ESR Group Limited (Incorporated in the Cayman Islands with limited liability) Stock Code: 1821 Interim Report 2023 FORWARD TOGETHER
SPACE AND INVESTMENT SOLUTIONS FOR A SUSTAINABLE FUTURE ESR is APAC’s leading real asset manager powered by the New Economy. On the back of the accelerating advancement, broad-based adoption and high frequency usage of technology, we are witnessing a once-in-a-multi-generation change in real estate and our vision is to deliver a fully integrated solution to leading global capital partners and customers. As a part of this continuous pursuit, we will leverage our scale, extensive offerings, capabilities and resources to provide a suite of best-in-class real estate development products and real asset investment solutions that spur meaningful, longterm sustainable growth of the business, the economy and the environment. We are fully focussed on contributing to a positive impact for our employees, customers, investors, capital partners and the communities around us. Visit www.esr.com for more information. INVESTMENT Our investment platform includes completed properties held on our balance sheet, our co-investments in the funds and investment vehicles and the public REITs we manage, as well as other investments. FUND MANAGEMENT We manage a broad range of funds and investment vehicles that invest in a diverse portfolio of premium real assets in various stages of the property life cycle, providing a single interface with multiple investment opportunities for our capital partners. NEW ECONOMY DEVELOPMENT Our New Economy development platform with an end-to-end integrated suite of technical capabilities and services covers every stage of the development cycle including land sourcing, design, construction and leasing.
2 1H2023 Financial Highlights 4 1H2023 Operational Highlights 6 Overview of ESR Group 8 Key Trends to Support Our Growth Strategies 10 Management Discussion & Analysis 20 Corporate Governance and Other Information 48 Auditor’s Independent Review Report 49 Unaudited Condensed Consolidated Financial Information 99 Non-IFRS Measures End Corporate Information Contents
FORWARD TOGETHER 2 1H2023 Financial Highlights Notes: 1. Based on FX rates as at 30 June 2023 2. Includes the reported AUM of the Associates and assumed the value of the uncalled capital commitments in the private funds on a levered basis 3. Fee-related AUM excludes AUM from Associates and levered uncalled capital 4. Refers to EBITDA, which excluded the share-based compensation expense, and in 2022 which also excluded the transaction costs related to the ARA Acquisition 5. Refers to PATMI, which excluded the amortisation of intangible asset attributable to the ARA Acquisition (net of tax), share-based compensation expense related to ARA, and in 2022 which also excluded transaction costs related to the ARA Acquisition 6. Interim dividend of HK$12.5 cents (approximately (1.6 US cents per share) per ordinary share declared for the financial year ending 31 December 2023 amounting to approximately US$70 million 7. Based on closing share price of HK$11.50 on 22 August 2023 US$69 billion New Economy AUM1,2 Adjusted PATMI5 US$304 million US$78 billion Fee-Related AUM1,3 US$550 million Adjusted EBITDA4 18% y-o-y 2.2% Dividend Yield7 US$6.4 billion Market Capitalisation7 US$329 million Fund Management EBITDA 14% y-o-y 9% y-o-y 10% y-o-y US$147 billion Total Assets Under Management (“AUM”)1,2 US$3.0 billion Cash and loan availability 26% y-o-y 1.6 cents Dividend Per Share6 (US$) 13% y-o-y
ESR Group Limited Interim Report 2023 3 Notes: 8. Refer to EBITDA, which excluded the share-based compensation expense 9. Excludes amortisation of intangibles (net of tax), and share-based compensation expenses relating to ARA 10. FY2021, 1H2022 and FY2022 excluded transaction costs related to the ARA acquisition. For FY2022 also excluded share of certain associates' fair value of investment properties and financial assets at fair value through profit or loss and financial instruments 11. Excluded share of certain associates' fair value on investment properties, financial assets at fair value through profit or loss and financial instruments # EBITDA, Adjusted EBITDA and Adjusted PATMI are non-IFRS measures. These measures are presented because the Group believes they are useful measures to determine the Group’s financial condition and historical ability to provide investment returns. EBITDA, Adjusted EBITDA, Adjusted PATMI and any other measures of financial performance should not be considered as an alternative to cash flows from operating activities, a measure of liquidity or an alternative to net profit or indicators of the Group’s operating performance on any other measure of performance derived in accordance with IFRS. Because EBITDA, Adjusted EBITDA and Adjusted PATMI are not IFRS measures, these may not be comparable to similarly titled measures presented by other companies. Refer to non-IFRS measures reconciliation in page 99 670 1,152 707 585 550 18% 451 712 410 315 329 27% 432 821 404 388 455 5% 727 1,28411 777 663 597 289 148 226 235 18% 199 342 342 568 374 229 288 211 148 329 120 Investment Fund Management New Economy Development 1H2023 1H2022 FY2022 FY2021 FY2020 Total Segmental Results (US$ million) Profit after Tax9,10 (US$ million) Adjusted EBITDA8,10 (US$ million) Revenue (US$ million) 1H2023 1H2022 FY2022 FY2021 FY2020 1H2023 1H2022 FY2022 FY2021 FY2020 1H2023 1H2022 FY2022 FY2021 FY2020
FORWARD TOGETHER 4 1H2023 OPERATIONAL HIGHLIGHTS Notes: 1. New Economy assets only. Excludes listed REITs and Associates 2. Weighted by AUM of each respective country 3. Fee-related AUM excludes AUM from Associates and levered uncalled capital 4. Stabilised New Economy assets only STRONG PORTFOLIO FUNDAMENTALS RECORD HIGH ROBUST LEASING CLOSE TO FULL OCCUPANCIES +10.4% 2.1 mil sqm 92% 98% Weighted average rental reversions1,2 Strong leasing momentum in 1H20231 Portfolio Occupancy1,4 Portfolio Occupancy ex-China1,4 STEADY GROWTH IN FUND MANAGEMENT SUSTAINABLE GROWTH DRY POWDER ASSET LIGHT STRATEGY US$78 billion US$19.3 billion 7.4% Fee-Related AUM3 Undrawn capital to capitalise on future opportunities Average % of co-investment Doubling down on New Economy with Operational Outperformance
5 ESR Group Limited Interim Report 2023 CAPITALISING ON TAILWINDS OF GROWTH OF NEW ECONOMY APAC LARGEST ON TRACK FOR ANOTHER RECORD YEAR WITH HEALTHY DEVELOPMENT MARGINS US$13.0 billion US$3.8 billion US$2.2 billion Work-in-progress Development starts Development completions
FORWARD TOGETHER 6 Overview of ESR Group US/EUROPE US$22billion AUM SOUTHEAST ASIA US$12 billion AUM AUSTRALIA & NEW ZEALAND US$23billion AUM GREATER CHINA US$31billion AUM INDIA US$2billion AUM SOUTH KOREA US$14billion AUM PAN APAC US$13 billion AUM New Economy REITs Alternatives / Others JAPAN US$30billion AUM ABOUT ESR GROUP ESR is APAC’s largest real asset manager powered by the New Economy and the third largest listed real estate investment manager globally. With approximately US$150 billion1,2 in total AUM, our fully integrated development and investment management platform extends across key APAC markets, including Greater China, Japan, South Korea, Australia, Singapore, India, New Zealand and Southeast Asia, representing over 95% of GDP5 in APAC, and also includes an expanding presence in Europe and the U.S.. We provide a diverse range of real asset investment solutions and New Economy real estate development opportunities across our private funds business, which allow capital partners and customers to capitalise on the most significant secular trends in APAC. ESR is the largest sponsor and manager of REITs in APAC with an AUM of US$45 billion1,2. Our purpose – Space and Investment Solutions for a Sustainable Future – drives us to manage sustainably and impactfully and we consider the environment and the communities in which we operate as key stakeholders of our business. Listed on the Main Board of The Stock Exchange of Hong Kong, ESR is a constituent of the FTSE Global Equity Index Series (Large Cap), Hang Seng Composite Index and MSCI Hong Kong Index. Visit www.esr.com. 31% GREATER CHINA 10% JAPAN 13% SOUTH KOREA 18% AUSTRALIA / NEW ZEALAND 13% SOUTHEAST ASIA 5% INDIA 5% PAN-APAC 5% US / EUROPE GFA by region US$147 billion Total AUM 47 million sqm GFA3 * Information as of 30 June 2023 1,2
7 ESR Group Limited Interim Report 2023 ESR Group's Robust Scale, Vastly Expanded Capabilities and Deeper Breath of Offerings will Define the Future of APAC Real Estate Notes: 1. Based on FX rates as at 30 June 2023 2. Included the reported AUM of the Associates and assumed the value of the uncalled capital commitments in the private funds and investment vehicles on a levered basis 3. Excludes Associates 4. Core Capital refers to Pan-Asia funds bearing Core/Core plus mandates which target returns derived frommore defensive, lower risk, income producing real estate and infrastructure. REITs and Core Capital funds comprise 62% of total fee-related AUM 5. Based on 2020 Nominal GDP per Euromonitor 12 of Top 20 Global LP Relationships US$13 billion Development WIP APAC’S Leading Real Asset Manager Powered by the New Economy TOTAL AUM¹,2 Composition Greater China Japan South Korea Southeast Asia India/others Australia/New Zealand Pan-APAC US/Europe 3% 9% 21% 20% Region 9% 16% 8% 16% 1% Sector3 New Economy REITs Alternatives/Others 24% Perpetual + Core + REITs Other Funds Balance Sheet 59% 38% Type 3% 61% 24% 15% New Economy AUM1,2 US$69 billion Listed Real Estate Investment Manager Globally 3rd Largest GDP in APAC Covered5 >95% Public REITs1,2 US$ 45 billion S REITs + Core Capital4 Countries; ~85% of AUM allocated in APAC 59% 28 LEADING REAL ASSET MANAGER IN APAC POWERED BY THE NEW ECONOMY WITH A FULL SUITE OF INVESTMENT SOLUTION AND A GLOBAL FOOTPRINT WITH LEADING APAC PRESENCE
Key Trends to Support Our Growth Strategies FORWARD TOGETHER 8 Rapid rise of New Economy Growth in real assets Financialisation of real estate in APAC ASIA PACIFIC LOGISTICS – LARGEST SECULAR GROWTH OPPORTUNITY IN ASIA 1 Real Asset Investment Manager Powered By The New Economy ESR is APAC’s largest real asset manager powered by the New Economy and the third largest listed real estate investment manager globally. With approximately US$150 billion in Total AUM1, our fully integrated development and investment management platform extends across key APAC markets, including China, Japan, South Korea, Australia, Singapore, India, New Zealand and Southeast Asia, representing over 95% of GDP in APAC, and also includes an expanding presence in Europe and the U.S. 2 Fully Integrated Closed-Loop-Solutions Ecosystem Offering a full suite of both public and private investment solutions, ESR has created the only fully integrated closed-loop-solutions ecosystem for real estate globally. The platform allows global capital partners to increase allocation to New Economy real estate where they are still significantly underweight. Leveraging a wide network of capital partners and resources, the enlarged ESR Group will further expand and diversify its product offerings. 3 Well-Established Fund Management Platform that Facilitates AUM Growth Designed to provide us with long-term operational control of our assets and sustainable fees across the full asset life-cycle, our fund management platform supports AUM growth and generates multiple sources of fund fee income. 4 Network Of High-Quality Tenants and Best-In-Class Capital Partners The size and scale of our capital partners combined with their long term approach provide us with access to capital while we maintain strong and long-standing relationships with our network of high quality tenants. 5 Proven Ability to Grow Organically and Execute Opportunistic M&A Transactions to Expand Our Capabilities Our strategy is to create long-term, scalable logistics platforms with proven development capabilities and we partner with strong local leadership for expansion into new markets. 6 Strong Management Team and Backed by Reputable Shareholders We are co-founded and are led by an experienced management team that has pioneered the asset class in every major market in Asia. Our key and strategic shareholders have provided us with the ability to leverage their capabilities, and access to capital, strategic land holdings and tenant relationships. Note: 1. Based on FX rates as at 30 June 2023. Included the reported AUM of the Associates and assumed the value of the uncalled capital commitments in the private funds and investment vehicles on a levered basis.
9 ESR Group Limited Interim Report 2023 1 Capitalise on significant market opportunities across Asia Pacific • Further develop our markets and build logistics infrastructure for the modern economy • Build on our network of high quality tenants • Leverage on our integrated fund platform by using our robust deal sourcing and development capabilities and capital pool 2 Leverage our scale and geographic presence to expand into new growth markets • Actively evaluate opportunities in new markets through potential partnerships and selective acquisitions in high growth markets • Deepen our regional connectivity by offering logistics solutions in multiple markets in our portfolio • Focused on building and strengthening long-term tenant relationships 3 Expand our fund management platform and attract new capital partners while bringing existing capital partners across markets • Global institutional investor base and capital recycling model • Inject select completed properties into our core/core-plus funds • Pursue acquisition opportunities for listed fund platforms and selectively expand existing REIT vehicles • Leverage the network effect to attract capital partners across Asia Pacific 4 Strategically explore and expand into adjacent businesses and investment products within Asia Leverage our ecosystem of shareholders, capital partners, local teams and tenants to penetrate adjacent businesses
Management Discussion & Analysis FORWARD TOGETHER 10 BUSINESS REVIEW In 1H2023, ESR delivered resilient financial and operational results against a challenging macroeconomic backdrop. The Group continues to grow its Total AUM1, 2 which increased 9% year-on-year (“YOY”) to US$147 billion, propelled by 13% growth in New Economy AUM1,2 to US$69 billion. Notably, the Group’s Fund Management EBITDA grew by 14% to US$328.7 million with a record-high Fund Management EBITDA margin of 82% (up from 78% in 1H2022) supported by higher fee revenue, disciplined cost management and broader economies of scale. Excluding the impact of promotes, Fund Management EBITDA was up by 19% year-on-year. Most importantly, the Group continues to successfully execute on its asset-light transformation as evidenced in the growth of its fund management EBITDA, which was up 14% YOY and now represents approximately 55% of its total segment EBITDA (compared to less than 25% at the time of the IPO). Given that the Group reports in US dollars, FX translation continues to experience headwinds with sustained weakness in the Japanese Yen, Chinese Renminbi and other key Asian currencies. Total EBITDA and PATMI were down YOY mainly driven by lower fair value gains in the New Economy Investment and Development segments and the absence of one-off income and gains in 1H2022 as several of the contracted capital recycling events are expected to close in the second half of the year. Additionally, PATMI was impacted by higher interest expense as a result of increase in base rates. Focussed on delivering sustainable value to shareholders In line with ESR’s goal of a sustainable dividend policy established in 1H2022, the Board recommended the declaration of the third interim dividend of HK$12.5 cents per share (approximately US$1.6 cents per share) (which implies a 2.2%3 yield) for the financial year ending 31 December 2023, amounting to approximately US$70 million which will be paid to Shareholders on 29 September 2023. In addition, share repurchases totalled US$71.3 million (or 1% of market capitalisation), translating to a Net Asset Value uplift of US$0.02 per share. Notes: 1. Based on FX rates as at 30 June 2023 2. Includes the reported AUM of the Associates and assumed the value of the uncalled capital commitments in the private funds on a levered basis 3. Based on closing share price of HK$11.50 on 22 August 2023; on an annualised basis 4. Fee-related AUM excludes AUM from Associates and levered uncalled capital Double-digit growth in fund management earnings and higher margins ESR’s Fund Management segment continued to record strong performance given the deep support from its capital partners. Fee-related AUM1,4 grew 10% YOY to US$78 billion. Fund Management EBITDA increased by 14% to US$328.7 million, reflecting higher recurring fee revenue from growth in fee generating AUM, development starts, promotes and disciplined cost management. The Group continues to see strong capital flows from global institutional investors who are seeking to strategically rebalance their portfolios into New Economy sectors. The Group raised US$2.0 billion (approximately 80% is New Economy-focussed) through 15 new or upsized funds and mandates in the year-to-date. The Group remains well-positioned to achieve an acceleration in fundraising over the next six months as rates start to stabilise. Key capital raising commitments in 1H2023 included a further upsize of US$300 million for the ESR Data Centre Fund (ESR DC Fund 1), seeded by eight projects comprising 560MW of development projects and a sizeable pipeline of additional projects. ESR also entered into a strategic partnership with Indonesia Investment Authority and MC Urban Development Indonesia for development projects in Indonesia. The Group has US$19.3 billion of dry powder capital to deploy into new investments of which two thirds is in New Economy.
ESR Group Limited Interim Report 2023 11 Doubling down on New Economy is paying off with strong underlying operational performance ESR leased 2.1 million sqm5 of space, putting the Group on par to exceed its record year in 2022, with record weighted average rental reversions of over 10%5, 6 for 1H2023 across the portfolio. The leasing momentum for North Asia continues to be very strong with nearly 1 million sqm of new leases and renewals for 1H2023. The New Economy segment, spurred by e-commerce growth in APAC, continues to fuel demand for large-scale modern logistics space, representing 72% of new leases signed in 1H2023. Among the Group’s top 10 tenants by income, nine out of 10 tenants are e-commerce or 3PL related. In 1H2023, the Group achieved an overall occupancy rate of 92%7. Excluding China, the Group achieved occupancy rate of 98%7, with close to full occupancies in Australia/New Zealand, India, Japan and South Korea. Although China’s post-COVID recovery has been slower than expected, the Group has been very selective with the portfolio in China, with nearly 85% of the assets located in Tier 1 and 1.5 cities where there is long-term growth potential. Demand is still strong in major economic hubs areas in the Yangtze River Delta and the Greater Bay Area, driven by the strong activity in renewable energy industries and cross-border e-commerce respectively. The Group’s weighted average lease expiry (“WALE”) (by income) currently sits at 4.7 years5 and with relatively subdued supply and elevated inflation in many of the markets where it operates, the Group is positioned to capture outsized rental growth with 29% of leases due in the next 18 months. Notes: 5. New Economy assets only. Excludes listed REITs and Associates 6. Weighted by AUM of each respective country 7. Stabilised New Economy assets only. Excludes listed REITs and Associates ESR’s large New Economy development workbook underpins continued organic AUM growth ESR had over 27.4 million sqm of GFA in development pipeline across its portfolio including a sizeable landbank of over 6.4 million sqm for future development as of 30 June 2023. The Group achieved a record US$3.8 billion of development starts in 1H2023, up 9% year-on-year and US$6.8 billion on a last-twelve-months basis. The Group accelerated US$2.2 billion in completions in 1H2023 and US$5.7 billion on a last-twelve-months basis demonstrating its ability to deliver at scale. To date, ESR has a development work-in-progress (“WIP”) of US$13.0 billion, making it the largest development workbook in APAC. This provides clear visibility on future fee income for the Group. More than 90% of the development workbook is focussed on Tier 1 gateway cities in ESR’s key markets and over 70% of WIP is planned for completion between 2024 to 2026. Beyond logistics, in 1H2023, nearly 20% of the starts were in data centres and for the full year, the Group expects to start up to US$1.5 billion of data centre projects across key gateway markets, including Tokyo, Osaka and Seoul. In addition, ESR’s strong development pipeline includes a number of landmark projects that are set to create new benchmarks in the market and drive future fees and development profit: • In Japan, the Group is developing a US$1.5 billion multi-phase logistics park, ESR Kawanishi Distribution and Techno Park on a 505,281 sqm site located in Greater Osaka, unveiling one of the largest and most significant urban rezoning developments to accommodate Japan’s ongoing expansion in e-commerce driven New Economy real estate.
Management Discussion & Analysis FORWARD TOGETHER 12 • In South Korea, the Group is developing a US$800 million logistics park, Busan New Port on a 685,475 sqm site (which is being reclaimed) located in Greater Busan, the country’s largest container terminal and the world’s sixth largest port by volume. • The Group has also started ramping up data centre developments with two data centres totalling 155MW in Japan and South Korea, which are seeded into ESR Data Centre Fund. • The LOGOS Consortium is currently developing Australia’s largest intermodal logistics precinct, the Moorebank Intermodal Precinct (MIP) in south-western Sydney, into a high quality industrial property and infrastructure including initial approval for 850,000 sqm of warehouse opportunities directly adjacent to key rail intermodal facilities. When fully developed, MIP will have an estimated value of A$4.2 billion. • LOGOS has partnered with Amazon Australia and AustralianSuper to develop a second Amazon Robotics fulfilment centre in Melbourne, Australia at the AustralianSuper owned Craigieburn Logistics Estate. The facility, which is estimated to be completed in 2025, will span over 209,000 sqm across four levels, making it the largest warehouse ever built in Australia, powered by advanced robotics technology. These two deals cement ESR and its subsidiary LOGOS as the “Developer of Choice” in Australia. In 1H2023, key development starts included ESR’s 253,000 sqm Asia Industrial Estate Suvarnabhumi which marks ESR’s maiden entry into Thailand, and the 50MW Keihanna data centre in Osaka, Japan. In the same period, the Group saw the completions of large-scale landmark logistics assets which included the second phase of ESR Yokohama Sachiura Distribution Centre and ESR Higashi Ogishima Distribution Centre in Greater Tokyo, Pyeongtaek Logistics Park in South Korea, as well as Chengdu Qingbaijiang Cold Chain Industrial Park and Shenyang Hualong Logistics Park in China. Robust balance sheet and strong liquidity to capitalise on New Economy opportunities ESR had healthy gearing of 27.6% and a strong balance sheet with US$3.0 billion in liquidity in cash, loan capacity of committed and undrawn debt facilities, which is sufficient to cover aggregate loan repayments for the next three years without any additional capital recycling. With the contracted divestments announced post 30 June 2023, the Group’s gearing will reduce by 170 basis points to 25.9%. The Group also has US$19.3 billion of dry powder in its active funds of which US$12.7 billion is from New Economy vehicles. In addition, given the rising interest rates, the Group has expanded and diversified its funding and capital structure which is crucial for fuelling the Group’s long-term growth. • ESR received an investment grade first-time ‘AA-’ rating with a stable outlook from the Japan Credit Rating Agency, Ltd in March 2023. • In June 2023, ESR launched two series of Japanese Yen denominated fixed rate bonds, (i) JPY20 billion 1.163% fixed rate notes due 2026; and (ii) JPY10 billion 1.682% fixed rate notes due 2030, under its US$2 billion Multicurrency Debt Issuance Programme. The Group continues to recycle assets with over US$2.5 billion of divestments since January 2022, achieving three times its annual historical target with a specific focus on crystallising gains from selected China balance sheet assets. The Group is focussed and on track to deliver more than US$1 billion of divestments in 2023. In addition, the Group remains very focussed on its asset-light strategy with a 7.4% average co-investment as of 30 June 2023, which meaningfully enhances the Group’s tangible return on equity while maintaining sufficient funding capacity across the Group.
ESR Group Limited Interim Report 2023 13 Laser-focussed on business transformation and simplification anchored by three key pillars of growth In driving business transformation and simplification across the Group to deliver long-term shareholder value, the Group has achieved the following: • US$25 million of cost savings from the integration of ARA and LOGOS has been substantially completed. The Group expects to create additional synergies as it further integrates various aspects of LOGOS through 2024. • The Group has engaged in multiple discussions with parties to streamline businesses that have previously been identified as non-core. Up to US$750 million of non-core divestments have been identified with the plan to redeploy the capital back into core areas of growth. The Group will update the market as these discussions progress. • As stated above, the Group is on track to divest over US$1 billion of balance sheet assets in 2023 with greater upside expected if a successful listing of the China REIT (“C-REIT”) is completed later this year. • The Group’s development undertaken on its balance sheet has now been materially reduced to 4% at the end of 1H2023, leaving more financial flexibility for the Group going forward. Centring on the New Economy growth pillar, the ESR Data Centre Fund was recently upsized to US$1.3 billion with another large global investor, and the Group has cemented its position in Vietnam with a strategic stake in BW Industrial, a growing development platform where ESR also earns fees as it provides its best-in-class development, leasing and other fund management services to the venture. The Group has also continued to progress on its first life sciences vehicle. Accelerating positive impact for a sustainable future The Group recently unveiled its ESG 2030 Roadmap, built on the foundation and significant progress achieved under its 2025 Roadmap launched in November 2020. The Roadmap reaffirms its commitment to accelerate long-term sustainable growth across the three key pillars with established targets under the ESG Framework — Creating a Human Centric environment that is safe, supportive and inclusive for internal and external stakeholders; Developing and maintaining a sustainable and efficient Property Portfolio; and Delivering outstanding Corporate Performance for sustained and balanced growth. Under the social domain, the Group continues to enhance diversity, equity, and inclusion in the workplace, uphold employee health and safety, and enhance community development. As of June 2023, female representation was approximately 45% and the Group has had zero ESR workforce fatalities. To contribute positively to the local communities, volunteer leave was also implemented for all employees to support the Group’s community development efforts. On the environmental front, the Group remains committed to environmental stewardship by developing and maintaining sustainable and efficient buildings, some of which are equipped with EV charging stations. An additional 15MW of rooftop solar power capacity has been installed as planned and the Group is expected to significantly increase its on-site renewable energy generation this year. This will be further accelerated with more rooftop space from its selected assets under the RMB income fund, which will contribute to the overall 1,000MW target by 2030. In addition, approximately 39% of its portfolio of completed directly managed assets has obtained sustainable building certifications and ratings such as LEED, WELL and NABERS. As part of its commitment and transition to a low-carbon organisation, the Group is on track to develop a net zero strategy and decarbonisation roadmap.
Management Discussion & Analysis FORWARD TOGETHER 14 The Group strives to maintain the highest standards of corporate governance to ensure accountability, transparency, fairness and integrity. As a signatory to the United Nations-supported Principles of Responsible Investment (UN PRI), the Group has closed a total of seven sustainability-linked loans with approximately US$4 billion as of August 2023, strengthening its leadership in sustainable financing. The Group also continues to be recognised for its robust and exemplary ESG disclosure practices with outstanding rankings across various ESG benchmarks and global ratings such as GRESB, MSCI and Sustainalytics. As the Group leads the way forward in the transition to a more inclusive, low-carbon and climate resilient future, its ESG 2030 Roadmap and enhanced Group ESG Policies will sharpen its focus in driving ESG efforts forward as an enlarged Group. LOOKING AHEAD The Group remains steadfast in its pursuit of its core New Economy focus which also underpins the growth of its Alternatives and REITs’ business. The Company is geared towards key long-term macro trends of the New Economy: e-commerce and artificial intelligence for logistics and data centres; the growth of biotech and biopharma for life sciences; and decarbonisation for infrastructure/ renewables. These are areas capital partners have un-met demand, particularly across the Asia Pacific region. The Group is navigating a challenging external environment with its strong execution, continuing its asset-light trajectory and prudent capital management in its unwavering focus to deliver resilient, long-term earnings growth. This starts on the ground with well-located, high-quality projects and assets which support attractive development yields on cost, high occupancies and long-term rental growth, providing attractive returns to its capital partners. Supporting existing and new REITs will continue to be part of the Group’s strategy for diversifying capital partnerships, supported by REIT legislation that will continue to open new markets and opportunities across the APAC region. Although the Group has leading market share across many of the regions in which it operates, it is still at a very early stage of realising the full potential of its enlarged platform and the economies of scale it provides. With the recent promotions of Josh Daitch to CIO and Matthew Lawson to COO, the Group is making tangible progress towards its business simplification and transformation goals. The Group is delivering on cost savings, it is reducing its on balance sheet exposure and although the environment has not been overly conducive, it is engaging in multiple discussions with parties on several of the non-core assets. To preserve value, the Group will not rush these deals. The Group continues to remain excited by the future. Although a lot of capital remains on the sidelines, the Group is seeing some of the most exciting underwritten returns it has seen in a while on new deals. 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 its capital partners and investors.
ESR Group Limited Interim Report 2023 15 FINANCIAL REVIEW The Group reported a consistent growth in its AUM and fund management segment for the six months ended 30 June 2023. In line with its asset light strategy, the Group continues to make good progress in recycling capital from its balance sheet assets into stable and recurring fee income. ESR remains proactive and disciplined in capital management with net debt over total assets of 27.6% as of 30 June 2023. With the divestments announced post 30 June 2023, the Group’s net debt over total assets shall be 25.9%. The Group has US$3.0 billion of cash and undrawn facilities that is sufficient to cover its aggregate loan repayments for the next 3 years without further capital recycling or non-core divestments. REVENUE The Group’s revenue increased by 5.5% from US$431.7 million in 1H2022 to US$455.4 million in 1H2023, driven mainly by higher management fee. Management fee increased by 8.6% from US$371.0 million in 1H2022 to US$402.9 million in 1H2023. The increase was contributed by higher recurring fee revenue from AUM growth and development starts. In 1H2023, US$136.0 million promote income was recognised. Construction revenue increased from US$0.1 million in 1H2022 to US$12.6 million in 1H2023, contributed by new projects in Australia. Cost of sales increased correspondingly from US$9.3 million in 1H2022 to US$12.7 million in 1H2023. In line with the Group’s ongoing commitment towards its asset light strategy to sell down balance sheet assets into ESR managed funds, rental income decreased by 36.4% from US$57.7 million in 1H2022 to US$36.7 million in 1H2023. In 2H2022, the Group divested nine China balance sheet assets into an ESR managed core fund. Geographically, 95% of the Group’s revenue for 1H2023 contributed from Greater China, Japan, South Korea, Southeast Asia and Australia and New Zealand; with India and Europe made up the remaining 5%. 1H2023 Revenue Contribution By Region 10% Japan 18% Greater China 32% South Korea 18% Australia and New Zealand 1% India 17% Southeast Asia 3% Europe 1% Others 1H2023 Revenue Contribution By Segment 88% Fund Management 9% Investment 3% New Economy Development PATMI AND EBITDA EBITDA decreased by 15.6% from US$637.1 million in 1H2022 to US$537.4 million in 1H2023. PATMI decreased by 24.1% from US$380.6 million in 1H2022 to US$289.0 million in 1H2023. Lower fair value gains, absence of one-off income and divestment gains recognised in 1H2022 were the main drivers to the decline in EBITDA and PATMI. Additionally, PATMI was impacted by higher interest expense as a result of increase in base rates. The decline was offset by strong performance of the fund management segment. The Group recorded fair value gain on investment properties of US$115.3 million for 1H2023 (1H2022: US$162.9 million) arising mainly from assets under development in China. The Group’s share of profits from joint ventures and associates decreased by 45.9% from US$145.0 million in 1H2022 to US$78.4 million in 1H2023, mainly due to lower valuation gains from the Group’s investments in Australia and South Korea which have seen capitalisation rate expansion; and development progress in China.
Management Discussion & Analysis FORWARD TOGETHER 16 Finance cost increased by 59.9% from US$99.3 million in 1H2022 to US$158.8 million in 1H2023, contributed by rising interest rates, as well as increase in total borrowings from US$4.9 billion as at 30 June 2022 to US$5.6 billion as at 30 June 2023. The weighted average interest cost for the Group had increased to 5.6% due to higher interest rates and additional borrowing drawn for transitionary bridging of projects. Excluding bridging funding, the weighted average interest rate would have been 5.2% for 1H2023. Administrative expenses decreased by 14.4% from US$239.0 million in 1H2022 to US$204.5 million in 1H2023 primarily due to one-off costs relating to the acquisition of ARA of US$22.5 million incurred in 1H2022, and other professional fees. SEGMENT RESULTS Fund management segment results increased by US$40.8 million or 14.2% from US$287.9 million in 1H2022 to US$328.7 million in 1H2023 despite muted investment activity across markets and weak Asian currencies. Strong growth was driven by higher recurring fee revenue from growth in fee generating AUM and development starts. The growth was further boosted with the crystallisation of promotes as development fund assets are being rolled over to core funds. Supported by higher fee revenue, cost containment and broader economies of scale, fund management EBITDA margin had increased from 78% in 1H2022 to 82% in 1H2023. Investment segment results decreased by 43.0% from US$210.8 million in 1H2022 to US$120.2 million in 1H2023, reflecting the Group’s proactive capital recycling strategy. Lower rental income as the Group divested nine China balance sheet assets into ESR managed core fund in 2H2022. The decrease was further contributed by lower one-off investment income and valuation gains from significant capital recycling transaction in 1H2022. Fair value recognised in 1H2023 in relation to certain projects in China had also taken into consideration of domestic headwinds. New Economy development segment results decreased by 35.4% from US$228.7 million in 1H2022 to US$147.7 million in 1H2023. The decrease was mainly attributable to lower fair value gains partly due to delay in the development timing in China that was contributed by last year’s COVID situation and longer expected period to lease up as well as stabilise new assets. In Australia and Korea, there was the effect of the expansion of capitalisation rate. Additionally, 1H2022 had also benefitted from divestment gain from sell-down of a development asset, while similar transactions have been moved to 2H2023. 1H2023 Segmental Results 55% Fund Management 20% Investment 25% New Economy Development 1H2023 1H2022 Variance* Segmental Results US$ million % US$ million % US$ million % Investment 120 20% 211 29% (91) (43%) Fund Management 329 55% 288 40% 41 14% New Economy Development 148 25% 229 31% (81) (35%) * Year-on-Year (“YoY”) change % represents a comparison between the first half of current year (1H2023) and the first half of last year (1H2022).
ESR Group Limited Interim Report 2023 17 ASSETS AND LIABILITIES The Group had a robust and well-capitalised balance sheet with gearing of 27.6% (net debt to total assets). Total assets remained at US$16.3 billion as of 30 June 2023 (31 December 2022: US$16.2 billion). As of 30 June 2023, the Group had cash balances of US$1.1 billion that were primarily denominated in USD, RMB, SGD, JPY, KRW, AUD and HKD. Cash balances had reduced as part of the Group’s proactive capital management to pay down borrowings with higher funding cost, as well as deployment to fund ongoing projects and new investments. Investment properties decreased by 5.2% to US$3.2 billion as of 30 June 2023 (31 December 2022: US$3.3 billion). The slight decrease is mainly contributed by classification of certain properties as asset held for sale as of June 2023 in line with view for near-term disposal. The reduction was offset by ongoing development of the Group’s China projects during 1H2023. Additionally, the Group made prepayments of additional land use rights in Australia, Japan and Vietnam which partially contributed to the increase in other non-current assets by 40.4% to US$319.3 million. Investment in joint ventures and associates increased by 11.4% to US$3.3 billion as of 30 June 2023 (31 December 2022: US$3.0 billion). The increase was mainly contributed by the Group’s acquisition of 10.4% interest in Vietnam’s BW Industrial Development Joint Stock Company (“BW”) for US$207.8 million in 1H2023. On 4 August 2023, the Group exercised its additional subscription right to subscribe additional issued shares in BW. Upon completion, the Group will hold 15.57% of the issued shares of BW. Financial assets at fair value through other comprehensive income (“FVOCI”) increased by 5.8% or US$56.3 million to US$1.0 billion as of 30 June 2023 contributed mainly by the Group additional investment in ESR-LOGOS REIT. Trade receivables increased by 36.6% to US$482.8 million as at 30 June 2023 (31 December 2022: US$353.5 million) mainly arising from higher fee income. Total bank and other borrowings as of 30 June 2023 remained flat at US$5.6 billion (31 December 2022: US$5.5 billion). Net debt was US$4.5 billion compared to US$3.7 billion as of 31 December 2022 mainly due to lower cash balance arising from the Group’s ongoing fundings to its investments. As of 30 June 2023, 90% of total debt maturing in year 2023 has been refinanced. TOTAL EQUITY Total equity remained strong at US$9.1 billion as of 30 June 2023 (US$9.1 billion as of 31 December 2022), backed by 1H2023 net profits of US$313.9 million, offset by dividend distribution to shareholders of US$69.9 million and shares repurchased of US$68.0 million. In addition, an unrealised loss of US$48.2 million was recognised on the Group’s financial assets through other comprehensive income (“FVOCI”), mainly due to mark-to-market losses adjusted based on quoted market prices. The Group manages and minimises its foreign currency exposures by natural hedges using various currencies via project and corporate level; and continues to assess the use of financial derivatives where appropriate to manage its foreign currency exposures. For the 1H2023, the Group recorded unrealised currency translation losses of US$61.6 million arising from its foreign operations due to the strengthening of US dollars against the respective local currencies.
Management Discussion & Analysis FORWARD TOGETHER 18 CAPITAL MANAGEMENT ESR adopts a proactive and disciplined capital management approach, and regularly review its debt maturity profile and liquidity position. The Group maintains a well-capitalised balance sheet, and actively diversifies its funding sources through a combination of facilities with both local and international banks, and capital market issuances in optimising its costs of debt. ESR continues to be disciplined in executing its capital recycling programme, and prudently redeploying capital to support growth. The Group continues to actively leverage its fund management platform to unlock value and generate higher recurring fund management fees. The average co-investment for the Group was 7.4% as of 30 June 2023. This meaningfully enhances the Group's tangible return on equity while maintaining sufficient funding capacity across the Group. Debt Maturity Profile (US$ million) As of 30 June 2023 2026 and beyond 335 936 810 3,548 2023 2024 2025 6% 17% 14% 63% Total bank and other borrowings as of 30 June 2023 remained flat at US$5.6 billion (31 December 2022: US$5.5 billion). Net debt was US$4.5 billion compared to US$3.7 billion as of 31 December 2022 mainly due to lower cash balance arising from the Group’s ongoing fundings to its investments. As of 30 June 2023, 90% of total debt maturing in year 2023 has been refinanced. In 1H2023, the Group continues to expand and diversify its funding and capital structure, which is crucial for fuelling the Group’s long-term growth: • ESR received an investment grade first-time "AA-" rating with a stable outlook form the Japan Credit Rating Agency, Ltd in March 2023. • In June 2023, ESR debuted a total of JPY30 billion through two series of Japanese Yen denominated fixed rate notes: (i) JPY20 billion 1.163% fixed rate notes due 2026; and (ii) JPY10 billion 1.682% fixed rate notes due 2030, each under the US$2,000,000,000 Multicurrency Debt Issuance Programme. As of 30 June 2023, the Group’s weighted interest rate was 5.6%; and 19% of the Group's borrowings was on fixed rate while the remaining 81% was on floating rate basis. The Group's weighted average debt maturity was approximately 5.3 years as of 30 June 2023 (31 December 2022: 5.1 years). The Group continues to stay focussed on its capital recycling strategy with proactive and disciplined capital management. It regularly reviews its debt maturity profiles and refinancing ahead of maturity ensuring a well-capitalised balance sheet is maintained to meet the Group’s short-term obligations, ongoing developments, and investments opportunities. ESR Group now has US$3.0 billion of cash and loan drawdown capacity that is sufficient to cover the Group’s aggregate loan repayments for the next three years without any further asset recycling or non-core divestments. The Group has exposures to foreign exchange rate fluctuations primarily from its investments and income from its subsidiaries, associates and joint ventures, including Greater China, Japan, South Korea, Australia, Singapore and India. The Group manages and minimises its foreign currency exposures by natural hedges using various currencies via project and corporate level. Operating and development activities of each country are funded mainly through project level debts and operating income that are in their respective local currencies. At corporate level, the Group currently funds some of its investments through corporate borrowings in the currency of the country in which the investment is located. The Group continues to closely monitor the interest and exchange rates movements and evaluate such impact to its portfolio. The Group continues to assess the use of financial derivatives as additional tools when appropriate to manage foreign currency and interest rate exposures.
ESR Group Limited Interim Report 2023 19 As of 30 June 2023, currency profile of the Group’s cash and bank balances; and bank and other borrowings are as below: Cash and Bank Balances As of 30 June 2023 28% USD 15% SGD 21% RMB 14% JPY 5% HKD 6% AUD 9% KRW 2% Others Bank and Other Borrowings As of 30 June 2023 24% USD 21% SGD 12% RMB 17% JPY 5% AUD 20% HKD 1% Others CHARGE OF ASSETS As of 30 June 2023, certain of the Group’s assets were pledged to secure bank and other borrowings granted to the Group. The details of charged assets are disclosed in Note 16 to the unaudited condensed consolidated financial information. Except for the aforementioned charges, all the Group’s assets are free from any encumbrances. CONTINGENT LIABILITIES As of 30 June 2023, neither the Group nor the Company had any significant contingent liabilities.
FORWARD TOGETHER Corporate Governance and Other Information 20 DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES As at 30 June 2023, the interests and short positions of the Directors and chief executives of the Company in the ordinary shares (the “Shares”), underlying Shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the Securities and Futures Ordinance (“SFO”)) (i) as recorded in the register required to be kept under section 352 of the SFO; or (ii) as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (“Stock Exchange”) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (“Model Code”) are as follows: Interests in the Company Name of Director Capacity/nature of interest Number of Shares held (Note 1) Approximate percentage of shareholdings as at 30 June 2023 Mr Jinchu Shen Interest of controlled corporations (Note 2) 319,658,645(L) (Note 3) Beneficial owner (Notes 5 & 6) 583,800(L) 320,242,445(L) 7.30% Mr Stuart Gibson Interest of controlled corporations (Note 4) 449,783,103(L) 149,644,368(S) (Note 8) Interest of spouse 73,000(L) Beneficial owner (Notes 5 & 6) 583,800(L) 450,439,903(L) 10.27% 149,644,368(S) (Note 8) 3.41% Mr Charles Alexander Portes Interest of controlled corporations (Note 4) 449,783,103(L) 10.26% 149,644,368(S) (Note 8) 3.41% Mr Hwee Chiang Lim Interest of controlled corporations (Note 7) 227,859,487(L) Beneficial owner 4,402,959(L) 232,262,446(L) 5.30% Mr Brett Harold Krause Beneficial owner 145,000(L) 0.00% Ms Jingsheng Liu Beneficial owner 69,200(L) 0.00% Ms Wei-Lin Kwee Beneficial owner 12,000(L) 0.00%
ESR Group Limited Interim Report 2023 Corporate Governance and Other Information 21 Notes: 1. The Letter “L” and “S” denote the long position and the short position in the Shares respectively. 2. Laurels Capital Investments Limited directly holds the Shares of the Company and is wholly owned by The Shen Trust. In respect of The Shen Trust, the settlor is Rosy Fortune Limited (the sole shareholder of which is Mr Jinchu Shen). Mr Jinchu Shen has a deemed interest under the SFO in the Shares held by The Shen Trust solely in his capacity as the sole shareholder of the settlor of The Shen Trust. 3. Inclusive of the interest in 7,799,856 Shares underlying the share options pursuant to the Tier 1 ESOP. 4. Redwood Investment Company, Ltd. directly holds 448,933,103 Shares of the Company and is owned as to 42% and 58% by Kurmasana Holdings, LLC and Redwood Investor (Cayman) Limited respectively, of which Kurmasana Holdings, LLC is wholly-owned by Redwood Investor (Cayman) Limited, Redwood Investor (Cayman) Limited is wholly owned by Redwood Investor II (Cayman) Ltd. and the voting rights of Redwood Investor II (Cayman) Limited are controlled as to 45.87% and 45.87% by Mr Charles Alexander Portes and Mr Stuart Gibson, respectively. Hence, each of Mr Charles Alexander Portes, Mr Stuart Gibson, Redwood Investor II (Cayman) Ltd., Redwood Investor (Cayman) Limited and Kurmasana Holdings, LLC will be deemed to be interested in the Shares held by Redwood Investment Company, Ltd.. Besides, as at 30 June 2023, 850,000 Shares were held by Redwood Consulting (Cayman) Limited (“Redwood Consulting”) as beneficial owner. Redwood Consulting is owned as to 50% and 50% by Mr Charles Alexander Portes and Mr Stuart Gibson, respectively. Hence, each of Mr Charles Alexander Portes and Mr Stuart Gibson are deemed to be interested in Shares held by Redwood Consulting (Cayman) Limited. 5. This represents 192,000 options to subscribe for Shares granted under the Post-IPO Share Option Scheme to each of Mr Jinchu Shen and Mr Stuart Gibson. The options granted to Mr Jinchu Shen are physically settled unlisted derivatives, and the options granted to Mr Stuart Gibson are unlisted derivatives which are not physically or cash settled. 6. For each of Mr Jinchu Shen and Mr Stuart Gibson as of 30 June 2023, 130,600 Shares underlying the PSUs were vested, 587,700 Shares were lapsed, with the remaining 261,200 Shares to be vested in 2024 and 2025. 7. JL Investment Group Limited, JL Investment Group II Limited and JL Electron (BVI) Limited directly holds 101,984,984 Shares, 90,984,985 Shares and 34,889,518 Shares respectively, and all of 3 companies are 100% controlled by Mr Hwee Chiang Lim. 8. The short position represents Redwood Investor II (Cayman) Ltd. became the holder of, wrote or issued equity derivatives under which are under an obligation to pay another person an amount if the price of the underlying shares is above a certain level. Save as disclosed above, as at 30 June 2023, none of the Directors and chief executives of the Company has any interests and short positions in the Shares, underlying Shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) (i) as recorded in the register required to be kept under section 352 of the SFO; or (ii) as otherwise notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO or the Model Code.
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