Embassy Office Parks REIT

REIT- An Alternate Mode of Financing Real Estate

 REIT is an important alternative source of capital – it makes available long-term capital for real estate

 REIT is an investment vehicle that owns & manages investment grade and income producing real estate
properties such as offices, malls, industrial parks, warehouses, hospitality, healthcare centres, and almost
any asset that can produce an annuity revenue stream. Similar to mutual funds in which funds are raised
from investors for investing in equity stocks, REITs raise pool of funds for investment in rent yielding
assets.

 Benefits from REITs include regular and higher distributions compared to dividend on listed equity, higher
liquidity and transparency than direct investment in real estate, growth in rental and net asset value
through contracted rent increase, rent reversion and growth in portfolio of leased area and exposure to
well-diversified real estate portfolio providing better risk mitigation. REITs provide real estate ownership
at an affordable ticket size –with minimum IPO subscription size being INR 2 Lacs. Further, REITs
encourage professional management of assets since REIT Managers are required to have atleast 5 years of
experience in property management.

REIT- A superior product than InvIT

 REITs provide stable income and certain yield as 80% of REIT assets are income generating properties
that have long term rental contracts. Cash flows are less certain in case of InvITs as they are dependent on
various factors affecting their daily capacity utilization and scalability of tariffs

 REITs are better insulated from regulatory/ political risks: REITs hold land and buildings with on a free
hold basis or on lease from a government authority whereas InvITs have the concessions given on
infrastructure projects which are more prone to regulatory changes and political interference

 REIT’s underlying assets see growth in value over time and have high terminal value: InvITs comprise of
concessions where the projects are returned to the authority or are rebid post the concession period
whereas REITs own the property leased out whose value grows over time like all real estate classes

 REITs have a greater visibility of growth which can be achieved through redevelopment of existing assets,
new construction and acquisition of completed/ leased assets. While for InvITs, growth depends on
successful acquisition of concession assets through a bidding process

 REITs are more accessible to small investors and likely to have higher liquidity due to lower IPO
subscription price and trading lot than InvITs

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Embassy Office Parks REIT- An Overview

 Embassy Office Parks REIT (EOPR) is a leading owner & developer of high quality office properties in India

 It owns one of India’s largest office portfolios. The Portfolio comprises seven office parks and four prime
st
city-center office buildings totalling 32.6 Msf. as of 31 March 2018

 EOPR has 160 marquee tenant base of which ~81.4% of the Gross Rentals is from leading MNCs and
~43.8% is from Fortune 500 companies like JP Morgan, IBM and Microsoft (as of March 31, 2018)

 Following chart shows the REIT Structure and relationship between Embassy REIT, the Trustee, the
Manager and the Unitholders :

Unitholders (including
Sponsors and Sponsor
Groups)

Units Distributions

Holds the REIT assets in

REIT Management trust for the benefit of
Services unitholders

Manager Embassy REIT Trustee

REIT Management fee Trustee fee

Shareholder
Net Distributable
Property Property Debt/Equity/Equity
Cash Flows
Management Management linked instruments
Services fees

Asset SPVs

 Embassy Property Developments Private Limited - is one of the REIT Sponsors. It is a leading
Indian real estate company that has developed over 45 Msf. of area in the commercial and
residential segments (as of March 2018) and has a high quality board with eminent persons from
real estate

 BRE/ Mauritius Investments- is one of the REIT Sponsors. It is a part of Blackstone, one of the
world’s leading investment, real estate and alternative asset management firms

 Embassy Office Parks Management Services Private Limited- is the REIT Manager and is jointly
owned by Embassy Sponsor and Blackstone Sponsor Group

 Axis Trustee Services Limited- is the Trustee and ensures best practices in corporate governance

REIT Portfolio

 Commercial Office- REIT Portfolio comprises 74 high quality office buildings across 11 commercial offices.
These 11 offices comprise 7 office parks and 4 city-center office buildings along with social infrastructure
like food courts, employee transportation and childcare facilities

 Hotels- Portfolio includes 1 operational hotel (247 keys) & 3 under-construction hotels totalling 1,096 keys

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 Portfolio Occupancy- Portfolio is highly stabilized at 95.0% committed occupancy for commercial office
assets and 72% occupancy for operating hotel asset (Hilton, Embassy Golflink, Bengaluru)

 All of EOPR’s assets are located in India’s key office markets of Bengaluru, Pune, Mumbai & Noida:

Portfolio Summary
Leasable Area Market Value % of Total
Location
(Msf.) (INR Bn.) Market Value
Commercial Office:
Bengaluru 17.2 155.6 52%
Mumbai 2 49.7 17%
Pune 8.9 44.6 15%
Noida 4.7 26.3 9%
Total Commercial Office 32.6 276.2 92%
Bengaluru - Hotels 1,096 Keys 14.1 5%
Bengaluru - Embassy Energy 100 MW 10.7 4%
Total Portfolio 301.0 100%
CBRE is the independent Valuer of the assets

Around 60% of the portfolio assets (by value), including hotels and energy infrastructure, are located in
Bengaluru. Total market value of the EOPR portfolio INR is 301 Bn.

 Assets under- construction- Around 14% of the portfolio assets (by market-value) are under-construction

 ROFO Assets- EOPR also has Right of First Offer (ROFO) on 5 assets (with ~53 Msf. of leasable area) owned
by the Embassy Sponsor, if it seeks to sell them. These assets are located in Bengaluru, Chennai,
Hyderabad

REIT Business Model and Growth Drivers

EOPR has a simple business model with embedded growth:

 Stable Cash-flows- Stable, long-term contracted rental income from commercial office assets with 10% to
15% contractual escalations every 3 to 5 years.

 Near-Term Leasing Upside- Current portfolio has 5% transitional vacancy. Further, market rents are 35%
above in-place rents. Lease-up of the current vacancy and releasing at market rents will drive rental
growth

 Portfolio Development Potential- 2.9 Msf. area currently under-construction on entitled land within
EOPR’s assets. There is further 5.5 Msf. of proposed developable area to accommodate tenant expansion.
3 Under-construction hotel assets totalling 849 keys will further increase the portfolio size

The above factors are expected to grow NOI (Net Operating Income) 1.6 times (at 16.1% CAGR)- from
INR 13,539 Mn. in FY18 to INR 21,179 Mn. in FY21. Contracted NOI growth contributes 54% to projected
NOI growth in the same period:

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 NOI Bridge
(INR Mn)

21,179
866
2,644

4,130
13,539

FY 2018 Contracted NOI Growth Vacancy Lease-up & Re-leasing at Market FY 2021
Development Hotel Stabilization &
Others

% of Total
54% 35% 11%
Growth

Key Financials and Projections

Historical Financials (INR Mn) FY16 FY17 FY18

Revenue from operations 13,970 14,849 16,118
NOI 11,913 12,259 13,539
NOI Margin % 85% 83% 84%
EBITDA 12,288 12,400 12,408
EBITDA Margin % 88% 84% 77%
PAT 932 1,771 2,569

Snapshot projections (INR Mn) FY19 FY20 FY21

Portfolio Assets
Revenue from operations 19,390 22,926 24,869
NOI 16,540 19,577 21,179
NOI Margin (%) 85% 85% 85%
EBITDA 15,587 18,476 19,999
EBITDA Margin (%) 80% 81% 80%
Cash flows from operations 13,832 16,250 18,086
Portfolio Investment
Revenue from operations 3,285 3,542 3,746
NOI 3,173 3,433 3,622
NOI Margin (%) 97% 97% 97%
EBITDA 2,983 3,215 3,379
EBITDA Margin (%) 91% 91% 90%
Cash flows from operations 2,537 2,601 2,717
NDCF for Embassy REIT 16,592 19,056 20,429