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ICICI Securities
Embassy REIT (Buy)
Target: ₹400
CMP: ₹334.04
As per an exchange announcement, Embassy Office Parks REIT (Embassy REIT) has received approval from the National Company Law Tribunal in relation to its composite scheme of arrangement among its entities that restructures and simplifies the ownership of key portfolio assets, including Embassy Manyata, Bengaluru and Embassy TechZone, Pune.
Manyata SPV, which is the largest asset in terms of size in the REIT with 11.8 msf of completed area and area under development of 3.1 msf will now have a simplified holding structure, with the REIT having direct ownership of the asset. As per current regulations, dividend distribution tax is only exempt when it is paid by an SPV to the REIT and not when there is a 3-tier ownership structure.
We expect the overall share of tax-free dividend, plus SPV debt amortisation, to rise from about 62 per cent in 9MFY21 to between 70 per cent 75 per cent from FY22 onwards.
We upgrade our rating to ‘Buy’ from ‘Add’ with an unchanged target price of ₹400/unit as we have already built-in the collapsing of the Manyata shareholding structure in our estimates from FY22 onwards. At CMP of ₹329, the Embassy REIT offers an estimated distribution yield of 7.5 per cent in FY22 and 7.8 per cent in FY23.
Key risks to our call are a slower recovery in office leasing and higher portfolio vacancy levels.
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