India had no listed REITs till about 2 years ago and as of March 2021, we have 3.
Embassy Office Parks REIT, MindSpace and the most recent entrant – Brooksfield.
Of the 3, Embassy has completed 2 years of listing now since its launch in March 2019.
You can read an initial write up on Embassy REIT here and the Q2 FY2021 update here.
The Q3 results are out too and its down, again. At least perceived to be so.
Distribution per unit to unit holders falls further
The distribution per unit for the quarter of Dec 2020 is at Rs. 4.55 per unit. This is down 17% compared to the previous quarter and down 8% compared to same period, last year.
Of course, the payout was 100% of available distribution.
However, there is a key reason here.
The REIT issued new units to the extent of 176 million towards the end of December as it raised new capital. This increased outstanding units from 772 million units to 948 million units.
If this new addition had been shifted one week and had happened on Jan 1, 2021, the per unit distribution would have been Rs. 5.59 per unit. That would actually mean an increase of 2% in distribution.
This should normalise hopefully in the next couple of quarters.
Of course, the markets did not respond kindly to this and the REIT quoted price went on to touch a price of Rs. 320.
To put in context, the listing price of Embassy REIT 2 years ago was Rs. 300.
Business Highlights
For the business highlights, you can read the Earnings Update report from the REIT here.
New lease deals, increase in rentals, reduced financing cost, acquisition of Embassy Tech Village and the gradual return of normalcy in operations – all point to improvements of prospects for the REIT.
Valuations
The closing price of the REIT as on March 3, 2021 was Rs. 325 approx.
If the payout is assumed to be at Rs. 21 per unit for the year, it translates into a yield of about 6.5% at that price.
If we assume that this distribution can go up to Rs. 24 per unit in the next financial year, the yield at the current price will be 7.4% (pre tax).
We are not counting any capital appreciation here.
Using the Gross Asset Value and the Total Enterprise Value, the fair value rangers from Rs. 456 to Rs. 469 per unit.
At a price of around Rs. 325 per unit, the REIT is available at a discount to fair value.
Is this a good time to invest?
If you need a diversification offered by having a Grade A commercial REIT in your portfolio, then yes, this can be a good time to add gradually.
How much exposure should your portfolio have would depend on your individual situation?
It is always advisable to keep adding over time as you build your portfolio.
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