Although REITs are quite popular globally, in India we don’t yet have a listed REIT. The IPO of the first Indian REIT - Embassy Office Parks is ongoing and if you are thinking of investing, then here’s an interesting perspective by Manoj Nagpal.
Many people requested me to give my views on the Embassy Office Parks REIT IPO
— Nagpal Manoj (@NagpalManoj) March 19, 2019
General Q was
With a rental yield of 8.25% (+ incr) and possible capital appreciation, this seems to be great buy. Should I buy?
I will try to decode the Embassy REIT IPO in this tweet thread (1/N)
1. When you buy a REIT, you become a unitholder in the REIT
— Nagpal Manoj (@NagpalManoj) March 19, 2019
2. REIT will be listed for trading. Post listing, You can sell/buy on the exchange (NSE)
3. Globally REITs trade at a discount to underlying
4. Embassy Office Parks owns commercial real estate (and some hotels)
(2/n)
5. Most of this commercial real estate is leased out to good cos like IBM, Cognizant etc
— Nagpal Manoj (@NagpalManoj) March 19, 2019
6. It owns around 32 mn sq ft. To give you a picture, It's like owning 60 x Express Towers
7. This commercial real estate is in Bangalore (60%), Mumbai, Pune, NOIDA
(3/n)
8. When you buy the REIT, effectively u become a part owner of these buildings
— Nagpal Manoj (@NagpalManoj) March 19, 2019
9. The value of this commercial real estate is around 31500 cr (independent valuation done by the co)
10. The IPO will sell it to you at a 20% discount! Why? (Just goodwill to you?)
(4/n)
11. Let's not look at a gift horse and count it's teeth?
— Nagpal Manoj (@NagpalManoj) March 19, 2019
12. Reality is real estate valuation in India is not real and just an estimate
12. 20% markdown to quoted prices is normal in Indian real estate
13. So don't assume and gloat that we are getting a discount in the IPO
(5/n)
14. So if we buy the Embassy Park REIT, we get
— Nagpal Manoj (@NagpalManoj) March 19, 2019
(a) Part ownership of this commercial real estate
(b) Already pre-leased to big cos
(c) Effectively we get rental yield from these cos
(d) Capital appr, if listed price reflects this
With me till here?
(6/n)
15. So hypothesis presented is
— Nagpal Manoj (@NagpalManoj) March 19, 2019
(a) Current rental yields are 8%+ in this portfolio
(b) This is lower than market. So u have upside
(c) As time goes by, rental agreements will renew at higher prices
(d) So u get more yield!
(e) Plus cap apprecition!
(7/n)
16. Before you invest in this REIT, you need to test this hypothesis and see if this is indeed the case
— Nagpal Manoj (@NagpalManoj) March 19, 2019
17. Also measure the risks to this hypothesis and then take a call
18. Rental yields in Bangalore have been increasing but other markets are flattish for last 5-6 yrs
(8/n)
19. Once u project the rental yields in the future, you need to deduct the management costs (maintaining the blg, property mgmt, repair costs)
— Nagpal Manoj (@NagpalManoj) March 19, 2019
20. Also deduct any interest payouts (loans taken earlier by co)
21. Reduce REIT management costs
22. And balance is what u get
(9/n)
22. Let's assume that the projected rent increases by the co will hold in the future (in the past they have missed estimates sometimes)
— Nagpal Manoj (@NagpalManoj) March 19, 2019
23. If that holds, then the Net discounted Cash flow will give a pre-tax yield of 7.5%-8.5% in the future before interest costs
(10/n)
24. Interest costs by the shareholder still needs to be reduced.
— Nagpal Manoj (@NagpalManoj) March 19, 2019
25. Most of the debt is on zero coupon bonds, but interest is still accrued
26. So you need to account for that
27. Interest costs can take away around 1.25%-1.75% of your rental yield
28. So build that in
(11/n)
29. So effectively, your net yield post of all expenses and all interest costs (assuming that the company projections hold) will be a bit lower between 6%-6.5%
— Nagpal Manoj (@NagpalManoj) March 19, 2019
30. We are still pre-tax here
31. This is just an estimate, you need to build your own estimate to decide
(12/n)
32. And there is some litigation on some of the properties too
— Nagpal Manoj (@NagpalManoj) March 19, 2019
33. At best this will be just a legal expense and at worst some of the value of the properties need to be discounted
34. So keep that risk in the back of your mind/calculations
(13/n)
35. For the sake of being conservative, build the downside case in your mode. This may give you around 5% yield
— Nagpal Manoj (@NagpalManoj) March 19, 2019
36. On an optimistic side, if rentals increase more than expected, then you can be closer to 8%+ yields
37. So it's evenly placed there.
Do ur own calculations
(14/n)
38. Now let's come to capital appreciation part
— Nagpal Manoj (@NagpalManoj) March 19, 2019
39. In an illiquid asset (the REIT has no intention to sell underlying assets), capital appr if any, in future will get reflected in the calculated quarterly NAV
40. And in effect part of this will be in listed prices on NSE
(15/n)
41. Take taxes also into consideration. REITs are almost a pass thru though some additional tax leakage will be there
— Nagpal Manoj (@NagpalManoj) March 19, 2019
And then take your decision to invest in the REIT
None of the above tweets are any kind of advise. Just my thoughts as some wanted to hear them
**End**
(16/16)