Embassy Office Parks REIT (EMBASSY.BO) Earnings Call Transcript & Summary

Good evening, everyone. A very warm welcome to all for the Embassy REIT's First Quarter FY 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Amit Anil Kharche, Head of Corporate Finance for Embassy REIT. Sir, you may begin now.

Thank you. Welcome to the first quarter FY '26 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter ended June 30, 2025, a short while back. As is our standard practice, we have placed our financial results, 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 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 or pro forma information that we will provide on this call are management estimates based on certain assumptions and have not been subjected to any audit review or examination procedures. You are cautioned not to place undue reliance on such information, and there can be no assurance that we will be able to achieve the same. Joining me today are Ritwik Bhattacharjee, our CEO; Amit Shetty, our COO; and Abhishek Agrawal, our CFO. We will start off with the brief remarks on our business and financial performance and then open the floor to the questions. Over to you, Ritwik.

Thank you, Amit. Good evening, everyone, and thank you for joining us on the call today. Before I discuss the earnings for the quarter, I'm pleased to announce that the Board has approved the appointment of Amit Shetty as the Chief Executive Officer of Embassy REIT effective August 1, 2025. Amit is currently the Chief Operating Officer and known to many of you already as a member of our leadership team. Amit has played an instrumental role in building Embassy REIT into India's leading commercial office enterprise, and I wish him the very best. I will be a senior adviser to the REIT. It's been a real privilege to have led Embassy REIT and been a part of this organization, and I thank Jeetu, Aditya, the Board and the entire REIT team for their continued support and trust. I will pass it on to Amit to say a few words.

Thanks, Ritwik. Good evening, everyone. I'm really pleased to lead the Embassy REIT at such an exciting time for our business. I look forward to working with the team and interacting with all of you. The business is in very good shape. And as you will see during the earnings call later, the fundamentals are very strong, and we've got a very strong quarter to announce as well. Over to you, Ritwik.

Thanks, Amit. As Amit alluded to, we're really pleased to report a strong start to FY '26. So here are some of the highlights for the quarter. We've leased 2 million square feet across 25 deals, up 9% year-on-year. The 2 million square feet marked our highest ever Q1 fiscal quarter leasing. The leasing includes approximately 1 million square feet of new leases at re-leasing spreads of around 38%, 4000 square feet of renewals and 700,000 square feet of precommitments, which is a real shot in the arm from GCCs, technology and health care companies accounting for the majority of leasing. Our occupancy stands at 88% by area and 91% by value, both up by around 300 basis points year-on-year. Excluding Quadron in Pune, our occupancy is 91% by area and 92% by value. All Bangalore assets are now over 90% leased, reaffirming the strength of our core market, which contributes 75% of our GAV. Overall, 10 of our 14 properties are above 90% in occupancy, including 6 at 100%. GCCs continue to drive demand and account for 64% of portfolio rentals across approximately 100 tenants. Pre-leasing activity led by Chennai has been the clear theme this quarter. Block 10, which is roughly around 0.43 million square feet, 430,000 square feet at Embassy TechZone in Chennai, which is scheduled for delivery in Q2 has been fully pre-leased to a global health care company that's already a tenant of ours. Block 4, which is 600,000 square feet in Chennai has been 14% pre-leased, including the expansion option to Dexian. In Embassy Manyata, Block D1 and D2, which is slated for delivery in the Q4, FY '26, saw an additional pre-leasing of approximately 160,000 square feet, which brings the total precommitment for this block to approximately 80%. Our FY '26 deliveries of 3.2 million square feet are now 84% pre-leased, including expansion options. Just a quick note on strategic capital recycling and some inorganic growth. We've entered binding documents to divest approximately 376,000 square feet at Embassy Manyata that comprises 2 strata owned blocks, including a vacant vintage block that requires significant CapEx. This exit aligns with our capital recycling, and this deal is expected to close in the coming quarters, subject to conditions precedent. In addition, we've received an invitation to offer from Embassy Developments Limited, or EDL, a potential 3.3 million square feet commercial project in Whitefield, the opportunity, Whitefield Bangalore, excuse me. The opportunity is under evaluation in line with applicable regulations and governance protocols. In other updates, the 518 key Hilton hotels at Embassy Tech Village is on track for October 26 delivery. The remaining 2.8 million square feet of commercial pipeline scheduled for FY '27, '28 is 30% pre-leased, including expansion options. The Hospitality segment is tracking in line with expectations with 60% occupancy and 9% year-on-year growth in revenue and EBITDA, aided by 10% growth in ADR. Given geopolitical events in the Middle East, we did see that some travel plans were disrupted in the quarter, and that did have a small impact on our portfolio, but overall, the market has stabilized pretty significantly thereafter. The solar performance remains muted due to the lower unit generation, coupled with reduced tariffs in Karnataka. So overall, a very solid quarter, which positions us very well for the rest of FY '26. I'll hand it over to Abhishek to present our financial updates.

Thank you, Ritwik, and good evening, everyone. Let me take you through the financial highlights for Q1. Revenue from operations stood at INR 1,060 crores, up 13% year-on-year and NOI at INR 872 crores, up 15% year-on-year. This increase was largely driven by new leasing, rental escalations, recent deliveries and contributions from the fully integrated Embassy's Splendid TechZone asset. We declared distributions of INR 550 crores or INR 5.8 per unit for the quarter, representing a growth of 4% year-on-year. This was supported by NOI growth and working capital changes, partially offset by increase in interest expenses. During the quarter, we raised INR 4,225 crores of debt at a blended coupon of 7.18%, which was largely used to refinance higher cost debt. This included NCD issuance of INR 750 crores at a coupon of 6.97%, which is the lowest coupon we have ever achieved in the last 4 years, reaffirming our positions as a top-tier credit in India's commercial real estate sector. Our net debt stands at INR 2,0183 crores as on 30th June 2025, implying a leverage ratio of 33% with an average in-place coupon of 7.59%. Following the debt refinance post quarter closure, our in-place coupon now stands at 7.55%, reiterating our strong balance sheet position with dual AAA credit ratings. In addition to above, we recently raised a 10-year NCD of INR 2,000 crores at an effective coupon of 7.33%; this issuance saw strong participation from leading insurers, pension funds and mutual funds. This marks the first 10-year issuance by a REIT in India, underscoring the strength and quality of our credit profile. Now moving on to the forward outlook for FY '26. We remain on track with the FY '26 guidance that we provided last quarter. We continue to expect our NOI to be in the range of INR 3,589 crores to INR 3,811 crores and DPU to be in the range of INR 24.50 to INR 26 per unit. At midpoint, this guidance implies a 13% growth in NOI and a 10% growth in DPU on a year-on-year basis. I will now go through some of the key assumptions underlying our full year FY '26 guidance with 1 quarter of the year behind us. We continue to expect portfolio occupancy to be between 90% and 91% by area or between 93% and 94%, excluding Quadron at the end of FY '26. Hotel NOI is expected to grow by approximately 9% year-on-year, supported by steady improvements in both occupancy and ADR. Interest costs are anticipated to rise by 10% to 12% year-on-year, primarily due to the impact of the asset deliveries in FY '25 and the planned deliveries during the remainder of FY '26. We remain committed to delivering on these growth metrics while optimizing capital efficiency and maintaining strong cash flows. With this, let us now move to Q&A.

[Operator Instructions] The first question is from the line of Puneet from HSBC.

First of all, thank you to Ritwik for holding the fort in the interim and Amit, welcome to your new role and best wishes for that. Secondly, my first question is to do with the thought behind divestment of Manyata asset. And if you can reveal a bit more to who you are selling to, what is driving this thought process? And how should one think about valuations, yields, et cetera, on this asset? And what does it do to your future thought of at one point of time acquiring more of these assets within Manyata?

Anything else? First of all, thanks, Puneet, for those kind words. Any other question? Or is this it?

Second is also, if you can, we can get your thoughts on the divestment of the Pune asset, which was at one point of time contemplated. Is that not in consideration anymore? And lastly, if you can also talk a bit about leasing environment right now in the context of what's happening around the globe. Any updated thoughts would be very helpful. That's all.

Okay. Let me, we'll parcel this out. I think on Manyata, I'll let Amit Kharche handle that, and then we'll move on to talking about Pune for a little while. I'll start with Pune a little bit, and then Amit Shetty can add on to that and then move on to leasing. But Kharche, why don't you go first?

Sure, Puneet. So, to whom we are selling, that is one thing we have a confidentiality with them, which we won't be able to share on this call. But for the rationale behind the divestment, it's simple. These are, let's say, 20-year-old blocks facing an occupancy risk, and it will require a substantial refurbishment if we were to bring it back the occupancy, which we are seeing in Manyata. So, we got an opportunity. Second, someone was willing to pay us 2.2% higher than the independent valuation. So, we just thought we'll divest this asset and use this use of proceeds for a future proposition if we were to repay debt or use these proceeds for any strategic acquisition or anywhere else. So that is the plan right now. We have entered into binding documents. As and when we'll be able to move closer to the closing, we'll keep the market updated about the use of proceeds.

Just to add on what Amit said, I was saying that these are just strata blocks in 2 of the buildings, which were some floors. And the building also had a lot of other strata owners. So operationally also, it makes sense to, I mean, that also helped us to take this.

Yes. Just adding, Puneet, this asset had about 17 other strata owners, right? And the fact of the matter is that of the 375,000 that we owned, 231,000 is currently leased, 145,000 is vacant. Of that 231,000, about 105,000, there is an exit notice as well. And so, it just made logical sense for us because new leasing will require a significant amount of investment plus the risk of holdover and waiting of time. And we just thought that there was a great opportunity for us to recycle the capital. And that's what we thought is the right thing to do for the business. Moving on to Pune. Yes.

Look, let me start with Pune and Amit, why don't you add on. I think on Quadron, yes, we had spoken to the market about taking it off and maybe if somebody wanted to have it, given sort of the fact that there were a number of issues with the location, the fact that IT services, that was a lot of that was a large tenant and left it and kind of reached havoc on occupancy. And I think the fundamental thing was we did get sort of people kicking it around for a few numbers, but there certainly weren't anything we were interested in. And ultimately, we just took a call internally and even we're having a chat with the Board at various times that, look, at some point in time, look, the cycle turns, right? And I think if we are okay with waiting it out. Clearly, I think we've always approached it from, if there's absent a good price for this, we are more than happy to think about sort of keeping it with us for the moment. Pune is obviously expanding. It's doing well. And yes, while it's not maybe some of the other pricier parts of Pune, at some point when the metro comes in, at some point when Navi Mumbai Airport sort of picks up and you see that kind of traction, we could see a turnaround. I mean we're seeing a turnaround in Noida at this point in time. where you wait long enough for the asset eventually turn. So, I think for now, we're content to keep it, you should just, I'll be totally transparent. We also just look at the portfolio and the numbers of the portfolio ex Quadron for a bit. It's just, I think, the way that we think that it should run, it's a fraction of the value of the portfolio and the contributing analysis of the business. And yes, it's unfortunate that it's reached that position. But I think at some point in time, it will turn. But yes, I'll leave it at that. Amit, did you have anything to add?

No I think you covered it all, Ritwik. And I'd probably move to the third question that Puneet asked is how do we look at the overall market from a leasing perspective. Puneet, I mean, look, the markets look really good. There's a lot of activity happening in the market. It's been a very robust first quarter '19, almost about 20 million square feet getting absorbed and the supply is actually chasing the demand. The IPCs have projected approximately drop in vacancies as well across the country, which is really encouraging. The rental rates are moving up, right, about 5% to 7%. So, I think it's an overall great story for us. And also, Chennai is really firing for us. We've just pre-leased about 0.5 million square feet plus in Chennai. We've done some interesting pre-lease in Bangalore, and that momentum continues in both the market. We've done some exciting work in Noida. We've done about 225,000 square feet that we've already leased, and we've got a very, very active pipeline of about 1.5 million square feet, right? And the market is seeing potentially about 12 million square feet of active RFPs. And we're participating in about 90% of these RFPs. So, the story can't be greater for us.

Understood. And just lastly, on the walk down from NOI growth to NDCF growth. You did talk about some bit of interest rate impact. But should it have been that stark a 15% NOI growth translates into less than 4% NDCF growth? What are some of the other factors? And how should we think about this? Because a lot of new assets also came in, right, in the last couple of quarters.

Yes, Puneet. So, there are total 3 parts to it. One is the interest portion. The second one is payment of the property tax. So, what actually happens is the property tax of Bangalore properties was paid for the full year in the first quarter itself. So, there is that second impact. And the third impact is the properties that we delivered in the last year, last quarter. Now the noncash NOI has kicked in right now. However, the cash NOI will kick in from Q2 and Q3 onwards.

You're saying they are not rent yielding per se, they're still in the rent-free period?

Yes. Yes, because we delivered it in the last quarter. Now the cash rent actually, the RCD starts in Q2, Q3 onwards.

But the interest on the debt you had taken for this, you start paying that now from the last quarter onwards.

Absolutely.

Okay. And the property tax, if you could share the quantum? And should it not be a part of pre-NOI expense because NOI also grew 15%, right?

Yes. So, what happened is property tax is, yes, you are right. So, it is a pre-NOI expense, but the cash went out, but NOI, the larger chunk was also the noncash. So, all these 3 taken together explains the difference between 13% of NOI and 4% of DPO.

So noncash rent versus interest, I would, should assume is the gap between NOI growth versus NDCF?

Yes.

Our next question comes from the line of Pritesh Sheth from Axis Capital Limited.

Congrats, Amit, for your elevation. First, on this divestiture, just trying to understand, so these blocks that we are now having off, they were not contributing to rents as of now? Or what is the NOI rental kind of impact? Obviously, it will be miniscule, but just trying to understand whether they were contributing anything or not?

Yes. So, Pritesh, right now, the occupancy is around 6% and we have received additional notices for these blocks. Post that occupancy will drop to around 32%. And we see the rentals in the range of INR 8 crores, which will be close to 2% NOI post the exit.

Okay. Got it. And this is part of the [MR] block, is it?

Yes.

Okay. Okay. Second question on Splendid TechZone. I think the first block that's coming up in September saw good pre-leasing. What's the outlook on the second one? Will that also be fully leased before it's, before it's delivered completely or below 5 lakhs leasing a year should be a good leasing run rate in Chennai that we see?

Absolutely. Pritesh, firstly, thank you for your wishes. And from an overall Chennai perspective, the market is actually really, really hot. So, in terms of the overall supply, there is actually no quality supply in the market. And we are probably one of those developers who's actually got stock that's actually coming up into the market in the right point of time. Having said that, to answer your question on Block 4, we've already pre-leased about 14% to a company called Dexian, and we've got a very strong pipeline. The hope is that we will pre-lease this, but we are confident that at least 50% of that building will get pre-leased before delivery.

Sure. That's pretty helpful. And just one last on the cash taxes part. It has been like pretty much in the 5% of EBITDA kind of a range. since quite a few quarters. Would that run rate remain like for medium, longer term? Or eventually, we would start paying a little higher taxes, once your previous losses gets completely absorbed. So just guidance on that.

Yes, Pritesh. So, the expectation is that for medium term, it will remain similar to 5%, but it will increase by, let's say, 1% in the longer term for the reasons...

1% you are saying. 5% or so. So, it can go to like 6%, 7-odd percent.

It can go to 6% or max 7%. The expectation is 6%.

Our next question comes from the line of Parvez Qazi from Nuvama Group.

So, my first question, I'm not sure if you've already covered this.

I'm really sorry to interrupt. Paresh, you're sounding a bit muffled.