ESR Boosts AUM 9% Despite Global Market Slide

ESR Group grew its assets under management (AUM) 9 percent from a year ago to $147 billion by the end of June, the company said on Wednesday, despite rising interest rates and a slower market for asset sales.

“Despite a very challenging macro environment with continued uncertainty around long-term rates, the group has positioned itself well to capitalise on this changing environment,” ESR chairman Jeff Perlman said in a statement. “We have made real progress in growing our core Fund Management segment on the back of our leading New Economy business and are increasingly realising the economies of scale of our enlarged platform.

While the Hong Kong-listed developer and fund manager posted adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of $550 million for the first six months of the year, down from $670 million a year earlier, it pointed to growth in its fund management business as boosting income and preparing it for a market rebound.

“Our status strategies and targets remain on track as we’ve worked harder in this environment to drive our fundraising and capital recycling initiatives,” Perlman added in a call with analysts.

Fund Management Outperforms

By business segment, the group’s fund management division did the heavy lifting with a 14.2 percent jump in EBITDA to $329 billion for the first half of the year from $288 billion a year ago. During the first six months of 2023 fund management contributed about 55 percent of ESR’s total earnings.

ESR attributed the fund management growth to higher recurring fee revenues, disciplined cost management and broader economies of scale, resulting in an improved fund management EBITDA margin of 82 percent as of 30 June from 78 percent a year earlier.

So far this year, the group has raised $2 billion in fresh capital through 15 new and upsized mandates as global institutional investors continued to seek more exposure to the tech-enhanced sectors, such as logistics and data centres, which ESR favours.

A day prior to the earnings release, the firm launched a RMB 10 billion onshore income fund in China backed by one of China’s largest insurers, with that strategy seeded with a portfolio of six stabilised logistics assets.

After taxation and minority interests, ESR’s adjusted profit stood at $304 million in the first half, which was down 26 percent from the $412 million logged a year ago, as steeply rising interest rates drove finance costs up by 60 percent over the same period to $158.8 million.

Also pulling down ESR’s bottom line was a 29 percent decline in fair value gains from its investment properties as well as a 35 percent dip in profit from its development business, which the company attributed in part due to construction delays and slower leasing in China.

Perlman added that the group also did not realise one-off income and divestment gains during the period, although it has signed deals for asset disposals which will be realised in the second half of the year.

The company’s total borrowings rose to $5.6 billion at the end of June from $4.9 billion a year ago, resulting in net gearing rising to 27.6 percent from less than 23 percent at the same time last year.

Perlman voiced confidence that the firm’s $3 billion in cash on hand and loan capacity is sufficient to cover debt repayments over the next three years, while noting that the group has $19.3 billion in active funds ready for deployment at a time when asset owners are expected to begin marketing assets again.

“There is a very large backlog of third party portfolios that will need to be sold in the market once long term rates start to stabilise and we feel this can supercharge the growth of our platform, even the dry powder that is ready to be deployed,” he said.

Pipeline Hits All-Time High

EBITDA for ESR’s development business fell by 35 percent to $148 million in the first half of the year due in part to lower valuation gains for ongoing projects in China, Australia and South Korea.

Despite the slump, the firm continued to grow its “work-in-progress” portfolio to a record $13 billion as of end June, with its development starts reaching an all-time high of $3.8 billion worth of projects spanning 1.6 million square metres (17 million square feet) in total gross floor area.

“On the back of near-zero vacancies and robust leasing across our existing portfolio, we have continued to accelerate our development starts in the first half and are on-track to deliver another record year,” said Jeffrey Shen and Stuart Gibson, ESR’s co-founders and co-CEOs, in a joint statement. “Today, with the substantial change in rates, we are underwriting projects at the most attractive returns we have seen in a long time.”

ESR’s development business contributed 25 percent of the company’s bottom line in the first half while the investment segment accounted for the remaining 20 percent.

The group divested $2.5 billion worth of assets over the past 18 months as part of its asset-light strategy and as the fund manager scaled down its China portfolio. The firm expects to divest mainland assets another $800 million in mainland China assets by the end of the year.

For the whole year, Perlman said ESR expects to post a single-digit increase in AUM after achieving an 11 percent surge in 2022, as uncertainties in the market persist.

“Although a lot of capital remains on the sidelines, the Group is seeing some of the most exciting underwritten returns we have seen in a while on new deals,” Shen and Gibson said in their joint statement.

“ESR’s diversified and integrated development and fund management platform underpinned by its experienced in-country teams is well-positioned to take advantage of the opportunities to deliver long-term returns for our capital partners and investors,” they added.