Embassy Office Parks REIT - Resilient in tough times - ICICI Securities

The Embassy Office Parks REIT (Embassy REIT) delivered a resilient Q1FY21 performance with 99% collection efficiency in office rentals resulting in NDCF distribution of Rs4.5bn which was up 8% YoY. While COVID related concerns may impact incremental leasing in FY21E, we believe that the REIT's low leverage (net D/E of 0.2x), marquee tenant profile and de-densification of offices making up for increased Work from Home by occupiers stands the REIT portfolio in good stead over the medium term. Factoring in asset level adjustments, we revise our FY21E NAV to Rs403/unit (earlier Rs407) and cut our rating to ADD from Buy post the 6% rise in stock price over the last three months. At CMP of Rs383, the Embassy REIT offers a distribution yield of 6.3% in FY21E and 6.8% in FY22E.

- Q1FY21 NDCF distribution of Rs4.5bn: The Embassy REIT distributed Rs4.5bn of Net Distributable Cash Flow (NDCF) in Q1FY21 on the back of 99% office rental collections across the portfolio during the quarter. Leases signed for the quarter stood at 0.53msf and the REIT achieved rental increases of 14% on 1.8msf across 22 office leases in the portfolio. The only dampener was negligible income from the two hotels and a Rs291mn rebate given for FY21 to food courts and ancillary services (1.4% of annual rent). At a portfolio level, the REIT maintained an overall occupancy of 92.2% with same-store occupancy of 94.1%.

- Embassy REIT portfolio cushions the COVID-19 blow: While we acknowledge the risk to medium-term demand for office spaces in India, we believe that the office portfolio of the Embassy REIT is relatively resilient in these tough times. The REIT's current tenant portfolio has around 50% of tenants in the technology domain with even smaller verticals such as financial services and research/consulting consisting of Global in-house captives. Currently, the REIT's top ten occupiers contribute ~42% of the gross overall rental income as of June 2020. Globally MNC occupiers typically enter into long-term tenancy contracts with office developers for 8-10-year periods with a contracted rental escalation of 15% every 36 months. They also invest at least Rs3,000-4,000/psf for fit-outs for their offices in addition to the contracted rentals keeping in mind the longer tenure of their leases.

- High quality talent pool and affordable rentals in India: India leads in STEM (Science, Technology, Engineering, Mathematics) talent for technology assignments with over 2 million students graduating each year. Further, employees' costs in India would not be more than 20-25% of comparable cost for employees in the occupier's country of origin. India remains one of the more affordable office markets in the world, with average rentals for Grade A office markets in peripheral/suburban micro-markets hovering around 1 USD/psf/month or Rs70-75/psf/month.

Source : Equity Bulls

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