ARA Asset Management Credit Review

 Jun 12, 2019


 

In the local bond space, ARA Asset Management bonds look attractive in terms of high yields, with Ask Yield To Worst for perpetuals above 5% and senior note around 4% as at 11 June 2019. We provide a review of the company and its bonds to share our views on whether they represent value.

 

Table 1: ARA Asset Management bonds

 

Table 2: ARA Asset Management credit metrics as at 31 Dec 2018

 

What Does ARA Asset Management Do?

The company is primarily a real estate manager with 4 main revenue generating segments: REIT management, Real estate management services, Private equity real estate management, and the newly introduced Infrastructure investments segment. From this business model, returns are mainly generated through management fees, which show a stable and recurring nature.

 

Table 3: A large portion of ARA’s revenue is derived from management fees

 

Chart 1: Stable and recurring revenue and EBITDA

 

Revenue and EBITDA, consisting mainly of management fees, show a stable and recurring nature. They are mainly derived as base fees as a percent of gross property value as well as a variable fee as a percent of annual net property income of Assets Under Management (AUM).

 

Business Segments Overview

REIT Management

As of 31 Dec 2018, the company manages 20 REITs in the Asia Pacific region, including listed names such as Fortune REIT, Suntec REIT, Prosperity REIT and Cache Logistics Trust. Revenue generation is from base fees as a percent of gross property value of AUM, variable fees as a percent of annual net property income of AUM, and one-off acquisition or divestment fees as a percent of gross property value.

Real Estate Management Services

These include convention and exhibition management services. Revenue is generated through property management fees as a percent of gross revenues or gross revenue and net property income of AUM, convention & exhibition service fees as a percent of gross revenues of AUM, and consultancy fees on project basis.

Private Equity Real Estate Management

The private equity arm of real estate management services. Revenue is contributed through portfolio management fees as a percent of committed capital, contributed capital or gross property value of AUM, performance fee, and return on seed capital.

Infrastructure Investments

Established in 2018, the company seeks stable cash flow generation through equity investments in medium-sized infrastructure assets, companies or platforms.
Strong Stakeholders

 

Table 4: ARA is largely held by established strategic interests

 

  • Warburg Pincus is a private equity fund established more than 50 years ago. It has invested more than $74 billion in more than 860 companies in more than 40 countries around the world.
  • AVIC Trust Co. is a China-based investment and trust manager 19.9988% owned by OCBC Bank.
  • Straits Trading Co. is a public-listed investment company with diversified interests across the Asia Pacific in Real Estate, Hospitality and Resources.

These large established stakeholders are seen as a credit positive as they build trust in the issuer.

 

Why Are ARA’s Bond Yields So High?

Perpetual coupon rates above 5% are relatively high in the Singapore bond space and usually signal a riskier issuer. However, seeing that ARA’s income is generally recurring and would not constitute as lumpy or uncertain, why are its bonds priced with relatively high yields such as perpetual yields above 5%?

 

Non-call Risk

Firstly, ARA perpetuals have a higher risk of not being called on the first call date. This is due to coupon reset and step up dates being later than the first call dates, thus reducing the incentive for the issuer to call back the bonds at first call. Bond holders may be left with longer holding durations without additional reward. This bond structure is not ideal and presents a higher non-call risk, thus prompting a higher yield premium.

 

Table 5: ARA Perpetual Details, reset dates later than first call dates

 

Transparency Issues

Secondly, when ARA was taken private in 2017, its disclosure requirements were reduced as it was no longer required to file annual and quarterly financial reports to the exchange as do public-listed companies. This lack of transparency of being a private company increases risk of uncertainties, thus demanding a higher rate of risk premium.

 

Credit Review

Healthy Debt Ratios. However, Coverage Ratios Require Management

The company’s liquidity and debt ratios are relatively strong with current ratio at 1.39 and net debt to equity ratio at 0.21x as at 31 Dec 2018. However, a large proportion of its capital is financed with perpetual bonds that are not accounted as debt, but still require recurring payments as dividends.

After including recurring payments for its perpetuals, ARA’s EBITDA to interest coverage ratio stands at only 2x, which is relatively low despite the company’s recurring nature of income. As the company seeks further expansion down the line, they might have to rely on new sources of financing to manage its interest and dividend payments.

 

Possible Positive Re-rating Of ARA Bonds

Management at ARA previously hinted at a potential re-listing IPO when the company reaches its AUM target of S$100 billion, set to be achieved by 2021. As at 31 Dec 2018, its AUM stands at S$80.1 billion. Although nothing is set in stone, a re-listing would be seen as a credit positive as it would reduce transparency risk when financial disclosure requirements increase.

 

Relative Valuation

As a private real estate management company, ARA Asset Management does not have a perfect comparable in the Singapore bond space. To analyse the relative value of its bonds, we use bonds in the real estate and REIT space with close maturity dates as comparables.

Comparing ARA’s senior bond ARASP 4.150% 23APR2024 CORP (SGD) with the following comparables, we think OUESP 3.550% 10MAY2023 CORP (SGD) looks more attractive on a return basis with similar Ask YTM yields but with an earlier maturity date.

 

Table 6: Senior bonds relative valuation
Indicative as at 11 June 2019:

 

However overall we believe ARASP 4.150% 23APR2024 CORP (SGD) offers an attractive yield among comparables with similar maturity dates after factoring in a higher risk premium as a private company. This is given the recurring nature of its income and having strong backing from established stakeholders.

Looking at ARA’s perpetuals, we prefer ARASP 5.200% Perpetual Corp (SGD) to ARASP 5.650% PERPETUAL CORP (SGD) due to the earlier coupon reset date of 2024. This translates to a lower call risk.

 

Table 7: ARA perpetual bonds

For comparable perpetuals, we use ones in the real estate sector with similar first call dates.

 

Table 8: Perpetual bonds relative valuation
Indicative as at 11 June 2019:

 

 

In comparison, ARA’s perpetuals offer an attractive yield pick-up from bonds with similar structure of reset dates later than first call dates (MAPLSP 3.950% PERPETUAL CORP (SGD) and FPLSP 4.380% PERPETUAL CORP (SGD)) while having a healthier debt to equity profile.

Compared to bigger names such as MLTSP 3.650% PERPETUAL CORP (SGD) that have lower non-call risk, we believe the higher yield for ARA’s perpetuals provide adequate reason to consider them as they provide decent yield compensation for risk.

 

Summary

We believe that ARA Asset Management bonds represent value with a good yield pick-ups for investors seeking higher yield. The company conducts a stable and recurring business and boasts strong stakeholders. Despite risks including non-call, relatively low EBITDA interest coverage ratios and lower transparency as a private company, we think ARA’s bond yields provide decent compensation when viewed against comparable bonds. In addition, future positive re-rating of ARA’s bonds may be on the table as the company may seek to re-list in an IPO in the future, which is seen as a credit positive.

For a quote on ARA Asset Management bonds or other bonds, kindly give our Bond Desk a call at (+65) 6212 1818.

 

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