February

2016

ARA Asset Management (SGX: D1R)



Underappreciated Asset-light Real Estate Fund Manager with
Captive, Recurring & Growing Income Stream: Upside of 40% by
2017

EXECUTIVE SUMMARY

ARA Asset Management (ARA) is one of the biggest real estate investment managers in Asia with SGD 30bn (USD 22bn) of AUM.
70% of its AUM base are from the management of listed REITs which are essentially closed-end and evergreen vehicles investing
in real estate (RE) assets. The remaining AUM are from the management of private RE funds which are either anchored by single
investors (e.g. CalPERS, Morningside (NY State Retirement fund) & National Pension Fund of Korea) or the general private equity
structure (blind pool with multi-investors). Private RE funds usually have a lock-in period of 7-10 years and hence provide another
stable stream of fee income for ARA. Most of the properties which ARAs funds invest in are in SG, HK and China. ARAs funds have
recently started investing in properties in South Korea and Australia.
ARA was set up by Mr. John Lim, a close associate of Mr. Li Ka-Shing in 2003. ARAs big break came when Cheung Kong Property
(CK, main property holding of Mr. Li Ka-Shing) wanted to recycle part of its property portfolio in HK and SG to further invest in RE
development projects in China but yet still participate in the upside of these recycled properties. John and CK negotiated a deal
where these properties were injected into listed REITs which were partly owned by CK. ARA would perform the main tasks of
managing these REITs with CK as a joint manager.
Since then, the tailwind of favourable REIT regulation in Singapore, strong institutional and retail interest in Asian RE and REITs,
and the track record of ARA have helped the company to grow its AUM at a CAGR of 20% p.a for the last 10 years. The AUM
growth rate has been patchier in the last 2 years due to the slower economic environment and the corresponding investors
aversion to RE assets in Asia.
Since its peak in 2Q13, ARAs stock price has corrected by ~45%. We believe that this is due to the lack of investors conviction in
the company post the placement of a major portion of John Lims shares to Straits Trading and the subsequent capital increase
by ARA thereafter. The lack of off-gains from performance and investment profit from its PE funds as well as lower merger and
acquisitions fees from its REIT funds have also capped the near term growth of ARAs net income.
We believe that ARAs share price has overcorrected. Its net cash and investment holdings currently comprise nearly 47% of its
market capitalization and the stock trades at a P/E of 12.8x 16E (6.8x ex-cash). ARAs net income is backed by a recurrent stream
of fee income from captive closed-end listed REITs and RE-PE funds with a long investment horizon of 7-10 years. In addition,
ARAs key PE funds such as the ADF 2 will enter their divestment periods from end 2016 onwards, resulting in realized gains and
performance fees. A combination of better economic momentum in Asia which will drive property valuations and investors
interest in Asia RE will result in AUM and net income growth. We see a potential upside in excess of 40% for ARAs stock price as
its P/E rerates back to historical levels of 15x by 2017E due to the stronger net income growth.

DISCLAIMER
Disclaimer: As of the publication date of this report, Quarz Capital Management (Quarz), other research
contributors, and others with whom we have shared our research (the Authors) have long positions in and may
own option interests on the stock of the Company covered herein (ARA Asset Management) and stand to realize
gains in the event that the price of the stock increases. Following publication, the Authors may transact in the
securities of the Company. The Authors have obtained all information herein from sources they believe to be
accurate and reliable. However, such information is presented as is, without warranty of any kind - whether
express or implied - and without any representation as to the results obtained from its use. All expressions of
opinion are subject to change without notice, and the Authors do not undertake to update this report or any
information contained herein. Please read our full legal disclaimer at the end of this report.

FINANCIALS

Source: QCM Estimates, Bloomberg

AUM Growth of ARA Asset Management

Slower growth of
6.7%/12% YoY

Source: ARA Asset Mgmt, QCM

DIVISIONAL OVERVIEW


Net Rev 2015
(% of Total)
PBT (Margin)
% of Total

Business
Model

REITs
SGD 116m
(74%)
USD 73m, (63%)
83%
Investment manager for listed REITs.
Largest REITs which ARA manages are Suntec / Hui Xian / Fortune REITs
with mkt cap of SGD 4.2 /3.7 /2.7bn respectively.
Conduct asset enhancements, undertake acquisitions and divestments to
enhance the value of the property portfolios of managed REITs.
Management fees are normally divided into 3 components:
1. Base Fee as a proportion of total property value
2. Property Mgmt Fee as a proportion of gross rental revenue
3. Performance fee as a proportion of net property income
4. Acquisition /Divestment fee as a proportion of transacted propertys
value
Extremely difficult to remove a REIT manager:
1. Requires >10% of share capital to call for an EGM
2. Requires >50% of votes at EGM to remove the manager
3. Most REITs are held by retail investors, passive funds and sponsors who
are aligned to the REIT manager

Private RE Funds
SGD 30m
(20%)
USD 10m (33%)
11%
Investment manager for RE funds with
anchor investors or the usual private
equity structure (multi-investors).
Similar fee structure to REITs except that
performance fees are only realised upon
realised gains (divestment of properties)
which results in lumpy fee recognition.
Long life-span of these funds ensure
stability of fee income.
ARA-managed REITs are potential buyers
of RE assets in these funds (easier exit).

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Key Markets
Market
Position

Growth
Drivers

Customers

Competitors

4. ARA and their affiliated shareholders hold 10-45% stakes in all the REITs
they manage
Invest predominantly in properties in SG, HK and China.
Increasingly invest in properties in Australia and Korea.
One of the biggest independent REIT managers in Asia.
Among the top 10 players with one of the
Most REITs in Asia are manged by managers which are owned by the REITs
longest management track records of RE
sponsor (who sold the properties to and are the main shareholder of the
funds in Asia.
REIT).
Unlike global RE PE players, ARA is willing
REITs will continue their structural growth in Asia as they allow property
to set up funds, and work with anchor
developers and owners to recycle capital for new investments while still
investors who can commit >USD 200m of
maintaining control of the divested properties with a partial shareholdings.
capital (major PE players such as
Strong capital support from private banks and a domestic investor base for
Blackstone and KKR require a much bigger
REITs which provide stable and attractive yields in the current low interest
allocation).
rate environment.
This strategy has been successful with
SG remains one of the most attractive destinations to list REITs with
major institutional investors who want to
domestic and overseas properties (tax exemption on income, 0-10% tax
exercise more control over their
rate on dividends).
investments (instead of being a small
player in a mega fund).
Increase in fees from the acquisition of properties by ARAs current REITs.
Creating evergreen real estate funds for
Unlike closed-end funds, investors will generally agree to fund new
these anchor investors which will provide
acquisitions as long as the properties are DPU accretive (acquisitions
even more income streams for ARA.
provide at least the existing dividend yield to shareholders).
Potential acquisition of RE fund
Slower economic environment and overcapacity in office space have
management platform of European banks
resulted in a less vibrant RE market in Asia for the last 2 years which we
who are scaling back in Asia (E.g. ARAs
believe will persist till mid-2017.
Resumption of economic momentum, tightening supply and rental increase Korea platform was purchased from
Macquarie as it divested from non-core
will increase the value of the portfolio and management fees of ARA
assets).
correspondingly.
Continued low interest rate environment
Increasing cost of labour/regulation will make it more cost effective for
in DM and recovery of economic
property owners/developers to partner with ARA (who has scale) to
momentum in Asia to drive investors
manage their REITs.
interest in Asian RE.
Institutional investors (Pension, Sovereign,
REIT investors and property developers/owners.
Insurance funds and family offices).
Global players such as Blackstone, Lone
Star, KKR, and RE Mgmt arms of major
banks (GS, MS). While not having better
Property developers and owners who prefer to set up and manage their
track record than ARA, they have much
own REITs.
better access to institutional clients in US
and Europe.

Source: Quarz Capital analysis, broker research, ARA Asset Mgmts annual reports and conference calls
NCIALS

INVESTMENT CASE

ARA was previously an investors darling, trading at P/E of >15 and enjoyed share price gains of +200% between 2010 to 2013.
However the upward momentum in its share price eased in 1Q13. Since then, ARAs stock has been down 45% despite its NI
growing by 8% and its net cash and investment holdings increasing from SGD 215m to SGD 490m. The main reasons are:
1. Entry of Straits Trading (STC) as a 20% shareholder in Oct 2013 through the purchase of John and CKs shares. Investors
were not convinced by the reason given by John and CK that they choose to sell down their stakes instead of ARA
undertaking a capital increase as they did not want to dilute the minority shareholders of ARA. Minority shareholders
however see it as the major shareholders taking advantage of the high valuation (SGD1.7/share) to cash out.
2. Impending Fed Rate hike resulting in investors aversion towards companies related to RE and yield.
3. Fall in ARAs 2015 Net Income 10.1% YoY due to,
- Lower fees from acquisition/divestment due to a slower and fully valued property market
- Lack of one-off gains and performance fees from its private RE funds (this segment accounted for 10% of 2014s Net
Income)
4. ARA also undertook a SGD 150m rights raising in Nov 15 @SGD 1/share. The majority of the proceeds will be invested in a
new RE fund anchored by a substantial investor (co-investment by ARA to demonstrate skin in the game). While the major

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shareholders participated the capital raising exercise, it left a bad taste to minority investors as management had
previously claimed that the company do not required additional capital.

Stock Price and P/E Valuation of ARA Asset Management
Rights raising @ SGD
1/share

Period of increasing AUM and strong investors interest in RE

STC bought its 20% stake

Increasing gap between P/E and
P/E (ex-cash) due to increasing
net cash position
Weak YoY results
in 2015 due to one
offs profits (high
base) in 2014
Source: ARA Asset Mgmt, Bloomberg, QCM

Revenue and Net Profit of ARA (SGDm)
Lower fees, gains from acquisition and
divestment due to slower environment and lack
of funds maturing

Continuing growth in mgmt fees

Source: ARA Asset Mgmt, QCM

CATALYSTS

We believe that the potential downside to ARAs stock price is limited (10-15%). Additionally, several catalysts driving the
continuation of ARAs structural growth in revenue and net income exist in the midterm (2017):
1. Correction in ARAs share price has resulted in its market capitalization to fall to SGD 1.06bn versus its net cash and
investment position of SGD490m.
2. The stock is currently trading at a trailing P/E 16E of 12.8x (P/E 16E (ex-cash) of 6.8x) with a strong recurring stream of fee
income from its funds.
3. ADF 2, a private RE Fund incepted by ARA in 2011 will be in harvest mode starting from end 2016. IRR of the fund is
currently running at >15% p.a. which will result in performance fees and realized gains for ARA in 4Q16-2017.
4. ARA-managed REITs will continue to execute on their strategy of acquiring income accretive properties which will increase
the base and acquisition fee income (at least at the level of 2015).
5. Further expansion of private fund platform. ARA has already secured >SGD 1-1.3bn of new funding commitments from
anchor investors for 2016 (hence the need to raise USD 100m in Nov 15 to co-invest with these investors).

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6. STC also intends to invest in ARAs new funds once the divestment of its property portfolio which is currently being manged
by ARA is completed.
7. Economic momentum to return to Asia from 2017 onwards post the last 2-3 years of adjustment period. This will result in
higher rent and property values which will drive investors interest and increase the potential AUM and fee income of ARA.
8. Reach for yield by DM institutional (pensions and insurance) investors due to the domestic low yield environment. Stable
rental income with a bias towards growth in Asian RE provides a good match to their liability needs.
9. Given ARAs high level of cash and investment holdings, low capex nature of the business, resilient income model (closedend evergreen vehicles), and potentially higher performance fee once the private funds enter the harvest stage post 2017,
we believe that it is extremely likely that STC and John might seek a privatisation of the company if the stock price goes 1020% below current levels. Both shareholders are able to easily fund a potential privatisation transaction deal of ~SGD 700m.

STRESS FACTORS

Management: No.
1. John Lim (Founder and CEO) is still 59 years old and very much involved in the management of the business. He is well
connected in the Asian RE industry and will be instrumental in securing new clients and the property pipeline. Despite the
presence of 3 key shareholders, STC, John and CK, their interests are aligned with each other. STC is unlocking its legacy RE
portfolio through its partnership with ARA. It sees ARA as an asset-light vehicle and intends to support it with sufficient
investment funds to increase its scale. CKs main interest is property development. ARA provides CK with a flexible solution to
recycle and manage its property portfolio.
Structural: No.
Governance: No.
Financial: No

1. Net cash position of SGD 490m which increases by >SGD 35m p.a. (post dividend payout) due to the capex light nature of the
business.

VALUATION

We project ARA to grow NI by 5.6% in 2016 resulting in a P/E of 12.8x 16E (6.8.6x ex-cash). P/E of Private Equity / Alternative Asset
Manager peer group with long term lock in AUM are trading at P/E of >37.0x while traditional fund managers are trading at an
average P.E of 14.0x 16E .
We are mindful of ARAs smaller asset base and the weaker economic momentum in Asia currently. The high level of net cash and
liquid investment (46% of market capitalization) and well-supported dividend yield of 4.7% however provides ample downside
protection. Additionally, we believe that the company is a likely privatisation candidate if its share price is to fall by 10-20% due
to its strong recurring income and substantial level of net cash and liquid investment portfolio. ARAs good performing and
maturing private RE funds will provide net profit upside from 2017 onwards. We initiate on the stock at its current price of SGD
1.055 with a potential upside in excess of 40 by 2017E as net income growth and increasing investors interest will result in the
stock to trade near its historical average P/E of 15.0x in 2018E.
Valuation of ARAs Peers

Source: QCM Estimates, Bloomberg

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SHAREHOLDER STRUCTURE

Shareholder

Notification Date

Voting Rights

Straits Trading (STC)

31-Dec-15

20.0%

John Lim
Matthews International
Franklin Resource
Cheung Kong Property
Mawer
Total >3% notification threshold

16-Dec-15
1-Jan-16
31-Dec-15
31-Dec-15
2-Feb-16

19.1%
9.6%
9.5%
7.8%
1.7%
66.0%

Comments
Listed investment company of the
Tan Family
CEO/Chairman/Founder
Mutual Funds
Mutual Funds
Property affiliate of Li Ka-Shing
Value bias Mutual Fund AM

KEY RISKS AND LIMITATIONS

1. Lack of economic momentum in Asia to persist
2. Increasing regulation in the fee structure of REITs which might decrease ARAs potential management fees.
3. Appreciation of SGD vs USD and CNY to reduce NI from the management of HK and China based properties.

APPENDIX

ARA-Managed REITS (SGDm)

SGD 3.4bn

SGD 8.8bn

SGD 1.0bn

SGD 0.5bn

SGD 1.3bn

SGD 8.7bn

SGD 0.7bn

SGD 0.05bn

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ARA-Managed RE Private Funds (SGDm)

Liquidated

SGD 1.5bn
(Committed
Capital)
MultiInvestors

SGD 0.6bn
(Committed
Capital)
MultiInvestors

SGD 1.1bn
(Committed
Capital)
CalPERS

SGD 0.3bn
(Committed
Capital)
NY State
Retirement

SGD 0.4bn
(Committed
Capital)
N P of Korea

SGD 0.3bn
(Committed
Capital)
STC

SGD 0.9bn
(Gross Asset
Value)
Multi
Investors

SGD 0.6bn
(Gross Asset
Value)
Multi
Investors

SGD 0.4bn
(Committed
Capital)
Multi
Investors

SGD 0.1bn
(Committed
Capital)
Multi
Investors

Sample Properties of Suntec REIT

L-R 30% of Marina Bay Financial Centre (Sample Tenants: Barclays, BHP, Macquarie, Nomura, SCB), 30% of One Raffles Quay (Sample Tenants: RBS, DB, UBS),
Suntec City

Sample Properties of Huixian REIT

Beijing Oriental Plaza
(mall, 8 office
towers, hotels,
sample tenants:
Hyatt, Deloitte, E&Y,
British Telecom,
Amex, HKEX,
Prudential, Apple,
Dow, Chanel,
Swatch)

QUARZ CAPITAL MANAGEMENT PAGE 7 OF 9 CONFIDENTIAL | 26-FEB-16

L-R Chongqing Metropolitian Oriental Plaza (Pic 1&2, Mall, Office, Sample Tenants: KPMG, PWC, Siemens, DBank, 3M, British and Canadian Consulate), Sofitel
Shenyang Lido

QUARZ CAPITAL MANAGEMENT PAGE 8 OF 9 CONFIDENTIAL | 26-FEB-16

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QUARZ CAPITAL MANAGEMENT PAGE 9 OF 9 CONFIDENTIAL | 26-FEB-16