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

Ladies and gentlemen, good day, and welcome to Embassy Office Parks REIT's earnings conference call for the fourth quarter and financial year ended 31st March 2021. [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, Margaret. Good evening, everyone, and welcome to the fourth quarter FY 2021 earnings Call for Embassy REIT. And wherever you are, particularly for those of you listening from India, we hope you and your loved ones are keeping safe. Embassy REIT released its financial results for the quarter and financial year ending March 31, 2021, a short while back. As is our standard practice, we placed our quarterly and full year financial statements, earnings presentation discussing our 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 obligated to update them at any time. Further, there are significant risks and uncertainties related to the scope, the severity and the duration of the ongoing second wave of the COVID-19 pandemic; the actions taken to contain and mitigate the pandemic; and the direct and indirect economic effects of the pandemic and containment measures on Embassy REIT and on our occupiers. Joining me today are Mike Holland, the Chief Executive Officer; Vikaash Khdloya, the Deputy Chief Executive Officer and Chief Operating Officer; and Aravind Maiya, our Chief Financial Officer. Mike will start off with the FY 2021 highlights, the 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 Q4 and full year FY '21 results, along with our outlook for the coming year. While Aravind will take you through the detail of our full year numbers: We are very pleased to confirm that we have delivered in line with the guidance set out at midyear back in October 2020. You may recollect that, at our last earnings update in mid-February, I had expressed optimism of the decline in COVID cases and the resultant acceleration of return to work by our occupiers. Since then, we have seen the acceleration of the vaccine rollout, but the second wave of cases will delay the return to office and consequent uptick in leasing. Despite the current short-term step back with the second wave, we continue to be encouraged on a number of fronts for the mid- to longer term. First, in addition to delivering on the guidance set out at midyear, we have now completed 2 full years since listing, 1 of which had been fully under the shadow of the pandemic, and yet we have delivered 24% in total returns. And taking into account Q4 distributions, we will have distributed over INR 370 billion, approximately USD 500 million, since listing. Second, the resilience of our business has been clearly demonstrated, delivering in such a manner despite the global and local challenges. We remained strong on our operating fundamentals. In FY '21, we had collected over 99% of our office rents; signed new leases and renewals of 1.2 million square feet, with re-leasing and renewal spread of 18% and 13%, respectively. Even in today's challenging market, our year-end occupancy stands at a healthy 89%. Third, a consensus has emerged, as we had articulated a year ago, that the office of the future will be a place for collaboration, community and learning; and that while we will see more flexibility in the working week, that office and in particular the type of office products that we provide, the total business ecosystem, will continue to be in demand from the best global companies. The office will continue to be a key tool for attracting and retaining the best science, technology, engineering and math talent here in India. Fourth, the occupiers which we serve, utilizing technology to support their global businesses, continue to prosper; and forecast strong growth, including significant growth in hiring. A recent NASSCOM and Kotak research report estimate a record annual head count increase of 350,000 in the Indian ITES industry for FY '22. In the last 2 weeks, we have heard public results with India's leading technology services companies reporting all-time records in business pipeline and hiring in Q4. Similarly, global banking majors, several of whom have their captive centers in our parks, are reporting record Q4 earnings and growth in their home markets, so numerous strong indicators of growth in our core customer segments. And finally, we again underline the continuing appeal of the office market in India. Supporting high-quality global businesses which continue to grow in a digital and geographically agnostic world, Indian office has a strong future. And within India, with over 70% of our portfolio value, we are focused on the leading market, Bangalore, the market with the lowest vacancy, the highest absorption, the largest stock, highest technology export values and the most global captive centers in India. So even in the midst of this second wave, there is a great deal to be positive about around our business for last year and the coming years. Looking beyond the pandemic, we are using this period to accelerate our growth through the new on-campus development, to develop our acquisitions pipeline, to sharpen our long-term ESG plan to raise the bar with our occupier engagements activities, to continue to reinforce our already strong balance sheet, all to prepare for our next phase of growth as the world returns to work as it certainly will. Let me now hand over to Vikaash to discuss in detail our business and operating performance.

Thanks, Mike. Good evening, everybody. Our business performance was resilient despite the major impact of the pandemic. Business highlights for the full year FY '21 include our properties are fully operational throughout the pandemic, with over 90% occupiers operating from our parks. Our rent collections were robust at over 99%, and we achieved 13% rent increases on the entire 8.4 million square feet scheduled escalations. Our total lease-up stood at 1.2 million square feet across 43 deals; of this, half the new leases at 18% re-leasing spread, with the balance being renewals at 13% renewal spread. Our 5.7 million square feet on-campus development program continues at pace, and we are on target for the first phase with the delivery of 1.1 million square feet JPMorgan campus later this year. And finally, our on-ground teams continued our asset management efforts. We successfully integrated the ETV asset, undertook several upgrade projects as well as wellness initiatives during the last year. Now let me take you through the details. First, the impact of the second wave on our operations. All our parks continued to remain open for business despite localized restrictions on movement. However, the current second wave with rising daily cases has interrupted the ramp-up in employee numbers at our parks. Consequently, time line for back to office ramp-up is likely to be deferred by 1 to 2 quarters. On the positive side, a mass-scale vaccination rollout is currently underway in India, and this will positively influence the rate of return to offices, as is the case worldwide. Our on ground teams continue to support businesses through this second wave. Through our partnerships with leading hospitals as well as support of local civic authorities, we are facilitating vaccines rollout at our parks' premises. This is in addition to our safety initiatives; and our investments in touchless technology, advanced air filters, et cetera. Our recent association with WELL institute is another illustration of our focus on providing world-class health and wellness-oriented solutions to our occupiers. Moving to our leasing performance and outlook. In FY '21, we collected over 99% of rent on our 32.3 million square feet operating portfolio; secured all our rent escalations due, a 13% escalation on 8.4 million square feet across 94 leases; and successfully concluded 2.9 million square feet of rolling renewals. Delivering on above in a pandemic year reflects the strong underlying covenants of our occupiers and active lease management efforts by our teams. Further, we leased a total of 1.2 million square feet across 43 deals in FY '21 at market rents with an average lease tenure of 8 years. Breaking down this 1.2 million square feet lease-up: half the new leases across 23 deals at 18% re-leasing spread and the remaining renewals across 20 deals at 13% renewal spread. For Q2, our total lease-up stood at 124,000 square feet across 8 deals comprising 50,000 square feet of new leases and 75,000 square feet of renewals. Also, as reported during the previous call, we witnessed 1.5 million square feet of exits during the last year, a mix of business-as-usual churn, portfolio housekeeping and COVID-induced exits. Factoring the above new leases as well as exits, our portfolio occupancy stood at a healthy 88.9% on 32.3 million square feet operating area. While [ site-based ] decision-making and new deal activity were picking up in January and February, the second wave has once again deferred new leasing decisions for 2 to 3 quarters and is dependent on lifting of localized restrictions on movement as well as speed of vaccine rollout. However, based on our conversations with large occupiers, office demand in India is expected to pick up meaningfully in the midterm given the rapid technology and digital acceleration; growth in underlying businesses of occupiers, as demonstrated by recent hiring trends; necessity for physical office as publicly stated by a number of leading global and Indian corporates; as well as positive impact of lower density given that social distancing norms are likely to be a permanent feature at workplace. Our portfolio's best-in-class positioning, whether it is a technology sector concentration; or a geographic concentration to Bangalore, which has witnessed 37% of overall absorption in this pandemic year; or our portfolio's resilience in Mumbai city, where occupancy stood at a stable 83%, similar to pre-pandemic levels, all of these demonstrate that our properties are well positioned and likely to be the primary beneficiaries of the significant pent-up occupier demand. Till such time, we continue to maintain our new deal discipline, deepen our occupier connect and listen to the evolving needs and [ readying ] available spaces for occupiers. Now an update on our development program. We currently have 5.7 million square feet under development across 4 of our existing campuses in Bangalore, Pune and Noida which are due for delivery over the next 2 to 3 years. This development helps expand existing campuses and is significantly derisked. First, only 1.1 million square feet is due for completion over the next full year, and this build-to-suit campus is already fully precommitted to JPMorgan and on track for delivery in September '21. Second, over 70% of our current development is in Bangalore, by far India's best office market; and in 2 of our largest and market-dominant properties, Embassy Manyata and Embassy TechVillage. Third, construction permits are in place and financial closure has already been achieved for these projects. The timing of a new build project fits well into expected demand bounce back in early CY 2022 and increased emphasis by global corporates on the quality of campus infrastructures. Current RFPs in the market, already standing at over 20 million square feet, are also likely to gain significant momentum given the continued hiring and growth reported by tech occupiers and global captive centers or GCCs. Further, international property consultants have already assessed the 2-year forward supply to be down by 25%, and actual supply slippages may be significantly higher. This provides an opportunity to undertake new builds at attractive development fees given land is already paid for and given our financing costs are amongst the lowest in the industry. Hence, we'll continue to invest in new on-campus development as a significant growth driver to enhance our future operating income and DPU. Next, we are continually enhancing our total business ecosystem. In [ Q4 ], we fully integrated the recently acquired ETV property into our portfolio. We transitioned the on-ground team, stepped up the execution pace of the 1.1 million square feet build-to-suit campus and have kick-started an additional 1.9 million square feet of office development. Given ETV's presence in a key submarket in Bangalore, this acquisition has enabled significant addition to our market offerings to occupiers and will drive our portfolio's growth. We have doubled down on our asset management efforts and are utilizing this downtime to implement planned infrastructure and upgrades projects to continually enhance our value proposition. Notable completions planned in the year ahead include the amphitheater, flyover and skywalks at Embassy Manyata; addition of over 100,000 square feet F&B and amenity spaces across our portfolio; and a comprehensive asset repositioning of Embassy Quadron. At early stages of plannings are the integration with [ proposed metro stations ] for our ETV, Embassy Manyata and Embassy Quadron properties. While our 2 operating hotels, totaling 477 keys, witnessed an uptick in occupancy in Q4, with improved visibility of business [ and ] books, the second wave and travel restrictions have [ negatively impacted growing ] demand. Both our hotel operators Hilton and Four Seasons are working towards an improved performance contribution in FY '22. Our ESG initiatives have always been a significant part of our business philosophy; and our 3-year ESG road map, including GRESB assessment, is already [ underway ]. Our 100-megawatt solar park helps reduce an estimated 200 million kilograms of carbon footprint by providing green energy to our occupiers. And our 525-kilowatt rooftop solar project at Embassy 247 Mumbai has been awarded the best green building project of the year. We also continue our work within our local communities, particularly through our Corporate Connect and education programs. Moving to our positive mid-term outlook. As we conclude a challenging but successful year for Embassy REIT delivering to our investors and our corporate occupiers, we remain agile and flexible with a leading [ effort ]. And we'll continue to gear up for our next growth cycle through 5.7 million square feet new development. We are utilizing this period of pause in decision-making by occupiers to fortify our assets through investment in infrastructure and amenities and to be ready for the anticipated resurgence in demand. We will see acquisition opportunities emerge, and we will continue to assess such opportunities in the market per our previously stated criteria. In the midterm, as we look beyond the pandemic, we are well placed to capitalize on the future opportunities given the continued growth in our occupier businesses, especially technology and global captives, and given that our portfolio comprises some of the highest-quality properties in the India office market. It is very clear that our differentiated office portfolio will continue to attract quality occupiers; and that owners who have invested in amenities, services and technology will secure increased market share moving forward. Over to Aravind now for the financial update.

Thanks, Vikaash. Good evening, everybody. I will be covering 3 key areas with you today. That is our FY 2021 performance, a brief update on our balance sheet and outlook for FY '22. Let me start with the financial highlights for FY '21, which include net operating income grew by 12% year-over-year to INR 20,323 million, with operating margins at 86%. Total distribution stood at INR 18,364 million or INR 21.48 per unit, representing a 100% payout ratio, with Q4 distributions of INR 5,308 million or INR 5.6 per unit for the quarter. Simplified the holding structure of Embassy Manyata, thereby increasing the tax-free component of distributions to 78% for Q4; raised INR 52 billion debt at attractive 6.9% coupon and refinanced INR 32.8 billion existing debt, leading to 336 basis points interest savings; and maintained our fortress balance sheet with liquidity of INR 15.5 billion and low leverage of 22%. Now let me take you through the details. First, our NOI and DPU were on target with our annual guidance. Our revenue from operations for FY '21 grew by 10% year-over-year to INR 23,603 million mainly due to ETV acquisition, contracted rent escalations and income from new deliveries in Q4 of FY '20, which was partially offset by reduction in hotel revenues and decrease in commercial office revenues due to occupier exits. Our net operating income for FY '21 grew by 12% year-over-year to INR 20,323 million, in line with the increase in our revenue from operations and reflects savings due to our cost-saving initiatives. Our delivered NOI is on target with our full year NOI guidance. Further, on a same-store basis, NOI grew by 2% year-over-year, reflecting the underlying covenant of our 190-plus credit-quality occupiers and the contractual growth [ in-built in our lease contracts ]. Our EBITDA for FY '21 grew by 12% year-over-year to INR 19,693 million, in line with our increase in our NOI. We've included further details on each of the above components for Q4 in our earnings material. Our net distributable cash flow for the quarter stood at INR 5,324 million. And the Board of Directors have declared a Q4 FY '21 DPU of INR 5.6, with the tax-free portion of distributions increasing to 78% for the quarter given the successful completion of Embassy Manyata's restructuring. For the full year FY '21, we have delivered distributions totaling INR 18,364 million or INR 21.48 per unit, on target with the full year DPU guidance. We are also pleased to confirm that the acquisition of the ETV assets is accretive to our NOI and DPU, as reflected in our Q4 numbers. As you can see, our robust cash collection ratios, leading operating margins, low management fees and prudent leverage to fund select CapEx and growth initiatives result in a healthy NOI-to-unlevered distribution conversion. Next, an update on our strong balance sheet. In Q4, we raised INR 26 billion of listed debt at an interest of 6.4% coupon, our lowest-cost debt till date, which was primarily utilized to refinance ETV's in-place debt. Further, we have also secured INR 11 billion of SPV-level construction debt at 7.9% cost, one of the lowest in the industry. To round up our full year activity in the debt market, we successfully raised INR 52 billion debt at an interest of 6.9% coupon through a combination of REIT-level listed debt and SPV-level debt. And we refinanced INR 32.8 billion debt at 6.9%, leading to 336 basis points interest cost savings. We continue to maintain a strong liquidity position of INR 15.5 billion and a low leverage of 22% net debt-to-gross asset value. Considering our AAA credit rating, additional pro forma headroom of INR 126 billion and our ability to raise debt at competitive rates, we are in a strong position to pursue growth through on-campus development and accretive acquisitions, thereby enhancing overall return to our unitholders. Moving to other financial updates. Our independent valuer undertook a detailed property valuation exercise at year-end and assessed the GAV of the portfolio at INR 466 billion, with 95% of [ reached ] value from our core commercial office segment and with over 72% of value from Bangalore. We recognized an impairment loss of INR 989 million in our hospitality business as well Embassy One due to slower occupancy ramp-up and current economic conditions due to the second wave. Factoring the above, our net asset value as at March '21 stood at INR 387.54 per unit, a 3.3% increase to NAV as at September '20. We are pleased to deliver on the simplification of Embassy Manyata holding structure within the time lines committed. Collapsing of the legacy 2-tier structure has enabled Embassy REIT to significantly increase the tax-free component of its overall distributions, and our Q4 numbers reflect the enhanced post-tax returns to unitholders. Further, we have initiated the simplification of holding structure of our newly acquired Embassy TechVillage assets and expect this to be completed by September '21. Lastly, our outlook for FY '22. As Mike and Vikaash mentioned, the current second wave is likely to delay return to work and consequently defer leasing plans with occupiers in the short term. Considering this, we believe it is prudent to defer annual guidance for FY '22 till such time we have more clarity on trajectory of the second wave. However, I will provide a few key building blocks of our business components which may have a bearing on our FY '22 NOI and distributions. To start with, we will benefit from the full year impacts of the successful 8.4 million square feet lease escalations in FY '21. Further, we have an additional 7.7 million square feet of upcoming contracted escalations across 89 leases during the course of FY '22, with an average 14% rent increase. Similar to FY '21, we believe we will be able to achieve most of these rent escalations as well as achieve continued current trend of collecting close to 100% of office rents. We are currently 89% occupied as of March '21, with 3.6 million square feet existing vacancy. Of our 1.9 million square feet expiries in FY '22, [ basis of ] conversations with occupiers, 0.5 million square feet are likely renewals, and balance 1.4 million square feet are likely exits at this stage. The in-place rents on these exits are significantly below market and provide over 50% mark-to-market opportunities. We expect new lease deals to see traction and conclusion towards the end of calendar year '21, with an expected rebound in calendar year '22. We expect the full year impact of the ETV acquisition to reflect in both NOI and NDCF for FY '22. As you are aware, we acquired the ETV assets in the last week of December '20, and these assets contributed to NOI and NDCF accretions in Q4 of FY '21. And finally, we will determine the timing, coupon structure and [ constructs ] of a potential refinance of our initial INR 36.5 billion listed debt based on the then-prevailing market conditions. This NCD is due for redemption in June '22, with call options in November '21 and Jan '22 for early prepayment [ dates ]. Recent budget amendments enabling FPI participation in REIT debt as well as the recent IRDAI announcements in mid-April permitting insurance companies to invest in REIT debt both give us access to longer tenor and larger pools of debt capital and are expected to be positive for our debt refinancing plans. These developments are very positive for us, as a falling interest cost scenario contributes incrementally to our distributable cash flows, to the benefit of our unitholders. We remain focused on delivering our NOI and quarterly distributions, maintaining our balance sheet discipline; and continue to reduce the cost of debt. Even after one of the most challenging years for businesses worldwide, we are pleased to report that Embassy REIT remains in great financial shape with a robust balance sheet which provides a strong platform for organic and inorganic growth in the coming years. Over to Mike for his concluding remarks.

Thank you, Aravind. So the key takeaways. We have delivered on guidance for the past year FY '21 with INR 5,308 million distributions for Q4 and full year distributions of INR 18,364 million, underscoring the resilience of our business model through a full 12-month pandemic environment. Notwithstanding the uncertainties created by the second wave and the subsequent delay that will result in the reopening of offices and consequent leasing, our business remains resilient and ready for the future growth opportunities. Our occupiers are largely international, technology-driven and growing. On all parameters, we believe this will feed through to a leasing recovery in due course, though timing has been delayed. We are absolutely confident in our various theses around the business, the total business ecosystem in this [ digital talent ] nation, our geographic concentration, our on-campus development and our ESG focus. The management team remains focused, doing all that can be done in the current external environment to deliver in the best interests of our unitholders. And we remain excited on the growth opportunities that lie ahead for our business. We're happy to drill into any details in Q&A. Thank you.

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

I have -- my question really is on how much in the near term is the downside. I mean, [ coming more ] specifically, we've seen over the last 12 months the occupancy drop by a few percentage points. And more importantly, if I look at the expiry number that we put out in terms of the forward expiries, for FY '22 it used to be about [ 1.3 ], moved up to 1.5. Now in the current quarter, it stands at about 1.9, of which you talk about 1.4 being likely exits. If we were to take that as a certainty, you have the existing set of [ vacancies of ] 3.5 million square feet, plus another 1.5, so is that it? Or it's still sort of you're [ playing out ] each quarter, depending on how the sort of pandemic [ occurs ], to get a sense of what is the near-term damage in terms of occupancies, vacancies, et cetera. If you could throw some light on that based on your interactions with the tenants.

Yes, Murtuza, I'll make some comments on that, and then I'll ask Vikaash to it -- to add. Look, I think we all experienced from January and February a very positive environment. And we spoke to many of our occupiers who were accelerating their move back to the office, who were talking to us about their overall business growth both to some occupiers who had hired more people in the last financial year than any of their time in India. So businesses that we're catering to have a very positive outlook. We definitely feel that we're in a timing situation here, but there obviously is a delay about 2, 3 quarters perhaps. But fundamentally the businesses are strong. We've gone through the detail of our expiries. We've used our best judgment and, of course, basing also on conversations that we're having with those tenants. And that split of the likely exits and the balance at this point is our best assessment of where that will be. Now you'll remember, of course, from last year that in essence, with the 6-month notice at the end of any lease term, we're able to look forward with great confidence on a 6 months basis. So as the year moves forward, we'll be able to keep you updated quarter by quarter on that, but [ as we go on ], that's our best estimate of likely renewals.

Yes. Why don't I give you an example, Murtuza? Mike mentioned about the health of the occupier businesses. I was speaking to the [ CIO ] of one of our existing occupiers, a [ Fortune 10 ] health care company. And the conversations revolved around, okay, when can we move to LOI and a binding documentation. We are in advanced stages of a additional space deal there and it's been obviously paused. So the flavor that we got during the conversation was that, one, they've acquired one smaller company in the similar domain. Two, they are looking to consolidate some of their other smaller offices into one of our properties. Three, there's a clear mandate from the business that we need to -- that they need to de-densify from the 65, 70 square feet per person to more like 90 to 100. And they have a classification range based on the kind of work people do. And this -- and they are also saying that they are growing organically themselves, having more people. So -- and this is just to give you a flavor that, one, it's more of a timing issue. There's a complete pause. Businesses which have hit record results, record sales [indiscernible] [ and stock is 50%, 80% up ], even they are not able to -- they don't want to take a call right now and just want things to normalize a bit more. So that -- these are the kind of GCCs, the captives that we'll take a hit. Definitely, in the short term, the expiries -- some of the expiries are being preponed from FY '23 at 200,000 square feet into the FY '22 bucket, as you rightly mentioned. We see this more like a short-term phenomenon. It's been a year since we have been into the pandemic, so we think today this is our best estimate of what the exits could be in FY '22. The occupiers continue to review their portfolio optimization strategies, and some of them would want in the short term to give up space. At the same time, we are seeing these large global captives who have started to think about, for '22 and beyond, the pandemic requirements. So it's going to evolve. We'll have to wait and see next 2 or 3 quarters, but we remain really positive for the midterm.

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

A couple of questions from my end. Firstly, how are you thinking about the rental trends going ahead? So I guess last year panned out rather well, but as we say, it's the second year of low occupancy. Would you think that the rental trends would be any different either on getting the contracted increases or canceled during renewals? And then the second one is I appreciate the 1.4 million square feet of expected churn in the coming year as being BAU churn, but at 47% under-renting, [ I'm wondering why the tenants will be going elsewhere ], so if there's any color you could provide as to what's really driving these exits will be great.

Yes. So again I'll take the question about rental trends. So as you rightly say, the point that we were able to secure on 8.4 million square feet 100% of our lease escalations, I think, giving us overall average of 13%, that was a great result. And as we've said again, we believe that -- that 7.7 million square feet that we've got this year of contracted escalations, that we will secure that or very close to that. We've got no reason to believe there'll be any change around that. You understand our business model. The occupiers in the space have the CapEx, fit-outs. And there's a lot of inertia that prevents a move. In terms of overall rentals in the market, I've said before and I underline it, but these decisions are not -- decisions about stay or go, expand, choose another buildings, they are not fundamentally about the rental and the rental rates. You know better than probably anyone on this call the industries that we cater to, the technology, the industries. You know how well they are doing. And the decisions that are single-digit percentages of their costs that is rental is not what drives decisions to stay, go, expand contract. So we believe, again, that the overall product quality -- and as Vikaash mentioned, we're doubling down in some areas on that to make sure that the portfolio is really best in class, best in the market. We believe, and we've demonstrated that through some of the deals that we've done in the last year, that the best occupiers are not price sensitive, we believe. And you will see [ IPD ] confirming that certainly in our main market Bangalore we remain a low-vacancy market. And we're confident that the best companies will continue to pay the sort of numbers [ in rentals that have been cased ].

And Kunal, just to add to what Mike said and address your second part of the question as well. So just to -- on the first part, all the 1.2 million square feet that we leased out in FY '21 [ were at market trend ] on a blended basis, so we maintained the pricing discipline. Again it's not a question of price. Today, it's a question of are they ready to make a decision. Having said that, I will -- just want to qualify what Mike said about the core market with the fact that Mumbai definitely is seeing rental pressure. And I think Mumbai is one exception where we will -- we believe there will be continued rental pressure over the next at least 3 to 4 quarters. So that's on the rental trends. Other than that, Bangalore and all the other markets [ we stated as ] GCCs and technology companies large scale, those, we think, will remain stable. Coming to your second question. It's the [ mark to markets of ] 47%, 50%. Why are these guys leaving? So let me break down the categories of occupiers who are looking to give up space and what's happening there. So obviously we spoke about the COVID-induced exits. Bulk of that, we talked through last year, during the first year of the pandemic, when really the business was with really weak business model. Then came obviously the portfolio housekeeping, which is basically large occupiers, mostly IT services companies who have got 1 million square feet or -- and large spaces with us and [ really largest ] portfolio in India overall, who are now looking to do portfolio housekeeping to just optimize. So that's the second. And obviously third is business as usual, whether it's relocation, consolidation, et cetera. So these are 3 broad categories. And what we are seeing are in underlying trends within the occupiers is that, these global captives, the large banks and financial services companies, they have taken a call, based on our discussions, that office -- they want to continue to plan for their consolidation and growth in '22, '23, '24 years. And that's why we refer to the [ RFP ] pipeline. So we believe, when the decision-making pause comes to [ conclusion ] and people start making decisions, they will be -- captives will be the first to take the decisions because for them the quality of the spaces and the talent is really important. And then will follow -- behind them will be the technology and the product development companies. And then the last to follow in the pack would be the IT services company, while it's counterintuitive given that they have seen record deal wins and record hirings. I think, given that clients have permitted work from whom, they're kind of going to be last to ramp up on space. And when they do, we think it will be disproportionate, to the benefit of the office industry. So all in all, portfolio housekeeping. And the fact that we're really into the eighth, 10th, 12th year of their lease tenures, fully fitted out, amortized -- sorry, fully amortized fit-outs, make it less sticky for them. And yes, taking a more short-term view that, "Okay, let me just save us some costs now," we think, will gradually repay these IT services companies and more legacy leases with global captives who are looking to upgrade and come into larger business companies.

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

I just have 2 questions. So 1 is on the Slide 43. So this INR 3,800 crores of debt maturity that you have, what is the current rate on this? And I mean I'm just trying to figure out what the interest cost saving you can potentially achieve in fiscal '23. So because the point is -- of the overall 10,000 crore debt, how much can the cost come down next year? So that's 1. And the second is on the Slide 24, where you've given the rent escalations. So the way I should read the slide is -- sorry. Yes, Slide 28. Sorry. So the rent escalations are on INR 89 of -- 7.7 million square. 14% rent escalation is what is pretty much going to happen.

Yes. Saurabh, Vikaash here. So why don't I take the second one first and hand it over to Aravind? So on Slide 28, what we're trying to say is that 89 is the number of occupiers or the number of leases which come up for escalation, just to give you a flavor that it's not concentrated on a few leases. It's spread over a lot of leases. And as you rightly said, 14% is the blended escalation. Some of them are legacies. So 12%, 13%; some of them -- most of them at 15%. And that's on the entire [ area of ] 7.7 million square feet during the course of the year.

That's -- 14% will be -- I'm just trying to figure out the [ INR 6,200 crore ] NOI you have and leaving out vacancy for a moment. What is the organic growth for next year? That's -- vis-a-vis that [ point -- earlier point ]...

Yes. So just to -- again I'm just going to give you rough numbers here, Saurabh. If you factor the FY '22 escalations on a full year basis, annualized rental, it's going to be -- it is approximately 2.9%. And FY '21 escalations are about 2.4% of the annualized rental obligations.

And if I can just add onto that organic growth, Saurabh. One is the escalation. And secondly, without getting into specific numbers, we of course have the growth coming in from the FY '21 leasing as well; and a little bit of the Q4 FY '20 leasing, which had a little longer rent-free period because of COVID. So we do have organic growth coming in from that as well. So that is in relation to the second part of your question, Saurabh. Going to the first one, the expiries of INR 3,800 crores: Substantial portion of that is the INR 3,650 crores of a Series 1 bond, the NCD. Now that is at a average of 9.35%. That's something -- as we've stated, we will look at refinancing that either at November '21 or Jan '22 because these are the call options we have for prepayment.

Okay. So on INR 3,800 crores, basically if we take the incremental cost, which is 7-odd percent, effectively you're saving 2%-odd, right?

That's correct.

Okay. And the INR 4,800 crore is about the same cost as well, [ will be at 8.5% ]. Or that [indiscernible].

So INR 4,800 crores, if you broadly see, these are the more recent bonds which we did. INR 4,800 crores will be, I will say, in average [ were more close ] to 7%.

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

Just want to get some sense on the exits. So I understand you included [ the extend ] -- COVID-impacted exits. What I wanted to understand is are you factoring in exits here where occupiers want to stay in your park but have reduced their space requirement. So what I want to understand basically is whether in the exit guidance are you also including the occupiers who may move to hybrid [ model ].

Let me just comment generally on that. I think, what we've done, we've looked at the whole portfolio. We've looked at the current leasing contracts for all of the tenants. We based also on the conversations that we're having with all of our tenants. I think this is the best assessment that we have. I think that it would be fair to assume that the most significant exits or downsizing for COVID-impacted industries have probably set their way through, but -- we can't be 100% sure of that, but that's our view at the moment that this is our best assessment of the position.

And Kunal, just to add to what Mike said. The decision on a hybrid model will evolve similar to the decision on de-densification. So I think we will see both these factors play out as we move forward. We think it will be a positive impact of this -- the number of global businesses and Indian businesses have said work from home is not sustainable. I think we feel very positive. De-densification is a necessity based on whatever discussions we've had on the ground.

But essentially the de-densification [ may not net off if at all ] there is any movement towards -- or an increase in the vacancy levels.

I think everybody has had a year to look at this and plan. You'll remember we talked about [ this whole COVID was set to ] accelerate phenomenon. We would expect that occupiers have figured out their medium-term strategy in terms of de-densification versus the hybrid working side of things; and that, by now, they would have made those moves and made those changes. And also I will just underscore that a -- very significant parts of our portfolio are these global captive centers who are growing significantly, who are speaking to us and reporting in public very significant hiring additions through the pandemic. So again we think, as we've said before, that the de-densification plus hiring growth is likely to, by quite some margin, outweigh any impact of hybrid working, particularly [ for our type of our occupier ].

Sure, sure. My second question was on your -- if you can provide a bridge from -- for ETV assets particularly, a bridge between the NOI and NDCF. Because NDCF is slightly on the higher side. I understand there is some rental support. There are some fit-out rentals. If you can give a bridge between NOI to NDCF for ETV.

Sure. Honestly, the bridge for NOI to NDCF is very similar to what we put out as part of our acquisition materials. Well, basically if you see the 3 key items from NOI to NDCF: One, we have the finance costs. Now we know the exact finance costs at which we raised a INR 2,600 crore bond as well as the existing 1,500 crore debt. That's number one. Number two is the [indiscernible] rent support or the JPMorgan rent support from Embassy Sponsor. We had put out a number in the acquisition material, which is around 28 crores per quarter. That's number two. And number three is the fit-out rentals which is accounted as finance fees, and we get approximately about 17 crores per quarter on that. These are the 3 big moving pieces in terms of the bridge from NOI to EBITDA; and excluding small items like operating expenses and et cetera.

I'll take this off-line because the NDCF was lower than NOI in the bridge you have provided for first half, but in this quarter it's actually NDCF is higher than NOI. I'll take it off-line...

I can specifically respond to this. In terms of Q4, there is a one-off item in terms of tax refunds. So I have excluded that for the purpose of explaining the bridge because that's a one-off item in Q4. And that's one of the reasons why you see that number to be high for Q4, but on a steady-state basis for FY '22, we believe that the bridge as well as the accretion will be similar to what we had put out in the acquisition materials.

The next question is from the line of Puneet Gulati from HSBC.

Can you please help me understand what's happening to the same-store occupancy? So that seems to have fallen [ to like the ] normal occupancy, while at the same time you have leased the existing area instead of new area. How should one read this?

Puneet, this is Vikaash here. So you are correct. The same-store occupancy as of March '21 is about 87%, yes. So it has -- the reason for the fall is a couple of things, a couple of reasons. One is Embassy Quadron. We did mention this during last call. We had 2 occupiers, 1 who looked at spacing optimization [indiscernible] relocated and consolidated to the east of Pune. So that's one key reason for the drop in the same-store occupancy. Plus, of course, we have seen a couple of portfolio housekeeping items in our largest asset, Embassy Manyata. So these are 2 key reasons. And we are -- probably last year the top 5 exits that we had, right, in terms of the actual exits we had, contributed to 2/3 of the overall exits last year. So given ETV is [ a more new ] asset, given the fact that most of the leases are within lock-in, we have not seen exits and expiries in ETV. So that is a reason you see the same-store occupancy drop, but now post ETV acquisition, we look at, [ of course, we have ] one large portfolio. But that's the basis about the numbers.

Yes, but the overall occupancy is higher than same-store occupancy, and that's what I haven't been able to understand [ well ].

That's correct because ETV, which we acquired in December, stays resilient. And ETV's occupancy is about 97%-odd or 97%, 98%. That contributes to the 89% overall.

Got it. My second question is on Manyata. For 2 consecutive quarters, we've seen area getting vacant. And that, I thought, was one of the strongest in the entire portfolio. What's happening there? Why is it taking more time to lease Manyata?

Yes. Mike, do you want to make some comment? Or...

Yes. I mean let me make some general comments on Manyata. It is at 93.5% occupancy, so highly occupied, but you also have to look at it as it is an anchor and has been in the Bangalore market, really dominating North Bangalore for 10 to 15 years. So one of the great appeals that we have around Manyata is that the leases that are coming up for expiry over the next couple of years there have a really significant potential mark to market. So these are the types of occupiers who might have emerged in the mid- to late 2000s, perhaps more in the IT services sector, precisely that segment that is large scale but looking at efficiencies going forward. Now we've said before, we've reported on discussions and negotiations about those renewals. They are large-scale leases, so those discussions take place for 1, 2 more years before expiry. So those conversations are ongoing. The positive that we've got to highlight on that is the mark-to-market potential on these older, legacy leases is well in excess of 50%, as I think Aravind mentioned. And so we are doing a lot of work around infrastructure improvements at Manyata. We are well advanced with the flyover that is bringing ease in traffic on the north side. We are well advanced with the hotel and conferencing center, which many occupiers are really speaking very positively about. They like the idea of that pay per use on the conferencing center. That will give us a strong competitive advantage. So with that infrastructure upgrade, with the hotel, with the metro coming at the entrance to that park, we believe that we're really well positioned for these lease negotiations, as they come up this year and next, for that mark to market.

Yes. And just to add, Puneet, to what Mike mentioned just to put in context of a 300,000 square feet exit in Manyata is about 2% of the overall Manyata occupancy. It's really large. And given a bunch of the leases are legacy leases 10 to -- 10-plus year old -- Manyata started leasing in 2006, '07, so we have seen that expected churn. Maybe COVID has expedited it by a year or so. We think that churn of the older-generation occupiers and rents moving out are trimming the portfolio. And just like we'll see in ETV, the new-age, the more global captives and the high-end technology companies will start taking this space, so I think Manyata will see the transition. It will mean that -- of course, on a positive side with MTM. Of course, that also means that there may be a void period given the muted demand outlook for the next 2 quarters or so.

Okay. So will it be fair to assume then, as Mike also mentioned, that one should wait for the infrastructure to be completed before we see it going back? Because it used to be 99.3% just about 5, 6 quarters back. So should we wait for the infrastructure to complete?

No. I don't think it's about waiting for the infrastructure. I mean bear in mind that the decisions around leases for these types of large-scale occupiers are really long-term decisions. So indeed we're using that infrastructure work, which is going on now, to our advantage in discussion with occupiers who might even be 2 years away from this point. So just the fact that, that infrastructure is coming will work to our advantage in lease negotiations.

So Puneet, just to give you a perspective. This is just, because demand is muted, no decisions have been taken. Otherwise -- just about 18 months back, we were leasing out NXT, the new building at Manyata, at about INR 105, INR 110, while CBRE's assessment is INR 92. I'm just giving you context of it's just about the pause. We'll just need to be patient 2, 3 quarters or so. Once decision-making comes back, this is our most dominant asset. We will see [indiscernible]. And are willing to be patient and disciplined given the significant mark to market. We can't do deals which are [ so ] significantly below market.

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

My question is more on the bookkeeping side just to understand the revenue for ETV. So if we look at the occupancy of about 97.8% and 6.1 million square feet at INR 70, that translates into a revenue of about INR 125 crore, INR 126 crore. What you've reported is about INR 171 crore. So I understand there will be some CAMs in it, but how come the delta is so big? Can you explain what the difference really is?

I think the -- in terms of breakup, this is similar to what we had mentioned, the revenues. This includes revenue from the rentals as well as fit-out income a little bit as well as a little bit of additional car park over and above the CAM income. This is a breakup of the INR 170 crores of revenue what we have in [ tech build ] assets. [indiscernible] -- sorry. Go ahead.

But -- sorry. Go ahead.

I think, Pulkit, maybe the right -- the better metric may be NOI given the CAM -- both revenues [ are reflected up ] and expenses will be reflected in NOI.

Sure, sure, but I mean the delta in the revenue is quite significant. Maybe what I'll do is I'll just take it off-line to understand that better. I just have one more question...

[indiscernible] we can help you with that, yes.

Yes. So the second question is on the GAV for the solar asset. On a quarterly basis, there's a reduction of about 70 crores. So anything happening there, any problem with receivable, et cetera? Or is that again normal course of business?

It is normal course of business. Basically we are factoring for 2 things. One, if you are aware, the solar is a limited-life asset which is contract for 25 years, so there will be a natural decrease at time passes. That's number one. Number two, what the valuers have done is they have kind of rationalized the mix between industrial and commercial tariffs. That has also caused a reason for a little bit of decrease in the value. These are the 2 primary reasons and there's nothing else.

No impairment in this.

No, there is no impairment in this. There's an issue with the collection. It's just about the uptick of demand, and some of it, we are having to do it at industrial tariffs given the low occupancy.

The next question is from the line of Karan Khanna from AMBIT Capital.

My first question is for Mike. Mike, is there anything that you're picking up from global markets like Australia and Singapore that have contained the outbreak well? What I'm trying to understand is, post containment, what sort of [indiscernible] leasing activity starts picking up in these markets?

Yes. So look. I do think we have got in India a fundamentally different office leasing market and business to many of the international markets that you talk about. That said, one of the biggest U.S. REITs reported in the last couple of days they are seeing some level of leasing activity. This market is really a different type of animal, a different type of [ lease ] and scale, also type of deals that we do and so on and so forth. There is definitely a pickup in leasing in those international markets. We heard earlier today there is a flight to quality in those markets, which we absolutely would expect. And we will see that in India, that companies will use this time to make sure that they've got good-quality space, compliant spaces. Many companies will do new fit-outs, de-densify and so on, but we -- what is a common theme across both Asian and Western market is that people are moving back to the workplace, including many of those technology companies. And there have been some widely publicized statements by business leaders. So that's very encouraging. We think, the fact that we've got the vaccine rollout, it will also support that back-to-work, back-to-office phase.

Sure. And second question is for Vikaash. [ As you know, in fact, even last call ], you mentioned that 1 of your top 10 clients have been looking for 120 square feet. [ New discussions on increasing ], 150 square feet per individual [ in line ]. And we have also briefly touched upon that de-densification aspect earlier on in this call. During the last 1 year, have you seen or received any meaningful RFPs with respect to de-densification? Because globally we have seen some of the [ major banks ] talking about meaningful reduction in their long-term real estate requirements. They start adopting a more hybrid model which will require lesser space overall.

Yes. So Karan, [ thanks for these ]. So 2 -- a couple of things there, right? One, I think it is still -- given the second wave, it's still a little early for de-densification to play out, but all logic, all data both by different property consultants, our conversations with occupiers as well as the [ Fortune 10 ] global company example I gave earlier all point to the fact that it will be a factor for the best-quality occupiers, the kind of customers that we cater to. That's one. Two, I think we'll have to distinguish a little bit between the global banking majors and the captives with what they're trying to achieve in India. In India what they're doing is they gear to ramp up in numbers to tap the talent here. And India is a significantly different demographic for them in terms of just the average age group between 25 to 35 employees -- 35 years for the employees. So having said that, I think what we are hearing, early conversations from the same subset that you mentioned, the banks and the financial institutions, is they are actually looking to grow more, to take up more space. And obviously de-densification is factored into their new consolidation business plan. This is they're having an -- as a mid-term outlook for '22, '23, '24; and they are proceeding on that basis. So we actually think it's going to be a little different for India simply because, one, the costs for these global captives is negligible with respect to them. And more importantly, if they have to hire this best-quality talent Mike mentioned about earlier, we really need to ensure we provide them with safe and wellness-oriented properties, more so now during and post COVID [ kind of year ], to ensure they attract the best talent and also ensure they're productive. So we think it will take some time to play out, both the pause, over the next 1 or 2 or 3 quarters, but we think, the larger occupiers we have spoken to, they are actually thinking on these lines on how to consolidate, move into larger campuses, increase -- the space per -- [ implied per ] employees has gone down to as low as 60, 65 square feet per person. That is definitely going to increase. Estimate 100 to 120. Different occupiers will have different thresholds, but that is one thing we definitely think will happen. The timing of it, obviously we'll have to tie it up with the increase and the resurgence in demand. Mike, would you want to add something?

Yes. I think, I mean, it's a really great question and topic, Karan. I just want to give 3 or 4 specific examples. So one, it's not all about density. So that conversation that I had with a global technology company, who's a tenant of ours in one of our business class, in the last month saying that they've hired -- 18% increase in their head count in the last year. It was the biggest hiring uptick that they've ever had in India. So the hiring uptick washes away any conversation about density. So that's one factor. So it's just a pure addition of head count, and that's also definitely applicable to the big banking company and we have that direct feedback. The other issue is that many of the global captives, and I'm thinking of some public statements that have been made by a couple of them, have talked about how they have over the last few years, decade or so -- as they've been growing so quickly, that density that they were starting out with 200 or 220 per person had gone down simply because they couldn't keep up with the hiring rate, but they're now bringing that back up to that 200 square foot type of density. And just a third and final point, this issue about work space per employee. And I think you might be alluding to that in one of the banking statements that was made in the last couple of weeks. We have a relationship with one of the big global banks. When they built their own campus, they provided spaces for only 80 of every 100 employees because that takes account of the fact that people are out of the office on holiday and so on and so forth. So that level of efficiency has always been in the way in which people design their office spaces. So we will probably see actually less of that compressing and that will result in a lower density per person going forward. So it's absolutely clear. There are going to be more people working in a less-dense office environment in India. And that may well be very different from some of the global markets that we've talked about.

The next question is from the line of Prashant Kothari from Pictet.

I just wanted to understand the hesitation in providing guidance. I mean it is a fantastic year where we're able to meet the guidance despite all the challenges, so what is that, this uncertainty, that we are seeing? I mean, is it related to occupancy? Is it related to [indiscernible]? [ What's in that postponement in line ] for providing guidance?

Well, Prashant, I think, as I did mention as part of my prepared remarks, while we have laid out some of the key movers, we are as of today uncertain about the trajectory of the second wave. And that's the primary reason why we have decided to defer guidance. And Prashant, just taking you back 1 year: Same time last year, we had taken a similar decision because that's when COVID was -- started initially. And we had taken a decision to not give guidance for FY '21, but having said that, sometime during the middle of the year, when it was more -- clearer on how the picture would emerge, we gave a guidance for FY '21. So that's primarily the reason why we've deferred guidance as of now, Prashant. Mike, do you want to add on anything?

Well, I will just underscore the fact that we deferred a year ago. 6 months ago -- or midyear, we gave guidance; and at the end of this year, we delivered it, delivered on that guidance. So we can see quite well 6 months out in our business, as we've explained before, because of the 6 months lease termination notices. We are simply being prudent about this second wave has come in very quickly. I think all of us are looking at it and wondering how quickly will we get back on the very positive trajectory we were on. So it's important to us that we deliver on guidance as we did last year. We've given you a number of areas and framework that I think we'd be able to get a fairly good picture, and we will keep updating you as best we can every quarter.

[indiscernible] at least, let's say, some minimum [indiscernible] guidance [ and we are ] delivering at least minimum [ agreement of this large ] -- at least [indiscernible].

I'm not giving you anything.

So Prashant, Vikaash here. So what we'll do is we'll take the feedback. We will revisit next quarter. And based on how the situation is looking at that point in time, we will consider providing a guidance. As of now, we just have deferred it, but we take your feedback. We just want to get a little more color and comfort of the trajectory of the second wave.

Okay, understood. And second question was on the lease expiry. I see that almost 1 million square feet have started in Manyata. And you mentioned that there [indiscernible] clients out there who might be looking to move out. And so [indiscernible]?

I'm afraid we're just not getting your comment or question clearly. Can you try it again?

So it's about leasing at Manyata, Prashant.

That's right, yes.

So could you just repeat it, for everyone's benefit, please? It is a little hard to hear you. [ It's a little bit muffled ].

Yes, yes. Sorry. [ So that's just in my mind ] is that you have about 1 million square feet coming up as an expiry [indiscernible] given the mix of clients there and given the market conditions, is there a risk that almost all of that will remain unoccupied [ after a year ]?

Yes. So Prashant, thank you for that. I -- look, I think the reality of our business is these lease expiries can be a great opportunity. We mentioned about the fact that Manyata as a whole has approximately 50% mark to market. Actually some of those leases are even higher than that, potentially, mark to market. And so if a lease were to expire and the tenant was not to renew, yes, there would be a void period, but also we would be able to secure a very significant market uptick on rentals, which of course would then progress for another 5, 10, perhaps 15 years.

Just to -- sorry. Can I ask one more question?

[indiscernible]

[indiscernible].

[indiscernible] -- yes, but we can't hear you very well. So if you could just maybe speak up, that will be great. Apologies.

Okay, sure. So the last question that we have is on the MTM potential. I see the MTM potential is about 30% in our portfolio, but then when I look at the spreads on the renewal or re-leasing sides, they are less than 20%. [ How do I ] understand this gap?

Yes. Let me [ play in ]. So as I understand, the question is, overall at the portfolio level, mark to market, 29-odd percent. And we're talking about a 50%-plus in some markets and then, I think, last year, maybe a 14% mark to market. The issue is that the aggregated number is about 29% across the portfolio with the 190-plus leases that we have. Different properties, different lessees have different lease terms, different rates. And therefore, the actual achieved mark to market is very specific to individual leases, but I think, if you see our historic numbers, we've consistently been able to deliver on mark to market, although it can be quite volatile depending on which leases come up. Actually what we're highlighting is we've got a great opportunity this year and next with our mark to market, which is above the overall portfolio average at 47% and 44%. I hope that clarifies.

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Michael Holland, CEO, Embassy REIT, for closing comments.

Great. Well, ladies and gentlemen, thank you so much for joining us on today's call, for the great questions. We hope that we've communicated that for us the last year represents a really great result in a challenging year; that it shows that the business is resilient, that we're well positioned for further growth backed by the strong balance sheet, strong occupier relationships and our first-class, committed, on-the-ground teams that we must acknowledge and thank, even in these difficult times, working to keep the business ticking over. And we -- again we sincerely send our best wishes to each one of you and hope that you are well and safe and that your family is also. So thank you for your interest in the REIT and for your time today, each one of you. Good evening.

Thank you. On behalf of Embassy Office Parks REIT, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.