Q2FY24 Review: Embassy REIT: Leasing demand picking up, finally

27 Oct 2023 , 01:11 PM

Embassy REIT (EOP) reported Q2 distribution in line with its full-year guidance. Occupancy levels declined QoQ, despite record leasing, driven by higher expiries and new project completions. Mgmt has upgraded its leasing guidance by ~10%; expects higher occupancy levels by FY24-end, with demand from Global captives to offset the weak outlook for IT/ITES tenants. Regulatory resolution to leasing of SEZ spaces is in advanced stages of discussions within the government. Analysts of IIFL Capital Services retain their estimates for FY24/25 at flat/11% DPU growth respectively; retain BUY with TP Rs395 (32% upside). 

Q2FY24 review: Distribution in-line; occupancy levels decline: 

EOP reported distribution of Rs5.53/unit (+3% QoQ/flat YoY), H1FY24 at Rs10.9/unit (flat YoY) is in line with FY24 guidance of Rs20.5- Rs22/unit. Occupancy levels declined, driven by higher exits/expiries (1.6msf) and 1msf of completion at Manyata (~45% pre-leased). For H1FY24, of the 2.3msf exits/expiries, EOP has been able to backfill ~1msf, driving occupancy levels down to 83% from 86% at FY23-end.

Leasing demand from Global captives to offset muted outlook from IT/ITES: 

Management shared that demand from Global captives has been strong, with rise in request for proposals over Q2 (from 8msf to 23msf, >60% in Bangalore). Industry estimates for leasing demand for CY23 have also been revised upwards by 13%. EOP has also revised its leasing guidance to 6.5msf for FY24 (vs 6msf earlier). Mgmt expects same store occupancy to improve hereon, expect FY24 end occupancy at 85% vs 83% now. Risk to the guidance remains due to weak outlook of IT/ITES who are witnessing low physical occupancy and driving early lease terminations. 

Retain DPU estimates for FY24/25; re-iterate BUY: 

EOP has retained its FY24 guidance, analysts of IIFL Capital Services build a flat/11% DPU growth for FY24/25 implying yield of 7.1/7.9% respectively. EOP trades at a deep discount to its NAV, their see pick up in occupancy levels driven by global captives and favourable resolution of SEZ spaces as key drivers.