ARA Asset Management – Quarz Capital

About

ARA Asset Management

ARA Asset Management (“ARA”) is one of the biggest real estate investment managers in Asia with S$30billion of assets under management (AUM). 70% of its AUM is ‘captive’ in the form of managing listed REITs which are closed end and evergreen vehicles. The remaining AUM are from managing private real estate funds with 7-10 year lock-up period. These funds are anchored by institutional investors such as CalPERs, Morningside, National Pension Fund of Korea etc

ARA’s share price corrected by 45% since peaking in 2Q2013 attributed to the lack of investors’ conviction and uncertainty about future strategy. This is post the sell down of a major portion of the shareholding of the biggest shareholder in ARA to Straits Trading. The subsequent capital increase also took investors by surprise as the firm has consistently operated with a strong net cash balance sheet. This resulted in uncertainties and concerns about the firm’s alignment with shareholders’ interest.

The substantial correction in ARA’s share price resulted in its net cash and market value of its investment holdings to exceed 47% of its market capitalization. The company trades at a distressed P.E valuation of 6.8x ex-cash despite the structural growth in AUM and net income.

Engagement topics:

Commit to a fixed dividend payout of >40% of net income. This is as the firm has an asset light business model without the need for fixed capex
Commit that ARA will not raise capital for the next 3 years to increase investors’ confidence
Increase alignment of board, top management and shareholders’ interest through transparent compensation plan linked to shareholders’ return
Improve investor relations and enhance investors’ confidence by increasing disclosure of future growth strategies and products

Outcome:

A consortium led by the biggest shareholder, Straits Trading, Cheung Kong Property, AVIC Trust and Warburg Pincus launched a privatization offer for ARA at S$1.78, a 44% premium to the firm’s 12-month volume weighted average price
Quarz exited position with a return on investment of 48%

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