ARA Asset Management Limited’s Latest Earnings: What’s Next After A Sharp 22% Profit Decline?

ARA Asset Management Limited (SGX: D1R) released its fiscal second-quarter earnings report yesterday. The reporting period was for 1 April 2015 to 30 June 2015.

ARA Asset Management earns its keep mainly from the management of real estate investment trusts and real estate funds. It has four revenue segments: Management Fees; Acquisition, divestment and performance fees; Finance income; and Other income.

You can read more about the company here or catch up with its previous earnings report here.

Financial highlights

The following’s a quick take of ARA Asset Management’s latest financial figures:

  1. Overall revenue for the second quarter of 2015 fell 9% compared to the same quarter last year. ARA Asset Management ended the quarter with $36.8 million in revenue.
  2. Net profit for the period followed suit with a 22% fall to around $16.9 million.
  3. As a result, earnings per share (EPS) fell 21% from 2.47 cents in the second-quarter of 2014 to 1.95 cents in the reporting quarter.
  4. Cash flow from operations came in at negative $3.1 million for the second-quarter of 2015 with capital expenditures clocking in at $215,000. This gives ARA Asset Management negative free cash flow of $3.3 million for the reporting quarter, a huge decline from the free cash flow of $16.7 million (cash flow from operations of $17.1 million and capital expenditures of $406,000) that was achieved a year ago.
  5. As of 30 June 2015, the company had $61.4 million in cash and equivalents and $110.7 million in borrowings, or a net debt (total cash minus total debt) position of $49.3 million. This is a significant deterioration from a year ago when ARA Asset Management had $50.5 million in cash and equivalents and just $25.7 million in borrowings.

In all, it was a weak quarter for ARA Asset Management with the firm experiencing sizeable falls in both its revenue and profit. Furthermore, the company also slipped into negative free cash flow territory and took on a lot more debt as compared to a year ago.

During the reporting quarter, ARA Asset Management increased its borrowings to help fund its purchase of a strategic stake in Suntec Real Estate Investment Trust (SGX: T82U); the REIT’s also managed by the company. At the end of June 2015, ARA Asset Management owns 89.5 million units in Suntec REIT and these are classified as non-current financial assets on the firm’s balance sheet.

Despite the lower profit and cash flows, ARA Asset Management’s board of directors had declared an interim dividend of $0.023 for the reporting quarter, unchanged from the year before.

Operational highlights

Let’s take a look at how the real estate fund manager’s individual business segments had performed. Revenue from management fees rose by 1% year-on-year for the reporting quarter to come in at $31.7 million. This segment’s revenue can be deemed to be recurrent so it is important to keep an eye on any changes in here.

Revenue from acquisition, divestment and performance fees leapt by 256% year-on-year to $2.1 million. This was mainly due to higher fees received from acquisitions and divestments that were made at Fortune Real Estate Investment Trust (SGX: F25U) and Cache Logistics Trust (SGX: K2LU); both REITs are managed by ARA Asset Management.

On the flipside, lower finance income and other income were the main culprits which dragged ARA Asset Management’s overall revenue lower. Finance income had declined from a year ago due to a higher comparable figure which included distribution of profits from the firm’s privately managed ARA Dragon Fund (“ADF I”).

Other income fell because of a similar dynamic; the second-quarter of 2014 had negative goodwill arising from  the acquisition of ARA Korea Limited.

John Lim, the Chief Executive Office of ARA Asset Management, had the following comments to share regarding the reporting quarter’s results and his outlook for the future:

The second quarter was an active one for both our REIT and ARA Private Funds divisions. Both Fortune REIT and Cache Logistics Trust had successfully unlocked value in their respective divestments. Suntec REIT announced its proposed sale of Park Mall in conjunction with its 30.0 per cent interest in a joint venture to redevelop Park Mall into a commercial development whereby ARA is to be the strategic advisor, asset manager and property manager to the joint venture.

Over the last decade, the S-REIT market has grown tremendously through the collaborative efforts of all S-REIT players and with the sustained regulatory support received from the MAS. Operating within a rigorous regulatory framework has laid a solid foundation for the growth of the sector and we look forward to the implementation of the prudent enhancements which will support the future development of the sector.

As of 30 June 2015, ARA Asset Management had assets under management (AUM) of S$26.9 billion. After accounting for the effects of divestments, ARA Asset Management’s AUM would be S$31.9 billion at the end of the reporting quarter. These represent slight growth from the end of 2014 when the firm reported S$26.2 billion in unadjusted AUM and S$31.0 billion in adjusted AUM.

Foolish summary

At its closing price yesterday of $1.71, ARA Asset Management traded at around 17.2 times its trailing earnings and has a trailing dividend yield of 2.9%.

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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 Chin Hui Leong owns shares in ARA Asset Management.