Retain ‘add’ on Embassy Office Parks REIT with fair value of Rs 400/share

Lower contribution from the hospitality segment as well as improvement in margins of the commercial business helped improve blended margins to 89% with NOI of Rs 4.5 billion.

Resilient core; hospitality drags. Embassy REIT demonstrated robust performance in a challenging environment with NOI of Rs 4.5 billion (+1% y-o-y) even as the ailing hotel portfolio made losses during the quarter. Embassy was able to achieve 14% contractual escalations on 1.8 million sq. ft along with leasing of 0.5 million sq. ft with a spread of ~20% in 1QFY21 on re-lease/ renewals. Maintain ‘add’ rating with an unchanged fair value of Rs 400 per share.
Embassy REIT reported resilient operating performance with revenue of Rs 5.1 billion (-4% y-o-y, -5% q-o-q), NOI of Rs 4.6 billion (+1% y-o-y, -1% q-o-q) and NDCF of Rs 4.5 billion (+7.6% y-o-y, -15.4% q-o-q) in 1QFY21.

Lower revenues were on account of shut down of two hotel properties (reopened on 15th June) which reported revenues of Rs 18 million (-92% y-o-y) and NOI loss of Rs 111 million, additional receipts of Rs 300 million on account of pre-termination of a lease in 1QFY20, and rental waivers of Rs 90 million given in 1QFY21, primarily to F&B related tenants. Adjusted revenue growth would have been higher at 8% y-o-y.

Lower contribution from the hospitality segment as well as improvement in margins of the commercial business helped improve blended margins to 89% with NOI of Rs 4.5 billion. Management highlighted that the impact of Covid-19 has primarily been on ( the operational performance of the hotel segment, and construction activities for projects to be commissioned over the next few years.

Further, risk sectors (retail, hotel, aviation) account for only 6% of the overall portfolio of Embassy REIT.