Reit manager ARA's IPO likely to price at top

ARA Asset Management attracts strong demand as investors welcome its defensive profile. The recent investment by Calpers in one of its funds adds to the attraction.
Primary market investors looking for low-risk assets with a steady income flow and growth potential on top, have no shortage of vehicles to choose from at the moment with at least four real estate investment trusts (Reits) or business trusts currently in the market or expected before the end of the year. And that is in Singapore alone.

But that didnÆt mean they overlooked ARA Asset Management Limited, which has just completed the institutional roadshow for an initial public offering of up to S$279.45 million ($184 million). ARA is not a Reit, but a fund management company whose primary income is derived from the management of Reits. It also operates several other funds including a new private-equity style real estate fund that has received a lot of attention because it has attracted a large investment from California Public EmployeesÆ Retirement System, a leading US pension fund that is better known as Calpers.

As it gets essentially all its revenues in the form of fees paid by the investors that own units in the funds or Reits that it manages, ARA is an even more defensive play than the Reits themselves whose profits and dividends depend on the rental income generated by the properties they hold.

ôThe fees are more or less guaranteed, even if the Reits donÆt go up they are going to bring in a certain amount of income,ö notes one observer. At the same time, ARA has an impressive track record when it comes to growing its business and ôpeople are clearly also investing in this as a growth play", he adds.

Since it was set up in 2002 as a joint venture between Hong Kong-listed Cheung Kong (Holdings) and private individual John Lim, the company has grown its assets under management multiple times, from $433.5 million at the end of 2003 to $4.73 billion as of June this year. Of that total, the assets held by the four Reits in its portfolio account for $4.52 billion, which makes ARA the largest manager of Reits in Asia.

ôThe company plans to add one Reit per year, although this year it has instead added the private equity fund,ö the observer says. ôHowever, it definitely plans to take on more Reits and grow the company that way.ö

Its current Reits are: Singapore-listed Fortune Reit, which is backed by Hong Kong retail assets; Suntec Reit, which is also listed in Singapore and backed by Singapore office and retail assets; Hong Kong-listed Prosperity Reit, which focuses on Hong Kong industrial and office assets away from the city centre; and AmFirst Reit, which is listed in Kuala Lumpur and holds Malaysian office assets. ARA is the sole manager for all these Reits except for AmFirst Reit, where it owns a 30% stake in the management company.

In addition to the Reits the company also manages several private real estate funds, including a Shariah-compliant fund known as A1 Islami Far Eastern Real Estate Fund (AIFEREF) and the earlier mentioned private equity-style fund ARA Asia Dragon Fund, which has a targeted aggregate capital commitment of approximately $1.3 billion. The fund completed its first closing at the end of September, having attracted commitments of $716 million - including ARAÆs 2% seed capital û and plans to raise a sound round of funds by the end of this year to secure the remaining commitments.

Together with additional allocations that may provided by Calpers for co-investments together with the fund, ARA Asia Dragon targets a final aggregate committed and co-invested capital of $1.8 billion to $2 billion.

ôThe fund will leverage on our connections and experience to develop, acquire and enhance properties in major Asian cities,ö said Lim in a recently issued release. ôCurrently we have a strong pipeline of projects and expect to place out all of the funds within the next two to three years.ö

ARA has also entered into a non-exclusive cooperation agreement with Merrill Lynch (Asia Pacific) to co-invest in real estate projects across Asia.

While the other business is currently dwarfed by the assets managed through the Reits, the company says it expects its private real estate fund management, specialist fund management and corporate finance advisory services business will account for an increasing portion of its revenues as it develops these further.

According to a source, the institutional portion of the IPO was just under 20 times covered or over 30 times if you include orders from private banking and high-net worth individuals. The total amount of investors was around 200 and the final book included at least a few chunky orders from the Middle East, which suggests it was worthwhile to have spent part of the road show in Dubai. The management also visited all the usual places in Asia, Europe and the US.

Not surprisingly, the company attracted orders from a few specialist property investors and there were also more orders from long-only funds than from hedge funds, which may be logical as ARA is almost a competitor to some hedge funds in terms of its business and the fact that it too is constantly scouring the market for attractive property investments.

Based on the strong demand, sources said yesterday that the price was highly likely to be fixed at the top of the S$0.96 to S$1.15 range allowing the company to raise the maximum amount sought. If the 14.8% greenshoe is also exercised, the total deal size could increase to as much as $211 million. Credit Suisse and DBS Asia Capita were the joint bookrunners.

The final price is expected to be cleared by the Singapore Stock Exchange today.

As part of the offering, ARA sold S$43.5 million ($30 million) worth of shares to three cornerstone investors, which translates into 15.6% of the base deal and will give them a combined stake of 6.5% in the company before any exercise of the greenshoe. The cornerstones are Fidelity Investments, Mercury Partners and Indopark Holdings, which is a wholly-owned investment unit of Merrill Lynch.

The total share offering comprised 243 million shares, or 41.7% of the company, which will give it quite a decent free-float. Of the total, only 30% were new shares. The remaining 70% were sold by John Lim and Cheung Kong. As a result of that sale and the general dilution, Lim, who is the CEO of ARA, will see his stake in the company fall to 40.8% pre-shoe from 70%, while Cheung KongÆs stake will drop to 17.5% from 30%.

About 70.7% of the offering was available to institutional investors, after taking out the cornerstone tranche, a 3.9% ôfriends and familyö tranche and 3.7% that went to employees of the company. There is also a retail offering of 15 million shares, or 6.2%, of the base offer. The greenshoe is all secondary shares, 70% of which will come from Lim and 30% from Cheung Kong.

Assuming the price ends up being fixed at S$1.15, as is widely expected, it will value ARA at 26.5 times its 2007 earnings and 16.4 times its projected 2008 numbers, according to a source close to the offering. On a 2007 basis, that puts it at a significant premium to other similar property or asset managers such as Babcock & Brown, Fortress Investment Group, Blackstone and Cohen & Steers, which trade at an average of about 14 times. Cohen & Steers, which specialises in Reits, commands the highest valuation of this lot at about 19 times.

One reason for ARAÆs higher valuation, observers say, is the companyÆs strong earnings profile with an expected net income growth of 61% next year and margins approaching 50%. The Cheung Kong name also gave the IPO a rubber stamp of approval. Aside from being a part owner of ARA, Cheung Kong is also the sponsor of Fortune, Suntec and Prosperity Reit.
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