ESR Group Limited (Incorporated in the Cayman Islands with limited liability) Stock Code: 1821 Interim Report 2024 STRENGTH IN UNITY
ABOUT ESR GROUP ESR Group (“ESR”) is Asia-Pacific’s ("APAC") leading New Economy real asset manager and one of the largest listed real estate investment managers globally. Its fully integrated fund management and development platform extends across Australia/New Zealand, Japan, South Korea, Greater China, Southeast Asia ("SEA"), and India, including a presence in Europe and the United States (“U.S.”). ESR provides investors with a diverse range of real asset investment and development solutions across private and public investment vehicles. Its focus on New Economy real assets offers customers modern solutions for logistics, data centres, life sciences, infrastructure, and renewables. ESR's purpose, Space and Investment Solutions for a Sustainable Future, drives the Group to manage sustainably and impactfully for the communities where it operates and the spaces it develops to thrive for generations to come. ESR Group is listed on The Stock Exchange of Hong Kong Limited ("Stock Exchange") (HKSE: 1821.HK). Visit www.esr.com for more information. INVESTMENT ESR's investments comprise co-investments into its funds and REITs under management, investments in listed/privately held real estate investment vehicles, as well as investment properties (completed and under development). FUND MANAGEMENT ESR manages 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 its capital partners. NEW ECONOMY DEVELOPMENT ESR's New Economy development platform has a comprehensive suite of technical capabilities and services covering every stage of the development cycle including land sourcing, design, construction and leasing.
2 Overview of ESR 4 Key Business Priorities 6 1H2024 Financial Highlights 8 1H2024 Operational Highlights 10 Management Discussion & Analysis 20 Corporate Governance and Other Information 47 Auditor’s Independent Review Report 48 Unaudited Condensed Consolidated Financial Information 107 Non-IFRS Measures End Corporate Information Contents
2 STRENGTH IN UNITY US$13 billion FEE-RELATED AUM MAINLAND CHINA FEE-RELATED AUM COMPOSITION 27% Listed REITs 10% Credit 44% Private Logistics New Economy 53% 2% Infrastructure and Data Centre 17% Traditional Real Estate Funds By Sector 27% Listed REITS 37% Private Core 27% Development 9% Others Perpetual + Core 63% By Fund Type FEE-RELATED ASSETS UNDER MANAGEMENT ("AUM")2,3 US$80 billion TOTAL AUM2,4 US$154 billion GROSS FLOOR AREA (“GFA”) 50 million sqm 1H2024 CAPITAL RAISE US$2.3 billion +155% y-o-y UNCALLED CAPITAL US$23.7 billion5 56% New Economy Notes: 1. Fund Manager Survey 2024 published by ANREV, INREV and National Council of Real Estate Investment Fiduciaries (NCREIF). In September 2024, ESR Group was also ranked number one in PERE's APAC Fund Manager Guide ranking of the top 50 private equity real estate fund managers in 2024 2. Based on FX rates as at 30 June 2024 3. Fee-related AUM excludes AUM from Associates, balance sheet investment properties and levered uncalled capital 4. Total AUM 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 5. Excludes US$0.3 billion of uncalled capital attributable to ARA Private Funds 6. Includes Singapore listed REITs * Information as of 30 June 2024 US$13 billion FEE-RELATED AUM U.S. AND EUROPE APAC's Largest Real Asset Manager Powered by the New Economy1
3 ESR Group Limited Interim Report 2024 New Economy REITs US$15 billion FEE-RELATED AUM AUSTRALIA AND NEW ZEALAND Alternatives US$7 billion FEE-RELATED AUM HONG KONG US$2 billion FEE-RELATED AUM PAN-APAC, DATA CENTRES AND INFRASTRUCTURE US$14 billion FEE-RELATED AUM JAPAN AND SOUTH KOREA US$16 billion FEE-RELATED AUM INDIA AND SEA6
4 Clear Path to Maximising Shareholder Value STRENGTH IN UNITY 1. Business Simplification and Streamline • Simplify the business by divesting non-core assets (targeting US$750 million) primarily in Traditional Economy sectors and/or those with lower operating margins. • Set up for its next phase of growth across its Logistics, Data Centres, and Infrastructure and Renewables platforms. • Grow ESR's suite of New Economy fund platforms across the APAC region comprising development funds, core/core-plus funds and listed REITs, to suit a diverse range of capital partners. 2. Balance Sheet Optimisation • Ongoing capital recycling to syndicate balance sheet assets into ESR-managed vehicles to strengthen balance sheet and achieve an optimal capital structure. • Immediate focus on completing announced US$1.2 billion syndication and non-core divestments (in gross value). • Up to US$1.5 billion – US$2.0 billion of additional balance sheet sell-downs in the next 12-18months (in gross value). • Target to reduce the Group’s Gearing towards the low end of the 20-30% range. 3. Drive Positive Synergies From a Fully Integrated APAC New Economy Platform • Complete the integration of two leading New Economy platforms ESR and LOGOS, into one unified business across APAC. • Leverage economies of scale of the integrated businesses to generate additional revenue opportunities and achieve cost savings. 4. Pursue Sustainable Revenue Growth and Cost Management Strategies • Recycle capital into new and existing fund products to drive recurring Fee Income growth as AUM scales. • Continue to pursue disciplined cost management strategies to achieve stronger earnings and cashflow. 5. Growth in Fund Management EBITDA • Increase and scale New Economy AUM and development pipeline, as well as establish more perpetual vehicles to underpin continued fund management EBITDA growth. Note: 1. Moody’s Ratings, July 2024 ACCELERATING DATA CENTRES STRATEGY TO CAPITALISE ON ROBUST AI-DRIVEN DEMAND ESR is in a unique position to access a substantial pipeline of data centres through both off-market transactions, as well as its development assets, in anticipation of a compound annual growth rate (“CAGR”) of approximately 20% in data centre capacity in APAC through to 20281. ESR is focused on executing its 575 megawatts (“MW”) of committed data centre sites in key markets across APAC, with a pipeline of more than two gigawatts (“GW”) worth of land and projects currently identified. The Group is on track for 375 MW of projects under construction by the end of FY2024, with the first facility in Japan newly completed and ready for service by May 2025. 575 MW Upon completion of 8 sites US$1.35 billion ESR Data Centre Fund 1 375 MW Under construction by end FY2024 >2 GW Pipeline of land and projects identified UNLOCKING DATA CENTRE OPPORTUNITIES WITH A FAST GROWING DATA CENTRE PLATFORM ESR Group remains committed to maximising long-term shareholder value via its five key business priorities to drive sustainable profitable growth.
5 ESR Group Limited Interim Report 2024 ESR’S COMPETITIVE EDGE ESR’s six core strengths are its multi-model approach; scale; expertise in design reflecting its commitments to ESG and innovation; strong relationships with its customers; and track record in development in the APAC region. ESR’s end-to-end in-house capabilities allow it to unlock the full potential of the largest and one of the fastest-growing data centre regions globally. Designed with regional Artificial Intelligence (“AI”) and cloud expansion in mind, ESR’s multi-model approach is powerful in enabling the Group to deliver bespoke solutions both in business model and service provision to its clients and adapt for both operator requirements and unique attributes in each operating market. This is a significant differentiation to its industry peers. BUPYEONG KR1 DATA CENTRE, SEOUL 80 MW DEMO COMPLETED KEIHANNA OS4 DATA CENTRE, OSAKA 100 MW DEMO COMPLETED KWAI CHUNG HK1 DATA CENTRE, HONG KONG 50 MW (100% PRE-LEASED) UNDER CONSTRUCTION COSMOSQUARE OS1 DATA CENTRE, OSAKA 110 MW COMPLETED AND READY FOR SERVICE BY MAY 2025 RABALE MU1 DATA CENTRE, MUMBAI 35 MW (100% PRE-LEASED) READY FOR CONSTRUCTION START Maximises flexibility and outcome and captures growth, scale and diversification Multi-model Operating Platform Focused in-country dedicated teams supported by the strength of one of Asia’s largest real asset manager Scale Working with local design leaders to produce efficient, locally and environmentally friendly solutions to support partners and meet customer needs Design and Efficiency with Leading ESG Strategy Designing and building for the next wave of AI backed growth and regional cloud expansion Innovation Strong relationships with leading hyperscalers and colocation tenants allow ESR to quickly identify and act on new opportunities Strong Relationships Strong track record across the full development process including acquisitions, planning & design, construction and financing— a key differentiator for ESR Track Record * Projects aggregating to 375 MW
6 1H2024 Financial Highlights STRENGTH IN UNITY Notes: 1. Based on FX rates as at 30 June 2024 2. Fee-related AUM excludes AUM from Associates, balance sheet investment properties and levered uncalled capital 3. Total AUM includes 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 4. Refers to the fund management revenue 5. Refers to the fund management segment result which excludes the share of fair value of financial derivative assets in relation to certain Associates 6. Calculated as (loss)/profit before tax, adding back depreciation and amortisation and finance costs (net). Excludes the share-based compensation expense, share of fair value on investment properties and financial assets at fair value through profit or loss and financial derivative assets in relation to certain Associates, as well as impairment loss for non-core divestment; and transaction costs related to the Company's announcement on 13 May 2024 for a possible privatisation of the Company which, if proceeded with, could result in a delisting of the Company from the Stock Exchange (“Transaction Costs related to Indicative Proposal”) 7. Refers to (loss)/profit after tax and minority interests. Excludes the amortisation of intangible asset attributable to the ARA Acquisition (net of tax), share-based compensation expense related to ARA, share of fair value on investment properties and financial assets at fair value through profit or loss and financial derivative assets in relation to certain Associates, as well as impairment loss for non-core divestment; and Transaction Costs related to Indicative Proposal US$154 billion Total AUM1,3 +6.1% y-o-y -76.0% y-o-y -37.0% y-o-y -5.0% y-o-y excluding Promote Fees US$254 million Fee Income4 US$132 million EBITDA6 1H2024 US$80 billion Fee-related AUM1,2 +2.7% y-o-y US$174 million Fund Management EBITDA5 -47.1% y-o-y -9.8% y-o-y excluding Promote Fees NM -US$58 million PATMI7
7 ESR Group Limited Interim Report 2024 Notes: 8. Net debt is calculated as bank and other borrowings less cash and bank balances * EBITDA, Adjusted EBITDA and Adjusted PATMI are non-IFRS measures. These measures are presented because the Group believes they are useful measures to determine the Group’s financial condition and historical ability to provide investment returns. EBITDA, Adjusted EBITDA, Adjusted PATMI and any other measures of financial performance should not be considered as an alternative to cash flows from operating activities, a measure of liquidity or an alternative to net profit or indicators of the Group’s operating performance on any other measure of performance derived in accordance with IFRS. Because EBITDA, Adjusted EBITDA and Adjusted PATMI are not IFRS measures, these may not be comparable to similarly titled measures presented by other companies. Refer to non-IFRS measures reconciliation in page 107 Balance Sheet (US$ million) FY2021 FY2022 FY2023 1H2024 Total assets 9,338 16,199 16,191 15,859 Cash and bank balances 1,638 1,807 1,002 1,064 Bank and other borrowings 4,248 5,497 5,980 6,191 Net debt8 2,610 3,690 4,978 5,127 Net debt/total assets 27.9% 22.8% 30.7% 32.3% FY2023 5795 1H2024 1745 FY2021 244 FY2022 713 1H2023 403 136 267 1H2024 254 FY2023 554 1H2023 267 1H2024 254 FY2021 24 FY2022 76 1H2023 78 1H2024 80 FY2023 81 FY2023 737 1H2023 329 136 193 FY2021 199 FY2022 5685 FY2021 228 FY2022 510 Fund Management EBITDA (US$ million) Fee Income4 (ex. promote fees) (US$ million) Fee-related AUM1,2 (US$ billion) Fee Income4 (US$ million) Promote fees Promote fees
1H2024 OPERATIONAL HIGHLIGHTS 8 STRENGTH IN UNITY LEADER IN NEW ECONOMY BUILT FOR GROWTH Cosmosquare OS1 Data Centre, Osaka, Japan
9 ESR Group Limited Interim Report 2024 Work-in-progress US$13.1 billion Development Starts US$1.3 billion Targeted Development Margins 33.5% Data Centres 34% of Development Starts Development Completions US$1.5 billion Robust Leasing of Space1 3.9 million sqm +86% y-o-y Projected Yield on Cost 6.7% Healthy Portfolio Occupancy1 87% / 94% Portfolio Portfolio ex-China APAC'S LARGEST NEW ECONOMY WORKBOOK RESILIENT NEW ECONOMY OPERATING PERFORMANCE Positive Weighted Average Rental Reversions1, 2 +10.7% / +19.4% Portfolio Portfolio ex-China Notes: 1. For stabilised New Economy assets only. Excludes listed REITs and Associates 2. Weighted by total New Economy AUM of each respective country
Management Discussion & Analysis 10 STRENGTH IN UNITY BUSINESS REVIEW ESR is ranked as the largest real asset manager in APAC in the 2024 ANREV Fund Manager Survey1, in addition to being one of the top 10 global real estate investment managers. This is the second consecutive year that ESR has received this accolade, and it is a strong testament to its capabilities as the leader in New Economy and data centres in the APAC region. ESR’s fund management platform is well-diversified across major APAC markets, supported by strong partnerships with leading investors and global tenants. As at 30 June 2024, Fee-related AUM3,4 was US$80 billion, reflecting a 3-year CAGR2 of 52%. The elevated interest rates have substantially dampened the transaction activity and impacted asset revaluations in APAC real estate and globally. This has also delayed the timing of planned exits and promote fees from funds and slowed the pace of balance sheet sell-downs and non-core divestments. According to PERE5 data, fund raising in the first half of 2024 was only US$59 billion for private real estate, the lowest fund raising in the first half since 2012. Muted capital partner activity has not only affected capital raising volumes and demand for core transactions but it has also negatively impacted development starts in certain markets. However, as interest rates normalise, ESR continues to expect capital raising volumes to resume and return to historical levels. In Mainland China, while ESR continues to perform strongly with over 2.5 million sqm of renewals and new leases signed in 1H2024, the continued macroeconomic softness is putting significant pressure on overall leasing demand, thereby affecting valuations and the ability to promptly sell-down completed balance sheet assets. However, Management expects a gradual recovery in leasing going forward as new supply into the market is now limited. Notes: 1. Fund Manager Survey 2024 published by ANREV, INREV and National Council of Real Estate Investment Fiduciaries (NCREIF) 2. 3-year CAGR from 1H2021 to 1H2024 3. Based on FX rates as at 30 June 2024 4. Fee-related AUM excludes AUM from Associates and levered uncalled capital 5. PERE Fundraising Report H1 2024 6. Comprises the following: launch of the ESR C-REIT, progressive sale of the seed portfolio into the RMB Income Fund, and projects which are in active execution stage The Group recorded Total Revenue of US$312 million for 1H2024, with the fund management segment revenue contributing over 80% of this total. Fee Income and fund management EBITDA excluding promote fees stayed resilient — Fee Income excluding promote fees as a percentage of Fee-related AUM was approximately 70 basis points and the fund management EBITDA margin excluding promote fees was approximately 70%. The fund management EBITDA for the first half of 2024 was lower compared to the prior period, primarily due to the recognition of promote fees amounting to US$136 million in the prior period. In addition to lower promote fees, EBITDA and consequently PATMI were significantly impacted by non-cash asset revaluations which are reflective of current market conditions. Despite the impact of the non-cash asset revaluations, the Group’s underlying business remains healthy. Despite a challenging macro environment, ESR remains focused and continues to make steady progress towards its key business priorities: (i) balance sheet optimisation, (ii) business streamlining and simplification, and (iii) completing the integration of the ESR and LOGOS Property Group Limited (“LOGOS”) platforms to drive operational efficiency and position the business for further future growth. Alongside this, the Group is focused on the ramp-up of the data centres and infrastructure platforms to meet the projected surge in data centre demand in Asia, fuelled by advancements in AI and ongoing digital transformation. On balance sheet optimisation, the Group is on track to complete approximately US$0.7 billion worth of asset syndications6, including the listing of the ESR C-REIT which is expected to launch and complete by end of 2024. In the next 12 to 18 months, the Group aims to execute approximately US$1.5 to US$2.0 billion (in gross asset value) of additional balance sheet sell-down. Investment Properties As at 30 June 2024 62% Completed IP 38% Under Construction US$2.9 billion
11 ESR Group Limited Interim Report 2024 On business streamlining, the Group has also made significant progress on non-core divestments, with approximately US$335 million to be realised from the completion of the sale of ARA Private Funds7 (which is pending final regulatory approval and satisfaction of related condition precedents) and the ARA US Hospitality Trust management platform and units (which was completed in July 2024). The net proceeds from these divestments are intended to be used to repay the Group’s borrowings. Investments in Joint Ventures and Associates (“JVA”) by Sector As at 30 June 2024 76% New Economy 24% Traditional Economy US$3.3 billion Investments in JVA (New Economy Sector) by Region As at 30 June 2024 24% Australia 23% Mainland China 22% India & SEA 13% Hong Kong 18% South Korea US$2.5 billion On 21 and 26 July 2024, ESR announced the completion of its acquisition of the remaining shares in LOGOS from the founders of LOGOS8, ahead of the January 2025 deadline. The combined platform would cement ESR’s New Economy leadership position in APAC, with US$72 billion of New Economy AUM, as well as APAC’s largest development workbook of approximately US$13.1 billion. The unified platform also puts ESR on the pathway to be the number one New Economy manager9 in Australia and New Zealand, including the Data Centre business which is a key Notes: 7. Refer to the announcement dated 11 March 2024 on the discloseable transaction in relation to the sale of the ARA Private Funds business 8. Refer to the announcements dated 21 and 26 July 2024 on the acquisition of the remaining interest in LOGOS 9. On deployment of committed capital growth driver moving forward. Furthermore, it would also position ESR as a market leader in all key Southeast Asia markets and bolster its market-leading position in South Korea. An additional US$50 million of cost synergies are targeted from the ongoing streamlining of the business across the Group. ESR’s next phase of growth lies in data centres, infrastructure and its sizeable and well-diversified logistics portfolio and development workbook. Since its IPO, ESR’s development workbook has grown nearly fourfold to approximately US$13.1 billion as at 30 June 2024. The workbook is increasingly focused on data centre development, which accounted for 34% of development starts in 1H2024. The demand for data centres is expected to grow significantly on the back of increasing reliance on digital technology, cloud storage, remote work and the rise of AI. ESR’s robust data centre capability is underpinned by more than 2GW of extended pipeline. This puts ESR in a strong position to capitalise on this and grow to be a major player in the region. ESR’s multi-model approach would enable it to deliver bespoke solutions both in business model and service provision to customers and adapted for both operator requirements and unique attributes in each market ESR operates in. This is a key differentiation to its peers. The Group’s infrastructure platform is focused on sectors strategically positioned to grow with and benefit from key megatrends such as decarbonisation, digitalisation, and other key factors. At present, it has over US$1 billion of equity raised and various multiple in-country renewable energy joint ventures in operation. Leveraging existing adjacencies within the New Economy real estate business, the Group is confident of the growth potential in ESR’s infrastructure and renewables platform. FUND MANAGEMENT: FUND MANAGEMENT EARNINGS UNDERPINNED BY STABLE MANAGEMENT FEES ESR Group’s Fee Income for 1H2024 was US$254 million, underpinned by stable management fees. Excluding promote fees, Fee Income was 5.0% year-on-year ("y-o-y"), primarily due to slower development progress and project delays in Japan and South Korea. Excluding
Management Discussion & Analysis 12 STRENGTH IN UNITY the impact of foreign exchange fluctuations particularly in Japan and South Korea, the decline in Fee Income was a moderate 2% year-over-year. Core asset recurring fees from asset management, investment management and property management grew 7% y-o-y, underscoring the resilience of the fund management platform. Correspondingly, fund management EBITDA margins excluding promote fees stayed resilient at approximately 70%. Fee Income By Region* 29% India & SEA 21% Australia & New Zealand 7% Hong Kong 18% Japan & South Korea 9% U.S. & Europe 16% Mainland China US$254 million * Refers to the fund management revenue ESR raised US$2.3 billion in capital during the first half of 2024. This was an increase of 155% against the same period last year, despite a second consecutive year of muted fundraising for the sector. Furthermore, in the last 12 months, the Group had successfully raised and transacted over US$1.2 billion worth of core capital across a range of geographies, allowing investors to continue to stay invested and/or allocate more towards APAC New Economy. This continued support from existing and new fund investors is much appreciated and valued. Capital Raised by Fund Type 47% Development 32% Alternatives/Others 21% Core/Core Plus Funds US$2.3 billion Capital Raised by Region 41% Australia 31% Europe 18% South Korea 5% SEA 4% Japan 1% Mainland China US$2.3 billion As at 30 June 2024, the Group had substantial uncalled capital of US$23.7 billion10 for deployment to grow Fee-related AUM. Deployments are ongoing across all markets albeit at a cautious pace. NEW ECONOMY: HEALTHY OUTLOOK BUT LONGER RUNWAY FOR NEWLY STABILISED ASSETS IN MAINLAND CHINA AND JAPAN As at 30 June 2024, the portfolio occupancy rate for the Group’s New Economy assets11 stood at 87% (94% excluding Mainland China). More than 1.2 million sqm of newly stabilised assets in Japan and Mainland China came on-stream in the first half of the year. In a market where tenants are taking longer to commit to additional floorplates or execute on consolidation plans, a longer runway is needed for the committed occupancies of these new and high-quality assets to attain their target levels. The occupancy for the bulk of the portfolio excluding Mainland China and the impact of these newly stabilised assets remained strong at 97%. Approximately 3.9 million sqm of renewals and new leases were recorded for 1H2024, up 86% y-o-y, and at weighted average rental reversions12 of approximately 10.7% (19.4% excluding Mainland China). Leases in Australia and South Korea accounted for the highest rental growth rates, achieving reversions of approximately 27.9% and 24.0% respectively, mitigating the cap rate expansion for assets in Australia and South Korea, save for those with longer weighted average lease expiry (“WALE”). Although leasing conditions in Mainland China remain soft, the momentum in lease renewals and replacements were active. Rental reversions are negative as tenants seek flexibility in leasing and occupancy continues to be prioritised. As at 30 June 2024, the WALE for the Group’s New Economy portfolio remained at approximately 4.6 years and 4.0 years by income and area respectively. Notes: 10. Excludes US$0.3 billion of uncalled capital attributable to ARA Private Funds 11. Stabilised New Economy assets; excludes listed REITs and Associates 12. Weighted by the AUM of each country
13 ESR Group Limited Interim Report 2024 Australia and New Zealand Japan South Korea Mainland China India SEA Occupancy11 (%) 98 86 96 77 97 93 Weighted average rental reversion rate11, 12 (%) 27.9 2.3 24.0 -11 N.A. N.A. Portfolio Leasing Metrics11 1H2023 1H2024 Renewals (mil sqm) 0.7 1.7 New Leases (mil sqm) 1.4 2.2 Total Space Leased 2.1 3.9 Portfolio Lease Expiry Profile11 8% 17% 18% 14% 12% 31% 2024 2025 2026 2027 2028 2029 and beyond (by area) Development activity had adapted to a cautious pace with US$1.3 billion and US$1.5 billion of starts and completions respectively in 1H2024. 34% of development starts were projects in data centres, and for regions, 26% were in Australia and New Zealand, 23% of projects were in India and Southeast Asia and 17% were from Mainland China. The Group remains prudent when evaluating any new development starts, or new land acquisitions currently in Mainland China. In the case of development completions, 71% were from Australia and New Zealand, India and Southeast Asia, followed by 18% from Mainland China. The rest were from South Korea. The 23.1 million sqm GFA development pipeline13 continues to be robust as the Group pursues its development strategy in support of AUM growth. As at 30 June 2024, ESR’s US$13.1 billion workbook comprised 27% in Australia and New Zealand, 24% in Japan and South Korea, 15% in India and Southeast Asia, 11% in Hong Kong, 9% in Mainland China, and data centres which increased to 14% of the total. More than 95% of the workbook is funded by ESR’s managed funds, in line with ESR’s stated asset light strategy. On the back of healthy demand for the Group’s projects and stabilisation in construction costs, targeted development margins improved to 33.5%, with projected yield on cost of 6.7%. Notes: 13. Includes land, under development and MOUs as at 30 June 2024 Development Starts 34% Data Centres 26% Australia & New Zealand 23% India & SEA 17% Mainland China US$1.3 billion Work in Progress 27% Australia & New Zealand 24% Japan & South Korea 15% India & SEA 14% Data Centres 11% Hong Kong 9% Mainland China US$13.1 billion Development Completions 44% Australia & New Zealand 27% India & SEA 18% Mainland China 11% South Korea US$1.5 billion
Management Discussion & Analysis 14 STRENGTH IN UNITY CAPITAL MANAGEMENT: CONTINUED FOCUS ON CAPITAL RECYCLING As at 30 June 2024, the Group’s gearing was 32.3%, with weighted average debt maturity of 4.0 years. The gearing would be approximately 30% upon the impending completion of the sale of ARA Private Funds and the formal launch of the ESR C-REIT. The weighted average interest cost was further reduced to 4.9% from 5.6% in 1H2023 as Management had tapped lower margin financing to refinance more expensive US dollar denominated debt. On the back of interest rates cut expectations, a 100 basis points decline in interest rate would lower interest expense by approximately US$50 million per annum. The increase in total borrowings was attributable to a timing spill-over for an asset loan refinancing where loan drawdown was in late June, ahead of the repayment in early July. The Group’s liquidity position remained sound. Management is executing on the staggered refinancing and planned repayment of the debt amounts due in the second half of 2024 via a committed sustainability linked loan facility of US$2.5 billion, with a greenshoe option to upsize to US$3.0 billion14. The Group remains steadfast in its capital recycling efforts through this period of protracted transaction duration at a pace that is slow but expected to pick up meaningfully with the anticipated U.S. Fed rate cuts. Transactions of approximately US$1 billion in gross value are pending completion, and another US$2 billion are in the pipeline to be executed. Management remains committed to reducing its gearing towards the low end of the range of 20–30%. DELIVERING ON ITS ESG COMMITMENTS The Group continues to strive towards its ESG efforts to create a positive impact on the environment and the communities. In 1H2024, the Group made significant progress against its targets set out under its ESG 2030 Roadmap, which was launched in May 2023. The roadmap Notes: 14. Expected completion by end FY2024 underscores the Group’s commitment to enhance its synergies and accelerate long-term sustainable growth across the three key pillars under the ESG Framework — “Creating a Human Centric environment that is safe, supportive and inclusive for stakeholders”; “Developing and maintaining a sustainable and efficient Property Portfolio”; and “Delivering outstanding Corporate Performance for sustained and balanced growth”. The Group continues to advocate diversity, equity, and inclusion in the workplace with female representation at 46.0% in 1H2024, representing a 0.6% increase from 45.4% in 1H2023. The Group also collaborates with partners and stakeholders to drive social impact efforts in the communities where it operates, aligned with its focus areas of “Strengthening Social Resilience, Health and Well-being”, “Promoting Education & Upskilling”, in addition to “Protecting the Environment”. Across the Group, close to 3,000 volunteer hours were clocked by employees in community outreach activities implemented in 1H2024. On the environmental front, the Group remains committed to developing and maintaining sustainable and efficient buildings and increasing sustainable building certifications and ratings. In 1H2024, 148 MW of rooftop solar power capacity (32% increase from 112 MW in 1H2023), as well as over 1,000 EV charging stations (24% increase from 809 in 1H2023), have been installed across the portfolio as part of its transition to a low-carbon future. Additionally, 45.8% of the Group’s portfolio of completed, directly managed assets has obtained sustainable building certifications and ratings such as LEED, WELL and NABERS. This represents a 3% increase from 42.8% in 2023. In the pursuit of net zero carbon, several of ESR’s business units have established decarbonisation targets. For example, ESR Data Centres has set an ambitious target to achieve 100% renewable energy use across all its data centre assets by 2040, with an interim target of 75% renewable energy by 2030.
15 ESR Group Limited Interim Report 2024 Under the Corporate Performance pillar, the Group continues to be recognised for its robust ESG disclosure practices. In 1H2024, its ISS Governance QualityScore improved from 8th decile rank to 1st, in addition to its ‘Low Risk’ score of 15.5 in Sustainalytics ESG Risk Ratings. The Group also submitted its inaugural United Nations-supported Principles of Responsible Investment (UN PRI) assessment in July 2024, demonstrating its commitment to integrating responsible investment practices across its business. LOOKING AHEAD According to the World Economic Outlook15, the outlook for global economic growth is overall balanced although risks and uncertainties that have a bearing on monetary policy decisions still exist. Management will continue to progress its key business priorities, to achieve a sustainable growth and maximise long term shareholder value. The streamlining and simplification of ESR’s business enable the Group to focus on strengthening the development and fund management platform in New Economy, as it positions ESR for the next stage of growth. Management is optimistic that the next 12 to 18 months will be supportive of a recovery with the expected lower short-term rates providing the biggest market catalyst followed by the APAC growth in AI. A reduction in interest rates would likely support a rebound in asset values and consequently fund exits and promotes. It would also support a similar rebound in development starts and be a stronger catalyst for the execution of the balance sheet asset sales as well as the remaining non-core divestments. Increased capital raising in core/core-plus and development funds is expected as capital partner transaction activity picks up, along with increased deployment of uncalled capital to boost Fee-related AUM and Fee Income. The Group is also expected to benefit from an optimised debt portfolio and reduced interest expense over the next 12 months. Notes: 15. IMF World Economic Outlook Update, July 2024 FINANCIAL REVIEW The Group recorded net loss of US$209.0 million for 1H2024, as compared to net profit of US$313.9 million for 1H2023. The decrease in profit was primarily attributable to non-cash asset revaluations and a lack of promote fees in 1H2024, which are reflective of current market conditions. The Group’s underlying business remains solid and the Board is confident in the Group’s ongoing strategic direction and core operating earnings. REVENUE The Group’s revenue decreased by 31.4% from US$455.4 million in 1H2023 to US$312.5 million in 1H2024, mainly due to lower management fee that decreased by 37.0% from US$402.9 million in 1H2023 to US$253.7 million in 1H2024. Lower management fee was mainly due to US$136.0 million of promote fees recorded in 1H2023. Promote fees are recognised upon the recapitalisation or realisation of the Group’s managed funds. Accordingly, the Group’s promote fee varies with the life cycles of the managed funds and the real estate cycle. As highlighted in prior results announcements, there may be select periods where no promote fee is recognised and the Group did not record any promote fee in the six months ended 30 June 2024. This is reflective of the current phases of the Group’s fund life cycles and the overall real estate cycle, and increased promote fees would be expected as these two drivers move in the Group’s favour. Excluding the promote fees recognised in 1H2023, there was a 5% reduction in the management fee, primarily due to slower development progress and project delays in Japan and South Korea. However, the Group’s recurring fees from asset management, investment management and property management grew y-o-y underscoring the resilience of the fund management platform. Excluding the impact of foreign exchange fluctuations particularly in Japan and South Korea, the decline in Fee Income would be a more moderate 2% y-o-y.
Management Discussion & Analysis 16 STRENGTH IN UNITY Construction revenue increased from US$12.6 million in 1H2023 to US$20.6 million in 1H2024 as the Group continues to execute projects that commenced in the second half of year 2023. Cost of sales increased correspondingly from US$12.7 million in 1H2023 to US$27.2 million in 1H2024. Rental income decreased by 4.6% from US$36.7 million in 1H2023 to US$35.0 million in 1H2024. This was mainly attributed to a drop in rental income from assets divested, offset by full six months rental income earned from assets completed in FY2023. Geographically, 92% of the Group’s revenue for 1H2024 was contributed from Greater China, Japan, South Korea, Southeast Asia, India and Australia and New Zealand; Europe and USA largely made up the remaining 8%. Post June 2024, the Group’s exposure to the U.S. will be nil, following the sale of ARA US Hospitality Trust management platform and units that was completed in July 2024 and the sale of ARA Private Funds which is expected to complete in second half of the year. 1H2024 Revenue by Region US$312 million 28% Greater China 16% Japan & South Korea 24% Australia & New Zealand 8% U.S. & Europe 24% India & SEA 1H2024 Revenue by Segment US$312 million 81% Fund Management 12% Investment 7% New Economy Development PATMI AND EBITDA16 EBITDA17 decreased by 104.1% from a profit of US$537.4 million in 1H2023 to a loss of US$22.2 million in 1H2024. PATMI18 decreased by 175.7% from a profit of US$289.0 million in 1H2023 to loss of US$218.7 million in 1H2024. These were driven by the following factors, namely non-cash adjustments and write-down tied to non-core divestments or near-term divestments, negative fair value movements and absence of promote fees in 1H2024. Other income and gains, net decreased from US$214.8 million in 1H2023 to US$8.4 million in 1H2024. The Group recorded a share of losses of US$7.3 million from the results of its joint ventures and associates in 1H2024 compared to a share of profits of US$78.4 million in 1H2023. The reductions were mainly due to non-cash items listed below: Loss tied to non-core divestments or near-term divestments • ARA US Hospitality Trust write-down: US$97.4 million arising from the divestment of the Group’s stake in ARA US Hospitality Trust manager and units, the agreement for which was entered into on 27 May 2024 and which was completed on 9 July 2024. The amount was accounted for as impairment loss of assets held for sale and is adjusted under Non-IFRS Measures for a like-for-like comparison with 1H2023 as this was the divestment of a non-core asset, to simplify and streamline the Group to focus on New Economy. • Share of associate’s fair value losses: approximately US$44.6 million estimated from the asset revaluation of Cromwell Property Group’s (“Cromwell”) Australia investment portfolio as well as the sale of Cromwell’s European fund management platform and associated co-investments, consistent with Cromwell’s commitment to simplify its business to transition to a capital-light funds management model. The effect of fair value losses which are non-cash in nature and divestment of non-core assets is adjusted under Non-IFRS Measures for a like-for-like comparison with 1H2023. Notes: 16. EBITDA, Adjusted EBITDA and Adjusted PATMI are non-IFRS measures. Refer to non-IFRS measures reconciliation in page 107 17. EBITDA is calculated as profit/(loss) before tax, adding back depreciation and amortisation and finance costs (net) 18. PATMI is profit/(loss) after tax and minority interests
17 ESR Group Limited Interim Report 2024 Mainland China Negative fair value movements relating to assets in Mainland China comprising: • US$60.0 million arising from the revaluation loss of three balance sheet assets in Mainland China to be spun-off to ESR C-REIT. ESR had previously announced that these assets will be spun-off through a publicly offered infrastructure securities investment fund on the Shanghai Stock Exchange (the “Proposed Spin-off”). The listing was approved by the relevant regulatory authorities on 21 June 2024. This revaluation was an adjustment conducted in connection with the Proposed Spin-off. The Proposed Spin-off forms a central part of the Group’s efforts to optimise its balance sheet, including via divestments to ESR-managed vehicles such as this, which will enhance its recurring fee revenue going forward. • US$125.5 million decline in fair values attributable to two key factors. Firstly, fair values have been adjusted downwards in Northern China owing to a short-term oversupply of completed projects in the market. Secondly, in 1H2023, the Group benefited from valuation uplifts as three prime properties in the Greater Shanghai and Greater Bay area transitioned from development to completed investment properties, which led to a positive revaluation. For the current financial year, the Company did not record similar fair value gains given the challenging macroeconomic conditions in Mainland China, resulting in lower fair value gains recognised in 1H2024. Finance cost decreased by 3.2% from US$158.8 million in 1H2023 to US$153.6 million in 1H2024. As at 30 June 2024, the Group’s weighted average interest costs reduced to 4.9% from 5.3% as at 31 December 2023, as the Group continues to refinance its borrowings with lower margin financing. Administrative expenses increased by 57.3% from US$204.5 million in 1H2023 to US$321.7 million in 1H2024, mainly due to the US$97.4 million impairment of assets held for sale for the non-core divestment of the ARA US Hospitality Trust manager and units as mentioned above. SEGMENT RESULTS Fund Management segment results decreased by US$159.3 million or 48.5% from US$328.7 million in 1H2023 to US$169.4 million in 1H2024, mainly due to lack of promote fee as mentioned above. Nonetheless, Fee Income and fund management EBITDA excluding promote fees stayed resilient, where margins remain in the region of 70%. The Investment segment reported a loss of US$160.9 million in 1H2024 compared to profit of US$120.2 million in 1H2023. This was mainly due to the US$60.0 million revaluation loss of three balance sheet assets in Mainland China to be spun-off to ESR C-REIT, downward fair values adjustments of assets in Northern China, share of fair value loss from Cromwell of US$44.6 million, and the abovementioned impairment of assets held for sale of non-core divestment of the ARA US Hospitality Trust manager and units of US$97.4 million. Excluding the effects of the impairment and fair value losses of Cromwell, the loss from Investment segment would be US$18.9 million. New Economy Development segment results decreased by 73.3% from US$147.7 million in 1H2023 to US$39.4 million in 1H2024. The decrease was mainly attributable to the abovementioned lower fair value from the Group’s Mainland China assets in 1H2024. 1H2024 1H2023 y-o-y variance % Segmental Results US$ million US$ million Investment (161) 120 N.M. Fund Management 169 329 (48) New Economy Development 39 148 (73) ASSETS AND LIABILITIES Total assets reported a slight change from US$16.2 billion as at 31 December 2023 to US$15.9 billion as at 30 June 2024. Main movements are as described below. Investment properties decreased by 10.5% to US$2.9 billion as at 30 June 2024 (31 December 2023: US$3.2 billion). The decrease was mainly due to the reclassification of properties amounted to US$282.3 million as assets held for sale as at 30 June 2024, sales of assets which amounted to US$114.0 million and downwards valuation of certain properties in Mainland China. The reduction was offset by an increase in the properties under development during the period.
Management Discussion & Analysis 18 STRENGTH IN UNITY Investments in joint ventures and associates decreased to US$3.3 billion as at 30 June 2024 (31 December 2023: US$3.4 billion), mainly due to the abovementioned negative fair value movements relating to assets in Mainland China, share of fair value losses in Cromwell as well as write-down and reclassification of the ARA US Hospitality Trust manager and units to assets held for sale. Financial assets at fair value through other comprehensive income (“FVOCI”) decreased by 19.0% or US$199.1 million to US$851.3 million as at 30 June 2024, contributed by mark-to-market losses of US$91.5 million mainly from the Group’s quoted investments; as well as the reclassification of US$121.6 million pertaining to the disposal of ARA Private Funds to assets held for sale. Goodwill and other intangible assets decreased from US$4.8 billion as at 31 December 2023 to US$4.6 billion as at 30 June 2024, due to the non-core divestments of the ARA US Hospitality Trust manager and units and ARA Private Funds, in line with the Group’s key business priorities that include streamlining and simplifying the business with renewed focus on New Economy. Trade receivables decreased by 31.4% to US$365.4 million as at 30 June 2024 (31 December 2023: US$532.9 million) as 50% of the promote fee receivables were collected in 1H2024. Assets (net of liabilities) of a disposal group classified as held for sale increased significantly from US$60.6 million to US$675.7 million, arising from the reclassification of few investment properties to assets held for disposal; as well as the reclassifications of ARA US Hospitality Trust manager and units and ARA Private Funds as mentioned above. Total bank and other borrowings as at 30 June 2024 increased to US$6.2 billion (31 December 2023: US$6.0 billion). The increase was attributed to a timing spill-over for an asset loan refinancing where loan drawdown took place in late June 2024, ahead of the repayment in early July. TOTAL EQUITY Total equity as at 30 June 2024 remained relatively stable, with a slight decrease to US$8.1 billion from US$8.7 billion as at 31 December 2023. The primary factors included the loss for 1H2024 of US$209.0 million, an unrealised mark-to-market fair value loss of US$91.5 million on the Group’s FVOCI; and the share of unrealised currency translation losses of US$116.0 million from the Group’s joint ventures and associates due to the strengthening of US dollars against local currencies. In addition, the total equity as at 30 June 2024 is net of final dividend of US$67.4 million for the year ended 31 December 2023 and ESR Group shares repurchased totalling US$72.2 million. The Group manages and minimises its foreign currency exposures by natural hedges using various currencies via project as well as corporate level; it continues to assess the use of financial derivatives where appropriate to manage its foreign currency exposures. CAPITAL MANAGEMENT ESR adopts a proactive and disciplined capital management approach, and regularly reviews its liquidity position, debt maturity profile, and refinancing ahead of maturity. 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, as well as capital market issuances in optimising its costs of debt. ESR remains 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. This meaningfully enhances the Group's tangible return on equity while maintaining sufficient funding capacity across the Group. Net debt remained constant at US$5.1 billion compared to US$5.0 billion as at 31 December 2023. The Group’s liquidity position remains healthy, backed by a committed sustainability-linked loan facility of US$2.5 billion, with a greenshoe option to upsize to US$3.0 billion. The facility is expected to close by end of the year.
19 ESR Group Limited Interim Report 2024 Debt Maturity Profile (US$ million) As at 30 June 2024 2027 and beyond 1,029 564 1,195 3,403 2H2024 2025 2026 As at 30 June 2024, the Group’s gearing was 32.3%, with weighted average debt maturity of 4 years (31 December 2023: 5 years). The weighted average interest cost was 4.9% as at 30 June 2024 (31 December 2023: 5.3%) as management has tapped lower margin financing to refinance more expensive US dollar denominated debt. As at 30 June 2024, 10% of the Group’s borrowings was on fixed rate while the remaining 90% was on floating rate basis. While gearing was 32.3% as at 30 June 2024, it would be approximately 30% upon the impending completion of the sale of ARA Private Funds and the formal launch of the ESR C-REIT. With the ongoing transactions of approximately US$1 billion in gross value which are pending completion, and another US$2 billion in the pipeline to be executed, the Group remains committed to reducing its gearing towards the low end of the range of 20–30%. 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 at the project and corporate levels. The 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 monitors closely the interest and exchange rates movements and assesses the use of financial derivatives as additional tools when appropriate to manage foreign currency and interest rate exposures. As at 30 June 2024, currency profile of the Group’s cash and bank balances; and bank and other borrowings are as below: Cash and Bank Balances As at 30 June 2024 42% RMB 25% USD 11% JPY 6% SGD 6% AUD 4% HKD 4% KRW 2% Others US$1.1 billion Bank and Other Borrowings As at 30 June 2024 25% SGD 20% JPY 18% HKD 17% USD 4% AUD 15% RMB 1% Others US$6.2 billion CHARGE OF ASSETS As at 30 June 2024, certain of the Group’s assets were pledged to secure bank and other borrowings granted to the Group. The information of the carrying value of assets charged are in Note 18 of the unaudited condensed consolidated financial information. Except for the aforementioned charges, all the Group’s assets are free from any encumbrances. CONTINGENT LIABILITIES As at 30 June 2024, neither the Group nor the Company had any significant contingent liabilities.
STRENGTH IN UNITY Corporate Governance and Other Information 20 DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES As at 30 June 2024, the interests and short positions of the Directors and Chief Executives of the Company in the ordinary shares of the Company (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 2024 Mr. Jinchu Shen Interest of controlled corporations (Note 2) 319,658,645(L) (Note 3) Beneficial owner (Notes 5 & 6) 1,145,620(L) 320,804,265(L) 7.61% Mr. Stuart Gibson Other (Note 8) 448,933,103(L) Interest of controlled corporations (Note 4) 850,000 (L) Beneficial owner (Notes 5 & 6) 1,286,075(L) 451,069,178(L) 10.71% Mr. Charles Alexander Portes Other (Note 8) 448,933,103(L) Interest of controlled corporations (Note 4) 850,000(L) 449,783,103 (L) 10.68% Mr. Hwee Chiang Lim Interest of controlled corporations (Note 7) 227,859,487(L) Beneficial owner 4,402,959(L) 232,262,446(L) 5.51% 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 (retired as Independent Non-Executive Director on 31 May 2024) Beneficial owner 12,000(L) 0.00%
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