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Quarterly Profits at ARA Asset Management Limited Up 6%; Recurrent Management Fees Increase 11%

ARA Asset Management (SGX: D1R) is an Asian real estate fund management company that focuses on managing real estate investment trusts (REITs), managing private real estate funds, real estate management services and corporate finance advisory services. Some of the locally-listed REITs under ARA’s purview include Fortune REIT (SGX: F25U), Suntec REIT (SGX: T82U) and Cache Logistics Trust (SGX: K2LU). The asset manager reported its first quarter earnings on Wednesday where net profit increased 6% year-on-year to S$17.8 million.

The company reports its revenue under four different segments: Management fees; Acquisition, divestment, and performance fees; Finance income; and Other income.

For the quarter, revenue increased 18% year-on-year to S$38.2 million mainly due to increases in management fees and acquisition, divestment, and performance fees.

Management fees, which are recurrent in nature, grew 11% year-on-year to S$29.7 million, due to higher REIT management fees and real estate management fees received.

REIT management fees increased from S$15.5 million to S$18.5 million due to better asset performance post the asset enhancement initiatives undertaken, which resulted in higher valuation of the property portfolios of the REITs under management. Fees arising from the acquisitions made by the various REITs in the last financial year also contributed positively.

Real estate management fees went up from S$4.7 million to S$5.1 million due to the higher leasing commission and property management fees and convention and exhibition service fees received.

Furthermore, ARA received portfolio management fees from one of the newly-established funds, Straits Investment Partners, which was formed after a link-up with Straits Trading Company Limited (SGX: S20). The fund size of Straits Investment Partners is S$842 million.

The acquisition, divestment and performance fees received increased from S$1 million to S$2.6 million. The uptick was mainly due to acquisition fees received relating to Prosperity REIT’s acquisition of 9 Chong Yip Street in Hong Kong in January 2014 and Suntec REIT’s progress payments during the quarter for its acquisition of 177 Pacific Highway in Australia.

One dampener to the positive results was that net margin for the quarter was at 46.7%, down from 52.2% in the previous year. Higher staff costs due to an increase in headcount and staff-related expenses and higher “other expenses” relating to higher professional fees incurred because of the acquisition of ARA Korea Limited, mainly caused the dip in margin.

In April this year, ARA completed the acquisition of Macquarie Real Estate Korea Limited (renamed as ARA Korea Limited), a real estate management company based in Seoul, Korea. Due to the acquisition, ARA currently manages two privately-held Korean REITs invested in office properties.

The balance sheet of ARA is sturdier than three months ago. As of 31 March 2014, the firm had a cash hoard of S$47.6 million, as compared to S$39 million at the end of last year. Total borrowings decreased dramatically from S$30.5 million to S$4.8 million due to repayment of S$25.7 million of borrowings that was needed for general working capital purposes and seed capital contributions to the private real estate funds. Therefore, the gearing ratio reduced to 2%, as compared to 11% end of last year.

For the quarter, operating cash flow surged more than five-fold from S$6 million to S$36.7 million mainly due to higher proceeds received from the sale of certain REIT units as part payment for REIT management fees.

As of 31 March 2014, the assets under management (AUM) under ARA’s belt was around S$25.4 billion, up slightly from S$25.3 billion, as of 31 December 2013.

The Chief Executive Officer of the company, Mr. John Lim, said, “2014 will be a busy year for us, as we continue to seek growth in our AUM and deliver shareholder value. Our focus remains on active asset management to add value to the properties we manage, making acquisitions of value-adding assets and developing strategies to expand our suite of private funds.”

ARA closed at $1.805, translating to a historical PE ratio of 21 and a dividend yield of 2.8%.

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