Embassy Office Parks REIT: Key Takeaways From Analyst Call
The turnaround in occupancy remains key to sustained re-rating and it looks likely in the next few quarters, Jefferies says.
Embassy Office Parks REIT has highlighted a strong project pipeline and operating leverage, which could drive incremental net operating income, according to brokerages.
During an analyst meeting, the management remained confident of the next financial year being strong, led by demand from global captive centres, which continue to set up, expand and move towards higher-valued services in India.
The growth in the net operating income will come from multiple levers, including lease-out of vacant areas, contracted escalations, mark-to-market potential and new developments, JM Financial Ltd. said in a note.
Embassy suggested that some developers have received first-level approvals for demarcation of areas from special economic zones to non-SEZ. However, the overall costs are still not clear due to the segmentation of common areas, according to HSBC Global Research.
The management highlighted good leasing demand, led by GCC occupiers. Operating leverage and new builds should drive 40% net operating income rise in a few years, alongside rental uptick for a mid-teen potential growth rate, Jefferies Financial Group Inc. said.
HSBC Global Research
The research firm maintains a 'buy' rating on the stock with an unchanged target price of Rs 410, implying a potential upside of 12.7%.
Management also indicated that under the new SEBI regulations, unit holders or a group of unitholders owning more than 10% of units will be allowed to appoint a director on the board.
During the visit to sites, management highlighted that tenants are currently preferring newer buildings and buildings older than 15 years are becoming harder to lease.
Consequently, the REIT will likely undertake complete redevelopments of certain older buildings, and this should enhance the area of that building or refurbishment, which now typically costs one third the cost of construction.
"We believe EOP REIT's office parks are best-in-class as they offer modern amenities and infrastructure that meet the standards of their global occupier base."
Embassy also offers strong rental growth potential in light of its large, already paid-for under-construction area. Due to the legacy portfolio, in-place rentals for the portfolio are significantly below prevailing market rates.
Jefferies
Jefferies maintains a 'buy' rating with a target price of Rs 414, implying an upside of 14%.
The management expects better occupancy trends from the fourth quarter at operational properties, with Is it Hilton Bengaluru Embassy Manyata Business Park touching 75 percentage points in February.
The potential demand uptick should drive net operating income higher.
Management expects Hilton ETV, which is estimated to launch in 2026, to see good demand ramp-up.
The turnaround in occupancy remains key to sustained re-rating and looks likely in the next few quarters. The growth in distribution per unit may be limited due to rising debt costs, but eventually a stronger net operating income would translate to a higher distribution per unit.
JM Financial
JM Financial has 'reiterate' the stock with a 'buy', with a target price of Rs 390, implying a potential upside of 13.4%.
The overall occupancy inched upwards to 84% from 83% in September on account of stronger leasing and fewer exits. In continuation with the trend, Embassy expects leasing demand in FY25 to be led by the GCCs.
It expects the net operating income to accumulate at an 11.1% compound annual growth rate over fiscal 2023–26.
In Bengaluru, the demand for office space is shifting to the north and, thus, the management said the Embassy Business Hub has tremendous potential.
The management expects GCCs to drive leasing in fiscal 2025. Embassy estimates the cost of denotification to be three months of rentals for its Bengaluru assets and seven–eight months of rentals for its Pune and Noida assets.
The management also highlighted that it is seeing several Bengaluru clients expanding to Chennai due to the numerous engineering colleges and talented pool of people in the city. The manufacturing sector is the major demand driver in Chennai.
Embassy's stock fell as much as 2.19% during the day to Rs 361.20 apiece on the NSE. It was trading 0.39% lower at Rs 367.85 per share, compared to a 0.13% rise in the benchmark Nifty 50 as of 11:07 a.m.
Fifteen analysts tracking the company have a 'buy' rating on the stock according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 8.9%.