Embassy Office Parks REIT - Q4FY21 Result Update - ICICI Securities

Near-term headwinds, long term story intact

The Embassy Office Parks REIT (Embassy REIT) delivered a resilient performance in Q4FY21 with office rental collections of over 99% (similar to 9MFY21). However, office portfolio occupancy declined by 170bps QoQ to 88.9% owing to lease expiries in Manyata asset. Owing to the second Covid wave in India, the Embassy REIT manager expects muted leasing activity for another 2-3 quarters with a possible revival in H2FY22E, which is in line with our sector view. We retain our BUY rating with a revised target price of Rs391/unit (earlier Rs400) as we assume higher office vacancy levels in FY22E and delayed hotel cycle recovery while building in a recovery in FY23E. We have cut our FY22/23E Distribution per Unit (DPU) estimates by 5% and 2% to Rs23.2 and Rs25.1, respectively. At CMP of Rs312, the Embassy REIT offers an estimated distribution yield of 7.4% in FY22E and 8.0% in FY23E. Key risks to our call are a slower recovery in office leasing and higher portfolio vacancy levels.

- Strong office rental collections, higher FY22E expiries a concern: The REIT's office rental collections have been robust with collections of over 99 % in FY21 and the REIT portfolio has achieved contracted rental increases of 13% on 8.4msf of area in FY21. In February 2021, the waning Covid cases in India had led to an uptick in leasing enquiries along with talks of a possible return of employees to offices across India. However, the onset of the second Covid wave from March 2021 in India has led to occupiers again becoming cautious and holding back fresh leasing decisions and rationalising existing office spaces. As a result, the REIT has additional lease expiries of 1.9msf in FY22E of which 0.5msf is likely to be renewed with the balance 1.4msf at risk of remaining vacant until leasing activity recovers. As per the REIT manager, sentiment may remain muted for another 2-3 quarters before picking up sometime in H2FY22 which is line with our view of a leasing revival earliest by Q3FY22.

- Embassy REIT portfolio cushions the COVID-19 impact: While incremental leasing is yet to pick up until international travel resumes and existing assets seeing tenant exits, the REIT's current tenant portfolio which has ~43% of tenants in the technology domain with even smaller verticals such as financial services and research/consulting consisting of Global in-house captives is resilient to near-term weakness, in our view. Currently, the REIT's top ten occupiers contribute ~39% of the gross overall rental income as of Mar'21.

- Expect DPU yield of 7.4% in FY22E and 8.0% in FY23E: Assuming higher office vacancy levels in FY22E and delayed hotel cycle recovery, we have cut our FY22/23E Distribution per Unit estimates by 5% and 2% to Rs23.2 and Rs25.1, respectively. At CMP of Rs312, the Embassy REIT offers an estimated distribution yield of 7.4% in FY22E and 8.0% in FY23E.

Source : Equity Bulls

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