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‘Add’ on Embassy Office Parks, growth is speeding up for company

Axis Capital

We met with the management of Embassy Office Parks REIT (Embassy REIT) to reaffirm our thesis that its focus remains on fast-tracking growth, expanding portfolio through large acquisitions (ROFO proposal under evaluation) and faster execution and planning-ahead of schedule on under-construction portfolio and pipeline projects. Management is evaluating the ROFO proposal for Embassy TechVillage and asserted that it will go ahead with the transaction only if it is DPU/yield accretive.

Under-development projects remain ahead of schedule and it is well capitalised to fund inorganic growth. Its cash yield of 6.5% p.a. with expected growth in distribution of 9.5% p.a. over next 3 years makes for a compelling investment case. Revise to Add (Buy previously).

Key highlights

Under-construction portfolio 2 quarters ahead of schedule: Its near-term office development projects in Bangalore and Noida of 1.4 msf are 2 quarters ahead of targeted delivery, with 23%/0.25 msf already pre-let to Metlife, and an additional 0.4 msf pipeline at Embassy Oxygen (Noida). Further, it has already commenced work on M3 Block at Manyata (1 msf) and Hudson Block at Techzone (0.5 msf).

Net operating income (NOI) to post 15% CAGR over FY19-22e: Strong growth visibility driven by contractual escalations (which are certain), mark to market reset of rentals (current in-place rents are significantly lower than market rents) and lease up of vacant area.