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Annuity asset sale to drive deleveraging

Prestige Estates Projects (PEPL) has informed exchanges that it has completed Phase 1 of the proposed transaction with the Blackstone Group wherein PEPL was targeting to sell stakes in specific office, retail, hotel and /facilities management SPVs for Rs91.6bn. The company has initially received Rs74.7bn in Phase 1 and expects to receive the pending Rs16.8bn by the end of Q1FY22 (June ’22). PEPL had consolidated net debt of Rs84.6bn as of Dec’20 which will now reduce to ~Rs10bn (net D/E of 0.3x) post completion of Phase 1 of the transaction. PEPL will be left with Rs3.0bn of annuity income stream post this transaction and as per PEPL management, the company may look to get back to its pre-Covid annual rental levels of ~Rs10bn in two-three years through build-out of new assets. We retain our ADD rating with an unchanged SOTP based target price of Rs311/share. Key risks to our call are a slowdown in residential demand and continued weakness in office leasing.

* What was on the table? On October 17, 2020, PEPL had signed a non-binding Letter of Intent (LoI) with the Blackstone Group for the sale of PEPL’s direct and indirect interest in its office, retail, hotel properties and property/facilities management businesses. On November 9, 2020, PEPL had informed the exchanges that the nonbinding LoI had now progressed to PEPL executing a Term Sheet with Blackstone Group entities for specific assets held in various SPVs of PEPL. As per the disclosures given by PEPL, the Blackstone Group entities were evaluating purchase of up to 100% stake held in specific asset SPVs of 6 completed office assets, 85-87% stake in 9 operational retail assets (malls), up to 50% stake in 4 underconstruction/upcoming office assets and up to 100% in operational Aloft hotel and 100% in operational Oakwood Residences hotel.

* Completion of Blackstone deal to significantly bring down debt levels: PEPL had consolidated net debt of Rs84.6bn as of Dec’20 which will now reduce to ~Rs10bn (net D/E of 0.3x) post completion of Phase 1 of the transaction. As per company’s management, the Phase 1 proceeds of Rs74.6bn have been utilised to reduce the gross debt in these annuity assets by Rs45.9bn which stood at Rs Rs53.7bn as of Dec’20.

* What is the way forward? PEPL will be left with Rs3.0bn of annuity income stream post this transaction and as per PEPL management, the company may look to get back to its pre-Covid annual rental levels of ~Rs10bn in two-three years through buildout of new assets. In terms of overall debt levels, PEPL’s management has given a target net debt/equity ratio of 0.5x up to FY23E as it continues its capex and business development plans. Including the entire development pipeline of ongoing and upcoming office/retail projects, PEPL has 43msf of leasable area which is projected to yield rental income of Rs30bn annually as per the company’s estimates in four-five years.

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