Embassy Office Parks REIT

Embassy Office Parks REIT is entering the primary market to raise Rs. 4,750 crore via a fresh issue of units in the price band of Rs. 299 to Rs. 300 per unit. With strategic investors from US committing Rs. 876 crore to the issue with a 6 month lock-in, the offer size stands at Rs. 3,874 crore.

Issue Period18 -20 March, 2019
Anchior Investor Bidding15th March, 2019
Issue Details up to 158,333,200 Units
Issue Size (Rs. Cr)up to Rs.4,750 Cr
Strategic Investors29,208,800 Units  (Rs.876.26 Cr)
Price BandRs.299 – 300
Bid Lot800 Units  and in multiple of 400 units
thereafter
Net offer ( excluding Strategic Investors )129,124,400 Units  (Rs.3,873.73 Cr)
Institutional Investors75% of the Net offer (Rs.2,905.30 Cr)
Non Institutional Investors25% of offer ( 32,281,200 Units) (Rs.968.44 Cr)
RegistrarKarvy Fintech Pvt Ltd
Mode of PaymentASBA Mandatory (No Third Party)

Updates

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qib0.310.712.15
others0.060.143.09
Total0.200.472.57

About REIT

REITs are investment vehicles that can be used by real estate players to attract private investment, while investors (both retail and institutional) can gain dividends generated from income-producing real estate assets like office buildings, shopping malls, etc. They are similar to mutual funds which provide opportunity to invest in equity stocks, whereas REITs allow one to invest in income-generating real estate assets.

Sebi had notified REIT’s regulations in 2014, allowing setting up and listing of such trusts, which are popular in advanced markets. SEBI requirements mandate

  • REIT must invest not less than 80% of the value of its assets in completed and rent and/ or income generating properties.
  • Not more than 20% of the value of its assets may only be invested in certain permitted forms of investments which include, among other things, under construction properties, completed but not rent generating properties, listed or unlisted debt of companies etc.
  • minimum of 90% of net distributable cash flow to be compulsorily distributed among unit-holders, once every 6 months.

Embassy Office Parks REIT: Anchor Investors

Embassy Office Parks REIT raised Rs 1,743 crore from anchor investors as part of first real estate investment trust (REIT) issue in India. The REIT issue got good strong response from Anchor investors. Fidelity, American Funds insurance, Aviva Investors, TT Emerging, Schroder, Citigroup, Kotak Mahindra Insurance, Wells Fargo, Lockheed Martin, Morgan Stanley France, Japan Trustee Services Bank are among 59 anchor investors. Radhakishan Damani trusts including Bottle Palm Private Beneficiary Trust, Gulmohar Private Beneficiary Trust, Karnikar Private Beneficiary Trusts and Royal Palm Private Beneficiary Trust acquired 53.36 lakh units worth Rs 160 crore, as anchor investors.

Embassy Office Parks REIT I had earlier entered into agreements with strategic investors to allot them 2,92,08,800 units for Rs 876.3 crore. The strategic investors are American Funds Insurance Series, New World Fund INC and SMALLCAP World Fund Inc..

About Embassy Office Parks REIT

  • The Embassy REIT was registered with SEBI as a real estate investment trust on August 3, 2017.
  • In August , 2018, SEBI took on record the addition of the Blackstone Sponsor to the sponsors of the Embassy REIT. Presently Embassy Sponsor and the Blackstone Sponsor are the sponsors of the Embassy office Parks REIT.
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  • Embassy Group, a leading development firm in real estate commenced its operations in 1993 led by Jitu Virwani, Chairman and Managing Director of the group.
  • Embassy Office Parks had in September last year filed the draft red herring prospectus (DRHP) with market regulator Sebi to launch REIT, touted as Asia’s largest in terms of portfolio size of 33 million sq ft. Embassy Office Parks, a leading player in commercial real estate, has put 33 million sq ft of office and hospitality assets under its proposed REIT comprising of seven business parks and four city-centric buildings spread across Mumbai, Bengaluru, Pune and Noida
  • The establishment has developed 53+ Million Sq. Ft. of Commercial, Residential, Retail, Hospitality and Industrial Warehouse spaces and holds an extensive land bank of 1,000 acres across the country.
  • Embassy Office Parks REIT achieved a Committed Occupancy of 95.0% as of December 31, 2018 and maintained Occupancy at greater than 93.4% at the end of the last three fiscal years; and Undertaken extensive renovation programs, including successful upgrades of 33 office lobbies and 7 food courts.
  • Over the last 3 years and nine months, Embassy Office Parks REIT has
    • Leased 6.8 msf of total office space and achieved average re-leasing spreads of 48.0% on approximately 2.7 msf of re-leased space;
    • Achieved 80.9% tenant retention rate, with 7.7 msf of office space renewed
    • Demonstrated a 7.1% Same-Store Rental CAGR across the Portfolio Assets and the Portfolio Investment over FY2016 to FY2018, by attracting and retaining high quality tenants;

Embassy Office Parks REIT: Financials

Combined Financials Embassy REIT
Profit & Loss (INR Mn)FY16FY17FY189MFY19
Income15,75416,45617,66314,932
Expenditure3,4664,0575,2543,546
EBITDA12,28812,40012,40811,386
Finance Cost7,0836,9386,3125,174
Depreciation & Amortisation3,1583,2443,2282,687
Share of prft frm241579960875
PBT2,2882,7983,8284,400
Tax1,3561,0271,2591,549
PAT9321,7712,5692,851
Balance Sheet (INR Mn)FY16FY17FY189MFY19
Fixed Assets822548435097610101251
Other Non-Current Assets15666135761839320574
Current Assets7571140421915315966
Total Assets105490111969135155137791
Equity31717339603478937674
Borrowings50686582537945979762
Other Non Current Liabilities5540615759856328
Current Liabilities17547135991492114026
Total Equity and Liabilities105490111969135155137791

Embassy Office Parks REIT : Pros

  • Embassy Office Parks REIT Portfolio comprises 7 best-in-class office parks and 4 prime city-center office buildings totaling 32.7 msf as of December 31, 2018, with strategic amenities, including 2 completed and 2 under-construction hotels totaling 1,096 keys, food courts, employee transportation and childcare facilities. Embassy REIT has invested in amongst the highest quality assets in the best performing submarkets of India’s key office markets of Bengaluru, Pune, Mumbai and Noida.
  • Embassy Office Parks REIT has claimed that its Portfolio is highly stabilized at 95.0% Committed Occupancy and well positioned to achieve further organic growth through a combination of contracted revenue, re-leasing at market rents .
  • Embassy Office Parks REIT estimates that the market rents of its properties are 33.6% above in-place rents and Portfolio revenue from operations is projected to grow by 55.8% .
  • Embassy Office Parks REIT has been successful to attract, retain and grow multinational tenants in its parks leading to tenant stickiness. As a result, its revenue has grown from operations by 15.4% over FY2016 to FY2018.
  • Embassy Office Parks REIT own one of India’s largest office portfolios and approximately 80.9% of the Gross Rentals from its 160+ marquee tenant base is contracted with leading multinational corporations and approximately 43.4% is contracted with Fortune 500 companies such as JP Morgan, Google and Microsoft. This along with weighted av. lease length of 7 years provides considerable stability to its Portfolio.

Embassy Office Parks REIT : Cons

  • The valuation reports for Embassy Office Parks REIT Portfolio are based on various assumptions and may not be indicative of the true value of its assets.
  • REIT is a new product.
  • Yields may be affected by slowdown in the economy and Adverse government regulations.
  • Rise in interest rate

Embassy Office Parks REIT : Taxation

  • There is no dividend distribution tax on REIT, but distributable surplus is taxable in the hands of the unit-holder on income tax rates, applicable as per investor’s tax slab.
  • Long-term capital gains ( exceeding INR 1 lakh in totality) on sale of units held for more than 36 months – 10%
  • Short-term capital gains on sale of units held for up to 36 months is 15%

Yield Guidance

Based on the projected cash flows given in the prospectus, management has given a broad guidance of yield for FY 2020 and for FY 2021. For FY 2020, the yield is guided around 8.25%, of which 50% will be distributed as interest income and rest 50% will be distributed as dividend. This 8.25% yield will be paid in 4 quarterly installments.

Similarly for FY 2021, management expects yield to be 8.96% and distribution will be made in similar way that of FY 2020. Embassy Office Parks has indicated quarterly payouts as against mandated half yearly payouts by SEBI regulations for REITs.

Embassy Office Parks REIT : Assessment

  • REIT is an investment tool that owns and operates rent-yielding real estate assets and allows individual investors to make investment in this platform and earn income.
  • Embassy Office Parks is a joint venture of PE investor Blackstone and Indian real estate company Embassy.
  • Embassy Office Parks REIT has already raised an aggregate amount of Rs 2,619 from anchor and strategic investors which is 55% of the total issue size of Rs 4,750 crore.
  • Embassy Office Parks REIT shall become the first listed REIT in India India has emerged as a leading services hub for global corporations due to its large talent pool and cost advantage for high value services.
  • It is gathered that there no substantial activity in Grey Market for Embassy Office Parks REIT issue.
  • I intend to invest in Embassy Office Parks REIT primarily to diversify my portfolio and provide some exposure to this instrument which is a proxy to investment in income generating commercial real estate sector. There is need to keep watch on subscription figures as in absence of a strong demand price on listing can drift lower. Iam also influenced by backing of Blackstone & investors like RK Damani but the product is certainly long term in nature. The product should not be expected to give equity like returns & returns expectation should be moderated to return level of debt mutual funds (8-10%) in short run and slightly higher returns in medium to long run. (10-14%). these returns are pre tax returns. The product may however be suitable for HNIs looking for an Alternate investment platform.
  • Poor performance of earlier InvITs (IRB InvIT, IndiGrid ) warrants good degree of caution on this issue of REIT which is a new instrument even as Real estate may not face as much regulatory concerns as infrastructure.

Standard disclaimer: I am not a SEBI registered analyst /investment adviser and above analysis is for educational purpose only. However I have passed NISM certifications for Investment Adviser and Mutual Fund Distributor with decent scores. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.