Embassy Office Parks REIT has received approval from the NCLT for a plan of arrangement that will help the trust simplify the ownership of key portfolio assets. According to analysts at ICICI Securities, this could lead to an increase in the aggregate share of tax-exempt dividends plus SPV debt amortization from 62% in the nine months of the current fiscal year to 70-75% from the next exercise.
With this, the brokerage firm raised Embassy REIT’s rating to “Buy” from the “Add” rating earlier. Embassy Office Parks REIT shares are currently trading at Rs 331, down 31% from its 52-week high of Rs 480 reached in March 2020.
What will change?
As part of the arrangement, Embassy Office Parks REIT plans to simplify the structure of the portfolio’s key assets. Embassy Pune TechZone Pvt Ltd and Manyata Promoters Pvt Ltd will be owned by the REIT upon completion of the program. “Manyata SPV, which is the largest asset in terms of size of the REIT with 11.8 msf of area completed and 3.1 msf of area under development, will now have a simplified ownership structure, with the REIT directly holding ownership of the asset, ”ICICI Securities said in the memo.
The tax on the distribution of dividends is only exempt when it is paid by an ad hoc structure to the REIT. As a result, Embassy Office Parks distributed returns to unitholders primarily in the form of interest and debt amortization at the SPV level this fiscal year.
Expect more tax-free dividends
Embassy Office Parks REIT distributed Rs 15.88 per share in the first nine months of this fiscal year, of which 5% was dividends, 56.7% was debt amortization at the SPV level and 38.2% % in the form of interest. “With the expected collapse of Manyata’s shareholding structure to a 2-tier structure starting in the next quarter and the injection of Embassy Tech Village assets at the end of the third quarter of the current fiscal year, ICICI Securities expects the aggregate share of non-taxable dividends plus amortization of SPV debt to drop from around 62% to between 70 and 75%.
“Our distribution per unit estimate for fiscal year 22-23E remains unchanged at Rs 24.4 and Rs 25.7, respectively,” ICICI Securities analysts said. At the current price, Embassy REIT offers an estimated distribution yield of 7.5% in the next fiscal year and 7.8% in fiscal 2023, they added.
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