Two mutual funds and an alternate investment fund, that are unitholders of Embassy Office Parks REIT (Real Estate Investment Trust), will vote against its resolution to raise ₹3,000 crore to acquire a business park in Chennai with an enterprise value of ₹1,269 crore on Monday.
The grounds for opposition are that the proposed fund raise will be higher than the acquisition cost and on concerns that units could be issued below the REIT’s net asset value and market price, according to a person aware of the matter.
ICICI Prudential Mutual Fund, HDFC Mutual Fund and Kotak Real Estate Fund, which jointly hold 17.29% in the REIT as per Bloomberg, would vote against a resolution “to consider and approve raising of funds through an institutional placement(s) of units of Embassy REIT not exceeding ₹3,000 crore to investors in one or more placements at a unitholders’ meeting on Monday,” said the person, speaking on condition of anonymity.
While the resolution for acquisition will be passed by simple majority—votes cast in favour should be more than votes cast against—that for the fund raise will be passed by special majority—votes cast in favour need to be not less than one and a half times votes cast against the resolution, as per Sebi regulations for REITS.
The fund raise is to acquire the rights, title and interests of a wholly-owned subsidiary of Embassy Property Builders and Developers in Embassy Splendid TechZone for ₹1,269 crore.
The person cited earlier said that the mutual funds are primarily concerned about the fund-raise proposal being higher than the price of the property, and fear that units could be issued below their market price and net asset value. While the market price of Embassy Office Parks REIT was ₹362.02 per unit on the National Stock Exchange (NSE) as of Friday, the NAV per unit (948 million units) was ₹401.59 as of the end of March.
“We have discussed this issue multiple times with the management of Embassy REIT but have not received satisfactory response as to why it is raising higher equity than 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,” the source said.
Distribution refers to the portion of cash accruing from lease rentals and appreciation in property prices given to the unitholders.
However, the second person aware of the fund-raising proposal said the fund raise was not just for the acquisition but to optimise the REIT’s balance sheet.
“The fund raise was always to do two things—to raise funds for the acquisition and to de-lever to optimise 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.”
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Queries sent to ICICI Pru, HDFC MF and Kotak Real Estate Fund were not answered till the time of going to press. An Embassy spokesperson in an emailed response said the company does not comment on market rumours and speculation.
A REIT owns and operates a portfolio of income generating properties and is equivalent to a mutual fund in the real estate sector. It operates with a sponsor, who sets up the REIT and transfers assets, etc. in the special purpose vehicle to the REIT, an investment manager who takes investment decisions and manages its assets and a trustee who is responsible for the interests of its unitholders.
Embassy REIT, which owns and operates a 45.4 million square feet portfolio of nine infrastructure-like office parks and four city-centre office buildings in markets like Bengaluru, Mumbai, Pune and NCR, is the first publicly-listed REIT. It was previously backed by global private equity firm Blackstone and listed on stock exchanges on 1 April 2019 at ₹300 a share. Since then, Blackstone has fully exited the company.
Other REITS in India include Mindspace Business Parks REIT, and Brookfield India Real Estate.
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Published: 28 Apr 2024, 06:39 PM IST