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In its recently held analyst meet, the management of Embassy Office Parks REIT (Embassy) remained confident of a strong FY25, led by demand from Global Captive Centres (GCCs), which continue to set up, expand and move towards higher-valued services in India. Going forward, NOI growth will come from multiple levers including lease-out of vacant areas, contracted escalations, MTM potential and new developments: Embassy has an active development pipeline of 6.9msf (4QFY24-FY28E) with 90% concentrated in Bengaluru, India’s leading office market. We reiterate a ‘BUY’ rating with a Mar’25 TP of INR 390 (total return potential of 13.4%; 7.1% dividend and 6.3% capital appreciation).

* Encouraging demand signs: In 3QFY24, on the leasing front, Embassy achieved c.3.5msf across 22 deals with GCCs contributing to over 78% of this demand. Overall occupancy inched upwards to 84% (83% in Sep’23) on account of stronger leasing and fewer exits (0.5msf). In continuation with the trend, Embassy expects leasing demand in FY25 to be led by GCCs. Embassy has applied for denotification of two buildings that are completely vacant: i) 0.8msf in Bengaluru and ii) 0.3msf in Pune. The company expects full approvals to come in the next 3-4 months; the cost of such approvals will be c. INR 300-400psf (4-8 months of rentals). This is expected to have a positive impact on leasing momentum.

* NOI can potentially grow by 40% in the next 2-3 years: Over FY20-23, Embassy’s NOI grew by 52% from INR 18.2bn to INR 27.7bn driven by acquisitions, rental growth and hotel launches. Embassy’s current portfolio of 45.4msf (including 9.6ms of development pipeline) has a growth potential of c. INR 12bn (40% over FY23 NOI), which can be realised over the next 2-3 years. The organic growth pipeline comprises i) lease-up of 5.7msf of vacant area (INR 3.7bn contribution to NOI), ii) completion of 6.9msf of underconstruction assets (INR 7.7bn contribution to NOI) and iii) two new hotels at Embassy Tech Village with 518 keys (INR 0.8bn contribution to NOI). In addition to the organic growth pipeline, the 5% p.a. contracted escalations and 10% MTM potential for the total portfolio will further uplift the NOI.

* ROFO assets to further enhance growth prospects: Embassy’s ROFO pipeline encompasses c. 9msf in key micro-markets of Bengaluru (Embassy Whitefield) and Chennai (Embassy Spendid Techzone). Embassy Whitefield is situated in Outer Ring Road with a total completed area of 1.7msf, current occupancy of 64% and a future development area of 2.5msf. Embassy Spendid Techzone is situated in Pallavaram-Thoraipakkam office corridor with a total completed area of 1.4msf and occupancy of 95%. This asset currently has another 1.6msf under-construction (36% pre-leased) and 2.0msf that can be developed in the future.

* We reiterate ‘BUY’ with a Mar’25 TP of INR 390: We expect net operating income (NOI) to accumulate at 11.1% CAGR over FY23-26E. We reiterate ‘BUY’ with a Mar’25 TP of INR 390 (total return potential of 13.4%; 7.1% dividend and 6.3% capital appreciation).

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