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A REIT Way to Generate Regular Income

Oct 26, 2021

A REIT Way to Generate Regular Income

In the mid to late 1990s, the mutual fund industry made inroads on Dalal Street.

Investors could channelise their savings into units, which in turn invested in high quality equity and debt instruments, depending upon the scheme.

Twenty years later, we are seeing a similar trend with real estate investment trusts (REITs).

REITs are companies that own / manage a property portfolio. It could include office complexes, buildings, and warehouses, among others. These generates regular income in the form of rent.

REITs allow small investors an opportunity to participate in the property market without the hassles of managing a property portfolio by simply purchasing units of a REIT. This is akin to purchasing units in a mutual fund.

On Dalal Street, there are currently three listed REITs - Mindspace Business Parks REIT, Embassy Office Park REIT, and Brookfield India Real Estate Trust REIT.

REITs are growing in popularity with current dividend yields more than 6%.

However, the stock prices of the units of REIT have broadly under-performed the broader BSE Sensex during the pandemic. This is because of the growing popularity of work from home opportunities as well as the uncertainty about future demand for office space.

REITs are governed via the market regulator's (Real Estate Investment Trust) regulations 2014.

Under these provisions, REITs are required to distribute to unit holders not less than 90% of its net distributable cash flows in each financial year.

This makes them a very attractive investment for anyone who is looking to generate a regular income.

Now, let's take a look at the three REITs that are listed on the Indian stock markets...

#1 Embassy Office Parks REIT

Embassy REIT is the country's first publicly listed entity in this segment. It owns and operates a portfolio of eight office parks and four citycenter office buildings. These are spread across Bangalore, Mumbai, Pune, and the National Capital Region (NCR).

Its portfolio at the end of the June 2021 quarter comprised 32.3 m sq ft completed office space under lease, 5.7 m sq ft of commercial offices under construction, and 4.4 m office space under proposed development area.

It also has two operational business hotels, four underconstruction hotels, and a 100 MW solar park supplying renewable energy to tenants.

The company's consolidated revenue from operations amounted to Rs 7,376 m in the June 2021 quarter, a growth of nearly 43% on a year on year (YoY) basis. EBITDA grew 33.3% YoY to Rs 6,007 m. Net profit was Rs 2,049 m in the first quarter, which was flat.

It also announced a distribution per unit of Rs 5.64 for the quarter.

Meanwhile, during the financial year 2021, the REIT had given a distribution of 21.48 per unit.

This was due to strong growth. Its consolidated revenue grew 10% YoY to Rs 23.6 bn. The EBITDA grew 11.6% YoY to Rs 19.7 bn.

Facility rentals accounted for 75.6% of its consolidated revenues during the year. Consolidated net profit however, declined 8.7% YoY to Rs 7 bn during the year.

The REIT's IPO price was Rs 300. Since its listing in early April 2019, the stock has risen 16% to Rs 348 as of Friday's close. The unit trades at 40 times estimated financial year 2022 earnings.

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At the current price, it has a marketcap of Rs 330.7 bn.

#2 Mindspace Business Parks REIT

Mindspace REIT is managed by the K Raheja Corp Investment Managers. The portfolio includes five business parks and five independent offices. These comprise 31.2 m sq feet, of which 23.8 m sq feet is completed area, 1.8 m sq feet is under construction, and 5.6 m sq feet is for future development at the end of the June 2021 quarter.

The REITs' income generating properties are located in Mumbai, Hyderabad, Pune, and Chennai.

In the June 2021 quarter, this REIT reported consolidated revenue from operations of Rs 4,197 m and profit before exceptional items of Rs 1,999 m. A prior year comparison of financials is not possible.

Distribution to unit holders was Rs 4.6 for the June 2021 quarter.

Mindspace REIT reported a consolidated revenue from operations of Rs 11.4 bn for the financial year ended 2021 and net profit of Rs 3.3 bn. Again, a prior year comparison of financials is not possible.

The cumulative distribution to unit holders for year 2021 was 9.59 per unit.

The Mindspace IPO offer price was at Rs 275 per unit. It has gained 17% since its listing in early August 2020. Its units currently trade at Rs 322. The units trade at more than 40 times estimated financial year 2022 earnings.

At the current price, this REIT commands a marketcap of Rs 191.5 bn.

#3 Brookfield India Real Estate Trust REIT

Brookfield REIT was the last among the three listed REITs to enter Dalal Street in mid-February of this year. This REIT comprises of four office parks located in Mumbai, Gurgaon, Noida, and Kolkata.

The portfolio consists of 14 m sq ft, comprising 10.3 m sq ft of completed area, 0.1 m sq feet of under-construction area, and 3.7 m sq feet of future development potential.

In addition, this REIT has rights to acquire a further 8.3 m sq feet and rights of first offer on an additional 6.7 m sq feet, both currently owned by members of the Brookfield group.

The REIT's consolidated income from operations in the June 2021 quarter was Rs 2.2 bn while net profit was Rs 739 m. A YoY comparison of financials is not possible.

It has declared a distribution of Rs 6 per unit for the first quarter.

The unit price of Rs 274 on Friday's trade has been broadly unchanged since its IPO. The units trade at nearly 27 times estimated financial year 2022 earnings.

In Conclusion...

REITs are definitely an investment opportunity worth considering for anyone looking to generating regular income from their investments.

Over time, as more REITs list, there will be more options available to investors.

Either way, this is one space that needs to be tracked and followed.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Amriteshwar Mathur is a financial writer with over 20 years of experience. His partnership with Equitymaster involves writing on topics that are critical to understand if Indian investors are to realise their long term wealth building goals.

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