ESR Flags $730M Loss as China Project Markdowns Hit Bottom Line

ESR expects to report a net loss of $730 million for 2024, according to a warning issued Thursday by the Hong Kong-listed industrial developer and fund manager.

The predicted shortfall would reverse the $268 million net profit recorded in 2023, ESR said in a stock filing. The estimated result stems mainly from marked-to-market losses in asset and project valuations — led by a $320 million hit related to certain newly completed properties in China — as well as a $180 million decline in promote fees, a revenue stream tied to the performance of managed funds.

In the filing, co-founder and co-CEO Jeffrey Shen acknowledged a “volatile and uncertain” operating environment but affirmed that ESR’s underlying business remains fundamentally resilient, underpinned by sustained growth in recurring fee incomes from asset management, investment management and property management.

“The estimated net loss for the year is mainly driven by the movements in non-cash items resulting from these macroeconomic headwinds and is not reflective of the expected long-term performance of the group,” Shen said.

Buyout Looms

The fair value of the newly completed China assets, which ESR didn’t name, will be adjusted from valuation levels in 2023, when the properties saw valuation uplifts as they transitioned from the development pipeline to the investment portfolio. The group attributed the markdowns to weak demand that would mean a longer period to reach targeted occupancy and rent levels.

The filing also pointed to a $106 million revaluation loss on three balance-sheet assets that were divested to seed the sponsored ESR China REIT. The group went on to raise more than RMB 2.1 billion ($290 million) from the trust’s Shanghai IPO in January of this year.

Other non-cash items contributing to the anticipated loss include a write-down arising from the sale of ESR’s stake in Singapore-listed ARA US Hospitality Trust (since rebranded as Acrophyte Hospitality Trust) and red ink tied to the group’s interest in Australia’s Cromwell Property Group.

The profit alert comes three months after a consortium of investment firms including Starwood Capital, Sixth Street Partners, SSW Partners, the Qatar Investment Authority and Warburg Pincus announced a binding offer to buy out ESR in a deal valuing the group at nearly $7.1 billion.

The consortium is seeking to acquire all ESR shares that it does not already own for HK$13 ($1.67) each. The group’s HKEX-traded stock closed Thursday at HK$12.40, down 0.6 percent, after the warning announcement.

Data Centre Focus

With 2024 in the rearview, ESR can turn attention to its accelerated strategy to execute 575 megawatts of committed data centre sites across key Asia Pacific markets.

Last May, the group announced the groundbreaking of its fourth data centre location in Japan, a 60MW facility in Tokyo’s eastern Koto ward, boosting ESR’s pipeline of projects in the country to 320MW.

Earlier this year, ESR drafted in a partner to help get its Osaka data centre campus to the finish line, teaming with US builder CloudHQ on the $2 billion Cosmosquare project. The companies plan to jointly build, fit out and operate Cosmosquare to deliver 130MW of capacity in three phases.