Intrinsic Value of Embassy REITs Using DCF Method

Embassy REIT Portfolio Explorer

Introduction

Today, we’re going to calculate the intrinsic value of Embassy REIT.

You’ve probably heard about Real Estate Investment Trusts (REITs). If you want to know more about it, read it here. In short, it is a new way to invest in the real estate sector.

Embassy REIT stands out as India’s first publicly listed REIT. It is also Asia’s largest office REIT by area.

So, how to figure out what this giant is truly worth?

Well, one of the most robust ways is through a Discounted Cash Flow (DCF) analysis. Read about DCF method here. It’s a method that helps us estimate a company’s true value based on its projected future cash flows.

To put it simple, DCF method asks: “What are all the future earnings (cash flows) of a property (or stock) is worth today?“

1. DCF Approach for REITs

Now, you might be wondering, how does DCF work for a massive entity like Embassy REIT?

Embassy REIT 51.1 million square feet (msf) portfolio spread across prime markets like Bengaluru, Mumbai, Pune, Chennai, and the Delhi NCR.

• The core idea of DCF analysis is to first forecast the cash flows that the REIT’s properties are expected to generate over a period.
• Then, we discount these future cash flows back to their present value (PV). Read more about the concept of present value (PV) here.

Converting future cash flows in Present value (PV) has roots in the concept of time value of money.

But this future cash flow forecasting is done only for a specific number of years (say five years). After this explicit forecast period, a “terminal value” is estimated. This terminal value representing the value of the cash flows beyond that period, growing at a stable rate.

Finally, we sum all these discounted values to arrive at the intrinsic value.

It’s a comprehensive method, and frankly, the annual report already gives us incredible insights into this very process, as their independent valuer uses this exact approach.

2. DCF Analysis Discount Rates

Embassy REIT engages independent experts to assess the fair value of its vast portfolio.

For the financial year ended March 31, 2025, Ms. L. Anuradha, a registered external property valuer, in collaboration with Cushman & Wakefield, undertook this crucial task.

They didn’t just pull numbers out of thin air. Their valuation model is based on the Discounted Cash Flow (DCF) method. This model meticulously considers:

• Expected rental growth rates.
• Vacancy periods and occupancy rates.
• Average room rates for their hospitality assets.
• Lease incentive costs and blended tariff rates.

The future cash flows derived from these projections are then discounted using risk-adjusted discount rates.

What are discount rates?

It is also referred as the Weighted Average Cost of Capital (WACC) It incorporates both the cost of debt and the cost of equity. The cost of debt is considered to be around 8.4%, while the cost of equity is at 14.50%, reflecting market return expectations for commercial office spaces.

The blend of debt and equity is considered, keeping in mind that SEBI REIT Regulations set a maximum permissible debt limit of 49%.

The specific WACC figures used by the valuer for different types of properties are:

• Commercial (Completed/Operational): 11.75%.
• Commercial (Under-construction/Proposed Development): 13.00%.
• Hospitality (Completed/Operational): 12.14%.
• Hospitality (Under-construction/Proposed Development): 13.50%.
• Embassy Energy (Solar Park): 11.75%.

For the terminal value calculation, which essentially captures the value of the properties beyond the detailed forecast period, a capitalization rate is applied.

• For commercial properties, the capitalization rate ranges from 7.50% to 8.25%. Better-performing assets gets the lower end of this range.
• For hospitality assets, a capitalization rate of 7.14% is used, which is equivalent to an EV/EBITDA multiple of 14. If you want to know the depths of EV/EBITDA ratio, read this post.

3. Embassy REIT’s Intrinsic Value

3.1 Gross Asset Value (GAV)

Based on this detailed DCF analysis performed by the independent valuer, here’s what’s reported in the FY25 annual report about Embassy REIT’s intrinsic value.

Gross Asset Value (GAV) of Embassy REIT is estimated at Rs.611,632 million. Here is the break-up of total GAV:

SL	Asset Name	City/Location	Market Value (₹ Million)	Market Value (Rs. Cr.)
1	Embassy Manyata	Bengaluru	2,49,646	24,965
2	Embassy TechVillage	Bengaluru	1,40,396	14,040
3	Embassy Golf Links	Bengaluru	38,178	3,818
4	Embassy One	Bengaluru	15,019	1,502
5	Embassy Business Hub	Bengaluru	6,671	667
6	Embassy Express Towers	Mumbai	20,278	2,028
7	Embassy 247	Mumbai	19,864	1,986
8	First International Financial Center	Mumbai	15,813	1,582
9	Embassy TechZone	Pune	24,148	2,415
10	Embassy Quadron	Pune	9,125	913
11	Embassy Qubix	Pune	9,565	957
12	Embassy Oxygen	Noida	26,091	2,609
13	Embassy Galaxy	Noida	10,549	1,055
14	Embassy Splendid TechZone	Chennai	15,544	1,554
15	Hilton at GolfLinks	Bengaluru	7,067	707
16	Embassy Energy	Bellary District, Karnataka	3,678	368
–	Total Gross Asset Value (GAV)	Across 5 Major Indian Cities	6,11,632	61,163.

The GAV is the total market value of all the properties that Embassy REIT owns. It is determined primarily using the Discounted Cash Flow (DCF) method. This figure essentially represents the intrinsic value of all the underlying assets (real estate and related assets).

But in DCF Method, we use Free Cash Flows (FCFs)? Why GAV is being used in this example?

In DCF analysis typically uses future free cash flows. In Embassy REIT’s case, the GAV is actually the result of a DCF analysis applied to each of its individual properties.

To understand it clearly, may I ask you to think it this way:

• The independent valuers have looked at each property that Embassy REIT owns.
• For each of these properties, they project the “net cash flows” it is expected to generate in the future. This involves detailed estimations of future rental income, expected occupancy, and operating expenses.
• These future cash flows are then discounted back to today’s value for each individual property. This gives them the market value of that specific asset. For example, the estimated valuation of Embassy Manyata, Bengaluru is Rs.24,965 Crore.
• When the market valuation of all their 16 properties are summed up, what we got is the total is the Gross Asset Value (GAV) of Rs.61,163 crore.

Initially when I read the valuation, I had this doubt that were is Free Cash Flow (FCF) in the estimation.

But now I know how FCF has been used. In fact, FCF is the foundation for valuing each property.

Finally, Net Asset Value (NAV) is derived by adjusting this GAV for other assets and liabilities.

Continue reading to why we’ll use the NAV and not directly the GAV value.

3.2 Net Asset Value (NAV)

However, as stocks investors, we often look at the Net Asset Value (NAV) per unit to understand the intrinsic value on a per-unit basis. NAV is calculated after accounting for all assets and liabilities.

The NAV calculation is straightforward:

NAV = (GAV + Other Assets – Other Liabilities – Gross Debt) / Number of Shares.

• Other Assets: These are additional assets that Embassy REIT owns besides its main properties. These can be liquid assets like cash, short-term investments, and other working capital.
• Other Liabilities: These are all other financial obligations the REIT has, apart from its main borrowings. This can include things like money owed to suppliers (trade payables), deferred tax obligations, or provisions for future expenses.
• Gross Debt: This is the total amount of money Embassy REIT has borrowed from lenders. It includes both long-term loans and short-term borrowings that need to be repaid.

Let’s put in the numbers as reported in the FY25 annual report:

• Gross Asset Value (GAV): Rs.611,632 million.
• Other Assets: Rs.50,244 million.
• Other Liabilities: Rs.62,632 million.
• Gross Debt: Rs.198,073 million.
• Number of Units: Approximately 947.89 million shares.

So, the NAV comes out as:

= Rs.611,632 million + Rs.50,244 million – Rs.62,632 million – Rs.198,073 million) / 947.89 million share

= Rs.401,171 million / 947.89 million units = Rs.423.22 per share.

This NAV per unit of Rs.423.22 gives us an estimate of the intrinsic value of each Embassy REIT shares, derived directly from the detailed DCF valuation of its underlying assets.

At present, the Embassy REIT’s stock is trading at a price of Rs.389.21 per share. From this perspective, we can say that the Embassy REIT is trading at an undervalued price at a discount of about 7.8%

3.3 Future Growth Rate For Embassy REIT’s Business

In the annual report, the company has projected the future income each property is expected to generate.

This projection is usually done in two parts:

• Short-term detailed forecasts: They estimate specific cash flows for a certain number of years (e.g., 10 years).
• Long-term “forever” growth (Terminal Value): After this detailed forecast period, they assume that the property’s income will grow at a stable, sustainable rate indefinitely into the future (read about sustainable growth rate here). This is known as the perpetual or terminal growth rate.

This “forever” growth rate isn’t directly stated in the report. But we can estimate it mathematically taking reference of the two key rates:

• Discount Rate (WACC): This is the rate used to bring all future cash flows back to today’s value. It reflects the overall cost of funding for the properties. For Embassy REIT’s main completed/operational commercial office properties, this is 11.75%.
• Capitalization Rate (Cap Rate): This rate is used to convert the last year’s projected stable income into a “terminal value” that represents the property’s worth beyond the detailed forecast period. For Embassy REIT’s commercial office properties, a common Cap Rate used is 8.00%.

For easy understanding, think of the relationship as represented in the formula

Perpetual Growth Rate (g) = Discount Rate (WACC) – Capitalization Rate (Cap Rate)

Using the figures for Embassy REIT’s core commercial office assets, which represent a significant 93% of their Gross Asset Value:

g = 11.75% (WACC) – 8.00% (Cap Rate) = 3.75%

Now, I think, it is essential for me to paraphrase what is 3.75%?

It represents sustainable long-term growth rate that Embassy REIT’s core income-generating properties can achieve over an extended period. It’s the rate assumed for their cash flows to grow “forever” after the initial detailed projection period in the DCF model.

Conclusion

The annual report highlights that the independent valuer’s work is based on internationally accepted valuation standards and SEBI (REIT) Regulations.

It’s also worth noting that the manager is aiming for double-digit growth in Net Operating Income (NOI) and distributions in FY2026. This will contribute to future intrinsic value build-up.

This clearer picture of how Embassy REIT’s intrinsic value is assessed and what factors contribute to it. It’s always insightful to look beyond just the market price and understand the fundamental value of your investments.

Have a Happy investing, and keep reading.