Q3FY24 Review: Embassy REIT: Encouraging pick up in leasing demand

6 Feb 2024 , 12:59 PM

Embassy REIT (EOP) reported a broadly stable Q3FY24 distribution, in line with the full year guidance. Blended occupancy inched up higher QoQ. Gross leasing was the highest ever for any quarter, driven by strong pre-leasing demand for Bangalore under-constructions projects. ~70% of near term under construction projects are now pre-leased. Further, EOP is denotifying fully vacant SEZ buildings of ~1.1msf into non SEZ and another 1.1msf of floors are being demarcated for conversion based on recently notified rules. Analysts of IIFL Capital Services expect meaningful DPU growth in FY26; expect 6.1/7.4% yield over FY25/26 and retain BUY rating with ₹395/unit, implying 8% upside. 

Stable distribution; occupancy inches higher: 

EOP reported distribution of ₹5.2/unit (down 2% YoY), even as NOI was up ~8% YoY, largely due to higher interest costs and working capital changes. For 9MFY24, distribution came in Rs16.1/unit (flat YoY), in-line with FY24 guidance of Rs20.5-22/unit (IIFL ₹21/unit). Blended Occupancy improved marginally QoQ to 84% (vs 83% QoQ) with new leasing of 1msf. Fresh expiries increased for FY24 by 0.4msf. Hospitality portfolio (1,096 keys) performance improved with blended occupancy up 8ppt YoY, ADR up 19% YoY and Ebitda up 62% YoY. 

Highest ever quarterly gross leasing: 

Gross leasing trends were encouraging with 3.5msf for Q3FY24, which included 2.2msf of preleasing for under-construction projects at Manayta and Techvillage. Global Captives (GCCs) took up 78% of gross leasing for the quarter, largely in the BFSI and retail space. Further, mgmt has guided to a pipeline of 1.5msf across Bangalore markets along with some recovery in demand in the Pune and Noida markets as well. ~1.1msf of fully vacant SEZ buildings across Bangalore and Pune are awaiting de-notification. 

Favourable changes to SEZ area to bode well for occupancy; BUY: 

Mgmt shared that EOP has demarcated 1.1msf of SEZ area for conversion into non-SEZ, of which 0.6msf is in Manyata, while others are largely on a test case basis. EOP will continue to demarcate more SEZ areas based on demand visibility. Analysts of IIFL Capital Services expect leasing to improve steadily, with occupancy to attain pre-covid levels by FY26/27. Re-iterate BUY.