The initial public offering of Embassy Office Parks REIT, the first ever by a Real Estate Investment Trust in India (REIT), has opened for subscription on March 18.
After the issue, which will close on March 20, the shares will be listed on National Stock Exchange and BSE in the first week of April.
The book running lead managers to the issue are Axis Capital, Credit Suisse Securities (India), Deutsche Equities India, Goldman Sachs (India) Securities, HSBC Securities and Capital Markets (India), IIFL Holdings, JM Financial and Nomura Financial Advisory & Securities (India).
Here are 10 key things to know before subscribing the issue:
Company Profile
The Embassy REIT was on March 30, 2017 at Bengaluru settled as an irrevocable trust under the provisions of the Indian Trusts Act, and registered with SEBI on August 3, 2017 as a real estate investment trust. As of the date of this offer document, the Embassy Sponsor and the Blackstone Sponsor are the sponsors of the Embassy REIT.
Embassy Office Parks Management Services Pvt. Ltd (EOPMSPL) has been appointed as the manager to the Embassy REIT. EOPMSPL is held by the Embassy Sponsor and certain entities forming part of the Blackstone Sponsor Group. Axis Trustee Services Limited has been appointed as the Trustee to the Embassy REIT.
Pursuant to the formation transactions, (i) the Portfolio Assets are proposed to be held through the Asset SPVs; and (ii) the Portfolio Investment is proposed to be held through the Holdco, in accordance with the REIT Regulations.
The following chart illustrates the relationship between the Embassy REIT, the Trustee, the Manager and the Unitholders (which include the Sponsors)
on the listing date.
Embassy REIT portfolio comprises seven best-in-class office parks and four prime city-center office buildings totaling 32.7 million square feet (msf) spread across Mumbai, Bengaluru, Pune and Noida as of December 31, 2018, with strategic amenities, including two completed and two under-construction hotels totaling 1,096 keys, food courts, employee transportation and childcare facilities.
Approximately 80.9 percent of the gross rentals from 160+ marquee tenant base is contracted with leading multinational corporations and approximately 43.4 percent is contracted with Fortune 500 companies such as JP Morgan, IBM, and Microsoft, as of December 31, 2018.
The company achieved a committed occupancy of 95 percent as of December 31, 2018, and maintained occupancy at greater than 93.4 percent at the end of the last three fiscal years.
The market value of its portfolio as of December 31, 2018, as per the valuer is Rs 31,480 crore.
What is REIT
REIT is an investment tool that owns and operates rent-yielding real estate assets. It allows individual investors to invest using this platform and earn income.
The Securities and Exchange Board of India (SEBI) had notified REIT's regulations in 2014, allowing setting up and listing of such trusts, which are popular in some advanced markets.
REITs are listed entities that invest in income-generating properties and distribute at least 90 percent of their income proceeds to unit-holders through dividends. After registration with SEBI, units of REITs will have to be mandatorily listed on exchanges and traded like securities.
Properties listed through a REIT are typically commercial assets that can generate steady and lucrative rental income. Even government-run buildings can be placed under REITs.
REITs offer investors, with Rs 2 lakh in capital, an opportunity to invest in the commercial real estate market. Like listed shares, small investors can buy units of REITs from both primary and secondary markets.
About IPO
The price band for Embassy Office Parks REIT IPO is fixed at Rs 299-300 per share.
The 12.91 crore unit issue, made through the book-building process, will constitute at least 10 percent of the issued and paid-up units on a post-issue basis.
The minimum bid size is 800 units and in multiples of 400 units thereafter.
Not more than 75 percent of the issue, excluding the strategic investor portion, will be available for allocation on a proportionate basis to institutional investors, it said. However, the company may choose to allocate up to 60 percent of the institutional investor portion to anchor investors. For non-institutional investors, the same stands at not less than 25 percent.
The issue comprises allocation to strategic investors of 2.92 crore units worth Rs 876.26 crore and net issue size of Rs 3,873.73 crore.
Strategic investors are American Funds Insurance Series - New World Fund, American Funds Insurance Series - Global Small Capitalisation Fund, Capital Group New World Fund (LUX), New World Fund Inc and Smallcap World Fund Inc.
Issue Size
Embassy REIT intends to raise Rs 4,750 crore through the issue, of which it already garnered Rs 1,743 crore from anchor investors.
Anchor investors include ace investor Radhakishan Damani; foreign investors like Morgan Stanley, Fidelity Funds, DB International, National Westminster Bank, Citigroup, Wells Fargo, Japan Trustee Services Bank etc.
Issue Objects
Proceeds from the same will be used for: i) Partial or full repayment of bank/ financial institution debt (Rs 3,710 crore), ii) Payment for acquisition of the Embassy One Assets currently held by Embassy One Developers Pvt Ltd (Rs 460 crore), and iii) For general purposes.
Post the utilisation of the IPO proceeds, its total indebtedness is expected to be less than 15 percent of market value initially.
Competitive Strengths
The company believes its position as a leading owner and developer of high-quality office properties in India is founded on the following competitive
strengths:
a> Located in India, a leading services hub for global corporates
b> Best-in-class office properties with high-quality infrastructure
c> Highly occupied by a diversified, high quality, ‘sticky’ multinational tenant base
d> Simple business with embedded growth
e> Strategically located in the top-performing markets with high barriers to entry
f> Highly experienced management team
g> Renowned Sponsors with global expertise and local knowledge
Business and Growth Strategies
The company aims to maximise the total return for unitholders by targeting growth in distributions and in NAV per unit. The operating and investment strategies it intends to execute to achieve this goal include:
a> Capitalise on portfolio's embedded organic growth and new development opportunities
b> Disciplined acquisition strategy with a strong balance sheet
c> Proactive asset management to drive value
Tax Benefits
a> The REIT will receive income in the form of dividends and interest from SPVs. Such interest income received or receivable by the REIT from the SPVs should be exempt from tax in the hands of the REIT.
b> Dividend (interim or otherwise) declared, distributed or paid by a HoldCo / SPV, to the REIT out of its current Income, should be exempt from Dividend Distribution Tax.
Financials
Source for above two images: Sharekhan
Risks
Here are some risks, highlighted by Sharekhan, to consider before investing in issue:
Embassy Office Parks REIT is expected to borrow Rs 4,000 crore to refinance a portion of the existing debt of the Asset SPVs through repayment of existing loans, deferred payment obligations and to fund construction of certain projects after the listing of the Units. The terms of this financing may limit the ability to make distributions to the Unitholders.
The REIT Regulations impose restrictions on the investments made by it and require it to adhere to certain investment conditions, which may limit its ability to acquire and/or dispose of assets or explore new opportunities.
Its business is dependent on the Indian economy and financial stability in Indian markets, and any slowdown in the Indian economy or in Indian financial markets could have a material adverse effect on its business.
The gross rentals from top 10 tenants amounted to 42.31 percent while tenants in the technology industry accounted for 49.4 percent as of December 31, 2018. Any conditions that impact these
enants, the technology sector or parks may adversely affect its business, revenue from operations and financial condition.
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