ESR Interim Report 2020 (EN)

Management Discussion and Analysis BUSINESS REVIEW During the six months ended 30 June 2020 (“ 1H2020 ”), the Group’s three pillars of business – investment, fund management and development – remained robust, experiencing impressive growth on the back of several key achievements. Throughout the COVID-19 outbreak, ESR has demonstrated the strength of its resilient business model with solid operating results, disciplined capital management and robust fundraising for our third party vehicles. We are proud that our teams have remained dedicated to supporting our stakeholders and contributing to the Group’s accelerating momentum and performance across each of our business segments and geographies. In fact, the Group is especially proud that it achieved record leasing, fundraising and development completions in 1H2020. Net profit attributable to the owners of the Company (“ PATMI ”) grew 75.1% from US$76.0 million in 1H2019 to US$133.0 million in 1H2020; and EBITDA increased by 27.3% from US$211.6 million in 1H2019 to US$269.4 million in 1H2020. We have a robust and well-capitalised balance sheet as at June 2020 with US$946.6 million in cash, and a gearing ratio of net debt over total assets of 28.6%. The Group’s assets under management (“ AUM ”) recorded a strong growth of US$6.3 billion or 31.1% from US$20.2 billion as at June 2019 to US$26.5 billion as at June 2020, underpinned by new funds raised across China, South Korea and Australia in 1H2020. In China, we entered into a US$500 million joint venture with GIC 1 and a core fund joint venture with Manulife to invest in China logistics real estate. This was followed by the establishment of ESR Australia Logistics Partnership (“ the EALP ”) with GIC, a new core-plus fund in Australia with equity commitment up to US$416 million. In April 2020, together with APG and CPP Investments, ESR launched its second development fund in South Korea, with equity commitments of up to US$1.0 billion. In Japan, we entered into a US$257 million joint venture with AXA. In terms of Gross Floor Area (“ GFA ”), this grew by 22.4% from 15.3 million square metres (“ sqm ”) as at June 2019 to 18.7 million sqm as at June 2020, across our six markets. As at 30 June 2020, the Group has further approximately 7.2 million sqm GFA of development pipeline with MOUs signed across our markets with high quality tenant base. Development demand continued to grow and the Group has achieved US$0.8 billion of development starts and US$2.2 billion development completions for 1H2020. Many of these developments are landmark projects of the largest scale and most advanced specifications in the industry. The Group remains asset-light as we continue to leverage on third party capital to fund developments under our funds and investment vehicles. As at 30 June 2020, 89% of AUM was under third party funds and REITs. In 1H2020, the Group leased 0.9 million sqm (representing over 100 leases) as it experienced increased demand for prime logistics space from both new and repeat customers in the e-commerce, cold chain and manufacturing sectors across our markets. The Group maintained a high occupancy of 91% across its entire portfolio despite challenging market conditions brought on by the onset of COVID-19. E-commerce and third party logistics (“ 3PLs ”) (which largely support e-commerce) remain a key driver of demand representing over 60% of ESR’s tenant portfolio (based on leased area). OUTLOOK The logistics sector in Asia Pacific is poised to be a top- performing real estate sector, propelled by the continued surge in e-commerce adoption and usage. Additionally, the market is witnessing a growing demand for more logistics space from supply chains that are evolving from a pre-COVID “just in time” inventory model to a “just in case” inventory model. E-commerce penetration rates across Asia Pacific are expected to continue their steep growth trajectories with greater gains expected from markets that already have relatively high levels of e-commerce sales. Leasing activity remains robust with a resilient performance across ESR’s six markets. Despite the impact of the pandemic, ESR leased 0.9 million sqm in 1H2020. The pandemic has accelerated the shift in consumer purchasing habits to online shopping and the corresponding demand for logistics space remains intense. The pandemic has served as a catalyst for a greater need for modern warehouses from e-commerce related platforms and 3PLs as well as increased demand for cold and/or mixed storage space 2 . There is also a shift by manufacturers and retailers to build greater levels of local inventory and to prepare for the increasing demands generated during periods of lockdown and supply chain disruption. As such, there is an overall net positive impact of the pandemic on the logistics sector as consumer patterns and supply chain activities have changed. Investment Segment Competition for prime industrial and logistics space remains strong with growing interest from occupiers across the e-commerce supply chain spectrum. ESR’s diversified geographic presence across the Asia Pacific region in key gateway cities and quality tenant base focused on e-commerce and third party logistics players, continue to provide a resilient performance for the Group with healthy occupancies and rental growth. The Group has experienced increased demand for space from customers in the cold chain, manufacturing and e-commerce sectors. The Group continues to extend its tenant relationships across its markets which has led to meaningful expansion by repeat tenants. This has allowed the Group to fund incremental acquisitions of land and assets to further reinforce its strategic network. ESR actively deployed capital from our balance sheet and third party funds, acquiring assets across various markets. In June 2020, ESR acquired 100% stake in three prime assets in East China’s Jiangsu Province. Notes: 1 GIC is a global investment firm established in 1981 to manage Singapore’s foreign reserves. 2 CBRE Research, Asia Pacific, Real Estate Market Outlook 2020 Mid-Year Review. 10