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Home >Markets >Mark To Market >Embassy REIT rises despite tax spoilsport

Units of Embassy Office Parks REIT (real estate investment trust) have outperformed the benchmark Nifty Realty index by a wide margin, rising 39% since the April 2019 listing.

This is despite the recent headwind in the form of a change in dividend tax in the Union budget. A report by ICICI Securities Ltd said: “If the Budget proposal stands, it would result in foreign and domestic funds losing 9 basis points (bps) and 15bps, respectively, on their overall yields, assuming a 10% dividend payout as a percentage of the overall Embassy REIT distribution."

The company, meanwhile, reported a strong performance for the December quarter, with higher income and profitability. It posted 16% year-on-year growth in net operating income. Ebitda (earnings before interest, tax, depreciation and amortization) margin jumped 500 basis points.

For the nine months of FY20, the management guided that the REIT should achieve 96-97% of the projected distribution of 1,900 crore for the full year, owing to a slower rate of scale-up in Four Seasons Hotel and a few smaller assets.

But this will be compensated for in the following year, which doesn’t make it a major cause for concern. Another risk to appreciation in unit prices is its rich valuations. Current prices suggest investors are forecasting distribution yields of 5.5-6% over FY20-FY22.

Meanwhile, the strong leasing outlook for its existing and forthcoming assets, re-leasing and escalation in lease rentals due to strong demand, augur well.

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