ARA Analysis - Part V

Outlook for ARA

2010
As discussed in the earlier section, we see that base fees should fall 5-10%, while performance fee should fall by 10% as well. Therefore top-line revenue should see a fall 7 -10% yoy for 2010 (7% = 2/3*5%+1/3*10% as base fee makes up ~2/3 of revenue)

The fall in revenue should be partially off-set by gain-on-disposal of REIT units received in 2009 at lower prices. We note the potential for more acquisitions at the level of the existing REITs - which should see acquisition fees being booked and may partially offset the top-line decline too. The acquisitions should also increase AUM and the base and performance fees received. The best example is the Fortune REIT acquisitions which increases AUM by ~S$500m from a base of ~S$12b - a 4% increase. The net results of these two factors will likely see top-line revenue maintain unchanged at best - not very exciting prospects.

However, we can expect AUM to increase as ARA raises new funds. A recently announced Shariah-compliant hospitality REIT done with Regency Group, planned to be completed in 2H2010, is expected to increase AUM by S$1b. As a side note, ARA's share price did not move when it was announced. One may suspect that the news was not that "new".

A quick googling online turned up a recruitment ad whose company profile seems to describe ARA. The ad mentioned that the firm was hiring for a planned new REIT in the logistic/industrial space. Co-incidentally, a SGX-listed company also announced plans to list a REIT when quizzed by SGX on sudden movements in the share price. One can expect the fund size, as with any decent REIT nowadays, to be between S$500m to S$1b.

But that's just a side note, which does not change the fact that AUM will increase by ~S$1 to 2b - a 8% to 15% increase in AUM ( currently ~S$12.5b) which should translate to a 8% to 15% increase in the top-line ( assuming that AUM and NPI increase by the same %, which implies that the NPI/AUM of new funds is the same as existing funds). The bottom-line might not grow as much because cost might increase much more revenue at the beginning due to start-up cost.

On top of these 2 funds, it is likely that ARA will announce new funds in 2H10 that might only realize in 2011.

2011
Capital values should rebound by 2011 and AUM will naturally increase with that. As equity markets improve and real estate prices moves upwards, it will make it easier to raise funds. It is likely that new funds - both REITs and private funds - will be raised. All these will increase AUM and help boost base fees.

With new REITs, the NPI and in turn performance fees will increase as well. Rental rates should have bottom then and performance fees of existing funds should stabilized by then.

Likely to see earnings boost as ADF enters into divestment fees and ARA recognizes carried interest and their share in ADF's returns via their 2% stake in the fund.

~ To Be Continued ~