Q1FY24 Review: Embassy REIT: Outlook likely to improve 2H onwards

27 Jul 2023 , 01:33 PM

Embassy Office Parks REIT (EOP) reported an overall muted performance with marginal decline in distribution QoQ and also in occupancy levels. Leasing demand is now being driven by Global Captives, and a fair share of leasing demand is also coming from existing SEZ occupiers, especially in Bangalore. However, the overall leasing momentum pick up depends on amendment to the SEZ act, allowing floor by floor de-notification. Mgmt announced a rather muted FY24 distribution guidance which implies a flat to a marginal decline YoY. Valuations are compelling, analysts of IIFL Capital Services see SEZ amendment and favourable interest rate cycle as key catalysts for stock performance. Retain BUY. 

Q1FY24 performance muted: 

EOP reported a distribution of Rs5.4/unit, down 4% QoQ, even as NOI was up >8%. ~44% of the distribution was in form of dividend, ~13% as interest while 43% was repayment of capital. EOP’s blended occupancy levels dipped marginally QoQ to 85% vs 86%. It reported a gross leasing of 1.1msf for Q1, of which 0.5msf was pre-leasing, against net leasing and renewals of 0.6msf, it faced expiries of 0.7msf leading to the QoQ occupancy decline. The hotel portfolio performance was also soft with occupancy levels at 53%, key drag being Four Seasons Bangalore at 36%. Net debt at Rs149bn was up 3% QoQ, and net debt to GAV was at 29% for Q1FY24. 

Leasing demand in H2FY24 likely to fare better: 

EOP mgmt shared that the leasing demand during the quarter was driven by global captives (GCC’s) which accounted for >70% share. SEZ demand in Bangalore continues from existing tenants’ expansion, although in other markets like Pune and Noida SEZ amendment is critical to demand improvement. As a result, mgmt has announced a leasing guidance of 6msf for FY24 (+20% YoY), which includes pre-leasing of 1.3msf (flat YoY). 

Marginal cut in FY24 DPU, retain BUY: 

EOP announced its guidance of FY24 distribution which implies distribution to be +1.4% to -6% YoY. While the NOI growth is expected to be healthy, higher interest cost will offset the same, leading to flat to marginal decline YoY in distributions. Analysts of IIFL Capital Services cut their FY24 DPU by 2%; distribution yield is healthy 7/7.8% pre-tax for FY24/25 and unit trades at a steep discount to NAV. Retain BUY.