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Profits Slump At ARA Asset Management

ARA Asset ManagementProfits at real-estate fund management company ARA Asset Management (SGX: D1R) fell 9% to S$32m in the first six months of the year. Revenues rose 1% to S$64.1m and assets under management (AUM) jumped 7% to S$23.5b.

ARA has three main revenue segments, namely Management Fees, Acquisition, Divestment & Performance Fees and Finance Income. The slight increase in the company’s top-line for the half-year was driven by Management Fees growth, which made up for large drops in the other two segments.

Management Fees grew by 18% to S$56.2m from a year ago. In this segment, revenue comes from fees of Real Estate Investment Trusts (REITs) and private real estate funds that the company manages. This is an important part of ARA’s business as this is where company derives most of its recurring revenues.

Better asset performance from REITs such as Cache Logistics Trust (SGX: K2LU) and Fortune REIT (SGX: F25U) due to higher property valuations resulting from asset-enhancement-initiatives had positive contributions toward the growth in Management Fees.

In addition, most of ARA’s private real estate funds, such as ARA Asia Dragon Fund II, ARA China Investment Partners, and ARA Harmony Fund, all paid out larger fees to the company.

Acquisition, Divestment & Performance Fees had dropped by 51% year-on-year to S$2.3m. In the first half of 2012, ARA had received large fees in this segment due to a series of sales and purchases of real estate made by the REITs it manages.

That included the sale of Chijmes by Suntec REIT (SGX: T82U) and purchases made by Fortune REIT. These activities are one-off by nature, so there are bound to be wide fluctuations in the revenue from this segment.

For the first half of 2013, the segment earned its keep by helping to facilitate Cache Logistic Trust’s purchase of properties in addition to providing consultancy services for others.

Finance Income fell by 45% to S$5.6m compared to a year ago. In the first half of last year, ARA logged S$5.9m worth of gains after the sale of units of some of the REITs it manages. This year, the company did not sell any REIT-units. Instead, it suffered losses on those securities as their market prices fell.

The mark-to-market losses were partially made up by distribution income – a component of Finance Income – of S$5.6m, as ARA received distributions arising from the sale of properties from one of its private real estate funds.

ARA’s expenses outpaced its top-line growth, leading to the 9% drop in half-year profit to S$32.1m. A larger headcount due to the company’s expansion into the property management business in China as well as higher operating lease expenses were the main culprits.

Besides a focus on reported profit, shareholders should also cast an eye on the company’s recurring profit (essentially after-tax profits from its Management Fees revenue-segment). On that front, ARA did not disappoint as recurring net profit actually went up by 17% for the half-year to S$27m compared to a year ago.

The company has declared an interim dividend of 2.3 cents per share, which is a 10% increase over last year’s split-adjusted dividend of 2.09 cents per share.

For the near future, ARA’s management commented that “barring unforeseen circumstances, the Directors expect [ARA’s] net profit in FY2013 to be comparable to that achieved in FY2012.”

ARA closed Monday’s trading session at S$1.87 per share, representing a Price-to-AUM ratio of 6.7%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.