ARA Asset Management

[freedom]

Don't they sell their Suntec REIT units quarterly ?

of course not.

otherwise, why do you think they have a strategic stake in Suntec Reits. IMO, those are the units they could not sell at that time.

[freedom]

Will the actual earning be stable at 8 cents per share as reported?

I sat in a presentation 1-2 weeks back by ARA(John Lim and his staff)and here are something worth noting:

1.someone ask about the units that they hold and its impact on mark to market. His response was that the impact to earnings would be minimal as they don't hold a lot unless if the whole market collapse.

2. he eluded an interesting point on how to determine the intrinsic value of such a company like ara. he said that typically such companies in US would price it at 5% of mkt cap to AUM. So this would put the price of ara at about $1.22. voila! as this is what it is right about now giving a yield of about 4%. not great(below inflation rate) and not bad(relatively safe and definitely much better than FD) either. just right. so the only way for the price to go up would be for AUM to go up. so this beg the question as to why he buys at $1.42 right? well see below.

3. there is going to be a big jump in earnings in 3rd qtr of $10million as they will receive a performance bonus from one of the funds.

4. the earnings of 8 cents for this year will be intact as mentioned above. next year can't say.

item 3 should be considered one-off or exceptional item, imo. It may boost the earning of Q3 or FY2011, but the impact 5 or 10 year down the road is quite minimal, I believe.

---

maybe I am wrong, but I always wonder why ARA did not hedge its acquisition fee received in Suntec units? Yes, ARA (Suntec) has one-year restriction, but I don't find it wrong for ARA to sell around the same amount of units from its strategic stake to hedge its acquisition fee.

If ARA is considering becoming an investment company as well, its stable fee-based earning will be jeopardized. It will have a new set of risks involved in owning investment.

[freedom]

This is a great business.
If they and their funds never bought anything else for the rest of their existence, we have a 2.6% dividend yield + annual growth in rent of about 3-5% or inflation. Over a long enough period, assuming Singapore & HK are ok property markets, growth in rent should at least equal inflation, so this is definitely better than bonds - esp the recent ones out at retail investors.

They generally grow by adding new assets. So either their funds by more buildings e.g. Suntec Reit buys a chunk of MBFC, or they start a new fund like Cache. So since most property in Sg, HK, Msia, China isn't already in a REIT, they're quite far from their growth limits. ROE is high because ARA is not spending very much capex to add a new building - the funds spend the capex, and then ARA even charges fees for doing the work to add new buildings.

So returns = inflation + 2.6% (current dividend yield) + (assets they keep adding - as 2010 has been a year when they grew very nicely).

There are 2 issues: 1. when property prices fall, but then they're not on the hook for rights issues refinancings the REIT holders are - since fees are based on assets not net-assets. 2. when they have to invest some of their own money into their funds, so it's very unlikely that their funds can give them 35% returns.

PB is not really relevant for valuing such a company.
http://pages.stern.nyu.edu/~adamodar/New...inants.htm has a mathematical derivation, but the point is that when ROE is much higher than the cost of equity, the expected book value is much higher than 1. You can examine Buffet's largest positions e.g. Coke, P&G etc - the book value is far above 1.

IMO, PB should be relevant in valuing for almost all companies. And of course you do not take BV that is based solely on the NAV obtained from B/S but rather the RNAV and perhaps some additional value for the intangibles that are not measurable by accounting practices.

But P/B just tells you how much you are paying for the company in terms of the size. So P/B of 7 means you expect to pay 7 times for a company of its current asset and intangibles worth. To assess whether is it worthwhile to pay for the size of the asset u are purchasing, one has to use ROE to determine how many years before the current asset can compound to reach the amount you pay for.

Compounded growth for asset can be easily calculated based on earnings history but compound growth for intangibles may not be so obvious or one can simply treat that value as a premium add onto whatever asset value has grown into.

Agree on your point on high ROE would naturally lead to higher P/B due to lower cost of equity. If you look at ARA price history, the lowest price it went to was 24 cents almost equivalent to P/B of 1 only and not lower. But the question is how long can the high ROE sustain?

In the case of ARA, compounding growth at 35% (also ROE) at asset level would mean they have to continously grow its earnings more than 35% each year for 4-5 years. My most optimistic estimate would be at most 2 more years and they have to stagnate. The reasons are because there are no other developments from Cheung Kong that they can tap onto locally (other than MBFC 2) and they have to develop other source of business trusts themselves where some point they will hit law of diminishing returns from the size and no. of CEOs to manage.

Therefore, at my selling price, I have determined that I would not expect to see further intrinsic upside and could not exactly measure over-exuberance to a certain extent which lead to my decision to sell. Securing profits also mean some certainty to myself and possiblities to tap onto other opportunities evaluated before my sell decision.

Correct me if I am wrong, I am learning from this experience as well.

I think the ROE of ARA is much higher than 35%. most of its assets are not operating assets, I mean, ARA does not need those assets for their day-to-day operation. e.g. its financial assets (suntec reit units), no matter ARA holds or does not hold its suntec reit units, its revenue would be likely the same, the variance for its profit would be negligible (the distribution income). Essentially, ARA almost can liquidate most of its assets for distribution (probably ARA can't liquidate its seed capital in one of its fund), and still earns the same for a very long time.

[Contrarian]

Started buying today. One of the biggest drops in terms of %...

[Nick]

Boss added another 0.5 million shares yesterday. It seems to be stabilizing at around this price. 4.1% yield with 50% payout ratio - lower earning yield than its managed REITs lol !

(Not Vested)

[Stocker]

The business of ARA seems "guaranteed", profit almost certain.

[Stocker]

Base on last closing price of 1.225, and EPS of 8 cents, the PER is 15.31 x , If 7 cents PER is 17.5 x.
Buy or sell ?
( vested )

[Temperament]

i am waiting for a chance to buy. The last few days trading were very low volume.
Not vested.

[Nick]

Fortune REIT is proposing to acquire HK$1.9 billion worth of properties so this will mean acquisition fees and higher recurring AUM fees in 2012.

Historic EPS is 9 cents with 4.8 cents dividend. At current prices, the PER is 13.6 with yield of 3.9% If ARA adopts the REIT style of 100% payout, its yield would be 7.3% which is significantly better than its managed REITs considering it has a very clean b/s. I don't think it is very cheap but it is being priced for growth so if this doesn't materialize, the price may falter.

(Vested)

[Jacmar]

The business of ARA seems "guaranteed", profit almost certain.

After the KREIT saga, looks like MAS has to act with some new legislation.if you have been following what was written at the newspaper/ forum, one of it is to peg performance fees to other than AUM valuation and maybe to mkt cap of the asset so as to align REIT shareholder interest and the asset manager. if there is going to be a change then ARA "guaranteed" will be not so much guaranteed and more volatile. this might explain the recent weaknress of the share price.

just 1 more variable to consider. not sure what else MAS will introduce. wait n see.