In a bid to expand its office portfolio, Embassy Office Parks REIT, one of the largest office space developers in the country, had recently agreed to buy Embassy Tech Village (an integrated office park in Bengaluru) from affiliates of Embassy Group and Blackstone Group and other shareholders for a consideration of ₹9,782.4 crore. With nearly 92 per cent of its completed area already occupied by multinational clients, the property is expected to aid in revenue growth of the REIT in the coming quarters.

For REIT investors, this is likely to improve their distribution income per unit (DPU). According to the management, the impact of this property addition is expected to be 4.2 per cent accretive on DPU. That is, on an average the REIT was able to pay-out ₹6 per unit to its investors every quarter and it is likely to increase to ₹6.252 per unit. However, the stock has not moved up much since its March lows of ₹320, considering the uncertainties surrounding the office market.

Also read: Large office space occupiers in Bengaluru restructuring leases

In October this year, the Embassy REIT had also acquired the property maintenance business of Embassy Manyata and of Embassy TechZone from an Embassy Group affiliate.

Also read: Embassy REIT to buy TechVillage for $1.3 billion

The REIT had not only acquired additional office spaces but was also able to maintain consistent occupancy levels of over 90 per cent. Further, the REIT was able to achieve rental escalation as well since the March quarter. This is thanks to its large client base and prime location of its properties.

Revenue to grow

Embassy Office Parks REIT derives nearly 83 per cent of its revenue from rental collections and the REIT had been able to maintain its rental revenue steadily since the outbreak of the pandemic in March this year. In the recent September quarter too, the REIT was able to collect 99.5 of its rentals from its client base. Now, with the acquisition of Embassy Tech Village, it is likely to maintain a strong rental collection in the coming quarters as well given the high occupancy of the property. Also, Embassy Tech Village has about 3.1 million sq ft of property under-construction of which about 36 per cent is already pre-leased to JP Morgan. By next year, nearly 1.1 million sq ft is likely to be completed and expected to generate income thereby boosting the revenue for the REIT.

Large client base, properties in prime locations and long-term lease contracts are key factors contributing to the growth prospects of the REIT.

During the September quarter, the REIT was able to sign three new leases (totalling 1.24 lakh sq ft) despite the leasing activities in the market being muted. This will help in improving rental collections in the coming years, given that the average lease tenure is between five and nine years for Embassy REIT. In its recent acquisition of Embassy Tech Village, the average lease tenure is 9.7 years.

In addition to strong rental collections, the REIT was able to achieve rental escalations as well in the last 2-3 quarters. In its September quarter, the REIT achieved 11 per cent rental escalations on 18 office leases on 1.9 million sq ft.

In terms of occupancy, in its September quarter of FY21, the REIT maintained nearly 92 per cent across its properties.

Concerns

With many continuing to work-from-home, the REIT’s management expects leasing decisions to be deferred until corporate occupiers figure out their strategy in terms of operations (work-from-home). This could not only have an impact on the rental pre-commitments but also in signing of new lease contracts.

Also read: Despite ‘work from home’, the stock of Embassy REIT is a good buy

Also, the lockdown measures that were earlier imposed across the country could delay the delivery of projects. But construction activities have resumed in almost all of the REIT’s properties (operating at 85 per cent capacity).

Financials

Embassy’s overall revenue for the quarter ended September 2020 increased 4 per cent y-o-y to ₹540 crore. With continued cost rationalisation, the REIT’s net operating margin improved to 89 per cent, from 84 per cent during the same period last year. But its profit registered marginal growth of 0.1 per cent y-o-y to ₹232 crore due to higher finance costs. Overall, the performance in the September quarter is an improvement from the REIT’s June quarter (FY21) performance where the revenue and profit had declined 4 and 8 per cent y-o-y respectively.

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