I would now like to introduce you to our host for today's conference call, Ms. Sakshi Garg, Head of Investor Relations for Embassy REIT. Thank you, and you may begin, ma'am.
Thank you. Welcome to the first quarter FY 2025 earnings call for Embassy REIT. Embassy REIT released its financial results for the quarter ended June 30, 2024, a short while back. As is our standard practice, we've placed our financial statements, earnings presentation discussing our performance, and a supplemental 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 to result and is not obliged to update upon any time.
Specifically, any financial guidance and pro forma information that we will provide on this call are management estimates, based on certain assumptions and have not been subjected to any audit review or examination procedures. Precaution 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 Arvind Maiya, our CEO, Abhishek Agrawal, our CFO, and Ritwik Bhattacharjee, our CIO. Start off with brief remarks on our business and financial performance, and then open the floor to questions. Over to you, Arvind.
Thank you, Sakshi.
Thank you all for joining us today to discuss our first quarter results.
Happy to report on another successful quarter to start off the financial year. Quarter with a total of 1.9 million sq ft and completed the acquisition of a 5 million sq ft Embassy Splendid TechZone asset in Chennai. We also started a new redevelopment project in Embassy Manyata aimed at increasing the leasable area from 0.3 million sq ft to 0.9 million sq ft, with an expected yield on cost of around 20%. Most importantly, I'm delighted to announce our Q1 distributions of INR 5.6 per unit, which implies a DPU growth of 7% quarter-on-quarter and 4% year-over-year. As I highlighted in a previous earnings call, FY 2025 is expected to be a year of growth for our business on all fronts: our scale, occupancy, NOI, and DPU.
We are on track to deliver that growth to our investor base, which has crossed the 1 lakh mark recently. On another positive note, the recent budget announcement has reduced the holding period for long-term capital gains on REIT units from 36 months to 12 months. This puts us at par with listed equity shares and should further enhance the attractiveness of the REIT product amongst investors. A bit on the macro front, Indian office market continues to do well, and recorded a strong first half with 31 million sq ft absorption in the top seven cities, a 26% jump year-over-year. Almost all independent property consultants are now expecting calendar year 2024 to create a new absorption record, beating the all-time high of 61 million sq ft in 2019.
Among cities, Bangalore and Chennai stand out, accounting for over 40% of H1 absorption and over 50% of active RFPs in the market. With 100% of our developments coming up in these two markets, we are very well positioned. The key demand driver continues to be global corporates who are setting up or expanding their GCCs in India. In the past three years, almost 70% of our leasing has been to GCC clients. Our GCC exposure continues to rise, with 87 such companies occupying close to 20 million sq ft total area, forming part of a 250+ tenant roster. Moving to our Q1 leasing performance, we leased 1.9 million sq ft across 22 deals, including 0.7 million sq ft of new leases and 0.6 million sq ft of renewals, at 11% combined spreads.
This included early renewal of two leases totaling 0.2 million sq ft, which were due to expire in FY 2026. In addition, we secured another large pre-commitment of 0.6 million sq ft, along with an expansion option for 0.3 million sq ft. This pre-lease is with one of our largest GCC tenants and will construct a build-to-suit tower by redeveloping Block B in Embassy Manyata. With an expected yield on cost of around 20% on this redevelopment.
Sir, we are losing your audio in between.
Okay. We have once again unlocked additional value at our prime asset, Embassy Manyata. At Embassy Manyata, in the last few years, we've also initiated 5 refurbishment projects post-large tenant exits spanning 2.2 million sq ft area. Of this, we've already backfilled 1.3 million sq ft at 75% spreads. These refurbishments have been instrumental in adding value to the asset and have enhanced the in-place rents of Manyata by 10% just in the last 12 months. In terms of lease expiries, which are front-loaded this year, we noted 0.9 million sq ft of tenant exits during Q1. We have received an exit notice for an additional 0.4 million sq ft from one of our IT services tenants in Pune, which we had indicated as a potential risk last quarter. We ended the quarter with an occupancy of 85% by area and 88% by value.
Our Mumbai portfolio is already at 99% occupancy, Chennai at 95%, and Bangalore at almost 90%. And three of our properties are now 100% occupied. Currently, we have a 5.8 million sq ft vacancy in our portfolio, with 2.5 million sq ft area in Bangalore and 1.3 in Noida. I want to highlight that we have a strong traction for this 3.8 million sq ft vacancy across Bangalore and Noida, with a good pipeline for Manyata, TechVillage, and Oxygen. On the SEZ front, during Q1, we successfully denotified the 0.8 million sq ft Block F2 and the under development 1.4 million sq ft Block D1 and Block D2 blocks in Embassy Manyata. With this, we have denotified a total of 3.4 million sq ft area since April 2023, and have already leased up over 70% of this. Another 0.3 million sq ft block in Pune is under the denotification process.
In addition, we have successfully demarcated another 0.1 million sq ft in Noida this quarter to non-processing area under the new guidelines, taking the total demarcated area to 0.8 million sq ft. Of this, over 40% is already leased up, and we have a strong pipeline for the remainder. Another 1 million sq ft area in Bangalore is under the demarcation process, and we expect to complete this by next month. Moving to our development portfolio, our current development pipeline now totals 8.6 million sq ft with a CapEx outlay of INR 4,600 crore. This is expected to result in incremental stabilized NOI of around INR 1,000 crore, implying around 20% yield on cost.
If you look at the delivery scheduled till end of FY 2026, six blocks spanning 5.8 million sq ft will come up in Bangalore and Chennai. We've already pre-leased around 70% of this area, including expansion options.
This 15% area addition to the existing 37.7 million sq ft of completed space gives good visibility of the REIT's growth runway in the midterm. Lastly, on our recent acquisition, we have completed the acquisition of the 5 million sq ft Embassy Splendid TechZone asset in Chennai and fully integrated the asset from June 24, 2024. With that, we are now a 51 million sq ft office portfolio and have strong embedded growth levers, giving us a clear pathway to continue delivering DPU growth. I will now hand it over to Abhishek to present the financial updates.
Thank you, Arvind. Let me take you through the financial highlights for Q1. Our revenue from operations stood at INR 934 crores, up 2% year-on-year, and NOI at INR 758 crores, up 3% year-on-year. If we look at the commercial office segment, both revenue and NOI were up 4% year-on-year. The increase was mainly driven by new lease-ups at high re-leasing spreads and contracted rent escalations. For our solar segment, which represents less than 5% of our top line, the NOI dropped by 34% year-on-year, mainly due to a seasonal reduction in solar unit generation, as well as a reduction in the government tariffs. On the other hand, our hotel segment NOI grew by 16% year-on-year due to an occupancy uptick of 800 basis points to 61%, as well as an ADR growth of 5% year-on-year.
We declared distributions of INR 531 crores or INR 5.6 per unit for the quarter, representing an increase of 4% year-on-year and 7% quarter-on-quarter. This increase was mainly driven by an uptick in our NOI, as well as positive working capital changes, which was partially offset by an increase in our interest costs. In the quarter, we raised around INR 1,450 crores of debt at an average rate of 8.06%. This debt was primarily used to refinance a commercial paper, as well as other high-cost debt at the recently acquired ESTZ asset in Chennai. The debt raise was done through multiple term loans at SPV level, tapping various new banks and hence expanding our debt investor base even further.
Our net debt book now totals around INR 18,000 crores, implying a 32% leverage ratio and a 7.8% in-place cost, and our balance sheet remains solid with dual AAA stable credit ratings. Lastly, on the forward financial outlook, we remain on track with the FY 2025 guidance that we had provided last quarter. We continue to expect our NOI to be in the range of INR 3,215-INR 3,345 crores and DPU to be in the range of INR 22.4-INR 23.1 per unit. At midpoint, this guidance implies a 10% growth in NOI and a 7% growth in DPU on a year-on-year basis. I will now go through some of the key assumptions on which our guidance is based. We have updated our annual leasing guidance from 5.4 million sq ft to 5.6 million sq ft, post-factoring the 0.2 million sq ft early renewals signed in Q1.
This comprises 3.8 million sq ft of new lease-up, including new building deliveries planned for the year, 1 million sq ft of pre-commitments, and 0.8 million sq ft of renewals. We now have 2.7 million sq ft of lease expiries due for the year, implying 1.9 million sq ft of total exits. With that, we are updating our March 2025 occupancy guidance to 88% by area or 91% by value. We expect an 18%-20% increase in our interest costs on a full-year basis. We remain on track to achieve our scheduled rent escalations and the NOI guidance for our hotels and solar parks that we provided last quarter. We have delivered on our distribution guidance every year, and we remain focused on delivering this year's growth numbers to our unit owners. I will now hand it back to Arvind.
On last update, Ritwik has informed us of his decision to leave our organization at the end of September to pursue other interests. Ritwik joined the REIT in 2018 prior to its listing and has been instrumental in Embassy REIT's success, as well as the growth of the REIT asset class in India over the last six years. He's been a guide and mentor to many within the organization and well-respected by all our stakeholders. On a personal note, he's been a great friend and a colleague to me over the years. We thank Ritwik for everything he has done for the REIT and will definitely miss his wisdom and sense of humor. Ritwik, would you like to say a few words?
Thanks, Arvind. I'll keep it brief. It's been six wonderful years, and I'm immensely proud to have worked with this fantastic team at Embassy REIT. I'd especially like to thank Jitu, Aditya, Blackstone, the board, Arvind, the entire management team, and every single member of this organization. It's been a real privilege. I believe the REIT structure has enormous potential in India, and thanks to all the unit holders, the bondholders, and other stakeholders for your continued support. Lastly, I've built some fabulous friendships with a lot of you on this call, and I look forward to many more chats in the future, so I'll definitely be in touch. Thanks a lot. Let's move to Q&A, please.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone phone. 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. We would also request participants to restrict their questions to two per participant. If you have a follow-up question, please rejoin the queue. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Puneet Gulati from HSBC. Please go ahead.
Yeah, thank you so much, and good evening, and congrats on improving DPUs. My first question is with respect to your guidance of 91% occupancy by value. Where do you qualify your current occupancy in terms of value?
So, Puneet, do you want to finish your questions?
Yeah, and the second is if you can give more color on what's happening with some of the expiries essentially in quarter one and also Manyata.
Sure. I think in just the first question, easy answer, right now we are 85% by area and 88% by value. That's a number which goes up to around 91% by guidance end of the year. In terms of expiries, quarter on, we kind of called it out last quarter that we see a potential risk with one of our tenants over there. Broadly in line with that, we received a notice from them for about 0.36 million or 0.4 million sq ft to leave by later part of this calendar year. It's been a tough asset for us. I mean, we could dwell a bit more on that in due course. Manyata, again, the exits in first quarter are a bit more front-loaded, but largely in line with what we put out last quarter.
Last quarter, we had said that there is a potential exit of around 1.6. Of the 1.6, 0.9 exits are in line. There's no further increase in that as of now, number one. Number two, having said that, yes, a large portion of these 0.9 exits are from the Manyata asset because of which the occupancy has dipped to 83%, and we believe that it's a temporary dip. If you look in the last two years, Puneet, what we have done is, yes, some of the older blocks, as they've reached the ultimate expiry, some of them are exited. We've used that opportunity to refurbish buildings. We actually refurbished three buildings in the last, I think, one and a half to two years. All of them have reached close to 100% occupancy post-refurbishment, with rentals increasing anywhere from 2.5x-3x.
Similarly, we're refurbishing now two blocks pursuant to these exits, and we believe we'll have similar results in terms of both occupancy and rental growth. And when you look at it collectively for Manyata as an asset, besides the 12.3 million sq ft which is completed, we have 3.7 million under construction. Of the 3.7 under construction, literally, I mean, 92% is pre-leased. We just have very, very little space left to lease. So when you look at it collectively, as a park, I would say that it is doing phenomenally well. The dip in occupancy, what we've seen this quarter, is temporary or transitional in nature.
These two blocks, when you refurbish, where does the area move?
Yeah, so the two redevelopments we are doing, refurbishment, but it doesn't increase the area.
Okay.
Okay. These two blocks which we change the look and feel. But redevelopment, we are doing two now in Manyata. One is the D1, D2 block, which we started last year, which increased from 0.4 million existing. We broke it down. Now what we are developing is 1.4 million. And the new block which we spoke about, current is 0.3. That goes up to 0.9.
This is just Block L4?
No, this is Block B or Magnolia.
Okay. So B, where you have ANZ?
Not really. We'll probably not refer to a specific tenant on this call.
Okay. Understood. That's it. Thank you so much. All the best.
Thank you. The next question is from the line of Kunal Tayal from Bank of America. Please go ahead.
Great. Thank you. My first question is that the acquisition seems to be debt financed for now. Are you largely good with that, or is the plan to sort of reduce it by raising equity still on? So that's the first one. Second, Abhishek, you were mentioning that the total interest expense will go up by about 18%-20% this year. Any sort of early views as to some of that increase? Does it carry forward into FY 2026, or is it really that bulk of the increase sort of comes through and then stabilizes within the year? And then the third one is on the distribution guidance. Given that in Q1, you're starting off at 4% year-over-year, and then between what you've laid out, that occupancy goes up from 85%-88%.
Is it any pretty easy to see how this goes up towards, let's say, the low half of the range or towards the midpoint? I just wanted to understand what could it take to still strike the upper end of the guidance from current levels? Thank you.
Thank you. I'll allow Ritwik to take the first question.
Yeah, look, just on that acquisition, yeah, very bluntly, we were comfortable doing it with debt. I think the broader picture, when we went out there with the equity raise, clearly there was some discomfort in the market. But I don't think that really changes our overall strategy of at some point in time thinking about using our units as currency. We've got, I mean, I think if you just look around, markets tend to be volatile, and I think we don't want to sort of be short-sighted in the view that at some point in time, we might be out there if the price is there to go out there and think about tapping the markets to delever or have capital for a rainy day. That's effectively how we think about acquisitions and capital raising.
It's always a, I mean, effectively still a very sort of new instrument. I think there's always been sort of a lot of conversations around from the market about how we should actually raise funding, but ultimately, we'll also sort of keep that at our discretion and making sure that we do what's right for the REIT.
And Abhishek, you'll do the second one?
Yeah. So Kunal, on the interest expenses, 18%-20% increase is because of, one, the capitalization deliveries that we have done last year, deliveries that we will do this year, refinancing impact, increasing the interest cost because of refinancing, and also because of the debt that we have taken to fund the acquisition. Now, how much will roll forward to 2026? Two points. One, it will depend on the interest rate trajectory. And the second is, I mean, it's too early.
What we will do is, at the start of the next year, when we come back with the guidance, that time we will give the guidance of how much we'll roll forward to next year.
And on your last question, Kunal, I mean, I'll just give you a very hypothetical theoretical answer. I mean, what can move to the higher end of the range? It is early lease-up, decrease in interest rates, early collection of rentals. I mean, the basic business levers, if you're able to front-end a bit, that could lead to the numbers being in the upper end of the range. That is, if anything gets delayed, it could be in the lower end of the range. That's broadly as simple as that.
Okay. All right. And all the best, Ritwik.
Thank you.
Thank you.
Thank you. The next question is from the line of Mohit Agrawal from IIFL. Please go ahead.
Yeah, thanks. Thanks for the opportunity. Thanks, Ritwik. Wish you the best for the future. Look forward to being in touch. So my question is, Arvind, you mentioned in one of your remarks that Quadron has been a tough asset. Now, there was a media article a week back saying that the company is looking to sell this asset. So any comments on that that you want to mention? Are you touching upon the asset performance?
Yeah. You want to finish your question, Mohit? Or that's about it?
Yeah. I think the second question is also on a broader question. I think about a quarter back, you had engaged with the government to kind of classify REITs into. And when I say you, as in the entire REIT community, had engaged with the government to classify REITs as an equity asset class. Where are those discussions? And has there been any discussions or feedback from the regulators? Yeah, those are my questions.
Sure. I guess on Quadron, what you saw in the press, I would largely say there are market rumors. We'll stay away from commenting on it. The only comment I would say is, overall, our philosophy has not changed. We are long-term owners of assets. But having said that, of course, we're open to recycling assets if we see better value in that. So we'll keep all options open. That's all I would like to say at this stage. In terms of equity classification, discussions are on. At a big picture level, I think SEBI is open to this idea now. This is reaching conversations. They are evaluating at highest levels as to see what needs to be done to classify this as equity. But we'll continue to stay engaged with them as IRA to see.
One of this whole change from 36 to 12, I would also say, is one of the levers for that. A few other things need to be put in place. Big picture, I would say government is open to this idea, but it's still under discussion.
Okay. Perfect. That's all. Thanks.
Thank you.
Thank you. The next question is from the line of Piyush Mittal from Kotak Alternate Asset Managers Limited. Please go ahead.
Hi. I have two questions. Firstly, on the acquisition.
Sorry to interrupt. Mr. Mittal, you're sounding a lot distant. So if you can use the handset mode, please.
Yeah. Hello. Is this better?
Yes, sir. Much better. Please go ahead.
Yeah. So I have two questions. Firstly, on the acquisition, now that we aren't getting any rental support, what would the revised cap rate for that acquisition look like? That's number one. And the second one is, I read a footnote about Embassy Whitefield, which said that a letter of invitation was received, which we don't seem to be evaluating. So if you could just throw some light on that.
Yeah. So honestly, cap rate, I'll not get into the details of the number because, in short, all I would like to say is we've stuck to the numbers what was disclosed in the deck. Pre or rather without rental support, there was a number of INR 1,185 crore, which is close to INR 80 crore reduction in the overall value. That is the number at which we bought. That's number one. In relation to the second part, yes, we've received a ROFO, but as disclosed in the supplemental deck, necessary full information was not provided, and hence we've not been able to respond conclusively on the ROFO.
So are we planning on, I mean, say subsequently, if we were to receive that information, are we planning on evaluating it further, or that's been put on hold for now?
Like any other ROFO asset, we'll continue to evaluate all of them. Based on all available data, once we get it, we will continue to pursue or not pursue.
All right. Great. Thank you.
Thank you.
Thank you. A reminder to all the participants, you may press star and one to ask a question. The next question is from the line of Satinder Singh Bedi from Aeon Investech Limited. Please go ahead.
Yeah. Good evening. Thanks for the opportunity. And congratulations on a very healthy bump up in the distributions. So I've got one question of Arvind and then two or three from Abhishek. So Arvind, any outlook on Oxygen, TechZone, Qubix? How do you see them moving, let's say, by 31st March 2025? Because they seem to be still, in that sense, taking time. And any potential exits that you see till March 2025?
Sure. Let me take that, and then you can give all the questions to Abhishek. I mean, in terms of Oxygen, Noida, as I mentioned, the market is looking up. It's been pretty healthy over the last 3-4 months. You will see that the occupancy has gone up marginally. We've also demarcated one full tower and a floor, and we're seeing traction on all these. 3 of the blocks are relatively new. So I would say, and overall, Galaxy in Noida has already reached 99%. So I see the occupancy moving up over the next 3 quarters. That's one. Second, in Pune, overall, Hinjewadi as a market has been slow for various reasons, as we've said even before. But Quadron and Qubix are relatively okay because they are in phase one of Hinjewadi. And both these occupancies range somewhere from early 70s to mid 70s.
There's a little bit of traction, I think, if you look at both these assets put together. We have around 0.3 million sq ft of non-SEZ space and another building, 0.3 million with denotifying, which means around 0.6 million sq ft of existing supply we have, which is non-SEZ. So from our point of view, I would say our focus is to see how we can lease up the space over the next three quarters. So that's the big picture comment on these three assets. But I'll hand it back to you, Satinder, on your questions on the numbers.
Yeah. Okay. Thanks. Abhishek, this time, the distribution components, so they've been very tax efficient. The dividend has seen a big bump up, and the interest cost has come down. So do you see this as the trend going forward, or is this more of a one-off?
Satinder, you want to finish all your questions or Abhishek can give all answers together?
Okay. Yeah. One. Second one's on the dividends and distributions from EGL. They've dipped by about 22% despite a 2% increase in revenue. So anything to read into this? That would be second. Third is the working capital changes of INR 374 million so far. So what components make up this 1,374? Abhishek?
Satinder, on the first question, distribution split, so what happened is basically the amount of dividend and the amount of interest, actually, the amount of dividend depends on the profitability of each of these SPVs, which is dependent on the interest cost and the depreciation. Because of capitalization, the depreciation is also increasing, and the interest also is increasing. So very difficult to say what will be the trend going forward. But what we say, this quarter, the dividend increased because of one of the SPVs. It started with a negative result. Last year, it became positive result. So that could be distributed as dividend in this quarter. If you could see the trend, I think Q4 of last year will be what will be what we will maintain in the next one year.
On the second question, total distribution from EGL, I think this number of INR 63-64 crore per quarter is a number which we think is a stabilized number, at least quarter-on-quarter for this year. The reason for dip, if I have to say, depends on a lot of factors. One is which basically determines the cash availability with the entity, the payment of property tax, and all of those. So we believe that the INR 63-64 crore per quarter will be the number for the next one year. On the working capital, like we mentioned last year, that there were a lot of leases and pre-leases that we did last year, but we did not receive the security deposit. So we have not started receiving the security deposit. The biggest component for this quarter's working capital is security deposit itself.
Okay. Okay. And what would be this out of 374?
So actually, security deposit is INR 50 crore for this quarter, offset by some payments and lower collection. So net net INR 40 crore working capital.
Okay. Okay. Thanks a lot. All the best. If you have any other questions, I'll come back. Thank you.
Thank you.
Thank you. Thank you. Ladies and gentlemen, as there are no further questions on behalf of Embassy REIT, that concludes this conference.