Embassy Office Parks REIT: upgrade from “buy” to “add” rating with unchanged TP of Rs400 / unit

Potentially higher dividend share in the distribution of fiscal year 22E: out of the distribution of Rs 15.88 / unit for 9MFY21, 5% was in the form of dividends, 56.7% in the form of debt amortization at the level SPV and 38.2% in the form of interest

According to an exchange announcement, The Embassy Office Parks REIT (Embassy REIT) has received approval from the National Company Law Tribunal (NCLT) with respect to its composite arrangement scheme between its entities that restructures and simplifies asset ownership portfolio keys including Embassy Manyata, Bangalore and Embassy TechZone, Pune. After the planned completion of the Manyata SPV shareholding merger into a two-tier structure, we expect the aggregate share of tax-exempt dividends plus SPV debt amortization to increase by approximately 62% in 9MFY21 at between 70 and 75% from FY22E. We are raising our rating to “buy” from “add” with an unchanged target price of Rs400 / unit, as we have already factored the collapse of Manyata’s shareholding structure into our estimates from FY22E. At Rs329 WAC, Embassy REIT is offering an estimated distribution yield of 7.5% in FY 22E and 7.8% in FY 23E. The main risks associated with our appeal are a slower recovery in office leasing and higher levels of vacancy in the portfolio.

The ownership structure of Embassy REIT assets will be simplified: under this program, the Embassy TechZone asset in Pune will be de-merged from Embassy Office Parks Private (EOPPL) into Embassy Pune TechZone Private (EPTPL), which will be held 100% by Embassy REIT. EOPPL will be merged with Manyata Promoters (MPPL) and as a result, MPPL will be 100% owned directly by Embassy REIT, thus collapsing MPPL’s ​​two-tier shareholding structure. The Plan of Arrangement will come into effect once the required filings and approvals are made with the Registrar of Companies and the Special Economic Zone Approval Board. What are the potential benefits? Manyata SPV, which is the largest asset in terms of size of the REIT with 11.8 msf of area completed and a developing area of ​​3.1 msf will now have a streamlined holding structure, with the REIT directly owning the property of the asset. Under applicable regulations, tax on dividend distributions is only exempt when paid by an SPV to the REIT and not when there is a three-tier ownership structure. As a result, the REIT distributed returns to unitholders primarily in the form of interest and debt amortization at the SPV level in 9MFY21. Potentially higher dividend share in the distribution of fiscal year 22E: out of the distribution of Rs 15.88 / unit for 9MFY21, 5% was in the form of a dividend, 56.7% in the form of debt amortization at the level of the SPV and 38.2% in the form of interest. With the expected collapse of Manyata’s shareholding structure to a two-tier structure starting in the first quarter of fiscal 22 and the injection of Embassy Tech Village assets at the end of the third quarter of the FY21, we expect the aggregate share of tax-exempt dividends plus SPV debt amortization to decrease from around 62% in 9MFY21 to between 70 and 75% from FY22E.

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