Embassy REIT: Rental revision, project pipeline, client base growth drivers

Even as the residential real estate market is struggling to recover due to muted demand, the commercial segment is faring better. This has helped commercial real estate majors to reap the dividends of improving occupancies and higher rentals. Embassy Office Parks Real Estate Investment Trust (Embassy REIT) is a major beneficiary of this trend. 

Rental growth, brownfield and greenfield expansion, and value-added services are expected to be the growth triggers. On the rental front, the management has maintained a strong outlook for its operational and upcoming assets. 

For its operational assets, the upside will come when a fifth of the total leasable area comes from renewal over the FY20-23 period. Given that market rents are 30 per cent higher than the current rents that tenants pay, there is significant room for increasing rates for expiring leases. The monthly average rate per square (sq.) feet (ft) is currently pegged at Rs 66, compared to market rates of about Rs 86. 

The second trigger is the growth pipeline. The company has an agreement with Embassy Group to give Embassy REIT the right of first offer on new assets. Of the 43-million sq. ft total new pipeline, 6.2 million sq. ft is operational and 3.1 million sq. ft is under construction. This, according to analysts at Axis Securities, offers long-term visibility. 

While the company has received some proposals, at what valuations these will be acquired will be key. The management has indicated that a new property (such as Embassy TechVillage in Bengaluru) has to be yield-accretive for unit holders (current yield at 5.6 per cent). 

What will be of help when the REIT looks at new assets is its low debt-to-equity ratio. Analysts at ICICI Securities say that the low leverage ratio of 0.2x net debt-to-equity ratio puts Embassy REIT in prime position to expand its asset portfolio through further acquisitions. 

Finally, value-added services, such as hotels and solar power, which accounted for 26 per cent year-on-year growth in the first half of 2019-20, add to the margin and growth profile of the company. Investors can add the stock to their portfolios on dips.