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 2026 result. 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 2027 guidance.
We'll take questions at the end. Let me start with the highlights. FY 2026 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 AUD 6.5 billion, up 42% on last year. That contributed to AUD 3.1 billion in net deployment, underpinning strong base management fees and performance fee growth into FY 2027. Our early FY 2027 momentum is strong, with AUD 1.1 billion in investments already approved by our investment committee or closed as of today. That compares to approximately AUD 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 AUD 19 million in cash from previously accrued performance fees. Combining this amount with AUD 12 million we received in the first half from performance fees, we have now received AUD 31 million in cash from performance fees over the last 12 months to August 2026. 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 five-fold. Secondly, Arch Finance is gaining momentum into FY 2027.
And finally, our build-to-rent equity strategy delivered AUD 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 are extremely proud of. These FY 2026 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 2027 net profit before tax guidance of AUD 74 million-AUD 80 million, an increase of approximately 17%-26% on FY 2026. Turning to slide seven. This slide sets out the earnings picture, which highlights consistent growth across fee-related earnings. We are also experiencing significant margin expansion over the last five years. Base management and transaction fees have grown consistently and strongly, up 27% and 28% respectively from prior periods.
These are our core reoccurring earnings base. We recently upgraded our Australian funds management EBITDA margin target from above 50% to above 60%. I am 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 AUD 0.0775 per share, and this brings our total FY 2026 fully franked dividend of AUD 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 two 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. The numbers tell that story. Fee earning FUM grew 36% to AUD 11.9 billion. We have AUD 2.4 billion of available capital for deployment, taking total capital deployed and available to AUD 14.3 billion, up 21% on last year. 72% of our AUD 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 stage of development.
There are four clear reasons we have strong earnings visibility into FY 2027. The first is our capacity to grow.
Our AUD 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 2027 with fee earning FUM 21% above the FY 2026 average. That alone supports base management fee growth from day one. Third, a more productive balance sheet. Drawn co-investment rose 46% to AUD 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 2027. Fourth, a higher quality performance fee pool. Embedded credit performance fees grew 32% in the second half. The total unrecognized pool now stands at AUD 81 million. The composition has shifted significantly, and credit now represents 78% of that pool, up from 57% six months ago.
We do point out that the movement in the pool reflects two 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 2030. 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 2027. 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 is important to keep in mind several underlying growth drivers that continue to support our positive outlook for FY 2027.
The underlying housing shortage has not gone away. What we are 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 are 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 have 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 are accruing and receiving in cash a growing stream of credit performance fees. It is also important to note we have exciting growth potentials across our platform. 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 2027 with our funds in a robust position with no impairments as at 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 have 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 competitive constraints. To explain what those opportunities look like right now, I will hand over to Mark.
Thanks, Andrew, and good morning, everyone. Over the next few slides, I will take you through the market backdrop, where the opportunities are, and how our funds management platform is positioned to capitalize on them. I will also provide an update on our funds management business across FY 2026 and our pipeline for FY 2027. 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 have maintained deployment growth through the cycle. While our deployment is not solely residential, it shows we have 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.
We are 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 five years since IPO and the market headwinds in each of those years. Our growth over that period shows that we have navigated them while continuing to grow. We saw interest rates begin rising in 2022, alongside significant construction cost escalation, and by 2024, construction insolvencies had peaked, and the cash rate had reached its highest level in a decade.
Even over the past year, we have had the Middle East conflict, we have had an oil price shock, we have had three rate hikes, and we have had budget tax changes, which have all weighed on sentiment. Yet through those headwinds, we have 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 AUD 6.5 billion, which is a compound annual growth rate of 35% per annum since FY 2022.
That consistent growth is not accidental. It is 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 is also a widening house-to-apartment price gap, which supports apartment demand as affordability deteriorates.
We have growing demands 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 2019 and FY 2026, 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 2026 alone, including a single AUD 1.2 billion investment. While one or two large investments can move the average in any given year, as we saw in FY 2026, the underlying trend still holds. We have 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. 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%.
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. I will 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 in 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 2026, and this reflects our focus on the larger end, precisely where the market is heading. There are two 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 are too large for a single traditional financier and the wholesale and retail-backed platforms. 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 six 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 two 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. 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 AUD 400 billion of exposure across retail, office, industrial, and other commercial real estate, which is over four times 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 two 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 AUD 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 that 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 2026 deployment. These dynamics are exactly what shaped both the volume and the composition of what we financed this year. We deployed a record AUD 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 six assets with two operational, one 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 are progressing fundraising discussions and actively screening new opportunities to invest in that space. In the credit business, our pipeline is building strongly into FY 2027, with continued momentum in both the size and the certainty of investments. The closed and investment committee approved portion is six times higher than at the same point last year, which gives us strong confidence in the base management fee growth through FY 2027.
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 2026, we saw higher renewal activity, and we like to focus on this type of deployment for two reasons. Firstly, they carry lower origination costs than new investments, and secondly, they still generate transaction fees for Qualitas, which lifts our margins. As the platform grows, follow-on investments will remain a key focus for our deployment.
That completes our funds management and market update. I will now hand over to Philip, who will take you through the FY 2026 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 AUD 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 AUD 41.7 million, up 25% on the prior year. There were three 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 AUD 38.6 million. Second, there was a significant uplift in transaction fees on the back of record deployment of AUD 6.5 billion and a strong contribution from net performance fees, which rose 70% to AUD 13.7 million. Third, principal income of AUD 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 AUD 63.4 million, up 20%. Normalized earnings per share rose 19% to AUD 0.147 per share. On the strength of this result, we have declared a fully franked final dividend of AUD 0.0775 per share, bringing the total full-year dividend to AUD 0.1125 per share, up 12.5% on FY 2025. 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 AUD 70.3 million. A particular highlight is the 41% increase in net funds management revenue to AUD 38.6 million, as revenue growth materially outpaced employee costs, reflecting the scalability of our platform. Base management fees grew 27% to AUD 62.1 million, and transaction fees grew 28% to AUD 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 two of our construction credit funds are now four and five 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 2026 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 AUD 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 AUD 4.3 million, unchanged from FY 2025. That result is after adding back a one-off restructuring cost of approximately AUD 600,000.
Following the appointment of a new management team in early FY 2026, growth is building. The loan book grew to AUD 304 million by June. The business is shifting away from the highly competitive bank-dominated lending market and has established relationships with three 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 2027. 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 AUD 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 retain 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 AUD 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 will now hand back to Andrew for his closing remarks and our FY 2027 guidance. Thank you.
Thank you, Mark and Philip. When considering our FY 2027 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 have built in Australia and extend it into a market roughly five times 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. With that backdrop, let me now turn to our FY 2027 guidance.
Net profit before tax of between AUD 74 million and AUD 80 million, representing growth of approximately 17%- 26% on FY 2026, and earnings per share of between AUD 0.172 and AUD 0.186. This excludes any mark-to-market movements on Qualitas co-investments in the Qualitas Real Estate Income Fund, and that fund's capital raising costs and any other unforeseen events. We have good visibility on the drivers of that growth. Our FY 2027 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 2027 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 would now be happy to take your questions. Thank you.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Olivier Coulon with E&P Financial Group. Please go ahead.
Hi, guys. Congrats on the great result. 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 are seeing on the macro conditions, what sponsors are telling you and what you are seeing from your competitors, how are you feeling about the part of the pipeline that we do not see? Which is, my understanding, most of it at this point of the year. Because obviously the total pipeline that you have disclosed is marginally down on FY 2025, but I am aware that that does not include a whole bunch of earlier stage discussions than when you are mandated.
Yeah, thanks, Oli, and good question. One I expected to get asked as well. You are quite right in terms of the pipeline risk. We always track what we call a high conviction pipeline risk. If I talk about how we are 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. The interesting thing for us has been that the number of competitors in the market seems to have retreated somewhat as well. If I think about what exists beyond what we have 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.
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. If I think about that long list of pipeline, it's closer to AUD 3 billion than it is the number that we reported. 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. 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. The guidance, it doesn't appear super aggressive in the context that you're likely to get 3% growth just from Arch getting to break even. You've obviously got meaningful upsides just from the annualization of the closing and 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?
Yeah. 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. 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. 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.
That increases our month in fee loads as well. Then we are able to overlay into that what we think is just a reasonable deployment assumption. To put your mind at ease, we have not gone and assumed this massive growth in order to get to this guidance number that we have put out there. We have had regard for the market, and we have not taken this huge leap of faith on a deployment that we do not think we can achieve. We definitely want to put your mind at ease on that point.
Yeah. No, that is perfect. Thank you. Maybe just a very last one from me. Do you have any profitability from the U.K. plus European platform assumed in that guidance range, or have you seen broadly neutral contribution?
Thanks, Oli. Broadly neutral contribution is the assumption.
Great. Thanks. Appreciate it.
Your next question comes from Elizabeth Miliatis with Macquarie. Please go ahead.
Good morning, and thanks for taking my questions. First one's 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 2027? Are we going to be operating at sort of that lower level?
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.
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.
Okay.
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 six or eight weeks ago, we've also been putting a lot of effort into our AI initiative, our deal room work that the team's been working on. 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 have been doing in previous years. 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.
Mm-hmm. Yeah. Got it. 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.
Yeah. 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. 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 of time. This is a really important point to understand, that as we continue to fund those construction loans and they get larger every single month in, month out, that fee increases relative to the size of the commitment that we've made or a committed fund that we have.
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. Just one bit of a 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. That's despite all the negative press currently at the moment. What are you seeing from that perspective? 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 should really underpin growth for the next few years?
Yeah. Look, I think that what we are seeing is from institutional clients who are very sophisticated. What we are seeing is a build-up of interest in Australia because they differentiate between the Australian real estate cycle versus the Australian credit cycle. And they are two very different cycles. One of the things that you are finding in the market at the moment is that there is 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 is 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 platform's behavior, where is risk-adjusted returns moving in Australia? What is the ongoing demand for credit that is 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. In fact, this has actually only become a more exciting market for institutional capital, and I do not 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 are bringing to the market, all with very large institutions. For me, it only shows their conviction of the Australian marketplace, and we are wholly supported obviously from what we are seeing on the ground here.
Thank you. That is very clear.
The next question comes from Tim Piper with Jarden. Please go ahead.
Good morning, Andrew and team. Just the first one on the performance fee outlook. 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, is that giving you greater confidence in the growth profile of performance fees over the next couple of years? 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. Yes, and the short answer is we are expecting higher contribution of performance fees in FY 2027 and FY 2028. The way in which the funds are recognizing the performance fees, 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 2027 and 2028 than we have had in 2025 and 2026.
Thank you. Your next question comes from Andrew Hodge with Canaccord Genuity. Please go ahead.
Good morning. Thanks for taking my questions. Just the first question, Mark, you sort of alluded to this answer with respect to the competitive environment seems not as quite a competitive environment, but have you seen any early movement from the big four banks that are in a structural downturn in terms of how much they lend to private credit, but would they tick up, do you think, in the near term, given that they're seeing declines in their residential mortgage system growth?
Yeah. Thanks, Andrew. I think the most important point to consider in thinking about this question is the banks play in a very different risk-return appetite sandbox to where our institutional investors and our funds play. Even to the extent that the banks did, because of the reasons you've described, want to come back into the type of space that we play in, they're looking for very different things to what we are looking for in terms of deployment. We're currently not seeing it to any great scale. Yes, they're there. Yes, they're targeting the ultra blue ribbon borrower type on ultra blue ribbon assets. That's not the space that we typically play in, so they're not encroaching on what we're looking to do. I think if anything, we can be complementary to them.
A lot of the borrowers that we target are borrowers who have great relationships with those banks, but they also have great relationships with firms like Qualitas. It's not something we're looking at in terms of the outlook on deployment and thinking that it will impact our market activity.
Great. Thank you. Andrew, just to follow on the question around base management fee percentage. I just want to understand. The way that you've described it, I guess what we're looking at for 2027 over 2026 is that, given that the deployment in 2026 was so high, that the S-curve of those loans naturally helps that base management fee as we move into a different stage of the timing around that curve.
That's exactly right. For people on the call that may not know what an S-curve is, it represents the tracking of drawdowns on a construction loan month in, month out. If you plot the incremental drawdowns, they look like an S-curve, the letter S on a sheet of paper. What that means is, we're being at the baseline of the S. If you think about it from bottom to up, we're being at that baseline. That means we're earning a relatively small fee load on those very large construction loans that we did last year. As we climb up the S-curve, exactly, we earn much more fees as every month there's more and more drawdowns that are going into those particular loans. It's really important people understand that when they look at those numbers.
Maybe a way for me to really drive the point harder is, to the best of my knowledge, I cannot think of one investor that has approached our firm to negotiate fees down over the reporting period. Right. This is not about investors saying, "Oh, we can go somewhere else, and we can get better fees," and, "Well, we are going to internalize the model, and therefore you should cut your fees." None of that is going on. Right. What this is a mix issue. We did a lot of construction loans. As I said, in future periods, as we draw down on those construction loans, the level of fees relative to the commitment increases at a corresponding rate.
Great. Thanks, Andrew.
Your next question comes from Nilesh Bhaiya with Citigroup. Please go ahead. Nilesh Bhaiya, your line is now live. Please proceed with your question. We will move on to Liam Schofield with Morgans. Please go ahead. Liam Schofield, your line is live. Please proceed. Apologies. Your next question comes from Tim Piper. Please go ahead.
Oh, hi, Andrew. Sorry, my line dropped out before. If I could ask a second one. Maybe just an update on the U.K. Where are you at, in terms of investor mandates there? Sort of clients in discussions, and what size mandate are we sort of thinking would anchor that business on a go-forward from here?
Sure. Thanks, Tim. Nothing like a direct question. Look, it's a business that we've literally owned for six weeks or so. What I can say is, we've been really happy with the loans. Firstly, we acquired 11 co-investments in underlying loans, and we've been really happy with the performance of the loan book. We've had one repayment since the acquisition date, which is a good thing because it shows the health of the book also. As I announced in previous announcements, we did acquire the co-investment subpar as well. Obviously it's good for us when those loans repay and at full face value, given our acquisition price. Look, we're in active discussions. In our budgeting, we gave ourselves quite a lot of runway in respect of when we would land our first mandates in Europe.
What I can confirm is, in respect of the very major investors within the Qualitas Group, we are in numerous discussions in regards to Europe. I think that everyone we've spoken to totally sees the logic of why Qualitas would've made that move into Europe. A lot of them are already very active over there, so it's not like we're explaining to institutional investors the merits of private credit in the U.K. and various European markets. I'd say very early days, but we've had great reception from investors, and I feel really positive about what we can achieve over FY 2027 as well. Probably best for me to say stay tuned, but feeling really good about what we've acquired and feeling that the numerous discussions we're having, Qualitas is getting an excellent reception from investors.
No, that's great. Thanks. See if I can just squeeze one more in. Sorry. Just on slide 15, that chart showing sort of financing demand in the next 12 months, a pickup in demand for refinancing and development loans coming off a little bit. Just a bit of extra detail around what that profile looks like on the refinancing side versus what a core development loan would look like maybe in terms of size, maturity and the kind of margins. Are they vastly different or not too dissimilar?
Yeah. So what we talk about when we get into the types of investing in the credit business, we talk about total return credit, which is our construction financing activities, and we talk about income credit, which is lending to completed real estate. Really what that talks about is perhaps we expect to see more in the income credit space because there is more refinancing required of existing completed real estate. From a Qualitas manager perspective, in terms of the fees that we can generate, the fee cards on those are very similar between construction and income. In terms of average transaction size, look, I do expect that construction financing will be a larger average size, but also it's worth noting that the management intensity from a Qualitas perspective on a construction loan is higher versus that on a non-construction loan.
From a margin perspective for us, they are very similar, notwithstanding there might be a difference in average size. Really what we are trying to say on that slide is there is a wall of existing loans that were made a number of years ago by others and by the banks that need to be dealt with over the coming period of time, and that is a great hunting ground for our team to go and look to deploy into.
That is great. Thanks for taking the questions.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Nilesh Bhaiya with Citigroup. Please go ahead.
Hi. Thanks for giving me the opportunity again. My first question, coming back to your OpEx slide. It is about the performance fee incentive. You have discussed the core employed cost, where you do see a lot of economies of scale and operating leverage, but even the performance fee incentive line seems to be trending lower. Is that just a timing issue or the mix ratio, or is that also a lever driving your EBITDA margin?
Thanks, Nilesh. The operating margin is increasing, so I am not quite sure that I understand your connection with the performance fee, because the performance fee contribution was higher in FY 2026 than the previous year.
Yep.
On the actual performance fee on a net basis was still very high at 98% margin. So it is actually helping to improve the overall group margin, if that is your question.
Yeah. But I thought that the performance fee incentives, you had been guiding for higher-
Sorry.
percentage of the growth. But it is trending lower, right?
Yeah. No, that is-
So you are making your assumption.
Yes, good point. The incentive, the staff carry cost, we do guide to a higher average normalized carry. Certainly, that is not flowing through in FY 2026.
Okay. Can you discuss the Arch Finance a bit? It seems like there is a strong turnaround there. There is a strong growth. If you look at the committed funds there at AUD 372 million, it suggests that FY 2027 should again be a strong growth on the loan book. In terms of your guidance, is there a strong delta in the potential margin contribution from Arch Finance that you are assuming?
So just so I can clarify the question. We are talking about the base management fee contribution for Arch?
No, for Arch.
Oh, for Arch. Oh, sorry. Certainly for Arch, we are expecting a very solid turnaround in that business. If we think back to the previous June 25, we were down in the low AUD 200 million portfolio size, and we have closed at June 26 at just over AUD 300 million portfolio size. That momentum is continuing. We do expect the Arch contribution to move from a contribution loss to a contribution profit in FY 2027 as part of our guidance. I think just the
That's Yes.
I think just the other thing that I'd add there is, we do have it on one of the slides, but when you sort of look at where we've come from on Arch, where at June 2025 it was AUD 224 million of total receivables, and a year later, we're at AUD 304 million. That's a very sizable increase. And it's only August, so we're, what's that, six weeks from balance date, and we're up at AUD 329 million. You can see there that business has really substantially turned around and is really showing month in and month out growth in its loan book. I think it goes to one of the earlier questions about what's happening more in the bank market.
There it reflects where the banks are at, but also where some of that sort of smaller ticket competition is at as well in terms of their competitive behavior. But it's really given us an ability to take quite a sizable jump on that particular business.
Yeah. You expect that growth to continue even beyond FY 2027, like say you want to grow that business?
Yeah. Look, I think that we're committed to it. It's got a new senior management group who is very focused, as I think Philip said. We've got three new broker relationships. They've developed new product. They're out in the market looking at new funding lines that are incremental to the business as well. I think there's a lot to look forward to.
Yeah. Thank you.
There are no further phone questions at this time. I'll now hand back to Andrew Schwartz for closing remarks.
Great. Thank you. I'd just like to firstly take the opportunity to thank my board of directors. They give tremendous oversight and guidance to myself and the executive leadership team. The entire Qualitas staff for what is unwavering support that they've shown over the course of what has been an excellent year for the firm. To thank our shareholders and our investors for the support that they give to the company. I think if anyone on the call has got any further questions, please reach out to myself or any member of the IR team, and that formally concludes our full year 2026 earnings call. Thank you.