Embassy Office Parks REIT - Q2FY21 Collections - Standing tall in tough times - ICICI Securities

The Embassy Office Parks REIT (Embassy REIT) continues to deliver a resilient performance with office rental collections of 98.5% in Q2FY21 (99.9% collected in Q1FY21) inspite of COVID-19 headwinds. Further, the REIT portfolio has 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. 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 reiterate our BUY rating with an unchanged target price of Rs430/unit. At CMP of Rs363, the Embassy REIT offers a distribution yield of 6.7% in FY21E, 7.0% in FY22E and 7.7% in FY23E.

- Strong office rental collections in H1FY21: As per the Q2FY21 operations update of Embassy REIT, office rental collections for Q2FY21 have remained strong with 98.5% of rentals collected as of 30th September, 2020 (99.9% collected for Q1FY21).

- Rental escalations also on track, comfortable liquidity position: 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.

- 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 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.

Source : Equity Bulls

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