Embassy Office Parks REIT - Standing tall in tough times - ICICI Securities

The Embassy Office Parks REIT (Embassy REIT) delivered a robust performance in FY20 in its maiden year of listing with a Net Operating Income (NOI) growth of 15% and NDCF distribution of Rs18.8bn or Rs24.4/unit. Inspite of COVID-19 headwinds, Q1FY21 performance was also resilient with 99% collection efficiency in office rentals resulting in NDCF distribution of Rs4.5bn which was up 8% YoY. 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 will enable the REIT to deliver 11% NOI CAGR over FY20-23E. We roll forward our DCF based target price to March 2021 with a revised NAV of Rs430/unit (earlier Rs403) and upgrade our rating to BUY from ADD. At CMP of Rs360, the Embassy REIT offers a distribution yield of 6.8% in FY21E, 7.1% in FY22E and 7.8% in FY23E.

- FY20 NDCF distribution of Rs18.8bn: The Embassy REIT distributed Rs18.8bn of Net Distributable Cash Flow (NDCF) in FY20 or Rs24.4/unit. Of the total FY20 distribution/unit, Rs10.0 was in the form of interest, Rs14.0/unit in capital repayment and Rs0.4/unit in the form of dividend. At a portfolio level, Net Operating Income (NOI) grew 15% YoY driven by incremental leasing, re-leasing at decent mark-to-market spreads and early completion of 1.4msf of development.

- Embassy REIT portfolio cushions the COVID-19 blow: 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. We expect the REIT to deliver 11% NOI CAGR over FY20-23E driven by incremental leasing, new assets and recovery in hotels.

- Mark-to-market opportunity is back-ended: 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 and debt maturity 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. As of June 2020, the REIT has gross debt of Rs59bn (including amortised cost of zero-coupon bonds of Rs36.5bn), of which Rs2.7bn is scheduled for repayment in FY21E and Rs4.3bn in FY22E. The REIT also has cash and investments of Rs9.0bn to cushion against COVID-19 impact.

Source : Equity Bulls

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