Brigade Enterprises Limited (532929) Earnings Call Transcript & Summary

Thank you. Good afternoon, everybody. We hope all of you and your loved ones are keeping well during these challenging times. On behalf of the company, I would like to welcome you all to the earnings call for the first half of FY '21 of Brigade Enterprises Limited. I'm joined by our executive directors, Ms. Pavitra Shankar, Ms. Nirupa Shankar, Mr. Amar Mysore. Our senior management team, Mr. Atul Goyal, CFO; Mr. Rajendra Joshi, CEO Residential; Mr. Vineet Verma, CEO Hospitality; Mr. Subrata Sharma, COO Office; Mr. Shashie Kumar, CFO Retail; Mr. Om Prakash, Company Secretary; and VP, Investor Relations, Mr. Pradyumna Krishnakumar. While COVID-19 has impacted all our lines of business, some have fared better than others, thankfully. The bounce back in residential business and the consistency in office occupancy or office leasing has supported the continuing challenges in the retail and hospitality business. However, it renewed confidence in our multipronged approach of a diversified real estate portfolio. During the course of Q2, our residential business continued to gain momentum observed in the June month compared to the loss of April. We ended the quarter at pre-COVID levels. That is 1 million square feet of new bookings with a value of INR 576 crores, while still working with tighter marketing budgets. The comeback in the residential sector has been stronger and faster than expected and seems it will continue to Q3 also. October was also a very good month, supported by the festival season, the reason being we having the projects at the right locations and right prices and customers continuing to trust Brigade for our quality and service. Added to that, our sales team has worked real hard to achieve the numbers. One other reason for the accelerated pickup in the sales is also consolidation within the sector. We expect larger established players to show growth in transaction volumes and pricing even if the overall market demand has not yet reached pre-COVID levels. Customers continue to prefer completed or near completion inventory as well as larger units. Demand for homes above INR 45 lakhs has actually increased compared to affordable housing, further supporting that today's buyers are primarily end users. In quarter 1, we saw much higher volume [indiscernible], whereas in quarter 2, this has stabilized to some extent. On the collections front, we have had our best quarter so far at INR 400 crores from the residential business. This is primarily driven by the strong sales performance of the 2 prior financial years and resuming good construction progress at all sites post unlocking of restriction. In our office segment, we continue to maintain close focus on collections of lease rentals and have achieved 99% cumulative collections thus far. On the leasing front, we are seeing increased momentum in terms of leasing inquiries, RFP releases and site inspection. However, decisions are still being prolonged mainly since average physical occupancy level of staff are still sub-10% across all office parks. As on date, we are in discussion for approximately 1.4 million square feet in Brigade Tech Gardens, Bangalore and other projects in Chennai, also World Trade Center in Chennai. We are quite positive about the opportunity. We are keeping our fingers crossed. We're also seeing leasing inquiries for managed offices. Overall, our strategically located and well-designed properties, Brigade Tech Gardens and World Trade Center, Chennai are attracting prospects because of the superior value proposition. Hence, we are confident of transacting the remaining inventories within the next 2 to 3 quarters, if not [ both ]. In retail, the larger focus continues to remain on a retailer segment -- retailer engagement towards interim commercial negotiation of leases and higher tenant occupancy at our malls. The mall business recovered towards the end of Q2 in September with higher tenant occupancy at 65% to 70%. Rental revenues are at 45%, and footfall recovery is at 30% to 35% of last year level. The key drivers of occupancy and footfall was the top end restobar formats that were allowed to open. Retailers and consumer electronics, beauty and cosmetics, sports and leisure wear, key fashion anchor and department stores are showing a recovery of 50% to 60%. The trend is further supported in October when multiplex and family entertainment formats were allowed to trade in Karnataka. We also had the soft launch in September of our third mall Orion Uptown on Old Madras Road in Bangalore. It is a good catchment area with no competition and has been doing reasonably well despite the apprehension surrounding the sector. Going forward, we expect the recovery to be steady for this mall and also other malls. Moving to hospitality. All our 8 hotels continue to operate, our newest total, Holiday Inn Express & Suites, Bengaluru OMR was launched in October and -- soft launched, you can say, and is doing 50%-plus occupancy in November due to a long-term group booking. All our hotels with the exception of Four Points by Sheraton Kochi Infopark and our Grand Mercure Gandhinagar GIFT City turned GOP positive in October. We expect the trend to continue with close monitoring of operating costs, F&B and banquet business across all our hotels witnessing quite a good traction, F&B and banquet business, following easing of restrictions by the government. With increasing confidence among travelers to start flying again, we are hopeful of improved performance in our rooms business in the coming months. We expect strong headwinds for the sector for the 12 months once the international travel and business-related trip commences [Audio Gap] sites labor strength has reached 90% of pre-COVID levels and is continuing to improve. There is no shortage of construction materials or disruption in the supply chain. Over the next few quarters, we plan to launch 3.8 million square feet of space in residential and about 0.76 million square feet of commercial space. So with these remarks, I hand over the mic to Atul Goyal, CFO of the organization, after which we can have question and answers. I thank you for your patience. Thank you.

Thank you, sir. Good afternoon, everybody. On behalf of the company, we would like to welcome you to the earnings call for Q2 FY 2021. As we all know that this quarter has been better than the last quarter in terms of business performance. To give you some highlights of our performance in the last quarter, we recorded a real estate sale of INR 1 million during the quarter vis-à-vis INR 0.4 million during the last quarter. Collection residential improved by 44%, totaling up to INR 400 crores in Q2 FY '21. On the office side, we achieved 99% rental collection and a growth of 62% revenue in H1 FY '21 versus H1 FY '20 because of additional rental income coming from new leasing in Tech Gardens, Opus and additional leasing in WTC, Kochi. We have started seeing some uptick in the hospitality performance. And recently in the month of October have improved even in terms of operation in for hotel. On consolidated level, there was an increase in cash flow from operating activities by 123% and net cash flow by 138% as compared to Q1 FY '21. We continue to have adequate liquidity and credit lines from banks. Our average cost of debt has been coming down over the last few quarters and was 9.23% as of September 20 versus 9.73% as on September 19, a 50 bps reduction, which is very, very good. Mortgage rates at all-time lows has been strong tailwind for the business, especially for the resi business. Coming to the consolidated financial performance for Q2 FY 2021. The consolidated revenue for Q2 FY '21 stood at INR 322 crores versus INR 752 crores in the same quarter ending last financial year. The Real Estate segment clocked a turnover of INR 221 crores and an EBITDA of 20% in Q2 FY '21. This is, again, based on AS 115. So whatever issues were there in the registration is now slowly resolving. The hospitality segment clocked a turnover of INR 18 crores and operating loss of INR 5 crores. However, as mentioned earlier, going forward, we expect these operating losses to be much lower. The leasing segment clocked a turnover of INR 83 crores and an EBITDA of 72% in Q2 FY '21. The consolidated EBITDA, including other income for Q2 FY '21 stood at INR 99 crores versus INR 206 crores in Q2 FY '20. EBITDA margin, including other income stood at 31%. The [Audio Gap] charges for Q2 FY '21 stood at INR 82 crores. Consolidated loss before tax for Q3 FY '21 was INR 39 crores compared to profit of INR 66 crores for Q2 FY '20. With respect of performance for H1 FY '20, the consolidated revenue for H1 FY '20 stood at INR 536 crores versus INR 1,469 crores in the same half year ending last financial year. The Real Estate segment clocked a turnover of INR 242 crores and EBITDA of 16% in H1 FY '21 versus a lower -- versus a turnover of INR 1,134 crores and EBITDA of 22% in H1 FY '20. The hospitality segment clocked a turnover of INR 28 crores and a negative EBITDA of 65% in H1 FY '21 versus a turnover of INR 160 crores and EBITDA of 26% in H1 FY '20. The Leasing segment clocked a turnover of INR 165 crores and EBITDA of 73% in H1 FY '21 versus a turnover of INR 175 crores and EBITDA of 63% in H1 FY '20. The consolidated EBITDA, including other income for H1 FY '21 stood at INR 156 crores versus INR 397 crores in H1 FY '20. EBITDA margin, including other income stood at 29% versus 27% for H1 FY '20. The interest and finance charges for half year stood at INR 171 crores. Consolidated loss before tax for the half year was INR 126 crores compared to INR 138 crores profit in the same year in last financial year. Coming to the debt position and its breakup. INR 749 crores is the Real Estate segment debt, INR 557 crores in hospitality segment in which INR 430 crores is GOP securitized loan and INR 127 crores is the CapEx loan. And INR 3,034 crores is the Leasing segment debt in which INR 1,700 crores is securitized lease rental and INR 1,333 crores is CapEx loans. The cash and cash equivalents stand at INR 513 crores as on September 30, 2020, Consequently, the company's net debt outstanding as on September 30 is INR 3,828 crores, out of which BEL share is INR 2,991 crores. As mentioned earlier, the company's effective cost of debt then reduced as on 30th September 2020 at 9.23% per annum versus 9.73% at the end of Q2 FY '20. We have a credit rating of A with stable outlook, which has been assigned by both CRISIL and ICRA. I also wanted to share some leverage ratio that we track on a trailing yearly basis. Interest coverage ratio stood at 1.09x in H1 FY '20 due to absolute lower EBITDA numbers because of the impact of pandemic. The net debt-to-equity stood at 1.27x at the -- as on September 2020. The company has a strong balance sheet and is in good position and has adequate liquidity to meet operations and other business commitments, including debt. I will hand over it back to the moderator for questions. Thanks.

[Operator Instructions] The first question is from the line of Adhidev Chattopadhyay from ICICI Securities.

The first question is on the Orion Mall at Gateway. So the occupancy seems to have come off quarter-on-quarter by around 15%. So is it just a regular churn we're expecting new tenants to shift in? Or it is some permanent -- retailers choosing to permanently vacate the space?

See, there has been some churn, some churn of tenants, I would say. One is this HyperCity, we had HyperCity, the supermarket, which was under Future Group earlier. And just before COVID thing, they had terminated the lease. Now we have re-leased it to another large well-known supermarket called Namdhari in this part of the country. Then also, we terminated a large area of Central, which was part of the -- Future Group for nonpayment of rent. So that has become vacant, and we are in the process of finalizing, I would say, better quality tenants there. And in addition to that, we had another bowling alley, which I think they ran into financial problems, that is under re-leasing. Other than that, there is small to medium-sized guys. So there were some forced exits during this COVID period and therein some voluntary exits were there. I think this is -- though on an immediate basis, it may have some impact on lease rentals. But from the overall interest of the mall, it is a welcome change. We can bring -- I would say, we can refresh the mall occupancy and with better-quality tenants.

Okay. Sir, just to follow up on, have we come up with a formula how the rental waivers will be given for the rest of the year?

Yes, yes, yes. No, we were very, very clear about the formula. And in fact, all those people who have opened after entering into written understanding on the way forward. We just did not -- we did not show any desperation to just allow them to occupy without resolving the method of way forward. There has been a combination of, I would say, terms with 50% rental waivers for the lockdown period and then having some revenue share so till September. And from October, it has been introducing minimum guarantees and revenue share. But I think it's a question of give and take. And we have always used the word that is the relationship between mall owners and retail tenants are one of a symbiotic relationship. We need to depend on each other. So that way, actually, we have been very, very fair and reasonable in our approach, which is appreciated by all the retailers. And that is why I think our team has no hesitation to say Orion Gateway is the best performing mall in Bangalore, pre-COVID and also post-COVID times.

Okay. And sir, just the next question is on the land bank. So it seems to have gone up by 5 million square feet quarter-on-quarter in Bangalore, and you have made payments of almost INR 170 crores. So can you just give us a color where this land is located and why the payment was made right now? Is it for that?

Yes. So this is adjacent to the Brigade Utopia, Cornerstone Utopia. This is the second phase of the project. The Brigade Cornerstone Utopia first phase is 47 acres, which is under operation. So currently, we are calling it as Utopia Phase 2. This will also be 47 to 50 acres land. But we have acquired -- completed acquisition process of about nearly 16 acres purchase and about 14 acres joint development. And the balance, another -- yes, balance another portion of 17 to 20 acres is also we have entered into an MOA. Hopefully, before March, that should also get completed. It will give us 6.5 million to 7 million square feet of good-quality residential space in demand in that location, which will help us our revenue realization, I would say, post -- or beginning or post 2022.

Sir, to understand the entire land for this quarter, was this one single transaction? Or it is split across some other transactions as well?

It is primarily the single transaction. Also, we've entered into another MOA for another joint development of about 35 acres in -- on Mysore Road.

Okay. And sir, land [indiscernible] even the Phase 2, whichever we have for...

Phase 2 is Cornerstone. The Mysore Road is a different [ land bank ].

[Operator Instructions] The next question is from the line of Parikshit Kandpal from HDFC Securities.

Congratulations on the smart recovery in the residential segment. So my question was on the BTG project. So if you can take us through -- so you did mention in the presentation that inquiries have been improving. So is there discussions gone ahead like advanced stages? So if you can highlight some potential inquiries which could be now in the finalization stage and what could be the potential size of these opportunities?

Yes. So certainly, they are in advance stage for Brigade Tech Gardens. 1 million square feet is in a fairly advanced stage and about 0.4 million square feet is at RFP levels, and which the prospective tenant has already shortlisted us. So it depends -- that's the reason we said it can take till Q4 of FY '21 and Q1 of the calendar year 2021.

Okay. So -- but the revenues -- so what I understand from my own checks is that right now, the landlords are offering almost like anywhere from 6 to 9 months or rent-free period post the deal sign-up. So what could be the terms here like? And when do we see the first -- suppose the deal gets over by fourth quarter or first quarter of next financial year. So when will the first revenue start kicking in from this 1.5 million of incremental leasing?

See, it has more or less become a standard practice to give 90 to 120 days of rent-free period once the lease rental is signed. So that way it is -- if you ask me, if we conclude in the next couple of months, the rent may start ticking in from Q2 of FY '22, that is from July 1, 2021, we can expect the rent to start. If we're lucky, it can happen earlier.

On the entire 1.5 million, we're talking about, 1 million plus 0.5?

So those are -- details at this stage, it may be difficult to confirm, but it will be a substantial portion, I would say.

Okay. The second question was on the residential segment, sir. So we had seen a good momentum pickup from the first quarter to second quarter now. So do you see the -- so if I have to bifurcate it into pent-up demand and the sustainability of the demand, so what are the trends right now in the month of October and November into the festive season? So do you see the momentum carrying on from hereon? Or is it the interest is now maybe plateauing and fizzling out?

I will ask our CEO, Rajendra Joshi, of Residential, to respond to this.

Yes. So as Mr. Jaishankar did mention, the trend in October was also positive, and we are also seeing the same continuing in the month of November. This is not just the pent-up demand. I think what also is happening is, as somebody pointed out, a lot of people are realizing that it is important to have your own home in the times of crisis like that we went through. which is what is spurring the demand. And of course, consolidation, as Mr. Jaishankar pointed out, is really driving volumes for larger players like us.

So you remain confident on 1 million square feet even for this quarter, third quarter, in terms of trend?

Yes. Touchwood, I say.

The next question is from the line of Biplab Deb from Antique Stockbroking.

The first question is on your rental revenue. Despite your retail malls generating, I think, new phase rental, the overall rental revenue have jumped, I see, 83% year-on-year. Is it because of the rental from Brigade Tech Gardens Phase 1 getting recognized? Or there is something more to it? I just wanted to know why the rental -- I mean from where this rental jump has come, the rental revenue.

Atul, CFO, will respond.

Yes. Biplab, you are right. Rental, which is coming from Brigade Tech Gardens as well as we had some additional leasing in Opus as well as WTC, Kochi. So all that additional rental is coming from there. It stood at a tune of around INR 50 crores per quarter -- sorry, INR 5 crores -- INR 8 crores per month.

INR 8 crores per month, is that incremental -- because of incremental leasing?

Yes.

Okay, okay, that's perfect. And on the second thing is, sir, just -- I was just observing that your employee costs in all the 3 segments has jumped back to pre-COVID levels. And in the office, it is higher than the pre-COVID level. I mean is there a new incremental recruitment in the office segment? And what is the reason for this incremental jump in the employee cost, sir?

So Biplab, overall, our employee cost has gone down. It's only that there are some reallocation within the segment, which is there. But if you see overall, our employee cost has gone down by 44% as compared to Q4, if you see that is the -- if you take it as a normal quarter.

Okay. Okay. So no, I'm just saying there is -- okay. Sir, there wasn't really. So sir, just one final question, sir. From this -- from your office portfolio, what would be the kind of cash flow that is -- that would be able to generate? Just from your office portfolio and your share, how much -- what kind of cash flow around ballpark number that you would be generating in FY '21?

Yes. So I think we should generate cash flow of around INR 280 crores or so from commercial lease in full year. If there is additional leasing, definitely, it will go higher.

The next question is from the line of Yash Gupta from Angel Broking.

The first question on office leasing portfolio. As we have now added Brigade Tech Gardens 2 in our portfolio, so by what time we expect it to reach to around the 60, 70 occupancy level? And along with that, how the rent escalation are going in other properties also?

See, as indicated in my introductory remarks, we expect it to take 2 to 3 quarters is what I said. And as far as the escalation is concerned, it is -- generally, it's an average of about 15% once in 3 years. In few cases, it is 5% every year. And in exceptional cases, it may be slightly less than 15% once in 3 years.

So there will be no effect of lockdown. Escalation will go into happen as normal it is?

Yes. I think wherever there are commitments, it is bound to happen. We don't expect any major change, particularly where there are commitments locked -- lock-in. So it is going to be there. But ultimately, this is all market forces, let us see, how it pans out.

Okay. My second question is on the follow-up of the Cornerstone Utopia, Cornerstone when I visited the property last year, we were just -- we are constructing the first 2, 3 buildings of the Utopia Cornerstone out of 47 acres. So why we have acquired so early the second 47 acres or around to be 50 acres of the land also? Is that demand is -- some phenomenal demand is there in that particular area?

Yes. I would say, see the whole project is about 5.5 million square feet. Of that, we have already sold about 2.6 million square feet. And there are totally 7 buildings in that project. It is -- the first one what you had seen was called Serene and Eden blocks. Now what is under construction, also under construction is Helio and Halcyon and Tranquil, Halcyon and Tranquil blocks. In addition to that, we have recently started the multiplex and food court block. And the last residential block called Paradise, that will also start in the month of -- post Diwali. And we will have just one office block called Elysium, which will start in January. That means by this financial year-end, all 7 blocks in the projects would be under construction. That is the reason we have tied up for the additional land adjacent to this. But even if we succeed in fully acquiring this before March 2021, it will take us 12 to 18 months of good work and hard work after that to get all the approvals, and we'll be in a position to launch only sometime in the calendar year for 2022. By that time, we hope to fully sell the Brigade Cornerstone Utopia first phase.

The next question is from the line of Kunal Lakhan from CLSA.

Sir, quickly on your hospitality portfolio, the occupancies in this quarter have really not like picked up relative to last quarter despite your -- I mean unlocking in cities happening. Just -- and I'm presuming this occupancy has also been driven by mostly retail customer base. I just wanted to get some sense on the corporate demand and what is happening there? And are you seeing any indication in the prebookings? And when do you expect the corporate demand to pick up?

Our CEO, hospitality, Mr. Vineet Verma, will respond to this.

Kunal, how are you? As far as hospitality is concerned, Kunal, we have been seeing improvement month-on-month starting from September. September was quite poor. But in October, as we -- as our Chairman mentioned, with the exception of 2 of our hotels, the others have turned around with increasing occupancies. And I'm happy to tell you that even till date in the month of November, the occupancies have jumped even further. For example, now we are actually doing occupancy starting from even 29%. We -- one of our hotels is doing 54%. Our Holiday Inn Chennai is doing 42% as against the earlier 16% in September. So we have seen a noticeable improvement month-on-month, and I'm hoping that the trend is going to continue. As far as your corporate business is concerned, it is gradually picking up right now, Kunal. In fact, right now, we are actually seeing a lot of staycations and people moving in domestically. That's most of the business. And fortunately, because of the removal of restrictions on banquets, we're also beginning to get a lot of banquet inquiries where some residential requirements is also coming up for the rooms. So our F&B and banquets have been doing much, much better. Of course, nowhere close to pre-COVID. But I'm sure that by the turn of this year, we are going to see a much better traction.

That's very helpful. Just any indication on how are the room rates playing out in November now?

Kunal, unfortunately, the room rates are under pressure. They continue to be under pressure because of the gradual opening up, almost every competitor hotel is offering the lowest possible rates. So as far as ARRs are concerned, they continue to be under pressure. But what we are working on is mostly occupancy-driven business.

Sure, sure. And my second question was, again, on the land payment side. So the INR 165 crores of land payment that we see in your cash flows, is it fair to say that completely towards the 16 acre of purchase -- part purchase that we have done in the Utopia? Is that allocated to it?

Yes. No, it includes that. It includes that, yes.