- ESR reported a loss for FY24, extending the loss reported from 1H24. We continue to view ESR as a stable issuer,
considering a majority of the losses had been contributed by non-cash
impairment losses owing to property revaluation. Additionally, default risk
remains minimal for now, given the Group’s robust liquidity and further balance
sheet optimisation to come.
- For the year ended 31 December 2024 (“FY24”),
ESR reported a negative profit after taxes and minority interests (“PATMI”) of
USD -699.8m, as compared to a profit of USD 230.8m recorded in FY23. ESR saw a
considerable drop in EBITDA across the year, falling from USD 724.6m (FY23) to
USD -415.6m (FY24). The decline was contributed by lower revenue (see below),
alongside significant non-cash revaluation losses associated with divestments
of non-core assets and Mainland China properties.
- The decline in revenue (-27% YoY) was primarily
due to lower management fees, falling from USD 736.7m (FY23) to USD 497.8m
(FY24). Management indicated that it was affected by the decline in promote
fees, with USD 182.3m recorded in FY23. Promote fees could be understood as
performance-based fees and ESR explained that they are recognised upon the
recapitalisation or realisation of the Group’s managed funds. As such, promote
fees are greatly dependent on performance across the life cycle of the managed
funds, while noting that the pace of transaction activities has slowed
significantly in FY24.
- Meanwhile, we saw the non-cash revaluation
losses extending from ESR’s 1H24 results, particularly with further impairments
experienced for Mainland China assets. Across FY24, ESR recorded the following
non-cash losses amounting to approximately USD 591m – (1) USD 97.4m for the
divestment of ARA US Hospitality Trust, (2) USD 65.3m for the divestment of
assets under Cromwell Property Group (“Cromwell”), (3) USD 106.1m revaluation
losses associated with Mainland China assets under ESR C-REIT, and (4) USD
322.4m revaluation losses associated with newly completed properties in
Mainland China.
- On an adjusted basis (primarily for the
impairment of assets held for sale and losses associated with Cromwell), ESR
reported an adjusted EBITDA of USD -79.6m (FY24) as compared to USD 885.3m
(FY23). If we further exclude the fair value gains/losses on investment
properties, the adjusted EBITDA figure will be a positive of USD 232.4m (FY24)
against USD 697.7m (FY23).
- The underlying business operations remain
resilient in our view. ESR continues to see growth in its fee-related AUM and
fee income (excluding promote fees) on a pro-forma basis, adjusting for the
divestment of non-core assets. Pro-forma Fee-related AUM and fee income grew by
+5.9% YoY and +6.6% YoY respectively, underpinning ESR’s key strategy of
becoming asset-light and focusing on stable management fees as its core income.
Additionally, operating cash flow for ESR remains positive, seeing an increase
from USD 224.5m (FY23) to USD 356.4m (FY24).
- Recently in January, we saw the successful
listing of ESR C-REIT on the Shanghai Stock Exchange (SSE Stock Code: 508078), raising
more than RMB 2.1b. ESR retained a 41% stake in the ESR C-REIT, with 12
cornerstone institutional investors attracted for the initial public offering. We
believe the listing reflects the consistent effort in ESR’s ongoing balance
sheet optimisation strategy. The proceeds raised from the listing are expected
to be utilised towards further debt repayment plans.
- At the same time, we view the privatisation
proposal by the consortium of investors as positive for ESR Group. This
ultimately validates ESR’s intrinsic value in the extended term, affirmed by
the consortium proposing to take ESR private.
- On ESR’s credit and liquidity profile, we note
several key improvements despite a general deterioration in debt metrics owing
to the non-cash impairments. Weighted average interest cost further fell to
4.7% as of December 2024, down from 4.9% as of June 2024 and 5.3% as of December
2023. Meanwhile, earlier in December, ESR secured a five-year syndicated
sustainability-linked term loan and revolving credit facilities totalling USD
2.5b. This enabled ESR to have a robust liquidity position of USD 3.9b from
cash and committed facilities.
- On
the other hand, borrowings saw a slight increase from USD 5,980m (Dec 23) to
USD 6,148m (Dec 24). This was mostly due to a delay in receipt of net proceeds
from capital recycling transactions which were completed in late December 2024
and January 2025. Net-debt-to-total-assets and net-debt-to-equity rose from
30.7% and 57.0% (Dec 23) to 35.3% and 70.2% (Dec 24) respectively, due to the
considerable decline in assets and equity.
- Overall, despite the recent losses, we believe
default risk remains minimal for now. With further USD 2.7b of capital
recycling earmarked for the balance sheet optimisation, we expect the proceeds
and current liquidity to be more than sufficient for its maturing debt. On top
of that, we believe the positive operating cash flow experienced by ESR
reflects the underlying resilient business operations, despite its overall
losses.
- Nonetheless, we wish to highlight the general
risks associated with perpetual securities for ESR’s outstanding issuances.
Investors ought to consider the possibility of a non-call on the perpetual
securities, while the recent losses increase the probability of interest
deferral (albeit still a low likelihood of it happening).
- Among the three ESR perpetual securities, we continue to prefer the ESRCAY 5.650% Perpetual Corp (SGD) owing to its short ~0.9 year remaining to call. At the yield to call of ~6.8%, we believe this remains sufficient to compensate the relatively high risk for the perpetual security and given the issuer’s credit profile.
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