through the Qualitas Low Carbon Debt Fund, an impact-driven credit fund 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've retained our carbon neutral certification for full year 2023, which is a look back certification by Climate Active. As we're currently being assessed for full year 2024, 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 Respect 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 year of PRI assessment, where we achieved five 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'm 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 AUD 27.3 million, up 25% on the corresponding period of AUD 21.9 million. The key components of the strong result are the 24% growth in net funds management revenue to AUD 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 AUD 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%, an increase from 46% in the prior corresponding period. Moving to slide 22. This slide puts into perspective the strong gains made in FY 2024 and the underlying drivers of growth going forward, reconciling the flow of investor 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 fund that is earning base management fees and is allocated to investments that may or may not yet be drawn. Invested fund represents funds currently deployed and drawn, which carries the highest fee load to Qualitas. So in other words, invested fund underpins current earnings, while fee-earning fund underpins future earnings capacity.
While end-of-period invested fund has only grown by 13%, fee-earning fund has increased by 40% over the period, and committed fund by 46% compared with June 2023. The skew towards construction financing in our deployment has a lagged effect on our invested fund as construction loans draw over a 2-4-year construction period. The extent of undrawn construction loans at June was AUD 2.4 billion, which will progressively draw over FY 2025 and FY 2026, increasing invested fund. Future earnings will also be a function of this increase in invested fund, as well as the conversion of the current AUD 1.5 billion of dry powder, being committed fund still available to be deployed as at June 2024. Moving to slide 23.
Looking now in more detail at the funds management segment, we achieved 35% growth in total funds management EBITDA, reaching AUD 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 AUD 800,000, reflecting strong growth in performance fees earned on our credit fund, 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 2023. 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 2023.
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 2024, with scale benefits of larger average deal size being a key driver of this efficiency. While base management fees as a percentage of invested fund 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 fund from institutional investors.
Notwithstanding the lower gross base management fee margin, increasing deployment has underpinned stronger transaction fee revenue, which held at 0.4% of total deployment. With prudent investment and additional capacity, we have been able to achieve a material improvement in the overall operating margin to 52% for the core funds 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 AUD 194 million of cash and cash equivalents reported as at 30 June. We have investments of AUD 110 million, compared to AUD 38 million at June 2023, 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 AUD 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 will now hand back to Andrew for his closing remarks.
... Thanks, Philip. Now turning to our outlook statements for FY 2025. We are well positioned for the year ahead. We have AUD 1.4 billion undrawn construction credit, not earning full management fees, which will underpin revenue growth this financial year. AUD 1.5 billion of dry powder, an expanded investment platform, and a performing portfolio. We anticipate that the recurring base management fees and principal income will continue to drive earnings growth in FY 2025. 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 2025, although we'll maintain a very careful eye on our margins. It is with this lens that we've provided our FY 2025 guidance.
Net profit before tax in a range of AUD 49 million-AUD 55 million, and FY 2025 earnings per share range of AUD 0.115-AUD 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 the 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.
Thank you. And 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 a question. And our first question today will come from David Pobucky with Macquarie Group. Please go ahead.
Good morning. Thank you. 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 6-12 months, please?
Hi, David. It's Mark speaking. The strong pipeline has started early in the year, and total pipeline that we are sitting on as at today in financial year 2025, it's about AUD 1.7 billion in total. This compares to about AUD 1.4 billion at the same equivalent point in the last year. We have closed about AUD 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 AUD 400 million- AUD 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, as 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.
Thank you. Appreciate the help-
Thank you, Andrew or Philip, that you'd like to add to that.
I guess, David, as well, I'd say that in terms of the, you know, the bigger picture in the market, you know, we are... and I say this in a sort of early stage, we are seeing green shoots coming through the market. You know, whereas FY 2024 was really dominated by projects that were less feasible because, particularly in places like Melbourne, is a good example, where realization values hadn't really caught up to create project feasibility. I think over the last few weeks, you know, there's real tangible evidence of developers being able to achieve the realization rates that it requires in this higher construction cost environment that we find ourselves.
So from that point of view, it feels like, you know, we should be more, you know, receiving more volume of transactions just because I think more things will get done in the market over the next 12 months relative to the last 12 months.
Thank you. Appreciate that. Just the second question on your AUD 18 billion medium-term fund target. Maybe if you could just talk to your level of confidence in achieving that versus a year ago and, you know, some of the line of sight that you have on achieving that growth, please.
I'd say, no, no, 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, pleasingly, our funds are performing really well. Our credit investors are receiving, you know, good risk premiums in terms of the fund's 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 ADIA and their increased commitment to our firm.
We did announce during the year that, and you know, I've just repeated it in my presentation, the North American fresh mandate that we've got. We've certainly got you know, more inquiry from you know, some of the world's largest investors who see what the Qualitas performance is and 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, you know, I can't give budgets and, you know, guidance on the 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 AUD 18 billion number.
Thanks for that, and congratulations again on the results, and good luck for the coming 12 months.
Thanks, David. Appreciate the questions as well.
Our next question will come from Liam Schofield with Morgans. Please go ahead.
Morning, team. Just two quick questions. Firstly, more just generally on deployment. If we go back to May, you sort of had AUD 3 billion odd approved, with the pipeline pushing AUD 4 billion. You've delivered AUD 4.2 billion. 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? 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 sum 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.
Hi, Liam, it's Philip here. Look, 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 AUD 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?
Yeah. 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're, you know, 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, you know, the definition of operating leverage, really the amount that, you know, we're using in the balance sheet relative to third-party external funds. So, you know, 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, you know, 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. You know, we're originating excellent investment opportunities, and whilst we're waiting for the balance sheet to be fully optimized, there's no reason why, you know, Qualitas can't be using some of that balance sheet to invest alongside some of the funds.
I think that that's a thing that, you know, the market should expect from us over the next 12 months as well, to really drive balance sheet earnings even further from, you know, 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, really underwriting the ultimate loans before third-party capital is raised. But this is more saying, you know, Qualitas itself is sitting on cash, which we recognize, and therefore, how do we get the, you know, the best efficiency out of it? And the good part about our actual investments is the durations are relatively low. You know, something Mark touched on in his discussion around the fact that, you know, we're able to, you know, review where we are in the credit cycle and asset values and, you know, it's a really good way to do that, is make sure that your durations are relatively short, not get caught up in, you know, long-dated assets that have more market volatility.
Given our durations are short, there's no reason why, you know, Qualitas is sitting in cash. We shouldn't be sort of investing a little bit of that alongside the funds, you know, whilst we're transitioning to be fully absorbed into co-investments. That's an active work stream within the firm.
Right. I'll jump back in the queue. Thank you.
Thanks.
Once again, if you'd like to ask a question, please press star then one. Our next question will come from Olivier Coulon with Evans & Partners. Please go ahead.
Hi, Andrew. Thanks for taking my question. Just on the guidance range, in terms of the factors that enable you to get to the top, you know, or the bottom end of that range, you know, what are those? And then, I suppose, have you weighted those at all, in terms of, you know, to the downside or upside?
Thanks, Ollie. I'll ask Philip to address that.
Thanks, Ollie. Look, the comments are as presented to date, 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.
Okay. And have you seen any, you know, I suppose delay in that to date? I mean, you know, it's only the twenty-first of the second month of the fiscal year, so a bit early to tell.
Yeah. Yeah, Ollie, it is early in the year, but I think I outlined we have, you know, transactions for the financial year 2025 under mandate and already closed in that vicinity of AUD 1.7 billion. And I mentioned that there's transactions being worked on in the amount of an incremental AUD 400 million-AUD 500 million in addition to that. So I think the early momentum in that is good for the year, 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.
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, thanks for that. Just, also on the undrawn construction credits, so obviously that's lifted, you know, by close to AUD 500 million or AUD 600 million dollars from the first half to the second half, which kind of represents a fairly large, you know, 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 it would follow if you significantly increased your deployment into construction as a percentage of your overall deployments, you know, you're possibly carrying a larger percentage of the loans undrawn than you normally would, if that makes sense.
Yeah, I'll-
A more mature portfolio would have, you know, a mix of stuff that's drawn and undrawn, right? If you see what I mean.
Yeah, no, you're exactly right, Ollie, and we certainly see that narrowing over time. The numbers at thirty 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.
Yeah. Okay. And then just a final one from me, just on performance fees. So appreciate the additional color on the split between the credit funds and the equity funds for the unrealized performance fees or, you know, expected performance fees. Obviously, suggest that the momentum in, you know, building those performance fees and eventual realization for the P&L is lifting pretty rapidly. I was just wondering, you know, is there more color that you can give us on, I guess, the expectation for the next, you know, two years or so as some of those large credit funds that you've started, you know, in the last two years, get to the point where it's very unlikely that, you know, the IRR is below the hurdle rate?
Yeah, okay. I think there was quite a bit in that question, or sort of two or three 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 know, 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.
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 market changes in market cap rates and valuations. 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, you know, 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, you know, more comfort in respect of, you know, earning of those particular performance fees. The other comment I'd make on your question, which is really the second part of it, is, you know, 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, you know, what your view is in respect of, future interest rate movements and whether, you know, you're likely to see another four hundred 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 movements in equity valuations, and hence why our investors, you know, 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, you know, 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.
Yep. No, appreciate that. Thanks.
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 firstly 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 2025. On that note, I'd like to wish everyone a pleasant day on this call, and that formally concludes our entire presentation. Thank you.
This will conclude today's conference. Thank you for participating, and at this time, you may now disconnect your line.