Stock Fundamentals

Why the stock of Embassy REIT is a good ‘Buy’

Bavadharini KS BL Research Bureau | Updated on May 01, 2021

In a year impacted by lockdowns, the company maintained occupancy over 90 per cent

The second Covid-19 wave is likely to impact the slow recovery of many sectors in the country, including real estate. Though the commercial segment, particularly office space had shown resilience in terms of occupancy during the difficult period in the past year, the ongoing local lockdowns could impact the leasing activities in the short-term. However, office players with properties in the prime localities might be able to withstand the challenges better. Embassy REIT is one of the many office players well placed to face the short-term headwinds.

In the past year when the country was in complete lockdown for a short period and then in partial lockdown for some months, Embassy not only maintained occupancy over 90 per cent but also achieved strong rental collections. In its recent March quarter FY21, the REIT had an occupancy level of 89 per cent and achieved rental collection of 99 per cent. This is despite many states such as Karnataka implementing local control measures. A large client base, properties in prime locations and a strong balance sheet with a comfortable net debt position (0.35 times net debt to equity ratio) are some of the key factors that contributed to the REIT’s performance.

Thus, considering its resilience, Embassy REIT could be a good alternative investment avenue for long term investors with an appetite for risk. It can be bought in mutiples of 200 units in stock exchanges. The REIT has distributed ₹21.48 per unit in FY21 and the yield (pre-tax) works out to around about 6.9 per cent, almost same as last year (7 per cent).

While the stock had recovered from its low in April last year, it has since corrected with the spike in Covid cases. Between January 2021 and now, the stock fell about 11 per cent. At the current market price of ₹311, the REIT is trading at a 20 per cent discount to its NAV of ₹387 as on March 31, 2021.

Stable leasing activities

Embassy REIT is one of the largest office players in the industry with 12 commercial properties spread over 32.3 million sq ft.

The REIT had been able to maintain steady rental collections of over 97-98 per cent in FY20 and 99 per cent in FY21. This is mainly thanks to the long-term lease contracts that offer income stability and minimal chances of default. The average lease tenure is five to nine years or more, with three to five years of initial commitment period. The new lease agreements signed in the March quarter have average lease tenure of nine years .

The REIT is also able to quickly renew contracts nearing expiry with existing tenants or lease it to new tenants. For instance, of the 2.2 million sq ft of lease expiry in FY21, the REIT was able to back fill 0.7 million sq ft in Q3FY21 and 0.9 million sq ft in Q4FY21. Further, of the 1.9 million sq ft of upcoming lease expiries (in FY22), 0.5 million sq ft are likely renewals for the REIT. In the March quarter, the REIT achieved 13 per cent escalations.

Revenue to grow

With Embassy REIT’s property in prime locations, it was able to attract large companies across industries. This has helped the REIT maintain consistent occupancy levels of 90 per cent even during the lockdown impacted FY20. The REIT had not offered any rent waivers during FY21 though rebates were offered to food & beverages and ancillary retail tenants which accounted for only 0.6 per cent of its revenue.

It has about 5.7 million sq ft under construction (14 per cent of its portfolio) of which about about 47 per cent (2.7 million sq ft) is expected to be completed by the end of FY22 which would thereby boost the revenue for the REIT. Some portion of the on-going projects is already pre-leased to the REIT’s occupiers like JP Morgan.

The REIT also has proposed development area of 4.4 million sq ft which could aid in its growth prospects. In addition to locational advantages, the lower rentals help the REIT to retain/draw new clients. Its average rent works out to ₹71 per sq ft per month (across its office properties) while the average market rent is ₹81 per sq ft per month, giving headroom for increase in future rental income.

Financials

Embassy’s overall revenue for the quarter ended March 2021 increased 36 per cent y-o-y to ₹738 crore.

The net distributable cash-flow (NDCF), based on which payouts are fixed for unit holders, was flattish at ₹532 crore. For FY21, the revenue registered 10 per cent growth to ₹2,360 crore while NDCF was marginally down 3 per cent to ₹1,836 crore.

Published on May 01, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.