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The Embassy Office Parks REIT (Embassy REIT) delivered a resilient Q2FY23 performance with office portfolio occupancy levels remaining flat QoQ at 87% and NOI increasing 4% QoQ to Rs7.0bn. The REIT manager had given guidance for 5.0msf of leasing in FY23 vs. 2.2msf in FY22 (including 1.2msf of pre-commitments and 1.7msf lease-up of vacant area). In H1FY23, the REIT manager has achieved total leasing of 3.4msf (1.3msf of renewals, 1.1msf of pre-commitments and 1.0msf of vacant area lease-up). The REIT expects to achieve fresh leasing of 0.7msf in H2FY23 vs. 0.1msf of expected exits, which implies an uptick in portfolio occupancy in H2FY23 of 0.6msf. The REIT manager maintains its FY23 DPU guidance of Rs20.6-22.8/unit (mid-point of Rs21.7) vs. Isec estimate of Rs21.6/unit. We retain our BUY rating with an unchanged target price of Rs442/unit based on Mar’23E NAV including Golflinks CAM business acquisition. Key risks are a slow recovery in office leasing and higher vacancy levels.

* Stable Q2FY23 performance: The REIT saw overall portfolio occupancy remaining flattish QoQ at 87% with Q2FY23 NOI of Rs7.0bn (up 13% YoY and 4% QoQ) primarily owing to commencement of rentals from space leased by JP Morgan at Embassy Tech Village. The REIT manager declared an NDCF of Rs5.2bn or Rs5.46/unit (up 2% QoQ) and is on track to achieve its FY23 DPU guidance of Rs20.6-22.8/unit (mid-point of Rs21.7) vs. Isec estimate of Rs21.6/unit.

* H1FY23 leasing off to good start, momentum may pick up going ahead: The REIT portfolio has scheduled expiries of 3.3msf in FY23, of which the REIT manager expects to renew 1.9msf with 1.4msf of likely exits. In H1FY23, the REIT manager has been able to renew 1.3msf while there have been fresh exits of 1.3msf against which there has been fresh leasing of 1.0msf (excluding pre-commitments) leading to portfolio vacancy level remaining flat in H1FY23 at 87%. For H2FY23, the REIT manager expects to renew another 0.6msf and another 0.1msf of exits against which it expects to achieve fresh leasing of 0.7msf, which implies an uptick in portfolio occupancy in H2FY23 of 0.6msf on like-to-like basis. For FY23 overall, the REIT manager maintains its leasing guidance of 5.0msf across renewals, new leasing, and pre-commitments. Key monitorable is improvement in overall occupancy levels in the Manyata, Bengaluru asset which currently has occupancy of 88%.

* Capex and acquisition opportunity evaluation continues in full swing: The REIT has launched 1.2msf of office block redevelopment and has also started another 1.3msf of new office development at Manyata, Bengaluru taking the active development pipeline to 7.1msf. The REIT manager has also signed non-binding offer letters for the potential acquisition of two Sponsor properties of 7.1msf (Splendid Techzone, Chennai of 5.0msf and Business Hub, Bengaluru of 2.1msf).

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