Real estate fund management company, ARA Asset Management (SGX: D1R) announced its third quarter earnings yesterday evening and saw a slight increase in its bottom-line while its top-line remain unchanged.
The company manages publicly-listed real estate investment trusts as well as private real estate funds that invest in Asian properties. ARA is one of the largest REIT managers in Asia (excluding Japan) and currently has six REITs under its stable.
These REITs include Singapore-listed Fortune REIT (SGX: F25U), Suntec REIT (SGX: T82U), and Cache Logistics Trust (SGX: K2LU); Malaysian-listed AmFIRST REIT; and Hong Kong listed Hui Xian REIT and Prosperity REIT.
In addition, ARA also provides real estate management and corporate finance advisory services.
The company earns its keep by collecting fees based upon the services it provides as well as certain operational metrics of the REITs, funds, and real estate that it manages. Some examples of those operational metrics would be the gross property value and net property income of its REITs.
Some basic numbers
For the three months ended 30 Sep 2013, ARA’s revenue remained essentially flat at S$33.1m compared to a year ago. Meanwhile, profits had inched up 2% to S$20m.
The company’s top-line is made up of four components: Management fees; Acquisition, divestment, and performance (ADP) fees; Finance income; and Others.
During the quarter, Management fees – which form the bulk of the company’s revenue – helped pull up the slack by growing 6% year-on-year to S$27.9m as the other components faltered. The component, which is a form of recurrent revenue for ARA, had grown on the back of higher REIT management fees, higher portfolio management fees from the various private funds, and higher real estate management fees.
REIT management fees in particular had grown 6% to S$16.4m due to “improved asset performance” that were driven by asset enhancement initiatives resulting in higher property values for the REITs’ portfolios.
In addition, the three locally-listed REITs – Fortune REIT, Suntec REIT, and Cache Logistics Trust – had all reported year-on-year growth in quarterly net property income in their most recent earnings release.
ARA’s private-fund management fees had grown on the back of contributions from its ARA Asia Dragon Fund II and ARA China Investment Partners, as well as higher property valuations from its ARA Harmony Fund portfolio.
ADP fees, which are largely one-off revenue streams for the company, fell 70% year-on-year to S$0.62m as the previous year saw some of its REITs busily acquiring properties, activities which did not happen so frequently this year.
Finance income slipped 5% to S$4.55m while others dropped 10% to S$28,000.
The company’s profits had grown despite the unchanged revenue mainly due to a decrease in administrative expenses, which deal with staff salaries.
Operational highlights and the balance sheet
ARA ended the quarter with S$23.4b worth of assets under management (AUM), an increase of 8.8% from S$21.5b a year ago.
The company’s balance sheet had weakened compared to the previous year as cash on hand decreased from S$78.6m to S$40.1m while total debt grew from S$5.1m to S$22.8m. Nonetheless, ARA’s balance sheet still remains healthy with a net-cash (cash minus total debt) position of S$17.3m.
What’s next for ARA Asset Management
One major development for ARA in recent times was its strategic alliance with The Straits Trading Company (SGX: S20) formed in late October this year. As part of the arrangement, STC would become a 20.1% owner of the company and ARA would also become manager of STC’s entire investment property portfolio.
This is an arrangement that would likely benefit ARA’s investors as managing the new portfolio of properties from STC would bring in more recurrent revenues.
In addition, STC, together with ARA’s chief executive John Lim, would be forming a co-investment vehicle which would provide up to S$950m of seed capital for real estate funds that ARA would manage.
Lim commented on the alliance in the earnings release: “As we continue to grow our [AUM], the establishment of the strategic partnership with Straits Trading presents exciting opportunities that we will seek to capitalize on. We are honoured that Straits Trading has recognised ARA’s track record and achievements, and placed confidence in the quality of the ARA team as we continue to strive to deliver.”
Elsewhere, a recent acquisition of the Kingswood Ginza Property by Fortune REIT in October 2013, which was first announced in August 2013, will help to boost ARA’s ADP fees for the rest of 2013 and increase its recurrent management fees in the future.
Valuation
ARA closed Tuesday’s trading session at S$1.84. At that price, shares of the company are valued at 22 times trailing earnings and 6.6% of its AUM. Based on its pay-out last year, shares of the company having a trailing dividend yield of 2.7%
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