Embassy Office Parks REIT : To Buy or Not to Buy?🏢

To Buy or Not to Buy – that is the question – mainly because you like some aspects of a REIT – the prospect of receiving rental income; but not sure about others – is there capital  protection and how much income can I expect?

Ticker: NSE: EMBASSY; BSE: 542602

CMP Rs. 419.98/- as on 15 Nov 2019, NSE

Let’s answer the questions first:

[1] Is there capital protection for REIT?

Ans. No, like any stock traded on the stock market, the price of a REIT unit is determined by demand and supply; hence the amount invested will appreciate or depreciate – no guarantee of capital. Since the listing at Rs 300/-, at the current market price of Rs. 419/- there has been a price appreciation of 40%

[2] How much income can I expect?

Ans. Consider that you are buying 1000 units @ Rs.419/- ie. investing Rs. 4,19,000/- (lots of 200 only). The distribution projected for this year is Rs. 24.5/- per unit, the interest is paid quarterly; in one year you can expect to get Rs. 24,500/- (before tax)

[3] What are the tax implications for the income distributed by the REIT?

The income distributed by REIT will be categorised under three heads [1] dividend [2] interest [3] principal. Only the distribution of interest component is subject to tax (10% for resident individuals) and tax is deducted by the REIT and TDS certificates issued (Form 16A) to the unit holders. The dividend and principal components are not taxed. 

The story so far 

  • Embassy Office Parks REIT (EOPREIT) was launched by Embassy Property Development Pvt Ltd – real estate company based in Bangalore and Blackstone – a PE firm based in New York
  • They manage 33 million sqft of commercial office parks in Bangalore, Pune, Mumbai and NCR – technology companies contribute 43% of the rental income
The tenant distribution for EOPREIT Source: Company website
The tenant distribution for EOPREIT Source: Company website
  • Currently the only listed REIT in India; the IPO was in March 2019, listing price per unit was Rs. 300/-, saw highs of Rs. 450/-
  • The market rents are 30% higher than the current in-place rents and can result in increased rental income going forward during re-leasing.
Re-leasing has the opportunity to increase the rental income Source: Company website
Re-leasing has the opportunity to increase the rental income Source: Company website
  • EOPREIT has been included in FTSE Russell Global Series of Equity Indices
  • EOPREIT has received offer from Embassy Property Development Pvt Ltd for sale of 9 million sqft of office space in Embassy Tech Village situated on the outer ring road Bangalore; the are currently doing the due diligence.

Numbers Snapshot

Numbers snapshot of EOPREIT Source: Company disclosures
Numbers snapshot of EOPREIT Source: Company disclosures
  • The single key metric for a REIT is the Net Operating Income (NOI) – which is the income from the property after deducting the operating expenses but before the interest expenses and taxes – saw a 3.2% dip qoq
  • The single figure that makes the individual investors happy is the Distribution per unit (DPU) and so far since listing EOPREIT has paid Rs. 11.4/- per unit
  • The Net Asset Value (NAV) – difference between the company’s assets and liabilities; helps to know whether the REIT is overvalued, undervalued or fairly valued. The NAV at Rs. 374.93/- as on 30 Sep 19 and with price at Rs. 419.98/-, it appears overvalued prima facie; but technically it does not include the premium for management expertise and other qualitative aspects.
  • Net debt to Enterprise value is approximately 11 % as on 30 Sep 19 and the permissible limit is 49%

The rewards – reasons to Buy

  • REIT is a source of rental income without the hassles of owing physical assets; more importantly EOPREIT gives access to rent from commercial real estate, beyond the reach of an individual investor.
  • They have to mandatorily pay out 90% of their income. The payout for EOPREIT has been 99% – much higher than dividend payout from normal companies.
  • The guidance for total income distribution in FY20 given at the time of listing the EOPREIT was Rs. 19,103/- million. There are currently 771,665,343 units ie. at 99% payout ratio, DPU for the year promised is Rs. 24.5/- per unit; two quarters down they have delivered Rs. 11.4/- per unit (before tax)
Project cash flows available for distribution for EOPREIT Source: Company Prospectus
Project cash flows available for distribution for EOPREIT Source: Company Prospectus
  • As per the SEBI guidelines 80% of the assets of the REIT must be completed properties and hence they are able to provide reliable and stable cash flows (their WALE – weighted average lease expiry is 7 years)
  • Re-leasing helps the rental income keep up with the inflation levels
  • India has one of the lowest dividend yields and hence the REIT rental yield at 8.2% (before tax)(Rs.24.5/- per unit/cost of Rs. 300/-; if you bought the units at the current market price, the yield will be lower). An attractive yield with the FD rates going down.
  • There is the upside of capital appreciation, something not there in a FD

The risks – reasons Not to Buy

  • The interest income from REIT is taxable
  • The income is distributed quarterly
  • Unlike the interest from a FD, the interest income is not guaranteed
  • Like any other listed stock, the REIT unit price also varies and hence there is no guarantee of the capital also.
  • Since the REIT distributes 99% of its cash flows, it will take on additional debt or issue new units to raise capital for buying new assets.

To conclude, REIT has the characteristics of both an FD & equity – does not guarantee the safety of a FD with assured monthly income; it however gives more interest income than the normal dividends from equity and there is the upside of capital appreciation. But unlike dividends, the interest income is taxable.

It can be considered

  • in the equity portfolio of a person who invests for dividend income
  • in the fixed income portfolio of a person who wants income and growth
  • in a portfolio to add rental income stream without investing in physical assets

Hope it helps.

Here’s the link to the first post on REIT A better way to add rental income to your portfolio💰

Till next post, take care !!

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