Embassy Office Parks REIT has received approval from the NCLT for a scheme of arrangement that will help the trust simplify the ownership of key portfolio assets. This, according to ICICI Securities analysts, could result in the overall share of tax-free dividends plus SPV debt amortisation to rise from 62% in the nine months of the current fiscal year to 70-75% from the next fiscal year onwards.
With this, the brokerage firm has upgraded the rating of Embassy REIT 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 hit in March of 2020.
What will change?
Under the scheme of arrangement, Embassy Office Parks REIT plans to simplify the structure of key portfolio assets. Embassy Pune TechZone Pvt Ltd and Manyata Promoters Pvt Ltd will be held by the REIT upon the completion of the scheme. “The Manyata SPV, which is the largest asset in terms of size in the REIT with 11.8msf of completed area and 3.1msf area under development, will now have a simplified holding structure with the REIT having direct ownership of the asset,” ICICI Securities said in the note.
Dividend distribution tax is only exempt when it is paid by a special purpose vehicle to the REIT. Hence, Embassy Office Parks had been distributing returns to unitholders largely in the form of interest and amortization of SPV level debt this fiscal year.
Expect more tax-free dividend
Embassy Office Parks REIT distributed Rs 15.88 per unit for the first nine months of this fiscal year, of which 5% was in the form of dividends, 56.7% in the form of amortization of SPV level debt and 38.2% in the form of interest. “With the expected collapsing of Manyata shareholding structure to a 2-tier structure from the next quarter and injection of Embassy Tech Village asset at the end of the third quarter of the current financial year, ICICI Securities expects the overall share of tax-free dividends plus SPV debt amortization to rise from ~62% to between 70-75%.
“Our FY22-23E distribution per unit estimates remain unchanged at Rs 24.4 and Rs 25.7, respectively,” analysts at ICICI Securities said. At the current price, the Embassy REIT offers an estimated distribution yield of 7.5% in the next financial year and 7.8% in the fiscal year 2023, they added.
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