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

Thank you, Stephen. Good evening everyone, and welcome to the First Quarter FY 2022 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter ended June 30, 2021, a short while back. As is our standard practice, we have placed our quarterly financial statements, our earnings presentation discussing our performance and the supplemental financial and operating data book on our website at embassyofficeparks.com, under 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. Specifically, the financial guidance and any pro forma information that we will provide on this call are management estimates that are based on certain assumptions, and they have not been subjected to any audit, review or examination procedures. You are cautioned not to place undue reliance on such guidance and information, and we cannot assure you that we will be able to achieve the results. Further, there are significant risks and uncertainties related to the scope, the severity and the duration of the COVID pandemic and the direct and indirect economic effects of the pandemic and containment measured on Embassy REIT and on our occupiers. In a significant move, the trading lot size for Embassy REIT units in the Indian stock exchanges will be reduced to one unit from the current trading lot size of 200 units upon the notification of the necessary amendment regulations. The announcement follows the Securities and Exchange Board of India's approval of the amendments to the appropriate regulations to reduce trading loss for both REIT and infrastructure trust or index that had outlined at its board meeting on June 29, 2021. The reduction in lot size brings the trading loss in line with those of listed equity companies on the Indian Stock Exchanges, and it's helped an increase in liquidity, enabling REITs to be included in potential benchmark, domestic indices and allows for greater participation in newer pools of institutional and retail investors. Joining me today are Mike Holland, the CEO; Vikaash Khdloya, the Deputy CEO and COO; and Aravind Maiya, the CFO. Mike, will start off with the business overview and the strategy, followed by Vikaash and Aravind. We will then open the floor for questions. Over to you, Mike.

Thank you, Ritwik. Good evening, and thank you for joining us today to review our Q1 FY '22 results. Despite the full year pandemic, Embassy REIT delivered in FY '21. The second wave and lockdown, which started in April 2021 brought similar challenges, but we have had the benefit of prior experience and, of course, the ongoing vaccine rollout. COVID cases and deaths in our four cities have been in a steady decline since early May and are now as a fraction of second wave peak. The last few weeks have seen a steady relaxation of restrictions, reopening of businesses and uptick in economic activity. While companies are operating with minimal staff levels, our discussions with occupiers indicate plans to return to office in strength starting fourth quarter of this year. Embassy REIT remains resilient and delivered on its guidance last year, this quarter is no different. As we cautiously enter the recovery phase, we emerge with strength and growing momentum, and this is reflected in the encouraging operating results for this quarter. We timed new leases and renewals totaling 545,000 square feet during the quarter at 13% leasing spreads. We are in line with the expiry and renewal numbers we reported last quarter. Our occupancy stands stable at 89%, and our rent collections remain robust at over 99%. Our active development pipeline will deliver 1.1 million square feet this year, which is fully precommitted to J. P. Morgan, and we have an additional delivery pipeline of 4.6 million square feet over the next two to three years. We are developing our acquisition pipeline, supported by our robust balance sheet, and we are making good progress with our ESG initiatives. Over 10,000 frontline staff across our office parks have been vaccinated. And in addition, we understand from our occupiers that over 110,000 vaccinations have been completed for their employees and families. Our perspective on the business outlook and our strategy has not changed. If anything, our previously articulated views have been reinforced. We cater primarily to global technology companies and global captive centers who are in India for the same talent that is required by these global businesses. We continue to see strong growth in tech and allied sectors with many of our occupiers reporting record hiring and new business wins. Given our continuing investments in park infrastructure and our new build program, combined with our ESG and employee wellness initiatives, we are confident that this global tech megatrend will convert to strong demand for our product, the total business ecosystem. Embassy REIT is well positioned for new growth, given our concentration to the right markets, and we will benefit from consolidation of supply and acceleration of demands. An update on a few changes within our team. We have reinforced our leasing team through the appointment of Amit Shetty as co-head of leasing for South India, alongside Rishad Pandole, who remains responsible for our North and West portfolio. Amit Shetty, has 15 years of leasing experience in the Bangalore and South India market and has been appointed to focus and accelerate our leasing activity in this 170 million square foot office market. Additionally, earlier this year, Sachin Shah, our CIO, had expressed his desire to step down to pursue other interests. We are grateful to Sachin for his contributions, and we wish him great success with his future endeavors. Ritwik Bhattacharjee, who has been responsible for our Capital Markets and Investor Relations function over the past two years and is known to many of you, has been appointed as CIO with effect from 1st August. Ritwik has over 12 years' experience in Investment Banking and Capital Markets. We have also appointed Rahul Parikh to lead our debt raise initiatives. Rahul has over 15 years of experience in the public debt markets. Our management team now stands at over 120 individuals, with expertise across the full property business cycle and continues to be fully focused on delivering to our unitholders. Let me hand over to Vikaash to provide an update on our business and operating performance for the last quarter.

Thanks, Mike. Good evening everyone. Business and operating highlights for Q1 include, total lease-up of 545,000 square feet across nine deals, achieving 13% leasing spread. We maintained stable occupancy of 89% with successful rent increases of 13% on 2.2 million square feet leases. Our construction on 5.7 million square feet development projects continue with 1.1 million square feet, JPMorgan Campus targeted for handover by year-end. And we have progressed our ESG strategy and continued our investments in top infrastructure and immunity. Let's look at the details. First, an update on our operations during the second wave. COVID related restrictions by state governments were in place across our four cities to most of Q1. This disrupted back to office efforts of our occupiers with less than 5% of workforce operating from our properties during the quarter, a significant decline compared to Q4 of FY '21. However, all our properties were fully operational to support business continuity of our occupiers. On a positive note, recent data suggests a steady increase in recoveries with active cases now significantly below the second wave peak. Vaccine rollout has also been gaining momentum. Corporates today are focused on vaccinating their employees, providing a safe workplace and planning their office ramp up. This is demonstrated by a 23% uptick in employees working from our properties in July compared to June, and this number is expected to further increase in the coming months, with many occupiers indicating intent to return to office in strength by end of this year. We continue to actively support our occupiers in their efforts. Next, an update on our leasing. During Q1, we achieved 100% of the scheduled rent increases on 32 leases covering 2.2 million square feet with aggregate rent escalations of 13%. We are on track for the additional 14% rent escalations due on 5.5 million square feet across 37 leases in the balance of FY '22. We achieved 545,000 square feet total lease-up across nine deals at 13% leasing spreads. This comprised 161,000 square feet new leases at 17% releasing spread and 384,000 square feet renewals at 10% renewal spread. All the new leases were expansion by our existing occupiers to cater to their business needs. Our portfolio occupancy remained stable at 89% in Q1, in line with the previous quarter. On lease expiry, you may recollect that we guided to 1.9 million square feet expiries for FY '22 during our previous call. Of this, 0.5 million square feet will likely renew and 1.4 million square feet will likely exit. We remain on track with that guidance. Of the 1.4 million square feet likely exit in FY '22, we saw 0.2 million square feet exits in Q1. The balance 1.2 million square feet remain as likely exits with a mark-to-market potential of over 70%. While there will be an interim void period due to this churn, we view expiry of such legacy leases as an opportunity to bring rents to market, thereby delivering on our embedded growth potential. The second wave disrupted the office market recovery underway in early 2021. It impacted site visits and timing of deal closures. While hiring and business growth for many of our occupiers is very strong, they continue to defer leading decisions and are prioritizing employee vaccination. However, several RFPs continue to be active in the market, and we are having a number of positive conversations on future leasing. Office demand is likely to rebound in 2022 as vaccinations pick up pace, business sentiments improve and as occupiers ramp up their return to office plans in form of this case strategies. Moving to our development program. We minimized the impact of the second wave lockdown across a 5.7 million square feet construction by applying our learnings from the first wave of COVID. Post reopening activity and labor site are back to full strength. That said, we anticipate that the disruption associated with the second wave has had a timing impact on our project delivery by one quarter. The delivery of 1.1 million square feet built-to-suit to JPMorgan is a near term priority, and we are targeting handover by year-end. This campus is a great addition to our industry technology assets. The balance 4.6 million square feet ongoing development is due for delivery over the next two to three years. This positions us well to benefit from the ongoing consolidation of supply and expected demand rebounds. Our on-campus development program is a significant growth avenue for us and helps to meet occupied growth needs. Given our ownership of all land for development and that our CapEx debt costs are amongst the lowest, we believe that the development yields will be attractive and will enhance both NOI and unitholder value in the coming years. Moving to our total business ecosystem initiatives. We continue to reinvest in our property, whether it is the convention center in Skywalk at Embassy Manyata, the Central Garden in F&B at Embassy TechVillage or the overall asset repositioning of Embassy Quadron, we continue to enhance our park connectivity, infrastructure and amenities. At our Embassy Manyata property, the flyover construction at the park entrance is on schedule for delivery in Q2. Similar initiatives include metro connectivity for Embassy TechVillage in Quadron and the underdevelopment Hilton Hotels at Embassy Manyata and TechVillage. All of these complement our office offerings and create unmatched value proposition for our occupiers. We are progressing well with our ESG road map comprising the three pillars of responsible business, resilient planet and revitalized communities. Our 100-megawatt solar plant in Karnataka and our occupier Corporate Connect program in areas of health, education and public infrastructure are two of many initiatives for sustainable tomorrow. Several other initiatives are underway, and we would invite you to review the recently issued annual sustainability report for FY '21 on our website to understand in detail the initiatives and disclosures under the ESG program. Our infrastructure projects create long-term value for our unitholders and fortify our properties for the next phase of growth. Along with the ESG initiatives, we are able to offer complete business ecosystem to our occupiers, a key differentiator to attract and retain talent. Finally, looking beyond the pandemic. The tech industry, domestically and globally, continues to report strong earnings, record hiring and business pipeline, given the technological transformation of businesses across all sectors. Recent earnings reports underscore these trends with annual hiring increasing by as much as 80% to 100% from pre-pandemic levels. Concerns around attrition have also been highlighted in recent results. Therefore, attracting and retaining Indian tech talent has assumed increased significance for these global businesses. We believe that our high-quality complete business ecosystem product has even more relevant and appeal in this new technologically dominated global business environment, which will continue to drive demand in the India office sector. We are very well positioned for the next phase and beyond. Over to Aravind now, for the financial updates.

Thanks, Vikaash. Good evening everybody. Let me start with the financial highlights for first quarter of FY 2022. Net operating income grew by 36% year-over-year to INR 6,213 million, with operating margins at 84%. Distribution for Q1 stood at INR 5,346 million or INR 5.64 per unit, with 80% of distribution's tax-free for unitholders. Raised INR 12 billion debt at an attractive 7.4% interest rate and refinanced INR 5.2 billion, with an 80 basis points interest savings and maintained our fortress balance sheet with liquidity of INR15 billion and low leverage of 23%. First, let me take you through our Q1 financial performance. Revenue from operations grew by 43% in Q1 INR 7,376 million, reflecting rent escalations from 4.6 million square feet, revenue accretion due to additional 6.1 million square feet completed area of ETV acquired in December 2020, and revenue from Embassy Manyata and TechZone, CAM acquisitions in October 2020. The impact of these positives were partially offset due to occupier exits. Net operating income grew by 36% in Q1 INR 6,213 million, mainly due to increase in our revenue from operations, as mentioned above. This increase was partially offset by increase in costs due to acquisition of CAM operations of Embassy Manyata, TechZone and ETV in the previous year. EBITDA for Q1 grew by 33% to INR 6,008 million, in line with the increase in our NOI. Net distributable cash flow for Q1 grew by 19% to INR 5,315 million. Earlier today, the Board of Directors declared distribution per unit of INR 5.64, reflecting -- representing the 100% payout ratio. 80% of our Q1 distributions are tax-free to our unitholders, reflecting the benefits of the fourth quarter FY 2021 restructuring of Embassy Manyata entity. Moving now to our balance sheet and our debt strategy. Our balance sheet continues to be conservative with $15 billion of liquidity, low leverage of 23% and a AAA credit rating as an issuer. Additionally, our pro forma debt headroom of INR 121 billion provides us flexibility to capitalize on growth opportunities. During Q1, we raised INR 12 billion SPV level debt at a blended 7.4% interest rate, comprising INR 6.5 billion rent amortizing debt at attractive 7.1% and INR 5.5 billion CapEx debt at 7.7%, one of the lowest in the industry. Of this, INR 5.2 billion was used to refinance existing debt at 80 basis points interest cost savings, and the balance will be utilized to fund our ongoing on-campus development. We continue to focus on reducing our overall debt cost. And at the end of Q1, our INR 109 billion gross debt stands at 7.7% interest cost compared to 9.6% just a year ago. Given our ability to attract debt capital at competitive rates and the continuing flight to quality borrowers, we are evaluating early repayment of INR 36.5 billion listed bond issued in May 2019, carrying 9.3% interest rate. While this bond is due in June 2022, we have a call option for early redemption in November 2021. On a pro forma basis, our 200 basis points refinancing spread brings down our consolidated re-debt cost significantly to around 7% compared to 7.7% currently. Subject to market conditions prevailing at that time, we will explore refinancing the entire outstanding of INR 45 billion through a coupon bearing debt. We believe this is an opportune time given the fact that debt markets continue to be positive for quality borrowers and the recent approval to insurers to invest in reset enhances access to deeper pools of capital. To summarize our overall debt strategy, our plan is to build leverage selectively, finance development through SPV level CapEx debt and finance acquisitions through optimal debt equity mix. Further, based on investor feedback, including our top institutional investors as well as to enable simpler understanding of the yield and growth components of our total return story by the growing retail investor segment, we are now targeting to consolidate all of REIT's debt to coupon bearing instruments. Lastly, I'll update on the outlook for full year FY 2022. During the previous call, given the uncertainty around second wave, we had deferred guidance and instead provided an overall framework and key building block of our business projections. Given that we are witnessing a steady decline in cases, accompanied by gradual relaxation of restrictions and opening of businesses, we are now providing guidance, which is based on the premise that we will not see increased caseloads or lock down for the balance of the year. Our estimates are based on the following assumptions. Firstly, we will benefit from the transformational acquisition of ETV completed in December 2020. With a stable 98% occupancy, robust collections and 1.1 million square feet delivery pipeline, we expect full year impact of ETV acquisition to reflect in both NOI and distribution for FY 2022. Further, we expect our NOI to reflect the positive impact of Embassy Manyata and TechZone CAM operations, acquired in October 2020, and our overall NOI margins to be around 83%, reflecting change in segment mix given the acquisition of CAM operations. We had, at the time of acquisition, laid out pro forma acquisition numbers for both ETV and CAM operations and as of now, we expect to meet or even exceed our underwriting. Second, we will benefit from the full year impact of successful lease escalations on 8.4 million square feet in the previous year at an average 13% rent increase. We are also confident that we will achieve and collect rent escalations on additional 7.7 million square feet during the current year at an average 14% rent increase. Coming to impact of exits, we expect our numbers to reflect 1.5 million square feet exits, which we reported in the previous year at an average INR 63 per square feet in place rent. Additionally, we have factored 1.4 million square feet of exit in FY 2022 at an average 50 per square feet in-place rent with a mark-to-market potential of over 70%. Next, our guidance assumes a total lease-up of 0.9 million square feet, comprising 0.5 million square feet of renewals and 0.4 million square feet of new lease deals. On new lease deals, we remain optimistic of demand recovery starting next year, given the technology growth megatrends. Our two operating hotels totaling 477 keys are expected to see muted demand recovery for current year, given dependency on business travel resuming. We have factored a cash burn of INR 340 million for this year, in line with previous year. And finally, coming to a refinancing plan and the impact on our FY '22 distributions. Earlier during today's call, I have laid out a debt strategy around INR 36.5 billion listed bond issued in May 2019. Our guidance assumes that we will exercise the call option to repay this bond in November 2021, and we propose to refinance the total outstanding of INR 45 billion through a new coupon bearing debt. Factoring the above assumptions for the full year FY '22, we expect NOI to be in the range of INR 22,871 million to INR 24,530 million, with midpoint of INR 23,700 million, up 17% year-over-year and distributions to be in the range of INR 19,667 million to INR 21,093 million with midpoint of INR 20,380 million, up 11% year-over-year. Finally, we expect DPU to be in the range of INR 20.75 per unit to INR 22.25 per unit with a midpoint of INR 21.5 per unit, in line with our FY '21 DPU. Do note that our guidance is subject to the evolving nature of the pandemic, including a possibility of a third wave. Despite the second lockdown in India for most of first quarter FY '22, Embassy REIT remains in great financial shape, with resilient distributions and ability to pursue growth through organic and inorganic opportunities in the coming years. In the near term, we continue to remain focused on delivering on our NOI and quarterly distributions, maintaining our balance sheet discipline and continually optimizing our debt cost. Over to Mike for his concluding remarks.

Thank you, Aravind. In summary, FY '22 is off to an encouraging start. Though pandemic related certainties, uncertainties still remain, we are optimistic of the opportunities ahead and committed to achieve our goals for this year and subsequent years. The economic outlook is certainly looking more encouraging, and we are very positive about the global technology trends as these will further provide significant new growth impetus for our business. Finally, I would like to thank all our employees, frontline workers, business partners and our stakeholders for navigating this challenging time together, and we are grateful for their continued cooperation and support. Let's now drill into any details in Q&A.

[Operator Instructions] The first question is from the line of Kunal Tayal from Bank of America.

So a couple of questions from my side. The first one is it seems like there have been no out of turn exits that have transpired this quarter. So is it fair to assume that the thought process of existing occupiers is now more constructive on the balance sources a quarter back? And then the second one is, as you think of return to office by Q4 of this year, is it still largely contingent on what happens around wave three, given the vaccination levels, the time lines are more immune to the environment?

So Kunal, just your first question, do we see things as being more constructive around the conversations on leasing. And I think that's an unequivocal, absolutely, we do. It's remarkable how quickly things have turned around from a very positive situation in February and then 180 degree turn with the second wave. And now today, we're seeing existing occupiers talking to us about potential expansion. We're seeing occupiers who perhaps six months ago were talking about surrendering small amounts of space now coming back and saying that they would retain and perhaps even expand. So certainly, we're seeing more constructive, positive expansionary types of conversations. Those tend to be with our existing tenants. I think until people get their employees back at scale, which we think is going to be end of this year, the final quarter of this year employs back, that is when we believe we'll see some real traction on fresh leasing from new occupiers as well as existing. And your question about is it contingent on any other eventuality, particularly potentially third wave? That is a contingency for everybody, but we're getting very encouraging sentiments from occupiers, great take-up of vaccination. Our occupiers have rolled out over 110,000 vaccinations, I think reported by 130 odd companies for us. We've done 10,000 vaccinations of our own frontline staff. I think there's a very positive sentiment about back to work in the final quarter.

Got that. Maybe if I can slip in one question further then. I think on refinancing of zero coupon bonds, I think your earlier philosophy was that it could be a mix of coupon bearing and maybe just further zero coupon bonds as well. So just if you could walk us through the shift in thought process as to all of it being coupon bearing now?

Yes, at the outset, Kunal, I think our philosophy of having the zero coupon bonds was to match the value of under construction properties, which come from our principle of matching cash inflows from our properties as and when completed to cash outflows towards funding such properties. As of today, only about 20% of the under construction properties at the time of our IPO have been converted into completed and cash-generating assets. Having said that, we have taken note of the feedback, which has been provided to us by various stakeholders, including large institutional investors around our philosophy. As I also mentioned in my remarks, we just wanted to enable a simpler understanding of our yield and growth story to the growing retail segment. And considering all of this, we have decided to consolidate our entire debt book into a coupon bearing instrument.

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

A few questions from my side. So first is Aravind on this NOI guidance, INR 24 billion and the DPU of this INR 21.5 billion. So I just want to understand, once you refinance the zero -- I mean, this bond, in Q4, because I'm presuming you kind of sustain this number for two quarters. So I just want to understand what happens in Q4. Do you see a big downward shift in DPU because of this coupon bearing debt? So that's the first one. I'll take the other ones later. And the NOI also, if you can just highlight, because your first quarter NOI is 6.2 odd, and your guidance midpoint is about 24. So basically, you're assuming that this Q1 NOI trend doesn't sustain for the full year. So I just want to understand where do we land up on Q4 basis the guidance you have given?

So first on the DPU, talking about the assumption on refinancing on zero coupon. What we have assumed in our guidance is that we will be refinancing it into a coupon bearing debt sometime mid of October because this is due to be paid on November 3rd. So it has an impact in our Q2 -- it will have an impact on our Q3 as well as Q4. We have factored all of that into the INR 21.5 billion If I were to give you the exact number, which we have assumed in our guidance, this refinancing will have INR 1.5 per unit, in fact, for our full year guidance. So that is on the DPU. Talking about NOI, Saurabh, basically, the 17% NOI growth factors in, if I were to just kind of give a very broad breakup. It factors in the ETV, the acquisition accretion of close to around 21%, factors in the escalation positive of around 2% but it also factors. Yes. So let me...

From Q1, if you can just reconcile this, that would be great?

Yes. So just to keep it short, the impact of the likely exits will be seen in Q3 and Q4, which is what we've factored a total negative of around 6%. All of this plays into the total number of INR 23,700 million.

Okay. And just coming back to the DPU, is it fair that the impact will be about INR 1.2, INR 1.3 per unit in Q4? Is that would be a fair assumption basis whatever you've given?

I think Saurabh it will be a simple math, it's INR 1.5 for five and a half months, so you can compute that proportionately for three months out of five and a half months.

The second one is on this, so on this share pledge, so your annual report has both Embassy and Blackstone pledging 100% of their shares. So could you comment on -- I mean, what's happening there?

Look, I think it's not for us to comment on sponsor's internal financing arrangements and I think if you look at the last couple of years, their shareholding demonstrates their commitment to the success of the REIT. They have reiterated that like us, they understand the strength and resilience of the business, and we understand that they're fully committed as they always have been.

Third is, Mike, I mean, what percentage of the workforce is in parks today? I mean, if you can -- in July, basically, what percentage of workforce will be in your park? And what number was this in February? And just one last thing is of this 1.4 million square feet I'm assuming you have not assuming any releasing, so yes.

Yes. So let me take the numbers in the park, and maybe I'll ask Vikaash to take the second part. So just to put some context, how many people in the park today? There's about -- sorry, first off, let me start with -- there's a very broad range. Some occupiers are at 25%, 30% in different places. And some of the more international tenants tend to be at a sub-5% level. So a very broad range, I think city by city, it also varies. Today, I believe there's approximately 17,000 people working in the parks. That went down to a low point of about 7,000, 8,000 at the nadir of the pandemic. And to give you a flavor of where that was back in Jan-Feb, it was up at 27,000. So we're seeing big swings, but we have seen a big increase in the number of people just in the last month. And your second question about releasing, I didn't quite get the full question.

Yes, so the question was of this 1.4 which is expiring. The assumption, I mean, I'm guessing you don't have any visibility on releasing of this, so that's why it's being factored into the NOI guidance, will that be a fair statement?

So Saurabh again, of the 1.4 million square feet likely exit, we have already seen 0.2 million square feet in Q1. And against that, we undertook backfill of about 161,000 square feet this quarter. So basically, as Aravind mentioned in his assumption, we have assumed a total lease-up for the full year of 400,000. So what that implies is, for the balance, 1.2 million square feet likely exits for the rest of the year, we have factored in lease-up or backfill of about 240,000 square feet.

One last question, if I can, may, of this, J. P. Morgan lease, now it is Q4 and your acquisition has said till September, there is rent support, so what happens for that one quarter?

Yes, so Saurabh good question. So basically, the way the rental support and the rental guarantee was structured is that we buy this property on a -- as if it's a fully completed basis. So for FY '22, we don't think there will be any impact given that it is supported by rental support. However, any delays the contractually the way it's being agreed, any delays which is on account of construction delays due to pandemic or due to any other force majeure, that could be to our account, as is the case for all of our other construction. So next year, if this gets delivered by, let's say by one quarter, which is what we are estimating that in FY '22 '23 it would be to the REITs account.

Okay. So any delay in FY '22 is not to your account, sponsor continues to pay that?

That is correct. But as I mentioned, we were targeting this September, now it's moved to December. So that one quarter impact we will have in FY '22 '23.

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

So if I got it right, what you're essentially saying is that for new leasing perspective, since you've already renewed 0.4, you're expecting only 0.1 to be renewed for the balance nine month, is that how one should read it?

Sure Puneet, and your next -- the other question, please?

Yes. The other one is on the debt side. So we are seeing a debt increase of almost INR 4.81 billion, while if I look at FX it was about INR 2.94 billion, so where is the gap and what is resulting in the excess secondary net debt?

Sure. So why don't I take the first one, Puneet, then maybe I'll hand it over to Aravind for the second question on debt. So Puneet, just to break it down, we had indicated and guided to 1.9 million square feet expiries split between 1.4 likely exist and 0.5 million square feet renewal, we are on track with that guidance given last quarter. So on the renewals of the 0.5 million square feet that we indicated, that really renewed 0.4 in Q1 likely renewal for the balance three quarters is 0.1 million square feet. So nothing changes from our previous guidance of a total renewal of 0.5 million square feet. The balance 1.2 million square feet will be likely exit, most of it coming in Q3 and Q4 of the financial year. Does that help?

Yes. And just since you're -- on leasing, if I look at the trend and releasing, it's generally more on second generation leases, is that something to read on that? Or should one consider first generation, second generation leasing as pretty much similar?

When you say second-generation leasing, you mean -- so we're assuming that it's end of lease and then a new lease, which has seen a significant part of that 545,000 square feet that we've leased in the last quarter.

Yes. So basically, the older ones are getting leased or renewed, is there something more to read into that from occupiers perspective?

Well, I mean, the point to observe from that is that on those older leases, we often have a very strong potential mark-to-market. So we see good escalations from those types of renewals.

And maybe I want to add here, Puneet, is that obviously, it's also a natural progression simply because some of these legacy leases, we replace them with new age occupiers, doing more sophisticated and high-end kind of value creation works who have higher propensity to pay rent. So I think this is -- we would call it business as usual and normal course to kind of churn some of those long tenure, 10, 15-year old leases to backfill it with more new age occupiers. So Puneet, on the question on increase in net debt of 480 crore, if I were to just give a simple walk of that, about INR 100 crores of the increase is because of the accrual of interest on Series 1 debt. About INR 140 crores is because of the loans we've taken from bank for CapEx purposes. And about INR 240 crores is the opening surplus cash, which is used for CapEx as other payments. So that's the...

But loans for CapEx is anyways cashing also, right? So net debt change of INR 480 is, it should all be CapEx only, right? And maybe INR 100 crore accrual of interest, which I missed out. yes.

Yes, that's correct. It's all towards CapEx towards the INR100 crores of the Series 1 accrual and a little bit of other -- just to give you an example, we will place certain amount of fixed deposits for some of the BDs and LCs, which we use for CapEx. So it's a combination of these.

But that also gets counted as cash only, right? So that shouldn't impact net debt again.

We don't consider those fixed deposits which are lien marked as cash.

The next question is from the line of Adhidev from ICICI Securities.

Just a question for Aravind. Again, on this working capital adjustment is almost INR70 crores for this quarter. So just a housekeeping question. What is the nature of this adjustment?

So broad breakup of the INR 69 crores, some of this we had spoken in the previous calls, including the acquisition as well. Approximately INR 29 crores is coming from the rental support payments towards the J. P. Morgan building, approximately INR 15 crores is because of this fit-out rental cash flows, which are traded as finance lease will not operating lease. And the balance is towards normal working capital movements, including movement in other current assets and current liability. So that's the broad split of the INR69 crores, Adhidev.

So just to follow-up, so this trend should continue, this working capital, this accretion of cash for the remainder of the year or will it smoothen out for the rest of the year?

Yes Adhidev. I think broadly, this is the trend which is going to continue for the rest of the three quarters, and the guidance also assumes similar numbers.

Okay. Second question is for all our under construction assets, do you, can you give the cumulative number of what is the pending CapEx and the next couple of years or next two, three years of annual budgeted spend, a broad number?

I'll guide you to page #19 of our supplemental data book, why don't I take you through that? Basically, we have laid down here for all our under construction projects including infrastructure and upgrade projects, the CapEx outlay, the pending cash to be spent split by all the projects. So basically, on the numbers, we are looking at spending about INR2,663 crore over the next three years across the base build projects and the infrastructure projects, and there's a detailed breakup of that. Roughly, it was INR3,000 crores last quarter and we roughly, let's say, spend INR300 crores during the quarter on construction.

And just one last question. We have heard a lot of talk about the de-densification of office spaces because of the pandemic. So now in your discussions with your existing occupiers as they bring people back to office, are you seeing, do you expect the lease area to go up on account of that, if you could just throw on some light on that?

Yes. I think the de-densification topic has kind of got bundled into the overall back to office, higher quality product. I think what's clear is the type of occupier that we have in our portfolio is going to be looking for higher-quality products that may include less density, but it will also include specific requirements around energy efficiency and ESG requirements, safety and security, wellness for the staff. But broadly, some of those companies that are in our portfolio have had a very low-density in the past in any event. It's really the ITES type of companies that had moved to the high-density spaces, we would anticipate that there will be a move to a less dense, more collaborative environment. And again, that's going to be good for us because our type of product, not just within the building, within the four walls, but also the overall amenities of our business park is what the best occupiers are going to be looking for over the coming years.

Okay. And just a last question, if I could just squeeze it in. Are you again seeing fresh RFPs growth in the market again from July, or is it just the once which is in Jan or Feb, which are yet -- which are again not being revised?

We are seeing fresh RFPs across the country. I think we've got a list of 26 million square feet of RFPs. We've actually scaled that back to something which is, A, applicable to our markets; and B, we've written out a couple of the really large numbers that skew the overall numbers. And still, in our market, we have visibility to about 9 million square feet of RFPs. And yes, some of those are new.

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

So, Mike my first question is on the upcoming supply. So on your thoughts on the upcoming supply over the next two years, your last quarter's presentation suggests nearly 37 million square feet of the upcoming supply is unrealistic, which has now reduced to 32 million square feet. With encouraging signs on the demand side, do you see further risk to the unrealistic supply estimates and resultantly, how should one think about the impact on your lease expiries plus user friendly mark-to-market potential because of this?

Yes. So I mean, our view on upcoming supply actually just gets reinforced every quarter. We've been saying the same thing for a year now, and it's turning out like many of the things we've been saying to be the case. We believe that supply over the coming two years is down 25%. We've had that reconfirmed from a number of different sources. That's combined with what is clearly going to be a very significant uptick in demand, given the hiring figures being up so significantly. We think we're going to be in a very strong position in 2022. Does that address, I think there were some detail that I missed. I couldn't quite understand.

Yes, Karan, why don't I add to what Mike said, Karan, our view is very clear. And this is based on not only conversations, but what we are seeing on the ground and pretty much, we track line by line, all the projects, which are announced or which are under construction. If any project is already not under construction today, it is not likely to come up in the next three years. And on the basis of that and the dislocation, which we see in the availability of financing for some of the grade A minus and grade B projects, we really think supply is going to consolidate to a very few institutionally owned landlords or developers with a strong balance sheet. So we think this will start playing out. While there's a lot of talk about supply, we think actually, the situation on the ground is to the converse. And a lot of the supply will simply get deferred and there are some interesting anecdotes which are coming from the ground where, in some cases, the developers are contemplating or have already converted a potential announced supply, which is coming in this figure that you mentioned to, let's say, a residential project also. So I think we'll see -- we'll have to wait to until it stands out, but we think supply has already declined versus what was announced, and it is going to continue to consolidate to very few landlords simply because office business is a longer gestation business and the capital requirements come into play.

And talking about the demand side, Vikaash, we have seen data center emerging as an asset class, where one of the other REITs, in recent weeks also recently closed a long data agreement with one of leading data centers. So in that context, this being a fairly mature asset class globally, and given your experience, can you help us with your thoughts with respect to the opportunity with respect to this segment and if you're seeing any RFPs from this asset class in your micro market?

I think to just directly answer your question, do we get asked a lot about data centers, we do. But I think we've got to be a little pragmatic in the way we approach it. I think first and foremost, our bread and butter is being an office REIT, catering to the tenant base that we have for all the regions that we've repeatedly outlined about why they're in India, right? I mean, the Indian talent pool is effectively -- has been the biggest retable story of our times, and that's the reason over the last three years, you've seen three office REITs come to market. Now clearly, I think, I mean, given the global sort of technology mega trends that are taking place and sort of the pull towards with data analysis, data storage and the performance of crowd of data centers worldwide. That's clearly been a focus on seeing how that can sort of be replicated in India. But I think it's an opportunistic view, but it really depends on the scale. Data centers tend to be incredibly capital intensive. They definitely cost a lot more to put together than office. And I think it's really a question of the markets that you want to be -- that are most conducive to actually having data centers. For example, I think Bombay, given that it's a coastal market or a market like Chennai, again, markets that either have -- coastal markets are good power, are more conducive to setting up data centers. I think if you're looking at city like whether it's Pune or Bangalore, I think it's really sort of more of an opportunistic sort of data center proposition that would make sense. As of this point in time, it's clearly, given sort of the expenses involved, given the sort of high capital-intensive nature of it and given how we are actually deploying capital and thinking about growth in the office market, we think that at this point in time, it's too complex, there are too many technicalities that involve our full and undivided attention. So we'll continue to analyze the market. I think we do on top of sort of a lot of the intelligence that's there, we can clearly see some of the trends. And if we have something to report, we will.

This is my last question, if I may. With ETV in your portfolio now, what kind of a quarterly rental update can one expect, which will be possible once, say, the business normalizes say at 95% portfolio level occupancy? And further, assuming there is no threat of a third wave, et cetera, by when do you expect this will be possible? And what kind of distribution would be relatively at that point?

Yes, Karan. So probably in terms of future, as Mike and Vikaash mentioned, we are pretty positive on the demand returning later half of '22, considering all the technology and the GCC demand, which is likely to come. But having said that, in terms of projecting or forecasting when we're going to reach 95% or whatever is the stable occupancy, we would want to stay away from that and as time passes, we will keep giving you guidance on the more near-term numbers. But on an overall basis, I think we are pretty optimistic and bullish on the levers of growth what we have.

We take the last question from the line of Kunal Lakhan from CLSA.

Just on an earlier question on the distributions. So Aravind, like even if you take the higher end of the distribution estimate of INR22.25 DPU. And even if you adjust the INR1.5 impact on account of the refinancing, we're looking at like almost INR22.5 billion of total distributions. And if I adjust the TechVillage impact in this and try to do a like-to-like comparison versus last year, is it fair to assume that there could be a decline in the distribution, excluding TechVillage, is that the understanding correct?

If I can simply explain this in terms of same store, as we reported in Q1, the same-store NOI is down 3%. And the same-store number for the full year in terms of NOI is expected to be down 5%. And in terms of distribution, when you factor in the impact of the Series 1 refinancing and the INR1.5, which I spoke about on a same-store basis, the distributions are around 12% to 13% lower as compared to last year and this has got offset by the accretion, which we are estimating or projecting from the ETV as well as the CAM acquisition.

Okay. But that should be accretive, I thought, right, in terms of absolute distribution?

Yes. So ETV is accretive, both in terms of absolute as well as percentage-wise, taken together is our DPU number is flat. So there is a decline in the same-store distribution, offset by accretion in ETV.

And that decline is 12% in the same source distribution, right?

Yes. So NOI is around 5%, when I factor in the impact of Series 1, the INR1.5 I spoke about, together with that, it's 12%. But just from a business perspective, the same-store is 5% down.

Secondly, on the renewal side, right, the 1.4 million square feet expiry that we are looking at, a large part of that, almost 1 million square feet is actually in Manyata, where the MTM increase that we are targeting, it's almost like 120-odd percent. So, I just want to understand have we reviewed any leases that these kind of MTM increases in Manyata, especially like last year, we've seen some releasing in Manyata, have we done that at these fees rate?

So the answer to that is definitely a yes. Let me give you an example. Some of the leases that come up in Manyata, which kind of reflects in the MTM opportunity we spoke about of over -- in fact, over 80% on the 1.2 million square feet. I'm referring to Slide #28 of our earnings presentation, those are realistic. The in-place rents today to give you a flavor, are about INR 32, INR 33, right? Whereas in the lowest cost market in India today, let's say, Noida or Pune, the passing rent and the market rent would be INR 50, INR 55. So yes, these are achievable. In Manyata, in fact, pre pandemic, we've done deals crossing INR 105, INR 107, and we did report that in Q3 and Q4 of the first year. The range that have been assumed here for the mark-to-market of 83% are the CBRE estimate of rents. And for Manyata, if my memory is correct, they have assumed a INR 93 rent. In fact, the latest lease that we have presented in slide #26, which is the new lease that we have done in Manyata, the two new leases, those actually in the middle of the second wave, those have also been in excess of the CBRE guided market rent. So we think those are achievable. There may be a timing gap of a quarter, two quarters also, depending upon the rebound, but we think those are definitely achievable.

Lastly, on -- I just want to understand how the landscape for acquisitions. We talk about new supply being delayed, stalled, but what is the situation on existing rental yielding assets? Are you seeing any attractive opportunities for acquisitions in the REIT assets or have capital values come off from the pre COVID levels?

Yes. I think on acquisitions, we do see opportunity. I think -- but we continue very selective on how we view them and very, very stringent in the way we evaluate acquisitions. And let me kind of put it into this perspective. In an appropriate world, we want to buy assets that resemble the assets we own in our portfolio, right? They cater to the world's best companies, they're in the best micro markets and in sort of the top six, four to six cities in India just from a strategic perspective, right? And they obviously have to be accretive to unitholders, net of financing. I think those kinds of assets effectively are given sort of where the market is quite hard to find, and we will continue to be extremely selective in the way we incorporate and evaluate these assets in the portfolio and how we actually finance them. Now there are a lot of assets out there in the market that are one-off stand-alone assets. Quite frankly, I think we think it's a difficult proposition to sit here and say that you buy maybe 500,000 to 1 million square feet and think that, that's going to be able to provide a significant boost to a 42 million square foot portfolio because our focus is really to widening the moat against our competition with scale and with the kinds of sort of assets that we have in the portfolio as well as sort of some of the opportunities we get from our partner and sponsor network. Clearly, we've executed on growth on a ROFO opportunity. We do have the opportunity to look at more of that, we have opportunity to look at over 20 million square feet from our partner network as well. So there is clearly, there is supply out there. I think the expectations around value from one-off owners from certain parties, certainly hasn't abated. I think REIT is viewed as being strong credit, strong currency and some -- clearly, it stands a test of time, both sort of from a resilience perspective and the potential for future growth. But that being said, we're obviously in no rush. We'll continue to evaluate the market and execute as we go along. You have to remember, we brought growth in a very volatile market and executed and continue to execute on that to the best in a very meaningful manner and in a very good manner. So I think, fundamentally, we'll be on the lookout, and we'll make sure that we update you as and when we see opportunities and execute on them.

I would now like to hand the conference over to Mr. Mike Holland, CEO at Embassy Office Parks REIT for closing comments. Over to you, sir.

Thank you very much. And to each one of you, thank you very much for joining today's call. I hope that we've been able to communicate to you two things; one, the strength and resilience of the business, so looking back but also secondly our positivity about the mid-term given the very conducive supply and demand prognosis that we've set out. We genuinely appreciate all of your interest in the rates and for the time today. Many of the data points that we spoke to are covered on our website, but we're always happy to engage further if there is any additional clarification required. So with that, we say thank you and good evening.

Thank you.