ESR Warns of $210M H1 Loss on Markdowns, Fee Income Drought

ESR expects to report a loss of $210 million for the first half of the year, according to a warning issued Wednesday by the Hong Kong-listed industrial developer and fund manager.

The predicted shortfall would reverse a net profit of $313.9 million in the same six-month period of 2023, ESR said in a stock filing. The Warburg Pincus-backed group said market conditions led to non-cash asset revaluations and a lack of promote fee income, the latter being a revenue stream tied to the performance of managed funds.

“However, the group’s underlying business remains healthy and the board is confident in the group’s ongoing strategic direction and core operating earnings,” ESR co-founder and co-CEO Jeffrey Shen said in the filing.

The news comes three months after a consortium including US private equity firm Starwood Capital made a non-binding offer to buy out ESR, which last year ranked as the biggest manager of private real estate funds in Asia Pacific with $70.8 billion in unlisted vehicles, according to an ANREV survey.

Cyclical Shortage

The lion’s share of ESR’s pending loss stemmed from the absence of promote fee income in the current reporting period. Promote fees are booked upon recapitalisation or realisation of managed funds and are based on the funds’ historical performance.

The group recorded no promote fee income in the six months to June, compared with $136 million in the year-earlier period.

“This is reflective of the current phases of the group’s fund lifecycles and the overall real estate cycle, and increased promote fee income would be expected as these two drivers move in the group’s favour,” ESR said.

A $100 million loss will arise from the divestment of ESR’s stake in Singapore-listed ARA US Hospitality Trust. While the deal was completed on 9 July, the amount is being booked as an impairment loss for the six months to June and adjusted for the purposes of the results presentation to ease comparison with the year-earlier period.

The group also estimates fair value losses totalling $60 million for three balance-sheet assets due to be spun off into a China REIT and $45 million from the revaluation of Cromwell Property Group’s Australia portfolio and the sale of Cromwell’s European fund management platform.

ESR’s stock fell 1 percent in Wednesday trading to HK$11.36 ($1.46).

Raising Cash Down Under

With the first half’s red ink in the rearview, ESR kicked off the second half of 2024 with an influx of cash from a pair of deals in Australia.

In July, ESR announced the sale of a Sydney logistics estate to Aussie real estate investment manager and operator Arrow Capital Partners for A$101.8 million ($68 million), marking the country’s biggest single-asset industrial transaction so far this year.

A month later, the group teamed up with Mitsubishi Estate on a joint venture that will see the Japanese builder invest in an ESR project near Melbourne with an end value of A$175 million ($113 million).

ESR has more than $156 billion in assets under management, including over $80 billion in fee-related AUM.