Embassy REIT: Is this “Blackstone” promoted REIT is real diamond?

Here are my thoughts related to Chennai acquisition.

Crux – Its a minor acquisition (~1,300 Cr) compared to size of Embassy (~35,000 Cr). Nevertheless, the intention is much more important. Is it carried out in shareholders interest or not?

Details – Based on investors presentation, the acquisition involves acquiring 5 million sq ft of leasable area, 1/3rd of which is operational, 1/3rd under construction and 1/3rd for future development. A simple back of the envelope calculation will tell you that this cannot be a distribution accretive acquisition from day one, as you are buying only 1/3rd operational assets, that will add to the income immediately.

But :

1. You need to get this transaction done, probably, from the pressure of promoter (Embassy),
2. However, being a REIT, you also need to show that tranaction is distribution accretive to the shareholders.

How do you achieve the twin objective?

Right way (which Embassy will do):

1. With acquisition, get rid of high cost debt that comes with property, and replace it with low cost debt at REIT level
2. Take income support for sometime from Promoter

But you can’t show its NOI/Distribution positive just by doing that, then what do you do?
Do some tinkering, find out some way and that is:

1. Do not use debt to fund the transaction as it costs 8.5% interest, and exceeds cash inflow from lease of acquired premise
2. Raise equity (Rs 3000 Cr), on which you need to pay 6% distribution (based on Rs 375 per unit), and use part of it to reduce debt, which comes with 8.5% interest, and hence, reduce the ongoing interest outflow associated with it.

With this you may try to depicit the story as NOI/ distribution accretive. This looks like the game plan to ME.

Having said that, the acquisition may work out well in the long run, when entire 5 million area is built and leased. The cost of debt to construct the assets is less than 8.5%, an advantage that hardly any developer can compete with.

@dd1474 – please share your views

Note – These are the thoughts I have about the acquisition. I can be completely wrong in my assessment. I am invested in Embassy REIT. Its largest portion of my fixed income portfolio.