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

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

Thank you, operator. Welcome to the Q3 FY 2023 earnings call for Embassy REIT. Embassy REIT released its financial results for the quarter and 9-month period ended December 31, 2022, a short while back. As is our standard practice, we have placed our financial statements, earnings presentation discussing our performance and the 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 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. 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 evening, and thank you for joining us today to review our Q3 results. We are pleased to report another robust quarter of business performance and a continued positive outlook for India office market. We signed a total of 1 million square feet leases, improved our same-store occupancy to 88%, generated healthy 13% NOI growth, announced 15th consecutive quarter of 100% distribution, and remain on track with our full year guidance. Additionally, we unlocked further growth in Bangalore at our Embassy TechVillage property by launching the new 410,000 square feet office block at a highly accretive 24% yield. Our active development pipeline now totals 6.6 million square feet and sets us up to deliver an incremental INR 8 billion annual NOI upon stabilization at an attractive 24% yield. So another quarter of resilient business activity and a clear pathway towards accelerating growth, which we are well pleased to finance given our low 27% leverage, competitive debt costs and AAA stable-rated fortress balance sheet. Even amidst a highly volatile global macro environment, India continues to attract more and more global companies to set up and grow their offshore captive centers. Morgan Stanley, in its recently published report, Why This is India's Decade, has highlighted offshoring as one of the key mega trends, which will continue to fuel India's growth. The dual drivers for this phenomenon are structural, mainly India's abundance in talent and the cost efficiency offered by India's gateway cities relative to more expensive and less scalable markets globally. As we have highlighted previously, these global captives continue to pursue premium quality, wellness-focused properties to attract and retain talent and to grow their presence in India. Our year-to-date leading performance are highly accretive active developments and our resilient distributions demonstrate a continued strong conviction in the long-term growth opportunity offered by India office. Let me now update you on our leasing performance. During Q3, we leased a total of 1 million square feet across 19 deals and added 7 new occupiers across health care, financial services and tech firms. We achieved robust new leasing of 0.5 million square feet at impressive 5% premium to market rents. Additionally, we renewed another 0.5 million square feet leases at 21% renewal spreads, including 0.4 million square feet of early renewals by 4 large multinationals. We also secured 13% rent escalations on 2.1 million square feet, which further contributes to our NOI growth. Physical attendance in our properties also continued its upward growth trajectory and stood at around 46% last week, a 30% uptick compared to last quarter, majorly led by banks and global captives. Bangalore continues to drive demand with the occupancy of Embassy Manyata now touching 90%, and a strong deal pipeline for both Embassy Manyata and Embassy TechVillage, reflecting continued strong demand from global captives. Further, Pune witnessed early signs of demand pickup with 152,000 square feet new leases in Q3, including by an American health care major. With this, our Q3 occupancy stood at 86%, and our same-store occupancy rebounded to 88%. Our active deal pipeline of 850,000 square feet set us on the path to pre-COVID occupancy level of 90% in the next few quarters. Our strategy of attracting higher growth occupiers has helped us diversify occupied concentration, deliver above-market trends, and more importantly, embed growth into our portfolio. For instance, in the last 18 months, we added an impressive 52 new occupiers across sectors such as cloud infrastructure, cybersecurity, fintech, health care tech and renewables. These deals were across 1.4 million square feet and at 4% premium to market rents. Notably, based on our on-ground discussions, around half of these occupiers are already looking to grow their India footprint, which will further aid our new leasing. On the SEZ front, the industry is currently awaiting further regulatory clarity around the proposed DESH Bill. Excluding our 3.3 million square feet SEZ vacancy, our Q3 same-store occupancy would be at even higher levels of around 97%, and enabling regulatory framework around de-notification and flexibility of usage of existing SEZ will boost demand for such spaces and further drive leasing traction. Next, an update on our ESG program. ESG remains a core pillar of our strategy, and our sustainability-focused buildings continue to receive recognition from globally-renowned organizations. Our operational portfolio was awarded 9 Swords of Honour by the British Safety Council, acknowledging the best-in-class safety and wellness aspects of our buildings. In addition, we are proud to report that we have been recognized as the world's largest USGBC LEED Platinum certified office portfolio. We continue to progress on a 3-year ESG road map, supported by INR 3 billion committed investments. We remain focused on reducing our carbon footprint through green initiatives such as our 20-megawatt solar rooftop project, and we are progressing well on a 75-25 renewable program, that is our commitment to achieve 75% renewable energy usage across our properties by FY 2025. Our team recently launched a dedicated microsite to provide details on our ESG program, and we encourage you to visit the same. Finally, moving to the outlook for India office. 2022 was a resurgent year for India office, with total absorption of around 55 million square feet, closer to pre-pandemic highs. While globally, there will be increased caution around office demand, the long-term fundamentals of India office remains strong as ever. Apart from banks and financial services captives, which continue to drive demand, many global retailers, insurers and health care majors are now setting up their India offices. Increased focus on cost and efficiencies by global corporate is likely to further accelerate this India offshoring trend disproportionately to the benefit of institutional landlords like us. On the other hand, though supply of quality office stock continues to consolidate towards fewer and larger institutional quality landlords, we are well funded to invest in sustainable growth. A combination of cost inflation and rising interest rates is likely to increase the replacement value of properties, thereby impacting supply and driving rent growth in the medium term. As you may recall, we had given a 5 million square feet total leasing guidance for FY '23, which was meaningfully above a pre-pandemic 5-year average of 3.3 million square feet. We are happy to report that year-to-date, we have already leased 4.4 million square feet, achieving around 90% of our annual guidance despite Q3 traditionally being a seasonally slow quarter. Notably, we are tracking ahead on both our fresh leasing and pre-leasing guidance, and our active deal pipeline remains robust, which will further accelerate our NOI growth. Let me now hand over to Ritwik to expand further on our growth initiatives.

Thanks, Vikaash. Hello, everyone. Our key growth initiatives for Q3 include, we delivered a new 900,000 square foot block at Embassy TechZone in Pune, and we've launched an additional 410,000 square feet new office building at Embassy TechVillage in Bangalore. We've accelerated development of our 6.6 million square feet of active growth pipeline with approximately 90% concentrated in Bangalore, which is India's best-performing office market. And we continue working on the nonbinding office to acquire the 7.1 million square feet of sponsor assets in Chennai and Bangalore. First, an update on the development portfolio. At Embassy Manyata, we're developing 3.5 million square feet across 5 blocks. The 1 million square feet M3 Block A is nearing completion, and we expect to receive the occupancy certificate in Q4. We're seeing good leasing traction with 3 deals in active discussions. Further, we've seen encouraging progress on obtaining the transferable development rights of TDRs and other statutory approvals that we need for the 600,000 square feet entry Block B. This block has already been pre-leased to ANZ Bank and superstructure work is underway. Our recently launched new builds across the 700,000 square feet L4 Block and the 1.2 million square feet D1 and D2 redevelopment blocks are progressing well, and we are witnessing early traction from global banking, cloud computing and other tech players. At Embassy TechVillage, we're developing our 1.9 million square feet blockade of which 550,000 square feet has already been pre-leased to JPMorgan. We continue to see surging demand for the balance. We've always been optimistic about the leasing dynamics of ETV in particular, and other ring road -- the other ring road micro market in general. To that end, we're launching another 410,000 square foot block named Helenium by unlocking the available FAR potential at ETV. This new block is in addition to ETV's development potential that we underwrote at the time of its acquisition. This project is expected to generate a highly accretive yield on cost of approximately 24%. Also, in Q3, we received the occupancy certificate for the Hudson and Ganges blocks, the 0.9 -- the 900,000 square feet blocks in Embassy TechZone Pune, and the 700,000 square feet Tower 1 at Embassy Oxygen in Noida, which is also nearing completion. To summarize, our total development pipeline now stands at 6.6 million square feet. Over 90% of this growth sits in Embassy Manyata and ETV in Bangalore. Our reason for concentrating development in our best box in Bangalore is simple. Bangalore is the Indian city which leads global occupier demand, and the development economics in 2 of India's best business parks, which we own are simply too attractive to ignore. With INR 30 billion of total committed CapEx, of which INR 21 billion is spending as of Q3, these 6.6 million square feet of projects are expected to deliver approximately INR 8 billion of annual NOI upon stabilization. These projects set us up for impressive 24% yields on cost, and they validate our strategy to accelerate our growth pipeline. Next, an update on our hotels and our total business system. Our 4 operating hotels continued their marked rebound in Q3, with 47% occupancy, a 15% quarter-on-quarter ADR growth and year-to-date EBITDA of INR 704 million. This performance is significantly better than what we initially guided to. We've always believed that our hotel business complements our office offering perfectly and that it will continue to positively reflect in our leasing and our rents over the long term. We expect this to be no different as we develop the 518 key dual-branded Hilton hotels at ETV, The ORR market where ETV is located is underserved, with only approximately 1,400 rooms serving over 50 million square feet of office space. Additionally, we continue to provide a total business system -- ecosystem experience to our occupiers by constantly upgrading our properties with an eye on occupiers' future needs. Our 200,000 square feet of refurbishment Block K at Embassy Manyata is nearing completion and will enhance the leasable area of the spot by 18%. Additionally, we look forward to the upcoming launch of the NXT Retail Plaza at Embassy Manyata. This is an 85,000 square feet F&B hub that will further boost employee experience as well as widen Embassy Manyata's competitive moat. And finally, an update on our acquisitions. We made significant progress in our discussions with Embassy sponsors and other stakeholders to acquire the 2 properties in Bangalore and Chennai, which totaled 7.1 million square feet. This includes the 5 million square feet of Embassy Splendid TechZone business park in Pallavaram, Chennai and the 2.1 million square feet Embassy Business Hub property in Yelahanka in North Bangalore. Both properties are strategically located in fast-growing micro markets and are anchored by renowned global occupiers in banking, financial services, health care tech and the IT services sectors. Of the 7.1 million square feet, 2.1 million square feet is completed or nearing completion with 91% of committed occupancy, which provides us with stable cash flow visibility. And of the balance, 5 million square feet construction is underway for 3 million square feet, which aids further growth. The potential acquisition will account for less than 4% of the REIT's current GAV and remains subject to ongoing diligence, negotiations, funding and requisite approvals. We're also evaluating certain other acquisition opportunities from third parties. We are focused on prudently financing potential acquisitions through an optimal mix of debt and equity, and we're closely monitoring the challenging financial markets for appropriate transaction windows. We remain committed to ensure that all our growth initiatives deliver value to our unitholders as we've demonstrated by our earlier ETV acquisition, which has outperformed our underwriting on numerous metrics. Over now to Abhishek for the financial updates.

Thanks, Ritwik. Good evening, everyone. Let me take you through the key financial highlights for Q3. We grew net operating income by 13% year-on-year to INR 7,049 million with operating margins of 81%. We announced distributions of INR 5,033 million or INR 5.31 per unit with a 100% payout ratio. And we continue to maintain our strong balance sheet with 27% low leverage and attractive 7.2% debt cost. Let me take you through the details. First, an update on our Q3 financial year '23 income performance. Revenue from operations grew by 17% year-on-year to INR 8,654 million. This was mainly driven by our new lease-up at higher spreads, contractual rent escalations, delivery of our 1.1 million square feet JPMorgan campus at ETV, and ramp-up of our hotel business. 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% and 14% year-on-year, respectively. This was primarily driven by an increase in the revenue from operations, partially offset by the increased hotel operating expenses corresponding to our hotel business ramp up. Our overall NOI and EBITDA margins stood at 81% and 80%, respectively, and continue to be the best in class. Our NOI margins consistently remained around 86% for the commercial office segment, demonstrating its scale and efficiency. Net distributable cash flows stood at INR 5,045 million, up 2% year-on-year. The year-on-year increase in our NOI and EBITDA contributed positively to our NDCF, which was primarily offset by an increase in our interest costs. These incremental interest costs mainly related to the debt expense of our recently delivered buildings as well as the INR 46 billion coupon-bearing debt raised to refinance our earlier ZCB. Further, earlier today, our Board of Directors declared Q3 distributions of INR 5,033 million or INR 5.31 per unit, representing a 100% payout ratio. This brings our YTD distributions to INR 15.3 billion or INR 16.1 per unit. In the 15 quarters since our listing, we have now cumulatively distributed over INR 73 billion. Moving to our balance sheet updates. We continue to maintain our fortress balance sheet with 27% low leverage, attractive 7.2% debt cost, AAA stable credit rating and INR 108 billion pro forma debt headroom to finance growth. Our debt strategy remains focused on active capital management and interest cost optimization by locking in fixed rates given the inflationary environment. Over the last 3 quarters, we have cumulatively refinanced or renegotiated over INR 42 billion debt at 120 basis points spread. As a result of this and earlier refinancing, 65% of our INR 139 billion debt book carries a fixed rate of 6.7% for an average maturity of 2 years. Additionally, 27% of our debt carries a yearly reset date, and the interest rate is fixed for the next 7 months on an average. Further, we are in advanced discussions for refinancing and additional INR 16 billion floating rate debt and are targeting around 45 basis points positive spreads. Given our access to various debt capital pools across mutual funds, insurers, FPI, banks and NBFCs, we are well placed to refinance any upcoming debt maturities at best-in-class industry rates. Further, in line with our ESG commitments, I am happy to report that our sustainable finance portfolio has now grown to INR 39 billion, representing 28% of our total debt book, which is one of the best in the industry. Lastly, an update on our financial year '23 guidance. As a recap, during April '22, we had provided our full year guidance with 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%. This guidance implies a year-on-year increase of 9% in NOI and an in-line DPU considering the midpoint guidance. On a like-to-like basis, postpartum the impact of our November '21 ZCB refinancing, this DPU guidance was also 9% higher year-on-year, reflecting the efficient flow-through of our NOI to distribution. Based on our YTD performance, I'm pleased to reconfirm this guidance. There has been a positive rebound in office leasing as well as hotel business, both of which are currently tracking at or ahead our estimates. On the other hand, we expect interest costs to be higher than our initial assumptions given the rapid rise in rates over the last 3 quarters. While rising interest rates have severely impacted the global REIT distribution and resulted in widespread guidance downgrade, we are happy to report that the positive operational levers of our NOI have been able to largely mitigate the increase in interest costs. Looking beyond financial year 2023, our new lease-up, contractual rent escalations, mark-to-market rent growth and scheduled deliveries will act at significant growth levers, thereby accelerating our growth to the benefit of our unitholders. Over to Vikaash for his concluding remarks.

Thank you, Abhishek. So we continue to deliver consistently and are moving forward on our growth trajectory. On the business front, Q3 was another strong quarter with 1 million square feet leasing, an uptick in our same-store occupancy to 88%. With 4.4 million square feet leases already signed year-to-date, and a promising 850,000 square feet pipeline, we are well positioned to deliver on our annual guidance. We continue to unlock value as demonstrated by the FAR enhancement projects across Embassy Manyata and ETV, which will add 1.2 million square feet to a total leasable area at highly accretive 22% yield. And we remain focused on our 6.6 million square feet development growth investment estimated to add around INR 8 billion to our NOI upon stabilization. On the capital markets front, amidst significant declines in global REIT stocks, Indian office REITs have been resilient and, in fact, significantly outshine the global peers. This was largely driven by the continued offshoring demand, impressive leasing spreads, development growth at attractive yields and low leverage of Indian REITs. Given wider understanding of the yield plus growth total return story, combined with our consistent 15 quarters of business delivery, Embassy REIT provides one of the best risk to reward to file. Our unit hold register continues to expand with a retail base increasing around 18x since listing to over 70,000 investors. We continue to focus on growing our NOI and distributions by developing and acquiring quality properties and delivering long-term value to our unitholders. With this, let's now move to Q&A, please.

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

Vikaash, my first question was around the leasing intensity for...

The line has been unmuted. Please proceed with your question.

I hope you can hear me. I'm unmuted. So Vikaash, my first question was around the leasing intensity for corporates. There's been this news flow around layoffs in the tech sector. And I very well understand that the direct impact on India or the plans for direct layoffs in India could be quite less and there's the long-term offshoring trend as well. But I was just wondering if this kind of news flow might be now for corporates to start thinking about pushing that out these plans for 6 to 12 months. Is that something that you have seen? Or does it continue to be unchanged versus 3, 6 months back? And then the second question is around the DESH policy. Any clarity as to when that could get done? We've seen in get pushed twice over. And I was just thinking about the 97% occupancy of your SEZ spaces I'm wondering if policy clarity would become a bottleneck to losing next year?

Thank you, Kunal. So just let me take the first question. So on leasing. There are a couple of interesting things that's happening right now. One, obviously, we are hearing the overall macro commentary globally and a bit in India as well on layoffs. But I would just like to state that employment or recession trends are cyclical, whereas the talent and cost advantage that India has is structural. So I think that's a huge advantage we have. What we have seen in India, specifically on the workforce, there's comparatively limited and concentrated -- this is the -- the layoffs are concentrated to a few pockets. The elimination of roles is happening in fewer areas, but companies continue to hire in other strategic areas, including R&D, and we are seeing a lot of that. In general, I would say that we have seen a couple of things. One, demand continues to be led by global captives. We do think that large deals, 800,000 square feet to 1 million square feet plus, we will see increased caution, and hence, decision-making may be slow over the next 2 quarters. But we continue to see robust deal pipeline and momentum if you also look at our advanced leasing pipeline that we've indicated of 850,000 square feet for Q4. You'll see that the smaller and midsized requirements, we continue to see -- continuing to see momentum going. So we do think that large deals will slow down for the next 2 quarters, but then pick up in the second half of this calendar year. And the reason is simply that the global corporates right now are revaluating their strategy, and they are firming up the decision on overall cost optimization method -- measures given the macro uncertainty. But once they arrive at a decision, I think the India cost advantage will stand in stark contrast and more work will come to India. We are firm believers of that. We've seen that in the past, we continue to believe in that. So I think we are well positioned to continue to focus on the smaller and midsized requirements until we see the large -- momentum on the large requirements. Interestingly, even within the deals that we are seeing, we are seeing that the geographical mix is expanding. So besides just U.S. banks and U.S. captives, we are now seeing many European and Australian banks setting up and expanding offices in India. We have done a couple of deals in this quarter and the previous quarters. Also, we're also seeing newer sectors of global captives setting up shops or expanding. For example, apart from banks and financial services, we are now seeing a lot of retailers, insurers and health care majors setting up their R&D centers, and a lot of those examples as well. I think the key is to be nimble and flexible in the solutions, and we think that we'll continue to see demand momentum. As for the larger deals, we'll see that pick up only in second half of this calendar year. So that's on the leasing trend. Coming to DESH policy. I think there are 2 things here. One, the industry as a whole is awaiting clarity on the DESH policy where the ask simply is to provide flexibility especially on the start of [ partial ] de-notification. I think it's an industry-wide issue. Kunal, my personal view is we may see 1 or 2 quarters before there's a final resolution to this. Of course, there's been a lot of advocacy by the industry participants on this. But in the meantime, the way we have approached this, given it's an external factor, is in a 2- or 3-pronged strategy. One, we are full up on our occupancy, as we mentioned, 97%, excluding the SEZ vacancy. On the all the new developments we are doing, we've converted a plan that is non-SEZ, including all the developments that are coming up later half of this year. So we deliver about 1.7 million square feet in the next 2 quarters. So all of that is standard non-SEZ. So that we can offer to market. Two, we are exploring and already initiated about 1.3 million square feet of the existing SEZ vacancy, which we are converting to non-SEZ by exploring moving some of the tenants to other buildings and de-notifying the entire building. So 1.3 million square feet is in process under that rule. And then finally, obviously, the advocacy efforts continue. Given that we have more supply coming up in terms of new product and given also that we are focused on the precommitments on the 6.6 million, we think we'll be reasonably fine in terms of the leasing momentum for the full year next year. We'll obviously lay out a guidance next quarter. But initially, the first 2 quarters, the applicability or announcement of the DESH policy may definitely hamper or slow down the [ starter ] SEZ vacancy that we have and the leaseability of that. Just in terms of numbers, we have about total -- today, we have about 4.8 million square feet vacancy as of December. Of that, 4 million is SEZ. And as I mentioned, 1.3 of that we are converting to non-SEZ, which we have ability to another existing framework, and 0.7% of non-SEZ already. So yes, it means that for the next 2 quarters, there will be a little bit of a challenge given the conversion. At the same time, given we have a massive under-construction and about-to-be-delivered pipeline, I think, will be reasonably better off compared to the market.

Can I just add 1 small piece to that, Kunal? I think there's been a -- we can't understate sort of the efforts of the advocacy program here, right? I think the ministry and the government, I think, everybody has been really lobbying hard to make sure that this happens. This is a big year for India, right? I mean at the end of the day, we've differentiated and the markets held up well relative to where China is and yes, China is opening up. But India has done very well. This is a year that we hosted the infrastructure, the G20, there's a lot of focus from tenants as well, who are clearly looking sort of for non-SEZ space. As we said, the demand for that's off the charts. And my sense is, thinking sort of a couple of quarters down from now is when you'll probably see sort of a resolution start to kick in. But they're all focused on it, the government is aware of that, and I think it's something that I think we will be able to get some priority.

Sure. I understand that. And it seems like new addition is very timely. If I can push in the follow-up here. I wanted to understand this 1.3 million of conversion. Is that expected to be operationally and financially smooth? Or what might that involve?

Yes. I mean so Kunal, what we've done is one of the recent deliveries in Pune 0.9, that gets converted. So we expect that to happen anytime in the next month or so. And one of the earlier buildings where we have a legacy IT services occupy Manyata, obviously, that we have kind of also relocated fewer smaller tenants within other buildings in Manyata and ensure that the whole building is vacant and available for de-notification of existing regulations. So that also we expect to happen in the next 2 or 3 months, and we are already in discussions to backfill the space. So I think the 1.3 is very near term.

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

Yes. Thank you so much for the opportunity and very happy to see you making extra efforts here on converting into non-SEZ, My question again is on Manyata. So the 0.36 million square feet which will be expiring next year, is that also SEZ? And is there any visibility on that getting reused?

Yes, Puneet, sure. So roughly, even next year, we have -- of all the vacancies that we have here, the SEZ component is what you mentioned, about 30% of our expiries in next year is SEZ overall in the portfolio and 70% non-SEZ. We expect a large majority of our expiries next year. It's 0.9 million square feet of that, but in the business of the site, we may always have 100,000, 200,000 extra. We think a large majority of that is -- will be renewed. So we don't think extra SEZ space will be added to stock, talking at end of March 2024. I think it will be about 100,000 to 200,000 square feet additional SEZ space, which will not be renewed at the end of FY '24 as per estimates as of today.

So you're saying out of 0.3, 0.4, you will still be able to renew at least half of it? Half of...

Yes. We think a little higher than that, yes.

The second question is on the NDCF for ETV. That seems to be lower on a Q-on-Q basis from INR 208 crore to INR 172. Anything to highlight there?

Abhishek, would you want to take that?

So if you look at quarter-on-quarter, the NDCF is lower because -- largely because of the fact that during the end quarter, we have received lower security deposits as compared to the previous quarter.

Okay. So...

Lastly, on the -- sorry.

Sorry, I just wanted to mention that in general, we just look at more -- while we appreciate a quarter thing, but in general, we look at it more from a year-to-date or full year because there will always be some movements on security deposits and working capital quarter-to-quarter.

Understood. That's all. Lastly, on just on the hotel. From industry commentary, we seem to be hearing that occupancies are much higher, but all your hotels are still up 50%. What should we read into that?

Yes. Sure. Puneet, so if I can speak to the Slide 34 of our earnings deck, what we have seen is that Hilton and GolfLinks the occupancy was low this quarter, one, for seasonal reasons; and two, because the back to work, given the holiday season was lower during the month of November, December. But we are seeing pre-pandemic levels, both on ADR and this quarter is looking pretty strong. On Four Seasons, if you may recollect, that this was the hotel where we had pretty low ADRs to start with. So what we've done is we have restrategized. We have changed the entire team at the hotel on the operating level, and we have raised the ADRs now to over INR 15,000. And so you'll see a nice uptick in EBITDA even though the occupancy still remains low at around 31%, but the target is to take it up to 50% in the next 2 quarters. And Hilton Manyata, in fact, actually is a good success story because within the first year of operations, it's throwing a positive EBITDA for a hotel of this scale, 619 keys. And as of today, the occupancy is 50%. Hilton Garden is doing pretty well. While we have not shared the occupancy numbers between Hilton Garden and Hilton -- in our materials, Hilton Garden is doing pretty well. There, the objective there is to hike the ADRs. But Hilton, the larger hotels which was launched later at a more premium offering, that we are still -- the occupancy level is at about 40%, and we're trying to move the occupancy levels higher there. That's the segment which depends on business travel from senior executives. And that's where in November, December, we saw some amount of slowdown. Overall, I would say we are well on track. And in fact, the EBITDA, which we expect to deliver on hotels, to be more than double than our underwriting. So I think our hotel is on a good trajectory. We'll continue to see quarter-on-quarter improvement. Q3 has been slowed a little bit for 2 reasons, one, the holiday season; two, some of the festive season that's happening. And most of the Bangalore hotels -- out hotels in Bangalore more -- offer more position to corporate travel and not leisure travel.

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

My first question is on the new supply. So you mentioned that the 0.9 million square feet in Pune that you're now getting converted into non-SEZ. So what is the kind of demand that you're seeing there? Considering in earlier calls, you've mentioned that Pune has been slow, and you've mentioned today that you're seeing some recovery. So if you could give some color on that. And also on the 1.7 million square feet that is going to come up in the next 6 months between M3 and Oxygen?

Sure. So on Pune, it is that we delivered the 0.9 million square feet, which I mentioned earlier that we are converting to non-SEZ and expect it to be successful -- expect it to go through the next 1 or 2 months. So far, what we have seen is that the Pune as a market is recovering, but the traction is more on the east side through the banks and financial services candidates. For West Pune, demand still remains muted while we have done some deals, but mainly it is awaiting clarity on DESH bill. Although we've seen some early signs of pickup, what we have done in Pune is we've done 2 or 3 leases on the new building, which you mentioned at about 150,000 square feet. Our pipeline currently is about 400,000 square feet for Pune, 120,000 square feet of that is in advanced discussion and that's included in the 850,000 -- 850,000 square feet overall leasing pipeline for Q4 that we indicated. And most of the inquiries are for non-SEZ. So of the entire vacancy or vacant data that we have in Pune, half of it is SEZ. That's been a marketing challenge. We have seen existing occupiers expanding. So we have seen in the pipeline some of the European captives in automobile and renewals, we're speaking to them, and that's included in the pipeline. We are also seeing some new tech players across health care looking at space. And maybe 2 or 3 quarters down the lane, while it's including the 400,000 square feet pipeline, we have some large Fortune 500 American corporates who are looking to set up centers in Pune. I would say that Pune will -- is expected to be slow for the next 2 quarters, awaiting both clarity on DESH bill and on the SEZ side. And the back to office on Pune has been slower than what we have seen overall in our portfolio as well as in Bangalore and ETV especially. So I think we'll have to just be patient on Pune. The good thing about our portfolio, with the scale that we're operating is we can play the patient game in markets where there is muted demand. We think it will come back. But as of now, next 1 or 2 quarters, we expect the traction to be at similar levels with what we have seen.

Yes. And I think just on that as well, just one thing. When we build, I mean, our entire strategy of building is building to where we sort of foresee demand in the future, right? I mean given that it takes 3 years to put -- from putting a shovel in the ground to actually getting a building up and running, I think we never want to be in a situation where we're caught offside simply -- and particularly in these kinds of volatile markets where interest rates have been rising or the cost of construction and everything has been sort of swelling around a bit. We just want to make sure that we have sort of the buildings ready, we're able to sort of be -- obviously, to put -- 900,000 square feet is effectively 2 buildings, right? I mean -- and for us to sort of put that into a market where there is obviously demand from automotive, from renewables, from people looking to do EV, over time, I think we feel pretty good about the project and the prospects.

And, Mohit, if I can just add on the 1 million square feet in Manyata that we deliver next quarter, there, we are seeing pretty robust pipeline. So we have about 400,000 square feet of advanced discussions, which is included in our 850,000 square feet pipeline number. And just to give you a flavor of the occupiers we're talking to, we're talking to an IT infra services occupier. We're talking to a global engineering and consulting occupier there, and we're looking to convert 400,000 square feet by the time the building is delivered next quarter in line with our usual target of having 50% of the building precommitted by the time it's delivered. And on Oxygen, which is the 0.7 million square feet tower in Noida. Again, Noida, given that most of the buildings are SEZ, this is also an SEZ and being -- in the process of being converted. The delivery comes up sometime in June or July of 2023. We are talking to one Fortune 500 big tech company. We'll see how it goes. So that's in intermediate discussions. But I would reiterate that Bangalore continues to see a lot of strong traction. Pune, Noida, we think it will take a little bit more time to lease up.

Sure. And how much time does it take to de-notify from the time you start the process?

Yes. Usually, it takes about 3 months. But in certain states like Noida, it's the first time that it's being done in the state itself. So that takes a little bit more time for the regulators to kind of just figure out the processes internally. But typically, in Bangalore, we see up in 3 months.

Okay. And my second question is on the rental growth. So in an inflationary environment, one would want to believe that you'd be able to push higher rentals to account for the overall inflation, higher interest rates. So I wanted to get your thoughts, have we been able to do that? Or is the market forces is not allowing that?

Yes. So Mohit, the short answer to that is, yes, we are seeing rental growth -- in fact, [indiscernible] office reports earlier this month had mentioned that Bangalore has seen a year-on-year increase of 11% in rents just for the market overall. We continue to lead a premium to the rent that CBRE expects for our properties this quarter, I mentioned overall, not just for Bangalore, overall -- for our overall leasing, we have leased that 5% premium to market trends. And obviously, the spreads are much higher if you take into account the renewals and increased rents. So we are seeing it, and you're absolutely right, in an inflationary environment, we will -- especially with interest costs rising, we will see the replacement values of the properties go up, which would mean 2 things. One, it will mean that supply declined, and we've already seen that last year, as announced, supply which the IPC is expected to be delivered versus what was actually delivered was lower. We continue to believe that the supply will be constrained. And two, we'll also see rental growth. It's already we are seeing that in Bangalore. Many of our discussions in Bangalore are not centered around rent, it's just centered around solutions, timing and flexibility to the occupiers and quality and wellness. And we think over time, that will flow through to Noida, Pune as well. So yes, rental inflation is likely. We've always seen that in Bangalore, and we are trying to see how best we can convert that into NOI growth on our portfolio. If you see our in-place rent versus market rent and the gap, over the last 4 to 6 quarters, we have narrowed that gap considerably. So that's obviously because of the renewals happening at mark-to-market at higher spreads. Plus, as we see better back-to-work ramp-up, which we've already seen a good uptick this quarter, we'll also start seeing even healthier rental growth, not just in Bangalore, but in other cities over the next 2 or 3 quarters. And that will also mean that the portfolio will start catching up to those newer rents as leases expire or come up for renewal or new leases as we see come in. So yes, rental inflation is something we are seeing, and we believe it will be demonstrated in the leasing as we move forward.

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

Vikaash, you mentioned that your physical attendance has been ramping up and you're at 46% last week. Just wanted to understand, in your discussion with your occupiers, say, at what level of physical attendance do you think occupiers will be compelled to look at new office options?

Sure, Kunal. So let me give a little bit flavor. We have a slide in the deck, which I can point to, but let me give a flavor of what's happening in the portfolio but it's really interesting. The trends that we are seeing, it's not similar for all the cities, for all the kind of occupiers as well as for all properties. If you see Slide 30, let me walk you through that and what we believe would be a trigger point. So overall, we saw that our physical attendance was 46% for our properties earlier this -- in the month in Jan. Mumbai is already at prepandemic levels of 75%. Bangalore has shown a nice uptick, and it's not around 45%. In fact, ETV is already at 60%, and that's why we see a lot of precommitment activity and pipeline at ETV. ETV again, if you recollect, has the highest -- has a very high proportion of global captives. Pune, Noida, [indiscernible] has been slow. It's around 40% or slightly lower. And that's simply because the IT services back-to-work has been slower overall compared to the captives and compared to the big tech. We believe that at around 50%, 55%, occupiers will be compelled to just look at their space strategies, and to firm up with decisions, both on medium term as well as on long term. We are already seeing that happening for banks, health care and retail captives. We think that will also translate and trickle down to the big tech, the product tech companies that we speak of. And I think the IT services companies will be the last to come in. I think the back-to-work is slower in IT services, although we have seen very positive commentary by the CEOs who are pushing people -- who are trying to push and nudge people back to work. So I think at 50%, 55%, we'll see a trigger. We are already seeing that in certain segments. If you see, we have renewed -- early renewed with a healthy uptake, although we have contracted for a much later timeline with a global retail captive and [indiscernible] additional space to them in Manyata, the banks continue to feature in our pipeline. And I think a 50%, 55% overall physical attendance will require the companies to look at their plans because I think it will never be 100%. It was never 100% prepandemic. I think somewhere around 70%, 75% is what is being expected. And that is the level at which they will need to start factoring in more space. So I think 55%. We have not seen conversations around desk sharing. I think that's not -- that's the conversation that's not happening. There will be flexibility. So there will be a certain amount of work from home. But majority of the time, the business leaders want people to keep that to work, and there's a lot of requirement of space to be remodeled that the discussion's happening, both on creating more social spaces and a larger per person seat space.

Sure. Sure. That's helpful. So 50%, 55%, going by the traction that you're seeing, say, about 1 or 2 quarters, we should be there?

Yes. We think so too as well, Kunal. And that's why we said the second half of this year, we believe that we'll see traction on the larger leases. And by that time, global corporates will also firm up their -- both their long-term plan. So because if they come to [indiscernible], they have to think of a 5- or 10-year commitment if they are offshoring an R&D process or any other center. And I think by that time, we'll also be able to get internal approvals on the CapEx requirements to set up or offshore more to India.

Sure, sure. That's helpful. My second question was on, again, the financials. So on a 9-month basis, right, YTD, we have seen a 12% growth in the NOI. But on NDCF basis, we've seen a decline, and understand it so because of the conversion of the 0-coupon bond and so on and so forth. But like going into next year, should we expect -- or can we expect the NOI growth to also reflect into NDCF growth? Or there could be a disconnect there?