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

Hi Amit. Thanks for your detailed analysis. You have highlighted some important points. I agree that it will be difficult for an asset that is only 1/3rd operational to be NOI/DPU accretive ordinarily. As I have stated in my response, these metrics are less important from longer-term value creation perspective and the better metric to track for this purpose is the impact that this acquisition will have on Embassy’s NAV. In the valuation report of ESTZ, the valuer has appropriately analysed the cash flow and discount rates for the operational, under-construction and future development parts of the asset to arrive at its gross asset value (GAV). I will also concede that the price at which the sponsor is offering the asset to the REIT is fair at a 6.7% discount to the average GAV arrived at by the two valuers. In FY22, BIRET had acquired sponsor assets in an equal partnership with GIC at a 5.6% discount to GAV.

My real concern is regarding the way the REIT is looking to fund this acquisition. The acquisition will only be NAV accretive if Embassy can complete the QIP at a unit price of Rs375 odd which looks highly unlikely given that the current market price is Rs350. Considering this, it is hard to see how the way that Embassy is looking to finance this acquisition is in the interest of its existing unitholders.

Coming to the point of debt vs equity tradeoff that you have highlighted in terms of their relative costs, I think it would be incorrect to compare the cost of debt vs the distribution yield on additional units that need to issued as the distribution is expected to increase as rent escalations kick in and MTM spreads are realized. More importantly, the 8.5% vs 6% cost argument assumes that dilution will take place at Rs375 which is unlikely as I have highlighted above. Moreover, with a lower unit price, the amount of units that will need to be diluted will be higher than at Rs375 which will further increase the absolute cost of equity financing.

The bottom line, in my opinion, is the dilutive impact that this acquisition will have on Embassy’s NAV which is not in the long term interest of Embassy’s existing unitholders.