Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the non-convertible debentures (NCDs), corporate credit rating and commercial paper of Embassy Office Parks REIT (Embassy REIT).

 

Operating revenue of Embassy REIT grew 8% y-o-y for fiscal 2024 to Rs 4,035 crore from Rs 3,726 crore for fiscal 2023, driven by – a) steady rentals due to contractual escalation for office portfolio, b) new leasing of 44 lakh sq. ft at a re-leasing spread of 28% and renewals of 13 lakh sq. ft at a renewal spread of 37% for fiscal 2024, and c) improvement in operating performance of hospitality segment. The occupancy level of Embassy REIT was adequate at 85% as on March 31, 2024 as compared to 86% as of March 2023; same store occupancy stood at 87% as of March 2024. Net operating income (NOI) also increased by 7% y-o-y to Rs 3,231 crore for fiscal 2024, as compared to Rs 3,018 crore for fiscal 2023; however, NOI margin has declined marginally to 80% from 81% for this period on account of higher contribution from hospitality segment in fiscal 2024, with office NOI margins continuing to be consistently around 85% over last 3 years. CRISIL Ratings expects operating performance of Embassy REIT to remain healthy in medium term supported by completion and leasing of under construction area, gradual improvement in occupancy levels along with contractual rental growth. There is limited risk of renewals with only 29% of the area coming up for renewal over the next four fiscals.

 

Consolidated gross debt rose to Rs 16,808 crore as on March 31, 2024 from Rs 14,806 crore as on March 31, 2023 mainly due to the acquisition of Embassy business Hub with exclusive ownership rights to around 14 lakh sq. ft and bank debt raised for capital expenditure (capex) requirements at SPV level, both funded through debt. Embassy REIT has also announced acquisition of Embassy Splendid Techzone, 50 lakh sq. ft office area in Chennai, in April 2024. It has an operational area of 14 lakh sq. ft occupied at 95% as of March 2024, under-construction area of 16 lakh sq. ft and potential development of 20 lakh sq. ft. Higher-than-expected debt-funded capex or acquisition, leading to deterioration in the debt protection metrics, will remain key rating sensitivity factors.

 

The ratings continue to reflect the trust’s satisfactory loan-to-value (LTV) ratio driven by moderate debt and healthy debt protection metrics, supported by a cap on incremental borrowings. Further, stable revenue and rent collection from the underlying assets, healthy occupancy, contractual rent escalations and geographical diversification support the leverage levels. While the LTV has increased in the recent past, CRISIL Ratings expects prudent debt management by Embassy REIT and leverage level to come down gradually. The rating continues to factor in exposure to refinancing risks and susceptibility to volatility in the real estate sector, resulting in fluctuations in rental rates and occupancy. The refinancing risks are expected to be mitigated by proactive refinancing strategies. Embassy REIT refinanced Rs 5,340 crore of debt at an average rate of interest of 7.9% p.a. in fiscal 2023 and Series II NCDs of Rs 1500 crore in September 2023. Recently, Series III NCDs of Rs 2600 crore were refinanced in January 2024 at the average cost of debt of 8.25%.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Embassy REIT with its underlying special purpose vehicles (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 during exigencies. Additionally, there is minimal structural subordination of cash flow, wherein the 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:

• Satisfactory debt protection metrics: Consolidated gross debt rose to Rs 16,808 crore as on March 31, 2024 from Rs 14,806 crore as on March 31, 2023. The increase in debt level was mainly due to the acquisition of Embassy business Hub with exclusive ownership rights to around 14 lakh sq. ft and bank debt raised for capital expenditure (capex) requirements at SPV level. Going forward debt-funded capex or potential acquisitions may further increase the consolidated gross debt. However, in line with management articulation, the gearing levels are expected to be maintained or brought down in the medium term. Embassy REIT is also planning to raise equity up to Rs 2,500 crore which will be utilised towards debt reduction as well as part funding the upcoming construction. A lower LTV ratio protects investors from the risk of decline in property prices and the consequent impact on refinancing.

 

• Stable revenue of SPVs held by the REIT: Around 90% of the revenue comes from 13 established and high-quality commercial assets and one solar park, with stable operations and track record of at least five years of rental collection. Consolidated revenue was Rs 4,035 crore for fiscal 2024 as against Rs 3,726 crore for fiscal 2023, supported by improvement in performance of the hospitality segment and contractual escalations for office portfolio. Also, 15 lakh sq. ft of area was added in Embassy Manyata and Embassy Business Hub in fiscal 2024. Embassy REIT renewed/entered into new agreements (including pre-commitment signings of 24 lakh sq. ft) to the tune of 81 lakh sq. ft for fiscal 2024 at a leasing spread of 31%. 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 454 lakh sq. ft of available office area with a healthy mix of operational area of 365 lakh sq. ft, under-construction area of 61 lakh sq. ft and proposed development of 28 lakh sq. ft. The commercial assets have robust occupancy, averaging 85% as on March 31, 2024, with a multinational occupier base over 250 tenants across industries, of which Fortune 500 companies account for 47%.

 

Weaknesses:

• 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. Top 10 tenants and technology sector contribute to 35% and 33% of gross annualized rentals, respectively, as on March 31, 2024, exposing the REIT to moderate concentration risk. Further, as on March 31, 2024, 29% of the leased area will be due for renewal between fiscals 2025 and 2028. While majority of the tenants are established corporates and may continue to occupy the property, any industry shock leading to vacancies may make it difficult to find alternate lessees within the stipulated time. Emergence of competing facilities in the vicinity could also have the potential to cannibalise tenants or rental rates. These could adversely impact cash flow, and hence, will be key rating sensitivity factors.

 

• Exposure to refinancing risks: All NCDs issued by the REIT have bullet payments at the time of redemption, thereby exposing the REIT to the risk of refinancing. While the REIT has staggered the bullet repayment timelines, active and timely treasury management remains essential. The risk is mitigated by the availability of call option in NCDs, healthy consolidated leverage and experience of the management.

 

Embassy REIT refinanced Rs 5,340 crore of debt at an average rate of interest of 7.9% p.a. in fiscal 2023 and Series II NCDs of Rs 1,500 crore in September 2023. Recently, Series III NCDs of Rs 2,600 crore were refinanced in January 2024 at the average cost of debt of 8.25%.

 

Most of the NCD instruments have call options available 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 financial institutions. Further, new avenues of capital are available in the form of investments from pension funds, insurance companies and foreign portfolio investors, which mitigates refinancing risk to some extent.

Liquidity: Superior

Liquidity is supported by stable cash flows from underlying assets. Debt level remains moderate for the REIT with LTV at 29.5% as on April 5, 2024 (as per external valuation as of March 2024). 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, LTV of the REIT is expected to remain well below 40%, protecting investors from the risk of decline in property prices and the consequent impact on refinancing. As on date, Embassy REIT had a cash balance of Rs 100-120 crore to support its day-to-day operations which is expected to be maintained at a similar level. Also, undisbursed debt is Rs 635 crore for ongoing construction activities as on April 5, 2024.

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:

• Decline in the value of the underlying assets or higher-than-expected incremental borrowings, resulting in CRISIL Ratings sensitised LTV ratio of 40% or above
• Weakening of operating performance leading to lower-than-expected occupancy levels
• Significant delay in completion and leasing of under-construction assets or acquisition of assets of lower quality affecting portfolio health 
• Any impact on independence of REIT operations due to but not limited to change in sponsorship of the trust or ownership of the REIT manager

About the Trust

Embassy REIT is registered as an irrevocable trust under the Indian Trust Act, 1882, and as a REIT with SEBI’s REIT 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 13 commercial assets (office parks and city-centric offices), six hotels (of which two 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 sq. ft, of which 96% was occupied as on March 31, 2024.

 

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 54% was occupied as on March 31, 2024. It also owns and operates mixed-use development, consisting of office and retail space and a hotel in north Bengaluru. The property Embassy One has a total leasable area of 2.5 lakh sq. ft, of which 82% was occupied as on March 31, 2024. The hotel, consisting of 230 rooms, run under the Four Seasons brand and had an occupancy rate of 41% for fiscal 2024.

 

Qubix Business Park Pvt. Ltd (QBPPL) owns and operates a commercial IT park, Embassy Qubix, in Hinjewadi, Pune. The company has a track record of seven years in lease rental collection. Of the total leasable area of 14.5 lakh sq. ft, 68% was leased as on March 31, 2024.

 

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 100% was occupied as on March 31, 2024.

 

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 100% was leased as on March 31, 2024.

 

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 97% of the entire leasable area of 15.0 lakh sq. ft was leased as on March 31, 2024.

 

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 32.2 lakh sq. ft, of which 58% was leased as on March 31, 2024.

 

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 124 lakh sq. ft, of which 87% was leased as on March 31, 2024, while around 28 lakh sq. ft is under development and around 4 lakh sq. ft is proposed to be developed. The company has recently developed a five-star and a three-star hotel with 266 rooms and 353 rooms, respectively, operated under the Hilton brand. These hotels had an occupancy rate of 59% for fiscal 2024.

 

Embassy Energy Pvt. Ltd (EEPL) owns and operates a solar project with capacity of 100 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), in Bengaluru. The hotel, consisting of 247 rooms, has been operational since 2014 and had an occupancy rate of 64% for fiscal 2024.

 

Embassy Pune Techzone Pvt. Ltd (EPTPL), owns an office park, Embassy Techzone, in Hinjewadi, Pune. Of the total area of 30 lakh sq. ft, 78% was leased as on March 31, 2024, while 24 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 Inner Ring Road, Bengaluru. The company has developed 31 lakh sq. ft, of which 95% was leased as on March 31, 2024.

 

Vikas Telecom Pvt. Ltd (VTPL) and Sarla Infrastructure Pvt. Ltd (SIPL) own and operate ETV, Bengaluru. The commercial complex is spread over 84.05 acres consisting of 73 lakh sq. ft of completed office premises, 23 lakh sq. ft of under-construction office space and a proposed hotel of 518 keys. Of the total operational area of 73 lakh sq. ft, 96% was leased out as on March 31, 2024.

 

Embassy Construction Pvt. Ltd. (ECPL) is constructing and developing an integrated business park at Yelahanka, Hobli Bengaluru under the name of Embassy Business Hub. Embassy REIT acquired Embassy Business Hub for an enterprise value of Rs 335 crore with exclusive ownership rights to around 14 lakh sq. ft of leasable area upon full completion. Embassy Business Hub is an integrated business park in North Bengaluru and is expected to comprise total leasable area of around 21 lakh sq. ft upon full completion. The company has developed 4 lakh sq. ft, of which 92% was leased as on March 31, 2024 with ongoing development for 10 lakh sq. ft leasable area.

Any other information:

The terms and conditions of the NCDs are mentioned below:

 

Series IV

• Net Total Debt / EBITDA of the REIT Group <= 5.5x.
• LTV of the REIT Group <= 40%.
• LTV of the Mortgaged Properties of SIPL <= 49%.
• EBITDA of SIPL >= Rs 86 crore as the total indebtedness against Mortgage Property of SIPL exceeds Rs 400 crore

 

Series V

• Net Total Debt / EBITDA of the REIT Group <= 5.5x.
• LTV of the REIT Group <= 40%.
• LTV of Secured Assets <= 49%.
• Total indebtedness against Operational Assets/EBITDA generated by Operational Assets <=7.0x

 

Series VI

REIT level

• Net Total Debt / EBITDA of the REIT Group <= 5.5x.

 

Asset Level

• Security cover >=2.0x

 

Series VII

REIT level

• Net Total Debt / EBITDA of the REIT Group <= 5.5x.
• LTV of Secured Assets <= 40%.

Asset Level

• Security cover >=2.0x

 

Series VIII

REIT Level

• Net Total Debt / EBITDA of the REIT Group <= 5.5x.
• LTV of the REIT Group <= 40%.

Asset Level

• Security cover >=2.0x

 

Series IX

REIT Level

• Net Total Debt / EBITDA of the REIT Group <= 5.5x.
• LTV of the REIT Group <= 40%.

Asset Level

• Security cover >=2.0x

 

Series X

REIT level

• Net Total Debt / EBITDA of the REIT Group <= 5.5x.
• LTV of Secured Assets <= 40%.

Asset Level

• Security cover >=2.0x

 

Proposed NCDs of Rs 300 crore

REIT level

• Net Total Debt / EBITDA of the REIT Group <= 5.5x.
• LTV of Secured Assets <= 40%.

Asset Level

• Security cover >=2.0x