Blackstone transaction, improving outlook to support Embassy Office Parks

The stock of India’s largest listed real estate investment trust (REIT) Embassy Office Parks REIT (Embassy) is up 15 per cent from its lows this month. While the government’s denotification of the special economic zone (SEZ) earlier this month was a key trigger, the recent stake sale by Blackstone Group (even as the stock has seen a bit of a correction given the large transaction size) is also considered as a positive as it removes the stake sale overhang. 

The world’s largest alternative asset manager through its investment companies sold a 23.59 per cent stake in the company, leaving the Embassy group as the sole sponsor of the REIT. The deal at around Rs 316 a unit fetched the asset manager Rs 7,100 crore ($850 million). Blackstone has been trimming its stake since the listing of the Embassy four years ago.

Murtuza Arsiwalla and Abhishek Khanna of Kotak Institutional Equities say the stake sale marks the exit of the Blackstone Group and abates any selling pressure from them, putting behind a host of headwinds that started with the pandemic, amendments to the treatment of distributions (return of capital component), as well as SEZ regulations that posed constraints on overall returns.

The recent trigger for the Embassy as well as other REITs is the amendment that allows REITs to lease out the vacant space in SEZs. Vacancies had increased after-tax benefits for new units in SEZs from March 2020 were withdrawn. Most brokerages have highlighted that overall occupancy levels of the REITs will see an improvement post the floor-wise denotification.  

Within the listed space, Embassy Office Parks REIT (Embassy) has the highest vacant areas at 4.2 million square feet in SEZs. The SEZ share for Embassy as a proportion of its portfolio is pegged at 60 per cent. 

In the September quarter, even as leasing momentum led by the global captive centres remained strong, the company reported a dip in occupancy. The metric as of September was at 83 per cent at 35.3 million square feet, down from 85 per cent at 34.3 million square feet in June this year. Additionally, occupancies by existing clients also declined to 85 per cent as compared to 87 per cent in June. The drop in occupancies was on account of 1 million square feet addition at Manyata Business Park (Bangalore), of which only 45 per cent was leased out. Further, there were exits to the tune of 1.6 million square feet largely by IT services players. 

Embassy has underperformed the benchmark Sensex over the past year given the muted operational performance and higher interest rates. Investors in Embassy are poorer by 5 per cent even as the Sensex is up 15 per cent over the same period. IIFL Research, however, believes that the worst of operational performance for the REITs is behind them.

 Mohit Agarwal and Saatvik Shetty of IIFL Research highlight that demand is steadily improving from global captives and is expected to outstrip the weak outlook from IT/ITES from FY25 onwards. This coupled with steady improvement in work from office trends (companies like TCS, Accenture, issuing strict diktats), even for IT/ITES companies and a probable shift in the interest-rate environment in early FY25 are acting as tailwinds to the REIT unit prices. 

Embassy remains the top pick of most brokerages among the listed REITs.