Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facility of Quadron Business Park Private Limited [QBPL; a part of the Embassy Office Parks REIT (Embassy REIT); rated ‘CRISIL AAA/CCR AAA/Stable’] to ‘CRISIL AAA/Stable’ from ‘CRISIL AA+/Stable’.

 

The rating action follows a revision in analytical approach for assessing REIT SPVs. QBPL does not have any external debt other than bank guarantee of Rs 75 crore. Consequently, there is no cash flow subordination from QBPL to Embassy REIT. The REIT has direct control over the day-to-day operations as well as strategic decisions of the company. Each of the SPVs of the REIT has to mandatorily distribute 90% of its net distributable cash flow (after servicing of debt) to Embassy REIT, leading to highly fungible cash flows. Further, the REIT will support the SPV, if required establishing criticality of QBPL for the REIT.

 

The ratings continue to reflect comfortable loan-to-value (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 of the commercial assets, healthy occupancy, contractual rent escalations and geographical diversification. These strengths are partially offset by exposure to refinancing risks and susceptibility to volatility in the real estate sector, resulting in fluctuations in rental rates and occupancy.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Embassy REIT and its SPVs, in line with its criteria for rating entities in homogeneous groups. This is because Embassy REIT has direct control over the SPVs and will support them when needed. There is no structural subordination of cash flow between QBPL and Embassy REIT. Additionally, all SPVs must mandatorily distribute 90% of their net distributable cash flow (after servicing of debt) to Embassy REIT, leading to highly fungible cash flow. Also, as per the Real Estate Investment Trust (REIT) Regulations, 2014, of Securities and Exchange Board of India (SEBI), the cap on borrowing by the 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 for Embassy REIT rose to Rs 13,301 crore as on June 30, 2022, from Rs 11,788 crore as of December 31, 2021. The increase in debt level was mainly due to acquisition of 3.56 lakh square feet (sq. ft) of office buildings at Embassy GolfLinks and CAM business of the park. Going forward the funds required for ongoing construction activities may further increase the consolidated gross debt. However, the debt protection metrics will remain strong with LTV and debt-to-EBITDA (earnings before interest, tax, depreciation, and amortisation) ratios expected to be comfortable at less than 40% and 5.5 times respectively. 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 3.56 lakh sq. ft of office buildings at Embassy GolfLinks and CAM business of the park has further strengthened the stability of cash flow. Consolidated revenue was Rs 3,173 crore for fiscal 2022 as against Rs 2,560 crore for the corresponding period in fiscal 2021, supported by timely rental escalations as well rent collections from tenants. Rental collections from office occupiers were robust despite the pandemic, reflected in over 99% collection witnessed in fiscal 2022. Furthermore, the REIT renewed/entered into new agreements to the tune of 22 lakh sq. ft during the fiscal 2022 at a re-leasing spread of 27%. Rentals have an upside potential on account of 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 a well-diversified portfolio: Embassy REIT owns and operates office spaces, a solar park and hotel properties spread out across prime areas of Bengaluru, Mumbai, Pune, and the National Capital Region. The group has a total of 428 lakh sq. ft of available office area with a healthy mix of operational area of 338 lakh sq. ft and under-construction assets. The commercial assets have robust occupancy, averaging 87% as on June 30, 2022, with a multinational occupier base, of which Fortune 500 companies account for 48%

 

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, office rental collection for fiscal 2022 and the first quarter of 2023 for Embassy REIT was robust over 99%.

 

Exposure to refinancing risks: All NCDs issued by the REIT have bullet payments at the time of redemption. Sizeable debt for the existing NCDs increase the risk of refinancing. However, the risk is mitigated by the availability of call option in NCDs, healthy consolidated leverage and extensive experience of the management.

 

All the NCD instruments have multiple call options available six months prior to the final maturity, which provides the trust with sufficient time to arrange funds or refinance the NCDs prior to the due date. Further, SPVs of REIT have the flexibility to raise lease rental discounting (LRD) loans from banks for the purpose of refinancing the NCDs, thereby giving access to large pool of capital from banking sector. Further, new avenues of capital are available in the form of investments from pension funds, insurance companies and foreign portfolio investors (recently allowed by the respective regulators), which mitigates refinancing risk to some extent.

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 on June 30, 2022, REIT has a cash balance of Rs 124 crores to support its day-to day operations as well as has sanctioned undisbursed debt of Rs 1,014 crores 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% for Embassy REIT.
• Occupancy, at a consolidated level, remaining below 85% on a sustained basis.
• Significant delay in the completion and leasing of under-construction assets at REIT level.
• Any non-adherence to the structural features of the rated SPV and REIT debt.

About the Company

QBPL is wholly owned by Embassy REIT. It owns and operates the Quadron Business Park, in Hinjewadi, Pune which is spread over 25 acres with an operational leasable area of 18.9 lakh sq. ft. QBPL also owns the Embassy One office park with a total leasable area of 2.5 lakh sq. ft and the 230-key Four Seasons Hotel in Bellary Road, Bengaluru.

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, including QBPL:

 

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 78% was occupied as on June 30, 2022

 

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, 90% was leased as on June 30, 2022

 

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 86% was occupied as on June 30, 2022

 

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 84% was leased as on June 30, 2022

 

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 89% of the entire leasable area of 13.6 lakh sq ft was leased as on June 30, 2022

 

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% was leased as on June 30, 2022, 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 87% was leased as on June 30, 2022, while around 17.0 lakh sq ft is under development and 14.0 lakh sq ft is proposed to be developed. The company has also recently launched a five-star and a three-star hotel with 266 rooms and 353 rooms, respectively, 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 69% as on June 30, 2022. 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, 84% was leased as on June 30, 2022, 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 31 lakh sq ft, of which 99% was leased as on June 30, 2022

 

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 72 lakh sq ft of completed office premises; 19 lakh sq ft of under-construction office and a proposed hotel of 518 keys. Of the total operational area of 72 lakh sq ft, ~99% was leased out as of June 30, 2022

Any other information: Not applicable