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

Ladies and gentlemen, good day, and welcome to the Embassy Office Parks REIT Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ritwik Bhattacharjee, Head of Investor Relations at Embassy REIT. Thank you, and over to you, sir.

Thank you very much. Welcome to the Third Quarter FY 2020 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter ended December 31, 2019, a short while back. As is our standard practice, we've placed the reviewed financial statements and investor presentation discussing our quarterly performance and a supplemental financial and operating data book on our website at ir.embassyofficeparks.com in the Investor Relations section. Our management team continues to engage extensively with various stakeholders, including unitholders, research analysts, industry associations, the media and regulators to educate investors and to strengthen the REIT market further in the country. As always, we'd 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. Joining me on the call today are Michael Holland, the CEO; Vikaash Khdloya, the Deputy CEO and COO; and Aravind Maiya, our deputy CFO. Mike will start off with the third quarter highlights, business overview and strategy, followed by Vikaash and Aravind. We will then open the floor to Q&A. Over to you, Mike.

Thank you, Ritwik. Good evening. Thank you all for joining the call. Today, we announced our third quarter results, and we've had another great quarter. The first 3 quarters of this fiscal saw some uneven macro factors, both in India and internationally. In contrast, given that our business caters primarily to the international corporations based here in India, servicing their own home markets through the cost-effective talent available, we continue to see growth from the strong and consistent occupier demand. In fact, we're on pace to have one of our strongest leasing years by square foot leased with year-to-date re-leasing spreads averaging 56% on new deals. This buoyant occupier demand for Indian office sector was illustrated by leading property consultants reporting pan-India year-end gross leasing numbers of around 60 million square feet, growing more than 25% year-on-year and a continuation of the positive trend we have seen over the past few years. As we look ahead into 2020, both our portfolio's demand pipeline and the overall market forecasts from leading consultants remain encouraging and suggest similar, if not higher levels of lease-up in the coming year. Technology companies are the fastest-growing businesses in the world and accounted for the majority of new leasing in many markets, including U.S.A. and India in 2019. With over 2 million students graduating each year in Science, Technology, Engineering and Mathematics, India leads in STEM talent for technology assignments and the cost is also favorable here relative to the rest of the world. And it's because of that tech talent, again in 2019, India absorbed more office premises than any other national markets in the world. And Bangalore, which is our key market, continues to be the #1 location in Asia for technology occupiers. In the last quarter, we've again seen reports of double-digit year-on-year growth in hiring. We've heard our existing occupiers confirm plans for continued growth. And there is a strong pipeline of demand across our markets, particularly from the technology segment, including demand from artificial intelligence, data analytics, cloud computing and cybersecurity tech firms. And this aligns with the occupier businesses, which are growing within our portfolio. And only this week here in Mumbai, we've heard a similar theme from the NASSCOM Annual Strategic Review. The indicators are consistent. Abundant tech talent at an attractive cost is a powerful combination that has driven leasing and we believe will continue to drive growth in demand through 2020 for high-quality office product in the major metros of India, primarily in the 4 cities in which we operate. On today's call, you'll hear how the scale of our business gives us significant competitive advantage, how we've maintained our lease-up momentum in Q3, how we're growing our portfolio through both inorganic growth through a delivery of 1.4 million square feet of our on-campus development program as well as inorganic growth through our accretive add-on acquisition of 600,000 square feet at Embassy Manyata and the analysis of large scale, high-quality acquisition opportunities to further expand the portfolio on the strength of our balance sheet and add further value to our unitholders. We remain committed to our business strategy, delivering total return through regular and predictable quarterly distributions, supplemented by growing NOI and underlying value through various accretive growth initiatives, including potential acquisitions. The business continues to be in excellent shape, and it's been another quarter of solid earnings growth. Q3 saw a year-on-year revenue and NOI growth at 14% and 16%, respectively, and we plan to distribute INR 4,707 million to unitholders this quarter. Vikaash will now discuss in detail our business and operating performance.

Thanks, Mike. Good evening, everyone. Business highlights for this quarter include new lease-up of 527,000 square feet with a strong forward pipeline of approximately 500,000 square feet; successful completion of 2 under construction office developments totaling 1.4 million square feet, with both projects delivered ahead of schedule and 44% pre-committed; moving ahead with the next phase of on-campus development growth with construction of 2.6 million square feet now under way; and acquisition of approximately 0.6 million square feet leasable area in Bangalore within the overall Embassy Manyata campus upon building completion in Q4 of FY '23 at a 9.25% yield. Now let me take you through the details. Leasing continues to be a core driver of our business growth. We had another strong quarter of leasing performance. We leased 527,000 square feet in Q3 to 10 tenants driving the occupancy at the end of Q3 to 95.1%, an increase of 40 basis points compared to Q2 occupancy. With this, our lease-up for the 9 months of this fiscal year is approximately 1.7 million square feet, similar to the levels we achieved for the full 12 months in the previous year. Our near-term leasing pipeline continues to be encouraging at approximately 500,000 square feet, including some strong interest for our Embassy Manyata NXT as well as Embassy Oxygen projects, wherein we are in advanced discussions with renowned global corporations. With this good progress, we are aiming to surpass the previous highest full year lease-up of 2.1 million square feet achieved in fiscal 2016. The quality and scale of our portfolio makes us the landlord of choice within our submarket, resulting in our properties commanding a rental premium. We also achieved approximately 56.3% mark-to-market spreads on over 1.1 million square feet of re-leases year-to-date, demonstrating the continuing appeal of our product and the embedded growth in our portfolio. Our on-campus development delivers ahead of schedule. In the previous quarter, we indicated that we were ahead of schedule on the 1.4 million square feet on-campus development projects. We confirm that we have delivered these projects with 44% leasing precommitment at rents which are new benchmarks for their respective micro-markets. These occupiers comprise some of the global Fortune corporations and they're expected to commence operations in the second half of 2020. We are currently in active discussions with a number of occupiers for the balance area. This impressive traction for our projects, even prior to completion and at rents which are at a premium to market, validates our strategy in relation to new development. Given that our portfolio is now 95.1% occupied and our submarkets are generally running at sub-6% vacancy, we are now moving ahead with an additional 2.6 million square feet on-campus development to drive our next phase of growth. This 2.6 million square feet of new development is spread across 4 blocks and 3 of our portfolio cities, namely Bangalore, Pune and NCR. Our endeavor here is to do more of the same; that is, on-time delivery and high levels of leasing prior to completion. Moving to our add-on acquisition at Embassy Manyata. In late December 2019, we entered into an agreement with Embassy Sponsor to acquire approximately 0.6 million square feet of leasable area within the overall Embassy Manyata business park campus upon development completion in Q4 of FY '23. Considering Embassy Manyata is our largest asset with 11 million square feet completed area, and is consistently running at close to 100% occupancy over the last few years, the additional office block will help cater to the growing space requirements of our occupiers in a strong micro-market in Bangalore. This 0.6 million square feet acquisition also helps consolidate existing M3 land parcel at Embassy Manyata. At a 9.25% yield, this debt funded acquisition is expected to be DPU accretive upon stabilization. The acquisition cost of INR 7.4 billion shall be funded through additional debt and will be paid in tranches linked to milestones. The other significantly larger acquisition opportunity, which is currently under consideration, is the ROFO asset of Embassy TechVillage pursuant to a ROFO notice received from Embassy Sponsor last quarter. With over 6 million square feet of completed area currently 97% occupied and 2 million square feet of office development as well as proposed 518 keys Hilton Hotels, the asset is one of the premium assets located in the Outer Ring Road micro-market in Bangalore with a diverse tenant roster comprising technology, banking, finance, e-commerce and engineering occupiers. The opportunity is currently under detailed evaluation, and we will report more at an appropriate juncture. We continue to evaluate other acquisition opportunities which can fit our criteria of high-quality, large-scale business parks located in the right micro-markets, which are accretive and which offer further upside through active asset management. Lastly, I will cover our asset management initiatives which are core to our business philosophy. Our hotels exist to complement our business parks and benefit from the captive demand. Hilton at Embassy Golflinks continues to perform well with both year-to-date GOP margin and RevPAR up 500 and 600 basis points, respectively, on a year-on-year basis. Further, our Four Seasons Hotel at Embassy One has had an encouraging quarter after a slow start. Occupancy for Q3 was 26% vis-à-vis 10% in Q2. Our operator Four Seasons has today signed over 120 corporate accounts, and the hotel has been rated the best new business hotel in India and South Asia by Travel and Leisure. Our on-ground teams remain focused on ramping up occupancy and turn cash positive over the next 2 to 3 quarters. In relation to our ongoing infrastructure and amenity upgrade initiatives, we have successfully repositioned Embassy 247, including recent launch of a large-format lifestyle store by India's leading retailer at the ground floor. Our ongoing efforts at this asset over the last 24 months has seen meaningful increase in both occupancy as well as rents, both metrics significantly higher today. Our comprehensive infrastructure program at Embassy Manyata comprising of construction of a new flyover, construction of 619 keys dual-branded Hilton Hotels and master plan upgrade initiatives are all on track. The positive occupier interest around the hotels and infrastructure initiatives validates our strategy and will further deepen the moat around this asset and be a key trigger for mark-to-market and pre-commitments during the next phase of development at Embassy Manyata, our largest asset. To conclude on our business performance for the quarter, our leasing continues to be robust with 1.7 million square feet year-to-date. We have made significant progress on our on-campus development, adding 1.4 million square feet to our existing portfolio and are proceeding with an additional 2.6 million square feet of new development. We continue to be active asset managers across all our properties, and we have concluded our first acquisition since listing. Over to Aravind now for the financial updates.

Thanks, Vikaash. Good evening, everybody. I will now present our financial results for the third quarter. Our revenue from operations increased by 14% year-over-year to INR 5,459 million, mainly driven by continued leasing momentum across the portfolio. Net operating income increased by 16% year-over-year to INR 4,639 million. And our third quarter distribution stood at INR 4,707 million, which translates to a DPU of INR 6.1 per unit for this quarter. With this, our cumulative distributions for the 9-month ended December 2019 totaled INR 13,504 million, which is INR 17.5 per unit. As you can see from the above, we had another strong quarter of financial performance. I will now discuss in detail on our third quarter earnings performance. Revenue from operations grew by INR 685 million or 14% year-over-year, mainly on account of a strong leasing momentum with lease-up of close to 1.8 million square feet as well as contractual rental escalations across approximately 6.1 million square feet of space. In terms of revenue drivers for the quarter, vacancy lease-up and mark-to-market contributed 30% of the revenue growth; rental escalations and other contracted income contributed 30%, whereas hotel operations, including a recently launched Four Seasons, contributed 23% of the overall increase in our revenue from operations. Net operating income grew by INR 655 million or 16% year-over-year, mainly due to an increase in our revenue from operations as well as reduction in operating expenses due to successful implementation of certain cost-saving initiatives at Embassy Manyata. EBITDA for the third quarter grew by INR 767 million or 21% year-over-year due to our NOI increase as well as certain one-off items in the previous year. Our operating margins, once again, reflect the benefits of our scale as well as our low manager fees. Both our NOI and EBITDA margins stood at healthy 85% and 82%, respectively. Net profit after tax stood at INR 2,535 million, representing an earnings per unit of INR 3.28 for Q3. I will briefly touch upon our distribution for third quarter now. Our net distributable cash flows at the REIT level for the quarter stood at INR 4,710 million. The Board of Directors in their meeting held earlier today declared a quarterly distribution totaling INR 4,707 million or INR 6.1 per unit, representing a distribution payout ratio of 99.9% for Q3. Cumulatively, we have now declared a YTD distribution of INR 13,504 million or INR 17.5 per unit with a YTD distribution payout ratio of 99.65%. The record date for Q3 distribution is February 24, 2020, and the distribution will be paid on or before Feb 29. Turning to our outlook for the remainder of fiscal year FY 2020. We continue to expect strong leasing in our key assets, including recent completions at Embassy Manyata NXT and Embassy Oxygen. Partially offsetting these gains will be 2 factors, which we mentioned during the previous quarter's earnings call, namely the slower-than-anticipated lease-up of Embassy One office tower and ramp-up of Four Seasons Hotel. Notwithstanding, we achieved 17% NOI growth YTD and expect similar growth for the remainder of the year. Taking these 2 factors into account, our distribution guidance for the full year FY 2020 is now in the range of INR 23.9 to INR 24 per unit, that is approximately 96.5% to 97% of our initial target. Business fundamentals remain strong, and we believe that our proactive asset management approach will continue to drive meaningful results over the medium- and long-term. I now want to briefly touch up on our balance sheet strength and how a low leverage of 12% net debt to total enterprise value places us in a prime position to drive our growth initiatives. To recap, our capital outlay during Q3 was towards 1.4 million square feet new deliveries as well as 2.6 million square feet of under-construction projects. Various infrastructure initiatives, including the 619 key Hilton Hotels at Embassy Manyata and add-on acquisition of 0.6 million square feet M3 Block B within the overall Embassy Manyata campus. To fund the above growth initiatives, we successfully secured INR 16,400 million debt during third quarter at an attractive 9.03% interest rate, 86 basis points lower than our Q2 in-place debt cost. This includes the INR 6,500 million Tranche II listed bond, at 35 basis points lower than our Tranche I bond raised in May 2019 as well as INR 9,900 million debt at one of the lowest rates in industry to fund ongoing construction at Embassy Manyata and Embassy Oxygen. Our overall interest cost decreased by 24 basis points compared to Q2, and we are currently actively evaluating certain refinancing opportunities to further optimize our debt costs. Our ability to raise debt at competitive rates demonstrates flight to quality by lenders to fewer, higher-quality borrowers with disciplined balance sheets. As of end of third quarter, we have a pro forma additional debt capacity of INR 111 billion or $1.6 billion, assuming the current asset base and constant property values. Our conservative leverage is particularly valuable in the current environment and provides significant flexibility for growth initiatives. To conclude my remarks, on a YTD basis, revenue from operations was up 16%; NOI and EBITDA remains -- margins remain robust at 85% and 81%, respectively; and our YTD distributions totaled INR 13,504 million, that is INR 17.5 per unit. Further, we continue to maintain a strong balance sheet with low leverage and have plenty of firepower to fund our on-campus development as well as pursue acquisitions, should accretive opportunities arise. I now hand it back to Mike for his concluding remarks.

Thank you, Aravind. So another solid quarter delivering to all stakeholders and building on the previous 2 quarters post listing. Currently, our key focus areas include conversion of the projected leasing pipeline of 500,000 square feet and lease-up of the remaining 800,000 square feet of the 1.4 million of newly constructed blocks at Embassy Manyata and Embassy Oxygen, continuing our drive for ramp-up of Four Seasons Hotel and lease-up of 250,000 square feet Embassy One office tower, driving progress of 2.6 million square feet of new on-campus development projects and other infrastructure initiatives and to determine the way forward on our ongoing evaluation of the ROFO opportunity relating to Embassy TechVillage asset in Bangalore. To conclude, it's been another strong quarter. Our global corporate customer base continue to grow their business in India. And at Q3 year-to-date, we've leased 1.7 million square feet, with an additional 0.5 million square feet near-term pipeline. We've delivered 1.4 million square feet ahead of schedule with approximately 44% leased prior to completion. We have some large scale, high-quality acquisition options for our near-term consideration. We've delivered a year-on-year NOI growth of 16%, a total distribution year-to-date of INR 1,350 crores, that's INR 17.5 per unit, and a 41% uptick in unit price as at December 31, 2019. So that's the business overview for Q3 FY '20. Let's move to Q&A, please.

[Operator Instructions] The first question is from the line of Murtuza Arsiwalla from Kotak Securities.

My question -- first question is on the dividend distribution tax. Given the new sort of regulations as they stand right now, a, what is the savings that we could anticipate if you were to take FY '21 as a benchmark in terms of Embassy Golflinks and Embassy Manyata in terms of the exemption of dividend distribution tax? And where does -- have there been representations made or where does the stance on dividend distribution -- taxing of dividends in the hands of the individuals stand as far as the budget proposals go?

Yes. Okay. Thanks, Murtuza. Of course, this has been a hot topic of late. Aravind will explain the detail of how the change proposed, which is, as you know, yet to be enacted, has minimal impact for Embassy REIT for FY '20 and '21, in a second. I'd just like to say that the proposed change to the DDT exemption is far from ideal given that such changes do impact investor confidence. You're aware, I think, that it's been reported, representations have been made by numerous industry bodies to restore the earlier status, and we will watch the outcome of those representations with interest, see the response from government before it is ratified in the final budget in March. But we just underscore that it has limited impact for us over the next couple of years. Aravind, can you go through the detail on that?

Sure, Mike. I think I'll just start off with some background about our distributions, which basically takes 3 forms. One is interest on SPV level debt, the second one comprises the SPV debt repayment itself, and the third being the dividends distributed by SPVs. The proposed tax change impacts only the last component, which is the dividends distributed by SPVs. Assuming that this DDT exemption is not restored back, and also given that the dividends for FY '20 is a small proportion, which is about 1% for the distributions YTD, we believe that it will have almost a negligible impact on our pro forma YTD FY 2020 yield for our investors. Just to give you some stats, for our foreign institutional investors, it might impact about 1 basis point, whereas resi individuals at the highest tax bracket might impact by 2 basis points. But hypothetically, if we were to assume that the dividend proportion increases to about 10% from the current 1%, then the impact for the current yield for pro forma FY 2020 would be: for foreign institutional investors, approximately 9 basis points; for domestic companies, approximately 15 basis points; and for resi individuals at highest tax brackets, approximately 26 basis points. However, what I want to mention is that we will continue to optimize the mix of distribution between these 3 components. And I would like to say that we believe the impact to be negligible in the short term, and we are awaiting the outcome of the representations which we made to several ministries.

Aravind, just as a follow-up, the other part of the question was, what is the savings -- because Embassy Golflinks is not 100% owned, is there any savings element for Embassy in terms of the dividend distribution tax which you all at the REIT level would be paying?

As I mentioned, Murtuza, basis what we've computed the impact to FY next year should be negligible with basis the different optimization which we believe we want to factor in, including the Golflinks which you mentioned.

The next question is from the line of Tanuj Mukhija from Bank of America.

Congrats for another good performance in this quarter. My first question is, what is the construction cost of the assets completed ahead of schedule?

And your second question, Tanuj? Just...

The second question, actually a follow-up to that, is our guidance was that the zero-coupon bond was taken basically for under-construction assets. Now that you have completed the assets, would you look to convert the corresponding construction cost to interest paying debt?

So I think Vikaash can certainly answer that second question on the zero-coupon bond.

Yes. Tanuj, this is Vikaash here. So quickly on the -- on both of your questions, one, approximately, the construction cost for the 1.4 million square feet, which we delivered across 2 projects, would be INR 5,320 million. Again, just to highlight there, some of the cost was incurred prior to IPO and we incurred the balance as we completed the construction post listing. So that's the first part. On your second part, Tanuj, again, as we mentioned earlier, we are currently 44% pre-committed on these 2 blocks, which we delivered 2 and 3 quarters, respectively, ahead of schedule. If you include the growth options, the pre-commitment levels would be 58% on a blended basis. Now it would take 6 to 12 months for these assets to stabilize and start generating stabilized NOI due to the time required for tenant fit-outs and the rent-free period. We believe that the full year impact of the NOI would be in FY '22. And it is at that point in time that we will consider to convert the zero-coupon into a coupon-bearing bond to match the interest cost to the yield from the newly built assets.

Makes sense. And at 44% pre-leasing, could you tell us what are the rents, at which you have pre-leased so that we get tentative idea regarding what could be the revenue from the asset and how would that impact, let's say, your dividend growth, if at all, any impact on dividend growth?

Yes. So again, 2, 3 things. One, of course, we think this kind of demonstrates our philosophy of delivering under-construction to grow and derisk the project by kind of achieving high levels of pre-commitment prior to completion. Now especially in both these projects, given the high quality, we've been able to achieve market-leading rents in the respective micro markets, and yields for both these projects were anywhere in the range of 12% to 14%. This is post factoring the land cost, which was already valued at the time of the listing. Does that help?

Yes, that helps a lot. Got it. And third question, if I may, was on the 2.6 million square foot additional development. How would you fund the construction cost for this development potential? And could you just remind us, 2.6 includes which assets? And what are the assets that you have added currently in this quarter?

Sure. So Tanuj, if in case you have the investor presentation with you, I'll quickly refer you to Slide 27 and I'll just [ indiscernible ], if you see FY '20 bar, the 2 assets which we delivered ahead of schedule is the 0.8 million square feet of Manyata front parcel NXT blocks, that's in Bangalore; and the 0.6 million square feet, the dark blue box, is the Tower 2 at our Embassy Oxygen park in Noida. So that totals to the 1.4 million square feet which we delivered. Now coming to what we are doing currently is encouraged by this response on the pre-leasing activity we have seen on these 2 blocks, plus given that Bangalore and Pune are sub-6% vacancy levels with high pre-commitment interest, we have kick-started the next 2 blocks in Embassy Techzone, which is in Pune. Again, to highlight, earlier the thought was to do 1 block, but now we have launched both Hudson and Ganges block, then -- that we will deliver some time in December of '21. And then we have also kick-started the last tower of Oxygen, which is the 0.7 million square feet, which is the last tower in Embassy Oxygen. And the 1.6 million square feet, which you see in Embassy Manyata Bangalore, relates to the M3 land parcel, both the earlier 1 million square feet block and the recently entered into forward purchase agreement for the 0.6 million square feet Block B. So that kind of -- so in summary, what we're trying to do here is all the 3 assets in the REIT, where we have development potential, we've kicked started the next phase of growth. Now quickly to just answer your second part of the question on how are we going to fund it. If I can refer you to Page #41. Currently, the way we're thinking about it is, we have SPV level debt at the respective SPVs, whether it's Embassy Manyata or Oxygen, and we have undrawn facilities to the extent of approximately INR 4,000 million. You can see that in the blue-shaded box. Plus, whether it is through the recently raised Tranche II bond or through additional construction debt at Embassy Techzone Pune, we will fund the construction there. So we are pretty well covered. We are adequately funded. And actually given the distress overall in the market, it actually has worked to our advantage in terms of interest rates where we are able to get, even construction financing at really attractive interest rates.

Got it. And just one data point request from my end. At what rent did you lease office space in Manyata to WeWork?

So Tanuj, again, I would not be able to disclose a specific tenant rent detail. But why don't I say this that, overall, on the front parcel NXT block at Embassy Manyata, we have really seen triple-digit rents, which are new highs for the respective micro-market. On the specific lease, you mentioned about, one, we see co-working as a very complementary to our overall total business ecosystem offering. And we have obviously gone through the necessary processes given it is a related party, and we have got adequate arm's-length benchmarking done by Grant Thornton in this case.

[Operator Instructions] We take the next question from the line of Saurabh Kumar from JPMorgan.

Sir, first is this net debt increase to INR 4,500 crores from INR 3,900 crores last quarter. So what's driving that? And secondly, Mike, just on the supply outlook. So effectively, you've obviously put out a supply outlook. But if you kind of triangulate versus what some of the listed peers have announced in 3Q, the numbers are pretty high. So I just wanted to get a sense as to how you are thinking about the fact that almost all your competitors in Bangalore and NCR are talking about almost 15 million to 18 million square feet of new developments? And how are you reading the market, maybe not today, but maybe 1 to 2 years out? These are the 2 questions.

Okay. Clearly, I'll deal with that supply question. Aravind, can you take the first question?

Sure. Sure, Mike. So Saurabh in terms of the debt, as Vikaash explained in Slide 41 of our investor deck, we have taken about INR 16,400 million of debt in Q3 at pretty attractive interest rates. And in terms of end-use of this debt, all of these are for the on-campus development which is happening. So the end-use of...

No, I'm talking about the net number, Aravind. The net number. So the net number will be the usage. So I'm just wondering where the INR 600 crores got used. So I understand the gross part. I just want the net part.

Yes, just give me a second.

So Saurabh, this is Vikaash here. Just -- if I understand your question correctly, your question is whether the INR 650 crores of the Tranche II bond, where did that get utilized? Is that the right...

No. So last quarter, you declared a net debt of INR 3,900 crores, INR 39 billion. And this quarter, the net debt disclosed was INR 45 billion. The entire operating cash flow has pretty much been dividended out. So...

Got it, Saurabh. So to answer that, it has been used for the on-campus development. And to be specific, a large part of it has gone for the M3 Block B acquisition which we did in Q3.

Okay. So of the INR 740 crores, you've probably paid about INR 600-odd crores. Is that fair?

No, we have paid about INR 425 crores as at December.

Okay. And -- okay, the remaining will be CapEx?

Yes.

Yes. And the second question, Saurabh, the supply side. I mean actually, in summary, we see the supply and demand forecast as being nicely balanced. I think if you look at Slide 19 of our latest deck, which is on the website, you can see quite a detailed breakdown of that. We've actually looked -- we've looked across all of the markets and, in particular, our 4 city markets. We've identified what we believe are all of the projects across those markets which total some 180 million square feet. We've broken those down into projects which we believe are credible, that they will be delivered within the next 3 years. And then we've looked at those projects which we see as being realistic competitors to our type of projects. And you can see from that deck that actually within that overall 180 million, because the number of projects simply won't be completed in the 3-year time frame, in fact, a number of them haven't started that, there's about 13% of that overall [indiscernible] supply is realistic competition for us, about 24 million square feet. I mean clearly, every project, which every potential developer announces, is not necessarily going to be delivered. And that is accentuated by the well-known liquidity issues that are out there in the market for funding these -- this development pipeline. So we look at it carefully. We've looked at pretty much all of those projects that we believe are there. We feel that it's nicely balanced. And actually, if you look at some of the data points that have been put out by people like CBRE and just -- they're talking about in 2020 and '21 that the ratio in our markets is approximately 43 million square feet to be absorbed, 40 million square feet of supply and 39 million and 40 million in '21. So yes, people announced schemes, but they are unlikely or many of them are unlikely to be delivered. We're comfortable with the supply-demand position.

Okay. I'll take a follow-up, but probably later.

And on that, we'd be happy to go through that detail with you at any time.

The next question is from the line of Abhishek Bhandari from Macquarie.

Congrats on a very stable performance. If I look on your Slide 31, where you have given details of the M3 Block, what you've acquired from Embassy Group at a forward rate of 9.25% yield and comparing that with 8% stabilized cap rate of Embassy Manyata, is it fair to assume these are your guiding lines for the evaluation of the big ROFO asset what is being offered to you?

Abhishek, this is Vikaash here. So a couple of things. One, of course, this M3 add-on acquisition that we referred to, the 0.6 million square feet, that is on a forward-purchase basis, right? We do it -- and this was similar to the construct we did for the M3 Block A, which was disclosed at the time of the IPO. Now coming to the ROFO opportunity. As we mentioned earlier during the remarks that, that is something which is still we are evaluating. And as of today, we would not be able to comment or provide any more color on that, but we definitely will come back when we have something concrete to disclose. So as of today, it's pretty -- it's early to kind of comment on what the structure, if at all, would be on that. The only one thing I'd like to mention is that the structure of M3 was different in the sense that it was a forward purchase with both construction and leasing risk to the sellers' account. So it depends upon the construct in each particular acquisition transaction.

I have 2 follow-ups here. I know you can't comment on valuation, et cetera. But if you look at the stabilized cap rate of 8%, and our borrowing cost being at best 9% incrementally, how would you want to make it a DPU accretive one? I was just wondering how does the math work?

Yes. It's Ritwik, Abhishek. I think that's a pretty good point. We, as a REIT, in India do face sort of the situation of having our cap rate inside the borrowing rate. So I think theoretically, when you think about REITs being able to sort of finance a lot of acquisitions, and I'm talking very theoretically here, and in global markets they're able to use debt. For us, I think, we've got to be a little more prudent about how we finance any sort of acquisition that we can make it in an accretive format. I think there is clearly -- we're trading well on -- with our equity at this point. We're trading at a premium to equity. So that's always also a consideration that we would use. But I think then I'm talking about this just from a very theoretical construct. But you're right, we're trading inside our cost of borrowings.

A related question [indiscernible].

I'm sorry to interrupt you Abhishek, but we can't hear you very clearly. We request you to use the handset.

Hello?

Yes, I think we had a little bit of a hard time on -- hearing that...

Sorry, so I'll repeat that, my apologies. I was asking, is there any firm time line being asked to you by the sponsor for this asset consideration?

Abhishek, again Vikaash here. So as we mentioned, we are currently doing our homework on the ROFO evaluation, but -- just to take a step back, the ROFO agreement which we have with the sponsor, it provides a broad framework for the process which we need to -- which needs to be followed in case any assets meets the defined criteria and is offered to the REIT. There is a time frame that is defined by the ROFO agreement, but that can be extended by mutual consent. We are currently focused on evaluating the opportunity in detail, and it will be difficult for us to give any particular time line on next steps. We will definitely keep you posted as and when there are concrete next steps.

And are the minorities -- I mean, what is the process of the [ e-voting? ] Is it a majority of minority excluding related parties?

That is correct. So it is a majority of minority excluding the related parties, which in this case would be the Embassy Sponsor as well as the Blackstone Sponsor.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

Just to understand this new acquisition, 0.6 million square foot. What does this INR 740 crore consideration include? Does it include the construction cost?

Sameer, this is Vikaash here. Yes, it includes -- it's an all-in cost. It includes the construction cost, the implied value on the land itself. So basically, it's a fully built-out basis, but it also include some whatever transaction fees that we incurred in terms of diligence, et cetera.

Okay. Okay. And I presume the capital cost over next 3-year period, say, roughly at 7% -- at about 9%, that would be borne by the buyer?

Sameer, so as I mentioned, of the cost, which we've agreed, we've paid about INR 425 crores as of date. So the balance will be paid over the balance 39 months, which we have agreed at the end date by when they need to deliver.

Okay, got it. So -- okay. So they spend money on construction and then we reimburse, something like that?

That is Correct.

Correct.

And just to add this, Sameer, as we've disclosed in the same slide, during construction, as we keep funding based on milestones that they achieve, we would make a 100 basis point spread on our cost of debt so that it is then net debt positive from a NDCF perspective.

Okay. Sorry to belabor on this. So my guess here is INR 740 crore may move up including the cost of financing to about INR 900 crores. I'm just trying to get to your 9.25% rental yield on this. So what's the sort of rental assumption that you have, rental rate?