Embassy Office Parks REIT: Upgrade rating to ‘buy’ from ‘add’ with an unchanged TP of Rs400/unit

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March 10, 2021 2:17 AM

Post the expected completion of collapsing the Manyata SPV shareholding into a two-tier structure, we expect the overall share of tax-free dividends plus SPV debt amortisation to rise from ~62% in 9MFY21 to between 70 and 75% from FY22E onwards.

Potentially higher dividend share in distribution from FY22E: Of the Rs15.88/unit distribution for 9MFY21, 5% was in the form of dividend, 56.7% in the form of amortisation of SPV-level debt 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) in relation to its composite scheme of arrangement among its entities that restructures and simplifies the ownership of key portfolio assets, including Embassy Manyata, Bengaluru and Embassy TechZone, Pune. Post the expected completion of collapsing the Manyata SPV shareholding into a two-tier structure, we expect the overall share of tax-free dividends plus SPV debt amortisation to rise from ~62% in 9MFY21 to between 70 and 75% from FY22E onwards. We upgrade our rating to ‘buy’ from ‘add’ with an unchanged target price of Rs400/unit as we have already built-in the collapsing of the Manyata shareholding structure in our estimates from FY22E onwards. At CMP of Rs329, the Embassy REIT offers an estimated distribution yield of 7.5% in FY22E and 7.8% in FY23E. Key risks to our call are a slower recovery in office leasing and higher portfolio vacancy levels.

Embassy REIT asset holding structure to become simpler: Under the scheme, the Embassy TechZone asset in Pune shall be demerged from Embassy Office Parks Private (EOPPL) into Embassy Pune TechZone Private (EPTPL), which will be 100% held by Embassy REIT. EOPPL will be merged into Manyata Promoters (MPPL) and consequently MPPL will be 100% held directly by Embassy REIT, thus collapsing the two-tier shareholding structure for MPPL. The scheme of arrangement shall become effective upon completion of requisite filings and approvals with the Registrar of Companies and Board of Approval for Special Economic Zones. What are the potential benefits? The Manyata SPV, which is the largest asset in terms of size in the REIT with 11.8msf of completed area and area under development of 3.1msf will now have a simplified holding structure with the REIT having direct ownership of the asset. According to current regulations, dividend distribution tax is only exempt when it is paid by a SPV to the REIT and not when there is a three-tier ownership structure. As a result, the REIT has been distributing returns to unitholders largely in the form of interest and amortisation of SPV-level debt in 9MFY21. Potentially higher dividend share in distribution from FY22E: Of the Rs15.88/unit distribution for 9MFY21, 5% was in the form of dividend, 56.7% in the form of amortisation of SPV-level debt and 38.2% in the form of interest. With the expected collapsing of Manyata shareholding structure to a two-tier structure from Q1FY22 and injection of Embassy Tech Village asset at the end of Q3FY21, we expect the overall share of tax-free dividends plus SPV debt amortisation to rise from ~62% in 9MFY21 to between 70 and 75% from FY22E onwards.

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