Credit Suisse upgrades Embassy Office Parks REIT, sees upside potential after sharp underperformance

Challenges in terms of re-leasing remain for Embassy REIT.

Embassy Office Parks Real Estate Investment Trust (REIT) posted a 3% increase in revenue from operation over the previous year, but the net profit of the firm slipped 15% during the same period. Despite this, global brokerage and research Credit Suisse has upgraded Embassy REIT to an ‘Outperform’ rating from the ‘Neutral’ rating earlier. In a note, Credit Suisse said that the REIT is trading at a 5% discount to its NAV in September 2020 while terming it as a play on the tech growth in India and the country’s talent pool. Embassy Office Parks is the first REIT to be listed on the domestic bourses.

Collection efficiency, rentals support growth

Analysts at Credit Suisse said that the total net operating income of Embassy Office Parks REIT surging 3% is positive along with the cash rent collection of 99.5% and steady contractual rent escalation. “Embassy has had strong collection efficiency in 1H, with 99.5% in 3Q and almost full collection in 1H,” the report said. Challenges in terms of re-leasing remain for Embassy REIT. Credit Suisse is building up a 91% occupancy for the next fiscal year, expecting it to ramp up thereafter. “Embassy has underperformed by 17% since CY19-end even though the ten-year treasury has gone down 56 bp during this time reducing the cost of capital for REIT,” the report added.

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Domestic brokerage firm Kotak Securities has maintained its ‘ADD’ rating on Embassy REIT but upgraded the target price. The brokerage firm does not seem alarmed by the drop in occupancy rates. “Drop in occupancy at 90.6% compared to 91.7% in 2QFY21 should be seen in the context of inclusion of Embassy Tech Village (97.2% occupancy). However, steady in-place rents at Rs70/sq. ft per month and market rental for the portfolio at Rs90/sq. ft per month remain encouraging,” they said.

Not impressed

However, ICICI Securities does not seem impressed even though it terms the quarterly performance as a resilient show in tough times. ICICI Securities has cut their rating to ADD from BUY factoring in the ETV asset infusion and lower incremental leasing in few assets. “Our FY22-23E Distribution per Unit estimates remain largely unchanged at Rs 24.4 and Rs 25.7, respectively. At CMP of Rs 350, the Embassy REIT offers a distribution yield of 7.0% in FY22E and 7.3% in FY23E, on our revised estimates,” they added. 

For the current quarter, Embassy REIT has announced a distribution of Rs 4.55 per Unit. So far Embassy REIT has distributed, on an average, Rs 5.95/unit every quarter, according to  Deepak Jasani, Head of Retail Research, HDFC Securities. “IPO allottees of Embassy REIT have seen total returns (XIRR) of 15.8% since inception,” he told Financial Express earlier this month. ICICI Direct’s estimated distribution differ from that of Jasani’s, who was expecting a pre-tax annual distribution yields of ~6.7% prior to latest quarterly results.

Valuations

Embassy Office Parks REIT offers a yield of 6.7%, according to Credit Suisse, which is 5-70 bps ahead of 10-year G-Sec. Further Credit Suisse added that Embassy REIT plans conversion of the majority of distribution to dividend by next financial year which is tax-free. The target price has been increased to Rs 420 per unit. Kotak Securities sees medium risk in the REIT with a fair value of Rs 380. On the other hand, ICICI Securities has trimmed the target price to Rs 400 per unit from Rs 408 earlier. 

After having listed at Rs 300 per unit in April of 2019, Embassy REIT currently trades at Rs 350 apiece. It is significantly down from its March 2020 high of Rs 518.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)