Broker’s call: Embassy REIT (Add)

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Target: ₹415

CMP: ₹716.75

Embassy Office Parks REIT (Embassy REIT) clocked Q1-FY25 NOI of ₹770 crore (down marginally q-o-q) and NDCF of ₹530 crore with distribution of ₹5.6/unit. Overall portfolio occupancy as of Jun’24 remained flat q-o-q at 85 per cent, including infusion of 1.4msf Splendid Techzone, Chennai asset of 1.4msf from June 1.

Driven by a combination of filling up of SEZ vacancy and pre-leased assets, we estimate portfolio occupancy of over 90 per cent by FY26, resulting in FY25 DPU of ₹22.5/unit vs ₹21.3/unit in FY24 with FY26 DPU of ₹26.9/unit. The REIT manager has given FY25 guidance for 5.6msf of total leasing in FY25 and expects 10 per cent NOI and 7 per cent DPU growth in FY25.

Unlike assets in infrastructure trusts like toll/annuity roads or power transmission assets which have a fixed tenure of operations, the underlying assets in REITs which consist of offices, malls and hotels are perpetual in nature and carry an element of capital appreciation as well through escalation in rentals, addition of new assets and ramp-up in occupancies. Hence, the total return offered by a REIT should be measured as a mix of annual distributions and capital appreciation of the units of the REIT

We retain Add with a revised TP of ₹415/unit (earlier ₹402)..

Key risks: Slower recovery in leasing and higher portfolio vacancy levels.