Good evening, everyone. A very warm welcome to all for Embassy REIT's second 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. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Miss Sakshi Garg, Investor Relations Manager for Embassy REIT. Ma'am, you may begin.
Thank you. Welcome to the Q2 FY 2024 earnings call for Embassy REIT. Embassy REIT released its financial results for the quarter and half year ended September 30, 2023, a short while back. As is our standard practice, we have placed our financial statements, earnings presentation discussing our performance, and a supplemental financial and operating data book in the investors 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 Q2 results. To start with the key highlights for the quarter, we achieved our highest ever quarterly leasing of 2 million sq ft, delivered a new office tower of 1 million sq ft in Bangalore, and announced distributions of INR 5.53 per unit. Although our portfolio occupancy saw a temporary dip due to an anticipated large IT services exit, we have a strong pipeline to backfill the space. We remain on track with our FY 2024 financial guidance, and taking into account a large early renewal of space at our Embassy GolfLinks Business Park, we are raising our leasing guidance from 6 million sq ft to 6.5 million sq ft for the full year.
To start on the macro front, global companies continue to flock to India on the back of our skilled Indian talent available at scale. In the first half of calendar year 2023, 41 new Global Capital Centers were set up in India, including 18 new entrants. Considering this buoyancy in demand for premium Indian office spaces, independent property consultants have raised their current year forecast for India office absorption. We are also seeing an increase in the active requests for proposals in the market, which have gone up from 8 million sq ft as of July 2023 to 20 million sq ft today. Notably, around 60% of these open space requirements are for Bangalore, our core market. Additionally, return to office continues to pick up pace in India, with multiple large employers mandating employees to work out of offices.
With this backdrop, let me now update you on our Q2 leasing performance. We leased a record 2 million sq ft across 25 deals and expanded our occupier base to 240. This included 1.2 million sq ft of new leases and 0.7 million sq ft of renewals at 56% rent reversions. The renewals included a 0.6 million sq ft of lease expiry due in FY 2025, for which renewal terms were agreed with IBM over a year in advance. Further, for our existing tenant, ANZ, exercised their hard option for an additional 133,000 sq ft in the under development M3 Block B in Bangalore, and with this, the building is now fully pre-leased. Continuing the trend from the last quarters, the leasing demand was primarily driven by global capitals, contributing to over 70% of our leasing.
In terms of sectors, technology, BFSI, and healthcare firms led the demand. Interestingly, 7 deals over 100,000 sq ft, including one deal over 500,000 sq ft, were signed by us this quarter. This clearly indicates that global corporates are getting increasingly confident of their business and headcount growth in India, and hence accelerating their medium-term real estate planning. We noted leasing traction across our assets and signed deals for nine of our properties. With this, 50% of our properties are now back to 90%+ occupancy levels, and our Embassy 247 Park in Mumbai is 100% occupied. In terms of markets, Bangalore and Mumbai led the demand and contributed over 90% of the total leasing this quarter.
These two cities, which represent our largest market and over 85% of our portfolio value, are near or above 90% occupancy levels now. Overall, our office portfolio is at 83% occupancy by area and 86% by value. On a same-store basis, the occupancy stood at 87%, which excludes the recently delivered M3 Block A, Hudson and Ganges Block in Pune, and the recently vacated F2 building in Embassy Manyata, which is currently under refurbishment. In terms of exits, I want to highlight that of the total 2.3 million sq ft exits in the last six months, we have already backfilled 1 million sq ft of space at market rents. The balance 1.3 million sq ft was primarily exited by two large Indian IT services players at our Embassy Manyata and Galaxy Business Park.
We have a strong pipeline for both these spaces, and are confident of backfilling at least 50% of this space by the end of the financial year, and realizing over 50% mark-to-market on the same. Of the 6.2 million sq ft current vacancy, around 60% is concentrated in Pune and Noida, both of which are significantly lower rental market for us. The vacancies in these two cities will take some time to fill, but it is important to highlight that even full, full stabilization, it will translate to only approximately 5% of our current NOI.
So at the halfway mark for this year, we've already leased 3.1 million sq ft and have a record leasing pipeline of 2.5 million sq ft, which includes 1.3 million sq ft against existing space and 1.2 million sq ft of pre-commitments in our development portfolio. Considering the 0.6 million sq ft of early renewals signed this quarter, we are raising our FY2024 leasing guidance from 6 million sq ft to 6.5 million sq ft. This comprises 4 million sq ft of new leasing, including the new building deliveries planned this year, 1.3 million sq ft of pre-commitments, and the revised 1.2 million sq ft of renewals. Overall, we expect that by the end of the financial year, our full portfolio occupancy will end at around 85%.
This will include the impact of 2.1 million sq ft of buildings being delivered this year, including the 0.7 million sq ft tower in Noida, where the leasing demand is muted. On a same-store basis, we expect occupancy to end at around 88% levels by March 2024. On the SEZ front, we have successfully denotified the 0.4 million sq ft D3 building in Embassy Manyata. We've also applied for denotification from the recently vacated 0.8 million sq ft F2 building in the same park, which is also under refurbishment. We already have a healthy non-SEZ leasing pipeline for this block.
For our partially vacant SEZ buildings, with around 3.5 million sq ft of vacancy, we understand that a likely amendment to the SEZ Act is in advanced discussions at the relevant ministry level, and we continue to be hopeful for a quick resolution on this matter. Moving to our development portfolio. During the quarter, we received occupancy certificate for the 1 million sq ft M3 Block A in Embassy Manyata. In the coming months, we expect to deliver another 1.1 million sq ft across two blocks in Embassy Business Hub and Embassy Oxygen at Bangalore and Noida, respectively. Our current development pipeline now totals 7.1 million sq ft. Of this, around 90% is in Bangalore, the city which continues to lead India's office absorption on the back of sustained interest from global capitals.
Notably, around 25% of our Bangalore development pipeline is already pre-leased, and there is a 1.2 million sq ft advanced pipeline for the remainder. Lastly, on our hotels, our Q2 hotel occupancy stood at 52% and ADRs at over INR 10,000 per room night, resulting in a quarterly EBITDA of INR 37 crore. Overall, our hotels delivered a 24% year-over-year ADR growth, stronger than the market. Particularly, the three Hilton hotels continue to grow strongly and deliver NOI margins close to 50%. Finally, we are delighted to launch the Indian REIT Association last month as a founding member. The association has already started work on key agenda items, such as educating investors, improving liquidity, and collaborating with regulators on enhancing the REIT governance and investor protection norms.
We are confident that together with IRA, we will continue to build understanding and awareness of the REIT product in India and further expand our unitholder register, which has already touched 89,000 this month. Let me now hand over to Abhishek for our financial update.
Thank you, Aravind, and good evening, everyone. Let me take you through the financial updates for the quarter. Revenue from operations grew by 4% year-on-year to INR 889 crores. This was mainly driven by our new lease up at high leasing spreads, contracted rent escalations, and a ramp up in our hotel business, which was partially offset by the impact of exits in our office portfolio. Net operating income grew by 2% year-on-year to INR 719 crores, in line with the increase in our revenue. Net distributable cash flows grew by 1% year-on-year to INR 524 crores. The year-on-year increase in our NOI contributed positively to our distributions, which was primarily offset by an increase in the interest costs.
Further, we have declared Q2 distributions of INR 524 crore or INR 5.53 per unit, making this our 18th quarter of 100% distribution payout. Moving to updates on our balance sheet. During Q2, we successfully raised non-convertible debentures and bank loans totaling INR 1,500 crore at an average rate of 8.1% to refinance our maturing debt. For the new NCD raised, we achieved a competitive 121 basis point spread over GSEC and secured first time participation from pension funds, further diversifying our debt investor base. We have INR 2,600 crore of upcoming debt maturity in Q4 of this financial year. We already have significant interest from multiple banks to refinance the entire upcoming maturity. We will also evaluate the debt capital market at the appropriate time during the next few months.
Considering our diverse debt capital market pool and credit lines available from banks and NBFCs, we are confident of refinancing this debt at industry-leading rates. From next year onwards, our bond maturities are much more evenly spread out. Overall, our balance sheet remains strong, with dual AAA stable credit ratings and in-place average debt cost of 7.4%, one of the lowest in the industry. Next on our independent valuation. As of September 2023, our gross asset value increased by 2% year-on-year to INR 52,651 crores, and our net asset value by 1% to INR 398.86 per unit. This change was mainly driven by an increase in our hotel ADRs, partially offset by a change in the leasing assumptions for our Pune and Noida assets. Lastly, an update on our FY 2024 guidance.
Based on our YTD performance, I am pleased to reconfirm the financial guidance provided last quarter. We continue to expect our NOI to be in the range of INR 2,924 crores-INR 3,136 crores, and our distributions to be in the range of INR 20.5-INR 22 per unit. This guidance is based on certain key assumptions, which includes revised 6.5 million sq ft total leaseup, around 88% same store occupancy by the year-end, a 60% year-on-year increase in the hotel EBITDA, and a 15%-18% year-on-year increase in the total interest expense for the year. Looking beyond FY 2024, I would like to reiterate the key growth levers of our business. First, we expect our occupancy to stabilize at pre-COVID levels of mid-90s in the next few years.
Second, we will continue to lock in the contracted rent escalations of around 15% every 3 years. Next, we expect to realize the current MTM potential of 12% over our remaining WALE of 6.9 years. We have consistently achieved these spreads in the past, around 20% on 2 million sq ft area renewed or released per year on an average since our listing. On the back of our portfolio's premium positioning, our transacted rents have been typically higher than the market rents. Additionally, the 7.1 million sq ft of new supply that we are developing primarily in Bangalore, offers over 20% NOI yield. Compared to the current marginal borrowing cost, ranging from 8%-8.5%, this organic growth is expected to be highly accretive.
Lastly, once the financing markets are conducive, any inorganic growth through accretive acquisitions will provide a further impetus to our distributions. These embedded growth levers sets us well to deliver consistent DPU growth to our unit holders from the next year onwards. With this, let's move to Q&A, please.
Thank you very much. We will now begin with 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. We will also request participants to restrict their questions to two per participant. If you have a follow-up question, we request you to rejoin the queue. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Kunal from Bank of America. Please go ahead. Kunal, you may go ahead with your question.
Sure. Thank you. Good quarter on leasing. My first question is on the expiries, you know, which seem to have gone up for FY24. I'm adjusting for, you know, the earlier renewal which is happening. So just curious as to which segment is this uptick in expiries coming from, and is it typical that if the demand or the leasing environment is improving, that the expiries should also be going up? That's my first question.
Sure, Kunal. You want to finish off your question?
Yes. My you know other question is around you know the MTM potential which you noted has come down to 12% over the period of last few quarters. The question here is: Is that because you know you've been very successful at renewing at market or market plus kind of rates? Is that the driver? Or is it also because of the fact that the market rates itself may no longer be going up at the pace that they were doing so earlier?
Sure, Kunal, thanks for your questions. Just starting off with the expiries for FY 2024, largely the increases are coming from IT service players, IT/ITES service players. The exits predominantly are from that sector. A combination of, you know, continued work from home, as well as the profit pressures which you are seeing in that segment. So that's, you know-
... the key reason for the increase in exits. From a leasing market perspective, Kunal, I think it's as we've said in our results as well as what I spoke a little earlier, overall very positive, especially for the two key markets for us, Bangalore and Mumbai. Occupancy also has gone up, and if you adjust it for the Cognizant space it's vacated in our Manyata Park in Q2, our occupancy has, you know, Bangalore as a whole is also about 90%, Mumbai is at 96%. Record 2 million sq ft lease of quarter, 2.5 million sq ft of pipeline as we speak. Overall, RFP is also in the market, much higher. So leasing market is much better.
I think it's a transitory period for us, where the occupancy is low, but we will see that going up, as we mentioned, even in our year-end guidance. So that's my view on the leasing market. The last question, I, I think you kind of answered it yourself. It's largely because of both the reasons. One, our ability to do renewals, re-leasing at or above market rate, number one. Number two, other than probably Bangalore and now a little bit in Mumbai, the market rents have not necessarily gone up to the same extent the way it used to go pre-COVID. So a combination of both factors, you see the current MTM spread available, at a much lower number than what it was before.
Understood. And just one quick follow-up. You know, the pipeline value of 2.5 million again is quite strong. Would you still characterize it as mainly coming from GCCs, or is the strength in that sense spreading to other segments as well?
Honest answer is largely GCCs. And it's just to give a little bit more flavor, it's a combination of large RFPs which has, you know, we've not seen in the past. Number two, it's also regular lease ups for existing spaces. But I think one important number to highlight over here is almost 50% of those RFPs are new tenants for us, looking at growth, and additional 40% of these RFPs are existing tenants, but looking for more space. So when you look at it together, large part of it is growth. So that's, I think, overall very positive.
Got it. All right, thank you so much.
Thank you.
Thank you. The next question is from the line of Murtuza Arsiwalla from Kotak Securities. Please go ahead.
Yeah, hi, sir. Just wanted to check, you know, while the leasing activity has been good, obviously the exits have been bothersome. Even this quarter, you've had this 1.6, some of it was anticipated, some may have come in as a surprise. Any sort of, you know, any trend that you can pick up in terms of the exit? Is it a particular client segment? Is it, you know, in terms of size, whether they're big tenants, new tenants, or, any visibility going forward from here, whether, you know, we are seeing the tail end of these exits? Because we are able to lease out pretty well, but with the exits, you know, you're not able to sort of capitalize fully on the new leasing that we are doing.
Any color that you can give on how should we think of the exits from there on? Is there more, you know, predictability, you know, any color that you can give on these exits?
Sure, Murtuza. I think exits are bothersome to us also, even though we've been able to re-lease much faster. But having said that, I think a clear trend is what I mentioned. Majority, a substantial majority of our exits are coming from the IT/ITES sector. A combination of both reasons, profits or overall margins being down. Their business model more amenable to work from home. That's, I would say, one sector which just stands out, you know, which is added to the exits. So two things I would like to add on over here. Number one, IT/ITES services in our portfolio is now at 12%. This number was 25%, at the time of IPO. So there's already a substantial reduction in this portfolio size.
So that's probably one indicator for you, as to, you know, what's the further downside in this market? It's not much. Second, you know, overall, when you look at it from a FY 25 point of view, I will not want to go beyond 25. There's about 1.1 million sq ft of expiries. While I wouldn't want to specifically give a guidance, but I would say, as we speak now, the trends are more positive.
So, and even in the 2024, for the second half, you've got another 1 million sq ft. Are you expecting to renew them? Would you be more confident to be able to renew them?
I think it's going to be a combination of both, Murtuza. I would say-
Yeah.
It will be a combination of exits and renewals, almost equal.
Yeah, because your full year guidance for renew is about 1.2. You've been able to do about 0.9 so far. So fair enough. Thank you.
Yeah. Thanks, Murtuza.
Thank you. The next question is from the line of Puneet Gulati from HSBC. Please go ahead.
Yeah, thank you so much, and, and sorry to maybe on the same point. If I see slide 16, it talks about 4.2 million sq ft of expiries. I think the same number was 2.8 million, just, you know, a quarter back. What really added to such, such something? Am I not reading it correct?
Yeah. So one is this big early renewal, Puneet, which is 0.6 million sq ft of IBM at Embassy GolfLinks.
Okay.
That's reason number one, which is a positive. Second is almost 800-900 thousand of additional expiries which have come in. And you know, for the sake of repeating the answer, it's largely coming from the same IT/ITES sector, IT, IT sector.
And what kind of discussions drive these early renewals?
Early renewals?
Yeah.
I think, one of the key things is, considering this specific example, it's a large space. From their point of view also, they need to be sure of where they will be, let's say, 12, 15 months down the line. So it makes sense for them also to secure themselves, whether they want to continue in the same space or if they want to explore a new space, you know, they might actually need more time, right? To move to a new space, set up a new office with fresh fit outs. So, it's largely driven from the occupiers themselves because of, you know, the quantum of space which they already hold.
Okay. And in your data book, there's also 0.9 million sq ft of leasing which happened in Manyata. I presume part of it would be the M3 Block, which is pre-leased. Can you give some color on what is the average rental there, that you're able to derive now?
Yeah. Average rentals, I would say ranges between INR 96-INR 97 to a little above INR 100, depending on age of the buildings as well.
Understood. And also, if you can give some color on, you know, what's the status of the M3 Block, how much is it leased totally, and how much more needs to go? And what did it finally cost, the REIT?
So sorry. Can you repeat the last question again, Puneet? I didn't hear you.
Yeah. And how much did it cost now in total to build M3?
Got it.
Yeah. And yeah.
Got it. It's about 45% leased. On the cost, I'll just hand it over to Abhishek.
So the total cost to company was INR 1,050 crore, including the amount that we paid earlier and the additional true-up consideration based on the agreement that we had. Okay. And 45% leased and presumably same value at INR 96-INR 100.
Yeah. The new blocks, I would say we've been able to exceed above 100, Puneet.
Okay. Okay. Okay, that's amazing. And, lastly, if I can add one more, you know, there is a positive working capital adjustment, this quarter. How long can we see these, these kinds of adjustments, and what is driving this?
So, Puneet, again, I would say that, looking at... We don't look at working capital adjustment quarter on quarter. What we look at is for the year, because quarter and quarter comes out of other regular matters also. Like, for example, when you see current quarter versus previous quarter, current quarter working capital is coming out of the fact that during Q1, we had paid property tax for half year. Okay. The impact of that is somewhere around INR 55 crore. Okay. So out of the INR 62 crore, main INR 55 crore is out, coming out of this.
Okay.
So, that was not there this time. That's.
But why should it get captured in working capital? Should it not be somewhere else in the P&L?
So, Puneet, what happens is we pay this working capital, this property tax, in advance. Right. So it goes and sits in my advance payment. And during the next quarter, when I do a working capital movement of all the payables, receivables, and advances, so it features there because it goes, it gets reduced there. So if you look at just from cash perspective, last quarter, INR 56 crore cash out, versus this quarter, 0 cash out. Ah, understood. Understood. Understood, understood.
Got it. That's very helpful. And lastly, if you can comment on the distribution from the Embassy Golf Links, that's also gone down a bit.
Yeah. So, Puneet, what happens is, for Embassy Golf Links, the distribution that they give to us is based, purely based on the cash flow that they have. Last quarter, the distribution that we got in total, all three components taken together, was INR 80 crore, compared to INR 68 crore, which we received this quarter. Also, what they do is some of this cash that they generate, use it for refurbishments and other projects also, and not necessarily fund it through debt. So that's the reason it is reduced a bit during this quarter.
If we just add on to that, Puneet, I think, from a working point of view, both we and the joint venture partner look at the cash flows on a quarterly basis, look at what's required from a next quarter point of view, and there could be some movements on a quarter-on-quarter basis. It need not necessarily move linearly.
Okay. So how do you think about the way...? Yeah. I mean, should we expect it to go up- Sorry, sorry. Sorry, I'm, I'm sorry. How should one think about this number from the next quarter on second half perspective? Should it go down or should it come back up to the previous levels?
So Puneet, what happens is this, out of the three components, one is interest, which is indexed based on the coupon rate. Right. The other two components is based on the availability of cash. I would say that the way to look at it is, you can take whatever we received during the first quarter and second quarter. Whatever we received during the half year, you can say double of that you would receive in the full year. Understood.
That's okay. Thank you so much.
Per quarter on an average 100 basis.
Understood. That's okay. Thank you so much. Thank you.
Thank you.
The next question is from the line of Mohit Agarwal from IIFL. Please go ahead.
Yeah, thanks for the opportunity. Arvind, in your opening remarks, you mentioned that, you know, by the end of the year, you expect the occupancy to stabilize around 85% and 88% on same store. Now, that number is nearly similar to where you started the year, though I understand there's some capacity addition. So in that context, how do you see the distribution or the NOI in FY 2025? I understand you, you're not giving us guidance, but if you could give some color as to what kind of growth we can see next year. Because the interest impact will continue, and the occupancy seems to be flattish. So if you could throw some light on that.
I think a simple answer for that, Mohit, was captured in Abhishek's last line, which is he clearly said that we expect the DPU to grow from next year. So I wouldn't attribute a number to it, but we clearly believe that NOI and DPU will grow from next year, from where we will end up, end this year.
Okay. Okay, understand that. Okay, the second question is, and, and this is for Abhishek. So I was just trying to do some math in terms of, if you look at the in-place rentals on a year-on-year basis has gone up by about 7%-8%, which is great. And the area under lease has also marginally gone up, but, but the facility rentals or the NOI seems to be flattish. So, could you throw some light on why that would be?
So, Mohit, when we disclose the in-place rentals, this also includes the in-place rentals of all the portfolio, which includes GLSP also. If you strip that out, then, I think it is in line with the increase in the NOI that we have.
Okay, okay. Okay, I probably I'll take that offline and understand that from you. Okay. And my last question is on the, you know, the share of interest in the distribution that you've announced this quarter has gone up sharply from about 12, 13% to 22%, which will impact the post-tax tax distribution. So how do you see that going forward? Is it like just one quarter thing or is that going to be the new normal?
So, Mohit, actually, if you see last quarter, it was somewhere around 15, 16%, and it has moved to 22%. The reason for this is two reasons: because the depreciation is going, the depreciation is increasing, and because of this, the profit margin that we have is decreasing and the dividend distributability is decreasing. I would suggest that, this, if you say the, whatever was there for the half year, which is around 17%-20%, that will continue for the rest of half year also.
Okay. Okay, that's clear. And just a last question, if I may. Aravind, on the SEZ denotification, you mentioned that this is, you know, any time due. So once it comes, let's say it comes today, you know, you have to, you know, between the regulations and approvals and the tax impact, which will be there, how much time do you think it will take for the occupancy to actually start reflecting, the positive impact?
Honest answer, it's a million-dollar question, Mohit. Honest answer, I think we just need to wait for the final regulations. In my view, it will take some time for the operational mechanics to stabilize because, you know, this will also require some approvals, what level of approvals, because whether it will go to a unit approval committee, whether it will go to a board of approvals of SEZ. You know, some of these we will have better clarity once the regulation comes. And I think I will wait to give a specific answer on this for the final regulations to be out, and we have some visibility of how long it takes to actually denotify floor by floor.
Okay. Okay, thanks a lot. That's all-
One last message I would give is, again, from a city perspective, Bangalore will rebound much faster even on the SEZ converted space, as compared to our Pune and Noida portfolio.
Because you think the approvals come faster there?
Not really. Just, just the micromarket, related matters.
Okay. Okay, thanks a lot.
Thank you. The next question is from the line of Chetan from Kotak. Please go ahead.
Hi, so three questions from our side. Firstly, on the true-up amount which is paid, so the data book mentions about a figure of about INR 230 crore. So just want to understand whether that represents a cash payment from the REIT to Embassy, and where could we tie it up with the financials? So that was question one. Number two, we wanted to understand some color on the physical occupancy which you're seeing now in your parks, and any trends which you can highlight for us, city-wise. And number three, on GolfLinks's renewal for the major client which you have done, what...
Could you elaborate on any kind of tenant improvement costs which could have gone there or, and whether, you know, if you can directionally give us a sense on the rentals, whether it is, I think you had mentioned about spread, but, you know, does it factoring any other, rent-free periods or any of such, discount which could have given potentially to such a large client?
Thanks, Chetan. I'll just ask, Abhishek to answer the true-up part, then I'll take the rest of the two.
So, Chetan, when we mentioned that the total true-up is INR 230 crore, as at thirtieth September, we had paid only INR 82 crore. The balance, INR 148 crore, was paid post September thirtieth. So that is the reason why you may be having that trouble in reconciling directly from the financials, because, say, after Q3, the total INR 230 crore will reflect in the financials.
Okay.
So 2.30 would represent a clear outflow of cash from REIT to the MBC entity?
Absolutely.
Okay.
As at 30th September, we had paid only INR 82 crore.
Okay, okay. Sure. Understood.
... This is more to physical occupancy. I think, I would say more or less, things are kind of stabilizing where we are today. From a directional sense, taking city by city, Mumbai is more or less stabilized at full occupancy. Bangalore, I would say it's a mix. Like we said before, captives are at a much higher number. It ranges from 65%-75%. And you could argue that 75% is full capacity, because probably even before COVID, it was never 100%, right? So you could say captives are almost back to, in a way, full capacity, versus IT/ITES is still low at 30%-35%, and that's primarily the reason why you are seeing exits in that sector, right? So that's the sense of physical occupancy. In relation to EGL renewal, a couple of points.
One, yeah, of course, we just need to do some refurbishments and upgrades to the building before they take it up, and we have one year time to do that. In terms of rental, without giving any specific number, all I can say is that we are very close to the market rate at which we have leased it. So overall, I would say it's a very good outcome for us.
Understood. Thank you so much for this.
Thank you. The next question is from the line of Saurabh from JP Morgan. Please go ahead.
Yeah, hi. So just two questions. So one is, in terms of, you know, interest expense, so what would be your, you know, incremental interest cost, versus, the current cost you're seeing? So I just want to know the differential now left to reprice up. And the second is, this movement of, the available space that you're seeing. So you're I mean, when do you think that this, piece turns, you know, more positive? So currently your new leases are basically equivalent to the expiries and the area vacated. At what point do you think, you know, we start to draw down on this, vacant space? Should it be next quarter or next year? How would you think about it? Thank you.
So why don't I take the space question first, then I'll give it to Abhishek. Saurabh, on a net basis, honestly, we believe from next quarter onwards, it should be positive. When you look at it holistically, while we've said that we'll be at 85% full portfolio occupancy, that factors in the 2.1 million sq ft of delivery. So, the short answer, yes, it is going to be positive from next quarter, but when you look at it for the full portfolio, including new deliveries, it'll go up from next year onwards.
Okay. But except the new deliveries, we should see this now drawing down next year onwards, right?
Yes. Yes, that's correct. That's, that's correct.
Over to Abhishek on the interest.
Saurabh, on the interest part, last entity that we did was at around 8.1%. From there, the interest cost has slightly moved up. So we think the incremental cost would be in the zip code of 8.5% coupon rate. If you look at from the year basis, then as per our guidance, we had guided that the total interest cost would be around 15-18 higher than what it was during the last year.
No, that I understand, but I just want to understand. So 8.5 is your incremental cost, and your debt reprices over, I mean, so, how much of this reprices into next year?
Into next year, Saurabh?
Yeah, fiscal 25.
Just give us a second. Let me just pull up the number. Yes, around INR 2,400 crore.
Okay. Okay. All right. All right, got it. Thank you.
Thank you.
Thank you. The next question is from the line of Abhinav Sinha from Jefferies. Please go ahead.
Hey, hi. Thanks for taking my question. So just couple of them. Firstly, on the capital structure side, so we are now around 29% leverage, and we are looking to move to 33%. So, do you think we pause at 33 or, you know, you still think we will go all the way to, like, say, 40-odd?
Sure, Abhinav. You have any further questions?
Yeah. See, the second one is actually on the supply bit. And this is broader market question: So are we seeing any letup in supply in your core Bangalore market, or it's still continuing at the same pace that we had previously, despite the higher vacancies in the overall market? That. Those are the two questions. Thank you.
Sure. I think in terms of leverage, the way... I don't know how you computed 29 going to 33, but the sense is, I'm presuming that you have taken all the CapEx to be spent on new build, increasing the loan balance, but that also increases the gross asset value also, so it does not increase in that proportion. So I don't see that number going up to the percentage what you mentioned, the first number itself, forget about 40%. Anyway, we have a hard cap of 35, which we can never cross, so my sense is we'll be below 33%. So that's the indicator on debt.
In terms of supply, you know, just focusing, while there's, there is a lot of supply, coming up, from our point of view, I would just focus on Bangalore supply because 7 million sq ft of our development is in Bangalore. Bangalore, even if you look at the upcoming supply, it's, for the next three years, it's in the same zip code as what it was in the past, approximately 15 million sq ft per annum.
And if you go line by line on the expected supply over the next three years and compare it to the supply which we have, which is largely in Embassy TechVillage and Embassy Manyata, I think, I don't necessarily think we can compare some of the supply to the quality we have because of the ecosystem which we've already built in TechVillage and Manyata.... So somewhere we always get a upper hand when, we are competing with some of the other developers for space. Not that we win everything, but we win a majority. So I wouldn't be too concerned on the overall supply coming up in Bangalore.
Okay. See, on the gearing bit, if I may, you know, further ask that question. So, see, there, you know, it appears that the headroom that we have to raise the gearing further is, you know, much limited than what it was three or four years back. So, you know, will you, when the DPU starts growing from next year onwards, you know, in a reasonable way, will we be, like, capping out, or paying out the whole 100%, or we will like to bring it down a little bit, to maybe reduce the gearing?
Yeah. Hey, it's Ritwik, Abhinav. Let me take, let me take that. I think, you know, we view sort of gearing as a very sort of, you know, sort of charged question in a situation, right? I mean, if you just look at sort of what's happened in the markets over the last three or four years, I think we've done a phenomenal job ensuring that the balance sheet remains as pristine as possible for a couple of reasons. One is, look, our capital market tends to be very shallow. We just don't have the firepower that, you know, REITs, let's say in Singapore or the U.S. have. So, you know, we've always been very focused on making sure that we're very selective about the projects we take on.
Right now, it's just more—it makes more sense for us to build and finance at, you know, the rates that we have, because it's more accretive in-house than to go out there and buy something that potentially we can't make the numbers work, right? So at the end of the day, that's effectively how we look at gearing. Now, if there was... And that's why we also took the entire decision to sort of cap it at 35%, because, you know, leverage has always been a bit of a difficult situation for real estate in this country, and we've been able to sort of use it selectively to build out the parks internally, buy, you know, world-class assets like ETV, and make sure that we can sort of build out the portfolio that we have.
So look, I mean, So, you know, as you said, distributions will grow in the cycle. This, I think, represents the last of sort of the stagnating kind of, you know, situation that we've seen. But as it grows, I don't think there's any plan at this point in time to sort of cap out, cap payouts, right? I think that's not sort of the correlation we see. We'll take on debt, you know, selectively to fund growth, right? The organic growth, I think we lay out very simply. It's within the park, and it's accretive. The inorganic growth right now, we just don't see that in front of us. Simply, it's not going to be accretive, and it's probably going to be, you know, a little expensive and hard to sort of, you know, put together at this point.
So, but I don't think the question really for us is to... We don't have any plans of actually capping distributions payout as they grow. We want to make sure that, you know, unit holders get full value for what they bought into the structure for. And I think as the leasing comes on, as it increases, we plan to sort of pay that out right now.
Excellent. Thanks, Ritwik. That's very helpful. That answers my question.
Thank you. The next question is from the line of Satinder Singh Bedi from Eon Infotech Limited. Please go ahead.
Yeah, thanks for the opportunity, and, congratulations on very stable distributions, good leasing performance and outlook. I think a very efficient funding. I think execution of development, which is on track, and your usual disclosures, okay. But my questions are the following: So, Aravind, you gave a flavor of the physical occupancy for Bangalore and Mumbai. So can you throw some light on the other two markets, also, in terms of whether there's a movement in physical occupancy over the last three months? Or is it kind of now stagnating or stabilizing at the levels earlier? And in terms of the take-up of space by new clients, in the past, it's been mentioned that the decision-making cycle, especially for larger spaces, has been extended.
So are we seeing that coming down? Because, we'd guided for pre-commitments of about 1.3 million sq ft. It seems that, on that one parameter, we've got some catching to do, okay. So, so are these related? So is the decision-making cycle coming down, or is it still, kind of, still, elongated, okay? And the rentals outlook, okay, so, so how, how, how have you seen the rentals, rental outlook move in the markets that we operate in? Thank you.
Got it, Satinder. So just, taking the physical occupancy, I kind of, addressed that by sector instead of city in a way, by saying that global capitals kind of stabilized between 65%-75%. IT services continue to stagnate, 30%-35%. Noida and Pune for us is a hardcore IT services market, so it's in that range, around 30%-35%, not really moving beyond that. So that's, on the physical occupancy. In relation to, the leasing cycle, I would say, the decision-making cycle, it's a mixed bag. There are few leases which are moving much faster than what it was before. There are a few which takes, elongated time.
Overall, when you look at it from a guidance point of view, yeah, I mean, pre-commitment, very difficult to say that it will flow evenly across the 4 quarters. It is. It can be very lumpy. It could all come in 1 quarter or 2 quarters. But overall, I would say things are looking much better. Few deals take similar amount of time, 3-6 months. Some of them happen much faster. So that's the sense on decision-making cycle. In terms of rental outlook, I think clearly in Bangalore and Mumbai, we are seeing rents going up, ranging between 3%-5%. Generally, we've been able to lease at much above market rent.
You would have seen it by the numbers, which I mentioned from Manyata sometime back, as compared to what the IPC call as market rent, which is around INR 94. So these two cities definitely have gone up in our portfolio. We have to say, Noida and Pune, not, I mean, the rent- rentals have remained stagnant for some time and continue to do so even now. So that's the sense on the rental outlook.
Okay. Okay, that's very helpful. Finally, one housekeeping, okay? We talked of renewals at 56%, reversion. So, is this the current rent, the cash rent over the cash rent, or is it the equalized rent over the equalized rent? Okay, so.
It's a cash over cash, Satinder.
It's cash, it's cash over cash.
Yeah.
Thank you. Thank you, and, congratulations on, I think, great job.
Thank you.
Thank you very much.
Thank you very much. That was the last question in queue. As there are no further questions, on behalf of Embassy REIT, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.