News Analysis

1QFY21: Embassy Office Parks REIT likely to withstand Covid headwinds

Bavadharini KS | Updated on August 07, 2020 Published on August 07, 2020

The stock of Embassy Office Parks REIT, one of the largest office players in the market, is down around 3 per cent on the bourses today on the back of uncertainties in the office space demand.

Its overall revenue for the quarter declined 4 per cent y-o-y to ₹516 crore predominantly due to the impact of Covid-19 on hospitality business. Though this segment’s contribution to overall revenue (about 4 per cent) is minimal, it took a sharp hit due to Covid induced travel restrictions.

The net operating income registered a marginal growth of 1 per cent to ₹457 crore during the June quarter. The net operating margin improved to 88 per cent, from 85 per cent during the same period last year, due to lower operating expenses. But the REIT’s profit fell to ₹204 crore, down by 8 per cent y-o-y in 1QFY21, mainly due to higher finance costs.

Given its strong client base and location of the properties, the Embassy’s collections (98.9 per cent), occupancy (92 per cent), and rental escalations (14 per cent increase) had been healthy. However, uncertainties remain over demand for office space at least for 2-3 quarters, especially with many companies opting for work-from-home until December. With a strong balance sheet, the Embassy should be able to withstand headwinds.

Pause in leasing activities

The June quarter performance was good, considering the challenging market. The company was able to sign-up 20 office leases comprising of new leases (about 12 deals) and renewals mainly to companies in the digital, analytics and technology field.

The REIT was able to renew a portion of leases that is about to expire in FY21 (1.9 million sq ft leases are about to expire). However, about 1.3 million sq ft of lease expiries are likely to exit due to the impact of the virus, lockdown measures and cost pressure, which could impact the revenue going ahead; though, according to management, about 0.8 million sq ft is part of normal occupier churn.

Further, office demand is expected to face significant demand slowdown, with many working from home till the end of 2020. According to the management, Embassy anticipates leasing decisions to be deferred over the next 2-3 quarters while the corporate occupiers figure out their strategy in terms of operations (work-from-home). It can impact the rental pre-commitments as well, going ahead.

On the development properties front, construction activities have resumed 2.7 million sq ft which is due for delivery in June 2022. While Embassy can meet the delivery time, there could be delays. As the virus continues rages in the country, the sporadic lockdown in each region of the States could impact the delivery timelines.

Stable rent collections

During the June quarter, Embassy was able to maintain rental escalations as per contracts. It reported rental escalations of 14 per cent on 1.8 million square feet (out of 7.1 million sq ft due for rental increase) across 22 office leases. According to the management, the REIT will be able to deliver a 13 per cent rental growth on the remaining 5.3 million sq ft for FY21. The average lease tenure for the REIT is 5-9 years with 3-5 years as the initial commitment. It has a contractual lease escalation of 15 per cent every three years.

In terms of rental collections, it was able to collect 98.9 per cent for the first quarter of FY21. But the REIT has provided rental rebates of about 1.4 per cent of annual rent for the food court, ancillary retail and small business tenants due to the pandemic. If the situation continues, the collection too can witness slowdown.

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Published on August 07, 2020
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