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

Good evening, and a very warm welcome to all for the Embassy REIT second quarter FY '22 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I now hand the conference over to Mr. Abhishek Agrawal, the Head of Investor Relations. Thank you, and over to you, Mr. Agarwal.

Thank you, operator. Welcome to the Second Quarter FY 2020 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter and half year ended September 30, 2021, a short while back. As is our standard practice, we have placed our quarterly financial statements, earnings presentation discussing our performance and a supplemental financial and operating data book in the Investors section of our website at www.embassyofficeparks.com. As always, we would like to inform you that the management may make certain comments on this call that one could deem forward-looking statements. Please be advised that the REIT's actual results may differ from these statements. Embassy REIT does not guarantee these statements or results and is not obliged to update them at any time. Specifically, the financial guidance and any pro forma information that we will provide on this call are management estimates based on certain assumptions and 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 there can be no assurance that we will be able to achieve the same. Further, there are significant risks and uncertainties related to the scope, severity and duration of the COVID pandemic and the direct and indirect economic effects of the pandemic and related containment measures on Embassy REIT and on our occupiers. In a positive move on August 11, 2021, Embassy REIT units started trading with a reduced single-unit lot size on expected lines. This regulatory change is resulting in a gradual expansion of our retail unit holder base, which has doubled since April 21 and tripled in the last 12 months. We welcome the continued broadening of our investor base. Further, Indian Stock Exchange NSE announced inclusion of Indian REITs and InvITs in relevant NSE indices. However, this decision was later put on hold by NSE. Globally, REIT as an asset class contribute significant way to benchmark equity indices, which are actively tracked by fund managers to construct their portfolios. We remain confident that post consultation and further analysis, all relevant stakeholders and market participants will reach a consensus that enables Indian REIT inclusion in key Indian indices at the earliest opportunity. Joining me today are Michael Holland, the CEO; Vikaash Khdloya, the Deputy CEO and COO; and Aravind Maiya, the CFO. Mike will start off with the business overview and strategy, followed by Vikaash and Aravind. We will then open the floor to questions. Over to you, Mike.

Thank you. And let me start by welcoming Abhishek Agrawal, recently appointed Head of IR and Communications, an appointment made in parallel with the recent announcement of the appointment of Ritwik Bhattacharjee as our Chief Investment Officer, announced last quarter. So good evening, and thank you all for joining us on the call today to review our Q2 FY '22 results. This quarter, we have again seen the continuation of multiple positive trends. First, the COVID data trend in India continues on a positive trajectory. Cases and deaths in India are at less than 5% of the May, June peaks, and this has been the case for some time now. Vaccination rollout in key urban centers is strong. And last week, India reached the 1 billion vaccination milestone. In all our 4 markets, lockdowns have been lifted and business activities are reviving. We are witnessing an uptick in physical occupancy across our properties and we expect a material increase post Diwali. We are supporting our occupiers with their back-to-work plans and are anticipating 15% to 20% physical occupancy levels by the end of this year. This backdrop is encouraging. Second, driven by the continuing acceleration in technology and digital transformation across the world, The tech sector continues to report strong earnings growth and importantly, for us, strong hiring. In addition with technology blurring physical boundaries, global corporates continue to drive India business expansion through high-quality, skilled and cost-effective talent with an additional 500 global captive centers or GCC, expected to be set up in India over the next 4 years as per the recent report by NASSCOM. That is in addition to the existing growing 1,400 GCCs, already employing 1.4 million people across key office markets in India. These 2 aspects, tech sector investments and GCC growth are extremely positive for us given that these sectors represent over 70% of our occupier base. The third positive trend is that leasing in our markets is showing early but very clear signs of revival. The record hiring is starting to crystallize into new leasing and longer-term RFPs with 20 million square feet of RFPs currently active in our 4 markets. Our significant Bangalore concentration continues to be a core strength. Bangalore is expected to lead office demand rebound, and our current pipeline is encouraging. The fourth positive trend relates to a number of favorable regulatory changes. The trading lot size reduction for REITs and the recent changes permitting domestic insurers and now FPIs to invest in REITs debt, all these steps are in the right direction and continue to deepen, expand and diversify our investor base. So multiple external positive trends over the past quarter, which are complemented by a couple of significant highlights driven by our active management. Our strong showing in ESG was recognized with a 4-star rating awarded by GRESB, the global standard in ESG benchmarking for real estate and infrastructure investments. This reflects our commitments matched by actions, not only around our environmental impact in terms of energy, waste, water and biodiversity but also the impact on our communities and stakeholders, and our overarching governance principles. Another highlight has been the INR 46 billion refinancing and a significant 300 basis points interest cost savings, which Aravind will expand upon. This debt raise demonstrates the confidence of the local market in our platform and it is an important milestone in our financing journey. It further strengthens our balance sheet, continuing the 2-year trend of significant reductions in our overall cost of debt. So a great deal to be positive about around our business and the macro environment, all trending in the expected direction laid out in our previous earnings calls. This quarter, with INR 5,365 million distributions, 0.7 million square feet leasing activity and 15% rental escalations on 1.4 million square feet of leases. We are on track to deliver on our FY '22 guidance, and we can see strong indicators of customer demand in FY '23. Let me hand over to Vikaash to expand on some of the business and operating highlights.

Thank you, Mike, and good evening, everybody. business and operating highlights for Q2 include: total lease-up of 713,000 square feet at 20% spread with an encouraging 500,000 square feet forward pipeline. Successful rent increases of 15% on 1.4 million square feet across 22 leases, construction in full swing on our 5.7 million square feet development projects with 1.1 million square feet JPMorgan campus on track to hand over by end of the year. And continued focus on our ESG strategy with recent 4-star GRESB rating for our operating portfolio. Let me take you through the details. First, an update on our occupiers return-to-work programs. The overall COVID situation and vaccination coverage continues to improve in India. There has been an uptick in the number of corporates moving ahead with the return to work programs. While the physical occupancy at our properties is currently at around 10%, we expect this to ramp up to 15% to 20% by the end of this year, led by the increasingly positive sentiment amongst occupiers. Apart from wellness focused initiatives, our teams continue to support occupiers in their vaccination drive and back-to-office plan. Moving to our leasing performance and outlook. We achieved total lease-up of 713,000 square feet at 20% leasing spreads in Q2. This comprises 169,000 square feet of new leases at 13% spreads and 544,000 square feet renewals at 21% spreads, including an early blend and extend lease of 511,000 square feet with a global telecom player. We are seeing a pickup in inquiries and site visits, a 66% increase in Q2 versus Q1 and our forward leasing pipeline is encouraging at 500,000 square feet. We remain on track with our previous guidance on expiries and renewals for this year. Of the 1.9 million square feet expiries, we have renewed 0.4 million square feet area and have seen 0.5 million square feet exits till Q2. Of the balance, 0.9 million square feet remain as likely exits with a 64% mark-to-market potential. Taking into account Q2 lease-ups and exits, our portfolio occupancy stands at a healthy 89% on a 32.3 million square feet operating area. Similar to previous quarter, we secured 100% of scheduled rent escalations in Q2, a 15% increase of 1.4 million square feet across 22 leases. We are on track to achieve the remaining 14% escalation from 4.1 million square feet across 35 leases due for the remainder of the fiscal. Our discussions with occupiers indicates significant pent-up demand due to postponed lease revisions since the onset of the pandemic. This coupled with increasing vaccination coverage, record tech spend and robust hiring trend signals a strong revival for the office leasing market in 2022. Large occupiers are initiating expansion and consolidation plans as reflected by an increase in active RFPs in the market. Occupiers continue to gravitate towards institutional grade wellness-oriented buildings to attract and retain talent and to bring them back to offices. Our best-in-class portfolio and our total business ecosystem product offering positions us as a landlord of choice. Another positive for us is that Bangalore currently contributes to over half of the active pan-India RFPs. Given its position as India's strongest office market, Bangalore is expected to be at the forefront of demand revival in India. With its established ecosystem of tech companies, global factors and Unicorn start-ups, a highly skilled talent pool and availability of institutional quality offices, Bangalore continues to be the preferred location for global corporates. With around 75% of our portfolio concentrated in Bangalore, we are well placed and are already seeing clear signs of traction for Bangalore properties. Next, an update on our development projects. During the quarter, construction continued at full pace on our 5.7 million square feet development projects across Bangalore, Pune and Noida. Labor ramp-up has been positive and is back to peak levels. The 1.1 million square feet JPMorgan campus at Embassy Tech Village is on track for handover by end of the year. The balance 4.6 million square feet will be delivered over the next 3 years and matches with the demand rebound expected starting 2022. We are building into the gap both on timing and location, and we are extremely well positioned given over 70% of our development pipeline is in Bangalore. We continue to progress well on our infrastructure upgrade initiatives across locations, the flyover and skywalk at Embassy Manyata as well as Embassy Quadron asset repositioning are nearing completion. Development planning for the proposed metro stations at ETV and Embassy Manyata in Bangalore and at Embassy Quadron in Pune are currently underway. As always, all such initiatives are aimed at adding long-term value to our existing properties and enhancing our complete business ecosystem offering. Finally, our asset management updates. Both of our operating hotels saw encouraging uptick in occupancy given lockdown relaxations and domestic travel revival. Occupancy increased to 28% in Q2 compared to 10% in Q1 with a corresponding positive impact on our hotel EBITDA. Construction of the 619 key Hilton hotels at Embassy Manyata is also progressing well, and we have initiated commercial engagement with corporates and are targeting a June 2022 loans. On the ESG front, we are targeting 75% of energy contribution to renewable sources by 2025 and to that end, we are in advanced stages of procuring 20 megawatts of rooftop solar installations across our properties. Entailing a total CapEx of around INR 950 million, this initiative will enable 25,000 tonnes reduction in carbon emissions besides significant energy cost savings. A payback period of 3 years and a projected IRR of over 30% reflects our constant efforts to integrate ESG priorities into our business strategy. We also participated for the first time in GRESB assessment a global benchmark and achieved an impressive 4-star rating for our operating portfolio. ESG excellence is a journey for us, and we are confident that we will continue to demonstrate tangible enhancements over the coming years. Given the scale and importance of the ESG topic, we will be commencing investor presentations and calls focused on our ESG road map and actions. We are also focused on inorganic growth and continue to evaluate acquisition opportunities, which fit our criteria of high-quality large-scale business parks located in the right micro markets and which are accretive and offer further upside through active asset management. Our balance sheet strength and our ability to raise capital at attractive costs positions us well to pursue growth. To conclude, we are encouraged by the significant uptick in leasing activity, and we remain focused on converting our leasing pipeline. With a high quality portfolio concentrated in the right markets, our strong relationships with occupiers, our continuing investments in our properties and our ESG initiatives, we are well placed to benefit from the demand rebound in 2022 and beyond. Over to Aravind now for the financial updates.

Thanks, Vikaash. Good evening, everybody. Financial highlights for Q2 include: Net operating income grew by 30% year-over-year to INR 6,236 million, with NOI margin of 85%. Distributions of INR 5,365 million or INR 5.66 per unit for the quarter with 80% as tax-free. We raised total of INR 46 billion of debt at 6.5% to refinance the existing zero-coupon bond, resulting in substantial approximately 300 basis points interest cost savings, and maintained a robust balance sheet with low leverage of 24% and ample liquidity of INR 14 billion. Now let me take you through the details. First, an update on our recent successful debt raise. Following the recent IRDAI approval permitting insurance companies to invest in REIT debt, we raised INR 3 billion of listed debt in Q2, a 6.8% coupon for a 5-year tenure to refinance the in-place construction debt. This debt raise is strategic for us as we attracted first-time participation by insurers and resulted in a 110 basis points positive refinance trend. More significantly, in October, we successfully raised INR 46 billion debt, comprising INR 31 billion of listed NCDs at 6.5% fixed coupon and INR 15 billion of term loan from a leading bank, a 6.35% floating coupon. These proceeds to be utilized to refinance our existing zero-coupon bond for which we exercised the call option for early redemption on second November 2021. This refinance yields a significant approximately 300 basis points or INR 1.3 billion pro forma interest cost savings annually and helps us reach overall cost of debt to 6.8% from the original 9.4% at the time of listing. Another positive for us is that this debt rate attracted strong interest from a wide pool of investors, including banks, mutual funds, general and life insurers. Besides increasing the debt maturity to 4 years, we have successfully locked in fixed interest rate for approximately 70% of the total debt base. This helps our overall debt stack as it staggers our debt maturities and also simplifies our cash flow through for distributions to our unitholders. Post the refinance, our balance sheet continues to remain robust with ample liquidity of INR 14 billion, low leverage of 24%, low overall interest cost of 6.8%, no near-term debt maturity for the next 2 years and an additional pro forma debt headroom of INR 120 billion. As we move forward, the recent regulatory changes by Indian Central Bank to allow FPIs to invest in debt securities of REITs is very positive. This proactive announcement will help expand and diversify our potential capital pool and will enable further reduction in our cost of capital. Next, an update on our Q2 financial performance. Revenue from operations grew by 36% to INR 7,352 million, reflecting 14% rent escalations on 4.8 million square feet leases, a ramp-up in hotel occupancy and revenue accretion due to the completed acquisitions of Embassy TechVillage and CAM operations of Embassy Manyata and Embassy Techzone in the previous year. The impact of these positives were partially offset by a few occupier exits. Net operating income grew by 30% to INR 6,236 million, in line with the increase in our revenue from operations. This increase was partially offset with cost relating to CAM operations of Embassy Manyata and Embassy TechZone acquired in previous year. Our EBITDA grew by 28% to INR 6,053 million, in line with our NOI increase. Net distributable cash flows grew by 27% to INR 5,368 million. The Board of Directors have declared a distribution per unit of INR 5.66 for Q2, representing a 100% payout ratio. With this, Embassy REIT has now cumulatively declared distributions of INR 10,711 million or INR 11.3 per unit for first half of this financial year. Also, I would like to highlight that 80% of our Q2 distributions are tax-free to our unitholders. Moving to other financial updates. Our independent valuers completed fair valuation exercise of our properties for the half year ended September and assessed the gross asset value of the portfolio at INR 475 billion, up 2% from March. Bangalore, India's best office market contributes a significant 74% of REIT's overall value. Our net asset value as of September stood at INR 388.26 per unit in line with our NAV as of March. As updated previously, in February of this year, we filed the scheme of arrangement to collapse the 2 tire holding structure of Embassy TechVillage entity and we expect to receive approval to March 2022. Upon simplifying this holding structure, we expect a tax free component of our distributions to increase to 85% from the current 80%. This will further enhance the overall post-tax distribution yield to the benefit of our unitholders. Lastly, an update on our FY 2022 guidance. Last quarter, we provided guidance for FY '22 with a midpoint NOI at INR 23,700 million with a range of plus or minus 3.5% and our midpoint DPU at INR 21.5 per unit with a similar range. This guidance was based on certain key assumptions, which were detailed during last quarter's call. These include the positive impact of ETV acquisition, 14% rent escalations on 7.7 million square feet leases and a total lease-up of 0.9 million square feet. Along with this, we had also factored the impact of anticipated exits and cash burn for our operating hotels. We are focused on delivering our NOI and quarterly distributions to our unitholders and remain on track with our earlier guidance for this financial year. As I conclude my remarks, I would like to reiterate that our strong balance sheet provides us access to long-term capital at attractive cost and we continue to be favorably positioned to capitalize on growth opportunities. Further, post refinancing a zero-coupon bond, all our debt will become coupon bearing. This simplifies our distribution framework, increases predictability of our quarterly distributions and enables better understanding of the yield and growth components of our total return story, especially for the growing retail investor segment. Over to Mike for his concluding remarks.

Thank you, Aravind. So to summarize, we continue to see multiple positive trends. The India's COVID situation, our occupiers industries, the office leasing markets, the regulatory landscape for REITs as well as our leasing, development and debt market performance. We are delivering in line with our distributions guidance, and we're on track with our ESG journey. All in all, with the strength and resilience displayed by Embassy REIT through the last 18 months, we are well positioned for future growth as we emerge from the shadow of the pandemic. We're happy to drill into any details in Q&A. Thank you.

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

I have 3 questions if I could slip those in. The first one is you've had substantial renewals this quarter. So what did you check if anything stands out here on parameters like the pricing, duration, density or anything else that you might have observed. The second one is, Mike, if you could remind us what exactly is [ Embassy ] trying to achieve renewing a lease 2 to 3 years ahead of time. And then the final one I had is your comment on Bangalore having an especially strong pipeline. I do understand the general strength that the city has to offer, but are there any more recent factors that might have emerged pre-COVID that is driving this trend?

So Kunal, thank you for that. So just to summarize, so you're saying, a, in terms of the deals and renewals, was there anything particular in the negotiation elements of it. The second, why do the blend and extend. And the third piece, I don't think we were clear on that pipeline.

If I can also sort of go back to the second question, it was more about why is the renewal happening 2 to 3 years ahead of time. And then the third question was more around Bangalore. I think the comment was it comprises 56% of the lease pipeline in the country. So is this general strengths that the city typically sees or some new factors that emerged in its favor.

Yes. Okay. So I'll just take a comment on the first and third points, and then I'll ask Vikaash to talk about the significant early renewal that we did. So in terms of key issues on either new leases or renewals, I think the one thing that we see is really -- it's not about the price. It's not about the rental rate. It's significantly about the availability of premises. It's about the timing and it's about the quality of the product. There is a desire and requirement for flexibility, key piece of that is about expansion, the ability to expand, and we believe that, that gives us a competitive advantage. It's significantly, as I said, about the qualitative aspect, we think that our complete business ecosystem aligns to that. And in terms of why Bangalore, the majority of the pipeline is coming up. Frankly, it is a reflection of the fact that Bangalore represents at least 1/3 and maybe up to 40% of the technology-related market, the start-up market and the GCC. So 1/3 of the GCCs are here in Bangalore, whether that's in terms of staff and exports. So there's multiple reasons why Bangalore for the last 5 years has consistently been the largest office market in terms of absorption. I think that number is 31% as an average over the last 5 years. And in terms of the RFPs, which are in the India market today, 26 million square feet, 56% of those are in Bangalore. So it's a natural corollary, and I think that's the competitive advantage we have, given the 74% in this market. I'll ask Vikaash to speak specifically to that early renewal.

Sure, Mike. Kunal, so on your second question, while we can't disclose specifics of this lease, but in general terms, our decision-making about each deal takes into account specifics from that occupier scenario, including the scale, covenant, pricing, let's say, growth, shrinkage, exit assessment, what's the current portfolio status of the asset and the detailed terms on the table for the lease, et cetera. Sometimes, these occupiers are looking to consolidate and at times, they may also potentially exit. So in this case, just speaking of the outcomes, we did execute a early blend and extend, achieved a 35% spread on the market trend and also brought forward revenues from FY '25, '26, too much earlier. Apart from locking in an escalation at a higher percentage than what was in the current contract, we actually locked in 22% of the next 4 years upcoming expiries at Manyata, ensuring a zero void if there would be an exit upturn. So all in all, we're pretty pleased about the outcome, especially given it's a new 10-year lease with a lock-in of 5 years. And we continue to look at multiple alternative approaches and based on specifics of each deal, we will take a call whether we renew early or sometimes, it may also be a case that we let the tenant exit given we believe we have a significant mark-to-market opportunity. So it really depends on specifics of each deal. This deal, we think, is a great outcome simply because we achieved a good mark-to-market and we bring forward revenues by a couple of years.

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

So firstly, whilst overall occupancy remained stable at 88.5%. Can you give us your outlook on lease ups for the specific assets like Embassy Quadron in Pune, Embassy Oxygen in Noida, and FIFC in Mumbai.

Yes, sure. So you mentioned FIFC, Quadron and Embassy One. So why don't I -- Oxygen, right. So in terms of these 3 assets, occupancy has been subdued compared to some of our other assets but in the recent past, we have seen some traction in FIFC, we are in discussions of the 500,000 square feet pipeline that you see. It's best contain 1 or 2 leases that we are discussing at FIFC. Mumbai, generally, as a market has seen subdued demand compared to rest of the technology-driven markets like Bangalore, Pune and Noida. In Quadron, actually, if you recollect, we had done a deal last year with a Australian telecom player. And right now, we're in discussions with them for expansion space. And typically, we are the kind of occupiers, we like to attract the global captives who start with a certain base and continue to grow. If you see one of the slides in the deck, we have completed the company -- the entire asset repositioning of Quadron. And while it will take a couple of quarters to fully stabilize the asset, but the early signs are encouraging both because of the infrastructure projects, new road and connectivity, which is now linking Hinjawadi Pune in the West as well as the planned Metro, where we are in discussions to see if we can explore a direct inlet into our park. In terms of Oxygen, which is at sector 134 in Noida, it remains the best asset in that micro market and one of the only institutional grade assets. Again, Noida as a market caters to a certain set of occupiers. The current profile of occupier that we have is pretty good. However, to lease up the balance space, which is -- which comprises of the recently delivered Tower 2, we think may take a couple of quarters. But we think we'll be the first beneficiary as and when the rebound happens on all the 3 assets. They are super top-quality assets in each of the respective micromarkets.

Sure. And just an extension to this coupling with the -- in the opening remarks, which you mentioned that physical occupancies on an overall basis remain at 10%. So can you help us understand how does this stack up across micro markets for your portfolio? And by when do you or the tenants are expecting to have a substantial occupancy, say, more than 50% employees back to office? Any sense on that?

Okay. You mean in terms of people back in the premises. Okay. So we monitor this at least on a weekly basis. Today, we've been speaking to pretty much all of our occupiers across all the parks. We've got a good handle on the fact that post Diwali, many of the largest occupiers are looking at bringing back between 20% and 40% of their employees. It varies with different companies. It varies also by city. So at the moment, Bombay is much more advanced in terms of headcount than some of the southern markets, around about 50% in one of our assets in Bombay. So that leads us to believe that between 15% to 20% of the headcount will be back by year-end, and that will be rising further in the new year. It's hard to give an absolute number because clearly, we've got 193 tenants, so plenty of variables in there, but that's the trend that we're seeing. Very clear back to work trend. Does that answer the question?

Sure, Mike. That was very helpful. And just last one, if I could squeeze in. So over the last 2 quarters, there have been talks around the dedensification but obviously, the fresh leases were not happening. Now in that context with RFPs floating in and site visits picking up, can you give us some sense on how the dedensification is taking up place on ground?

Yes. I think if you look at the -- there's really 3 variables in this. And frankly, a lot of our comments a year or 18 months ago in the first quarter of the pandemic have been borne out to be the case. There are 3 broad variables, one, hybrid working. So will everybody be in the office going forward. There's definitely a conclusion that the office is still at the heart of businesses. Senior leaders, I'm sure your team, want people back in the office. But there will be more flexibility in work. So that is perhaps something that dials down a little bit, the quantum of space that might be required. But on the other side, you look at the hiring data and how that is really off the chart. This doubled the last 5-year average in terms of hiring and growth. And the issue about dedensification tends to be taken into account with great variable, tends to be taken into account when people are refurbishing or expanding their spaces. And certainly, we have numerous examples where companies are reducing density from maybe 100 square feet per person to 120, some tenants talking about 150 feet per person. So we believe in the midterm that actually, there will continue to be a net positive in terms of the requirement for space, both in terms of quantity and qualitatively.

Next question is from the line of Puneet from HSBC.

My first question is on Manyata, the occupancy continues to decline there. What's happening there? And when should we see it bottoming out?

Sure Puneet, Vikaash here. So as you mentioned earlier, Manyata, a chunk of the 1.4 million square feet exits that we laid out at the beginning of the year are from Manyata because some of the 15-year legacy leases expired in this year and also some bit in next year. And that is the reason why, as I mentioned earlier that in some cases, we kind of renew early, blend and extend where we think the terms are favorable. And when there's a huge mark-to-market opportunity of 100%, 120% or 70%, whatever that is, because it's a 15-year-old lease, we prefer to encourage some of the occupiers to exit as they can't pay those rentals we are targeting. So in this case, we will, in next 2 quarters have certain more exits of the remaining 0.9 million square feet that is balance, which we have shown as potential exits, which still totals up to 1.4 million square feet. And we think that will get reflected in the Manyata occupancy in the next 2 quarters. Let me take a step back and just give you the way we look at it, right? We are not too overly worried about the occupancy first day of Manyata. We just look at more directionally where the asset is going and what kind of rents, what kind of tenants occupiers we are attracting. So just to give you an example of the 500,000 square feet pipeline that we have kind of indicated for next quarter, about 83% of that is from Bangalore and a big chunk from Manyata. So we just churn and volume is a normal part of business. And we are just focused on ensuring we achieve this mark-to-market and sometimes they need a downtime. So just to summarize, there would be certain exits in Manyata in the next 2 quarters and probably in the next year as well. But directionally, we are pretty pleased with the kind of pipeline we're attracting. In some cases, we will evaluate to develop with an additional FPI potential is possible or to refurbish the older buildings as they become vacant to achieve those higher rentals. So again, it's an opportunity and case-to-case basis, we take that call. And again, the infrastructure at Manyata with the new road that has come up, Hilton Hotels I mentioned, we're targeting a launch in June it's going to really make a lot of difference. It's a huge positive from an occupier perspective. So I think we're doing the right things from a medium-term perspective and that will surely reflect in terms of the leasing traction as we move forward.

Right. Understood. My second question is on the early expiries. You have 0.5 million square feet expiring earlier renewing early. Now from your NPV perspective, is it largely same? Or is it that just some part of it got front-ended in terms of escalations, but on NPV, it could be slightly inferior.

Yes. So actually, Puneet, that's a good question. So while we did the deal and, of course, there were a lot of qualitative factors we decided why we would agree to this blend and extend while in some other cases, like I mentioned, for a large occupier, we let them exit. In this case, we really ensure that on a 10-year basis, we achieved those market rentals and NPV basis, we are positive as if the lease have renewed at market based on the existing lease structure. So we're actually better off and we have also preponed some of the revenue and also got a fresh lock in. So we have -- actually it's a pretty good deal for us. NPV wise, we are positive, and we have preponed the revenues.

So basically, pre-COVID period when you would have estimated that this would expire in '24 and you would really versus that and now you're saying it's still NPV positive.

Yes. So Puneet, as I mentioned earlier, you can see that some of the details on Slide 36. Again, as I said, on a 10-year basis, if we were to do the renewal in '25, '26, we are still better off doing it today, both on an NPV basis as well as on several other qualitative factors that I kind of laid out earlier. Does that help?

Yes. That's useful. My last one is on the GolfLinks. The dividend from there seems to have gone up from what used to be INR 300 million quarterly to INR 450 million. Is it the new run rate that we should think of? And what has driven this increase?

Yes, Puneet. Just if you go back in time till last year, there was a debt at GolfLinks level from REIT, sort of a cash extraction, which is happening in that form and the balanced cash flow was being distributed in the form of dividend to both the shareholders. Now last year, that loan was fully repaid. And from this year onwards, it's only the dividends, which are being distributed. So to answer your question in specific, yes, you can consider this as the current run rate for now.

Okay. So INR 300 million has become INR 450 million now.

Yes, that's correct.

The next question is from the line of Mohit Agarwal from IIFL.

So my question is again on physical occupancy across the parks. So is there a threshold range beyond which you see that somebody mentioned 40%, 50%. Is there a range beyond which you see a sharp pickup in leasing demand coming back? Or you think that these things are not very strongly correlated. Also, if you could remind us what was the physical occupancy pre-COVID levels? I'm assuming it was not 100%. And the second part to that question is that in terms of returning back to office, is the commentary from the tech tenants and the nontech tenants are different considering that the tech guys are seeing a very high attrition, so return to work, return to office be influenced by that factor.

Yes. Thanks, Mohit. Those are 3 big questions. I think the preoccupancy, frankly, we were not tracking daily occupancy in the way that we were. We would have assumed it would have been somewhere in the order of 85% of the theoretical full number. Is there a threshold? I think that there's multiple factors that are coming into it at the moment. Once one gets past a critical threshold, which we think probably is in this 15% to 20% where we're going, we think, by the end of this year, we think we will have broken through or occupiers were broken through the concerns that they have when they're looking at other occupiers. But many of the occupiers are not prepared to go first, so to speak. So we think that we will see a rapid increase, and this is based on talking to so many occupiers across the portfolio. We'll see a rapid increase post Diwali and in the new year. We definitely see a significant variation in the way in which it works with different tenants. I think we've said before on calls, that we see some of the India technology companies have been more aggressive at getting people back even in the first -- at the end of the first lockdown. We definitely see the domestic-facing companies, particularly in Bombay have higher numbers going back -- and we probably fair to say see the most resistance to going back from the West Coast GCCs, so we put it that way. That said, one of those, a global name, we understand that directly post Diwali -- they're bringing 50% of their people back. So there's variation across the board. But one thing is absolutely clear, the trend will rapidly increase post Diwali.

That's helpful. And my second question is on the industry level supply. So in your presentation, you've been tracking the CBRE number that there's been a 23% reduction in supply. Can you help us understand as to is this supply being shelved, permanently delayed or like converted into resi. Some color if you could give on that.

Yes. So why don't I take that? If you see -- if you look at Slide 24, we do track this -- the supply coming up, especially in our markets. So basically, the supply, which we are seeing has been -- which has declined is basically either supplied and got pushed out simply because if something is to be delivered in 2 or 3 years from today, it should very well be in full activity on the ground on construction front. So we think some of these are facing liquidity and financing issues, one. Two, some of them are just really not realistic both in terms of time line or the grade A product quality. So that's what we believe. Now again, whether these projects will come up and the relevant supply in later course of time, maybe we don't know today. But clearly, today, what happened is that both the labor availability as well as the momentum on construction has consolidated to fewer larger institutional landlords who have the financing availability. So some of the stand-alone grade A, minus B-ish kind of developments which has been announced have got pushed out because those are the kind of land owners or landlords were looking at some precommitment to move toward on construction. Whereas our approach has been right since the first lockdown that we knew demand would rebound, and we continue with construction at full pace. So we think some of it may come with a little bit of deferment time and some of it may just never see the light of the day. Does that help?

So last one -- yes, sorry. And the last question I have is, do you have a target or any internal target? Or do you want to share any guidance on when can your occupancy levels -- blended occupancy levels be back to pre-COVID levels of around 95%.

I don't think that we would hazard a specific time when that will happen. What we can say is that clearly, the leasing demand side appears to be on a strong positive trend, given the 700-odd square feet of leases that we've done last quarter. The strong pipeline that we've got in hand for this current quarter and next quarter. So that's trending in a positive direction. We've declared the likely exits a couple of quarters ago. There's no change to the numbers that we gave you a couple of quarters ago. So the next 2 quarters probably will be in a similar place where we are today, and we would hope that by early FY '23, we start to trend upwards.

The next question is from the line of Venkat Samala from Tata Asset Management.

I just wanted to understand, you seem to be a lot more optimistic this time about leasing compared to say what you were a few quarters back, right? So could you help us understand anecdotally what are you hearing from some of your large clients, which can help us understand, I mean, where the confidence stems from. Because you did allude to the fact that you see a strong sort of pent-up demand layout in the next fiscal year, right?

Yes. Yes. I think as you rightly say, we are positive. We're seeing an encouraging trend. And part of that positivity comes from looking at the data, so the 711,000 of leases this quarter in pipeline, as I said, database. Some of it is from the pipeline, which is conversations with our occupiers. Many of the deals that we do are with our existing occupiers. We actually have the happy position with one of our occupiers, where, given there's no vacancy in the part that they occupy in Bangalore, they're looking at taking up some space with us in Pune. So we have that benefit that comes from them. We're seeing and hearing of the strong hiring and strong demand from numerous tenants, and we're seeing multiphase new leasing and multi-phase growth. So it's a database side of things, but it's also anecdotal from a number of our tenants across the portfolio. But it's very, very clear. And I think I'm sure most people on the call will be aware of this. If you speak to any of the [ ITCs ] who are actually doing deals out there in the market at a market level, not with us, the number of deals that have been done in Q2 versus Q1 is up 50%. So it's a clear upward trend.

And just to add to what Mike said, right, the pipeline that we've indicated and just to give you a flavor, of course, we have the banking financial services as well as the technology companies in that pipeline. But also we have sectors across spectrum like telecom, automobile, health care, e-commerce companies as well as FMCG logistics, engineering and research and consulting. So we're just seeing across the board, occupiers starting to take decisions or at least preparing themselves to take decisions given that over the last 6 to 8 quarters, literally they've just frozen the real estate plans. But at the same time, the business has grown, and they've continued to hire people. And just -- there was another question earlier that is there a correlation between the physical occupancy and the space takeup, so interestingly, in some cases, it's not. Simply because they've got new business or they have offshore -- they have offshored a different process and they really need a new space to accommodate the team, even though in the existing premises that they may have, the occupancy may be just 10% or 15% on a physical occupancy basis. So I think it's just a lot of pent-up demand. And the landlords who have available space, landlords who can kind of be flexible and provide the standards and wellness that the occupiers expect, I think we're really well placed as we move forward into the next year.

Right, right, right. Secondly, I just wanted to understand now what we are seeing is post COVID. A lot of these new tech companies or start-ups are growing in a very large way. And even in terms of hiring absorption also, a lot of which used to be previously working with the conventional tech company seems to be moving there, right? So in terms of leasing or the interest in terms of the pipeline. Are you seeing a meaningful pick in the...

Sorry to disturb you Venkat, we are loosing your audio.

Am I audible?

Are we seeing a meaningful uptick in then we lost you?

We can't hear you, Venkat.

Venkat, sorry, may I request you to come in a better reception area, please?

Sorry, I'll just join back in the queue. I think the area which I'm in is in the poor reception area.

We can hear you now. Why don't you try one more time?

Okay. Okay. I'll just try once again. So what I was trying to understand was post COVID, what you're seeing is there's a lot of growth in the new age start-up companies, right, both in terms of hiring as well. So is that also translating in terms of better leasing or leasing interest versus what it used to be before for you guys?

So thanks, Venkat. I think that the startup sector, the pre-IPO segment, clearly is like, frankly, all other areas of the technology universe are hiring significantly. And so we're seeing pressure from whether they be the well-established international names, or within the market, the start-up environment. I think we all know the hiring numbers are very strong. Those smaller start-up type of operators, they often need flexible space. This is another reason why as part of our total business ecosystem environment, we tend to have on our large parts, some sort of co-working shared space player. And in fact, one of the deals that we did this last quarter was such an operator. So again, we try to provide that broad amenitized offering for whether it be start-ups, whether it be GCCs or whether it be the core IT sector products or services. And all of them are growing. It's not any one sector. We have had one Indian more than a start-up but a pre-IPO business that in the early stages of the pandemic was talking to us about surrendering some space actually. They then reversed that conversation with us given the fact that they were hiring so many people and growing. So it's growing across the segment, and we try to provide different products within each part for all of those segments.

Understood. And one last question from my side. I know it's still very early days. But anything that you think or maybe early feelers that you're getting about the impact of hybrid working on the structural leasing demand moving forward. Anything that you may be picking up in India or even from the other geographies, where the occupancies are higher than what it is in India.

Yes, sure. So on hybrid working, there's been a lot of talk. So while the impact on office market due to the increased flexibility around hybrid working, there will be some impact. We think it will be offset by massive headcount growth and dedensification. We remain at the top of the pyramid and the very clear message that's coming from the leadership of the occupiers is that they want the people back in offices. So that's why we think that even with the hybrid model, more space will be required for collaboration, leisure, amenities and wellness. We've heard news of all the top IT services firms are starting to ask the employees to come back to office. And interestingly, when these corporate leaders want the employees to come back, one of the ways they will do is to have great offices in great locations, which is exactly what we do and what we offer at Embassy REIT. So we think while the optimal balance of work from home, hybrid versus office will evolve over time and may differ for each company and sector, the massive growth in the occupier headcount and in the businesses and the dedensification impact, which we think will definitely play out in the medium term will more than offset it. And occupiers will require more space for collaboration, and they will tend to move towards grade A top of the quality landlords to have and attract and retain the talent and bring them back to work.

Right, right, right. Sure, sure. And with the large pent-up demand that you're seeing, I know it's very early days. But is there a possibility that FY '23 could be similar to what we saw usually in the pre-COVID days. I know it's very early days, but is there a likelihood of that happening?

I think that we wouldn't speculate on that, but I think that you can take from our comments and the data that we're on a positive trajectory.

The next question is from the line of Chirag Sureka from DSP Mutual Fund.

This is Vivek Ramakrishnan. I had 2 questions. Do you believe we just talked about the hybrid model, would you believe that post COVID, the space per capita will actually increase where there will be more social distancing and et cetera, with that company is actually distorting their earnings model? So that's question number one. And the question -- second question is, again, related to Manyata, where since the clients have invested in the space, the employees are comfortable and they've been there for 15 years, what is causing them to exit?

So Vivek, why don't I take the second one which is easy and then I'll hand over to Mike for the first question. So again, Manyata, these are legacy leases 15 years back, the escalations with submarket, usually, we have 15% every 3 years. When the lease was done in 2006 or 7, the escalations were 10%. So in the 15 years, the lease -- the costing rent fell much, much, much below the market rate, market grew at about 10% CAGR over the last 15 years, generally speaking, in Bangalore, given the low base it started from. So clearly, you can imagine that some of the occupiers, the businesses may not have kind of really moved up the value chain in terms of sophistication as it moves forward and for them to pay the mark-to-market rental, which in Manyata now with touching triple digits in many of the recent deals that we did. That clearly -- some of the occupiers would want cheaper options and which works pretty well for us, in fact, because that gives us an opportunity to bring in new age occupiers. And as I mentioned before, in some cases, we're actually revisiting and looking at refurbish these spaces, although we do a complete redevelopment where we can potentially enhance and, in some cases, double the available FSIs and the size of the building. So I think it is a mix of both. We see it as an opportunity and some occupiers do turn out given that there will be new age occupier. We spoke about the part and we spoke about the other large captives who are doing high-end processes and technology or digital solutions and who have the propensity to just pay higher, the kind of market things that we like. So we think it's is normal course.

Sorry, if I can just follow up that question before the second question answer. So would the people who leave go to lower-grade offices? Is that what they're doing because anyway, the A grade offices, the price is pretty much constant across?

Sorry, can you repeat that would the people?

Go to lower grade offices? I mean, your A grade everything...

So that's the challenge that the occupiers are facing. And what we understand from the occupiers as well as from the brokers when such decisions are taken, right, because you would want to achieve a range and occupier -- there's a mismatch on what they are expecting. It's a tough HR decision for them and that's why these are very few cases. But for them, the numbers matter more. We do get a lot of feedback on -- a lot of pushback from the HR and the people side. But at the end of the day, sometimes business to wants to move forward with that.

Can I comment, Vivek, on your question on space capture. I think if you're talking about per capita in terms of the number of people physically accommodated within a space, and the answer is certainly, yes, there will be a decrease in density. So that's this point that we made about 100, 120, 150 square feet per person. If you say space per capita, based on the total employee base, some of whom may not be attending office, I think that, that's unclear at present, and that depends on the type of business, how they use their space. What is very clear now after so many months of this discussion and debate is that many, particularly the high-quality GCCs, many companies view their workspace as a place that is part of their business culture. And they are using that space for the culture building, the innovation, the collaboration and so forth. So the qualitative aspect of the space is probably for those companies more important than the quantitative density type of side of things. So this is particularly important at the time when you've got high churn in your people base. And some of you on the phone have been writing about the attrition in the technology industry. So we're in an interesting time where companies are hiring significant numbers of new people. They're trying to maintain and build their existing corporate culture. And many of those occupiers have voiced sentiments that that's particularly difficult when people are not in the office. So it all gels together from our perspective, that people, companies will want to come back to higher quality culture building office operations.

[Operator Instructions] The next question is from the line of Chandrasekhar Sridhar from Fidelity International.

I have a few questions. One is just on the 20 million RFP. Can you just give us maybe some kind of color on these RFPs? Are we seeing more shorter term RFPs as we see smaller areas, people are looking for? Or is there some color which you could just provide? Just trying to understand if anything changed versus pre-COVID.

Okay. Could you just give us your second question, where we get that pace up.

Yes. Vikaash, at the end of the last call, you had said that you will have -- of the 1.2 million square feet, which would be vacated for the 9 months, you wouldn't think you'd be able to backfill more than 240,000. Just where are you in that since you progressed another quarter, do you think you can -- does that change at all? And then just one question for Aravind, you start seeing the 3Q impact from this quarter itself as you guided for INR 1.5 that I think works out to about 5 months of interest costs. So we see that impact over a 5 month period. And then just a very last one for you -- which is basically there's a forecast there for about 45 million gross absorption for next year, which is there on the press presentation that put out by CBRE, which is pretty much CY '18 levels of absorption and the absorption which we had before we went vertical in CY '19. So I'm just trying to get your brains on -- that seems like a pre-COVID year of absorption.

Yes. Okay. So I'll take number one, and I'll just comment there on 4 as well. So I think you've analyzed it exactly how I would look at that, that 45-odd million square feet gross. It doesn't match 2019, but it's probably, if you look at the previous 3 years to that '18 and back you're probably looking at that type of number. I think we are hearing sentiments that calendar year '23 will be the year that we really see the numbers coming back in full force. But we're seeing good demand from the RFP side for next year as well. Just to answer your question, number one, you asked about what sort of RFPs are we seeing? So across the country, that includes markets that we're not in that is 26.1 million square feet. You asked about what's the size and scale and I'm looking at these, and they range from 25,000 up to 3 million square feet. So it is a whole variety of largely international names ranging from, as I say, 50,000 up to 3 million, some of the big global names across the board. It's the GCC, I would say, primarily GCC, 20 million out of the 26 million and the balance is primarily technology. I hope that answers the question because it's a good question.

And Chandra, just to -- just on the other question, we have captured total -- let me just get in terms of total new lease up, whether it is re-lease or lease of fresh space or existing vacant space, we had factored in our guidance, 450,000 square feet till now, which is the 2 quarters, we've gone about 900,000 square feet. And we have a healthy pipeline for the coming quarter. So it's looking encouraging. We just want to wait for one more quarter. We are really focused on converting the 500,000 square feet pipeline for Q3. And we are hoping that we'll be able to exceed the 450,000 square feet new lease-up guidance which includes the re-leases and backfill that we set out in the guidance. So we'll have to see how fast we can convert them into binding contracts. And maybe next quarter, we can give you a better flavor on this, is there a upward kind of potential on the number that we laid on new leasing and backfill.

Chandra, just to answer the third question, yes, your numbers are correct. The impact kicks in from Q3. It's approximately a INR 1.5 impact for this year, and it will be approximately INR 3.2 annualized impact for FY '23.

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

The first question is on the rent support from JPMorgan. So rent at this end -- you have alluded that by December '21, you'll be completing and possibly handing over the structure. Should that move into the rental income from next quarter -- sorry, from the fourth quarter of this year?

Yes. So Adhidev, the rent support continues till March '22. So what happens is there is a 6-month rent free, which is agreed with JPMorgan as per contract. So if we do end up delivering this in Q3, which is what is planned, factoring in the 6 month rent free then the rents start kicking in from the second quarter of next year. So there is a potential 1-month lag in us receiving rentals in the next year.

Okay. So and just to see the March -- till March, this rate would continue, right?

That's correct, Adhidev.

So there is no intervening. Okay. Okay. And the second question was on the hotels now, now that travel is gradually beginning to pick up. So how are you seeing the occupancies now trending up based on forward bookings at our hotels? And when do we think we'll have positive surpluses, both on NOI and both on NDC front from the 2 operational hotels? If you could give some clarity on that.

Okay. Yes. So it was a significant uptick for us in this quarter, 28% occupancy as compared to 10%. And the cash burn for this quarter was as low as INR 2.8 crores approximately as compared to closer on INR 9 crores last quarter. So if this current trend continues we expect to breakeven probably in the next 2 to 3 quarters. So that's the way we are seeing hotel business going. And while the occupancy has picked up, I think what we still need to achieve is in terms of increasing the ARR. I think that's something which will pick up only in due course, and may take a few more quarters for that to happen.

Yes. And if I can just add to what Aravind said, the business on books for the coming quarter of Q3 looks pretty encouraging, right? So we're seeing the wedding season, we are seeing revival of domestic travel, we are seeing staycations, so there seems to be a general positive sentiment on hotel occupancy. And we are hoping that we can convert the cash burn quickly into positive and then move forward from there and contribute meaningfully to the distribution.

Ladies and gentlemen, we'll take that as the last question. I will now hand the conference over to Mr. Mike Holland, CEO, Embassy REIT for closing comments.

Excellent. Well, thank you very much for those questions. I think you all have clearly picked up our positive sentiment about the overall direction. We're very grateful to you for your interest in Embassy REIT, not just this quarter but over the past couple of years. Most of the data points that we covered today are covered with the information on our website. We're always happy to engage further additional clarification as required. We will be getting in touch with some of our analyst community to discuss having an Investor Day in due course when travel is appropriate. So until then, we thank you, and we wish you a very happy Diwali from the whole of our management team. Thank you, and good evening.

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