Embassy REIT: Strong operational visibility for FY25

26 Feb 2024 , 11:25 AM

At its 2024 analyst meet, Embassy REIT (EOP) outlined a bullish outlook on near-to-medium-term occupancy improvement. Supply across EOP’s key markets in Bangalore is limited, and Global Captives are floating large RFPs offering strong leasing visibility. The SEZ demarcation process has been smooth so far, and the cost economics is in favour of conversion. Mgmt wants to re-look at inorganic acquisitions from the sponsor pool, Chennai is likely to be the next asset added to the portfolio. Improvement in Hospitality segment will be steady and gradual. Reiterate BUY with 6.1% FY25 yield and 9% upside; expect +6% DPU for FY25 and much stronger DPU growth in FY26. 

Global Captives to drive leasing; SEZ demarcation a shot in the arm: 

Leasing environment improvement is driven by Global Captives (70-80% of new leasing); with Manyata witnessing a strong interest for pre-leasing (L4 and D1-D2 block), and also a healthy pipeline for existing vacancy (~2.2msf). In Pune, mgmt expects strong demand for TechZone (after conversion into non-SEZ); while Quadron (Hinjewadi Phase-2) is likely to witness improved demand once the metro line is constructed by next year. Oxygen (Noida) suffers partly on account of its location, and will gradually pick up as Infrastructure improves (like Jewar airport). 

To consider ROFO acquisitions: 

EOP is open to doing unit-holderaccretive acquisitions; the current ROFO from the sponsor for Chennai asset is likely to be the next addition to REIT portfolio, with the mgmt looking excited to enter this new market. Mgmt is also open to evaluate opportunities outside sponsor pool, but will remain selective on quality. The Hotel portfolio (Bangalore based) is still to recover fully, given the relatively lower exposure to leisure travels and MICE demand. 

Steadily improving visibility for FY25/26; BUY: 

Mgmt re-iterated FY24 NOI/distribution guidance; and expects FY25 to be better, although an official leasing/NOI/distribution guidance is likely in the next quarter. Low expiries and healthy leasing momentum will drive occupancy and NOI improvement; low debt maturities will keep interest costs in check. Analysts of IIFL Capital Services expect 6% growth in FY25 DPU, followed by a much stronger growth in FY26. Reiterate BUY with FY25 yield of 6.1%/9% upside.