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Embassy Office Parks REIT Issue review (Subscribe for Long Term)

Review By Dilip Davda on Mar 13, 2019

• REIT investments are the most popular schemes in global markets.
• Investment is done in commercial/office developed premises in prime locations.
• EOP REIT has marquee Fortune 500 tenants like Google, Microsoft, JP Morgan, Goldman Sachs, Accenture, Nokia, IBM etc.
• EOP REIT is rated AAA/Stable by ICRA.

PREFACE:
SEBI cleared the issuance of InvITs and REITs in the year 2014, but due to compliance issues and some technical hitch, it took some time for this new instrument floats in the primary market. First InvITs of IRB InvIT Fund issue came in April 2017 that was followed by India Grid InvIT Fund in May 2017. While maiden InvIT issue of IRB got an overwhelming response and heavily oversubscribed, its poor listing dampen the sentiment and India Grid InvIT faced the music with lower than expected response and also poor listing. Both these InvITs quoting at discount to offer price impacted float of REITs. However, with more transparency and compliance the first ever REITs of Embassy Office Park REITs filed its offer documents in September 2018and is now hitting the Indian Capital market in this month.

While InvITs and REITS are popular in global markets as the safe investment instruments for the long term, REITs are the most preferred investment tool. In fact, REITs are in existence in the US market for more than five decades and the most popular and preferred as long term investment option across the class of investors. For the Indian market, it is the maiden issue and the first mover in this segment.

ABOUT THE COMPANY:
An Embassy Office Parks REIT (EOP REIT) is not merely a workspace—it is a space built on relationships with our clients, who share our passion for excellence. It is a workspace built for success. Embassy Office Parks is the owner of a high-quality office portfolio in India that serves as an essential corporate infrastructure to multinational tenants and has significant embedded growth prospects. The Portfolio comprises seven best-in-class office parks and four prime city-centre office buildings totalling 32.7 MSF as of December 31, 2018, with strategic amenities, including two completed and two under-construction hotels totalling 1,096 keys, food courts, employee transportation and childcare facilities. EOP REIT has invested in amongst the highest quality assets in the best performing submarkets of India's top office markets of Bengaluru, Pune, Mumbai and Noida. These markets have exhibited strong market dynamics with world-leading absorption (from 2013 to Q1 2018) and constrained forecast supply resulting in high rent growth and low vacancy on average.

It owns one of India's largest office portfolios and believes that replicating such a platform would be difficult given land acquisition complexities and long development timelines in India. As of December 31, 2018, approximately 80.9% of the Gross Rentals from 160+ marquee tenant base is contracted with leading multinational corporations and approximately 43.4% is contracted with Fortune 500 companies such as JP Morgan, Google and Microsoft. EOP REIT's high-quality tenant base, along with long-term contracted rentals (weighted average lease length of 7.0 years) provides considerable stability to its Portfolio. While company's Portfolio is highly stabilized at 95.0% Committed Occupancy, it is well positioned to achieve further organic growth through a combination of contracted revenue, re-leasing at market rents, lease-up of vacant space and new construction within the Portfolio to accommodate tenant expansion. Portfolio revenue from operations is projected to grow by 55.8% over the Projections Period primarily due to these factors.

Embassy REIT


ISSUE DETAILS/CAPITAL HISTORY:
The initial public offering (IPO) of Embassy Office Parks REIT ("Embassy REIT"), the first ever by a Real Estate Investment Trust in India, will open on March 18, 2019, at a price band of Rs 299 to Rs 300. Embassy REIT is issuing Units aggregating up to Rs. 4750.00 crore (the "Issue"). This Issue will constitute at least 10% of the issued and paid-up Units on a post-Issue basis in accordance with Regulation 14(2A) of the REIT Regulations. The issue will close on March 20, 2019. Based on the upper price band of Rs.300, EOP REIT is issuing approx. 158333333 units. Out of this, 29208800 units (Rs. 876.3 cr.) are issued to strategic investors, thus the net offer is of Rs. 3873.7 cr. Out of the net funds mobilized, and EOP REIT will use Rs. 3710 cr. for repayment/pre O payment of certain debts and the rest for the acquisition of certain assets. The Units of the Embassy REIT are proposed to be listed on the National Stock Exchange of India Limited (the "NSE") and BSE Limited (the "BSE"). The Manager, in consultation with the Lead Managers, may retain oversubscription in the Issue in accordance with the REIT Regulations and the SEBI Guidelines.

The Net Proceeds from the Issue will be used for (i) Partial or full repayment or pre-payment of bank/ financial institution debt of certain Asset Special Purpose Vehicles ("SPVS") and by the Investment Entity, (ii) Payment of consideration for acquisition of the Embassy One Assets currently held by Embassy One Developers Private Limited ("EODPL"), and (iii) General purposes. The Issue will include participation by Strategic Investors in accordance with the SEBI Guidelines.

The Issue is being made through the Book Building Process and in compliance with the REIT Regulations and the SEBI Guidelines, wherein not more than 75% of the Issue (excluding the Strategic Investor Portion) shall be available for allocation on a proportionate basis to Institutional Investors, provided that the Manager may, in consultation with the Lead Managers, allocate up to 60% of the Institutional Investor Portion to Anchor Investors on a discretionary basis in accordance with the REIT Regulations and the SEBI Guidelines.

Further, not less than 25% of the Issue (excluding the Strategic Investor Portion) shall be available for allocation on a proportionate basis to Non-Institutional Investors, in accordance with the REIT Regulations and the SEBI Guidelines, subject to valid Bids being received at or above the Issue Price. Bids can be made for a minimum lot of 800 Units (i.e. Rs. 240000) and in multiples of 400 Units (i.e. Rs. 120000) thereon, thereafter by Bidders other than the units subscribed for by Anchor Investors and Strategic Investors.

The Global Coordinators and Book Running Lead Managers (GCBRLMs) to the offer are Morgan Stanley India Company Private Limited, Kotak Mahindra Capital Company Limited, J.P. Morgan India Private Limited and DSP Merrill Lynch Limited. Book Running Lead Managers ("BRLMs") to the Offer are Axis Capital Limited, Credit Suisse Securities (India) Private Limited, Deutsche Equities India Private Limited, Goldman Sachs (India) Securities Private Limited, HSBC Securities and Capital Markets (India) Private Limited, IIFL Holdings Limited, JM Financial Limited and Nomura Financial Advisory and Securities (India) Private Limited. Axis Trustee Services Limited is the Trustee to the Issue while Embassy Office Parks Management Services Private Limited is the Manager to the Issue. Embassy Property Developments Private Limited and BRE/ Mauritius Investments are the Sponsors of the issue. Karvy Fintech Pvt. Ltd. is the registrar to the issue.

ICRA has given AAA/Stable rating for EOP REIT.

FINANCIAL PERFORMANCE:
On the financial performance front, for last three fiscals, EOP REIT has (on a consolidated basis) posted turnover/net profits of Rs. 1575.37 cr. / Rs. 93.18 cr. (FY16), Rs. 1645.64 cr. / Rs. 177.06 cr. (FY17), Rs. 1766.27 cr. / Rs. 256.91 cr. (FY18). For the first nine months of FY19, it has earned a net profit of Rs. 285.23 cr. on a turnover of Rs. 1493.23 cr. As on 31.12.18 its paid-up equity capital of Rs. 360.82 cr. is supported by free reserves of Rs. 3406 cr. plus.

COMPARE WITH LISTED PEERS:
As per offer documents, it has no listed peers to compare with.


Conclusion / Investment Strategy

EOP REIT invests in ready to use or leased out property acquisitions thus reducing gestation periods. This instrument is most popular in global markets. EOP REIT is the first mover in this segment with its maiden offer. It is a safe bet for long term investment as it is offering a regular dividend and the appreciation in the properties at the end of the scheme.

Reviewer recommends Subscribing to the issue for Long Term.

Review By Dilip Davda on Mar 13, 2019

Review Author

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.

(SEBI registered Research Analyst-Mumbai).


About Dilip Davda

Dilip Davda, a freelance journalist

Dilip Davda is veteran journalist associated with stock market since 1978. He is contributing to print and electronic media on stock markets/insurance/finance since 1985.

Dilip Davda is a leading reviewer of public issues and NCDs in the primary stock market in India. The knowledge he gained over 3 decades while working in the stock market and a strong relationship with popular lead managers makes his reviews unique. His detail fundamental and financial analysis of companies coming up with IPO helps investors in the primary stock market. Dilip Davda has a special interest in analyzing the SME companies and writing reviews about their public issues. His reviews are regularly published online and in news papers.

Email: dilip_davda@rediffmail.com

The Embassy Office Parks Analysis helps you to understand about the company, offer detail, valuation, capital structure and financial performance. Our SEBI registered IPO Analysts tells you if Embassy Office Parks worth investing. The Embassy Office Parks Note sets the IPO expectations in systematic way which tells you if Embassy Office Parks good to buy (good or bad / yes or no). The IPO Forecast tells you weather to invest in Embassy Office Parks by providing IPO recommendations i.e. subscribe, avoid and neutral.


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