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

Good evening, everyone. A very warm welcome to you all to the Embassy REIT's Second 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, Ms. Sakshi Garg, Head of Investor Relations from Embassy REIT. Ma'am, you may begin.

Thank you. Welcome to the Second Quarter FY 2026 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter and half year ended September 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 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 will provide on this call are all 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'll be able to achieve the same. Joining me today are Amit Shetty, our CEO; and Abhishek Agrawal, our CFO. We'll start off with brief remarks on our business and financial performance and then open the floor to questions. Over to you, Amit.

Thank you, Sakshi. Good evening, and thank you all for joining us today. I'm happy to report that quarter 2 was a stellar quarter for us on all fronts. The 3 key highlights that stand out are: we grew our occupancy by an impressive 200 basis points quarter-on-quarter to 90% by area and 93% by value. Secondly, we declared our highest ever quarterly distribution of INR 617 crores or INR 6.51 per unit. We registered double-digit growth across all our key financial metrics and grew our revenue by 13% and our NOI by 15%. Let me begin by starting with the outlook for the Indian office market. India, which is already the fourth largest global office market is on the verge of crossing the 1 billion square feet mark in terms of office stock. Robust demand from multinational corporates is driving this momentum. These companies range from large Fortune 500s to the mid-tier firms setting up their India offices. We see this positivity across the cities as demand continues to surpass supply, resulting in all India vacancy falling to the 20% levels, which was the pre-pandemic level. With this backdrop, let me delve deeper into our Q2 leasing performance. We leased 1.5 million square feet across 20 deals and expanded our occupier base to 274 marquee tenants. This included 1 million square feet of new lease at 27% re-leasing spread, 0.4 million square feet of renewal and 64,000 square feet of precommitment. GCCs accounted for over 50% of our leasing and the remainder was mainly contributed by domestic technology, consulting and flex operators. Our core portfolio of Bangalore continued to lead the demand and contributed to over 85% of our quarter 2 leasing. With this, our Bangalore portfolio occupancy is now at 95%, up 300 basis points quarter-on-quarter. On the back of our strong leasing this quarter, we increased our portfolio occupancy by 200 basis points quarter-on-quarter to 90% by area and 93% by value. On our development portfolio, we delivered a new 0.9 million square feet building in Embassy Manyata in Bangalore, which is 100% pre-leased to a Fortune 500 retail major. Another 1.4 million square feet building in the park is scheduled for delivery in the later part of the financial year. This block is 100% pre-leased, including expansion options. Moving to Chennai, where we have been developing 3 new office blocks since the acquisition of Embassy Splendid TechZone. Block 10 totaling 0.4 million square feet was completed this quarter and is 100% pre-leased. Its occupancy certificate is expected by the end of this month. Block 4 and Block 1, totaling 1.2 million square feet are slated for delivery across the next 3 quarters and are now 30% pre-leased, including expansion options that we have a strong pipeline for the remainder of the space. On the back of this robust demand, which is driven mainly by the GCCs, we have launched 2 million square feet of new development in this asset and look forward to building a strong pipeline for the same. With this, our total development pipeline now stands at 7.2 million square feet. All these projects are highly accretive to our NOI and DPU. Lastly, we welcome and commend SEBI's landmark move to reclassify Indian REITs as equity. This brings Indian REITs on parity with its global peers and will pave the way for broader investor participation, stronger liquidity and potential index inclusion. The move has been taken up positively by the market and has been a key contributor to the 20% total returns that we have delivered in the last 9 months. Overall, this was a really strong quarter for us. We are able to actively evaluate multiple acquisition opportunities from third parties as well as from Embassy Group and will update the market as we progress. We are excited to continue delivering meaningful growth to our ever-expanding base of over 110,000 investors. I will now hand over to Abhishek to present our financial update.

Thank you, Amit, and good evening, everyone. Let me take you through the key financial highlights for Q2. Our revenue from operations grew by 13% year-on-year to INR 1,124 crores and NOI increased by 15% year-on-year to INR 927 crores. This strong growth was driven by our continued leasing momentum, rental escalations, increase in hotel ADRs and recent deliveries of new office buildings, partially offset by a decline in our solar NOI. We declared distributions of INR 617 crores or INR 6.51 per unit for the quarter. This impressive 12% year-on-year growth in distributions was driven by our NOI growth and working capital changes, partially offset by an increase in interest expenses. During the quarter, we raised INR 2,000 crores of debt through a 10-year NCD at 7.33%, which was largely used to refinance higher cost debt. By raising this first ever 10-year NCD in the Indian REIT space, we are proud to have pioneered newer debt capital pools for the industry. Our net debt stood at INR 2,0079 crores as of September '25, implying a 31% leverage ratio at 7.35% average in-place cost. Through our refinances and other treasury initiatives, we have successfully reduced our in-place debt cost by 55 basis points in the last 6 months. We remain focused on further optimizing our interest cost and have recently raised INR 400 crores through a commercial paper at an effective rate of 6.44% per annum. As of September '25, our gross asset value increased by 8% year-on-year to INR 6,3980 crores and our NAV by 7% to INR 445.91 per unit. This growth was primarily driven by strong leasing, rent growth and new deliveries. Backed by our premium portfolio assets and dual AAA credit ratings, our balance sheet position is extremely strong, and we are well primed to grow our business. Lastly, an update on our FY '26 guidance. Based on our H1 performance, we remain on track with our annual guidance. 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 24.5 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. This guidance is based on certain key assumptions for the year, which includes March '26 portfolio occupancy of 90% to 91% by area, hotel NOI growth of around 9% year-on-year and increase in total interest expense for the year by 10% to 12% year-on-year. We are committed to deliver growth for this year and to continue growing our DPU in the years to come. We can now move to Q&A, please.

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

Congratulations on a very nice pickup on leasing DPU, everything actually going well this quarter, it seems. So my first question is on Chennai block. And when I see your leasing there, you talked about a 64,000 square feet pre-lease in Chennai. But when I look at the individual slides, there is a Block 10 where you fully leased out and then there is Block 1, which includes expansion options. So do the expansion options also count as pre-lease? Or is that still very early stages?

So firstly, Puneet, thank you. Chennai has been a very strong market for us, and we've leased about -- in the last 1.5 years, we've leased about 0.8 million square feet. Having said that, Block 10 is completely pre-leased to a large client, while some of the other blocks, which is Block 4 and Block 10, like I mentioned, it's about 30% pre-leased. The expansion options we have not included, Puneet.

Okay. So in the 35% pre-lease of points in the Block 1, the expansion is not included?

That's right.

Puneet, actually, every time we put a lease or a pre-lease data, expansion options are never included. Those are over and above. And we disclosed it separately for our development pipeline in the supplementary data book.

Okay. Understood. And secondly, when I look at your contractual escalations, over the next few years, they all seem to be between 13% to 14% versus 15%. Has there been any change in how these escalation clauses are being worked out now versus earlier?

Not really, Puneet. The market, there's a very standard market, either the escalation is 5% per annum or it's 15% every 3 years. And mostly, it's 15% every 3 years. Those escalation -- standard contractual escalations remain.

But next 3 years, I see mostly 14% for you, which is why I was asking.

Yes, because there is an average -- see, because some of these contracts are between 5% per annum and some of them are 15% every 3 years. So when you average that out, you will hit a number of 14%.

Understood. That's very helpful. And lastly, on the Hilton side, occupancy has inched up quite nicely this time. Any meaningful change here? Or was it driven by some big event in Bangalore during the quarter?

No. I mean, it is business as usual for us. And we believe that given that these hotels are within the business park and given the activity of leasing and corporate activity, on the back of this, we saw this occupancy.

The next question is from the line of Mohit Agrawal from IIFL.

Congratulations on a great quarter. My first question is, see, you all agree, it's a great cycle. If I look at your numbers, the same-store NOI now is double-digit growth. So first half, you did about 11%. Occupancy also, we just mentioned that it's trending 90 -- you had an estimate of 90%, 91%. Just trying to understand how do you see this playing out for the investors? So let's say, your FY '26 guidance, 13% NOI, 10% distribution growth. Do you now see that you could probably reach the upper end of the guidance for FY '26? And would this mean even if you may not want to quantify, but does that mean that '27 and '28 could be much sharper like-for-like NOI growth and also distribution considering that the interest rates have been coming down. So your thoughts here?

Mohit, do you want to ask all the questions and then we can answer collectively.

Yes. Okay. Yes. So my second question is specifically on your Pune assets, what's happening there? So obviously, Bangalore is doing -- done very well. Pune, while I don't see any uptick in the occupancy meaningfully, but the value -- the JV has actually gone up in the last 6 months. So how are you looking at the demand and rentals there? And what is the green shoots that you're seeing there?

Okay. So let me take the first question, [ Puneet ]. See, from an overall occupancy perspective, we've reached 90% this quarter. And we see increased leasing momentum in the market, right? But having said that, we are very -- we are also delivering a lot of spaces. So we are focused on those deliveries as also on the occupancies of those spaces. And having said that, again, [ Puneet ], we are very confident that we will be surpassing our occupancy guidance that we have given the market. But having said that, we do not want to revise any guidance to the market at this point in time. When the time is appropriate, we'll come back if there is any revision to those guidance, right? The second part of the first question is how do we see some of the operating income growth. Like we said, there is a 7.2 million square feet development pipeline, and we have guided a 10% growth. And we are very actively looking at delivering those 7.2 million square feet. And like I said, also pre-leasing those assets. And hopefully, we will surpass our guidances, right? Second question was Pune. On the Pune piece, like you know, the market has been a little bit sluggish, especially the Hinjewadi market, but we are seeing a little bit of traction in terms of leasing. First quarter, we saw a couple of leases. This quarter, again, we've reported one lease that we have concluded. But the team has built about -- a pipeline of about 150,000 square feet, but the fortunes can change very quickly once the metro as well as the Navi Mumbai Airport is operational, which is what happened with us in Noida as well. So probably in the next 6 months, 1 year, we are hopeful that the fortunes will change in Pune market.

Just a follow-up. Firstly, on the first question, '27, '28, do you expect the NOI growth could be sharper like in the range of, let's say, 13% to 15% like-for-like or more than that?

Mohit, this is Abhishek. I mean, we expect that the NOI will be higher for sure, but I mean, I don't want to quantify or give you an indication right now. But because of all the deliveries that we have and because of all the leasing that we have, the kind of leasing that we are seeing, now definitely, it will be higher.

And Abhishek, what will be the benefit of lower interest rates? So let's say, currently, what are you building? What interest rates you are building? And then what is the expectation, let's say, going forward? Would that benefit also flow into distribution?

Yes, definitely, that benefit will start flowing into distributions from the next quarter itself because all the -- if you see the interest rate has reduced from 7.9% to 7.35% right now. Most of the impact will start coming in from the next quarter. From here on, organically, we don't see much decrease in the interest rate. But let's say, the Indian government also wants to mirror what Fed has done and there is a 25 to 50 basis point reduction in interest rate. In that case, there can be further reduction in interest. And most of it will start flowing to NDCF because now the interest rate capitalization is reducing because of all the deliveries.

Sure. Just a last clarification. On the Pune assets, what has been the driver for the valuation going up, if you could explain that?

So one of -- there are a couple of factors. One is like with the flux of time, the way DCF model works, there is an impact of escalations. There's an impact of all the renewals that we are doing. So because of that, the valuation has increased a bit.

The next question is from the line of Jatin from BofA.

This is Kunal. A couple of questions from my side. The new leasing has indeed been very strong. I'm just curious that there also has been an increase in planned expiries for the year. And we've also sort of seen this in the numbers of some of the other REITs as well. So just curious, otherwise I would have thought that if the leasing environment is so strong, even the planned exits should sort of come down, but hasn't been the case. Is this regular course of business you think? Or could it be something to do with the nature of demand there was 3, 4 years back, and that's what's showing up in numbers now? So that's question one. And second, on your development pipeline now starting to come to fruition broadly, how would you want to think about the DPU accretion of that? Does it take some time before it becomes accretive? Or should it start becoming accretive from day 1 because most of these assets seem to be 100% pre-leased?

Firstly, let me begin with the exits. It's business as usual. If you see the overall exits from a trajectory perspective, actually, it's pretty tight this year. And also, I just want to mention that some of these exits were actually relocation. For example, ANZ, which was having about 0.5 million square feet with us, grew to about 700,000-plus. So they exited their old block and they took a newer block. And similarly, about another 150,000 square feet was with the retail major. They have also grown with us in our portfolio itself. So cumulatively, we don't see this as additional exits, but it's just business as usual. Abhishek, over to you.

So [ Jatin ], on the development pipeline efficiency, definitely, we are taking care of now 7.2 million square feet, which will be delivered most part, let's say, 5.2 million in the next 3 years and another 2 million after that. So it will be DPU accretive because if you see the yield on cost is almost around 15% there. So barring the interest cost, which will come in, this will be -- and let's say, the interest cost is 7.5%, it will be DPU accretive. But what I want to also mention is even though they are pre-leased, once the building is up, these tenants will take some time for their fit-outs and hence, we have a rent-free period, which is generally -- if it's a big tenant, then 6 months, it depends if it's the smaller tenants, it can be lower. So it will take that time because during those period, the interest will be a drag, but the rental actually starts after that rent-free period. So it takes some time.

The next question is from the line of Yashas Gilganchi from BOB Capital Markets.

I would like to know more about the invitation to offer from Embassy developments for the commercial project in Whitefield. At what stage is the evaluation process? And how long is it expected to take? Are you -- and what yield on cost would you be targeting? And if the project were to be evaluated positively, when do you expect to start spending on the project? What is the CapEx outflow to be like? And my second question is, are you also evaluating acquiring third-party assets? If so, how would you describe the market now? And are there any opportunities or challenges?

Okay, let me first begin with the Whitefield asset that we've got an invitation to assess. We're currently in the stage of evaluation. There are multiple diligence that we have to carry on. All that I can comment at this stage is that the evaluation is under progress. And as soon as we are completed and in a better position, we will update the market. Having said that, Whitefield is a very accretive market, probably the best performing micro market in Bangalore today. And we see that this asset is strategically positioned in the main part of Whitefield on ITPL Road. So having said that, we are keenly evaluating the asset. Also on third-party acquisitions, we are -- like we've mentioned in our press release as well, we are actively evaluating all third-party assets opportunities that is available across the top 6 cities in the country. As and when we are closer or we've made a decision, we will update the markets.

Sorry to interrupt, shall we move ahead with the next question?

Yes, please.

The next question is from the line of Gaurav Khandelwal from JPMorgan.

Most of my questions are actually -- what were your expectations on the cost of fund at the beginning of year versus 7.35%. And let's say, if there are no further rate cuts, does the blended cost of funds still continue to trend down? That's number one. Number two, sorry, I should have known this, but can I just understand when you gave us a guidance of 13% NOI growth versus 10% DPU growth, what was the 3% disconnect there? Those are all my questions.

Yes, Gaurav. So on the disconnect between NOI growth and DPU growth, it was largely because of 2 things. One is the interest cost increase because of the new deliveries, as I was explaining before to Yashas. And the second was the noncash NOI, which would come in because of the rent-free period. So that was the disconnect. Going to the debt cost at the start of the year, we were at 7.9%. We were expecting slight decrease on the refinancing. And let's say, we had built in around 0.25% to 0.5%. But today, we are at 7.35%. There is a positive there. Having said that, if, let's say, there is no rate cuts from here on, it will slightly go down because of the refinance that we will do of the upcoming refinance is around INR 1,100 crores. So slight dip there. And there is one INR 400 crores CP that we had done at 6.44% because of which the average would come down slightly because it's a very small one. But otherwise, no major expectation that we have there.

Got it. But it's then safe to assume that the interest costs are faring better than what you had budgeted at the beginning of the year?

Yes. Yes, Gaurav.