Embassy Office Parks: Occupancy benefit

Bangalore-based Embassy Office Parks RIET has reported 10% year-on-year rise in net operating income for the quarter ended March to Rs 461.8 crore.
The company, which operates India’s first listed Real Estate Investment Trust (REIT) and the largest in Asia in terms of area, witnessed an 8% growth in revenue to Rs 543.4 crore.
For the full year FY 2020, Net Operating Income and revenue from operations grew by 15% to Rs 1817 crore and 14% to Rs 2144.9 crore.

Embassy Office Parks REIT’s portfolio achieved occupancy of 92.8% on 26.2 mm soft of office portfolio as on March end, an increase of 220 basis points from a year ago. Cumulative new leasing for the year so far stood at record 1.7 million sq ft. It leased 3, 89, 000 sf new area during the fourth quarter, with full year lease-up of 2.4 msf being the highest absorption in previous 5 years

The Board of Directors of Embassy Office Parks Management Services Private (‘EOPMSPL’), Manager to Embassy REIT, at its Board Meeting held on Wednesday, declared a distribution of Rs 5,317 million or Rs 6.89 per unit for 4Q FY2020. The cumulative distribution for FY2020 totals Rs 18,821 million or Rs 24.39 per unit. The record date for the 4Q FY2020 distribution is May 28, 2020 and the distribution will be paid on or before June 3, 2020.
Since the listing of Embassy REIT in April 2019, the company has delivered a total return of 25%.

This consistency of income and distribution payout illustrates the stability and resilience of Embassy REIT delivering cash flows backed by the covenants of over 160 largely multinational occupier base.
Meanwhile, the COVID-19 pandemic has resulted in an uncertain near-term outlook for many businesses worldwide. But is confident of surviving these scenarios as it is uniquely positioned to weather this pandemic-induced storm with its best-in-class office portfolio and strong balance sheet. The demand is likely to moderate considerably through 2020.

We remain concerned about the impact of COVID-19 on the future cash realizations and escalations. The company has been able to collect ~92% of the rentals for April 2020 and upto 20th May 2020, it has been able to collect 75% of the rentals for May 2020 as compared to 100% collections earlier
EOPR has leased 0.39mn sq.ft. of new area in 4QFY20 and occupancy stood at 92.8% as at 4QFY20. 0.08mn sq. ft. area was released with 20% re-leasing spread and 0.14mn sq. ft. area was renewed with 46% renewal spread during the quarter

The debt maturity profile of the company also stays comfortable with only 1.3% of the debt maturing in the next two years
The Embassy REIT management expects its business to be little impacted only 6% of rentals exposed to COVID affected sectors
In the con call, the management has stated that rental collections have been at 92% in April and for May 2020 at 75%

While acknowledging the near and medium term challenges to commercial real estate industry, Embassy REIT management expects its business to be little impacted in the medium term due to a large MNC’s contributing nearly 50% of rentals and only 6% of rentals exposed to COVID affected sectors including co- working spaces, hospitality, aviation and retail.
The company has halted all construction activity and hotel operations to comply with government directives during the lockdown.

The Management expects sharp drop in supply due to COVID-19 disruptions on supply chain and labor remobilization in the short to medium term but noted that REIT has no near-term new supply, c.2.6 msf ongoing developments will be delivered from FY2023 onwards
Net net while longer term prospects look good the near term outlook for the next 2-3 quarters are expected to remain challenging ahead.

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