10 Quick Things I Learned From ARA’s AGM 2014

About a year ago, in 2013, I left the Annual General Meeting of ARA Asset Management (SGX: D1R) with a really good impression: I had the biggest respect for three of ARA’s directors, John Lim, Justin Chiu, and Edmond Ip, who volunteered to waive their entitlement of directors’ fees of S$70,000 each despite investing their precious time and expertise in growing and moving the company forward.

What I also like about them is that John Lim, CEO of ARA Management, and his team of directors always take the time to answer questions posed by shareholders at every AGM year after year. And this year was no different.

So based on what the directors shared with the audience and through the insights they gave answering numerous shareholders’ questions, here are…

10 Quick Things I Learned From ARA’s AGM 2014:

  1. ARA has an asset-light business model which means the company doesn’t require high levels of investment or CAPEX to operate successfully. Instead, ARA’s core business is in managing public and private real estate funds. ARA’s management of these assets under management (AUM) allows the company to continually earn a steady stream of income year after year. In fact, more than 70% of ARA’s revenue is recurring in nature. As covered previously in our article on NeraTel, companies with a stable, recurring stream of income is highly attractive to investors in general. ARA’s recurring revenues derive from a combination of base fees (charged as a percentage of total AUM) and performance fees (charged as a percentage of net property income). The larger the AUM, the more automatic recurring revenue ARA makes. And the larger the AUM, the higher the overall net property income and again ARA’s recurring revenue. As long as ARA continues to run successfully and continually increases its AUM, its coffers will continue to swell bigger and bigger. As of now, ARA’s AUM stands at S$25.4 billion. Only a handful companies have such an enviable business model that commands both extremely high profit margins and recurring revenues.
  2. A chunk of ARA’s non-current financial assets (38% of total assets) is seed capital for private real estate funds, namely ADF 1, ADF 2, CIP and MIP. The intention of this seed capital is to align the interests of ARA Asset Management with their clients. Stapling the fund manager’s and clients’ money together is a common practice in the fund management industry. The main reason for doing so is that if the fund doesn’t perform well, ARA’s stake will equally be affected. So it is always in the interests of the fund manager, ARA, to do well.
  3. As a REIT manager, ARA collects half of its fees in cash and the other half in share-units of the REITs under-management. It is always ARA’s policy to sell the share-units as soon as possible. John Lim has stated previously he does not attempt to time the market when selling these shares. The only exception was in 4Q2013 due to a highly sensitive period involving a major transaction with The Straits Trading Company, who had just acquired 20.1% of the group. To avoid any dubious activities or any queries from SGX, ARA decided not to sell any share-units then.
  4. As a rule of thumb, the fees received from managing a real estate fund are approximately 1% of AUM. For example, if ARA manages a billion dollars in AUM, the fees earned is $10 million in a year. That gives us a good estimate of the additional revenue ARA can generate when new private real estate funds are set up in the near future.
  5. There might be a possibility of an ARA Dragon Fund 3 materializing this year. The reason behind is because ARA Dragon Fund 1 is now close to full divestment. As soon as the fund is fully divested, existing clients will be awash with cash and a new Dragon Fund will give them an opportunity to reinvest their money. Since ARA’s revenue and profits are tied to its AUM, such initiatives are crucial for the future growth of the company.
  6. John Lim is confident in growing ARA’s AUM by $2 billion a year. As the size of AUM grows larger, its percentage growth is likely to slow down in the foreseeable future. Because of that, the company is looking for new products in new markets to maintain the same growth rates. The recent acquisition of Macquarie, a real estate management company in Seoul, Korea, is one such initiative ARA’s management is taking to boost their business expansion.
  7. Macquarie was acquired at an attractive valuation; at a P/E of less than five. Such a deal is rare in the market. One of biggest benefits of acquiring Macquarie is its relationship with one of South Korea’s largest pension funds, Korea National Pension Service. This pension fund is reportedly larger than Singapore’s sovereign fund, Temasek Holdings. This deal highlights one of the main strengths of ARA’s economic moat – its network. Through strategic acquisitions and access to mega-funds around the world, ARA’s moat is growing to even a more formidable size.
  8. ARA is managing four of the largest pension funds in the United States. These shareholders have deep pockets and could potentially provide millions of dollars in revenue in years to come if ARA maintains their performance. However, as ARA starts to gain more traction and manage many more different pension funds, there will be a point where they need to handle any conflict of interests across their different funds. John Lim is clear that none of their funds should have any directly conflicting businesses. Anyway, if this happens, it can only be a good problem for ARA to have!
  9. ARA’s partnership with The Straits Trading Company, one of the most influential companies in Singapore and whose founders also started one of the most successful banks in Singapore, Oversea Chinese Banking Corp, again strategically builds on one of ARA’s main strengths – its network. In the north, Cheung Kong (Li Ka Shing’s investment group) backs ARA by letting them manage billions of dollars’ worth of property mainly in Hong Kong and China. Whereas in the south, The Straits Trading Company deal will help ARA open many new doors and opportunities. It is still too early to tell how the partnership will pan out but together with The Straits Trading Company John Lim aims to increase AUM by additional $10 billion.
  10. Though Cheung Kong (and John Lim personally) pared down their stakes for the Straits Trading deal to happen, their lower percentage stake doesn’t signal a withdrawal of interest from Cheung Kong. Instead the reason for their stake reduction was because Justin Chiu, together with the board, decided the best way to bring The Straits Trading Company onboard was is to pare down their stakes rather than issue new shares and dilute the total shareholding (which would have been unfair to all shareholders). I applaud Cheung Keung and John Lim for doing this because rather than be fixated on their proportion of ownership in ARA, they were willing to sell a percentage of their stakes in order to bring Straits Trading to the table and benefit the overall growth of ARA. If only most business leaders placed such great emphasis on shareholders’ interests, our job as an investor would be made so much easier!

To end this off, I would like to enlighten everyone that ARA actually invites any shareholder, regardless of the amount of shares you own, to set up a private appointment at their office if you have any questions about the company or details of their individual real estate funds.

Such an invitation is tremendously rare for the retail investor, so seize this opportunity if you must! You’ll never know what you might get out of the meeting…
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Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Rusmin is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur and is the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple’s iBooks. Rusmin was actually a former SIAEC scholar who gave up his scholarship and a cushy career to follow his itch of learning how to be a better investor and ultimately lead a life of financial independence. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.

5 Comments

  1. LeeYJ

    June 9, 2014 at 2:25 pm

    Great write up Rusmin! Appreciate it!
    Did John Lim share his view on the effect of QE tapering to his vision of expanding AUM where its private real estate fund contributes about 20% to its total AUM?

    • Rusmin Ang

      June 11, 2014 at 10:05 am

      Hi YJ,

      You’re most welcome!

      Someone did ask John Lim about QE tapering at last year’s AGM. However, the issue raised was pertaining to the REITs under ARA’s care. John Lim’s answer was he wasn’t worried too much about the impact it had on REITs.

      He also commented that if we looked at the bigger picture – when interest rates go up, so do inflation and salaries. Consequently, income and asset inflation of their funds will closely catch up as well.

      • Peter

        June 19, 2014 at 5:48 pm

        Hi Rusmin,

        enjoyed your write up.

        Would you be able to shed some light on how would interest rates increase caused inflation increase, shouldn’t it be the other way round?

        • Rusmin Ang

          June 21, 2014 at 9:48 am

          Yes, it should be the other way round – when inflation goes up too high, the government will usually curb it by increasing the interest rate. Thanks for pointing out the typo, Peter!

          What was meant in John Lim’s comment was that he wasn’t worried too much about interest rates going up now as it already meant inflation, prices and salaries had already increased in the many years before. And consequently, income and asset inflation of their funds will closely catch up as well.

  2. Pingback: Why we will be rejecting ARA Asset Management’s privatization offer of $1.78 per share – The Fifth Person

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