Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the non-convertible debentures (NCDs) of Embassy Office Parks REIT (Embassy REIT).

 

The ratings continues to reflect Embassy REIT’s comfortable LTV ratio - driven by low debt and strong debt protection metrics, supported by a cap on incremental borrowings - and stable revenue and rent collection from the underlying assets, given the high-quality commercial assets, healthy occupancy, contracted rent escalations and geographical diversification. These strengths are partially offset by exposure to refinancing risk and susceptibility to volatility in the real estate sector, resulting in fluctuations in rental rates and occupancy levels.

 

Revenue of the REIT grew 9% y-o-y for Fiscal 2021 to Rs 2,561 crore from Rs 2,340 crore during last fiscal, driven mainly by the acquisition of Embassy Tech Village (ETV). Same store revenue growth remained muted due to Covid-19 induced increase in vacancy level, however same store NOI grew 2% y-o-y for Fiscal 2021. CRISIL expects Embassy REIT  to observe double digit growth from Fiscal 2023 supported by completion of under construction area, contractual rental growth, improvement in occupancy levels as well as improvement in hospitality business. The occupancy level of the Embassy REIT stands at 89% as on 31st March 2021 including ETV, however Same Store occupancy levels have fallen to 87% in fiscal 2021 from 93% in previous fiscal. Nonetheless the increase in vacancy level is anticipated to be  short term with gradual improvement expected post current fiscal. Additionally, Covid-19 also has led to adoption of a hybrid working model by many corporates, any impact of this on the occupancy levels as well as micro market of REIT will remain key monitor able.

 

Embassy REIT has proposed certain amendments in the DTD of NCDs w.r.t. voluntary redemption and changes in the definition EBITDA to align all the NCDs, CRISIL Ratings believes that these amendment will not impact the credit profile of Embassy REIT.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Embassy REIT with its underlying SPVs and has applied the criteria for rating entities in homogeneous groups. This is because Embassy REIT has direct control over the SPVs and will support them in case of exigencies. Additionally, there is minimal structural subordination of cash flow, wherein the SPVs have to mandatorily distribute 90% of their net distributable cash flow (following servicing of debt) to Embassy REIT, leading to highly fungible cash flow. Also, as per the Real Estate Investment Trust Regulations, 2014, of Securities and Exchange Board of India (SEBI), the cap on borrowings by the real estate investment trust (REIT) has been defined at a consolidated level (equivalent to 49% of the value of Embassy REIT’s assets).

 

Please refer Annexure – List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong debt protection metrics: Consolidated gross debt of the REIT increased to Rs 10,622 crore as on March 31, 2021 from Rs 5,746 crore in previous fiscal. The increased in debt level was mainly due to acquisition of ETV. Going forward the funds required for ongoing construction activities may further increase the consolidated gross debt. However, the debt protection metric still remains strong with LTV and debt-to-EBITDA ratios expected to remain comfortable at less than 40% and 5.0 times. A low LTV ratio protects investors from the risk of decline in property prices and the consequent impact on refinancing.

 

• Stable revenue of SPVs part of REIT: More than 95% of the revenue comes from 12 established and high-quality commercial assets and one solar park, with stable operations and track record of at least five years of rental collection. The acquisition of ETV has further strengthened the stability of cash flow. Consolidated revenue was Rs 2,561 crore for fiscal 2021 as against Rs 2,340 crore for fiscal 2020, supported by timely rental escalations as well rent collections from tenants. Rental collections from office occupiers remained robust despite the pandemic; with 99.8% collection witnessed for  fiscal 2021. Rentals have upside potential given the superior asset and service quality; favourable locations in prime areas; healthy demand in the respective markets; and competitive rental rates.

 

• Strong tenant profile with well diversified portfolio: REIT owns and operates office spaces, solar park and hotel properties spread out across prime areas of Bengaluru, Mumbai, Pune, and the National Capital Region. Group has a total of 42.4 msf of available office area with a healthy mix of operational and under construction assets, around 76% of which is currently operational. The commercial assets have robust occupancy, averaging 89% as on March 31, 2021, with a multinational occupier base, of which Fortune 500 companies account for 48%. The top 10 tenants contribute around 38.6% of rentals

 

Weakness:

• Susceptibility to volatility in the real estate sector: Rental collection (key source of revenue) is susceptible to economic downturns, which constrains the tenant’s business risk profile and, therefore, occupancy and rental rates. Emergence of competing facilities in the vicinity could also have the potential to cannibalise tenants or rental rates. However, we note Embassy REIT’s office rental collections for the fiscal 2021 remained robust at 99.8%.

 

• Exposure to Refinancing risk: All NCDs issued by the REIT have bullet payment at the time of redemption. The large quantum of debt along with redemption premium for first NCDs, increases the risk for refinancing. However, refinancing to be supported by availability of the call options in NCDs, healthy consolidated leverage as well as extensive experience of management.

 

The earlier NCDs-2019 (Rs 3,650 crore) are zero coupon and have bullet repayment (including premium on redemption) at the end of the tenure which is 37 months, i.e. June 2022. The issuer has call options at the end of the 24th, 27th, 30th, 32nd, 34th and 36th month.

 

The recent NCDs-2020 (Rs 1,500 crore) are coupon-bearing (payable quarterly) and have a bullet repayment (at par) at the end of the tenure which is 37 months, that is, October 2023. The issuer has call options at the end of the 30th, 33rd and 36th month.

 

The latest NCDs-2021 (Rs 2,600 crores) are coupon-bearing (payable quarterly) and have a bullet repayment (at par) at the end of the tenure which is 37 months, that is, February 2024. The issuer has call options at the end of the 30th, 33rd and 36th month.

 

These terms provide the trust with sufficient time to arrange for funds or refinance the NCDs prior to the due date.

Liquidity: Superior

Liquidity is likely to remain supported by stable cash flows from the underlying assets. The debt level remains moderate for the REIT. The NCDs are non-amortising, exposing the debenture-holders to refinancing risk. However, the conditions around redemption provide the REIT with sufficient time to arrange for refinancing. Furthermore, consolidated debt at the REIT level is not expected to exceed LTV ratio of 40%, protecting investors from the risk of decline in property prices and the consequent impact on refinancing. As at March 31, 2021, REIT has a cash balance of Rs 412 cr to support its day-to day operations as well as has sanctioned undisbursed debt of Rs 1,138 cr for ongoing construction activities.

Outlook: Stable

CRISIL Ratings believes Embassy REIT will continue to benefit from the quality of its underlying assets over the medium term.

Rating Sensitivity factors

Downward Factors:

• Depreciation in the value of the underlying assets or higher-than-expected incremental borrowings, resulting in LTV ratio of over 40%
• Covid-19 led disruption in micro market demand dynamics leading to decline in occupancy level below 85% on a sustained basis.
• Significant delay in the completion and leasing of under-construction assets
• Any non-adherence to the structural features of the rated debt

About the Trust

Embassy REIT is registered as an irrevocable trust under the Indian Trust Act, 1882, and as a REIT with SEBI’s Real Estate Investment Trust Regulations, 2014, as amended. Embassy REIT is sponsored by BRE Mauritius Investments (part of the Blackstone group) and Embassy Property Development Pvt Ltd (part of the Embassy group). It has 12 commercial assets (office parks and city-centric offices), six hotels (of which four are under construction) and a solar plant. Embassy REIT’s portfolio of assets are held through the following SPVs:

 

Indian Express Newspapers (Mumbai) Pvt Ltd (IENMPL) owns and operates a commercial property, Express Towers, in Nariman Point, Mumbai. The property has been operational for over four decades and has a total leasable area of 4.7 lakh square feet (sq ft), of which 91% was occupied as on March 31, 2021.

 

Quadron Business Park Pvt Ltd (QBPL) owns and operates a commercial information technology (IT) park, Embassy Quadron, in Hinjewadi, Pune. The property has been operational since 2010 and has a total leasable area of 18.9 lakh sq ft, of which 49.7% was occupied as on March 31, 2021. It also owns and operates mixed-use development, consisting of office and retail space and a hotel in North Bengaluru. The property has a total leasable area of 2.5 lakh sq ft, of which majority is yet to be leased. The hotel, consisting of 230 rooms, is run under the Four Seasons brand.

 

Qubix Business Park Pvt Ltd (QBPPL) owns and operates a commercial IT park, Embassy Qubix, in Hinjewadi. The company has a track record of seven years in lease rental collection. Of the total leasable area of 14.5 lakh sq ft, 91.1% was leased as on March 31,2021.

 

Earnest Towers Pvt Ltd (ETPL) owns and operates 3.6 lakh sq ft of First International Finance Centre (FIFC) in Bandra Kurla Complex, Mumbai, of which 77.5% was occupied as on March 31,2021.

 

Vikhroli Corporate Park Pvt Ltd (VCPPL) owns a commercial property, Embassy 247, in Vikhroli, Mumbai. It has been operational for eight years and has total leasable area of 11.9 lakh sq ft, of which 82.1% was leased as on March 31,2021.

 

Galaxy Square Pvt Ltd (GSPL) owns and operates an IT park, Embassy Galaxy, in Sector 62, Noida. The company has a track record of seven years in lease rental collection, and 98.5% of the entire leasable area of 13.6 lakh sq ft was leased as on March 31,2021.

 

Oxygen Business Park Pvt Ltd (OBPPL) owns and operates a commercial IT park, Embassy Oxygen, in Sector 144, Greater Noida. The property is part of the Oxygen Boulevard IT Special Economic Zone and has been operational for six years. The property has completed  area of 25.2 lakh sq ft, of which 73.3% was leased as on March 31,2021, while around 7.0 lakh sq ft is under development.

 

Manyata Promoters Pvt Ltd (MPPL) owns and operates Embassy Manyata Business Park, Bengaluru. The commercial complex is spread over 120 acres. The company has developed around 117.5 lakh sq ft, of which 93.5% was leased as on March 31,2021, while around 17.0 lakh sq ft is under development and 14.0 lakh sq ft is proposed to be developed. The company is also developing a five-star and a three-star hotel with 266 rooms and 353 rooms, respectively, to be operated under the Hilton brand.

 

Embassy Energy Pvt Ltd (EEPL) owns and operates a solar project, with installed capacity of 100 megawatt (MW). The park is spread over 465 acres across multiple villages in Karnataka. It has executed power purchase agreements for over 85% of the total capacity for supplying electricity to office parks and hotels of the Embassy group in Bengaluru.

 

Umbel Properties Pvt Ltd (UPPL) owns and operates the Hilton hotel at Embassy Golflinks, along Intermediate Ring Road (IRR), Bengaluru. The hotel, consisting of 247 rooms, has been operational since 2014 and had an occupancy rate of 14% for the year ended March 31,2021. The hotel was temporarily closed in accordance with state government guidelines following the lockdown and subsequently reopened by mid-June 2020.

 

Embassy Pune Techzone Pvt Ltd (EPTPL), on a standalone basis, owns an office space, Embassy Techzone, in Hinjewadi. Of the total area of 21.6 lakh sq ft, 88.6% was leased as on March 31,2021, while 9.0 lakh sq ft is under development and 24.0 lakh sq ft is proposed to be developed.

 

Golflinks Software Park Pvt Ltd (GLSP) was incorporated in 2000 for developing a software technology park, Embassy Golflinks, on Intermediate Ring Road. The company has developed around 27.4 lakh sq ft, of which  97.2% was leased as on March 31,2021.

 

Vikas Telecom Pvt Ltd (VTPL) and Sarla Infrastructure Pvt Ltd (SIPL) own and operate Embassy Tech Village, Bengaluru. The commercial complex is spread over 84.05 acres consisting of 61 lakh sq ft of completed office premises; 31 lakh sq ft of under-construction office space (of which 36% has been pre-leased to JP Morgan) and a proposed hotel of 518 keys. Of the total operational area of 61 lakh sq ft, 97.8% was leased out as of March 31,2021.

 

Embassy Office Ventures Pvt Ltd (EOVPL) is the holding company of VTPL.

Key Financial Indicators (CRISIL Adjusted)

For fiscal	Unit	2021	2020^
Revenue	Rs.Crore	2,561	2,340
PAT	Rs.Crore	699	779
PAT margin	%	27.3	33.3
Adjusted gearing	Times	0.39	0.26
Interest coverage	Times	3.33	4.78

^Does not include VTPL,SIPL and EOVPL as they were acquired in Dec,2020.

Any other information

Series I

• The Issuer shall ensure that the Gross Total Debt divided by EBITDA, shall be less than or equal to 5.0x. Provided that Issuer shall not borrow any Permitted Indebtedness which shall result in the Gross Total Debt divided by EBITDA on a proforma basis exceeding 4.5x.
• The Issuer agrees and undertakes that the Loan to Value Ratio shall not be greater than 49%.

 

Series II

• The Issuer shall ensure that the Net Total Debt divided by EBITDA, shall be less than or equal to 5.0x.
• The Issuer shall ensure that the Loan to Value Ratio shall be less than or equal to 40%.
• The Issuer shall ensure that the LTV of Secured Assets shall be less than or equal to 49%.
• The Issuer shall ensure that the Mortgage Properties and the Portfolio Assets of IENPL contribute at least INR 225 crore to the EBITDA of EPTPL and IENPL, on an aggregate basis.

 

Series III

• The Issuer shall ensure that the Net Total Debt divided by EBITDA, shall be less than or equal to 5.0x.
• The Issuer shall ensure that the Loan to Value Ratio shall be less than or equal to 40%.
• The Issuer shall ensure that the LTV of Secured Assets shall be less than or equal to 49%.
• The Issuer shall ensure that the Mortgage Properties and the Portfolio Assets of EEPL contribute at least INR 400 crore to the EBITDA of VTPL and EEPL, on an aggregate basis.