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

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

Thank you, Raymond. Welcome to the Third Quarter FY 2021 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter ended December 31, 2020, a short while back. As is our standard practice, we have placed our quarterly financial statements, earnings presentation discussing our quarterly performance and a supplemental financial and operating data book on our website at embassyofficeparks.com in the Investors 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 obliged to update them at any time. Specifically, the financial guidance that we will provide on this call are management estimates and the guidance has not been subjected to any audit, review or examination procedures. You're 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 the 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. On December 24, 2020, Embassy REIT completed the acquisition of the Embassy TechVillage assets for an enterprise value of INR 97.8 billion or USD 1.3 billion. We will provide an update on the acquisition during this call. Joining me today are Mike Holland, the CEO; Vikaash Khdloya, the Deputy CEO and COO; and Aravind Maiya, our 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 questions. Over to you, Mike.

Thank you, Ritwik. Good evening, everyone, and thank you for joining us on the call today to review our Q3 FY '21 results. Q3 was transformational for Embassy REIT with the successful completion of the acquisition of Embassy TechVillage or ETV, a unique large scale 9.2 million square feet integrated office park with over 45 marquee international occupiers, located in one of India's best-performing office submarkets in Bangalore. This acquisition has increased the scale of our portfolio by 28% to 42.4 million square feet. Our ability to successfully raise equity as well as debt to fund this acquisition in the midst of the ongoing pandemic serves as a testament to the confidence that our existing and new investors place in our business model and in the execution capabilities of our team. We particularly welcome our new investors who subscribed in the recent equity issuance. In addition to integration of ETV, we delivered strong operating results during Q3. We collected 99.5% of our rents. We continued the momentum on our development pipeline, and we have announced healthy quarterly distributions of INR 4,313 million. This brings our total YTD unitholder distribution to INR 13,056 million or INR 15.88 per unit. Our guidance for the financial year on a same-store basis is on track, and we have also updated our full year FY '21 guidance to include the positive impact of the ETV acquisition. Aravind will take you through the same later during this call. So a transformational acquisition and another quarter of resilient performance through the ongoing pandemic. And while these are challenging times, looking forward, we see multiple positive indicators. First, we are optimistic on the COVID-19 situation in India. The encouraging downward trend in active COVID-19 cases and deaths across India has continued since September 2020. Economic activity levels continue to increase and there is further optimism with the ongoing rollout of the COVID-19 vaccine program in India. We have seen a gradual ramp-up in the number of employees working from our properties, a 27% increase in Q3 over Q2, and this upward trend has continued in January. We remain actively engaged with our occupiers to support them in their gradual return to workplace and ramp-up plans, and those conversations suggest that this back-to-office trend may accelerate during the course of the coming months. While international companies are clearly taking a cautious cue from the continuing COVID-19 situation in U.S. and Europe, several of these global companies are preparing and piloting back-to-office initiatives for their centers in India. These are all encouraging, positive and clear trends. The second area for optimism is the performance of the technology sector and its ongoing role as our most significant demand driver. As anticipated since the onset of the pandemic, another positive trend now clearly emerging is the strong performance of the technology sector both in India and globally. In recently announced results, tech companies impressed once again with all-round growth led by execution on digital priorities of clients and strong deal pipeline for cloud, cybersecurity and outsourcing services. With the sharp pickup in demand, many corporates have reported robust hiring plans for the year ahead. Our portfolio, with 43% exposure to technology occupiers and a further 31% to global captive centers, stands to gain as global firms continue to look to India for innovation, R&D, delivery excellence and cost-efficient solutions driven by the availability of a highly skilled talent pool. Also, with the recent ETV acquisition, 72% of our portfolio by value is now centered around Bangalore. In the last 2 months, we have seen independent reports ranking the city as #1 in India's Innovation Index and the fastest-growing tech ecosystem worldwide during the period 2016 to '20. So we reiterate our view that we are concentrated around the growth opportunity, the right macro trend, customers and markets. And the third area where we see positive change is the post-pandemic office demand. The priorities for corporate occupiers during last year's lockdown related to employee well-being and business continuity through remote working and resulted in a year-on-year decline in pan-India office absorption by 45%. However, now, post the lockdown and with the initiation of the vaccine rollout, corporate real estate strategies are evolving to again become more forward-looking to support the future needs of their growing businesses. This was reflected in the pan-India gross absorption figures reported by independent property consultants, which showed a 29% quarter-on-quarter increase from Q3 to Q4 calendar '20. With the vaccine program in India gaining momentum in the coming months, we remain positive on the growth trend and expect demand recovery to gain strength from the second half of this year. On similar lines, compared to calendar '20, property consultants are forecasting an increase in office demand of 27% for calendar '21 and 50% for calendar '22. On the supply side, the 2-year forward forecast remains down 23% year-on-year, while vacancies have moved up only marginally from 14% to 17% pan-India year-on-year. Occupancy in our portfolio remains stable at over 90% despite the pandemic headwinds during the previous year. As Vikaash will cover subsequently, we are well placed to match our supply timing with the expected bounceback in demand. We remain of the view that a more flexible hybrid way of working will influence the office of the future. We continue to believe in the strength of our key customer base, technology and captive centers, which are dependent on the young, talented Indian workforce, and which will continue to rely on high-quality workspaces and integrated business parks with a focus on the total business ecosystem. We remain convinced that this is especially true for India, owing to the unique demographics of its working population, a young, career-oriented, learning-focused group looking for collaborative spaces for culture building and mentoring, and the stark contrast with the digital and physical infrastructure challenges at home. We are well positioned to benefit from the shifting occupier attention to quality workspaces and will gain market share with the expected consolidation. Clearly, the intensity of the pandemic, not just in India, but more so in U.S. and European markets, impacts recovery timing. But the indicators within India are almost universally positive. And all the factors I have mentioned highlight the stable and resilient nature of our portfolio and our business. Let me now hand over to Vikaash to discuss in detail our business and operating performance for Q3.

Thanks, Mike. Good evening, everybody. Business highlights for this quarter include: gradual and consistent ramp-up in back-to-office numbers; lease deals signed for 311,000 square feet with 14% spreads on 206,000 square feet re-leased area across 11 new deals; rental increases of 15% on 1.5 million square feet across 24 leases and rent collections of 99.5%; launch of 1.9 million square feet new office development at ETV with construction activity at full pace on overall 5.7 million square feet on-campus development; and completion of 9.2 million square feet ETV acquisition with successful INR 36.8 billion equity raise through an institutional placement. Now let me take you through the details. First, an update on our efforts to facilitate occupiers' return-to-work programs. Our buildings have remained operational and safe with an estimated 97% of occupiers operating from our properties across India during Q3. The success of our on-ground teams in this regard is reflected in our robust rent collection figures. We collected 99.5% office rents for Q3, 99.9% for Q2 and 100% for Q1 with no waivers to office occupiers. We continue to support occupiers as they bring forward their back-to-office plans. We have seen a consistent gradual ramp-up in the number of employees working from our properties, an average of 20,000 employees worked from our properties in Q3, a 27% increase compared to Q2. Domestic corporates are leading the back-to-office trend. However, multinational occupiers remain cautious and are ramping up slowly, likely driven by the rebound in the COVID-19 cases in their home countries. Overall, the feedback from our occupiers continues to be encouraging and suggests further ramp-up in the coming months. Moving to our leasing and lease management update. During the quarter, we signed new leases for 206,000 square feet across 8 deals with a 14% releasing spread. This included 143,000 square feet of leasing at Embassy TechVillage, the latest addition to our portfolio. We also renewed 104,000 square feet across 3 ultimate lease expiries at 6% renewal spreads to existing rents. This adds up to 311,000 square feet leases signed this quarter across 11 deals. On a year-to-date basis, we have now signed 1 million square feet leases across 37 deals, comprising of 531,000 square feet of new leases, including 450,000 square feet of re-leases at 16% releasing spread, and 514,000 square feet of renewals of ultimate lease expiries at 14% renewal spread. Next, on our upcoming expiries. Of the 2.2 million square feet expiries in FY '21, we have successfully backfilled or renewed 0.7 million square feet or 32% of expiries at 11.4% mark-to-market spread on a year-to-date basis. Of this, 190,000 square feet was achieved during Q3 at 7% mark-to-market spread. 0.9 million square feet of lease expiries resulted in occupier exits on a year-to-date basis, and a further 0.6 million square feet are likely exits over the next quarter. This was broadly in line with our expectations of 1 million square feet-plus exits due to COVID-related pressures on occupier businesses, some rightsizing by occupiers as well as normal occupied churn seen every year. Despite these exits, our occupancy remained stable at 90.6% on our enlarged 32.3 million square feet operating portfolio, with our same-store occupancy at 90.5%. As demand returns gradually over the coming quarters, we expect to build on our existing pipeline of 150,000 square feet and lease up our vacant spaces. As Mike mentioned, the leasing market has shown early signs of recovery, and we foresee the recovery to gain momentum from the later half of this year. As per our conversations with occupiers and property consultants, initial inquiries and RFPs for large deals have already commenced, and we observed over 60% quarter-on-quarter increase in inquiries for our properties. Also, we are witnessing an increase in the number of site visits to our properties. With a steady ramp-up in the back-to-office numbers and with the rollout of vaccinations globally, we are confident that we will see further pickup in leasing demand over the coming quarters, especially from tech companies and GCC's who are likely to expand and be a significant contributor of office demand. Further, of our 8.3 million square feet leases due for escalation during FY '21, we achieved 15% rental increases on 1.5 million square feet across 24 office leases during Q3 and delivered year-to-date rental increases of 13% on 5.3 million square feet across 66 office leases. These embedded escalations are key to our NOI growth, and we have achieved all the rental increases as per schedule. We are confident that we will deliver the 13% rental increase on the remaining 3 million square feet leases due for revision during the next quarter. On similar lines, we signed rolling renewals of 2 million square feet across 15 leases as per year-to-date schedule, including renewals of 1.1 million square feet on 5 leases signed during Q3. These relate to renewals achieved post the initial commitment period and before the ultimate expiry of the lease as these occupiers exercise the option to continue with the lease and not give up this space. As per early conversations with occupiers, we are on track to sign the remaining 0.9 million square feet leases due for renewal -- due for rolling renewal during the next quarter. Next, our development and asset management update. During the quarter, construction continued at pace across our 3 ongoing on-campus development projects in our existing portfolio totaling 2.7 million square feet. Post ETV acquisition, a further 3.1 million square feet of development potential has been added to our portfolio. This includes the 1.1 million square feet build-to-suit already precommitted to a banking major, and for the balance 1.9 million square feet we have kickstarted development last month immediately post ETV acquisition. With less than 2% vacancy in the ORR submarket where the ETV asset is located, we are confident to bring this supply forward. Apart from a 1.1 million square feet build-to-suit project which is 100% precommitted and on track for delivery in September of this year, all our new deliveries are expected starting FY '23. These time lines tie well with the expected demand revival in the medium term. For the total 5.7 million square feet under construction projects in our enlarged portfolio, we expect balanced CapEx spends of INR 23.3 billion over the next 3 years, and we continue to be well placed to finance these projects. We continue to make progress on our infrastructure and amenity upgrade initiatives across our portfolio. 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, including a skywalk, continue to be on schedule. Our comprehensive repositioning initiative for Embassy Quadron in Pune is progressing well and on target for September 21 completion. We are also working with the Pune Metro to enhance direct pedestrian access to this park and are confident that these investments will add long-term value to the asset, attract world-class occupiers and will result in occupancy ramp-up at Embassy Quadron in the medium term. Both of our hotels were operational during the quarter and saw marginal increase in occupancy numbers. While hospitality demand recovery is expected to remain muted until FY '22, we expect occupancy to improve from current levels with the vaccine rollout in India. We continue to conserve cash and have further reduced the Q3 cash burn to INR 74 million. Lastly, an update on our latest acquisition and our acquisitions strategy. We successfully completed the acquisition of ETV assets on December 24, 2020. This acquisition has significantly enhanced our portfolio scale, further diversified our occupier base and facilitated REIT's entry into Bangalore's best-performing submarket ORR. Further, an acquisition of such scale and complexity has demonstrated our team's ability to successfully execute large multiparty transactions in compressed time lines. To finance our ETV acquisition, we successfully raised INR 36.8 billion of equity through an institutional placement of 111.34 million new units in December 2020 at a price of INR 331 per unit. This placement witnessed strong demand from both existing as well as new institutional investors, including global and domestic investors, pension funds, insurers and alternative asset managers. Further, we issued 64.89 million units, totaling INR 23.1 billion on a preferential allotment basis at a price of INR 356.7 per unit to the third-party selling shareholders of ETV. This total issue of 176.23 million new units has diversified our unitholder register, enhanced the liquidity of our units and is expected to facilitate the REIT's potential inclusion into additional global benchmark equity indices. Immediately post ETV acquisition, we initiated our asset management plan. We have successfully integrated the asset and on-ground teams into our REIT portfolio. We have kickstarted the 1.9 million square feet of new on-campus development, and we have also made progress on refinancing the in-place ETV debt and restructuring the asset SPV's. Aravind will provide further details on these shortly. Also, post the successful closure of this transaction, we are witnessing increased interest from other developers and asset owners as they look to consolidate with larger institutional quality landlords with strong balance sheets. We continue to evaluate acquisition opportunities in the market and as stated previously, we are focused to ensure that acquisitions are strategic and value-accretive to our unitholders. As you can see, during the quarter we remained focused on managing our existing leases, deepening our occupier relationships and gearing up for the upcoming demand revival by investing in our existing properties. We also commenced our next growth cycle by initiating new development projects across our existing campuses and successfully integrated the newly acquired ETV asset into our portfolio. We continue to be focused on creating long-term value in order to maximize returns to our unitholders. Over to Aravind now for the financial updates.

Thanks, Vikaash. Good evening, everybody. At the outset, I would like to overlay the principles we have adopted in relation to the acquisition accounting for ETV assets. ETV acquisition was completed on December 24, 2020 and these assets have been consolidated from December 31, 2020, that is a date close to the acquisition date. Hence, while the consolidated balance sheet as of December 31, 2020 includes the assets and liabilities of ETV, the income statement for the third quarter and the 9 months period ended December 31, 2020, do not include the results of ETV. With this background, let me start with the financial highlights for Q3, which include: net operating income of INR 4,780 million, up 3% year-over-year, with operating margins of 85% for the quarter; distribution of INR 4,313 million or INR 4.55 per unit for the quarter, representing a 100% payout ratio; successful debt raise of INR 7.5 billion during Q3 at 6.7% coupon, and raised further INR 26 billion in Jan 2021 at an impressive 6.4% coupon; and refinanced INR 32.8 billion in-place debt, resulting in 336 basis points of interest savings. Now let me take you through the Q3 FY 2021 earnings performance in detail. Our revenue from operations for Q3 grew by 4% year-over-year to INR 5,653 million, mainly due to contracted rental escalations, income from new deliveries in Q4 of FY 2020, an increase in CAM and other operating revenues, which were partially offset by decrease in commercial office revenues due to occupier exits as well as decrease in hotel revenues due to COVID-19 impact. Our net operating income for Q3 grew by 3% year-over-year to INR 4,780 million, in line with the increase in our revenue from operations. Our same-store NOI grew by 5% year-over-year to INR 4,020 million. Our EBITDA for Q3 grew by 8% year-over-year to INR 4,830 million, mainly due to increase in our NOI, interest income on purchase consideration advanced for Embassy Manyata M3 Block B and savings due to our cost optimization initiatives. Our operating and EBITDA margins continue to be impressive at 85% for Q3 and reflect the efficiency of the business given our scale and low fee structure. Our margins have been positively benefited from our cost savings initiatives as well as the change in segment mix since the beginning of this financial year. Our net distributable cash flow for the quarter stood at 4,308 million, and the Board of Directors in their meeting held earlier today declared a 100% payout ratio with total Q3 distribution of INR 4,313 million. This translates to a distribution per unit of INR 4.55 for Q3 on the expanded unit base of 947.89 million units in accordance with applicable SEBI regulations. With this, our cumulative YTD distribution totals INR 13,056 million or INR 15.88 per unit. The record date for Q3 distribution is February 22, 2021, and the distribution will be paid on or before February 27, 2021. Note that while our total Q3 distribution of INR 4,313 million is 2% higher quarter-on-quarter, our DPU for Q3 has declined by 17% quarter-on-quarter. This is due to the impact of 176.23 million new units issued through an institutional placement and preferential allotment in December 2020 in connection with the ETV acquisition. While these new units are eligible for Q3 distribution, the corresponding increase in NOI or distribution due to ETV's positive contribution would be reflected beginning Q4 onwards, given the timing of the acquisition and accounting principles adopted, which I mentioned in my opening remarks. For comparability purposes, the pro forma DPU, excluding 176 million new units issued in December 2020 would be INR 5.59 per unit for Q3 and INR 16.92 per unit, YTD. Next, an update on our recent debt capital market activity and the resulting balance sheet position. During the quarter, we successfully raised INR 7.5 billion debt at 6.7% coupon through the placement of tranche B of a Series II NCD. These funds were primarily utilized to finance the acquisition of the property management operations of Embassy Manyata and Embassy Techzone as well as CapEx spend for our ongoing on-campus development. Immediately post the ETV acquisition in January 2021, we successfully raised INR 26 billion debt at an impressive 6.4% coupon, our lowest cost debt till date, through the placement of our Series III NCD. These funds were primarily utilized to refinance ETV's in-place debt. Both these debt issuances witnessed strong demand from existing and new investors, with prominent domestic financial institutions participating and anchoring these issuances. Our ability to access debt market and raise financing at attractive terms, once again demonstrates investors' confidence in execution of our business strategy and flight to quality borrowers with balance sheet strength. The recent budget announcement enabling foreign portfolio investment in debt securities of REITs will enable access to larger pools of debt capital, leading to increased participation and competitive rates for our future debt issuances. Also, during Q3 and until mid-January 2021, we successfully refinanced a total of INR 32.8 billion debt, mainly comprising of INR 26.4 billion refinance of ETV's in-place debt and INR 6.4 billion refinance of our existing debt at Embassy Energy. We have delivered a 336 basis points interest savings on these refinancing. Further, we renegotiated the interest rate of INR 15 billion of rollover ETV debt at SPV level from 7.9% at the time of acquisition to 7.6% post acquisition, a savings of 30 basis points, and continue to be in discussion with lenders for further rate reductions. Our focus now shifts to our initial INR 36.5 billion debt, which is due for redemption in June 2022. This debt was raised in May and November of 2019 through the placement of our Series I NCD at a blended 9.3% coupon. In this regard, we continue to monitor the stabilization of our under construction buildings as well as the overall debt market conditions. These will determine the timing, coupon structure and the contours of the potential debt refinance, and we will keep you updated as we progress further. Moving to other financial updates. As updated during our previous calls, in June 2020 we filed a scheme of arrangement to collapse the legacy 2-tier holding structure of Embassy Manyata entity into a simplified and tax-efficient, single-layered SPV structure. The target is to complete the restructuring by March 2021, and we are currently awaiting regulatory approvals on the restructuring proposal. Similarly, in February 2021 we filed the scheme of arrangement to collapse the 2-tier holding structure of the newly acquired Embassy TechVillage assets to make distribution from ETV tax-efficient to our unitholders. The scheme is subject to regulatory approvals and the target is to complete the restructuring by September 2021. Upon simplifying our holding structure with above restructuring of both Embassy Manyata and Embassy TechVillage asset SPV's, the proportion of dividends in our overall distributions is expected to increase significantly. This will be a huge positive as it further enhances the overall post-tax distribution yield to our unitholders given REIT dividends are fully tax exempt. Finally, an update on our guidance for the remainder of this financial year. We have updated our guidance for the full year FY 2021 to take into account our updated assumptions of current market conditions as well as the estimated impact of ETV acquisition. Our guidance factors assumptions similar to those outlined during our previous earnings call in Q2 around rent collections, contracted rental escalations, portfolio occupancy, demand outlook in immediate term, et cetera, as well as business commentary outlined during today's call by Vikaash. Before I move into details, let me highlight that on a same-store basis, that is excluding ETV, we have retained our full year midpoint NOI guidance at INR 19,005 million and have marginally increased our midpoint distribution guidance by approximately 1% to INR 17,170 million. Moving to our revised guidance post ETV acquisition. Factoring for the 176.23 million new units issued in December 2020, which are eligible for both Q3 and Q4 distributions, as well as the incremental NOI and distribution contribution from ETV asset in Q4, we now revise our FY 2021 NOI guidance to be in the range of INR 20,009 million to INR 20,619 million, with a midpoint of INR 20,314 million, and our distribution guidance to be in the range of INR 18,065 million to INR 18,615 million, with a midpoint of INR 18,340 million. Assuming a 100% payout ratio, our full year FY 2021 DPU guidance would be in the range of INR 21.13 to INR 21.78 per unit with a midpoint of INR 21.45 per unit. We have included a guidance reconciliation in our earnings presentation as well as a supplemental data book with details such as increase in our same-store portfolio guidance, impact of issuance of additional units and increase due to ETV's positive contribution to NOI and distribution. As you would note from the Q4 guidance figures,, the addition of ETV to our portfolio is expected to be both NOI and DPU accretive. In summary, to round up our income statement on a YTD basis, our NOI and EBITDA are up 5% and 8%, respectively, mainly due to increase in revenue from operations, savings due to cost optimization initiatives as well as additional interest income on the M3 Block B transaction. Further, we continue to maintain our strong balance sheet with a low leverage of 23% net debt to total enterprise value, strong liquidity position of INR 9.4 billion as of December 2020 comprising of INR 5.9 billion of cash and treasury balances and INR 3.5 billion in undrawn commitments, and INR 120 billion or $1.6 billion of additional debt headroom. Our conservative balance sheet, available liquidity and access to capital, both debt and equity, enables us to finance our organic growth to the 5.7 million square feet on-campus development across portfolio as well as to pursue accretive acquisitions to the benefit of our unitholders. Over to Mike for his concluding remarks.

Thank you, Aravind. So this was another resilient quarter for Embassy REIT in the face of the global pandemic. We successfully completed the $1.3 billion ETV acquisition and have integrated the asset into our portfolio. We concluded our first ever institutional placement of over $500 million. We raised over $350 million debt at our lowest ever 6.4% coupon, and we delivered strongly on our existing portfolio through robust rent collections, continued momentum on our on-campus development and healthy unitholder distribution. We are witnessing a gradual and consistent ramp-up in both the number of people working in our parks and the new lease inquiries received by our teams. We expect these upward trends to continue in the light of positive macro indicators of decreasing active COVID-19 cases in India, vaccine rollout progress and exceptional results delivered by the technology sector companies, all of which will positively impact leasing decisions taken by our occupiers. As always, we remain focused on our strategy of delivering maximum returns to our unitholders through our organic and inorganic growth initiatives. So that was the business overview for Q3 '21. Let's move to Q&A, please.

[Operator Instructions] The first question is from the line of Saurabh Kumar from JPMorgan.

A few questions. One is about the -- [indiscernible] impact, so basically, the units have gone up and the -- and that's the dilution you're seeing in the DPU, right? So hopefully next year we come back to the 5.5-odd run rate which we had in 3Q, will that be a correct assessment?

Saurabh, that is correct. This is a onetime impact because in quarter 3, there was no distributions or NOI from ETV. But since the units were issued in December, they are eligible for distributions. Actually, these units are eligible for distribution after the record date, right, which will be February. And hence, this is a onetime dilution. And come FY -- actually, fourth quarter as well as FY '22, it will come back to normal.

Okay. And the second, Aravind, is on your debt costs, so you highlighted something around like 6.5% but if you look at your P&L the interest costs which you report, that works out to something like 8.9-odd percent. So I mean, where is the disconnect there?

Sure, Saurabh. So if you look at the profit and loss account, that includes the debt on the Series I NCD, which has a blended rate of 9.3% as well as the Series II NCD. So the right number to look at, Saurabh, would the walk through, which is there in the investor deck and the supplemental deck, which gives the cash interest paid, right? So that will be the right benchmark to look at.

Okay, that will also include the 0 coupon. I'm just trying to figure out the actual cost of debt, blended average cost of debt on balance sheet. I mean, that will be how much? That will be 8.9%, right?

We seem to have lost the line for the management. Please stay connected. I'll reconnect the management line. [Operator Instructions] Over to you, sir.

Saurabh, we dropped off. I don't know till where you heard. But what I was saying is the profit and loss includes the accrual on the Series I NCD, right? Sorry, please go ahead.

So I was trying to just figure out the average cost of debt for Embassy that should be 8.9% because the walk through will include the 0 coupon.

That's right.

The average cost of debt for Embassy on the portfolio is 8.9%, the incremental is around 6.5%, that I understand, but the average will be 8.9%, right?

So 2 things, Saurabh. What I would guide you is Page 18 of supplemental debt because that factors in the refinancing which has happened in Jan 2021, which is post the quarter end, right? So over there, if you see, while the average cost was 8.76% coupon as of December, after factoring the January refinancing through the INR 2,600 crores, the average cost has dropped to 7.91%. So that's the number to look at as the all-in, the entire portfolio coupon rate for us as of today.

Okay. Got it. Okay. And one thing on occupancy, Mike. So where do you think the portfolio occupancy would be for you on a more stabilized basis? So since listing, you've broadly been in that 94% mark? Well, the mark has been 94%, 94.5% and then we have subsequently seen that at 90% 92%. So on a more normalized basis, do you think 94%, 95% is more likely or will we ever see days of 97%,98%.

Saurabh, this is Vikaash here. So you are correct that we were in the high mid-90s before the COVID pandemic. The way we look at it, of course, is we do have certain expiries coming in Q4 of 0.6 million square feet. But on a normalized basis, assuming 3 or 4 quarters from today, we do see this occupancy ramping up, especially given the quality of our assets, back to what we have seen pre-COVID levels, especially given we also now have ETV assets which is a dominant asset in a micro market with low supply. So we do see ourselves going back to those levels which we have been able to maintain occupancy previously.

Okay. So in about 3 quarters, okay.

Yes. And given the construction profile, there'll always be some stabilization period for the new deliveries.

Understood. I have a few more, but I will jump back in the queue.

The next question is from the line of Kunal Tayal from Bank of America.

I have a couple. The first one, maybe for Mike. Mike, you had a fair amount of deal signings this quarter. Have you observed any changes on parameters like per person space assumptions in those deals, rentals or even lease durations? So that's question number one. The second one for Aravind. Aravind, can you remind us what is the earliest you can consider refinancing of the 0 coupon bonds?

Yes. Thanks, Kunal. Yes. I mean as we said, we've seen a slow but discernible change in terms of volume of leasing and interest and inquiries. I think inquiries are up by 60%. And there is certainly a sentiment that's positive about the growth of our occupiers. We are indeed seeing across the market many occupiers are looking to retain flexibility in terms of the length of their commitments, preferring sometimes shorter lock-in periods. Rentals, we're holding our rentals. I think you can see from the data. So I think generally, across the market on good quality products, particularly in Bangalore, which has these low vacancy rates, rentals are holding, but there is some push for more flexibility around lease terms. By terms, I mean lease periods, lock-ins.

Got it, Mike. Are there any observations on dedensification of per person space requirements?

Yes. So for sure, in conversations, I don't think that, that has yet fed through to be clear in terms of design of the internal space, but numerous conversations that I've had with business leaders would indicate that, yes, that dedensification thesis that we've all shared before is going to come through. And of course, that relates primarily to those companies who'd be in the more outsourced services space. The global captive centers, which is nearly 1/3 of our portfolio, those types of companies already have a fairly low density, although some of them are indeed talking about taking that density to even -- or allocation of space even higher. One, in particular, I'm thinking about who has in the past been looking at 120-feet per person moving up, talking about 150 and maybe even taking it up to close to 200. That would be one of our top 10 tenants.

So Kunal, on the second question on the Series I NCD. So the earliest prepayment option, what we have is 24 months from the date of issue, which is May 2021. But that is, of course, with a 2% prepayment penalty. And in November '21, we have an option to prepay with 0% prepayment penalty.

The next question is from the line of Amandeep Singh from AMBIT Capital.

So I had 2 questions. Firstly, Mike, my question is specific to Mumbai and Pune micro markets, where we have seen continued increasing vacancies with the rental at few micro markets like BKC even moderating by around 10%. In that context will it be possible to indicate nature of tenants who have been exiting and your outlook on these micro markets?

I think, just dealing with the Mumbai side of things, it's clear that there are buildings even in the same micro market, which are superior and attract the quality tenants. And certainly, we would put FIFC, our property in the BKC, right up there at the top of that list with 1 or 2 other buildings. And there are plenty of buildings in that market that will struggle. So I think we're seeing a slow uptick in demand. We are seeing that tenant's rental is not the most significant consideration in the decision-making process, but that today, rents are holding firm for our type of quality building, but decisions are slow to be made. With regards to Pune, Vikaash, would you like to comment on the Pune side of things?

Yes, sure. So Amandeep, on the Pune city itself, I think the demand has been soft since the COVID-19 outbreak. And we do expect it to take some time before we see a return of demand. Definitely, we are right now seeing certain pipeline, which is more driven by the global captive centers who prefer to be in the east of Pune. So in that respect, especially for our Pune assets, we are focused to ramp up occupancy, given some recent consolidations and relocation from our assets. So I think Pune may take a little more time. But however, when demand does get back from those technology and IT services companies, which prefer the west of Pune, we think will be the first beneficiaries. As of now, the global captives are the ones who are looking for consolidation and expansion. So I think the technology companies will follow suit.

Can I just add some further color to the comments on Pune. I mean our market, Hinjewadi, you'll have seen one of those new leases that we signed in the last quarter, an Australian telecom-related company. They also have options to expand further. So there is demand in that market, but there is very limited competing supply. In Hinjewadi for us, there really is only 1 small cluster development against which we're competing with. So again, I think it goes to our overall thesis that we will see pickup in leasing over the coming quarters, that there is an opportunity for us, come the end of this year and going forward, to capture the uptick that is surely coming.

Sure. That was really helpful. And secondly, on hotels, whilst you understand that it is really a small contributor and has been an ancillary to your commercial portfolio, can you help us understand what the large corporates are now indicating regarding the business travel?

Yes. Amandeep, Vikaash again. So hotels, as you mentioned, what we are seeing is that the occupancy ramp-up has been muted. What we are hearing from the ground is that it will definitely take more time. Just to remind you, the bulk of the occupancy in both our hotels, and that's true for entire Bangalore City, was driven by international and domestic travel. Now until the time the travel restrictions, not only in terms of regulations, but also in terms of company's policies, become more open and permissible, we think it will take time. In our estimate, we think until end of FY '22, which is March of '22, the occupancy will remain low. What we are focused on, if you recollect from the quarter 1, when we said cash burn would be around INR 60 crores a year, we have brought it down to about INR 7.5 crores this quarter, so roughly about INR 28, INR 30 crores for the year. So we are focused. The corporate RFP program is going on. But mostly, it's the mid-level executives who are traveling and the budget for that is considerably different than what it would be for the senior folks.

That's helpful. That's all from my side.

The next question is from the line of Pulkit Patni from Goldman Sachs.

My first question is when I look at Slide 32, which talks about 2.2 million square feet up for expiry in FY '21. Any reason why the mark-to-market opportunity in this portfolio is only 2% whereas when we look at this going forward, the M2M opportunity seems a lot higher. So anything specific to this portfolio, why the M2M opportunity is a lot lower?