Good evening, everyone, and a very warm welcome to all for Embassy REIT's third quarter FY 2024 earnings conference call. Currently, all participants are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. Please note that this conference is being recorded. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. I would now like to introduce your host for today's conference, Ms. Sakshi Garg, Investor Relations Manager for Embassy REIT. Ma'am, you may begin now. Thank you.
Thank you, Neeraj. Welcome to the Q3 FY 2024 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter and nine months ended December 31, 2023, on Friday. As is our standard practice, we have placed a financial statement, earnings presentation discussing our performance, and a supplementary financial and operating data book in the investor section of our website at www.embassyofficeparks.com. As always, we would like to inform you that management may make certain comments on this call that one could deem forward-looking statements. Please be advised that the REIT's actual results may differ from these statements. Embassy REIT does not guarantee these statements or results and is not obliged to update them at any time.
Specifically, any financial guidance and pro forma information that we provide on this call are management estimates based on certain assumptions and have not been subjected to any audit, review, or examination procedures. We caution not to place undue reliance on such information, and there can be no assurance that we'll be able to achieve the same. Joining me today are Aravind Maiya, our CEO, Abhishek Agrawal , our CFO, and Ritwik Bhattacharjee, our CIO. We'll start off with brief remarks on our business and financial performance, and then open the floor to questions. Over to you, Aravind.
Thank you, Sakshi. Good evening, and thank you all for joining us today to discuss our quarterly results. Q3 was our best performing quarter to date in terms of total lease-up, and I'm happy to report that we have met our full year leasing guidance within nine months. We created a new record by leasing 3.5 million sq ft this quarter, including three large pre-leases totaling 2.2 MSF. In addition, we delivered a largely pre-leased new office tower of 0.4 MSF in Bangalore and announced distributions of INR 5.2 per unit. As anticipated, our portfolio occupancy picked up marginally, closing at 84% at the quarter end. With the strong market demand dynamics, as well as the recently announced amendment to the SEZ rule, we are well positioned to continue this growth trajectory.
Overall, we remain on track with our FY 2024 financial guidance. On the macro front, calendar year 2023 was a year of rebound for the Indian office real estate. With annual gross absorption within striking distance of an all-time high of 60 MSF, India was one of the best performing office markets in the world. The last quarter especially stood out with an impressive 18 MSF absorption and initiation of multiple requests for proposals, which stands at 19 MSF as of date. In terms of cities, Bangalore once again outshined and contributed to over one-fourth of the total leasing and 50% of the active RFPs as of date. A majority of this demand emanated from Global Capability Centers , which continue their journey to set up, expand, and move towards highly, higher value services in India.
With another 200-300 GCCs expected to be set up by 2025, the Indian office sector is set to repeat this stellar performance in the coming years. With this backdrop, let me now update you on our record Q3 leasing performance. We leased a total of 3.5 MSF across 22 deals. This included 1.1 MSF of new leases in our existing space and 0.2 MSF of renewals, leading to 35% rent reversions and a premium to average market rents. The highlight of this quarter clearly are the three large pre-leasing deals totaling 2.2 MSF, providing customized solutions to global tenants in our development projects in Bangalore.
One of Australia's largest bank committed to 0.8 MSF, along with 0.3 MSF expansion options in the D1, D2 towers in Embassy Manyata. In addition, a renowned U.S.-based tech company committed to 0.6 MSF, along with 0.3 MSF expansion option in Block 8 in Embassy TechVillage, which is due for delivery in the next nine months. And finally, one of the largest American retailer committed to 0.8 MSF for the whole L4 block in Embassy Manyata, which is due for delivery in September 2025. We welcome these landmark deals, which once again reflected how our high-quality business parks remain the preferred choice for the world's best companies looking to expand their India footprint.
Supported by these three large deals, Global Capability Centers contributed to around 80% of our total leasing, with the demand primarily driven by BFSI, retail, and technology sectors. Our core Bangalore portfolio once again contributed to the majority of our Q3 leasing, with a 75%+ share. We're also encouraged by the early signs of recovery seen in our Pune and Noida markets, which contributed to around 0.8 MSF of leasing this quarter, mainly for non-SEZ spaces. Currently, our non-SEZ occupancy stands at 92% and SEZ occupancy at 78%. Of our total 4.5 MSF SEZ vacancy, we've already applied for denotification of 0.8 MSF fully vacant building in Bangalore under the previous SEZ rule. In addition, we've applied for denotification of another 0.3 MSF building in Pune, which got vacant post the quarter.
We also applied for demarcation of an additional 1.1 MSF area across our Bengaluru, Pune, and Noida properties as part of our phase one demarcation plan under the amended SEZ rules. Of the balance 2.3 MSF SEZ vacancy, 1.4 MSF is in Embassy Quadron in Pune and Embassy Oxygen in Noida. We will look to apply for demarcation of these areas based on a pickup in leasing activity in these respective micro markets. Overall, we are confident that the amended SEZ rules will help us to increase our occupancy further, which we believe has already bottomed out and started growing from this quarter. In terms of expiries, we started FY 2024 with scheduled expiries of 2.5 MSF, which has now increased to 4.6 MSF.
The increase was majorly led by early renewals of 0.8 MSF and unanticipated exits of 1.3 MSF, mainly from IT services companies. This includes a 0.3 MSF exit notice received in Q3 from a large Indian IT services player for a full building in Embassy Qubix. We have now applied for de-notification of this building and have a strong pipeline for the same. Overall, of the total year-to-date exits of 2.9 MSF, we have already backfilled 1.5 MSF at market rents, and 0.8 MSF is currently under refurbishment. In our view, this year has been exceptional in terms of the additional unanticipated churn from IT services occupiers, which has impacted our cash flows due to temporary vacancies and the subsequent rent-free periods on the backfill.
However, our IT services client exposure has now gone down to less than 12%. This is 25% at the time of our listing. Also, the positive rent spreads achieved on re-leasing these areas has placed us very well for the medium term, as we have increased our in-place rent by 10% just over the last 18 months. Year to date, we have already leased 6.5 MSF, thereby achieving our annual guidance within nine months. Led by this record leasing and post-factoring the exits, our occupancy increased by over 100 basis points in Q3 to close at 84% on a portfolio level and 85% on a same-store basis. Moving to our development portfolio.
During the quarter, we received occupancy certificate for the 0.4 MSF tower and Embassy Business Hub in Bangalore, which is leased to Philips. We expect to receive the occupancy certificate for another 0.7 MSF, Tower One, in Embassy Oxygen in Noida this month. Our current development pipeline now totals 6.9 MSF at highly attractive yields of over 20%. Around 90% of our upcoming developments are in Bangalore, our core market, which continues to lead India's office absorption on the back of robust GCC demand. Specifically, in the next 24 months, we expect to deliver 4.7 MSF across two of our largest properties, Embassy Manyata and Embassy TechVillage in Bangalore.
Post the three marquee deals signed in Q3, around 70% of these medium-term delivery is already pre-leased, along with expansion options for another 10%. We believe that this growth is the key driver of our NOI and distributions expansion post FY 2026. As we continue to deliver and lease up this organic growth, the natural next step for us will be inorganic expansion, for which we are starting to evaluate available options. Lastly, on our hotels. Our hotel portfolio continued to perform strongly, with a 55% occupancy and a 19% year-over-year ADR growth, resulting in a quarterly EBITDA of INR 50 crore. Finally, we welcome the expansion of our public float from 30% at IPO to 92% post the recent complete stake sale by one of our sponsors.
This transaction has positively expanded our unit holder register, which now boasts of many large global long-only funds, sovereign wealth funds, domestic mutual funds, insurers, as well as a rapidly expanding retail investor base. In addition, it has led to an increase in our weightage in multiple global indices, further improving the liquidity in our stock. As we approach our fifth anniversary, we are happy to report that till date, we have delivered over INR 9,300 crores in distributions and total annualized returns of over 10% to the benefit of our 90,000+ unit holders. As the management team of India's first listed REIT, we've always focused on delivering long-term growth while following the highest standards of corporate governance. We are determined to carry forward this benchmark as we continue on a strong and upwards growth trajectory. With this, let me now hand over to Abhishek for our financial updates.
Thank you, Aravind, and good evening, everyone. Let me take you through the financial updates for the quarter. Revenue from operations grew by 8% year-on-year to INR 936 crores. This was primarily driven by new leases, lease up at higher re-leasing spreads, contracted rent escalations, and a ramp-up in our hotel business. It was partially offset by the impact of exits in our office portfolio. Net operating income grew by 8% year-on-year to INR 760 crores, in line with the increase in our revenue. Our commercial office margins of 85% and hotel margins of 50% continue to be best in class. Net distributable cash flows stood at INR 494 crores, down 2% year-on-year. This was primarily due to an increase in our interest costs as well as working capital changes.
Further, we have declared Q3 distributions of INR 493 crore or INR 5.2 per unit, making this our 19th quarter of 100% distribution payout. Moving to updates on our balance sheet. During the last month, we successfully refinanced INR 2,600 crore of maturing debt at an average rate of 8.25%. The refinance was done through a combination of debentures, first-time commercial paper issuance and bank loans. Considering the current interest rate environment, we have tactfully focused on raising funds from capital markets with an average maturity of less than two years in our recent refinance. With this, we do not have any further debt maturities till the later half of this calendar year, and only 20% of our debt book has rates locked in for over two years.
With an expected turn in the rate cycle in the short to medium term, this places us well to optimize our funding costs. Our overall debt book now totals INR 16,000 crore, implying a 30% leverage ratio and is well balanced across diverse investor pools, debt instruments and tenures. We continue to maintain our dual AAA stable credit rating and an industry-leading in-place debt cost, which stands at 7.8% post the recent refinance. Lastly, on the forward financial outlook. Based on our year-to-date performance, I am pleased to reconfirm the FY 2024 guidance that we provided in July 2023. We continue to expect our NOI to be in the range of INR 2,924 crore-INR 3,136 crore, and our distributions to be in the range of INR 20.5-INR 22 per unit.
Due to the additional exits noted during the year, we expect to finish the year marginally lower than the midpoint of our NOI range and at around the midpoint of our distribution guidance range. As Aravind mentioned, we are focused on our organic growth by delivering and leasing our 6.9 MSF developments on time, financing for which is already fully secured. We are also keen to expand our focus on inorganic growth, as we believe that high quality accretive acquisitions in the right micro-markets should provide a further impetus to our distribution growth trajectory in the long term. Considering the positive impact of all these growth levers, we expect our NOI and distributions to grow further from this year's levels. We will provide detailed guidance for next year's along with our Q4 results. With this, let's move on to Q&A please.
Thank you very much. We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. The first question is from the line of Akshay Malhotra from HSBC. Please go ahead.
Hi, thanks for the opportunity. Can you hear me?
Yes, now we can.
Okay, thanks. So, for the first question, I would like to ask that, could you explain the, you know, contours of the pre-leasing that has, you know, happened this quarter? Things like, have you received the deposit yet, or, and when does the rent start accruing? Or also in terms of, when the, you know, fit out starts, or would there be any modifications required, to be done to the building, getting to the new tenant?
Akshay, you want to finish off your question so that we can answer all of them, or is this the only one?
Okay, I'll go on with the other ones also then. For the second one, I would like to ask about for Golf Links. So, we've seen some reduction in distribution from Golf Links in the last two quarters. It would be helpful if you could share some insights on the same. And thirdly, on the share of dividend within the total distribution, that seems to have seen a little reduction in this quarter. And could you, you know, explain that also? Yeah, that's all.
Sure. Thanks, Akshay. I'll take the first one and hand over to Abhishek for the second and third questions. In terms of pre-leasing, I'll give some guidance. I don't want to get into more than what we can disclose under our confidentiality terms. Overall, if you see the deals that are done for three buildings, which is D1, D2, and Embassy Manyata, which is due for delivery in February 2026. Then we have one more deal in L4, which is a 100% takeout, which is due for delivery in September 2025, and the other one is additional space in our Parcel 8 in Embassy Tech Village, which gets done later in this calendar year. Overall, I think, you know, other than D1, D2, that is gonna be a fully fitted out deal, and the other two are plain vanilla deals.
We do the base build and the fit-outs are done by the respective tenants. So that's number one. Number two, I think, in terms of, rentals, all I can say is we have obtained above average market rentals for all of these pre-leases. So that's number two. Number three, specifically on the cash flows, we've not really received any security deposit on any of these. We will receive that in due course. And, and, yeah, I think broadly, and, and I think in terms of rent-free, of course, considering that these are large deals, the, the rent-free range from, I would say, eight to 10 months. Yeah, I think these are the big picture contours of these deals.
And there are, of course, some specific customizations which are given by each of these tenants, which have been factored into our timelines. You will see that a couple of buildings we have deferred delivery than what we had presented in the last quarter. That is basically to factor in some of the customizations which are given by each of these tenants. So broadly, I think these are the things which I want to highlight in relation to these pre-leases.
And Akshay, this is Abhishek. On your second question, which was related to GLSP's distribution reduction. So we think that it's a temporary reduction because of working capital changes. And I think by the end of this year, we would have for maybe fourth quarter we would have slightly higher than the run rate that we are talking for nine months.
On the third question, which is on dividend percentage reduction. So the distribution of dividend actually depends on the profitability of this SPV, which in turn depends on the depreciation and interest costs, which are rising as of now. Depreciation because of the deliveries that we have, and interest cost because of the increase in interest rate and the refi that we have done. Going forward, we think for Q4 also the same run rate of Q3, we should be able to maintain that.
Okay, got it. I think if I can quickly take the last one. You've already, you know, thrown some light on the timelines for the denotifications of the SEZ area. Could you also, you know, throw some a little bit more detail on that? And also maybe how, what is the, timeline that is usually, taken to get this, area denotified—denotified? Thank you. That's all from my side.
Yeah, sure. So just, are you talking about denotification or the new demarcation?
Denotification.
Okay. Denotification, I mean, we have a few buildings which are currently under denotification. Majority of their, those are, of course, in Bangalore, except one building in Pune, which we've just now applied towards the quarter end, and one in Oxygen, which is the building which is getting completed. Broad, broad sense, I think Bangalore and Pune, we should be able to complete the exercise anywhere from six to eight months. We are in advanced stages on the Bangalore one. Pune, of course, has started. Oxygen, there were some interdependencies on obtaining OC, which is now expected...
I mean, we should have got the OC honestly in the month of January, because the building is ready, but it just got deferred due to some procedural issues at the relevant authority. So the moment that, that gets done, we believe it's another three to four month process. So that's broadly the timelines on the buildings which are under denotification.
Okay. Thank you. Thanks a lot. That's all from my side.
Thank you. Next question is from the line of Pritesh Sheth from Motilal Oswal. Please go ahead.
Yeah, thanks for the opportunity. First, is on, just a follow-up on the previous question. So rentals for the pre-leasing that you have done, you said it's above average market rentals. But just comparing your existing rentals, you know, in that asset, you know, how have the performance been? Any signs of, you know, rental increase, considering, you know, both these assets are doing well exceptionally on the, you know, non-lease web side. So, you know, how has the rentals, rental trend been? Are we seeing any signs of rental increase at this?
Sure, Pritesh. You have any more questions? It'll be good if we can take off all.
Yeah, of course. So you can take and maybe I'll follow up with that later, second one.
Okay, sure. I think in terms of, rents, we've been seeing consistent increase in rentals in our Bangalore assets, all three of them, honestly, which is Manyata, TechVillage and GolfLinks. I think on average, we've been able to increase in-place rent by almost 25% in Manyata in the last 18-21 months. TechVillage, there's not been too many expiries and, subsequent renewals, so the rentals are holding forth. Versus GolfLinks, if you look at it, we've been able to increase the rentals almost 15% in the last, again, 18-21 months. So overall, all three assets are good rental increase. And to your point, the fact that we have been able to achieve substantial pre-leasing in these future towers, I think our ability to increase rent- rentals for the balance space should be much stronger.
Yeah, sure, sure. That's very cool. And second question is on, you know, the distribution. So while we had a good increase in revenue, you know, at this quarter, because of high interest expenses, we had a, you know, flattish distribution. Considering the next renewals of debt comes in, you know, in the later part of the calendar year. Would next couple of quarters be, you know, where we see increase in distributions, you know, on quarter on quarter? Or, you know, there is some other line item which can offset that increase in NOI. So your comments on that.
Pritesh, I'll request Abhishek to take this.
So Pritesh, as we have mentioned, that this is our last quarter of bottoming out of occupancy, and in this current year, all the leases that we have done, because of those, there are huge amounts of non-cash NOI also, which will start converting into cash from next year. And NOI also will start increasing from the next year. Considering the efficient follow-through, we think that we should start making it into NDCF. Only thing that, as you said rightly, that there is interest rates, we'll have to wait and see what is the interest rate trajectory, because that is one thing which has an impact or a drag from NOI or EBITDA to NDCF. So that is where it is, and the taxes part on the increased NOI.
Some sense from my side, Pritesh, of course, I don't want to be guessing on where the interest rate lands, but we will have some negative impact because of the refinance we've done post the quarter. As Abhishek mentioned, that was at average 85%, whereas the in place was around 6.4%. That will have a negative, but overall, our sense is the rates have peaked out, and it should start reducing in due course. Of course, the due course, when that will happen is subject to debate. So that, that's broadly my take on interest.
Sure. So, that's what I wanted to know in terms of refinancing, when it happened and how it's going to impact the NDCF, you know, for next quarter. So thanks for that. And just, you know, lastly, on this 1.1 MSF of demarcation that you applied for, you know, is it kind of speculative in nature, or we are already seeing some kind of, you know, demand there, and hence you are going ahead with this first phase of demarcation? And how should one think about, you know, the balance 0.9 MSF of SEZ space? Because 1.4 MSF, you said, is in Quadron and, you know, Oxygen in Pune and Noida. What about the balance 0.9, you know, in terms of timelines?
Yeah, if you look at the 1.1 MSF which you have applied for right now, Pritesh, I think substantial portion, almost 0.6 MSF, is in Manyata. While, to be very frank, none of the 1.1 MSF is backed up by any existing tenant. But in Manyata we've gone aggressive and tried to demarket almost all of the vacant SEZ spaces except one recently completed tower. So that has been our strategy in relation to Manyata. And in other cities, what we have done is we have kind of picked and chosen a few floors as a test case to start off with.
Just to give you a sense why we've done that is, if you look at Pune, Embassy TechZone Hudson Ganges, where we denotified the 900,000 sq ft new building, while overall Pune market demand has been low, but in Hudson Ganges we've been able to already reach almost 70% occupancy, and there is good, good traction, I would say, for non-SEZ. So based on that, we have picked up a few floors in the other properties, and our strategy around those will be to apply for demarcation more on a back-to-back, because our sense is, at least based on discussions so far with SEZ authorities, Ministry of Commerce, the process for demarcation is expected to be much simpler, less time-consuming, and hence, I think we can... phase two, we can do more on a back-to-back basis. That's broadly the way we are thinking.
Sure. Sure. That's, that's very helpful. That's it from my side, and all the best.
Thank you.
Thank you. Next question is from the line of Mohit Agrawal from India Infoline. Please go ahead.
Yeah, thanks for the opportunity, and congratulations for a great leasing in the quarter. You know, staying with the demarcation question, so do we know, and you know, what kind of CapEx and what all needs to be paid back for demarcation now that we have applied for 1.1 billion sq ft? And what is the kind of ROE that we expect to generate? So is the incremental SD that we expect from new leasing sufficient to cover the CapEx? So some color on that, you know, how is the ROI in the, in the new, in the new set?
Sure, Mohit. I'll ask Abhishek to take this.
Hi, Mohit. On the demarcation CapEx, the way we understand is that we will have to give away the GST that we saved, which is basically 18% of the cost of construction, with some depreciation on the plant and machinery and the furniture and fixtures. For the 1 million, 1.1 million that we are demarcating now, we expect the cost to be in the range of INR 300-INR 400 per sq ft. If you talk about ROI, actually, for Bangalore assets, this price actually is around three to six months of rentals, which will be covered by the SD. For non-Bangalore parks, which is Noida and Pune, it should be around nine to 10 months of SD. Sorry, nine to 10 months of rentals. It will either be covered by SD or some debt drawdowns.
Okay. And this includes, Abhishek, this includes, you know, everything in terms of the common area, charges and all also that have to be paid? So this includes everything, right?
Yes. Just not the GST.
Okay. Okay. Understood. Thanks. Secondly, you know, on the you mentioned in your presentation on the pipeline demand of 1.5 MSF. So could you give some color on, you know, where this demand is coming from in terms of like, is it largely global capitals? And for which assets is this demand for? And second part to that question is, you know, Aravind, you mentioned in your opening remarks that you are seeing some early signs of recovery in Pune and Noida. So if you could give some color, because, you know, our understanding has been that even for non-SEZ, the demand has been weak in those assets. So some color on that will be great.
So, sorry. In terms of the 1.5 million pipeline, honestly, it's the two main cities where we have demand are Bangalore and Pune, and a little bit in Noida. So that's broadly the demand, and most of the demand are for our existing spaces, not pre-leasing. So that's number one. Number two, in relation to Pune and Noida, some sense over there, while we have Pune, all three assets in Hinjawadi, the TechZone and Qubix, Qubix assets are in phase one of Hinjawadi, and generally the demand for non-SEZ space in these two assets are reasonably okay, versus Quadron, which is in phase two, where I would say the demand is not that great. So that's a sense of Pune.
In relation to Noida, it's a similar story, where we have Galaxy, where there were quite a few large exits in the early part of this year. That's in Sector 62, closer to Delhi, better market, fully non-SEZ building. You'll see that we've been able to up the occupancy to around 84% this quarter, and there's some decent pipeline for the balance as well. Versus Oxygen, much further in the expressway, Sector 144, the demand continues to be subdued, so honestly, both SEZ and non-SEZ space.
Okay, perfect. And just one follow-up to my previous question on the first question. So, Aravind, from what I understand that, you know, if suppose if a whole building is vac- a whole vacant building is available, do you still have an option of applying under the old rules? Or are, with the new notification, the old rules, the option of applying under that goes away. What I'm trying to understand is that if you have a fully vacant building, will you stick to the old rules, and is that better to apply with? Or, or you will for all the new de-notification, you have to go with the new rules?
Honestly, both are independent, and both of them continue. The denotification is a denotification of land itself, so that becomes a non-SEZ land, and you just move on as non-SEZ. If the demarcation is just a floor-by-floor demarcation, where the land is not denotified. So they are two different concepts, and both of them continue.
Okay, perfect. That's absolutely clear. That's all from my side. Thank you.
Thank you. Next question is from the line of Parvez Qazi from Nuvama Group. Please go ahead.
Hi, good afternoon. Congratulations for the great set of performance on the leasing side. So my question is again regarding your Pune and Noida assets. We have seen some amount of pickup this quarter in occupancy, largely due to non-IT/ITS occupancy. So in your sense, based on your discussion with occupiers in this segment, do you see any movement, any green shoots there? Or do you think, for CY 2024, largely, IT/ITS demand will continue to be slightly weakish, right? Thanks.
Yeah, Parvez. I would, I would call it our guesstimate as of now for calendar year 2024 is IT/ITES will continue to be subdued or sluggish for this calendar year. While there have been a lot of growth in that sector prior to, let's say, last six, nine months, in terms of headcount, they've only given up space in the last three years, not given up any space. But given where we are in terms of their overall business, we as management believe that it might be some time before they come back into the market. So the demand is largely going to be from non-IT/ITES. Having said that, you know, one-off project related deals still come to us in these respective cities.
What I mean by that is, let's say, an IT/ITES company which has won a big, let's say, deal, you know, which has to mobilize resources physically, these guys are taking up some space, but that's far in future.
Got it. Thanks, and all the best for future.
Thank you.
Thank you. Next question is from Vishal Parekh, from Kotak Alternate Asset Managers. Please go ahead.
On the timeline, timeline state for the projects, I think I took the feedback on the shift in timelines and costs. I think hotels also, some timelines have moved. Just want to check any specific thoughts around it?
Sure. To the best of my knowledge, we've not really moved the ETV hotel timeline. I mean, of course, there is something which is still early stages in terms of construction. If there is any change in timelines, we will come back to you. But as of now, we have continued to-
Sir, sorry, it's sounding a little distant.
Is it better?
Yes, sir.
Yeah. I'm just saying as of now, we've stuck to the earlier timeline on hotel, but it's still early days in terms of hotel construction.
Sure, sure. Other questions answered. Thank you so much.
Thank you.
Thank you. The next question is from the line of Satinder Singh Bedi, from Eon Infotech Investments. Please go ahead.
Yeah. Thanks for the opportunity, and congratulations for great leasing numbers. It seems that the great performance on leasing and also the increase in revenues have been held back by the increase in interest costs, and the working capital changes. So on the interest costs, what is the occupancy in M3 Block A and the Oxygen Tower One? Because now they seem to be in a position where they are loading or will be loading the cost fully, but the occupancy is not known. So what is the occupancy on these two, please?
Yeah, sure. On M3, the current occupancy is 45%, and we have some basic pipeline to the balance. On Tower One, as of now, it's nil occupancy and expected to be completed this quarter, Satinder. That is Q4.
Okay. Okay, okay. This quarter. Okay, fine. Okay, and the next is on this, we have this renewals coming up for Qubix in 4Q FY 2024, which is sizable, about 347K. And then in the next financial year, TechZone, which is again about 420K. So aren't there any visibility on the visibility, re-visibility of this?
Sure, Satinder. On Qubix, as I mentioned in my initial remarks, this is an additional exit which has come from a large IT services player during the quarter, and they've exited post the quarter. So, that, that, it's an exit which has happened post the quarter. In terms of the expiries for next year, I would suggest we will give you better color in along with our Q4 results and next year guidance, Satinder, because they are still moving pieces. I think we'll be in a better position to comment on FY 2025 expiries in the next three months.
Fine. Thanks. And Abhishek, on the working capital changes, so could you amplify as to what explains non-availability of support? While part of it has been answered because the other expectation was that because of the strong leasing, the security deposits might have supported, but since they have not come in, so probably that explains part of it, okay. But so a good increase on top line has not been supported by the subsequent line items. So especially on working capital, there's a large move, so if you could amplify that, please.
Yeah. So Satinder, what has actually happened is, as you rightly said, that the SDs have not come in, but instead of that, the expiries that we have, for that, we had to repay the SDs, which was already there. So this time there's a hit of a, net hit of around INR 45 crore for this quarter on that. And also, the property tax for the half year was paid during this quarter, as per the regulatory requirement. So there is an impact of another INR 15-16 crore because of the property tax of half year getting paid in Q3. So these were the major movers.
Okay. Okay, thanks. And in Block 6, in this quarter, the timeline for completion has been shifted from December 2025 to 2026. So, any reasons for the same, Ritwik or Aravind?
Yeah, Satinder, I think we just delayed the project a bit due to certain approval related matters. And we also had to do certain, you know, pre-site works of shifting some of the existing DB sets, et cetera, which were there, which took extra time than what we anticipated, because of which there is a delay in that project, and hence we shifted the timeline.
Okay. Fine, thanks. I've got a few questions and come back to you in a little. Thank you very much. Thank you.
Thank you. Next question is from the line of Abhinav Sinha from Jefferies India. Please go ahead.
Hey, hi. Congratulations on strong leasing, and a couple of questions. So firstly, on the portfolio occupancy, you guys had guided for, I think, 85% for the portfolio and 88% on same store for 4Q. So does it still stand?
Yeah, Abhinav. I think based on current trends, what we are seeing in the pipeline, we believe we should be able to meet that guidance.
This will include the 0.7 million building, which is getting added to the portfolio?
Yes, that's correct.
Okay, so you are expecting another pretty strong quarter, right? I mean, close to 2 MSF, 1.5 MSF-2 MSF for leasing.
Yeah, I'll refrain from giving a number, but I think w e're still on track for that, guidance.
Okay, excellent. Secondly, on, so you were alluding to the inorganic growth plans now. So I just wanted to check, I mean, this is, within the ROFO pipeline that we have or outside it? And, within that, how comfortable, you will be on taking the gearing up for those acquisitions?
Thanks, Abhinav. Ritwik was feeling a little left out. Thanks for this.
No, thanks. What an opportunity. Thanks. Thanks. Hey, Abhinav. Yeah, look, I think, I think ROFO, for us, is, is something that we've always, you know, had as an option. And with that, I think front and center there is, Chennai, just as a matter of form, we, we had sort of looked at it. But, but again, I think we reiterate that, you know, anything that we buy has to be funded, right? Given that we push out cash in the form of distributions. And frankly, the market, just has not been there for us, in this interest rate environment. And this is not just, you know, applicable to us. I think globally as well, if you just look at sort of, our REITs have been impacted.
So I think raising debt for us has tended to be more of a sort of binary exercise. We wanted to make sure we got the refi done. We wanted to make sure that there wasn't sort of obviously pressure or any covenants, and I think the team's done a fabulous job of that. But I think now, in this environment, given that we are seeing sort of a slight rerating, sort of looking at the way the stock's been moving, a couple of the overhangs have obviously disappeared. The first one was leasing coming back, driven by GCCs. The second is obviously you've had sort of, you know, the sponsor stake overhangs have obviously disappeared as well, and that's reflected in the stock price.
What we want to do is actually have maybe more of a sort of a bigger plan to think about inorganic growth, right? There is clearly the market's improving, number one, from a leasing perspective, driven by the GCC demand. And so if there is a way we can think about, you know, injecting sort of a quality asset into the portfolio with the right mix of equity or debt, we'll do that. At this point in time, to lever up or take on more debt, I can't say what the optimal thing is. But most importantly, number one, the deal has to be accretive. Number two, it has to, I mean, just make strategic sense for us to do it.
And number three, we have to just fund it in a way that doesn't, you know, pressure either the balance sheet or result in heavy dilution. But yeah, it's in this environment. I think, you know, over the last sort of five years, we've been through so much volatility, and then we've been through so many pressures. I think for the first time, you know, we feel really good about sort of the runway ahead of us. If you just look at all sort of the macro and people talking about, you know, what's happening in India and companies coming in, and 78% of our leasing goes to GCCs, and the pipeline is also sort of majority, the 1.5 is also GCC-led. So I think if that sort of filters into the acquisitions, we'll certainly see how we can best do it.
Great. Thanks and all the best to the team.
Thank you.
Thank you. Next question is from the line of Kunal Tayal from Bank of America. Please go ahead.
Great. Thank you. A couple of questions from me. You know, the first one is on your pre-leasing success. So the question then is, you know, the pre-leasing basically is suggesting that some of these deals will go live, year, year and a half from now. What should be the read for that? Is it that, you know, it just so happens that some of these clients are in their stage of India ramp up, and that's why need capacity only, like, 12 months down the line? Or is it a reflection of the fact that if the environment on leasing is starting to improve now, by the time it translates to real demand, it should be this much of a gap in any case? So that's sort of the first question.
Second one is just a follow-up on the acquisition plans. If good assets were to come along, today, can they be NAV accretive at the current, levels of interest, or, or debt levels? Or, you know, would you have to wait for debt levels or cost of borrowing to go down and then you could consider them? Thank you.
Okay, thanks. I think in terms of pre-leasing, it's very, very completely dependent on where the respective company is in terms of their current headcount and the projected ramp up in their headcount. Some of these guys, I think all the three are existing companies, existing global captives . Some of them are relatively new, some of them have been there for some time. They have grown significantly, and they also expect to grow significantly in the next one to two years. Honestly, the factors, all of these, while they enter into these, you know, deals, that's the only thing which I can comment on. Probably Ritwik can answer your second question.
Yeah, I think on the second, it's a little more nuanced than that. If you were to sort of fund an acquisition today, I think it really depends on sort of number one, the size of the acquisition, and number two, just really thinking through sort of, you know, what the pricing expectations of that are, right? At the current interest cost, I think, you know, fundamentally, the biggest issue then for us is obviously making sure that it doesn't break the bank or either from an earnings perspective or actually where, you know, think, thinking about where NAV comes in. Ideally, we would obviously like to do an acquisition, you know, as close to NAV. Just, just thinking about sort of where we'd like to issue equity or just make sure that the funding is obviously done at numbers that, you know, aren't, you know, completely egregious to how we sort of price the deal.
But I think it's really a function of, you know, size and, and pricing expectations from, from any seller. Which, which in this environment, Kunal, just, just so that you're aware, I'm, I'm not completely— We've looked at a lot of stuff, you know, over the last sort of year, year and a half, or even, even beyond. I think, you know, but on, on, on the sell side, the, the expectations are still very, very tight. So and I think with that, it, it becomes difficult for us to think about, you know, NAV accretive deals or, you know, DPU accretive deals, which we are, which we're obviously very, very focused on.
Got it.
Actually, we've actually held off.
Yeah. Right. Okay, just one quick follow-up on the first one. You know, really just trying to get a sense that would you expect any large deals to come along and move at a fast pace from here and close, let's say, something like in the next six, nine months? Or is the typical conversion tenure closer to, like, year, year and a half in any case?
The deals of this size can vary, Kunal. Sometimes they get done in six months, sometimes it takes longer. Really, it's dependent on, you know, where the respective company is. Let me give you a couple of examples. One, if it's not just expansion but also relocation, it could be faster timeline to completion because they want to move fast. If it's more growth option, you know, generally, it could take a little more time because they would want to factor in much longer lead time, you know, in terms of the demand requirements, so that could take a little more time. You know, if the question is: Would you have an instance where you could do another big deal in the next six to nine months? Probably, yes, but it really depends on what the requirement is.
Got it. Okay. Very clear. Thank you.
Thank you very much. Ladies and gentlemen, we'll take that as our last question. On behalf of Embassy REIT, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.