Under the strong operational performance support, ESR achieved growth in asset under management and fund management EBITDA

According to the Zhitong Finance and Economics APP, on March 21, ESR (01821), the largest real estate management company in the Asia-Pacific region driven by the new economy, announced its annual performance for the year ending December 31, 2023.

Despite facing a challenging macroeconomic environment (including significant changes in interest rates and one of the historically weakest fundraising environments), ESR achieved growth in fund management profitability in the Asia-Pacific region through an increase in fee-related asset management scale and a solid operating foundation.

By the end of December 2023, the fee-related asset management scale had grown by 6.3% annually to $81 billion, while the total asset management scale increased by 7.3% to $156.1 billion.

In the 2023 fiscal year, the group's fund management EBITDA grew by 2% annually to a record $579 million. After deducting performance fees, fund management EBITDA grew by 8.9% annually. In line with the group's light asset transformation, fund management EBITDA currently accounts for nearly 60% of ESR's total branch EBITDA, an increase of 21% since the initial public offering in 2019. Fund management fee income has grown at a compound annual growth rate of 57% since 2020. The group's business in the Asia-Pacific region has become highly diversified over the past few years, with North Asia (Japan and South Korea), India/Southeast Asia, and Australia/New Zealand being the current three major regions, accounting for 36%, 22%, and 21% of fee income, respectively.

The group's revenue increased by 6% from $8.21 billion in the 2022 fiscal year to $8.71 billion in the 2023 fiscal year. EBITDA and PATMI declined annually due to significant changes in interest rates, leading to a decrease in fair value gains in major markets and an increase in interest costs.

In terms of performance, ESR's co-founders and co-CEOs, Jeffrey Shen and Stuart Gibson, stated: "Despite facing challenges such as rising interest rates and escalating geopolitical tensions, we are satisfied with our execution in 2023. Through focused execution, we have achieved three core priorities over the past 12 months, including (i) strengthening our market leadership in the new economy, with over $6 billion in development projects underway and over $4 billion in completed development projects, (ii) further simplifying and streamlining our business through the recent sale of the ARA private equity business, and (iii) increasing asset management scale and fund management EBITDA, which now accounts for nearly 60% of branch EBITDA. We continue to excel in fundraising with top-tier products, including establishing the largest RMB income fund in China in 2023 and launching the first $2 billion flagship open-ended logistics core fund in South Korea recently." As a comprehensive developer and fund management platform, we are ready to drive recurring fee growth by providing a full range of solutions and product platforms along the value chain to meet the needs of different capital partners. Although trading activities have been quiet in the past 18 months, we expect trading activities to pick up in 2024."

The Co-CEO further stated, "Operationally, the new economic demand supports our record-breaking leasing activities, allowing us to achieve near full occupancy in several key markets, with double-digit renewal rates in the Asia-Pacific region (excluding China). In addition, we have a large number of high-value development projects, with the contribution of data centers expected to accelerate growth with the rise of generative AI.

Furthermore, we continue to adhere to a light asset policy, including reducing risk exposure in China. We plan to sell $1.5 to $2 billion in balance sheet assets over the next twelve months. Meanwhile, the integration progress of LOGOS business is proceeding well. The integration will help achieve additional synergies, enhancing shareholder value creation."

Focus on Bringing Sustainable Value to Shareholders

In line with ESR's sustainable dividend policy target set in the first half of 2022, the ESR Board of Directors proposes to declare a year-end dividend of HKD 0.125 per share (approximately USD 0.016 per share) for the fiscal year ending December 31, 2023, equivalent to a dividend yield of 2.9%, totaling approximately $67 million, to be distributed to shareholders on June 28, 2024.

Raising Funds Steadily in a Challenging Environment

Despite two consecutive years of a weak fundraising environment in the industry, the Group closely collaborated with its capital partners to raise $7.5 billion. The key fundraising undertakings and plans for the year 2023 include:

ESR's largest RMB income fund in China to date, where the fund will be injected with assets from ESR's balance sheet

ESR Data Center Fund further increased to $1.35 billion, with a development project pipeline of 575 megawatts

LOGOS' Green Data Center Fund will invest in tailored data projects in the Asia-Pacific region, with a confirmed development pipeline of 350 megawatts

In the first quarter of 2024, the Group successfully raised approximately $1 billion. This includes the Group's first perpetual open-ended logistics core fund in South Korea, with an initial asset portfolio of 7 high-quality Grade A logistics warehouses valued at around $2 billion, achieving over 25% net internal rate of return and 3.5 times equity multiple for Fund 1 investors, solidifying a strong performance record.

As of December 31, 2023, the Group had a substantial amount of uninvested capital of $23.9 billion (with over $13.5 billion focused on the new economy), ready to be deployed on favorable asset pricing and improving development returns on behalf of investors.

Balance Sheet Optimization ESR has advanced its light-asset strategy through the securitization of its balance sheet, with a focus on the continuous sale and securitization work in the Greater China region. We are expected to complete announced transactions worth over USD 500 million and set a target to complete an additional USD 15 to 20 billion in transactions in the next 12 months. The planned sale of assets to ESR Management Company, together with the announced non-core asset sales, is expected to reduce the Group's mid-term asset-liability ratio to a low level of 20-30%, the historical target asset-liability ratio of the Group. The interest saved from the decrease in the asset-liability ratio can be used for potential distributions or to provide funds for future share repurchases.

Focus on Business Transformation and Simplification

The Group focuses on the new economy and has identified non-core asset sales of up to USD 750 million in 2023. In March 2024, the Group announced the sale of the ARA private equity fund business, a transaction that is a significant milestone in the strategy, with other non-core asset sales progressing steadily.

The Group is also committed to entering the final stage of integrating LOGOS during the remaining period of this year. Successful integration will combine operations in Australia/New Zealand, making it the largest new economy developer and the second-largest new economy manager in Australia and New Zealand (based on asset management scale and deployed capital not yet called). This will also create more economies of scale through additional funding and strategic initiatives. To date, the ARA business integration has achieved cost synergies of USD 35 million, and it is expected that the fully integrated Asia-Pacific new economy platform will further realize revenue and cost synergies in the fiscal years 2024 and 2025.

Resilient Operational Performance and Continued Diversification

The operational foundation of the Group's new economy assets remains strong, with a record-breaking leasing area of 5.3 million square meters in 2023. As of December 31, 2023, the Group's new economy asset occupancy rate remained above 91% (98% outside of China). The Group recorded a rental growth rate of approximately 8.2% (14.3% outside of China). Australia and South Korea recorded the highest rental growth rates, reaching around 19.5% during the year. This growth significantly alleviated the capitalization rate expansion of assets in Australia and South Korea, except for those with longer Weighted Average Lease Expiry ("WALE"). The Group has been rigorously selecting its asset portfolio in China, with nearly 70% of stable assets located in the key economic centers of the Yangtze River Delta and the Greater Bay Area, driven by local demand from the renewable energy industry and cross-border e-commerce activities.

The Group maintains a staggered lease expiry profile, with a WALE (by income) of 4.6 years.

Large-scale new economy development projects driving future revenue growth

As of December 31, 2023, ESR has a development project reserve building area of over 24.5 million square meters in its property portfolio, including approximately 7 million square meters of substantial land reserves for future development. The Group has been robustly progressing development projects in a challenging environment, with project commencements and completions in 2023 reaching USD 6.3 billion and USD 4.2 billion, respectively. Due to ESR significantly slowing down the pace of new mainland China development projects in 2023, only 2% of the development projects are located there The development projects are nearing completion, with 61% mainly located in Australia, Japan, and South Korea, while 30% are in mainland China.

The under-construction development projects are also diversified, with 52% in Japan, South Korea, and Australia/New Zealand, 26% in India/Southeast Asia and Hong Kong, and data centers accounting for 13% of the total. Approximately 90% of the Group's projects are expected to be completed between the fiscal years 2024 and 2027. Due to the Group's development of large-scale multi-phase projects, including data center projects, a solid foundation is laid for the Group's future revenue.

ESR's strong development project pipeline includes several landmark projects that will set new benchmarks in the market and drive future revenue and development profit growth:

The contribution of data centers to the Group is expected to continue to rise, accounting for 24% of the development projects starting in 2023. Upon completion of 8 sites, the Group will have a 575-megawatt project (including 100% pre-leased sites in Hong Kong and India). In addition, the Group's land and project pipeline will contribute to a capacity exceeding 1 gigawatt.

In Australia and New Zealand, LOGOS is currently developing the largest intermodal logistics precinct in Australia - the Moorebank Intermodal Precinct (MIP) in southwest Sydney, which includes a preliminary approved 850,000 square meter warehousing project adjacent to major rail intermodal facilities that utilize Australia's rail infrastructure. Once fully developed, the estimated value of MIP will reach AUD 4.2 billion. LOGOS is also partnering with Amazon Australia and AustralianSuper to develop a second Amazon robotic fulfillment center in Melbourne. ESR Australia and Toll Group have committed to investing approximately AUD 420 million in a new generation retail distribution and warehousing center at ESR's Westlink Industrial Park in Australia, with Toll committing to lease the facility for 10 years.

In Japan, seizing strategic opportunities and investor interest, the Group is developing the ESR Kawanishi Distribution and Techno Park in the Osaka metropolitan area, a USD 1.5 billion project covering 500,000 square meters, one of the largest and most important urban redevelopment projects to support Japan's continued expansion in e-commerce.

Leasing demand in South Korea remains strong, but the supply of strategic locations is limited. The Group is developing an USD 800 million logistics park in Busan - Busan Newport, covering an area of 685,475 square meters, which is the largest container port in Korea and the sixth largest port in the world by throughput.

Southeast Asia is a significant growth market for the next decade, and the Group has expanded its business to Thailand, developing the 253,000 square meter Suvannaphum Asia Industrial Park, and has commenced the construction of a flagship factory development project for Advanced Energy (listed on NASDAQ) located in ESR's Asia Linchaban Industrial Park Proactive Capital Management

The proactive capital management strategy effectively ensures sufficient liquidity, with existing cash and undrawn financing totaling $2.5 billion. Additionally, within the year, the Group successfully diversified its funding sources through a $1.2 billion multicurrency revolving credit facility obtained from multiple overseas banks. Although the asset-liability ratio as of the year-end date of December 31, 2023, was 30.7%, once the previously announced 2023 transaction is completed, the proceeds will be used to repay debt, potentially reducing the asset-liability ratio. The Group aims to reduce its asset-liability ratio to a low level of 20% to 30% of the target asset-liability ratio in the medium term.

The Group has expanded and diversified its funding and capital structure within the year:

• In March 2023, it was first rated "AA-" by Japan Credit Rating Agency, Ltd, with a stable outlook.
• In September 2023, it was rated "AAA" (stable outlook) by China Chengxin (Asia Pacific) Credit Ratings Company Limited, one of the largest rating agencies in mainland China.
• In July 2023, it launched two tranches of fixed-rate notes denominated in Japanese Yen, (i) ¥20 billion 1.163% fixed-rate notes due in 2026; and (ii) ¥10 billion 1.682% fixed-rate notes due in 2030, issued under its $2 billion multicurrency bond issuance program.
• In July 2023, it obtained $4 billion in sustainable/green-related loans and redeemed ¥30 billion in fixed-rate notes denominated in Japanese Yen, optimizing the debt currency mix. The USD-denominated loans decreased to 17% of the total debt at the end of 2023, reducing the weighted average cost of debt from 5.6% as of the first half of 2023 to 5.3% for the full year 2023.

Striving for a Sustainable Future

ESR's mission is to provide sustainable spatial and investment solutions for the future. This will drive the Group to manage in a more sustainable and impactful manner, focusing on the environment and communities as key stakeholders.

The Group has made significant progress in achieving the goals set out in the Environmental, Social, and Governance (ESG) 2030 Development Blueprint published in May 2023. The blueprint emphasizes the three pillars of the Group's ESG framework - "creating a safe, supportive, and inclusive human-centric environment for internal and external stakeholders"; "developing and maintaining a sustainable and efficient property portfolio"; "achieving excellent corporate governance performance to achieve sustainable balanced growth", to enhance synergies and accelerate the commitment to long-term sustainable growth.

In the social sphere, the Group continues to advocate for workplace diversity, fairness, and inclusivity, maintain employee health and safety, promote employee engagement, and expand community investments. By the end of 2023, approximately 45% of the Group's workforce were female. The Group continues to advance community investment work in three key areas, including "strengthening social resilience, health, and well-being", "promoting education and skills enhancement", and "environmental protection" The group is committed to developing and maintaining sustainable and efficient buildings, enhancing the certification and rating of sustainable buildings. By the end of 2023, the group had installed 110 megawatts of rooftop solar power capacity and over 850 electric vehicle charging stations in its asset portfolio. As part of the group's efforts to transition to a low-carbon future, collaborative efforts have been undertaken, including cooperation with tenants in some cases. In the completed directly managed asset portfolio of ESR, approximately 42% have obtained sustainable development building certifications and ratings such as LEED, WELL, and NABERS.

From a governance perspective, the group is committed to upholding the highest corporate governance standards to ensure accountability, transparency, fairness, and integrity across all its operations. Over the past year, the group has begun preparing its first United Nations-supported Principles for Responsible Investment (UN PRI) report for 2024. To strengthen the group's leadership position in sustainable financing, as of the end of 2023, the group has completed a total of 7 sustainable development-related loans worth approximately $4 billion. The group is also recognized for its robust ESG disclosure practices and maintains rankings in various ESG benchmarks and global ratings (such as GRESB, MSCI, Sustainalytics, and ISS)