The Zhitong Finance App learned that on March 21, ESR (01821), the largest real estate management company in the Asia-Pacific region driven by the new economy, announced its annual results for the year ended December 31, 2023 (“2023”).

Despite facing a challenging macroeconomic environment (including major changes in the interest rate environment and one of the weakest fund-raising environments in history), ESR's integrated fund management and development platform in the Asia-Pacific region has achieved an increase in fund management profits due to an increase in the scale of fee-related asset management and steady operating fundamentals.

At the end of December 2023, the scale of fee-related asset management increased 6.3% year-on-year to US$81.1 billion, while the total asset management scale increased 7.3% to US$156.1 billion.

The Group's fund management EBITDA in 2023 increased 2% year-on-year to a record $579 million. After deducting incentive fees, fund management EBITDA increased by 8.9% year-on-year. In line with the Group's asset-light transformation, fund management EBITDA currently accounts for nearly 60% of ESR's total segment EBITDA, up 21% from the initial public offering in 2019. Fund management fee revenue has grown at a three-year CAGR of 57% since 2020. The Group's business in the Asia Pacific region has been highly diversified over the past few years. Among them, North Asia (Japan and South Korea), India/Southeast Asia, and Australia and New Zealand are the current three regions, accounting for 36%, 22% and 21% of expenses and revenue, respectively.

The Group's revenue increased 6% from US$821 million in 2022 to US$871 million in 2023. The year-on-year decline in EBITDA and PATMI was due to major changes in the interest rate environment, which led to a decline in fair value earnings and an increase in interest costs in major markets.

In terms of performance, ESR Group co-founder and co-CEO Shen Jinchu and Stuart Gibson said, “Despite serious challenges such as the interest-rate hike environment and heightened geopolitical tension, we are satisfied with the execution of 2023. Through centralized execution, we have achieved 3 core priorities over the past 12 months, including (i) strengthening our market leadership position in the new economy, with development projects starting over US$6 billion and completing development projects of over US$4 billion; (ii) further simplifying and streamlining our business through the recent sale of ARA private equity business; and (iii) increasing the scale of asset management and fund management EBITDA, which now accounts for nearly 60% of the segment's EBITDA. We continue to stand out with our best-in-class products in fundraising, including the establishment of the largest RMB income fund to date in China in 2023 and the recent launch of the first $2 billion flagship open logistics core fund in Korea. As a fully integrated developer and fund management platform, we are ready to drive recurring cost growth by providing a full range of solutions and product platforms in the value chain to meet the needs of different capital partners. Although trading activity has been quiet over the past 18 months, we expect trading activity to pick up in 2024.”

The Co-CEO further stated, “On the operational side, new economic demand has supported our record-breaking rental activity, bringing us close to full rent in several key markets, with the Asia Pacific region (excluding China) recording double-digit renewal rates. In addition, we also have a number of high-value development projects, and the contribution of data centers will accelerate with the rise of generative AI.

Furthermore, we continue to adhere to an asset-light approach, including reducing our risk exposure in China. We plan to sell balance sheet assets of $1.5 to $2 billion over the next 12 months. Meanwhile, the continued integration of the LOGOS business is progressing well. Consolidation will help achieve additional synergy and enhance shareholder value creation.”

Focus on bringing sustainable value to shareholders

In line with ESR's sustainable dividend policy goals set by ESR in the first half of 2022, the ESR Board of Directors recommended declaring a final dividend of HK$12.5 per share (approximately US$1.6 cents per share) for the fiscal year ending 31 December 2023, equivalent to a dividend yield of 2.9%, totaling approximately US$67 million, to be distributed to shareholders on June 28, 2024.

Steady fundraising in a challenging environment

Despite the weakening fund-raising climate in the industry for two consecutive years, the Group worked closely with its capital partners to raise US$7.5 billion. Key fund-raising commitments and plans for 2023 include:

ESR is the largest RMB income fund to date in China, where the fund will be loaded into the asset portfolio from ESR's balance sheet

The ESR Data Center Fund (ESR Data Center Fund) further increased its capital to US$1.35 billion, and the development project reserve reached 575 MW

LOGOS's Green Data Center Fund will invest in tailor-made data projects in the Asia-Pacific region, with a confirmed development project reserve of 350 megawatts

In the first quarter of 2024, the Group successfully raised approximately US$1 billion. This includes the Group's first sustainable open logistics core fund in Korea. The fund holds an initial asset portfolio of 7 high-quality grade A logistics warehouses, with a total value of about US$2 billion. It achieved a net internal return of more than 25% and a 3.5 times equity multiplier for Development Fund 1 investors, consolidating a good performance record.

On December 31, 2023, the Group had a large amount of investment of US$23.9 billion (of which more than US$13.5 billion is focused on the new economy), which can be deployed on behalf of investors when asset pricing is becoming increasingly favorable and development returns continue to increase.

Balance sheet optimization

ESR has promoted its asset-light strategy through balance sheet syndication, with the Greater China region being the focus of its ongoing sales and syndication efforts. We are expected to complete announced transactions worth over $500 million and set a target of completing an additional $1.5 to $2 billion over the next 12 months. These asset sale plans to ESR Management, along with the announced sale of non-core assets, are expected to reduce the Group's medium-term balance ratio to a low level of 20-30% of the Group's historical target balance to liability ratio. Interest savings from falling balance-to-debt ratios can be used to potentially distribute or fund future share repurchases.

Focus on business transformation and simplification

The Group focused on the new economy and determined sales of up to US$750 million in non-core assets in 2023. In March 2024, the Group announced the sale of ARA private equity business. This transaction is an important milestone in the strategy, and sales of other non-core assets are progressing step by step.

The Group is also committed to entering the final phase of integrating LOGOS during the rest of the year. The successful integration will combine Australia/New Zealand business to become Australia and New Zealand's largest new economy developer and second-largest new economy management company (based on asset management scale and uncollected capital deployment). The move will also use supplementary funding and strategies to create more economies of scale. To date, ARA's business integration has achieved a cost synergy of 35 million US dollars. It is expected that in 2024 and 2025, the fully integrated Asia-Pacific New Economy Platform will further achieve revenue and cost synergy.

Resilient business performance and continuous diversification

The operating base of the Group's new economic assets remains strong, and the Group's leased area reached a record of 5.3 million square meters in 2023. As of December 31, 2023, the Group's new economy asset rental rate remained above 91% (98% outside of China). The Group recorded a rent growth rate of around 8.2% (14.3% outside of China). Leasing in Australia and South Korea recorded the highest rent growth rate, reaching around 19.5% during the year. This increase has greatly mitigated the expansion of the capitalization rate of Australian and Korean assets, with the exception of those with long weighted average lease maturity dates (“WALE”). The Group has always strictly selected China's asset portfolio. Nearly 70% of its stable assets are located in major economic centers in the Yangtze River Delta region and the Greater Bay Area. Local demand is driven by frequent activities in the renewable energy industry and cross-border e-commerce, respectively.

The Group maintained a staggered lease maturity situation, with WALE (by revenue) of 4.6 years.

Large-scale new economy development projects boost future revenue growth

As of December 31, 2023, ESR has over 24.5 million square meters of reserve construction area for development projects in its property portfolio, including about 7 million square meters of impressive land reserves for future development. The Group has been steadily carrying out development projects in a severe environment. The commencement and completion of projects in 2023 reached US$6.3 billion and US$4.2 billion respectively. As ESR greatly slowed the pace of new development projects in mainland China in 2023, only 2% of these development projects were located there. Of the completed development projects, 61% are mainly located in Australia, Japan and South Korea, while 30% are located in mainland China.

Development projects under construction are also scattered. Among them, 52% are projects in Japan, South Korea, and Australia/New Zealand, 26% are located in India/Southeast Asia and Hong Kong, while data centers account for 13% of the total. Approximately 90% of the Group's projects are expected to be completed between 2024 and 2027. As the Group develops more large-scale multi-level or multi-phase projects, including data center projects, it lays a good foundation for the Group's future expenses and revenue.

ESR's strong development project reserves include a number of iconic projects, which will set new standards in the market and drive future cost and development profit growth:

The data center's contribution to the Group is expected to continue to rise, accounting for 24% of the commencement of development projects in 2023. After completion of 8 construction sites, the Group will own a 575 MW project (including 100% pre-leased construction sites in Hong Kong and India). Furthermore, the Group's land and project reserves will contribute more than 1 gigawatt of capacity.

In Australia and New Zealand, LOGOS is currently developing Australia's largest multimodal logistics area, the Moorebank (Moorebank) Multimodal Transport Zone (MIP) in southwestern Sydney, which includes an initially approved 850,000 square meter storage project, which is close to major railway intermodal transport facilities and can use Australia's railway infrastructure. Once fully developed, the estimated value of the MIP will reach $4.2 billion. Logos is also collaborating with Amazon Australia and AustralianSuper to develop a second Amazon robotic distribution center in Melbourne. ESR Australia and Toll Group have promised to invest approximately AUD 420 million in a next-generation retail distribution and storage center in ESR Australia's Westlink Industrial Park, and Toll has promised to lease the facility for 10 years.

In Japan, the Group is seizing strategic opportunities and opportunities brought about by investor interest and is developing ESR Kawanishi Distribution and Techno Park in stages in the Osaka metropolitan area. The project is a logistics park with a total value of 1.5 billion US dollars and an area of 500,000 square meters. It is one of the largest and most important urban replanning projects to match the continuous expansion of e-commerce in Japan.

Rental demand in South Korea remains strong, but supply in strategic locations is limited. The Group is developing a $800 million logistics park, Busan New Port, in the Daebusan region. The project covers an area of 685,475 square meters. The region is the largest container terminal in Korea and the sixth largest port in the world in terms of throughput.

Southeast Asia is a major growth market for the next ten years. The Group has expanded its business to Thailand, is developing the 253,000-square-meter Suvarnabhumi Asian Industrial Park, and has also begun construction of the Advanced Energy (listed on NASDAQ) flagship plant development project in ESR Asia's Laem Chabang Industrial Park.

Proactive capital management

Active capital management strategies effectively ensure sufficient working capital, with a total of $2.5 billion in cash and undrawn financing. Furthermore, during the year, the Group successfully diversified its funding sources through US$1.2 billion multi-currency revolving credit financing from various overseas banks. Although the balance ratio as of December 31, 2023 is 30.7%, once the previously announced 2023 transaction is completed, the proceeds will be used to repay the debt, and the balance to liability ratio is expected to decrease. The Group will reduce its balance to liability ratio in the medium term to a low level of 20 to 30% of the target balance ratio.

The Group expanded and diversified its capital and capital structure during the year:

It was first rated as an “AA-” investment rating by Japan Credit Rating Agency, Ltd. (Japan Credit Rating Agency, Ltd) in March 2023, and the outlook is stable

It was rated “AAA” (Stable Outlook) by China Chengxin (Asia Pacific) Credit Rating Co., Ltd. (one of the largest rating agencies in mainland China) in September 2023

Two batches of yen-denominated fixed-rate notes were launched in July 2023, (i) 20 billion yen 1.163% fixed-rate notes due in 2026; and (ii) 10 billion yen 1.682% fixed-rate notes due in 2030, all issued under its $2 billion multi-currency bond issuance plan

Obtaining $4 billion in sustainability/green-related loans and yen-denominated fixed-rate notes with settlement of 30 billion yen in July 2023, thereby further optimizing the debt currency portfolio. Among them, dollar-denominated loans were reduced to 17% of total debt at the end of 2023, thereby reducing weighted rate costs by 30 basis points from 5.6% up to the first half of 2023 to 5.3% in fiscal 2023

Striving for a sustainable future

The purpose of ESR is space and investment solutions for a sustainable future. This will drive the Group to manage in a more sustainable and impactful manner, and focus on the environment and community where the company is a key stakeholder.

The Group has made significant progress in achieving the goals set out in the Environmental, Social and Governance 2030 Development Blueprint published in May 2023. The development blueprint emphasizes the Group's three pillars under the environmental, social and governance framework — “creating a safe, well-supported and inclusive human-centered environment for internal and external stakeholders”; “developing and maintaining a sustainable and efficient property portfolio”; and “creating excellent corporate governance performance to achieve consistent and balanced growth” to enhance synergy and accelerate long-term sustainable growth.

In the social sphere, the Group continues to promote diversity, fairness and inclusiveness in the workplace, maintain the health and safety of employees, promote employee participation and expand community investment. At the end of 2023, women represented approximately 45% of the group. The Group continues to promote community investment in three key areas, including “strengthening social resilience, health and welfare”, “promoting education and skills”, and “protecting the environment”.

The Group is committed to developing and maintaining sustainable and efficient buildings and improving the certification and rating of sustainable buildings. At the end of 2023, the Group installed 110 megawatts of rooftop solar power generation capacity and more than 850 electric vehicle charging stations in its portfolio of assets. As part of the Group's efforts to transition to a low-carbon future, the Group has collaborated, including with tenants in some cases. Of ESR's completed portfolio of directly managed assets, approximately 42% have obtained sustainable building certifications and ratings such as LEED, WELL, and NABERS.

From a governance perspective, the Group is committed to upholding the highest standards of corporate governance to ensure accountability, transparency, fairness and integrity in all of its operations. Over the past year, the Group began preparing its first UN-supported Principles for Responsible Investment (UN PRI) report in 2024. To strengthen the Group's leadership in sustainable financing, by the end of 2023, the Group had completed 7 loans related to sustainable development, with a total value of about US$4 billion. The Group also continues to be recognized for its robust ESG disclosure practices and maintains rankings in multiple ESG benchmarks and global ratings (such as GRESB, MSCI, Sustainalytics and ISS).