Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Embassy Office Parks REIT (BOM:542602, Financial) reported a successful quarter with a total of 1.9 million square feet leased and completed the acquisition of a 5 million square feet asset in Chennai.
- The company announced Q1 distributions of INR 5.6 per unit, reflecting a 7% quarter-on-quarter and 4% year-over-year EPS growth.
- Occupancy rates are strong in key markets, with Bangalore at almost 90% and three properties now 100% occupied.
- The company has a robust development pipeline totaling 8.6 million square feet, expected to yield around 20% on cost.
- Embassy Office Parks REIT (BOM:542602) has a solid balance sheet with a 32% leverage ratio and diverse AAA stable credit ratings.
Negative Points
- The company experienced a 0.9 million square feet of tenant exits during Q1, impacting occupancy rates.
- Occupancy dipped to 85% by area and 88% by value, with some properties experiencing higher vacancy rates.
- Interest costs are expected to increase by 18% to 20% for the full year, impacting overall profitability.
- The solar segment's NOI dropped by 34% year-on-year due to seasonal reductions and government tax changes.
- There are ongoing challenges with certain assets, such as the potential risk of further tenant exits and the need for refurbishments.
Q & A Highlights
Q: Can you quantify your current occupancy in terms of R&D?
A: Currently, we have 85% occupancy by area and 88% by value. We expect this to increase to around 91% by the end of the year. Regarding expiries, we had anticipated a potential risk from one tenant, which has now materialized with a notice for about 0.4 million square feet to be vacated later this year. This has impacted our occupancy temporarily, but we are confident in our ability to refurbish and re-lease the space at higher rents. (Aravind Maiya, CEO)
Q: Is the recent acquisition debt-financed, and do you plan to reduce this debt by raising equity?
A: Yes, the acquisition was debt-financed. While we are comfortable with this approach, we remain open to using equity as a currency if market conditions are favorable. Our strategy includes being flexible and opportunistic about capital raising to ensure we do what's best for the REIT. (Ritwik Bhattacharjee, CIO)
Q: What factors could drive your distribution guidance towards the upper end of the range?
A: Achieving the higher end of our distribution guidance would depend on several factors, including increased lease-up, a decrease in interest rates, and early collection of rentals. Essentially, any positive business levers that we can front-load would help us reach the upper end of the range. (Aravind Maiya, CEO)
Q: There were media reports about potentially selling the Q1 asset. Can you comment on this?
A: We generally do not comment on market rumors. Our philosophy remains to be long-term owners of assets, but we are open to recycling assets if it provides better value. We keep all options open. (Aravind Maiya, CEO)
Q: What is the revised cap rate for the recent acquisition now that rental support is being engaged?
A: We have adhered to the numbers disclosed in our deck. Without rental support, the acquisition value is around INR85 crores, which is close to an INR80 crore reduction in overall value. (Aravind Maiya, CEO)
Q: Can you provide an outlook on the Oxygen Tech Zone and Cubix assets?
A: The market in Noida is looking up, and we expect occupancy to improve over the next three quarters. For the Oxygen Tech Zone and Cubix assets, we have about 0.6 million square feet of existing supply to monetize, and our focus is on leasing up this space. (Aravind Maiya, CEO)
Q: The distribution components this quarter were very tax-efficient. Is this a trend going forward?
A: The distribution split depends on the profitability of each SPV, which is influenced by interest costs and depreciation. While this quarter saw an increase in dividends due to a positive result in one SPV, the trend may vary. We expect the distribution split to be similar to Q4 of last year. (Abhishek Agrawal, CFO)
Q: What are the components of the INR374 million working capital changes this quarter?
A: The primary component of the working capital change is the receipt of security deposits, which amounted to INR50 crores this quarter. This was offset by some payments and lower collections, resulting in a net working capital change of INR40 crores. (Abhishek Agrawal, CFO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
