Embassy’s impressive Q1 earnings justify demand  for  Mindspace  Reit

With a 10% rise on listing, the expected yield drops to about 6.6%. But demand even at these levels was resilient, which is interesting, considering the concerns over the commercial real estate sector likely to be a key casualty of the growing work-from-home (WFH) culture.

However, Q1FY21 results of Embassy Office Parks showed that such concerns may be a bit of a stretch, especially for grade-A office spaces.

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The key highlight of Embassy’s June quarter result was that despite the lockdown, rental collections from office occupiers remained robust at 98.9%. In a post-earnings conference call, the Embassy management said there has been a great deal of conjecture around WFH, domestically and globally. However, in India, WFH has significant challenges relating to the physical and digital infrastructure. It is indeed likely that there will be more flexibility in terms of work place with a hybrid of traditional office and home locations. But offices will continue to be a core amenity for the business community, the management said.

Given the focus on cash conservation, the management cautioned that near-term demand could be hit due to a pause in decision making by occupiers. However, in the medium-term, high-quality properties would benefit from supply shrinkage and increased offshoring to India, it added.

Speaking about tenants, the management said domestic IT firms, the key occupiers, have performed well despite covid-19, as reflected by their large deal wins. This gives them confidence about future demand for office spaces from the Indian IT sector. Around 42% of Embassy’s gross rentals come from its top 10 occupiers. Out of these, the top three are IT companies, contributing 25% to gross rentals.

Mindspace largely has multinational clients occupying its spaces, but the company is not dependent on any one or two clients. Its largest client, Accenture, contributes to 7.7% of gross rentals and are at 92% occupancy.

“Despite the impact of covid and weakened sentiment around commercial real estate, the two Reits, Embassy and Mindspace, have shown strong rental collections during the last quarter. Hence, even as escalations may be questioned, Reits provide a stable 7% post-tax return from locked-in rentals from existing tenants," Sharad Mittal, CEO, Motilal Oswal Real Estate Fund, said.

Embassy distributed 100% of its net distributable cash flows in Q1FY21 and the distribution stood at ₹5.83 per unit. This is in-line with what it had outlined. Indeed, the Embassy Reit has also appreciated meaningfully since its IPO last year. Including payouts, shareholders have ended up with returns of 33% in a little over a year.