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

The Embassy Office Parks REIT (Embassy REIT) delivered a resilient performance in Q2FY21 with office rental collections of over 99% (similar to Q1FY21) and also achieved contracted rental increases of 11% on 1.9msf of leasable area in Q2FY21 and 12% rental increases on 3.7msf of area in H1FY21. While our FY21-23E revenue/NOI/EBITDA estimates remain intact, we cut our FY21-23E NDCF estimates by 8-9%, factoring in extended weakness in hotel operations and working capital/balance sheet debt adjustments. We reiterate our BUY rating based on March 2021 DCF based NAV with a revised target price of Rs408/unit (earlier Rs430). At CMP of Rs343, the Embassy REIT offers a distribution yield of 6.5% in FY21E, 7.0% in FY22E and 7.4% in FY23E, on our revised estimates. Key risk to our call is rise in vacancies owing to greater adoption of Work-from-Home.

- Strong office rental collections, rental escalations remain on track: The REIT's office rental collections have been robust with collections of over 99 % in H1FY21 and the REIT portfolio has achieved contracted rental increases of 11% on 1.9msf of leasable area across 18 leases in Q2FY21 and 12% rental increases on 3.7msf of area across 40 leases in H1FY21. In Q2FY21, the REIT also raised listed debentures of Rs7.5bn at a 7.25% quarterly coupon to be used towards refinancing existing debt, construction development and for general corporate purposes. The REIT also has cash and investments of Rs12.2bn as of 30th September, 2020 to cushion against COVID-19. Post Q2FY21, the REIT has raised additional debt of Rs7.5bn at 6.7% coupon of which Rs4.7bn has been utilised to acquire the property maintenance operations of 20.3msf of leasable area in Manyata, Bengaluru and Tech Zone, Pune.

- Embassy REIT portfolio cushions the COVID-19 impact: The REIT's current tenant portfolio has ~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 September 2020. We expect the REIT to deliver 11% NOI CAGR over FY20-23E driven by incremental leasing and recovery in hotels. While the mark-to-market opportunity for higher rentals in the REIT portfolio are now at risk, with just 7% of overall portfolio expiring in FY21E and 5% in FY22E, we do not see any risk to our assumptions of a 5% CAGR growth in rentals across the portfolio with FY23E having ~9% of portfolio expiry when the demand situation may normalise.

- Limited completions in FY21-22E: With the next set of completions of 0.9msf being in Techzone, Pune, 0.7msf in Embassy Oxygen and 1.0msf in Manyata (M3) only in FY23E with the rest of the completions of 4.5msf scheduled post FY23E, the REIT has enough leeway to control supply depending on the market dynamics over the medium-term.

Source : Equity Bulls

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