Employees sort boxes and parcels after an online shopping festival. Picture: REUTERS
Employees sort boxes and parcels after an online shopping festival. Picture: REUTERS

Can a five-year-old Hong Kong-based property manager grow to take on the likes of Blackstone and Brookfield Asset Management?  That’s the question capturing the attention of some analysts for ESR Cayman.

The landlord of e-commerce logistics hubs has been on a deal-making spree for two years, most recently the acquisition of much larger competitor ARA Asset Management for $5.2bn.  And more is likely to come. 

The company plans to speed up investments in India and Southeast Asian countries where e-commerce still accounts for a tiny fraction of retail sales, chair Jeffrey Perlman said in an interview. The proportion of assets invested across China, South Korea, Japan and Australia will fall slightly while remaining key markets, he said.

“These other countries are expecting e-commerce sales to triple over the next five years against markets like China, which have already witnessed the outsized growth cycle,” Perlman said. 

The landlord to internet giants like JD.com and Amazon.com is walking a tightrope: grow too slowly and risk being left behind; grow too fast and financing costs may quickly spiral. That has left opinions split on the firm’s ambitious growth.

Shares sank as much as 19% in the weeks after the announcement of the ARA acquisition in August. The stock has since pared some of those losses and is trading at close to the six-month volume-weighted average price.

ESR’s rapid growth “raises concerns about whether it can maintain a high performance in the future”, Patrick Pun, an analyst at Wellchamp Capital, said in an interview. Both Pun and analysts at CICC said the ARA acquisition has weighed on the company’s shares. The latter suggested investors take a “neutral approach” to the deal in a note last month.

Goldman Sachs Group is more bullish, saying ARA will diversify earnings and boost the company’s ability to begin dividend distributions to shareholders. All analysts surveyed by Bloomberg, including CICC and Goldman Sachs, have a buy or outperform rating on the stock.

Deal spree

ESR’s pressure is coming from competitors that are also building out assets. JD.com is set to become a controlling shareholder in China Logistics Property Holdings in a $2.1bn deal, according to a statement in early September.

ESR is pressing ahead with billions worth of acquisitions and investments at a time when demand for traditional office space plunges with the global pandemic. The company plans to double its logistics and data centre assets to more than $100bn in the next several years, a person with knowledge of the matter said, asking not to be identified discussing private information.

Before ARA, ESR partnered with GIC to buy a portfolio of warehouse and logistics assets in Australia from Blackstone Group for about A$3.8bn ($2.8bn) in April.

The company expects India and Southeast Asia to make up 30% of the portfolio in future, from about 20% now, Perlman said. And he is looking at divesting one or two noncore assets from the ARA transaction that do not fit with the longer-term strategy. The ARA deal is set to triple assets under management to make ESR the third-largest listed real estate manager globally. 

Borrowing costs

Debt has been piling up, with a total of $3.2bn outstanding in loans, bonds and other credit facilities, according to Bloomberg Data. HSBC Holdings,  BNP Paribas, Bank of China, Standard Chartered and about a dozen other banks — mostly across Asia-Pacific — are lenders to ESR.

ESR’s financing costs are much higher than those of its peers. The cost of borrowing stood at 3.9% inf June, compared with 0.54% for Goodman Group or 1.8% for Prologis, according to data compiled by Bloomberg. That is due to the mature growth profiles and superior credit ratings at those rivals, according to Mohsen Crofts, an analyst from Bloomberg Intelligence. 

Borrowing expenses will come down, since ARA is able to obtain loans at less than 2% on an unsecured basis, Perlman said. And while ESR typically provides 10%-15% of the capital for its funds, ARA and its subsidiaries historically added less than 5%. Over time, that will enable ESR to borrow less for investments in real estate funds, Perlman said. 

To be sure, a deep slowdown in e-commerce sales and rising competition in the property third-party fund management space are among the risks the company could face, according to a note from Goldman Sachs dated September 21. 

But over the next five years, the cost of debt financing for logistics assets — barring a rise in interest rates — will reduce, Perlman said. “Most banks are highly underexposed to new economy or logistics real estate,” he said. 

Bloomberg News. For more articles like this please visit Bloomberg.com.


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