I began coverage of Embassy Office Parks REIT in July 2020 with an idea to understand REITs in general as well as the specific investment opportunity.
Using the annual report of FY2020 as the basis, it appeared then that the REIT stood strong against COVID headwinds. Loaded with Commercial Grade A properties occupied by bluechip tenants, it had very little impact.
You can read that note here.
The following note is in continuation to the above piece so it is better that you first read it and then come back here.
The Embassy Office Parks REIT’s Q2 FY2021 doesn’t appear as rosy as the 1st one and before that the last financial year was.
It is down. And there is one big indicator of it all.
Distribution per unit to unit holders falls
If you are a unit holder in the Embassy Office Parks REIT, the distribution per unit for the quarter of Sept 2021 at Rs. 5.5 per unit. This is minus 4% compared to the previous quarter.
The payout number for the REIT stood at Rs. 6 per unit in the same period last year, that is, Q2 FY2020.
Cumulatively, it stands at Rs. 11.33 per unit for the period of April 2021 to Sept 2021, a 100% payout of all the distributable income. The amount per unit in the same period last year, with a 99.5% payout, was Rs. 11.4.
The reason is lower distributions by SPVs or Special Purpose Vehicles to the REIT.
While the distributions increased in the 2nd half of last financial year with payouts at Rs. 12.99 per unit, it remains to be seen if the same phenomenon recur this year too.
Without new tenants or a large mark to market in rentals, it seems unlikely.
Business Highlights
For the business highlights, you can read the Earnings Update report from the REIT here.
Embassy Office Parks is a good REIT. It is putting up a good fight in the current environment.
However, it remains to be seen if there is further impact on the financials and how much it is going to be.
In the last few months, it has also been included as a part of two international REIT indices.
Valuations
In the last note, I had used the Fair value based calculation for NAV (as presented in the Annual Report). It as at Rs. 360 per unit as on March 31, 2020.
I will now also refer to the NAV based on Gross Asset Value (GAV). This is calculated by a third party valuer. (mentioned in the earnings report link above)
The GAV for the REIT has not changed since March 2020. It continues to be at Rs. 374 – 375 per unit.
However, the current market price of the REIT is at Rs. 348 (as on Nov 6, 2020).
Since, it is lower than either of the NAVs, there is some margin of safety available.
If I were to buy, I would like about 10% to 15% margin on the NAV based on Gross Asset Value. With that consideration, a price below Rs. 340, may be closer to Rs. 320, makes it safer.
What about payouts?
Assuming the REIT continues the same payout for the rest of the year too, we can double the payout from the 1st half of the year. This means Rs. 11.33 * 2, or, Rs. 22.66 as total annualised payout. This is a 6.5% pre tax yield on the current market price.
The expected yield is down from the last note.
Should you invest now?
Well, if you have understood the numbers and thinking above, you might want to hold on. If you really want to add the REIT to your portfolio, waiting for some dips may not be so bad.
Much better thing will be to keep adding some amount on a regular basis.
Between you and me: As an investor you will be looking at both the payout yield as well as some capital appreciation. What number will be good to justify as a good investment?
