Embassy Office Parks REIT IPO - FY19 Revised Down, Yield Propped up by Zero Coupon Bond

Embassy Office Parks REIT - Comparison with AIT and a Look at the Required Yield

Embassy Office Parks REIT - Good Assets but Projections Might Be a Tad Too Bullish

Value investor- India mid & small caps

Bhaskar Chakraborty

Equity Capital Markets

Embassy Office Parks REIT / Equity Capital Markets

<ul>
<li>
<a href="https://www.smartkarma.com/entities/27925" target="_blank" data-smartkarma-citation="entities:27925:1">Embassy Office Parks REIT (EOP IN)</a> boasts an impressive portfolio of office assets with adequate geographic diversification, strong client relationships and sound reputation.</li>
<li>Constructing/acquiring new office area is an integral part of Embassy’s growth strategy.</li>
<li>This requires massive capex (e.g. Embassy’s last 3 year’s capex is Rs32bn). Since it pledges to distribute 100% of its EBITDA to unit holders, it will have no cash left for capex or making interest payments.</li>
<li>Hence, post the IPO borrowings will increase to fund the capex. The interest expenses will lower the NDCF and in turn Dividend per unit.</li>
<li>Embassy may choose to issue fresh units to fund part of the capex in the future. This will also result in lower Dividend per unit.</li>
<li>
<a href="https://www.smartkarma.com/entities/935" target="_blank" data-smartkarma-citation="entities:935:1">Ascendas India Trust (AIT SP)</a> shows us why you should be conservative while building in capital appreciation of REIT units. Despite revenues growing 3.18x over FY08-18, Ascendas’ Dividend per unit is flat over the period as its borrowings growth (29% Cagr) far outdid its revenue growth (12.3% Cagr). It also diluted equity to the tune of 37% over the period. Its units have seen no capital appreciation over the last decade.</li>
<li>Embassy’s effective yield (adjusted for interest outgo notwithstanding its proposed workaround) works out to 6.4%- unattractive in our view.</li>
</ul>



Embassy Office Parks REIT (EOP IN) boasts an impressive portfolio of office assets with adequate geographic diversification, strong client relationships and sound reputation.
Constructing/acquiring new office area is an integral part of Embassy’s growth strategy.
This requires massive capex (e.g. Embassy’s last 3 year’s capex is Rs32bn). Since it pledges to distribute 100% of its EBITDA to unit holders, it will have no cash left for capex or making interest payments.
Hence, post the IPO borrowings will increase to fund the capex. The interest expenses will lower the NDCF and in turn Dividend per unit.
Embassy may choose to issue fresh units to fund part of the capex in the future. This will also result in lower Dividend per unit.

Ascendas India Trust (AIT SP) shows us why you should be conservative while building in capital appreciation of REIT units. Despite revenues growing 3.18x over FY08-18, Ascendas’ Dividend per unit is flat over the period as its borrowings growth (29% Cagr) far outdid its revenue growth (12.3% Cagr). It also diluted equity to the tune of 37% over the period. Its units have seen no capital appreciation over the last decade.
Embassy’s effective yield (adjusted for interest outgo notwithstanding its proposed workaround) works out to 6.4%- unattractive in our view.


Embassy Office Parks REIT: Why You Should Avoid It