Three major investors in Embassy Office Parks REIT (Real Estate Investment Trust) are set to vote against a resolution authorizing the REIT to raise ₹3,000 crore. The funds which include ICICI Prudential Mutual Fund, HDFC Mutual Fund and Kotak Real Estate Fund oppose the proposal on grounds that the funding would exceed the acquisition cost of the intended business park and potentially dilute the value of REIT units.
Key Points
- Embassy REIT seeks funding to acquire Embassy Splendid TechZone. It is a Chennai-based business park valued at ₹1,269 crore.
- The mutual funds object to the funding potentially being higher than the property’s price. Additionally, there’s concern that new REIT units could be issued below net asset value (NAV) and market price.
- The funding proposal requires a special majority to pass meaning favorable votes must outnumber opposing votes by at least 1.5 times.
- If the REIT issues units below NAV or market price it could dilute existing unitholder value and reduce distribution amounts.
The funds – ICICI Prudential Mutual Fund, HDFC Mutual Fund and Kotak Real Estate Fund jointly hold 17.29% in the REIT. They are opposing the move on the grounds that the proposed fundraise is higher than the acquisition cost of ₹1,269 crore for the Embassy Splendid TechZone in Chennai.
They are also concerned that the units could be issued below the REIT’s net asset value of ₹401.59 per unit and the current market price of ₹362.02 per unit.
“We have discussed this issue multiple times with the management of Embassy REIT but have not received a satisfactory response as to why it is raising higher equity than the size of the acquisition when leverage is not a concern. If they raise equity capital at a discount to NAV or to market price, it can lead to dilution and reduction in per cent distribution” said a person aware of the matter.
Embassy REIT’s Strategic Fundraise Plan
However, a second person familiar with the fundraising proposal said it was not just for the acquisition but also to optimize the REIT’s balance sheet as it is constructing close to 6.1 million square feet in its existing portfolio at a total expenditure of around ₹3,800 crore to be funded by debt.
“The fund raise was always to do two things—to raise funds for the acquisition and to de-lever to optimize the REIT’s balance sheet given that they are constructing close to 6.1 msf (million square feet) in their existing portfolio with a total expenditure of close to ₹3,800 crore to be funded by debt. It is a standard enabling resolution with a timeline of one year. The actual size and timing of fund raise will always be dependent on overall market conditions prevailing market price etc.”
How Voting Rules Impact the Funding Decision of mutual funds
The resolution for the fundraise requires a special majority where the votes cast in favor need to be not less than one and a half times the votes cast against as per SEBI regulations for REITs.
Embassy REIT owns and operates a 45.4 million square feet portfolio of office parks and buildings. This is the first publicly listed REIT in India. It was previously backed by global private equity firm Blackstone which has since fully exited the company.
Embassy REIT Response: An Embassy spokesperson declined to comment citing a policy against addressing market rumors. A source familiar with the proposal suggests the funding aims not only to acquire the business park but also to optimize the REIT’s overall balance sheet.
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Background
- Embassy REIT is India’s first publicly listed REIT owning and operating a large portfolio of office parks and buildings.
- REITs function similarly to real estate mutual funds allowing investors to participate in income generating properties.
- ICICI Prudential Mutual Fund, HDFC Mutual Fund and Kotak Real Estate Fund collectively hold a significant 17.29% stake in Embassy REIT.