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How Would Warren Buffett Look At ARA?
Corporate Digest | 23 September 2014
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By: Shane Goh
Articles (99) Profile

As discussed in our previous article on the four tenets, we shall explore the first of the four in this piece: Business.

As of 10 September, there are 29 Real Estate Investment Trusts (REIT) listed on the Singapore Exchange (SGX). Did you know that three of them are managed by the same firm?

ARA Asset Management is an Asian real estate fund management company with a focus on the management of public-listed REITs and private real estate funds.

The company also provides real estate management and corporate finance advisory services.

As of 30 June, ARA’s assets under management (AUM) stood at approximately $25.8 billion.

On the SGX, Cache Logistics Trust, Fortune REIT and Suntec REIT are helmed by ARA.

In addition, Hong Kong-listed Hui Xian REIT and Prosperity REIT as well as Malaysia-listed AmFIRST REIT round up the list of public-listed REITS under ARA’s charge.

ARA’s private fund segment includes its flagship Asia Dragon Fund and Asia Dragon Fund II.

How does it make money?
In FY13, management fees (public and private funds) contributed 81.2 percent of ARA’s revenue. Acquisition, divestment and performance (ADP) fees raked in 10.4 percent of its turnover while finance income made up the rest.

Management fees are simply the payment to ARA for it to add to and take care of the properties under the REITs/funds. Usually, there’s a flat fee with a performance-based component built into each fund for the manager.

This has a snowball effect. The better ARA manages the properties, the higher the likelihood of investors parking their money with the firm, thus, increasing AUM for the firm.

The segment also incorporates its real estate management services, such as executing asset enhancement initiatives.

Under its ADP fees, whenever a REIT/fund under its charge sells or buys a property, ARA earns a fee off of it as it manages the process.

Atop, income from project management and consultancy services fall under this segment.

Finance income, in ARA’s case, is not the interest earned from cash held. Rather, it’s the net marked-to-market gain on fair valuation and disposal of certain REIT units as well as distribution income from financial assets.

Lastly, there is an others segment where items such as negative goodwill arising from acquisitions are placed under.

From the looks of it, ARA gets a cut from the entire property investment value chain when they bring in new capital (management fees), purchase or dispose properties (ADP fees) and provide management services (management fees) to the properties.

However, the key segment to focus on is management fees, as this is seen to possess a recurring nature compared to the other segments.

Over the past seven fiscal years, management fees has risen 18.5 percent compound annual growth rate (CAGR) to $114 million.

Is there room for further growth?
As a fund management firm, ARA actively seeks to grow its AUM. The easiest way to expand AUM is through fund raising.

Since December 2003, ARA’s AUM has grown at a 45.6 percent CAGR to $25.8 billion in 30 June.

Out of the total, $19.4 billion is derived from REITs, $6 billion from private real estate funds and $0.4 billion from real estate management services.

Apart from property valuations potentially raising the value of REITs/funds, acquiring properties and setting up new REITs/funds are avenues to explore for ARA to grow its AUM.

So far, ARA appears to be on the right track.

In October 2013, ARA sold a 20.1 percent of the firm to The Straits Trading Company (STC). Along with the sale, STC agreed to engage ARA to manage its entire investment property portfolio (excluding hospitality assets).

In April, ARA acquired Macquarie Real Estate Korea. The latter has two privately-held Korean REITs with a combined value of approximately $750 million as at 30 June.

In May, ARA launched ARA Summit Development Fund I by raising US$80 million. With the launch, ARA’s offer of private real estate funds range from development-focused products to core investment products.

These moves show ARA’s willingness to grow its AUM and given how management fees are earned, it is likely to benefit the company’s top line.

ARA’s chief executive officer, John Lim, has cast the firm’s sights to achieve $40 billion in AUM by 2016. Compared to its current standing, that target translates to a 55 percent growth.

Next, we will look into the management tenets, to judge both their capabilities, and alignment of interest with shareholders.

Disclaimer: The author owns a stake in ARA.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

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