Warburg Pincus-backed logistics developer and fund manager ESR has posted a 21 percent rise in net profit to $245 million for 2019, as it continues to ride the growth of e-commerce and the shift of capital values to Asia.
In what was the company’s first earnings call since listing on the Hong Kong stock exchange last October, ESR sought to reassure investors that it had witnessed only minimal disruption as a result of the global COVID-19 crisis, while future business was secure.
“Despite the short-term impact from COVID-19, we are confident in the resilience of logistics real estate in Asia Pacific, and believe that it will remain the best positioned real estate asset class over the next decade,” said Warburg Pincus’ head of Southeast Asia, Jeffrey Perlman, who serves as ESR’s chairman.
Stuart Gibson, co-founder and co-CEO of ESR, said that, with over half of the company’s tenants from the e-commerce sector, ESR was “seeing a rush to secure high quality space”.
ESR has already managed to ride out one storm after postponing its initial public offering in June when anti-government protests broke out in Hong Kong. The company ultimately listed last October, raising HK$14 billion ($1.8 billion) in Hong Kong’s second-largest listing of the year.
Riding the E-Commerce Wave
Supported by rising demand for warehouses as consumers increasingly turn to online shopping, ESR said that it boosted its assets under management by 39 percent in 2019 to $22 billion and expanded its global portfolio size by 43 percent to 17.2 million square metres (185 million square feet).
With e-commerce tenants accounting for 60 percent of ESR’s portfolio, the logistics developer and fund manager in 2019 saw its revenue soar 40 percent from the year before to $357 million. (The company’s announcement of its results is available on the Hong Kong exchange here).
Perlman said that the continued rise of e-commerce, which was the “bedrock” of the company, would carry on into 2020, and might even be accelerated by the outbreak of COVID-19.
Despite the disruption to global markets, the company reported that only two of its 43 construction sites had been suspended as a result of the outbreak, with a further two of its 157 operating projects temporarily shut.
Benefiting from a Healthy Balance Sheet
With a net gearing of 26.5 percent at the end of 2019 and $884 million cash in hand, ESR said that the strength of the company’s balance sheet puts in a strong position to be able to maintain the growth momentum set in 2019.
“ESR is well capitalised with a strong balance sheet which will allow us to pursue strategic growth opportunities in a capital constrained environment,” Perlman said.
Perlman noted that ESR’s robust financial footing was reinforced by a $250 million unsecured syndicated loan which was announced last week after the company had last month issued S$225 million ($154 million) in fixed notes due in 2025. The net result has been a 150 basis point reduction in the company’s corporate borrowing costs post-IPO after ESR repaid $300 million in higher interest and shorter duration financing from Hana Financial Group.
Growing Logistics Sector in a Disrupted Environment
Despite the current market turmoil, ESR’s management told investors that the key drivers that underpinned the company’s growth in 2019 would remain unchanged.
Perlman said that the shift in capital flows from the US and Europe to Asia will carry on, while cap rate compression in warehouse assets will continue as investors cycle out of retail and into logistics for a favourable risk-reward proposition.
While acknowledging that COVID-19 is likely to have an impact on tenants, Perlman predicted that this would include an increase in demand for warehouse space, rather than a reduction in rental prices.
The disruption would also create M&A opportunities with the company anticipating openings to acquire industry peers which could encounter liquidity issues, according to the ESR chairman.
“We think capital is king in this environment and it will give us a great ability to seek out attractive investment and development opportunities,” Perlman said.
He noted that the actions of central governments in response to the outbreak suggest that there will be a low interest rate environment globally for an extended period of time.
“We think real estate is going to be an outperformer in that regard, especially logistics real estate,” he added.