ESR Group announced its FY2022 ended Dec 31, 2022 results on March 22. This is its first set of full-year results following its acquisition of ARA Asset Management which was completed on January 20, 2022. Since then, ESR’s share price is down 46%. In recent weeks, ESR’s share price may have been affected by its undertaking to underwrite ESR-LOGOS REIT’s (E-LOG) $150 million equity fundraising (EFR), some market watchers reckon.
In answers to unitholders, E-LOG’s manager has said that the funds raised of around $300 million from a placement and EFR would be used for redevelopment, asset enhancement initiatives (AEI) and acquisitions if any. Among the New Economy assets in E-LOG’s portfolio with leases of more than 40 years is Cold Hub which has unutilised GFA.
In January 2022, ESR completed the acquisition of ARA Asset Management for US$5.2 billion ($6.9 billion), satisfied with 90% of shares and 10% of cash. Along with the acquisition were parts of ARA that were non-core to ESR, including listed entities such as Cromwell Property Group and a few REITs that do not fit in with ESR’s New Economy focus.
During a results briefing on March 22, Jeffrey Perlman, chairman of ESR, was pretty frank about ESR’s share price performance. “I am going to start and address the elephant in the room. We are very disappointed with our share price performance since our very strong 1HFY2022 results in August. We believe strongly in creating long-term shareholder value and I will be laying out some additional steps shortly that we are laser-focused on to further deliver on that unwavering objective,” he says in his opening remarks on March 22. This includes simplifying the business and divesting non-core assets.
In 2022, ESR achieved US$15 million of cost synergies from the integration of ARA and part of the LOGOS business. As part of its plan to streamline and simplify the business, ESR divested its 18.16% stake in China Logistics Property Holdings and will divest a further US$750 million to US$1 billion of assets. In addition, Perlman indicates that the group will lower its co-investment stake to 7.4%, placing it in a good position to take on greater development capacity without increasing its existing balance sheet annual commitments.
ESR’s general mandate for its share repurchase programme allows it to buy back 10% of the number of shares issued. In 2022, the group bought back around 69 million shares for a total of US$169 million.
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“We were active in terms of share buybacks, we are also mindful of the opportunity set that we see in the market. But trading at 10 times ebitda, there’s logic in looking at share buybacks. But we have to think again about returning capital to shareholders, especially as we continue to recycle. We’re quite happy to reduce the size of the balance sheet that will release even more capital, which again, gives us more opportunities, whether that’s in the form of new projects or continued share buybacks which we will evaluate,” Perlman elaborates.
Finding the holy grail
“In terms of this business, it has reached that point of being self-funding and cash generative, which is the holy grail of a fund management business,” Perlman adds.
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ESR is structured such that it is divided into three segments: Investment, fund management and New Economy development. In turn, the investment segment is divided into three main categories: Properties that the group holds on its balance sheet; co-investment funds, investment vehicles and REITs the group manages; as well as other investments.
The fund management segment earns fee income which includes base, asset management, performance fees as well as acquisition, divestment and leasing fees. ESR also receives promote fees upon reaching or exceeding certain target internal rates of return and after the group’s capital partners have received their targeted capital returns. In FY2022, these amounted to US$200 million.
In FY2022, in terms of revenue, fund management was the largest, followed by New Economy development and then investments. Overall, revenue grew 7.1% y-o-y to US$821 million when measured against a pro forma revenue in FY2021 which includes ARA.
On that same basis, with the ARA inclusion, total ebitda increased by 10.2% to $1.15 billion compared to a pro forma US$1 billion. Patmi grew 9.3% to US$655 million. On a standalone basis, ESR’s actual revenue, ebitda and patmi growth were 127.7%, 63% and 73.5% respectively.
“If not for the substantial weakness of most Apac currencies versus the US dollar in 2022, total ebitda and patmi would have risen by 20% and 24% compared to 2021,” notes Perlman,
The patmi translates into earnings per share (EPS) of US$0.13 per share while net asset value is around US$1.86. ESR reports in US dollars but is listed in Hong Kong. Based on its latest share price, its price-to-earnings (P/E) ratio is 14 times while P/NAV is 0.94 times.
Planned divestments this year
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For local investors, the most interesting aspect of ESR’s briefing is its plans to have a simplified business structure. “We are transforming and simplifying the business, and focusing on, New Economy, alternatives [such as infrastructure] and [scalable] REITs,” Perlman says.
The group is readying around US$700 million to US$1 billion of assets to divest. “We’ve mentioned there is about US$700 million to US$1 billion of non-core assets we are looking to divest. We’re very clear. We are evaluating our stake in Cromwell. They have embarked on their own value maximisation exercise. We’ve said we will look at the other REITs we manage. We want to have scalable REIT vehicles. If those REITs can’t be scaled further, we are going to monetise those. That’s the top of our priority list and we see the opportunity to get that done this year,” Perlman says, adding that he would like to divest the REITs which are sub-scale.
Cromwell is listed in Australia and was the sponsor of Cromwell European REIT (CEREIT) when it was listed here. CEREIT has been busily rejigging its portfolio to have a greater focus on warehouses but remains weighted in favour of offices in Europe.
ESR holds around 30% of Cromwell while Gordon Tang holds a 16% stake. Cromwell itself has earmarked a capital-light strategy aiming for more efficient use of capital. Cromwell has announced that its Cromwell Polish Retail Fund (CPRF) and Italy Urban Logistics Fund (CIULF) portfolio are non-core assets. Cromwell has also been steadily reducing its co-investment stakes in its REITs and funds over time. It is also planning to list its Australian office portfolio as a REIT.
ESR is the sponsor and major unitholder of E-LOG, which it supports with a pipeline and financial backing should it be required. REITs that ESR inherited from ARA which ESR manages but is not a sponsor of include Suntec REIT and ARA US Hospitality Trust, which is viewed as sub-scale. ESR also has stakes in AIMS APAC REIT and Sabana Industrial REIT and owns Sabana REIT’s manager.
