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

Good evening, everyone. A very warm welcome to all for the Embassy REIT's Second Quarter FY 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce you to the host for today's conference, Mr. Ritwik Bhattacharjee, Head of Capital Markets and Investor Relations for Embassy REIT. Sir, you may begin.

Thank you, Ed. Welcome to the second quarter FY 2021 earnings call for Embassy REIT, everyone. Embassy REIT released its financial results for the quarter and half year ending September 30, 2020, a short while back. As is our standard practice, we have placed our quarterly financial statements, earnings presentation discussing our quarterly performance and the supplemental financial and operating data book on our website at ir.embassyofficeparks.com in the Investor Relations section. 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 obligated to update them at any time. Specifically, the financial guidance that we will provide on this call are management estimates and have not been subject to any audit, review or examination procedures. You are cautioned not to place undue reliance on the guidance, and there can be no assurance that we will be able to achieve the same. Further, there are significant risks and uncertainties related to scope, severity and duration of the ongoing COVID-19 pandemic, the actions taken to contain and mitigate the pandemic and the direct and indirect economic effects of the pandemic and the containment measures on Embassy REIT and on our occupiers. First, a quick update, in September 2020, we were included in the FTSE EPRA NAREIT Global Emerging Index, which is a prominent real estate benchmark for global investors. In addition, effective today, we have been included in the S&P Global Property Index and the S&P Global REIT Index. We believe that these inclusions will continue to enhance our trading liquidity, broaden our unitholder register and deepen the pools of capital that can potentially invest in our REIT. Joining me on the call today are Mike Holland, the CEO; Vikaash Khdloya, the Deputy CEO and COO; and Aravind Maiya, our CFO. Mike will start off with the second quarter highlights, business overview and strategy, followed by Vikaash and Aravind. We will then open the floor to questions. Over to you, Mike.

Thank you, Ritwik. Good evening, everyone, and thank you for joining us on the call today. We trust that you are all staying healthy and safe in these unprecedented times. Today, we announced our second quarter FY '21 results, notwithstanding the challenging external environment, we are pleased to again deliver on our quarterly distributions a healthy INR 4,244 million for Q2, bringing our year-to-date unit holder distributions to INR 8,743 million or INR 11.33 per unit. Now let me comment today on 3 key themes. First, on the pandemic. Throughout Q2, the period from July to September, India witnessed the phased lifting of government-mandated lockdown across states, although the number of COVID-19 cases continue to increase until a point in mid-September when the number of new cases and deaths started a steady decline on a pan-India aggregated basis. Today, it is very encouraging to note that 3 out of 4 of our markets, including Bengaluru, are reporting this downward trend. State governments have shown that they are committed to a return to some level of normalcy of economic activity, and central government has released a set of new guidelines under its Unlock 5.0 plan, effective October 1 to kick-start the economy with additional relaxations and fewer restrictions. And consequently, the slow but steady return to the workplace continues. However, while we see positive indicators in a number of areas, the pandemic retains the ability to surprise. Second, our occupiers and their industry. An area where clarity shines through in this time of uncertainty, feedback from our occupiers indicates that they are very positive about the future of their businesses in India and that they will continue to grow. Technology companies and global captive centers applying technology-based solutions for their overseas businesses are the backbone of Embassy REIT. Our occupier base comprises 50% pure technology and 43% global captives. Multiple indicators, including public results, hiring statistics in India, industry analysis, business leader commentaries and conversations all underscore the conclusion that these types of business have a very positive future. This is confirmed by NASSCOM Research, which projects that the Indian technology industry will grow at a CAGR of 13% to USD 350 billion by 2025. For many of these businesses, India and the availability of talent at scale will continue to grow in significance for global delivery strategies in our increasingly digitized and technology-dependent world. Third, the impact of work-from-home in India. After 7 months of work-from-home debate, we are seeing an emerging positive consensus, which reinforces our initial views as the Indian working population demographics and the environments at home are very different from the West, with a high proportion of young people in the early phases of their career that the desire for a collaborative space at the office to foster culture, learning and innovation is perhaps much greater in India as compared to the West. While we do expect work policies to incorporate more flexibility in the future, we believe that in the Indian market, the office will continue as the core business hub, perhaps much more so than in the West, providing high-quality, lower density spaces with an increased focus on wellness features, ultimately favoring institutional landlords like Embassy REIT. Compared to Q1, we see a gradual slow but consistent return to the workplace during the last few months. Interestingly, there are significant variations in approach between international and domestic companies. Many of the former are operating with less than 5% of their employees in the office, often due to their globally standardized protocols, while a number of large-scale domestic companies are operating with more than 30% of staff in the workplace. And so what does this mean for the office industry in India? In the short term, we have seen some modest progress on the return of leasing demand with some consultants reporting a quarter-on-quarter increase of circa 8% in pan-India gross absorption. However, gross absorption is down 52% year-on-year for this quarter. They indicate full calendar year 2020 pan-India gross leasing in the range of 35 million to 40 million square feet, down 20% to 25% against the last 5-year average gross absorption. However, given the technology and GCC occupier base, the India structural story is intact. International property consultants expect demand to revive in 2021 with forecast office demand of circa 45 million square feet, 20% higher than calendar year 2020 and in line with the 5-year average. While we have secured a number of leases totaling 210,000 square feet in Q2, which Vikaash will update shortly, it is clear that the pause, assess, accelerate in decision-making for corporate leasing will move past the assessment stage once occupiers have substantively moved back to the offices. Our view is that demand will return strongly in a couple of quarters, given robust performances posted recently by technology and tech-dependent sectors, which is the core occupier base for India office. Sector outlook in the medium-term. On the supply front, the market supply forecast for the next 2 years has continued to decline since the beginning of this year from 120 million square feet in January 2020 to 87 million square feet in September, implying a decline of 29%. Due to the continued pressures related to availability of labor, funding and liquidity, we may see further shrinkage in this number by the end of the year. Our assessment of the actual comparable and competing supply for Embassy REIT is even lower. With limited upcoming supply, already low vacancy rates in our key markets and further de-densification plans by corporates, we expect rentals to hold firm in our core markets of Bengaluru and Pune. The recent results announcements from many technology companies have outlined the strong pipeline of deals, significant pull forward in expenditure on digital transformation and cloud migration and an uptick in hiring by these corporates. Some corporates have indicated that COVID-19 has essentially halved the time line for digital transformation, bringing it forward by at least 5 years. We also expect increased off-shoring to global captives as well as third-party service providers in a recessionary and geographically agnostic world, beyond [ shop ] bounce back driving office demand as India experienced post the GFC. Looking to the longer term, we noted the detailed global research report from Cushman & Wakefield, which projects 700 million square feet of office demand to 2030 in APAC, excluding China, with 60% being driven by India, and the methodology and conclusions of that report underscores the continuation of the growth of the India office sector over the next decade as often articulated to us by many of our occupiers. Significant skills and cost advantage that India offers, both in terms of workforce as well as real estate costs, will continue to drive global occupiers to India office. On potential acquisitions, we are evaluating the Embassy TechVillage ROFO opportunity and are monitoring external market conditions. Other acquisition opportunities in the market, which match our previously articulated acquisitions criteria are also being examined. We will update at the appropriate time. I would now hand over to Vikaash to discuss in detail our business and operating performance for Q2.

Thanks, Mike. Good evening, everybody. Further to the operational update for Q2 that we provided a month back, business highlights for this quarter includes continued support to our occupiers as they repopulate the offices, including launch of #OfficeAgain campaign and recent health and safety certifications; new leases and renewals signed for Q2 stood at 210,000 square feet across 7 deals, including 124,000 square feet of new leases at 10% above market rents and 86,000 square feet renewals at 7% spread to existing rents; portfolio occupancy at 91.7% on a 26.2 million square feet operating portfolio with same-store occupancy of 93.4%; and the acquisition of property maintenance operations for 20.3 million square feet existing REIT properties for INR 4.74 billion to further enhance service delivery to occupiers. Let me take you through the details. First, an update on our operations and COVID-19 response. We remain closely engaged with our occupiers to facilitate employee safety and business continuity. All our properties across India remained open and operational throughout the quarter. We continue to see a gradual slow but consistent ramp-up in the number of occupiers repopulating our buildings. Over 95% of our occupiers and a weekday average of over 16,600 employees operated from our properties in October compared to weekday average of 8,500 employees operating from our properties during Q1. Safety of employees working from our properties remain our highest priority. We continue to keep our buildings safe and secure with international standard health and sanitization procedures and technology-driven solutions. Additionally, during the quarter, we received health safety and ESG assurance certifications from globally renowned institutions such as the British Safety Council and British Standards Institution, endorsing the quality and effectiveness of the wellness practices adopted by us and our efforts in controlling the spread of COVID-19 across our pan-India office portfolio. We continue to support our occupiers in the return to workplace efforts. We launched the #OfficeAgain campaign to engage and update occupiers and the employee on various health and safety initiatives and build confidence as they repopulate their workspaces. Employee feedback and response to our campaign has been very positive as we look forward to returning to workplace. Our initiatives, combined with the quality of our occupier base and proactive engagement by our on-ground teams, contributed to continued strong rental collections from our occupier. As of date, we have collected 99.5% of our Q2 rentals and 99.7% of our Q1 rentals from office occupiers. Moving to our leasing and lease management initiatives. During Q2, we maintained a healthy portfolio occupancy of 91.7% on our 26.2 million square feet operating portfolio with same-store occupancy at 93.4%. The portfolio occupancy declined marginally by 50 basis points compared to Q1, but was in line with expansion in vacancy rates across our key markets. Of our 7.1 million square feet leases due to escalations during the course of FY 2021, we achieved 11% rental increases on 1.9 million square feet across 18 office leases during Q2, delivering the year-to-date rental increases of 12% on 3.7 million square feet across 40 office leases. We remain confident to achieve 13% rental increase on the remaining 3.4 million square feet leases due for revision during the remainder of this financial year, given that these leases are already 30% below market. A healthy occupancy, robust collection and successful rental increases, therefore, from the base of our NOI and distributions. As expected, the leasing activity remained muted this quarter. Despite this, we signed a total of 7 leases totaling 210,000 square feet during the quarter, comprising both new leases and renewal of ultimate expiries. This includes 3 new leases totaling 124,000 square feet area concluded 10% above market rents to corporate from technology, telecom and manufacturing sectors and renewal of 4 ultimate lease expiries totaling 86,000 square feet at 7% renewal spread to existing rates. Given the travel restrictions, we also the launched virtual property tools of our buildings to facilitate inspections via existing and prospective occupiers and are seeing early signs of pickup in deal activity with the current pipeline of 265,000 square feet. Moving to expiry. Of the 1.9 million square feet due for expiry in FY 2021, we have successfully backfilled or renewed 529,000 square feet or 28% of expiries at 13% mark-to-market spread on a year-to-date basis. Of this, 129,000 square feet was backfilled or renewed during Q2 at 6% mark-to-market spread. An additional 148,000 square feet or 10% of expiries are likely renewals and discussions remain on track. As discussed during our previous call, the remaining 1.2 million square feet expiry contributing to 5.6% of our annualized rents are likely exits during the course of this financial year. Of this, 0.4 million square feet relates to occupiers facing COVID-19 headwinds and cost pressures and the balance 0.8 million square feet is part of normal occupied churn. These include instances of occupiers relocating to a different micro market, consolidating to self-owned or another property, rebalancing existing portfolios and undertaking portfolio housekeeping. Though we have backfilled approximately 1 million square feet annually over the last 4 years, the backfill of likely exits in FY 2021, totaling 1.2 million square feet may take some time given the overall pause in decision-making. While corporates remain cautious and continue to delay major leasing decisions, we are seeing early signs of recovery and pickup in deal activity with resumption of new lease inquiries and multiple large RFPs in the market. As Mike mentioned earlier, we are seeing strong performances and hiring ramp up by technology companies and global captives who continue to be the primary absorption drivers for India office. More importantly, as corporate continues to bring back employees to workplaces and ramp up numbers, the need for additional space to take into account social distancing and business norms will prompt leasing activity to considerably pick up. Our most recent discussions with both large occupiers as well as property consultants have revolved around large occupiers taking a long-term view on their space needs given low existing supply, especially in our core markets of Bengaluru and Pune. We remain confident of the medium-term demand prospects and ability and strength of our portfolio to deliver on the same. Our on-campus development projects have witnessed steady ramp up. During the quarter, construction continued across our 2.7 million square feet ongoing on-campus development projects with steady increase in site activity. With all appropriate health and safety precautions at work sites, the labor ramp-up has been encouraging at 85% of peak capacity. Given these development projects are due for delivery beginning June 2022, we are confident of meeting those time lines considering our liquidity and financing availability. Also, our occupiers continued with fit-out works on 820,000 square feet, corresponding to the 60% pre-committed spaces in the new buildings delivered at Embassy Manyata NXT and Embassy Oxygen earlier this year. Occupier for 245,000 square feet have already commenced business operations from these new premises and the rest plan to go live around the end of this financial year. Our ability to finance on-campus development projects, our line delays due to unanticipated events such as recent lockdowns and our flexibility to control supply timing of our projects places us in a preferred position, given the overall supply slippages in the market and the expectation by property consultants of supply recoveries significantly lagging demand recovery. Finally, I will cover our asset management update. First, an update on our hotel portfolio. Both our hotels were operational during the quarter but continued to witness single-digit occupancy due to the travel slowdown. Hospitality demand is expected to remain muted for the remainder of the financial year. Our hospitality team remains focused on conserving cash and has minimized the Q2 cash burn to INR 94 million. The impact of the hospitality slowdown is expected to be limited on our portfolio, given these hotels contribute less than 5% of our gross asset value and less than 1% of our pre-COVID NOI. We continued with our asset and infrastructure upgrade initiatives during Q2, regular investment in our properties through select infrastructure upgrade projects is core to our asset management philosophy. Our comprehensive infrastructure program at Embassy Manyata comprising construction of a new flyover, development of 619 key dual-branded Hilton hotels and master plan upgrade initiatives continued at pace and are on track. Additionally, the comprehensive repositioning initiative launched last quarter for Embassy Quadron property in Pune is progressing well. To further strengthen our property management delivery, we recently announced the acquisition of property management operations relating to 2 of our largest assets, Embassy Manyata and Embassy Techzone, totaling 20.3 million square feet. This acquisition is from an Embassy-sponsored affiliate and the consideration of INR 4,740 million is at an 8.5% discount to average of 2 independent valuation reports. This acquisition was funded through the 6.7% coupon bearing debt raised recently and is expected to be 2.3% NOI accretive and 0.5% DPU accretive on a pro forma basis. This acquisition further enhances our overall operational delivery capability and helps us respond with more ability to our occupiers' operational needs and address their safety concerns. With this acquisition, we will own property management service delivery of all our fully owned properties. As you can see, during this quarter, we continued to focus on active asset management and operational excellence to navigate and support the real estate needs of our occupiers through the pandemic. We recognize the increasing importance of wellness features and flexibility options in the future-leading decisions of our occupiers and continue to work with them to structure mutually beneficial solutions. We are confident that once the pandemic subsides, and it will subside eventually, and once decision-making and leasing activity are back on track, high-quality grade A office portfolio like ours will see greater demand and will result in significant market share gains for our properties. Over to Aravind now for the financial update.

Thanks, Vikaash. Good evening, everybody. Despite the external challenges brought by the continuing pandemic, we delivered another quarter of resilient financial performance. Financial highlights for Q2 include: Net operating income of INR 4,814 million for the quarter, up 10% year-on-year, with NOI margin of 89%, up 500 basis points; distributions of INR 4,244 million or INR 5.5 per unit for the quarter, representing a 100% payout ratio; successful raise of INR 7.5 million listed debentures at a competitive 7.25% quarterly coupon; and robust balance sheet with low leverage of 16% and strong liquidity position of INR 12.2 billion. Now let me take you through the details. Revenue from operations for Q2 grew by 4% year-over-year to INR 5,401 million, mainly on account of contracted lease escalations and income from new leases in our recently delivered buildings at Embassy Manyata and Oxygen, partially offset by decrease in hotel revenues due to COVID impact. Net operating income for Q2 grew by 10% year-over-year to INR 4,814 million and cumulatively for H1 by 5% year-over-year to INR 9,383 million. Our same-store NOI for Q2 grew by 6% year-over-year and cumulatively for H1 by 3%. Continuing the trend of last quarter, our NOI margins improved year-over-year by 500 basis points to an impressive 89%, mainly reflecting the change in segment mix with a higher-margin commercial office segment contributing to a greater proportion of the NOI as well as cost savings achieved during the quarter. EBITDA for Q2 grew by 13% year-over-year to INR 4,730 million and cumulatively for H1 by 8% year-over-year to INR 9,237 million. Our EBITDA margins improved by 700 basis points to 88%, led by our cost savings initiatives as well as interest income received on purchase consideration advance for Embassy Manyata M3 Block B transaction. Our net distributable cash flow for the quarter stood at INR 4,229 million, and the Board of Directors and the managers of the Embassy REIT, in their meeting held earlier today, declared Q2 FY '21 distribution of INR 5.50 per unit, representing a payout ratio of 100%. This distribution of INR 5.5 per unit comprised of INR 1.9 per unit towards interest received from SPV, INR 3.18 per unit towards amortization of SPV level debt and INR 0.42 per unit of dividends. With this, Embassy REIT has now cumulatively declared YTD distributions totaling INR 8,743 million or INR 11.33 per unit for the first half of FY '21. The record date for the Q2 distribution is November 10, 2020, and the distributions would be paid on or before November 17, 2020. Next, an update on our balance sheet. We continue to maintain our conservative balance sheet with a low leverage of 16% net debt-to-total enterprise value with less than 1% of total debt maturing prior to FY '22. Further, we continued our strong liquidity position with INR 12.2 billion of liquidity as of September 2020, comprised of INR 9 billion of cash and treasury balances and INR 3.2 billion in undrawn commitments. During the quarter, we announced the successful placement of INR 7.5 million CRISIL AAA/Stable-rated listed debentures to [ 37-month ] maturity at an attractive 7.25% coupon payable quarterly. The debt raise witnessed healthy demand and was anchored by a prominent domestic financial institution, demonstrating the preference for high-quality borrowers like us in the current volatile markets. We utilized majority of this rate to refinance INR 6,752 million of our existing debt at 140 basis points lower coupon rate. Towards the quarter end, we successfully raised another tranche of listed debenture totaling INR 7.5 billion at an impressive 6.7% coupon payable quarterly. This transaction witnessed healthy demand and was well received by several prominent domestic financial institutions. We utilized INR 4,740 million of this raise to fund our purchase of property management operations for 2 of existing lease properties, which Vikaash outlined earlier. Our ability to raise debt at competitive rates once again, demonstrates the strength of our balance sheet and the flight to quality borrowers given the current market situation. Even post this debt raised, we have over INR 110 billion or $1.5 billion of additional debt headroom and are well placed to finance accretive growth acquisitions to the benefit of our unitholders. Moving to other financial updates. Our rental collections from office occupiers remained strong at 99.5% in Q2, in line with robust office rental collections of 99.7% for Q1. While we have not guaranteed any rental waivers to our office occupiers, we have provided rental rebates totaling 1.4% of our annual rents to support our food court, ancillary retail and small business tenants through the pandemic. We continued our cost-saving program initiated last quarter, targeting savings across our operating hospitality and corporate overhead costs. To date, we have been able to achieve cost savings of INR 585 million, resulting in significant operating margin improvements. Our independent valuers undertook fair evaluation exercise of our properties for the half year ended September '20 and assessed the gross asset value of the portfolio at INR 337 billion, up 2% from GAV as of 31st March, 2020, with our core commercial office segment driving over 92% of REIT's value. Our net asset value as of September 30, 2020, stood at INR 289 billion or INR 375.02 per unit, in line with our NAV per unit estimate as of 31st March, 2020. As updated during our previous call, in Q1, we filed the scheme of arrangement to collapse the legacy two-tier holding structure of Embassy Manyata entity and we expect to receive regulatory approvals for March 2021. Upon simplifying the holding structure, the proportion of our dividends to our overall distribution is likely to increase to over 60% comparing favorably to 7% for H1. We anticipate that our dividend and SPV level debt amortization components taken together will represent over 75% of our distributions post March 2021. This will be a positive given REIT dividend is fully tax-free for investors and will further enhance the overall post-tax distribution deal, especially for domestic institutional and retail investors. Lastly, I will update on the outlook for the remainder of FY 2021. Given we are already halfway through FY '21, we now have reasonable visibility on the trends emerging for the remainder of the year. In terms of guidance for the full year FY '21, we expect NOI to be in the range of INR 18,530 million to INR 19,480 million, with a midpoint of INR 19,005 million, and expect distributions per unit to be in the range of INR 21.49 to INR 22.59 per unit, with a midpoint of INR 22.04 per unit. Note that these estimates have been arrived, taking into account the following key assumptions and are subject to there being no further major lockdowns or other unforeseen circumstances given the evolving nature of the pandemic. Our rent yielding commercial office portfolio based on over 160 credit-worthy occupiers continue to be resilient with 99.6% rental collections for the first half of FY '21. We expect similar rental collection trends going forward, and our NOI margins for the commercial office segment are assumed to remain at similar levels as first half of FY '21. We achieved YTD rental increases of 12% on 3.7 million square feet across 40 leases -- office leases and assume similar rental increases of 13% on 3.4 million square feet upcoming rental escalations for the remainder of the year. Our existing vacancy of 2.2 million square feet, along with the upcoming likely exits of 1.2 million square feet, will take some time to be backfilled due to the pause, assess, accelerate decision-making framework adopted by occupiers, which Mike referred to earlier. While we continue to remain very positive on return of demand in medium term, especially for institutional landlords like ourselves, in the short term, this may impact our existing 91.7% occupancy levels and hence, the revenue for the balance of FY '21. Our 2 operational hotels are expected to see muted demand and occupancy levels for the remainder of FY '21, and we expect a quarterly cash burn of INR 90 million to INR 100 million until such time travel and hotel demand reverse. We remain focused on delivering our NOI and quarterly distributions and maintaining our liquidity and balance sheet discipline. Over to Mike for his concluding remarks.

Thank you, Aravind. So we continued our resilient performance this quarter with strong rental collections and again, underline our commitment to quarterly distributions to our unitholders with the INR 4,244 million distribution in Q2. Our second quarter unfolded as expected. Corporates continue to defer decision-making in the volatile and uncertain macro environment and this translated to slower leasing in commercial office space and an overall marginal increase in vacancy rates for the Indian market has also reflected in a slight decline in our occupancy. The integration of property management operations for 2 of our largest properties through the acquisition, as detailed by Vikaash earlier, will further strengthen operational relationships with our occupiers and enhance service delivery, especially important given the heightened health and safety focus by occupiers as they finalize back to workplace strategies. We are positive for the next financial year due to our portfolio exposure to the right markets and the right sectors. The customers we primarily cater to are doing well, and we are confident that this will drive demand once decision-making returns next year. We are extremely well positioned to emerge stronger as the market moves towards fewer quality institutional landlords like Embassy REIT. And in the meantime, we remain committed to our business strategy to deliver total return to our unitholders through regular quarterly distributions supplemented by our organic and inorganic growth initiatives. So that was the business overview for Q2 FY '21. Let's move to Q&A, please.

[Operator Instructions] The first question is from the line of Abhishek Bhandari from Macquarie Securities.

Aravind, I have a question for you. So in this quarter, we did get some interest cost saving because of refinancing. Do you think we have further scope to reduce our borrowing costs, especially for the [ activity ], which is coming up for repayment in '22. Is there any repayment loss what you can take benefit of to reduce the cost?

Thanks, Abhishek, for the question. So yes, you're right, there has been significant reduction in our interest cost, and that's been evidenced in the 2 bond raises, which we've done. And just kind of linking it up to our current existing NCD, which is a INR 3,650 crores of bond, this Abhishek, comes up for ultimate maturity in June '22 with a prepayment option from December '21 onwards. So at that point in time, we'll evaluate the refinancing of this NCD and the proportion which we will refinance into a coupon-bearing debt, which is the proportion of under construction buildings which are completed. So at that point in time, we'll reevaluate, and if the current market continues, we expect that this compression in rates, we will be able to take advantage of, and it will be great for our business at that time.

Sure. Vikaash, my second question is to you. You mentioned that you achieved 13% mark-to-market kind of spread on the leasing. But if I look at compared to the previous year's numbers then we should talk about 19%, 20% spread on those numbers. Do you think this current MTM are turning slightly lower below our original estimates?

Thanks, Abhishek. That's a great question. So I'll take it into 2 pieces. One, on the new leases, if you see, as you mentioned, the 120-odd thousand square feet that we've done, that could lead us actually 10% above market rent. On the MTM, one, the momentum has been slow. We laid down the reason. So what we are seeing is that the MTM realizations have been flattish. What I mean by that is, while it is in line with what the market rents are and what we have achieved in the past but we've not been able to really drive those MTMs higher as usually we would do each year. So I think 13% [ receding ] spreads on the 0.5 million we've already done is partly reflective of the in-place rent of those leases when they came up for expiry. If you -- if I can just kind of guide you to Slide 31 of our earnings deck, the 1.2 million square feet, which we are projecting as likely exits. The MTM on that is actually 16%. So it's a mix of both. One, of course, we would love to achieve even higher MTMs, but these are in line with our expectations. And two, the remaining leases, which are likely exits are actually at much below market rents and whenever we do lease them up, we'll see higher MTM. Does that help, Abhishek?

Yes, yes. And Mike, my last question is to you. Given the current market conditions and the abundant liquidity available in the capital markets, do you think it makes sense to probably accelerate evaluation of [ TV ]?

Yes, so on acquisitions, generally, we are looking at a number of different opportunities. We continue to evaluate Embassy TechVillage. We'll come back on those opportunities in due course. I think as a general comment, we do see a divergence generally across the market where the really high-quality properties are in strong demand from a number of potential acquirers, and a falling away of the second grade type of properties. So we will continue to focus around the quality type of property. We have outlined the criteria for that before. And yes, we will continue to do that, to look at that and to do all the work around different opportunities, including TechVillage.

The next question is from the line of Saurabh Kumar from JPMorgan.

So I have 3 questions. One is on dividend, which is down. I just want to understand, below the line, what is happening at Golflinks? And any other below-the-line adjustments, which may have happened to drag down this dividend. Because as I look at your property level NDCF that is still up 4%. The drag is coming below that. And I just want to get a better handle of that. And also, Aravind related, essentially, if you can just explain why the working capital has moved the way it has moved. So that's first. And I have a follow-up with the other 2 later.

Sure. Aravind, you can take that?

Yes. So just taking the question one by one. So if you just go through the distribution number or a walk through, you will see that the distributions Q-on-Q were down 8%, even though the NOI is up. So I would say there are 2 main reasons for that. One is the point which you mentioned around Golflinks, the joint venture entity. The distributions are lower because the debt was fully repaid in the beginning of this quarter. So now the cash flows are distributed to both shareholders by way of dividends. In relation -- the second item, which kind of moves the distributions lower during the quarter is because of the working capital changes. Now this is largely due to the security deposit refund during the current quarter due to the occupier churn, which Vikaash mentioned. So these are the 2 main reasons, which are the numbers or items which are impacting our flow-through of EBITDA to NDCF.

Okay. And this Embassy Golflinks, this INR 26-odd crores. That is your profitable depreciation at Golflinks. Is that a fair number, I mean, on a quarterly basis? Is that a [ fair ] number?

Sorry, but can you just repeat that?

Of the INR 26 crores we are seeing in Embassy Golflinks, that is the -- now the stable level of cash flow. Which one should I expect that distribution from?

Saurabh, not really. So this number, what you have seen, INR 23 crores, was the final installment of debt, which was repaid during the quarter. And in future quarters, assuming there is no further debt, this number will move to 0. What will happen in subsequent quarters is that Golflinks will distribute dividends, and these dividends will be received in the entity Embassy Office Parks Private Limited, this is the Techzone entity [ such that work down or they sit there ] as a part of other income.

Yes. But I just want to know what is that amount, which is distributed. So what I'm trying to get is, what is the profit per depreciation of Golflinks and just to see what is the offset against this INR 23 crores, which we get?

Yes. So sort of the run rate going forward on a current basis will be approximately about INR 30 crores of dividend per quarter.

Okay. So INR 26 crores goes away, INR 30 crores comes back. Okay. Got it.

Yes.

Okay. Okay. Got it. Okay. The second is on this -- just following up on this mark-to-market question. So you have, in fiscal '22 and '23, significant mark-to-market, which you, I think, show on your Slide 31. So in the current market, and as you roll into FY '22, I'm sure you're having some of these forward-looking conversations with your tenants. How confident are you to achieve? Maybe not the exact number or something around that vicinity because that will be a pretty significant driver of your NOI growth, I guess, in fiscal '22 and '23.

Thanks for the question. Vikaash here. That's a good question. So a couple of things. One, the FY '22 and '23 mark-to-market, which you see on Page 31, which is approximately 58% and 37%, respectively, one, that's a function and factor of what is increased rent. So some of our legacy 15-year leases, some of our large occupiers come up for renewal ultimately -- ultimate expiry at that point in time. So for instance, just to -- just for example, Manyata rent for a legacy lease would be, let's say, 40%, 50% of the existing rent that we're able to achieve. So in that sense, we remain fairly confident and positive on achieving those mark-to-market gains. Yes, we also note that by that point in time, we expect the leasing momentum to pick up in the market. In fact, if you see, current quarter, some of the leases that we have done, the 124,000 square feet, has actually been 10% above market trends rents which are assessed by CBRE. And this also follows the market trends assessed independently by CBRE and how much is the mark-to-market. So we remain fairly positive. We have delivered those in the past. These are legacy leases significantly below market. We think we'll be able to achieve these mark-to-market.

Okay. Got it. And the third question is generally on the market. So we are seeing -- well, you are obviously painting maybe a more realistic outlook, but generally, when you see the papers, you keep hearing about all these record deals happen every 2 to 3 weeks in India. So I just want to know whether, are you seeing, from all these occupiers, that -- I mean, so effectively, do you see some of these guys continue to invest and continue to take about this 1 million, 1.5 million square foot asset? Is there -- are you losing out there just because you don't have supply in the relevant market or you don't have too much -- any capacity? Is that why we are not there? Or is it that -- I mean the market is just bad and there's nothing to be done there? I mean and this is just bad news -- I mean the new retail element.

So thanks for that, Saurabh. And you're absolutely right. I mean there are some great deals that have been announced over the last 6 months during the COVID period, the FAANG-type of companies and in multiple cities. So that's great news. And it's an indicator, I think, of the strength of the technology sector and the way in which they continue to grow and continue to see India as the place that they can support their global businesses. I think we do have limited supply ourselves. Our occupancy is up there at 91%. The supply that we did bring forward at the end of last year, particularly in Bangalore, you know that we're 70-odd percent occupied on that. And that's just a really positive reflection of particularly the Bangalore market. Parts of Bangalore, even though vacancies might have gone on by 1% or 2% over the last 6 months, actually, CBRE are reporting increases in rentals, even over the last quarter. So it's a strong market. Would we like to have more supply available to lease up now? Yes. We believe that once decision-making comes back, the limited quantum of space that we have today will be taken up pretty quickly. And then the new space that we've got under construction in Pune and in Bangalore, which, of course, is not coming on through for another couple of years, we think that we'll be talking to those types of large tenants who've got RFPs out in the market now. So very positive.

Okay. And just, sir, one last question with your permission. I mean just in terms of the distribution. So is there any thought to move away from distributing the entire free cash to doing something, which like the global reach through, [ would suggest the FFO ], which is maybe a profit on depreciation and the straight-lining impact, I mean, so as to reduce the volatility around working capital and all the other changes? Or would you continue on this?

Saurabh, so our process and philosophy around distribution is to continue 100% of our NDCF as distributions. And that is largely supported by, I would say, 3 reasons. One is the existing liquidity in the business of INR 9 billion as well as undrawn commitment. Second is a leverage -- low leverage ratio of 16% and our ability to raise additional funding as even required especially for our CapEx projects. And lastly, I would say, the strong 99.6% collections, which are coming from our office occupiers. All put together gives us the confidence to continue to distribute 100%.

And Saurabh, just to add here, while you make a point on ensuring that distributions are even. But the way we look at it is we manage the business for -- not for the quarter, but a longer horizon. And we would kind of encourage the analyst investor community to look at it more from distributions for a particular year or a longer time frame. So in that sense, a couple of cycles in the business will get taken care of itself, in terms of payment [ existing ] [indiscernible] coming in and the revenues and the distribution is reflecting that.

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

My first question was on the key assumptions that we have for the H2 guidance for the distribution. So I understand the Golflinks dividends may offset the principal repayment. But just wanted to understand the working capital change, right, considering that we expect 1.2 million square feet of likely exit. How are we, based on those assumptions, for H2?

Yes, Kunal. So you're absolutely right. In terms of the guidance, what we've given for the full year, FY '21, where we have given a midpoint number of INR 22.04 per unit factors in, I think, 2 key reasons why the distribution from EBITDA to NDCF goes down. One is the Golflinks point, which I spoke about. second, working capital has 2 components, a rather large component pertaining to the security deposit refunds, which are expected over the next 6 months, which have been factored in. And as we did mention in our last quarter call, there were a few one-off items which were there in the working capital of last year, which is not expected to recur. That's also being factored in.

Sure. Sure. That's helpful. Also, just a follow-up on the question on the distribution. So the tax loan distribution this quarter was down Y-o-Y to almost [ INR 260 million ]. What's the reason for that?

Sorry, can you just repeat the question again? The tax loan distribution is what?

The NDCF zone -- Techzone was down by [ INR 260 million ] Y-o-Y.

So this is basically comparing it to June '19 quarter, right?

Correct, correct. Yes.

Yes. So we had mentioned this in our last year call that in June '19, there was one pretermination from a large tenant, which earned us the pretermination fees, which was part of distribution for June '19 quarter. That is primarily the reason why you see this number going down.

Sure. Sure. And just secondly, in the opening remarks, Mike, you mentioned that you continue to evaluate opportunities besides TechVillage. Can you give us some indication on how is the acquisition scenario right now considering the deals that have happened so far, the rebalancing announcement or be it the deal that's going on between Blackstone and Prestige. So how are you looking at the acquisition scenario currently?

I mean I think we've set out the criteria that we're looking for in potential acquisitions. We've kind of set out the geographies that we look at, the customer base, the sector, which is office, the scale and we would have a particular return profile where we're not focused primarily on development. We're not focused on retail. So if you look at some of the portfolios that you've mentioned, they'd be very different in a number of the tax of criteria. So our core focus is office, large scale, very similar tenant profile to what we currently have within the portfolio because we feel that, that is the best profile of tenants, the highest credit quality and the most resilient as actually we've seen in the last 6 months. We were often asked about technology and concentration around technology, and I think it's been underscored that actually now, the world is becoming more technologically dependent and therefore, more dependent on our sort of tenants. So I think we will continue to focus on a similar profile, if we're looking at acquisitions, as we've previously articulated.

Also, Kunal, just to add. We believe that institutions with access to capital will really be able to differentiate themselves and kind of access some of these large opportunities at distress and liquidity concerns to pay out in the market. And the teams who have the ability to move fast and underwrite based on the on ground experience will really be able to benefit from this. So we think we are well placed in that regard.

So Vikaash, just a related question on that, like you mentioned access to capital. So would you still look at raising equity for interest acquisition, considering the cost of borrowing now that you're getting as closer to the yield?