Brigade Enterprises Limited (532929) Earnings Call Transcript & Summary

So this 2.2 million is what -- between the split which you gave between the two? And 0.7 is not included, which is the hard option?

Right.

Because earlier, last quarter, we have spoken about doing 3.5 million square feet of total leasing between the two assets at this -- by March. So are we on track to do that?

See, if you consider the hard option, [ with ] most of it, we are actually expecting to get preponed. So if we consider even 70%, 80% of hard option getting preponed, so it'll be near 3 million. And the pipeline that we have visibility is approximately 0.5 million. And some of -- more pipelines will get developed over the next 1 month or so. So we are on track, maybe slightly here and there, but we are on track as on date.

Sir, if I look at your construction progress between the 2 properties, the Bengaluru is at -- like 30% of the work is pending and in Chennai, it's around 42% is pending. But in terms of leasing, Chennai property is far ahead. So if you can just highlight the dynamics between the 2 --

No. No. It depends upon like -- it depends upon what kind of pipeline, what kind of requirement comes up in any place. So as far as Chennai is concerned, we would be handing over somewhere in March, okay? And the requirement that came from 3 of the companies was significantly high. So it helped us to actually lease out almost 96.5%, including the hard option. Now in Bangalore, again, it depends upon the character of the pipeline. So it -- again, the dynamics of the companies and the companies which are coming to us to take up the spaces.

See, as for the construction costs, see, these are also construction costs based on many common areas, which we have to finish it. So we are finishing the buildings and are applying for OC. So it will take 3, 4 months after that to complete the building, so that construction costs will incur.

No. Apart from that, the construction versus the completion on ground will have a certain lag, okay? So on ground, if you see, both the projects are on time, okay? Those will be delivered before March

And just for your information, we've applied for OC for both the projects, and we are expecting them even for WTC Chennai. We're expecting it within the next 4 to 6 weeks.

My question was more from the perspectives of demand in these 2 markets. So Chennai seems to be far ahead in terms of leasing and Bengaluru, I think has been lagging behind. So if you...

No. No. Again, as I said in the last call, I actually mentioned, sometimes, it depends upon what kind of -- a sudden demand comes your way, okay. We were lucky enough, and we were proactive enough to actually grab that demand into our part. So [Audio Gap] got populated faster than Bangalore, whereas if you see both the markets, Bangalore is a much, much more vibrant market than Chennai. It's almost like 3 to 4x than Chennai. So it depends upon what kind of opportunity we could grab at that point of time.

But as you highlighted earlier in the call, that maybe next 2, 3 quarters, maybe 3 quarters down the line, you will have the entire Bengaluru property getting leased up?

Yes, that is sure. Like in Bangalore, also, what actually Nirupa told about, around 0.5 million of pipeline, that is the immediate visibility. Apart from that, the size which is that we are experiencing, okay, out of those 2 are major consolidation options, okay? So 2 into 0.5 to 0.6. So again, it won't be a challenge to lease-out Bangalore. And if you see the properties [Audio Gap] property and the kind of market tenants that we are actually attracting within the park, it actually vindicates the class of the property.

In the presentation, you have highlighted only 0.7 is leased out and 0.3 is hard option, but you said that you have leased 0.9 million. So has there been a change? Like 0.2 million has been…

No. No. See, you're -- in presentation, it's only 9 months leasing. We're talking about the total. You were asking about the total leasing on Tech Gardens and the WTC Chennai till date. So there's a difference.

Okay. The 0.9 plus 0.3...

Sir, sorry for the interruption...

Just last thing -- just completing this question. The 0.9 plus 0.3 is a hard option. So 1.2 is kind of locked in, right?

Yes.

[Operator Instructions] Next question is from the line of Prem Khurana from Anand Rathi Shares and Stockbrokers.

Two questions. So one was with respect to this WTC Chennai, the transactions that we've done during the quarter. Would you be able to make us understand whether that was a single transaction? Or there are multiple tenants is this transaction involved? And also if you could -- comment on the rate that we have managed because when I do my calculation, the number [indiscernible] INR 98-odd, kind of square feet kind of -- wherein -- when I look at our exit rental sheet, it still says INR 80-odd a square feet?

So as of now, like we are bound by confidentiality agreement. So it would be very difficult to say whether it is a single or a multiple tenants. And as far as the rents, we can only say that it is significantly higher than the current weighted average rent. But what we can say is, including the hard option, Chennai is almost 96.5% full. Whatever the balance portion that we have, we are actually creating an incubation space, okay, for helping the clients to transit -- to the transition into the warm shell permanent spaces.

So as far as the exit rental sheet, we'll be updating once this agreement [ and ] signed for the rentals, then maybe we'll update the sheet. And definitely, the rental increase will be there, which I had said at the beginning of the call.

Sure. And sir, sorry, just to understand this better -- I mean, given the fact we have some space to go at Brigade Tech Gardens yet, so how does it work? I mean, is it fair to assume a large part of this would come, as if -- I mean it'll be a [ non-IT SEZ ] because, I mean, if the tenants wanted to have this as an IT, they would have to come in by March '20, and you're saying it will take you at least 2 to 3 quarters to be able to lease out the remaining area, so which essentially pushes me to FY '21, I mean, in terms of actually occupying the space. So is it fair to assume a part of your property would go as a non-IT SEZ space? And then what could be the impact on the rentals? Because -- I mean, if -- a part of my SEZ was to go as a non-IT SEZ.

Yes, as far as our properties are concerned, okay, see there are many -- see, many characteristics that drives the -- drive companies to our properties. One, if I see Chennai and if I were to tell you, like 60%-plus, how the tenants are actually -- they are not looking to avail SEZ benefits, okay. Similarly, in BTG also, we are experiencing tenants coming in who may not actually want to avail the SEZ benefit. So having said that, the kind of property that we have built and post the Sunset Clause, I don't see any challenge in renting it out. And we will command the same kind of premium rentals based on the overall quality of the product or the offering.

Similarly, I would also add that, even if SEZ expires, your GST benefit is still there. Only income tax benefits will go off. It is still very attractive for the companies to come into SEZ space.

Just one more point to add to that. Basically, if the company starts operating out of BTG, even part of the incubation space, as long as they start operating, even with a few seats out of the Tech Garden space, they are able to avail the SEZ benefits as well. So that's why we are offering large incubation spaces, because we find a lot of companies taking up our incubation space and perhaps then figuring out what their leasing requirements are.

Sure. So would you be able to share, I mean, how many of such companies do we have as of now wherein these have already moved in our incubation center, but then not committed to take up space on the SEZ side?

Basically, we can safely, as far as our incubation is concerned, out of almost 9- and 10-odd seats, we are almost 60% done. And out of the 60%, almost 4 companies, they have already started operating. Okay. Now one more thing that I would like to add is, we are seeing a lot of companies wanting to consolidate from various other places. Okay. And they are getting the rental advantage, like if somebody operating out of ORR at say INR 90. And when they're expanding, they don't have any space because of the reduced vacancy and plus the rentals are very high. Now such companies that are operating out of SEZ, they can actually show the expansion in another SEZ and claim the balance period benefits, okay? So those things are also possibilities.

Sure. And just one last, if I may. I mean, on this WTC Residential, I mean, I've been made to understand [indiscernible] of marketing and we have already activated our marketing channel. So would you be able to share, I mean, and kind of EOIs that we've been able to manage on the -- for this property? Expiration of interest, I'm sure, I mean, you would have received some?

So -- this is Rajendra Joshi, CEO for Residential business. We launched the WTC Residences the second week of January. We've seen a good interest in the market. This is a high-end luxury project with about 300 apartments. We've already got EOIs for about 10%, 12% of the total inventory.

Next question is from the line of Adhidev Chattopadhyay from ICICI Securities.

So firstly, on the hotel divestment, any update there, what is happening on that front?

Yes. Thanks for that question. So last time, we said we were very close to closing out because last time when we spoke, I said, we had narrowed down to -- can you hear us? [Technical Difficulty]

Yes. Yes. It's better now. Yes.

So the update is, last time when we spoke, I had said that we were talking to 2 potential parties. And [ what has ] happened since then is that we have finalized on the valuation. The only issue right now is there are a couple of legal clauses that we are kind of going back and forth on. And our stance is that even -- while we are okay on the valuation, we need to ensure that whatever agreement we get into protect the company in the long-term interest. So there are a couple of legal issues that we are still going back and forth on. So that's still under discussion.

So like -- is it something like is just a done deal, and you're just waiting, just -- these are just smaller, minor things to iron out? Or is it still some time away? Like how are we to understand this?

So I mean, honestly, just -- it's not a done deal yet, for sure. We need to still iron out a few issues.

Okay. Okay. Fine. And now that we're going to have like over INR 700 crores of rental income now, right, by next year. And so on SABMiller also, are we planning to start work, simultaneously now on that land parcel?

So we've already started work. We've already -- the contractors are in place, and we've already started work. Shapoorji Pallonji is the contractor. [Audio Gap] applied for a loan which we received, so we've already begun work on that. Again, we had been looking at a [indiscernible] partner to come on board. There was some back and forth, but it's still under discussion, but we have gone ahead and begun the work.

Okay. So the understanding is there would definitely be some partner coming on board in future? Or like -- because there's another INR 800 crore to INR 900 crore of CapEx, on what we understand, on that project?

Mostly, there will be a partner. But if there isn't, like I said, we still have the bandwidth to carry on the work.

Next question is from the line of Kunal Lakhan from Axis Capital Limited.

On -- just a follow-up on the previous question. You said you have finalized on the valuation for the Hospitality. So can you just give us some indication of what could be the quantum of the divestment amount?

Confidential.

Yes. So I'm unable to disclose anything on the valuation at the moment. The moment something is finalized and [Audio Gap] signed and sealed, I'll be sure to inform you on it.

Okay. All right. Okay. And my second question was on our slide, which talks about capital allocation, segment wise. If you look at it like over the past 3, 4 quarters, since last year almost, we have seen a steady decline in our returns segment-wise and -- which has also impacted our overall returns. For example, like your real estate EBITDA upon your operating capital employed has come down to 20% from 27% last year. Similarly, for lease rental -- I can understand lease rental, probably because of -- there could be some assets which have not yet occupied fully. But -- so just trying to understand like what's happening there? And where [indiscernible] when -- in which quarter we can expect this to revert back to, say, upwards of 25% for resident -- for Real Estate and maybe like a 15%-plus for Lease Rental?

See -- if you see, the formula is EBITDA over OCE. So EBITDA is again being monitored by AS 115. So there will be variation in this. But I can tell you that we have been reporting 23% to 25% return on Real Estate, and we are still maintaining that. It's only because of the AS 115 that there will be variation in the revenue and the EBITDA numbers, and that's why this variation is there.

Actually, I'm trying to compare like-to-like because I believe last year also for, say, Q4 '19 also, I think Ind AS 115 was applicable, sort of?

Yes. So this time, you see, last time, the revenue was more. It was around, I think -- in Q4, it was around INR 700 crores. And this time, it is at INR 550-odd crores. So EBITDA, it just impacts the EBITDA also. Because the absolute number of EBITDA changes because of the revenue. So that's why these changes are there. So this will vary as per the AS 115 in -- if some years, if you don't have a property to register, then it will be a -- it will vary.

Okay. And on the lease rental side, 15%?

See, lease rental side, we are doing -- we have been showing around 16%, 17%. It's only because of the depreciation and interest that this EBITDA versus OCE has come down. But as soon as the rental starts coming for the vacant space which we have, and for the leasing, which we are doing, this return will definitely go higher -- to around 16% to 17%.

Sir, you said [indiscernible].

It's just a phase -- it's in development phase. That's why you're looking at that. Sorry.

Sir, you said depreciation interest. I thought it comes after EBITDA. It's -- we're talking about --

Yes. Yes. It comes after EBITDA, but see, rental -- sorry, sorry. So it's a rental income, which has to flow into the business. So if you see operating capital employed, like Tech Garden has been put into operating capital employed, but it has not been fully leased. Similarly, we have vacancy of around 25% of space [indiscernible] Opus and WTC @ Kochi. So all those are -- capital has been employed, but leasing does not have been done in full. So we have a -- in vacant space, we can have a leasing of around INR 100 crores of rental per annum. So if you take that, we'll REIT to around 16% of return on capital employed.

So I can safely say in the next 1 year, once you are done with leasing as well as maybe some of the tenants become operational at WTC and -- as well as Tech Gardens, this should revert back to 16%, 17%?

Yes, yes. Definitely. Definitely.

Okay. And my last question was on plan for REITs per se, like we are ramping up on our commercial portfolio. And in a couple of years' time, I think it will reach a very sizable mass per se. We are already talking about divestment on the Hospitality front. But on the Commercial portfolio front, what are the plans for divestments?

Yes. So REIT is there on lines. But after this budget, I don't think so REIT will be possible in India because the way taxation has -- the taxation has been changed. So I think if Finance Ministry is considering to change the taxation, then it is there. But as our plan, if this anomaly is corrected, then definitely, around '21, '22, we plan to go into REIT, once we have at least INR 1,000 crores of rental revenue.

Next question is from the line of Alpesh Thacker from Motilal Oswal.

Congratulations for a good set of numbers. I have 2 questions. One is, frankly, one is related to the industry. So given the budget announcement which was favorable for affordable housing but not good for overall real estate sector and my view like -- because there are -- if the consumers move to the new tax regime, then there are like many exceptions, which has to forgo. So do you see any consumer that impact of demand -- consumer demand post budget announcement?

Yes. So I think the new budget, we were all hopeful that there would be some more in terms of stimulating customer demand or consumer demand, especially on the residential market. Definitely, things are [Audio Gap] there was slightly some good news on the affordable housing side because we have an additional year now to get sanction for affordable housing. I don't think that the new regime -- the new personal tax regime will affect us as much because people can still opt to stay under the old tax regime where one can get the deduction for housing interest. So I don't see this affecting. Overall though, in the country overall, there has been some improvement in the real estate sector and specifically in the markets that we are operating in, Bangalore, Hyderabad, Chennai. So we are continuing to focus on these markets. There seems to be a lot more pain to go in markets like NCR and Mumbai, and we are choosing to stay out of there at the moment. In terms of affordable housing, we will continue to look at new land parcels, whether we can do affordable housing there. But that said, our -- we find that there is a very good-sized market in the mid-income housing as well. In fact, 60% of our portfolio is in the mid-income housing bracket, which is anywhere from INR 50 lakhs to INR 1.2 crores or INR 1.5 crores, and we see a lot of traction in this. So some of our best-performing projects have been in this segment. So we still feel very positive about the residential sector. And we continue to focus on the mid-income housing and the affordable housing sector.

Okay. Okay. Makes sense. And my second question is, like -- so we have a plan to launch around 5.1 million square feet over the next 5, 6 quarters on the residential side. So what would be the portion of affordable housing in this?

So we're looking at about 30% of affordable housing, that is as of today, or more like as of right before the budget announcement. After that announcement, where we've extended that 1 year. We are going to relook at a couple of the parcels in our land bank and see whether we can tailor that towards affordable housing as well, subject to many other feasibility conditions, of course. But we will look at whether that 30% can increase.

Okay. And just one last question. On the gift city, so -- Brigade Finance (sic) [ Financial ] Centre. So how is the occupancy like panning out there? So I guess, the last call, we were targeting to achieve around 50% occupancy level by the end of FY '20. So are we still on track on that?

See, as far as Gift City is concerned, it's still a challenge, to be very frank, okay. But the good thing is, one of our existing tenants, they are looking at 25,000 additional floor, and they are also committing for another 25,000. So if those 2 happens, I think we will be somewhere around 45-plus percent. Apart from that, we are getting pipelines from [Audio Gap] those are very small requirements. Like 2,000, 3,000 to maximum 7,000 square feet. So Gift City is still a challenge, but only pluses, we have our existing tenants who are looking to actually multiply 3 times from their existing takeup of 1 floor.

And with regards to the hotel, see, we launched it only in mid-December 2019. So basically, we've just had 1 month of full operations. Obviously, if you look at 1 full year of operation, you could expect for a good hotel, it will [Audio Gap] percent of occupancy in the first full year. But the first month has been fairly encouraging. We've had almost 15%, 20% occupancy. And the rates have been around, on average, around INR 3,500. The good news is that we've fast-tracked our classification [Audio Gap] expecting to hear back from the Ministry of Tourism, and we'll mostly be getting a 5-star classification. We also need to see how [Audio Gap] because that will definitely have an impact on the business. So we've applied for it and we're awaiting the approval.

The next question is from the line of Parvez Akhtar from Edelweiss Broking.

Congratulations for a great set of numbers. A couple of questions from my side. And would it be possible to get a rough breakup of the share of affordable housing in the 2.8 million square feet that we have launched this year and also in the upcoming launch pipeline?

Sure. In the 2.8 million square feet, we have -- approximately 25% of that is affordable housing. So that would be affordable housing per the new regime, which is [ INR 45 lakhs ] and below, where it also attracts the 1% GST. And also another old affordable housing regime. So all of it is another 60 square meters carpet area as well. So 25% of our new launches or -- sorry, our launch products so far is affordable housing. We're looking to increase that percentage slightly over the -- in the new launches as well.

Sure. And as far our upcoming launch pipeline is concerned, we are looking at starting work on 2 new hotels, if I got that correctly?

Yes. So we have -- we're looking to open Holiday Inn Express on Old Madras Road, part of our mixed-use development called Brigade Signature Tower, Brigade Golden Triangle. And we have hotel products in both Brigade Tech Gardens and [Audio Gap] Chennai. So we are working on constructing those as well. And we have a hotel coming up near the airport as well, Bangalore Airport.

Sure. And lastly, [indiscernible] possible to get a rough breakup of the -- this quarter resi sales between what came from existing projects and how much the new launches contributed?

Yes.

Sure. In terms of ongoing projects, it was around 62%. New projects, that means anything launched this quarter or the previous quarter, 25%. And completed projects, 13%.

Ladies and gentlemen, that was the last question for today. I will now hand the conference over to Ms. Nirupa Shankar for closing comments.

Yes. Thank you, everybody, for participating on this call. We've had an exciting 9 months, and we're looking forward to an exciting quarter ahead as well. In Residential, we definitely expand -- we expect the good trend to continue. And in office, we are hoping to achieve our target of 3 million square feet without the hard option and perhaps another 1 million with the hard option. The good news is that our Brigade Tech Gardens received a platinum rating by the USGBC Council. And what we didn't talk about is perhaps retail where our Orion Uptown Mall will open in March 2020 of this year. Our Hospitality [Audio Gap] in quarter, we are opening up Holiday Inn Express on Old Madras Road, which will take our room count to about 1,500 rooms once we open in March. And on the Real Estate prop-tech side, one of our REAP start-ups, our Real Estate Accelerator Program start-ups, Clairco, which works in better air quality -- creating better air quality, received the CNN News 18 Young Achiever Year -- Young Achiever Award of the Year in real estate excellence. And ECOSTP, which is actually a sewage treatment plant that doesn't use electricity or doesn't use any chemicals, received -- was selected for an innovation fellowship by the Queen's Newton Fund and the Royal Academy of Engineering at the U.K. So that was quite exciting for us to hear. And that's it from our side. And if you have any specific questions, we'll be happy to answer on a one-on-one basis at a later time. And thank you, and speak to you again next quarter.