ESR Exploring Sale of Stake in Cromwell Property Group

Hong Kong-listed ESR aims to divest at least $1 billion in assets this year as it continues to focus on its fund management business, and those disposals could include its stake in Cromwell Property Group.

In an earnings webcast on Wednesday, chairman Jeffrey Perlman said ESR was considering a potential sale of the company’s 31 percent stake in Cromwell, which in turn holds a 27.8 percent stake in Singapore-listed Cromwell European REIT. The industrial specialist inherited its interest in the Australian property firm when it acquired ARA Asset Management in early 2022.

“We’re evaluating our stake in Cromwell, as well as subscale REITs in our portfolio that we don’t feel we can grow to a meaningful size and scale,” Perlman said. “We feel this can recycle up to $750 million of capital to the group and we can use that capital to deliver fee-generating AUM and make our business easier to understand in the process.”

Declining property valuations led Cromwell to report a loss of A$129.5 million (now $86.1 million) for the six months to December 2022, reversing a year-earlier profit of A$132.5 million, as chairman Gary Weiss noted that the group was pursuing “simplification of Cromwell’s operating structure, improved staff engagement and management of the balance sheet through non-core asset sales”.

Business Shift

Perlman’s remarks came as ESR has been shifting to an “asset-light” model and looking more to fund management revenues as a source of income.

After ESR made $1.1 billion worth of divestments in China last year, Perlman said mainland assets will continue to make up a large portion of the properties to be sold this year to deep-pocketed local investors seeking logistics assets, in addition to offering potential portfolio assets for ESR’s much anticipated China-listed REIT.

“We’re looking to further double down in areas where we believe we can create or invest in market leaders, which includes our data centre platform and our inaugural data centre fund, as well as our recent strategic investment in BW Industrial,” Perlman said, referring to the Vietnam-based warehouse developer. “We’re transforming and simplifying our business with a strong focus on ESR’s three core pillars of growth, namely new economy, alternatives and REITs.”

Healthy Financials

ESR on Wednesday reported a 10 percent increase in profit last year, propelled by growth in fee income and disposals of non-core assets.

The group’s earnings before interest, tax, depreciation and amortisation jumped to $1.15 billion in 2022 from $1 billion a year earlier (for the company and its then soon-to-be-absorbed ARA unit), as growth in fee income from its fund management business boosted overall group revenue to $821 million — up 7.1 percent from 2021.

ESR’s assets under management rose 11 percent year-on-year to an all-time high of $156 billion in 2022, after the company completed its $5.2 billion acquisition of ARA and notched fundraising successes that expanded its cash for deployment to a record $19.9 billion.

S-REIT Stress Test

Singapore-listed REITs of foreign assets continue to struggle, with Manulife US REIT last week confirming that it is currently in discussions with Mirae Asset Global Investments regarding a potential sale of shares in the trust of US office properties following a strategic review. Some big-name investment managers are also re-evaluating their positions in Singapore-listed property vehicles.

Late last year, US-based BlackRock sold 59,900 units of Cromwell European REIT, leaving the firm below the 5 percent threshold to be considered a substantial unitholder and therefore no longer subject to disclosing interest or change in interest in the trust’s voting shares. Over the past 12 months the trust’s share price has slid by more than 31 percent, despite rising 3.3 percent since the start of 2023.

The REIT’s manager has warned that it expects transaction activity to slow down in the near term and that the focus will remain on asset and capital recycling rather than acquisitions.

Share prices of S-REITs have plunged over the past year amid a sharp rise in interest rates and soaring inflation. Rising yields on Singapore government securities have provided an appealing alternative to REITs for risk-averse investors.

Note: This article has been updated to clarify ESR chairman Jeffrey Perlman’s comment about Cromwell Property Group, through which ESR indirectly holds a stake in Cromwell European REIT. Mingtiandi regrets any confusion caused.