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 amongst its entities that restructures and simplifies the ownership of crucial portfolio assets, such as Embassy Manyata, Bengaluru and Embassy TechZone, Pune. Post the anticipated completion of collapsing the Manyata SPV shareholding into a two-tier structure, we count on the general share of tax-absolutely free dividends plus SPV debt amortisation to rise from ~62% in 9MFY21 to among 70 and 75% from FY22E onwards. We upgrade our rating to ‘buy’ from ‘add’ with an unchanged target cost of Rs400/unit as we have currently constructed-in the collapsing of the Manyata shareholding structure in our estimates from FY22E onwards. At CMP of Rs329, the Embassy REIT delivers an estimated distribution yield of 7.5% in FY22E and 7.8% in FY23E. Key dangers to our get in touch with are a slower recovery in workplace leasing and larger portfolio vacancy levels.
Embassy REIT asset holding structure to turn out to be easier: 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 one hundred% held by Embassy REIT. EOPPL will be merged into Manyata Promoters (MPPL) and consequently MPPL will be one hundred% held straight by Embassy REIT, hence collapsing the two-tier shareholding structure for MPPL. The scheme of arrangement shall turn out to be productive upon completion of requisite filings and approvals with the Registrar of Companies and Board of Approval for Special Economic Zones. What are the prospective rewards? The Manyata SPV, which is the biggest asset in terms of size in the REIT with 11.8msf of completed region and region below improvement of 3.1msf will now have a simplified holding structure with the REIT getting direct ownership of the asset. According to present regulations, dividend distribution tax is only exempt when it is paid by a SPV to the REIT and not when there is a 3-tier ownership structure. As a outcome, the REIT has been distributing returns to unitholders largely in the type of interest and amortisation of SPV-level debt in 9MFY21. Potentially larger dividend share in distribution from FY22E: Of the Rs15.88/unit distribution for 9MFY21, 5% was in the type of dividend, 56.7% in the type of amortisation of SPV-level debt and 38.2% in the type of interest. With the anticipated collapsing of Manyata shareholding structure to a two-tier structure from Q1FY22 and injection of Embassy Tech Village asset at the finish of Q3FY21, we count on the general share of tax-absolutely free dividends plus SPV debt amortisation to rise from ~62% in 9MFY21 to among 70 and 75% from FY22E onwards.