From $600 Million to $23.5 Billion…
ARA Asset Management (ARA) is a real estate fund management company. The primary core business activity is management of public listed Real Estate Investment Trusts (REITs), which includes Suntec REIT, Fortune REIT, Prosperity REIT, Cache Logistic Trust, AmFirst REIT and Hui Xian REIT. The second core activity is management of private real estate funds. It is similar to its main business activity except these funds are unlisted and privately managed.
Now get this: ARA’s Assets under Management (AUM) has grown from $600 million (2003) to S$23.5 billion (2Q2013). This translates to a 40% annualised growth rate over a span of 10 years! ARA has also strategically spread their investment exposures and the overall properties under management are tactically diversified across Singapore, Hong Kong, China and Malaysia.
Being a REIT manager – providing real estate expertise to unit holders – the Group receives fees which are paid based on certain percentage of asset size and performance of properties. Moreover 70% of its fees are recurring in nature (FY2012: S$133.5 m). Should John Lim, CEO of ARA, go a one-year sabbatical, this chunk of recurring income will still be deposited into the company’s bank account. After my interaction with him (unlike some other companies), I have a strong feeling that he is definitely someone whom I could entrust my money with and still sleep peacefully at night. Of course, it will be best if you make your own personal assessment!
On top of that, one of the majority shareholders of ARA is Cheung Kong (CK) which is famously owned by property tycoon – Li Ka Shing. CK is one of the largest property developers of residential, commercial and industrial properties in Hong Kong. By tapping into CK’s vast network, ARA has direct potential access to CK’s portfolio of real estate properties in Asia.
If you will recall, ARA’s second business activity is private real estate fund management. These funds are raised from high net worth individuals, public pension funds, foundations or global institutional investors and invested in several properties in Asia. The word ‘private’ may make it sound like some top-secret business activity but it is just an ‘incubator’ for a new public listed REIT. One of the exit strategies for ARA’s clients would be divesting their investments as a REIT. The beauty of this model is that the divestment of private real estate assets would then channeled back to be managed as a REIT under ARA. Both ARA and its clients would make money from the divestment and ARA would continue to manage the new REIT. A close example is recent IPO offering by Dynasty REIT – one of ARA’s private real estate funds, ARA Asia Dragon Fund, whose assets were intended to form the REIT. However, it did not take off due to worsening of overall market conditions.
The Group has generated consistent top line growth of 18% for the past five years. In the same period, it achieved consistent high net profit margins (50%) and return on equity (>30%). The business is definitely a cash cow with strong free cash flow generation. It also does not require much debt and capital expenditure to run the entire business. The nature of its income is highly recurring and highly profitable. For example, during the 08/09 downturn, some of the REITs under their management wrote down their valuations, but ARA was unaffected and continued to grow. As a result, shareholders are well-rewarded with consistent dividend payouts of 50% since its IPO in 2007.
Not to forget there are always risks in any investment. In the case of ARA, there are risks such as volatility in the property cycle, currency & political instability, ties with Cheung Kong and many others risks which might affect top and bottom line. However, one thing I want to specifically highlight is the ‘regulation’ risk. Since REITs are highly regulated by the Monetary Authority of Singapore (MAS), being a REIT manager ARA is also subjected to any tightening of rules and regulations which might put them in a difficult position and affect future returns to shareholders.
With their established platform and solid track record, I am confident that ARA will grow in line with John Lim’s vision to grow its asset size to $40 billion within the next five years. Though he has a clear vision, but it is his philosophy to put his clients’ interest ahead of his company’s that truly impresses me. In short, if their clients do not make money, they won’t do business with them. But if they do make money, they would put more money with them! That itself tells me about the business model, his character and an empire he is building in the long run. Personally, I feel this company can be treated as a blue chip company as nearly 70% of their revenue is recurring! Once it gains sufficient market capitalization size, I won’t be surprised if ARA is one of the 30 constituents stocks of the Straits Time Index (STI) in the future.
I’ve been doing investment research for some years now and honestly, I have never come across a company with such an ideal business model and high earnings predictability. With such a great business model, it is definitely a steal even when it is trading at or close to fair value. If you do know any such companies, I would be thankful if you could share with me.
Disclosure: At the time of writing, we have a vested interest in ARA Asset Management Ltd. We share these companies NOT as recommendations, but to educate and share with you, acting as your eyes and ears. Do carry out your own individual assessment and exercise independent thinking!Earning Disclaimer
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