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

Good morning, everyone. A very warm welcome to all for Embassy REIT's Second Quarter FY 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. [Operator Instructions]. I would now like to introduce your host for today's conference, Mr. Abhishek Agarwal, Head of Investor Relations for Embassy REIT. Thank you. Over to you, sir.

Thank you, operator. Welcome to the Q2 FY 2023 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter and half year ended September 30, 2022, yesterday. As is our standard practice, we have placed our 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 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 have provided 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. Joining me today are Vikaash Khdloya, the CEO; Abhishek S. Agrawal, the Interim CFO; and Ritwik Bhattacharjee, the CIO. Vikaash will start off with business and industry overview, followed by Ritwik and Abhishek. We will then open the floor to questions. Over to you, Vikaash.

Good morning, and thank you all for joining us on the call. We have many encouraging trends and data points to communicate to you. We delivered yet another strong quarter with 1.6 million square feet total leasing including impressive new leasing and precommitment activity. We launched 2.5 million square feet across new and redevelopment projects, taking a total active development pipeline to 7.1 million square feet, the highest since our listing. We entered into nonbinding discussions for potential acquisition of two properties across Bangalore and Chennai totaling 7.1 million square feet leasable area. We continued to maintain a robust balance sheet with low 26% leverage, attractive 7.1% debt cost and 66% of debt book at fixed rates. And finally, we remain on track with our FY 2023 guidance and have delivered on our NOI growth and distributions. So a solid quarter of business performance, and we continue to invest in our growth. Our business and stock remain resilient and offers a compelling combination of yield, growth and value. Amidst a challenging global macro environment, Indian office REITs have outperformed global peers. India's structural advantage as the knowledge capital -- as the global knowledge capital and the preferred offshoring destination continues. The expanding offshoring demand from new and existing global captives is benefiting premium quality, wellness-oriented workspaces, and these are the hallmark of our portfolio and strategy. And it is encouraging to see a continued upward trend in back-to-office. The physical occupancy in our properties is up 21% quarter-on-quarter and is currently around 35%. Multiple announcements have recently been made by global Indian corporate majors regarding their plans to significantly ramp up their office utilization post the festive period. Let me now update you on our leasing performance. We achieved 1.6 million square feet of total leasing in Q2 across 27 deals and expanded our occupier base to 223 by adding 15 new names to our rent roll. This includes -- this 1.6 million square feet includes new leasing of 587,000 square feet at 19% re-leasing spreads and, in fact, 4% above market trend. We signed end-of-term renewals of 459,000 square feet, mainly at our Pune and Noida properties at 28% renewal spreads. We also successfully pre-committed 528,000 square feet, mainly to ANZ in our underdevelopment project M3 Block B at Embassy Manyata. With this, we ended Q2 with a stable occupancy of 87% and a promising 700,000 square feet deal pipeline. While Bangalore continues to drive India's office demand resurgence, we are also witnessing pickup in activity in other cities. Continuing the trend from last quarter, the leases signed in Q2 span established sectors such as banking and financial services, high-growth sectors such as cloud infrastructure and fintech as well as upcoming niche sectors such as renewables and healthcare tech. As you can see from our 1 million square feet pre-commitments to JPMorgan and ANZ in H1, global captives and banks continue to hire Indian talent and are progressing on RFPs to cater to their business needs. Further, global captives continue to expand and set up new centers in India, driven by growth and transformation projects as well as cost and optimization needs. And while demand from services tech occupiers remain below historical numbers, the recent moderation in attrition and concerns around culture and productivity are both likely to accelerate back-to-office ramp-up and space take up by these occupiers. As you may recall, we had given a 5 million square feet leasing guidance for FY 2023. We are happy to report that at midyear, we have already leased 3.4 million square feet, achieving around 70% of our annual guidance. Of the expected 3.3 million square feet expiries for FY 2023, we have to date successfully renewed 1.3 million square feet at 15% renewal spreads and expect a further 566,000 square feet as likely renewals during the remaining of this fiscal. Additionally, we have secured 14% rent escalations on 2.7 million square feet in Q2. These contracted rent escalations and a mark-to-market rent potential are 2 significant growth drivers embedded in our business. Next, an update on our ESG program. We continue to make progress on a 3-year road map across 19 defined ESG programs. 100% of our operational portfolio is now certified for the highest standards of safety and wellness through a 5-star rating from the British Safety Council, one of world's leading health and safety organizations. We are also extremely proud to report that our industry-leading ESG program and transparent disclosures have once again been recognized by GRESB, the global standard in ESG benchmarking. In just our second year of participation, we were awarded with the highest 5-star rating for both our operational as well as development properties. Finally, our sustainable finance debt has now grown to INR 33 billion, around 25% of our overall debt book. Our ESG program remains a core pillar of our business strategy, and we envision it as a key competitive advantage, both from the perspective of our occupiers as well as our investors. Finally, moving to the outlook for Indian office. India office is highly differentiated from other global office markets. Unlike many other global cities, India office demand continues to be resilient. This is driven by India's unique positioning as the unmatched talent hub of the world, combined with significantly lower rents of around $1 to $2 a foot a month, even for prime properties in gateway cities. While there are growing concerns of a slowdown in the developed markets, any recessionary environment in the respective home countries of global corporates in our view, will only accelerate demand for India office. Past downturns have prompted global companies to further optimize cost and efficiency and offshore more work to India, and we witnessed this play out post the global financial crisis as well. Occupier preferences have also changed in favor of high-quality, well amenitized sustainable spaces, resulting in consolidation of office demand with Grade A institutional landlords. We are well positioned to capture this demand given our high-quality product, our overall business ecosystem offering and our robust development pipeline. Even on the supply side, market continues to consolidate towards fewer and larger institutional quality landlords with strong balance sheets, which are well positioned to fund growth by accessing debt at competitive rates. Looking forward, we believe that the liquidity squeeze, rising interest rates and potential supply slippages on the one hand and robust demand and flight to quality on the other will further propel rent growth in our key micro markets. So a great deal to be positive about our business amidst the overall macro environment, all trending in the expected direction laid out in our previous earnings calls. Let me now hand over to Ritwik to expand further on our growth initiative.

Thanks, Vikaash. Good morning, everyone. I'll provide a snapshot of key growth initiatives for Q2. We launched a 1.2 million square feet redevelopment project at Embassy Manyata at a yield on cost of 22%. We committed 468,000 square feet in the under construction M3 Block B project at Embassy Manyata and we've kickstarted the development of a new 700,000 square feet block in the same property. And we've executed nonbinding offer letters to acquire two office properties that totaled 7.1 million square feet of leasable area in Bangalore and in Chennai. First, an update on the development portfolio. We continue to deliver state-of-the-art buildings, and we're bringing forward our future development pipeline to cater to the momentum we foresee in office demand in the years to come, particularly in Bangalore. This quarter, we have multiple updates to give you on Embassy Manyata. We're pleased to announce our first ever base build redevelopment project to transform two of the earliest buildings, D1 and D2. Both these buildings comprise 400,000 square feet of area, and we aim to increase the current leasable area of these buildings to 1.2 million square feet. We have over 170% of a mark-to-market opportunity on these buildings, given the significantly below market rents on expiring leases. Given the strategic location of the D parcel at the center of Embassy Manyata, we're confident that this redevelopment will help us achieve premium rents. We estimate this building to cost INR 6 billion, and we plan to deliver it by December 2025. This project is highly accretive, and we expect to deliver a yield on cost of 22%. We've already finalized building designs, secured the environmental approval for demolition and building approvals are in progress. Next, we're witnessing significant leasing traction for our 600,000 square feet M3 Block B. We're pleased to announce that ANZ, a premier banking conglomerate has pre-committed to 468,000 square feet or 78% of this upcoming building to meet their business needs. And they've kept the balance 133,000 square feet of area under an option for future growth. While the development of this project has been delayed due to the nonavailability of transferable development rights or TDR and other related approvals, we're seeing progress on these approvals, and we expect to deliver this block in mid-2025. Finally, given the leasing traction for both completed properties and under construction developments at Embassy Manyata, we're launching a new 700,000 square foot Block L4 in this business block. Together with the existing developments, including the 1 million square feet of M3 Block A, Embassy Manyata will now have 3.5 million square feet of projects under development to cater to occupier demand. Besides these, we're on schedule to deliver our other ongoing developments of 1.9 million square feet in Embassy TechVillage located at ORR in Bangalore, and 700,000 square feet in Embassy Oxygen located in Sector 144 in Noida. We're close to completing the Hudson and Ganges towers, the 900,000 square feet office block in Embassy TechZone in Pune's Hinjewadi micro market. We expect to receive the occupancy certificate by the end of October, and we're seeing early demand traction for the project as demonstrated by a 60,000 square feet precommitment by global captive in the automotive, electronics and tech sector. Our total development pipeline now aggregates 7.1 million square feet, the highest since our listing. Given our track record of bringing projects to market on time and within budget, we view this pipeline as one of the biggest drivers in our growth road map. I would like to highlight that over 80% of these projects are in Bangalore, the city, which continues to lead India's office absorption. Our total committed CapEx for this 7.1 million square feet of developments is INR 32 billion, of which INR 22 billion is spending costs that we will spend. The pipeline is expected to add over INR 8 billion to our NOI upon stabilization and an accretion of 30% over FY '23 midpoint NOI guidance. Given the CapEx that prices around 8.5%, the land component of these developments fully paid for on an attractive rent profile, particularly in Bangalore, our development portfolio sets us up for impressive yield on cost spreads. Additionally, our GRESB sector leader ranking amongst Asian office peers for our development portfolio reflects the pedigree of our on-campus development program. Next, an update on our hotels and our total business ecosystem. Buoyed by a rebound in business travel, our four operating hotels continued to perform strongly in Q2. The average occupancy increased to 49% and ADRs grew by 57% year-on-year. Consequently, our Q2 hotel EBITDA of INR 250 million tracks well ahead of our guidance. Even though our hotel business contributes less than 5% of our total NOI, our hotels are immensely complementary to our office offering and drive office demand. We continue to invest in the development of our new 518 key dual-branded Hilton Hotels at ETV, and we're on track to deliver these hotels by 2025. Our other asset upgrade projects are progressing on schedule and within budget. Our investments to upgrade the amenities, wellness and sustainability features are pivotal in widening the moat of our properties. Our upgrade of the infrastructure at Embassy Manyata serves as the best case study of the above. Since we listed, we have invested in a public flyover, skywalks, 619 key Hilton hotels and 60,000 square feet, one of its kind convention center and an exciting 86,000 square feet retail and F&B area that we plan to launch later this year. These upgrades have clearly differentiated Embassy Manyata. And over the last 24 months, we've successfully signed 681,000 square feet of new leases with over 20 occupiers at approximately a 4% premium to market rents. Finally, an update on our acquisitions. Earlier, we executed two nonbinding offer letters with Embassy Sponsor to acquire two high-quality properties in Bangalore and Chennai, which totaled 7.1 million square feet. Approximately 3.7 million square feet of these properties is completed or nearing completion and 54% of the area is currently leased or pre-committed to renowned global occupiers in banking, financial services, healthcare technology and IT service sectors. The properties for which we executed the offer letters are the 5 million square feet, Embassy Splendid TechZone business park in Pallavaram, Chennai and the 2.1 million square feet Embassy Hub property in Yelahanka in North Bangalore. We believe these integrated office properties add meaningful scale to and are complementary to our existing office portfolio. The Embassy Splendid TechZone property enables us to access a new growth market in Chennai, while Embassy Hub consolidates our position with an entry into a new micro market in North Bangalore. While the Chennai property was offered through a ROFO in January 2022, the Bangalore property is a new opportunity. The above nonbinding discussions have a 120-day exclusivity period, and they are subject to further diligence, negotiations, funding and approvals from regulators, Board and unitholders as may be applicable. We will keep you posted as we progress. We are also evaluating certain other acquisition opportunities from third parties. We remain prudent -- focused on prudently financing any potential acquisition through an optimal mix of debt and equity to ensure we deliver value to our unitholders. We continue to closely monitor the capital markets to identify suitable financing channels and transaction windows. As you're all aware, market conditions are currently challenging, and we will look to derisk any funding requirements both for acquisitions and the development pipeline. Over to Abhishek now for our financial updates.

Thank you, Ritwik, and good morning, everyone. Key financial highlights for Q2 include: we grew net operating income by 13% year-on-year to INR 7,038 million, with operating margin of 82%. We announced distributions of INR 5,175 million or INR 5.46 per unit, representing a 100% payout ratio. We successfully refinanced INR 7.5 billion debt at 96 basis point positive spread and locked in 66% of our total debt at fixed cost. And we continued to maintain a strong balance sheet with low leverage of 26% and pro forma debt headroom of INR 112 billion. Let me take you through the details. First, an update on our Q2 financial year '23 income performance. Revenue from operations grew by 17% year-on-year to INR 8,571 million, mainly driven by new lease up, contractual rent escalations, delivery of our 1.1 million square foot JPMorgan campus at ETV and ramp-up of business in our recently launched as well as existing hotel portfolio. This was partially offset by the impact of exits in our office portfolio over the last year. Net operating income and EBITDA grew by 13% year-on-year, primarily driven by an increase in revenue from operations, partially offset by the increased hotel operating expenses corresponding to the increase in hotel revenues. Our NOI and EBITDA margins stood at 82% and 80%, respectively, and continue to be best-in-class, demonstrating the scale and efficiency of our business. Net distributable cash flows stood at INR 5,182 million, down 3% year-on-year, but up 2% quarter-on-quarter. The year-on-year increase in our NOI and EBITDA contributed positively to our NDCF, which was mainly offset by incremental interest costs on the INR 46 billion coupon-bearing debt raised in November 2021 to refinance our earlier zero coupon bond. Further earlier today, the Board of Directors declared Q2 distributions of INR 5,175 million or INR 5.46 per unit, representing a 100% payout ratio. Taken together with our earlier distribution, we have now cumulatively distributed over INR 68 billion in the 14 quarters since our listing. Moving to our balance sheet and other financial updates. We remain focused on actively managing our debt book and given the ongoing interest rate hike, we continued our strategy to lock in fixed rates. During Q2, we successfully refinanced INR 7.5 billion bank debt with a 96 basis point lower cost debt, resulting in annualized pro forma saving of INR 70 million. This refinance comprised a new INR 5 billion fixed rate green bond at 7.65% for a 3-year tenure and INR 2.5 billion floating rate term loan at 7.98%. We were able to refinance at attractive terms due to our robust balance sheet and our AAA/Stable rating. As a result of the above and earlier refinancing, 66% of our total INR 136 billion debt now carries a fixed rate with an average maturity of 2.3 years and an additional 24% carries a fixed rate for financial year '23. Also, less than 2% of our debt matures in the next 12 months. Given 90% of our debt book is locked at fixed rates for financial year '23, we are substantially insulated from the impact of any further rise in the interest rates. On the regulatory side, insurance regulator, IRDA recently created 3% dedicated limits for domestic insurers to invest in debt and equity of REITs. Further, market regulator SEBI has allowed REITs to raise short-term debt by issuing listed commercial papers. We welcome both these developments and expect these to further expand the capital pool for REIT debt and to reduce our cost of funding. With these positive regulatory developments as well as a 26% low leverage at 7.1% impressive cost and our INR 112 billion pro forma debt headroom, we are well positioned to finance growth opportunities. Before I move to our financial year '23 guidance, let me provide an update on our half yearly portfolio valuations as of September '22. As per independent valuer's assessment, our gross asset value grew by 7% year-on-year to INR 508 billion. This was mainly driven by our recent deliveries and ongoing development CapEx, improved hotel performance, increase in market rents for few properties across Bangalore and Mumbai, as well as the add-on acquisition by our joint venture entity. Consequently, our net asset value as of September '22 increased by 3% year-on-year to INR 400.71 per unit. Lastly, an update on our financial year '23 guidance. During our Q4 earnings call in April '22, we had provided our full year financial year '23 guidance, comprising a midpoint NOI of INR 27,030 million, and a midpoint DPU of INR 21.7 per unit, both within a range of plus/minus 5%. At midpoint, this guidance implies a 9% year-on-year increase in NOI and an in-line DPU compared to previous fiscal. On a like-to-like basis, post factoring the impact of ZCB refinancing, this DPU guidance is also 9% higher year-on-year, reflecting the efficient flow-through of our NOI to distributions. Based on our YTD performance, I am pleased to reconfirm this guidance. While there has been a resurgence in our leasing and hotel business performance, both of which are tracking at or ahead of our estimates. We expect our debt cost to be higher than our initial assumption given the rapid rise in the interest rates. Looking beyond financial year '23, given our growth levers to mark-to-market rent growth, new lease up and deliveries, we are well positioned to accelerate our NOI and DPU growth to the benefit of our unitholders. Over to Vikaash for his concluding remarks.

Thank you, Abhishek. So another quarter of solid earnings growth. Our business continues to be in excellent shape, benefiting from strong fundamentals for India office, growing preference for high-quality properties and the unique offering and positioning of our best-in-class portfolio. On the business front, we are well positioned and have signed 3.4 million square feet leases in H1 already achieving around 70% of our overall annual leasing guidance. We have accelerated growth by actively developing over 7.1 million square feet projects, over 80% of which will come up in Bangalore, India's best-performing office market. Overall, we remain on track with our FY 2023 guidance, which is heartening amidst the uncertainty and earnings slowdown fears globally. On the capital front, with continuing support from regulators, there is encouraging news on widening of the debt and equity capital pool accessible to Indian REITs. We continue to see the REIT product evolve and we welcome the increased participation from retail investors, insurers, domestic mutual funds as well as global sovereign wealth funds. Looking forward, we remain committed to our business strategy of delivering total returns through regular and predictable quarterly distributions supplemented by growing our NOI and distributions through growth initiatives, both organic and inorganic. And we are an excellent team committed to deliver this growth strategy by serving our over 220 occupiers and 65,000 unitholders. With this, let's now move to Q&A.

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

Just to continue with the question. On the leasing target for the year, you've pretty much achieved your pre-leasing ambitions. You've done quite a lot on the new part of it as well. So is it that the business intensity in H2 could be somewhat different versus the first half of the year? Or is it more likely that you could sort of achieve more than what you set out for at the start of the year? That's my first question.

Sure. Kunal, and would you want to mention your the second question as well?

Yes. The second question was on the acquisition potentials that you've identified. I mean, I was just noticing that both of them actually have a fair amount of future development potential. So I wanted to check if that's design because it might be easier to make them NAV accretive that way? Or is there a different set of criteria when you look at what's sort of already ready versus the future development? And if you do allow a third as well, so very curious about the remarks about some of the leasing being 3, 4 percentage points above the market rents. So curious as to what exactly drives that.

Sure, Kunal. Thank you for your question. So why don't I take the first and the third, and I'll request my colleague, Ritwik to take the second one. So on the leasing guidance, one, we're pretty pleased that we have been able to achieve around 70% of annual guidance. If you recollect against the 5 million square feet total leasing guidance, which includes new leasing pre-commitments and also end of tenure renewal. Last year comparatively, we did 2.2 million square feet and even pre-pandemic, the numbers were lower than the 5 million square feet target we set for ourselves. So it was a pretty good target to set. What you've seen, Kunal, is there's been pretty good momentum on precommitment, especially by banks. And simply, that shows that occupiers are today looking beyond the immediate and planning for the medium-term requirements. -- especially given markets like Bangalore are seeing a complete dislocation on demand and supply, available supply in the right micro markets. Even new leasing, we are around 60% of the target we laid for ourselves. So what I would say is we are pleased with what -- how we have performed so far. We are hoping to deliver beyond the guidance that we have laid out, but we'll have to wait and see simply because we believe the Q3 ending December activity usually slows down a bit due to the holiday season. Having said that, we continue to see momentum on the ground and our strategy -- our dual strategy of one targeting the large banks and captive centers for precommitments and on the other hand, targeting smaller high-growth occupiers is paying rich dividends because those occupiers will lease out over the last 2 years are actually now in conversations to take up more space. So we are in a good place. And a majority of our -- a majority of our leasing has been in Bangalore, again, demonstrating why the market is so good in Bangalore. The other thing I wanted to highlight, Kunal, here is of our roughly 4 million square feet vacancy, about 3 million square feet is SEZ vacancy, right? And while we all are aware of that conversations on DESH Bill that pretty much shows that on a pro forma basis, occupancy moves up from around 88%, 89% on a same-store basis today to excluding the SEZ space to about 97%, 98% because SEZ space, obviously, the demand has moved to non-SEZ and we're waiting for DESH Bill. So we remain very positive, and we'll see how the next two quarters pan, but the conversations on the ground continue. Just coming to your point on the leasing trends and the market premiums, this is the query that we've been receiving generally from across the market participants. And hence, we provided this data point. We've always maintained that we achieved premium to market rents. Now in this context, the market rents are rents which CBRE has assessed based on the position of a property, which -- and they have already factored a premium compared to what's available in the market. But we have been able to do a premium to even those market rents and not only the substantial mark-to-market, but we do even beyond just the market rents, which goes in the making of the MTMs. And we've laid out the number of 4% at a portfolio level as well as for Manyata over the last 2 years we again leased at 4% premium, the 600,000-odd square feet of new leasing that we have done, and we're pretty pleased with that outcome. Again, it goes to show that today, the occupier is not thinking about rents as much thinking about the overall business ecosystem and what they can offer to their employees to hire and retain them. So I think the positioning of product is really important, and it's not about rents in most markets today. With that, Ritwik, why don't you take the second one?

Yes. Sure, Kunal. I think just on the two acquisitions and your question around sort of the amount of development that's actually in that portfolio, which sort of totals roughly around 5 million square feet. When we look at sort of these big business parks, so you're looking at sort of the kind of the campus style facilities that we have, there is obviously sort of a fair amount of development in there. And I think when you talk about it's being by design, in our view, the way we look at sort of this development is exactly what we've spoken about in our earnings today, where we want to control the economics, the land is effectively fully paid for. And these are markets where there is clearly rental growth, there is demand. And effectively, what we've been able to do over the last sort of 2 or 3 years since we've listed is take that development, bring it online, to the tune of a few million square feet a year and just make sure that it tracks sort of the demand in the market. And I think that's how we think about derisking that development. I'm not so sure that right now, we sort of look at it from an NAV accretive sort of viewpoint immediately. I think it's a little bit more of a holistic view that look, there is obviously the completed. We are in these growth markets and high demand markets where the development will eventually sort of pay off at the right sort of economics. And that's why we think about buying the whole park 7 million square feet overall right now effectively gives us sort of the firepower to have a 50 million square feet portfolio, right? So that's how we think about the development. And we would like to sort of obviously proceed along those lines.

Yes. Yes. Just sort of going back to the comment on the rental premium, it sounded like we should treat that 4% number as more like an Embassy premium of sorts and not as much a lead indicator that the rental rates overall in the marketplace might be starting to look up?

So Kunal, that's a very interesting question. So let me give you my view on that. One, I think, generally, it's safe to say that rents have started taking upwards in most markets. 1% or 2% in non-Bangalore market maybe, but Bangalore has already seen a healthy growth in rentals, which is already factored in the market rents with CBRE estimates. And I think what we go out there as Embassy REIT is we want to ensure that we position as premium and not just because we want to get better in, of course, we would like to. But also, Kunal, we want to attract those quality of occupiers who are not so much focused on rents, but who really like the overall business ecosystem. So we want to cater to the kind of occupiers who actually suit our existing occupier base of premium, high-quality ecosystem because that's what we're offering. And that is the reason why the portfolio has been so resilient, bottom of occupancy of 87%, despite the pandemic. And that's the business model that we really like. And Ritwik spoke earlier about the pipeline acquisitions while we are still evaluating those. Quality is really something we are really focused on because this is a long-term business and we really want to ensure the properties continue to dominate in the market long term. And for that, we really need to attract global high-quality occupiers because they are the ones who pay higher rents and they are the ones who will continue to grow.

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

Congratulations on good performance. My first question is just looking a little closely to -- closer to maybe next few quarters, how are you seeing the leasing momentum for M3 Block A and the other two which are likely to be ready in next quarter, Ganges and Hudson, if you can comment a bit on that?

Sure, Puneet. So let me give you a flavor. So on M3, you may recollect that we have Block A and Block B. Block B now is effectively fully preleased and committed by ANZ, including the growth options. Block A, the 1 million square feet we deliver by December this year, we are right now in intermediate discussions for around 400,000 to 450,000 square feet. And again, those premium rentals I just spoke about with one global occupier, so we're hoping to see if we can conclude that by early next year 2023. And then we'll obviously effectively take hand over of that given it's on a forward purchase construct. So again, Manyata is seeing the improved and increased demand, especially post the launch of the hotel, we're just seeing suddenly a lot of traction building up. Again, we expedited the L4 block, the 700,000, which is just right now at excavation stage, which Ritwik mentioned, again, for the same reason. The occupiers who are currently asking for build-to-suit design options. And we see this strong momentum continues -- as a lot of occupiers seek to both consolidate and also move out of existing A- or B+ properties. On ETV, if you may recollect, again, this is at early stages of construction, this 2 million square feet, 500,000 was already pre-committed to JPMorgan. We are in intermediate stages of discussions again with another bank for about 200,000 square feet, and there are early stage discussions for another 1 million square feet with other tech occupiers. Again, on ETV, our strategy is not so much to precommit everything today. We want to be balanced one to derisk the project itself. At the same time, we want to achieve those premium rents. And given the delivery -- actual deliveries 2.5, 3 years out, we would take a more calibrated view on leasing it out. We could theoretically lease this much faster, given the strong demand and very little available vacancy and the ETV positioning, but we'd want to kind of maybe by the time we deliver, we do 50% to 70% precommitment and push the rents higher for the balance and lease that out within 6 months post delivery. On ETZ, the Embassy TechZone property, which is in Pune, we currently have inquiries of 400,000 square feet. This gets delivered end of this month or early November, we received OC. Now again, as I mentioned earlier, the traction has been slow in Pune, and we think the ramp up on the traction and demand will also be steady -- slow and steady. It's unlike the Bangalore market where we see a lot of demand. So we'll have to be patient here. But just to give you a flavor, we recently signed a 60,000 square feet lease with a global captive of an American infotainment company, which has renowned global audio brands. So this is for 60,000 again at the market rents that we mentioned. We are in discussions currently with two occupiers in mid to advanced stages. One is a California-based integrated managed healthcare provider. And the second one is the world's leading insurance and financial services company. Both put together, this is about 300,000 to 350,000 square feet. But I just want to again emphasize that Pune is going to be slow on lease up. But as we see encouraging trends from the IT occupiers of back to work, and we've heard numerous announcements. And as we see the percentage inch upward on Pune park attendance right now, compared to last quarter when it was 15%, this quarter, the Pune occupancy -- park occupancy, the physical attendance was 35%. So pretty encouraging. And I think we think as it approach 50%, 60%, there will be a threshold at which point in time, we will see good demand traction. Again, just to close up on that one, Hinjewadi micro market remains one of the most competitive rent markets in India and offers the best cost versus utility trade-offs. So we feel reasonably good about it. Bangalore obviously is at the forefront, but Pune hopefully will pick up in the next couple of quarters.

Right. And is it fair to assume your Bangalore occupancies are also similar 35% or it's only for Pune?

1 That's right. Bangalore occupancy is at around same percentage. Pune and Noida have made the largest jump which were both at around 15% and Noida is now at 41%, roughly for our properties Pune 35%. Bangalore has been stable at around 35%, although ETV is much higher, and Bombay obviously leads at 60-plus percentage.

So while I understand the India story is absolutely great and offshoring trend will continue, but are you picking up any signs of worry that physical occupancies will come a little later, and there is a pending recession in the global market, so some of the leasing decisions for next 2 quarters may get delayed. Is there any indication to that extent?

So Puneet, that's an interesting question. So a couple of things there. One, if you have seen our existing Q2 deals, we have done deals across banking, financial services, we've done deals with healthcare firms across the value chain, whether it's a major pharmaceutical company or a health tech R&D center and we have done for other niche sectors like renewables and electronics and tech. But the way we are looking at Q3 and Q4 is two things. One, the large banks and captive centers continue with the RFP process, although there is increased caution and we believe the larger RFPs of 800,000, 1 million square feet plus, they will take more time for closure. And I think this is very consistent with what we've been also hearing from the tech companies on how they are seeing the deal pipeline. At the same time, it's very interesting to note that the high growth, the smaller quantum spaces that we spoke about that's finding a lot of traction. We are seeing a lot of companies who are looking to take a 40,000, 50,000, 60,000 square feet. We did a lot of them in Q1 and Q2, about 20-plus such deals, smaller sized deals, which is about 4x or 3x what we would have ordinarily done pre-pandemic. And those are the ones where we're seeing good traction. So the leasing pipeline of 700,000 square feet that we indicated that shows those intermediate to advanced discussions that we are having for Q3. So the momentum continues. I'm happy to give you a flavor on what kind of occupiers are looking for space, but it's a range of occupiers from new GCCs with large companies globally who are setting up the first time center or guys who are already existing in India with their global captive promises, but are expanding into R&D centers or then there's global consulting firms, private equity firms who are doing really well. And there's obviously you will have some of the other pharmaceutical companies, which are now actually showing up with the global captives here. So we remain pretty positive about it. Of course, the 1 million square feet kind of deals will take time.

Can I just add to that for a second, if you don't mind, Puneet? If you also look at sort of some of the U.S. bank results that have come out at this point in time, there's obviously been a big mixed bag simply because profits are down because of capital markets volatility, deal making is down. But the underlying core businesses that they run that are driven by sort of just deposits, interest, technology investments, that continues to fire. And I think if you think about the pre-commitments that we've seen across in our portfolio, so maybe talks to lot of these banking majors and financial services firms looking to sort of invest in the future. That hasn't kind of gone away. I think it's all but inevitable at look. There is going to be a sort of an economic slowdown out west for sure. And I think that's going to have a ripple effect on our markets. It's going to have a ripple effect on funding costs. But the broader space requirements that people will have might effectively, the conversations might move at the margin a little bit. But I think the long-term secular trend for our space will continue to be very robust, and that's why we will continue to also invest in it.

Understood. That's helpful. If you don't mind, just 2 more questions. Are we done with the entire IBM exit? Or is there still more to go?

Yes. Puneet, why would -- we would not want to comment specifically on one client. But if you see an expiry pipeline exits for this year, the balance exits are roughly around 100,000 or 200,000 square feet. And the next year, total expiries not necessarily exits, are 900,000 square feet as of now. So I think that will probably answer your question, that is for the full portfolio. So that will probably answer your question.

Understood. That's very helpful.

This quarter, of the 850,000, 900,000 square feet, there was one large staggered exit, which already got factored into the occupancy and also into our numbers, around 400,000 square feet in Manyata for legacy lease.

And last one is on the hotel side. I was under the impression that the market is doing quite well. But the Four Seasons part of the portfolio still seems to be running quite weak. Any comments on what needs to be done there?

Yes. Puneet, your observation is absolutely correct. So while our hotel business is really firing with Manyata actually achieving breakeven levels in the first month, a 619 key hotels, Manyata Hilton, that's phenomenal. But at the same time, on the other hand, Four Seasons, which is a very small component of an already small hotel component in our portfolio, that's been underperforming. And we have recently changed the management teams, operating teams on the ground and we are looking to revisit our positioning in the market. So we have now moved our room rates higher. And we will see an impact of that in the occupancy in the short term, but we are trying to reposition the hotel. The hotel actually if you recollect never got a good launch simply because at that time of launch when it was ready, just we hit the COVID period. So you're right, it's a small part of portfolio. Of course, we would want to do much better than what we're doing, but not something that really concerns us simply because it's a very small component of the NOI and distributions.

[Operator Instructions]. The next participant is Rahul Marathe from ICICI Prudential.

Congrats on strong leasing traction. So we could see that EBITDA growth and NOI growth was pretty strong, but because of the interest, like adverse movement on the interest expense that didn't flow through to the DPU. So when we will see that interest expenses stabilize and it will actually start flowing through the DPU? And secondly, we can see that we have a strong development pipeline of 7 million square feet. How do we plan to fund this CapEx? Because I think if we want to maintain the AAA rating, we would cap our leverage to 35%. So how do we plan to fund this?

This is Abhishek. So I'll take the first question. The EBITDA and NOI are growing. However, as you rightly pointed out, the interest expense has also risen. The reason for this is basically the ZCB refi that we did, if you remember, it was a zero-coupon bond.

Yes. I know that ZCB. I was just asking when it will stabilize.

Yes. So the point that I wanted to make is that this increase is basically because of this, and it will stabilize over the next quarters as the NOI and EBITDA will also grow because of the leasing that we have done during the last two quarters. And this interest was also because of certain projects were delivered because of which the interest which was getting capitalized is now moving to P&L. So having said that, this will stabilize over the next couple of quarters.

And on your CapEx question, Rahul, if I may take that. As of today, as Ritwik mentioned, the EBITDA pretty accretive on the CapEx. And given debt, we are still able to access debt financing for CapEx around 8.5% handled, we are comfortable financing it through -- fully through debt just to highlight the entire INR 2,000 crores that Ritwik mentioned that we are -- which is the pending construction cost, that is staggered over the next 3 to 4 years. That's not just for the -- in 1 year. So hopefully, the NOI also starts growing at some of the projects like M3 and ETZ starts coming up in the next 2 or 3 quarters. So we think that will balance the needs of maintaining our debt ratios and we'd be able to continue to borrow and fund the CapEx program fully through debt.

So the debt would be raised in -- you're saying 3, 4-year maturity bonds?

No, no, no. That's not what I said. Sorry, just to clarify, all I'm saying is this INR 2,000 crores, which is just the office figure and obviously, this infrastructure and hotels, all of that would be fully funded through debt. We will keep accessing CapEx get construction financing at SPV level so as to avoid the negative drag, which REIT-level bond will have because that will have to borrow at one go and construction would require it in tranches. What I'm saying is we will also need to borrow the money in phases because all of the construction spends are not happening on day 1 or year 1. So as we continue the construction, we keep borrowing this INR 2,000 crores. At the same time, the NOI will start growing as we deliver the earlier of these buildings, which are scheduled for later this year. So hopefully, that will match and we'll be able to maintain our EBITDA and our other ratios for debt and maintain the AAA rating and also access at those interest costs.

Yes. I think if you just look at our supplemental data book which we put out on Page 19, we show you sort of the breakout of what we have at the REIT level and at the SPV level. So I think that will give you an idea of how we think about construction financing, the cost of debt, and then the various maturities, and that's effectively what we will continue to sort of do at the SPV level and then as and when there is a requirement to fund at the REIT level, we'll go out to the bond market.

The next question is from the line of Pawan from IIFL Capital.

This question is again on Pune. So by when do you expect the occupancy revenues to reach something like a what is observed in Chennai or in your own portfolio in Bangalore and particularly -- and my second question is about Mumbai. Do you see Express Towers or the other -- and the key buildings that are there in Mumbai, do you see occupancies going higher? I mean, like more like what is the time line that you are looking at?

Yes, Pawan. Thank you for that. So if I got your question right, the first was in response in respect of the occupancy and when do we see it going up. So let me kind of break down the current occupancy Pawan, and what -- where we stand today, what do we see it on a pro forma basis and what do we see it on an SEZ vacant space basis. And I will just give you our view on how it will move. So today, as of Q2, our occupancy is at around 87%. On a same-store basis and factoring our guidance for the remaining half of the year, we expect to end up at 89% same-store basis because we add Pune property of 900,000 square feet over the next quarter or so. However, having said that, if you actually exclude the 3 million square feet SEZ vacant area, which effectively, it's been hard for the industry to market SEZ space, not just limited to us, but all office developers. Effectively, our occupancy as of the end of this year on a same-store basis, and excluding the 3 million square feet SEZ vacant area, primarily, we have in Manyata and in Quadron in Pune would be around 96%. So in some sense, the occupancy is already by the end of this year will already be at pre-pandemic levels. And of course, the SEZ is an issue, we all need to solve, and we are in discussions with regulators on that. But just to take a step back, honestly, we are more focused on the NOI growth than the occupancy. And that is the reason why we don't want to lock in lower rental just for the purpose of optics of occupancy. We are very selective of our occupiers, and we do not want to dilute our rent roster. Let me give you an example of Manyata, right, where in Manyata, we have had about 2.1 million square feet of exits at about INR 58 over the last 2 years. These are 2 year statistics. We let a large occupier referenced earlier in this call. We let them leave partial space simply because it was really submarket, and we wanted to charge market rents given the quality of the ecosystem. And in the same time period, we leased about 700,000 square feet in Manyata. This is the last 2-year time frame, right? And this is at average rents of INR 103. The market rents as per CBRE estimate and the 4% premium that I spoke about. So effectively, there's a 110%, 112% mark-to-market on Manyata. Of course, there's more vacancy that we need to lease up. We've only leased 1/3 of what got vacated over the last 2 years. But I just want to kind of mention to you the way we think about it. For us, it's about NOI growth and hence, DPU translating into DPU growth moving forward and not just occupancy number. And that is also the reason why our occupancy while still remains at 87% on a pro forma basis end of the year based on our guidance, but our NOI guidance is 9% up for the full year. So we would just encourage you to start thinking in terms of NOI growth more than just occupancy.

The next question is from the line of [Vishal Parekh] from Kotak Investment Advisors.

Congratulations for a good result. Could you throw some more light on the refinancing spread, which has been achieved? So for example, in the last year supplemental data, understand that there is a green loan of Embassy TechVillage at 6.84%. Now that TechVillage loan has -- it seems to be spread across multiple various other loans. So I just wanted to understand how -- what changes have happened? So that was my first question on the debt piece. And on the second question I had on the GolfLinks distribution. So I understand that about INR 64 crores has been distributed from GolfLinks apart from the dividends. So could you give a breakup of that INR 64 crores?

Sure. I request my colleague, Abhishek to take this question.