Fortune REIT proposes acquisition and 1-for-1 rights issue; positive for ARA

ARA-managed REIT, Fortune REIT, has announced 1) the proposed acquisition of three suburban retail properties in Hong Kong for HK$2,039 mn (+23% to FRT’s AUM), 2) securing of debt facilities of HK$3.1 bn to refinance existing term loan facility due in June 2010, and 3) a 1-for-1 rights issue at HK$2.29/right to raise HK$1,889 mn (a 44% discount to the last trading price, a 28% discount to TERP of HK$3.2).

As the manager of the REIT, ARA stands to earn a one-off acquisition fee of HK$20.4 mn (S$3.8 mn, being 1% of the purchase consideration) and also HK$6.3 mn as Advisory Fee.

We leave our estimates unchanged for now as the deal is subject to EGM approval on 11 September and due to be completed around mid-October 2009. The acquisition could boost ARA’s AUM by 3% from S$12.6 bn, and its FY09E EPS by 10% (due to the one-off fees) and FY10-11E EPS by 3% (recurring AUM fees).

We continue to like ARA for its high cash generative and scaleable business model. With positive momentum at both REITs and private funds, it is on track to growing its AUM to S$20 bn from S$12.6 bn by 2012. Maintain OUTPERFORM.

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ARA Asset Management: Revving its growth engines

Results showed resilience. ARA Asset Management (ARA) reported a stable set of 2Q09 results. Gross revenues climbed 23% yoy to S$20.6m as a result of (i) a stable AUM base and growing performance fees from higher NPIs from its listed REIT vehicles, (ii) 3rd closing of Dragon fund back in June 2008, (iii) one-off S$2m gain from selling of certain units in its managed reits for working capital purposes. Net profit grew by 35% to S$11.9m due to a lower than expected increase in operating expenses. For 1H09, the board declared an interim dividend of 2.3 Scts (higher than 1H08 of 2.17 Scts), translating to a payout ratio of c60%.

In view of the higher than expected operating margins, we have revised up our FY09 EPS by 14% to 7.6 Scts.

Re-rating catalysts - further possible avenues for AUM growth. ARA is set to resume its AUM growth trajectory. A new PE fund targeted at the healthcare sector may be launched in the near term. We estimate total AUM size for this fund to be US$500m, to close by 1H10. In the REIT space, we could potentially see new developments given the more buoyant and improving liquidity in current capital markets.

Contribution from the new PE fund could add 1 Scts EPS assuming full year contribution. This would increase our EPS estimates to 8.1 Scts in FY10 and 8.5 Scts in FY11.

Maintain BUY, TP adjusted to S$1.02 based on SOTP. Our TP is adjusted higher mainly as a result of new fund contribution in 2010. Further upside potential will derive from ARA (i) launching new REITs & PE funds, (ii) larger than projected AUM for its new PE fund.

ARA Asset Management: Bagging a trophy asset

Growing its AUM. ARA Asset Management Ltd (ARA) announced its appointment as asset manager and convention and exhibition services provider for “Harmony Fund” post the fund’s purchase of Suntec Singapore International Convention & Exhibition Centre for S$235m. One of ARA’s managed reit – Suntec REIT, is a 20% stakeholder in this fund.

A strategic acquisition. We view this transaction as a strategic move for ARA as it will control both the convention centre and as manger of Suntec REIT - the adjacent office and retail mall. This will give ARA the free role in realizing the full potential of one of Singapore’s iconic asset amidst the re-making of downtown Marina Bay area with the upcoming Marina Bay Sands Resort.

Growing EPS by 10% in FY10. ARA is expected to earn management fees as asset manager & service provider for the fund, we project these fees to increase EPS in FY09 and FY10 to 6.6 Scts and 6.9 Scts respectively.

Maintain BUY, TP S$0.89. We have revised our valuation metrics to sum of the parts (SOTP) valuation, which is likely to reflect fully its strategic equity stakes in Suntec REIT and AmFirst REIT. Our SOTP valuation of S$0.89 offers 31% upside.