IPO Note | Real Estate-REIT

March 16, 2019

EMBASSY Office Parks-REIT

EMBASSY Office Parks REITs (Embassy REIT) is the owner of a high quality office

Issue Open: March 18, 2019

portfolio that serves as essential corporate infrastructure to multinational tenants

Issue Close: March 20, 2019

and has significant embedded growth prospects. Embassy REIT’s Portfolio

comprises seven best-in-class office parks and four prime city-center office

buildings totaling 32.7msf as of December 31, 2018, with strategic amenities,

including two completed and two under-construction hotels totaling 1,096 keys,

Issue Details

food courts, employee transportation and childcare facilities.

Face Value: `10

Marquee tenant base: Approximately 80.9% of the Gross Rentals from 160+

No of Units offered: 129,124,400

marquee tenant base is contracted with leading multinational corporations and

Issue size (amount): *`3860 -**3873cr

~43.4% is contracted with Fortune 500 companies such as JP Morgan, IBM and

Price Band: `299-300

Microsoft. Embassy REIT’s high quality tenant base along with long-term

Lot Size: 800 shares and in multiple

contracted rentals (with a WALE of 7 years) provides considerable stability to REIT

thereafter 400

Portfolio.

Best-in-class office properties with high quality infrastructure at attractive capital

Post-issue implied mkt. cap: *`23,073cr -

values: Embassy Office Parks hold 7 best-in-class office parks and 4 prime

**`23,150cr

city-center office buildings totaling 32.7msf of Leasable Area, making them

Promoters holding Pre-Issue: 100%

the largest REIT amongst comparable Asian office REITs. These properties are

Promoters holding Post-Issue: 80%

among the largest and highest quality assets in their submarkets. Group

*Calculated on lower price band

provides a complete business ecosystem with campus-style infrastructure,

** Calculated on upper price band

world-class facilities and amenities. In the last 3 years and 9 months, existing

Book Building

tenants have grown by 4.2msf within their assets.

Institutional investors

75% of issue

Outlook & valuation:

Other Investors

25% of issue

Embassy REIT hold most of the assets in metro cities and key micro market,

which are either Financial or IT hubs and the occupancy is with high quality

tenant comprising of blue-chip multinational and Indian corporate. Most of

Post Issue Shareholding Pattern

the tenants are MNCs, which provides comfort to future cash flow.

Promoters

79.5%

Upside in cash flow will depend mostly from occupancy of vacant space,

escalation of rental and growth in re-leased spread. As per offer document

Others

20.5%

and offered NAV at INR 300 investor can expect 8-8.25% gross yield in FY20

and 8.6-8.96% gross yield in FY21. Moreover Investment in Real estate

properties also gives opportunity of appreciation in value of assets around 4-

7% in longer period of time. We expect a effective return of 12-13% is

reasonable expectation from Embassy office Parks REITs. Hence, in our view,

investors who want to invest in commercial property with expectation of 12-

13% return over longer period of time can SUBSCRIBE for the issue.

Key Financial

Y/E March (` Mn)

FY16

FY17

FY18

9MFY19

Operating Income

15,754

16,456

17,663

14,932

% chg

Net Profit

932

1,771

2,569

2,851

% chg

EBITDA

12,288

12,400

12,408

11,386

EBITDA margin

78%

75%

70%

76%

Kripashankar Maurya

P/BV (x)

7.3

6.8

6.7

6.1

Book Value

41.1

44.0

45.1

48.8

+022 39357600, Extn: 6004

RoE (%)

2.9

5.2

7.4

7.6

[email protected]

RoCE (%)

2.6

2.8

3.3

3.7

Source: RHP, Angel Research; Note: Valuation ratios based on post--issue outstanding shares and at upper end of the price band

Please refer to important disclosures at the end of this report

Embassy Office Parks REIT | IPO Note

About REITS

A first of kind of investment instruments in India which allow investors to invest

in large real estate properties by investing a fraction of amount in rent

generating assets by investing as low as Rs.2 Lakh (At time of issue of offer ).

REITs allow anyone to invest in portfolios of real estate assets the same way

they invest in other industries - through the purchase of individual company

stock or through a mutual fund or exchange traded fund (ETF). The unit

holders of a REIT earn a share of the income produced through real estate

investment - without actually having to go out and buy, manage or finance

property which normally less liquid and large size in terms of capital value.

Therefore, like stocks, investors will be able to buy units of REITs from both

primary and secondary markets. While investing in an IPO, the minimum

investment amount will be Rs.2 lakh, while on exchange the minimum lot size

will be Rs.1 lakh.

Key Highlights of REITS



Owning the ‘A’ grade assets with smaller amount of investments ;



Provide low entry level with minimum investment of Rs.2 lakh (In IPO)

while on exchange minimum lot size will be Rs.1 Lakh;



Diversified investment option at reduced risk, manage by professional

management. Investment in assets like Office Space, Industrial Parks,

warehouses, Hotels and Healthcare delivery (Hospital);



Investor can earn two types of Income. One, Capital gains while selling

the units and two through dividend/interest income.

About EMBASSY REITS

Embassy Office Parks REIT has a portfolio of 32.7 mn sq.ft spread across

major cities such as Bengaluru, Mumbai, Pune and Noida which consist of 7

office parks and four city center office building . Group looking to raise upto

INR 4,750 Cr from the issue (Including INR 876 Cr from Strategic Investor).

Key Highlights of Embassy Parks REIT



43% of gross rental comes from fortune 500 companies like Google,

Microsoft, IBM, Cognizant, Goldman Sachs, JP Morgan, Well Fargo and

Accenture, etc.;



49% of gross rental is derived from technology sector, which is India’s

fastest growing sector ;



95% of committed occupancy as of December 2018 and 80% plus

retention rate over last three year and nine months;



Embassy Office Parks' assets have stable cash flow with contracted

escalations of 10-15% every three to five years with typical 9 to 15 years

tenure;



City center office building has escalation of 15% every three years for

typical tenure of five to nine years;



Office parks manage by highly experienced senior management team

with an average experience of 20 years in operating, developing,

leasing and managing commercial real estate;



Each of the properties are located in prime location of respective cities,

which gives strong revenue visibility and property value appreciation in

longer term.

March 16, 2019

Embassy Office Parks REIT | IPO Note

Distribution of income mechanism to Unit holders:

 REIT will receive its income in the form of Dividend, interest or lease

from respective SPV;

 Post incurring expenses at Trust level, Manager has to distribute not

less than 90% of net distributable cash flows to unit holders;

 Distribution can happen in the forms such as Dividend or Interest.

NAV Valuation mechanism

Investment manager has to declare the NAV of unit on quarterly basis as per

prevailing market condition at that point of time. In this case, the underlying

asset being that of Commercial ‘A’ grade assets, we expect 4-7% increase in

value of assets over longer period of time.

Recommendation :

Embassy REIT hold most of the assets in metro cities and key micro market,

which are either Financial or IT hubs and the occupancy is with high quality

tenant comprising of blue-chip multinational and Indian corporate. Most of the

tenants are MNCs, which provides comfort to future cash flow.