There’s more to Db Realty than meets the eye

Of course, DB Realty is not the India Inc poster that you would normally have big name Indian business names queuing up to link you with. The company has had run-ins with regulators and central agencies, its performance has been nothing to write home about, and it has seen a lender call it a willful defaulter.

Considering this, the recent activity seeing eminent names like Prestige and Godrej Groups strike deals with Mumbai real estate agent, is certainly not something that can go unnoticed.

What is the real plot? What’s going on at DB Realty? Why are reputable real estate agents lining up at the door? Although we don’t have the real answers to these questions, we have tried to piece together a narrative from publicly disclosed information.

THE DB REAL ESTATE MESSAGE

DB Realty bills itself as a property developer with an “expanding portfolio comprising approximately over 100 million square feet of prime properties” in Mumbai. It’s his big plus. The disadvantages are many. The group has been accused of money laundering, it has been under the control of the Department of Revenue, it has been accused of not paying lenders and it has not seen significant progress on its projects, calling into question its very existence. These are all reasons that would normally scare away any potential partner. Still, he made some trademark deals.

Let’s take a quick look at some of these questions.

The money laundering case: CBI along with the Enforcement Branch filed criminal clearance applications in the Hon’ Delhi High Court against the release of the adjoining properties.

The contracting authority had seized assets of Rs 7.14 crore in August 2011. As a result, a bank balance of Rs 69 lakh, two apartments with a depreciated value of Rs 88 lakh and possibly redeemable preferred shares worth of Rs 5.5 crore was taken back. There were no new developments on this matter during the 2021 quarter ended in September.

In this regard, the company said: “In relation to certain allegations made by the Directorate of Law Enforcement against the company and its two principal executives, in a matter relating to the Prevention of Money Laundering Act 2002 money, this case is pending and the impact, if any, outcome is undeterminable at this stage”.

Confrontation with the tax authorities: In its September quarter filing, the company indicated that the company and KMP premises were searched by the income tax department and that certain documents were seized by the department. There is no clarity on the importance or seriousness of this case.

Lender problem: DB Realty given its precarious finances naturally encountered problems with lenders. In September 2020, Bank of India named its subsidiary, Pune Buildtech, a voluntary defaulter in respect of a Rs 225 crore loan granted in 2013. with one of the lenders that was due after the end of the quarter has not been paid and the company is in discussion with the lender and has requested an extension of the repayment dates. The lender’s response is awaited.

The company’s auditors also point to the fragility of its finances in their report for the September quarter. Firstly, the company has provided guarantees to lenders of Rs 4026 crore (this corresponds to Rs 4130 crore of total consolidated dues at the end of Q3-FY21) for credit to its various subsidiaries. But what is more worrying is the auditor’s observation on the matter: “Some of the entities have defaulted on their repayment obligations of principal amounts totaling Rs 780 crore as of September 30, 2021, but according to management , taking into account the value of the primary/underlying assets given as collateral being greater than the outstanding loans, the liability will not devolve on the Company”.

Besides, it’s disturbing: “The company has debt repayment obligations (including interest) totaling Rs 1328 crore over the next twelve months. Said going concern assumption depends on the Company’s ability to raise funds through the monetization of its non-core assets, the raising of additional funds, the advancement of various projects undertaken through subsidiaries, joint ventures and partners, and other strategic initiatives to meet its obligations. These conditions indicate that there is a material uncertainty that could cast significant doubt on the Company’s ability to continue as a going concern”. It is therefore clear that DB Realty had to act quickly to prevent any action by creditors and to avoid losing its “going concern” label. And the proposed Rs 1,575 crore to be raised via the Godrej Group and Prestige deals, was likely aimed at solving this problem.

SHAREHOLDERS DB IMMOBILIER

Shareholder

With Godrej Properties

After the release of Godrej

Promoters

54.08%

60.08%

Pinnacle Invest (Prestige Group)

17.97%

19.98%

Public ownership

17.97%

19.94%

Properties of Godrej

9.98%

0.00%

Fundraising (Rs cr)

1,575

1,175

No commercial development: The other area of ​​concern is that the company has made no progress in execution. The auditors point out: “There is no progress in the development of projects undertaken for several years and the Company has also suffered cash losses before exceptional items over the past three years as well as there have been defaults repayment of various debts and other obligations (including statutory dues)”. during the six months of the fiscal year ending March 31, 2022) and growing debts with current interest cost.

THE TIME OF STRATEGIC OPERATIONS

Recent transactions that DB Realty has handled show that its bank of projects has value. And over the past year, he has made deals to try to get out of the quagmire. In the annual report for the year ended March 2021, management indicates agreements with the Prestige Group for DB BKC Realtors, which is carrying out a project in Tata Colony, BKC and for Turf Estate Joint Venture LLP, in which Prestige has acquired a equal participation. These have helped the company provide an outlet for previous partners and get projects on track. It also signed an agreement with Rustomjee Group to transfer its DB Crown project to Prabhadevi, renamed Rustomjee Crown.

Some of the other major projects of the company are: DB Ozone (Dahisar), X BKC (BKC), One Mahalaxmi (Mahalaxmi) and DB Skypark (near Mumbai Airport). And it’s unclear if the company will seek more partners for any of them.

THE GODREJ VS PRESTIGE OFFER

The street reaction to Godrej Properties planning to invest Rs 400 crore in DB Realty and another Rs 300 crore in a joint venture for slum upgrading with the infamous Mumbai developer, has been of serious concern. The main gripes were the need to invest in DB Realty for a project-driven relationship and a foray into the subprime slum upgrading segment. Godrej Properties, after urgent deliberations by its Board of Directors, has decided to cancel the deal. He has, however, kept the window open for project-specific deals.

That’s fine, but why hasn’t there been a fuss over the Prestige group’s deals with DB Realty? The answer seems to lie in the structuring. The stake in DB Realty by Prestige group is acquired by an entity of the promoter group, Razack Family Trust, but the projects are carried out by a branch of the listed entity, Prestige Falcon Realty Ventures. This made it possible to separate the investment in the parent company from the project development activity, which remained with the listed company.

In its annual report for the year ended March 31, 2021, Prestige Estates clearly states its investments in DB Realty’s project entities: “The Company, through its wholly owned subsidiary Prestige Falcon Realty Ventures Private Limited, acquired 30.21% of the share capital and 20,961 cumulative redeemable and potentially convertible preference shares Series B representing 4.57% of the cumulative redeemable and potentially convertible preferred share capital of DB (BKC) Realtors Private Limited… (it also) invested through an equity contribution in Turf Estate Joint Venture LLP as a new partner in the LLP with 50% of the profits and losses…(and) acquired 50% of the share capital of Pandora Projects”.

WHAT REMAINS UNANSWERED

What gave the Godrejs and Prestige the confidence to sit down at the table with the DB Realty team and close the big deals remains a mystery. Are lenders driving the agenda? Do these renowned developers have assurances that give them confidence? What are these insurances?

There is also the question around the current fundraising by DB Realty. On the one hand, 64% of the promoters’ shares are pledged. Will they pledge more shares? The unpledged value of the promoters’ equity at current market value is around Rs 550 crore and the implied value of the warrants to be subscribed is Rs 160 core. It should be noted here, however, that the company’s share pledge has decreased since December 2020, when it was 70.84%, and the number of shares held by them has increased. It therefore seems that the promoters have other sources of funding and that there is pressure to provide more in order to maintain the activity.

Given this, the other big question is: what is DB Realty’s endgame? Will he just put projects on hold until he fixes his finances, or is there something more? It is important to note here that if Godrej had proceeded with the transaction, with the Prestige group, they would have held 28% of the capital of the company, which would have allowed them to block any special resolution. Investments in the parent company, in particular, will allow DB Realty to transfer funds to entities with obligations but little interest from partner developers, and this could have been one of the requests. Remember that the company has debts of Rs 1,328 crore over the next twelve months, compared to a revised increase of Rs 1,175 crore, after Godrej’s withdrawal. So, are there any other such deals in sight at DB Realty to fill the gap? Will this significantly change the shareholder equation?

There’s little clarity around all of the questions above, but we’re hoping for at least some answers in the next few days.

WHAT IS SHAREHOLDER VALUE

Did Godrej Property preserve or compromise shareholder value by canceling the transaction? The jury is out on that one. Assuming there is enough thought behind the deal and there are reassuring terms and conditions about the deal’s value creation, letting it go may actually undermine some of the value that would have could return to the shareholders. We will find out anyway in time. For now, what appears to have been resolved is shareholder concern over the structure of the deal, which the parties may not be able to disclose due to non-disclosure agreements. disclosure, and which may or may not be prejudicial to the interests of shareholders. The street will likely breathe a sigh of relief, but whether shareholders really won remains a mystery.

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