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

Good evening, everyone, and a very warm welcome to all for Embassy REIT's Third Quarter FY 2024 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. [Operator Instructions] I would now like to invite you -- introduce your host for today's conference, Ms. Sakshi Garg, Investor Relations Manager for Embassy REIT. Ma'am, you may begin now. Thank you.

Thank you, Neerav. Welcome to the Q3 FY 2024 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter and 9 months ended December 31, 2023 on Friday. As is our standard practice, we have placed the 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, any financial guidance and pro forma information that we provide on this call are management estimates based on certain assumptions and have not been subjected to any audit review or examination procedures. You're cautioned not to place undue reliance on such information and there can be no assurance that we'll be able to achieve the same. Joining me today are Aravind Maiya, our CEO; Abhishek Agrawal, our CFO; and Ritwik Bhattacharjee, our CIO. We will start off with brief remarks on our business and financial performance and then open the floor to question. Over to you, Aravind .

Thank you, Sakshi. Good evening, and thank you all for joining us today to discuss our quarterly results. Q3 was the best performing quarter till date in terms of total lease up, and I'm happy to report that we have met our full year leasing guidance within 9 months. We created a new record by leasing 3.5 million square feet this quarter, including 3 large pre-leases totaling 2.2 million square feet. In addition, we delivered a largely pre-leased new office tower of 0.4 million square feet in Bangalore and announced distributions of INR 5.2 per unit. As anticipated, our portfolio occupancy picked up marginally closing at 84% at the quarter end. With the strong market demand dynamics as well as the recently announced amendment of the SEZ rules we are well positioned to continue this growth trajectory. Overall, we remain on track with our FY '24 financial guidance. On the macro front, calendar year '23 was a year of rebound for the Indian office real estate. With annual gross absorption within striking distance of an all-time high of 60 million square feet, India was one of the best-performing office markets in the world. The last quarter especially stood out with an impressive 18 million square feet absorption and initiation of multiple requests for proposals, which stands at 19 million square feet as of date. In terms of cities, Bangalore once again outshined and contributed to a 1/4 of this total leasing and 50% of the active RFPs as of date. A majority of this demand emanated from global captive centers which continue their journey to set up, expand and move towards higher value services in India. With another 200 to 300 GCCs expected to be set up by 2025, the Indian office sector is set to repeat the stellar performance in the coming years. With this backdrop, let me now update you on our record Q3 leasing performance. We leased a total of 3.5 million square feet across 22 deals. This included 1.1 million square feet of new leases in our existing space and 0.2 million square feet of renewals, leading to 35% rent reversions and a premium to average market rents. The highlight of this quarter clearly are the 3 large pre-leasing deals totaling 2.2 million square feet providing customized solutions to global tenants in our development projects in Bangalore. One of Australia's largest bank committed to 0.8 million square feet along with 0.3 million square feet expansion options in the D1/D2 towers in Embassy Manyata. In addition, a renowned U.S.-based tech company committed to 0.6 million square feet along with 0.3 million square feet expansion option in Block 8 in Embassy TechVillage, which is due for delivery in the next 9 months. And finally, one of the largest American retailer committed to 0.8 million square feet for the whole L4 Block in Embassy Manyata, which is due for delivery in September '25. We welcome these landmark deals, which once again reflected how our high-quality business parks remain the preferred choice for the world's best companies looking to expand their India footprint. Supported by these 3 large deals, global captive centers contributed to around 80% of our total leasing with the demand primarily driven by BFSI, retail, and technology sectors. Our core Bangalore portfolio once again contributed to the majority of our Q3 leasing with a 75% plus share. We're also encouraged by the early signs of recovery seen in our Pune and Noida markets, which contributed to around 0.8 million square feet of leasing this quarter, mainly for non-SEZ spaces. Currently, our non-SEZ occupancy stands at 92% and SEZ occupancy at 78%. Of our total 4.5 million square feet SEZ vacancy, we've already applied for de-notification of 0.8 million square feet fully vacant building in Bangalore under the previous SEZ rules. In addition, we have applied for de-notification of another 0.3 million square feet building in Pune, which got vacant post the quarter. We have also applied for demarcation of an additional 1.1 million square feet area across our Bangalore, Pune and Noida properties as part of our Phase 1 demarcation plan under the amended SEZ rules. Of the balance, 2.3 million square feet SEZ vacancy, 1.4 million square feet is in Embassy Quadron in Pune and Embassy Oxygen in Noida. We will look to apply for demarcation of these areas based on a pickup in leasing activity in these respective micro markets. Overall, we are confident that the amended SEZ rules will help us to increase our occupancy further which we believe has already bottomed out and started growing from this quarter. In terms of expiries, we started FY '24 with scheduled expiries of 2.5 million square feet, which has now increased to 4.6 million square feet. The increase was majorly led by early renewals of 0.8 million square feet and unanticipated exits of 1.3 million square feet, mainly from IT services companies. This includes 0.3 million square feet exit notice received in Q3 from a large Indian IT services player for a full building in Embassy Qubix. We have now applied for de-notification of this building and have a strong pipeline for the same. Overall, of the total year-to-date exits of 2.9 million square feet, we have already backfilled 1.5 million square feet at market rents and 0.8 million square feet is currently under refurbishment. In our view, this year has been exceptional in terms of the additional unanticipated churn from IT devices occupiers, which has impacted our cash flows due to temporary vacancies and the subsequent rent-free periods on the backfill. However, our IT services client exposure has now gone down to less than 12% versus 25% at the time of our listing. Also, the positive rent spreads achieved on releasing these areas has placed us very well for the medium term as we have increased our in-place rents by 10% just over the last 18 months. Year-to-date, we have already leased 6.5 million square feet, thereby achieving our annual guidance within 9 months. Led by this record leasing and post factoring the exits, our occupancy increased by over 100 basis points in Q3 to close at 84% on a portfolio level and 85% on a same-store basis. Moving to our development portfolio. During the quarter, we received occupancy certificate for the 0.4 million square feet tower in Embassy business hub in Bangalore, which is leased to Philips. We expect to receive the occupancy certificate for another 0.7 million square feet Tower 1 in Embassy Oxygen in Noida this month. Our current development pipeline now totals 6.9 million square feet at highly attractive yields of over 20%. Around 90% of our upcoming developments are in Bangalore, our core market, which continues to lead India's office absorption on the back of robust GCC demand. Specifically in the next 24 months, we expect to deliver 4.7 million square feet across 2 of our largest properties, Embassy Manyata and Embassy TechVillage in Bangalore. Post the 3 marquee deals signed in Q3, around 70% of this medium-term delivery is already pre-leased along with expansion options for another 10%. We believe that this growth is the key driver of our NOI and distributions expansion post FY '26. As we continue to deliver and lease up this organic growth, the natural next step for us will be inorganic expansion for which we are starting to evaluate available options. Lastly, on our hotels. Our hotel portfolio continued to perform strongly with a 55% occupancy and a 19% year-over-year ADR growth, resulting in a quarterly EBITDA of INR 50 crores. Finally, we welcome the expansion of a public float from 30% at IPO to 92% post the recent complete stake sale by one of our sponsors. This transaction has positively expanded our unitholder register, which now boasts of many large global long-only funds, sovereign wealth funds, domestic mutual funds, insurers, as well as a rapidly expanding retail investor base. In addition, it has led to an increase in our weightage in multiple global indices, further improving the liquidity in our stock. As we approach our fifth anniversary, we're happy to report that till date, we have delivered over INR 9,300 crores in distributions and total annualized returns of over 10% to the benefit of our 90,000-plus unitholders. As the management team of India's first listed REIT, we've always focused on delivering long-term growth while following the highest standards of corporate governance. We are determined to carry forward this benchmark as we continue on a strong and upward growth trajectory. With this, let me now hand over to Abhishek for our financial updates.

Thank you, Aravind, and good evening, everyone. Let me take you through the financial updates for the quarter. Revenue from operations grew by 8% year-on-year to INR 936 crores. This was primarily driven by new leases, lease up at high releasing spreads, contracted rent escalations and a ramp-up in our hotel business, which was partially offset by the impact of exits in our office portfolio. Net operating income grew by 8% year-on-year to INR 760 crores, in line with the increase in our revenue. Our commercial office margins of 85% and hotel margins of 50% continue to be best-in-class. Net distributable cash flows stood at INR 494 crores, down 2% year-on-year. This was primarily due to an increase in our interest costs as well as working capital changes. Further, we have declared Q3 distributions of INR 493 crores or INR 5.2 per unit making this our 19th quarter of 100% distribution payout. Moving to updates on our balance sheet. During the last month, we successfully refinanced INR 2,600 crores of maturing debt at an average rate of 8.25%. The refinance was done through a combination of listed debentures, first-time commercial paper issuance and bank loans. Considering the current interest rate environment, we have tactfully focused on raising funds from capital markets with an average maturity of less than 2 years in our recent refinance. With this, we do not have any further debt maturities till the latter half of this calendar year and only 20% of our debt book has rates logged in for over 2 years. With an expected turn in the rate cycle in the short to medium term, this places us well to optimize our funding costs. Our overall debt book now totals INR 16,000 crores, implying a 30% leverage ratio and is well balanced across diverse investor pools, debt instruments and tenures. We continue to maintain our dual AAA/Stable credit rating and an industry-leading in-place debt cost, which stands at 7.8% post the recent refinance. Lastly, on the forward financial outlook. Based on our year-to-date performance, I am pleased to reconfirm the FY '24 guidance that we provided in July '23. We continue to expect our NOI to be in the range of INR 2,924 to INR 3,136 crores and our distributions to be in the range of INR 20.5 to INR 22 per unit. Due to the additional exits noted during the year, we expect to finish the year marginally lower than the midpoint of our NOI range and at around the midpoint of our distribution guidance range. As Aravind mentioned, we are focused on our organic growth by delivering and leasing our 6.9 million square feet developments on time, financing for which is already fully secured. We are also keen to expand our focus on inorganic growth as we believe that high-quality accretive acquisitions in the right micro markets should provide a further impetus to our distribution growth trajectory in the long term. Considering the positive impact of all these growth levers, we expect our NOI and distributions to grow further from this year's levels. We will provide detailed guidance for next year along with our Q4 results. With this, let's move on to Q&A, please.

[Operator Instructions]. The first question is from the line of Akshay Malhotra from HSBC.

Can you hear me?

Yes, now we can.

Okay. So for the first question, I would like to ask that, could you explain the contours of the pre-leasing that has happened this quarter, things like have you received the deposit yet? Or -- and when does this rent start accruing, also in terms of when the fit-out starts? Or will there be any modifications required to be done to the building catering to the new tenant?

Akshay, you want to finish off your questions so that we can answer all of them or is this the only one?

Okay. I'll go on with the other ones also then. For the second one, I would like to ask about the GolfLinks. So we've seen some reduction in distribution from GolfLinks in the last 2 quarters. It would be helpful if you could share some insights for the same? And thirdly, on the share of dividend within the total distribution, that seems to be -- has seen a little reduction in this quarter? And could you explain that also. Yes, that's all.

Sure, thanks, Akshay. I'll take the first one and hand over to Abhishek for your second and third questions. In terms of pre-leasing, I'll give some guidance, I don't want to get into more than what we can disclose under our confidentiality terms. Overall, if you see the deals that are done for 3 buildings, which is D1, D2 and Embassy Manyata, which is due for delivery in February '26. Then we have one more deal in L4, which is 100% take-up which is due for delivery in September '25. And the other one is additional space in our Parcel 8 in Embassy TechVillage, which gets done later in this calendar year. Overall, I think other than D1, D2, that is going to be fully fitted out deals and the other 2 are plain vanilla deals where we do the base build and the fit-outs are done by the respective tenants. So that's number one. Number two, I think in terms of rentals, all I can say is we have obtained above-average market rentals for all of these 3 deals. So that's number two. Number three, specifically on the cash flows, we've not really received any security deposit on any of these, we will receive that in due course. And yes, I think broadly, and I think in terms of rent-free, of course, considering that these are large deals, these rent-frees range from, I would say, 8 to 10 months. Yes, I think these are the big picture contours of these deals. And there are, of course, some specific customizations which are given by each of these tenants which have been factored in, into our time lines, you will see that a couple of buildings we have deferred delivery than what we had presented in the last quarter, that is basically to factor in some of the customizations, which are given by each of these tenants. So broadly, I think these are the things which I want to highlight in relation to these pre-leases.

And Akshay, this is Abhishek. On your second question, which was related to GLSP's distribution reduction, so we think there is a temporary reduction because of working capital changes. And I think by the end of this year, we would have -- or maybe quarter 4 we would have slightly higher than the run rate that we are clocking for 9 months. On the third question, which is on dividend percentage reduction, so the distribution of dividend actually depends on the profitability of this SPV, which in turn depends on the depreciation and interest costs, which are rising as of now, depreciation because of the deliveries that we have and interest cost because of the increase in interest rate and the refi that we have done. Going forward, we think for Q4 also the same run rate of Q3, we should be able to maintain that.

Okay. Got it. I think if I can quickly take the last one. You've already thrown some light on the time lines for denotifications on the SEZ area. Could you also throw some -- a little bit more detail on that? And also maybe what is the time line that is usually taken to get this area denotified. That's all from my side.

Yes, sure., Akshay. Just are you talking about de-notification or the new demarcation?

Denotification.

Okay. Denotification, I mean we have a few buildings which are currently under denotification. Majority of those are, of course, in Bangalore, except 1 building in Pune, which we've just now applied post the quarter end and 1 in Oxygen, which is the building which is getting completed. Broad sense, I think Bangalore and Pune, we should be able to complete the exercise anywhere from 6 to 8 months. We are in advance stages on the Bangalore one, Pune is, of course, just started. Oxygen, there were some interdependencies on obtaining OC, which is now expected -- I mean we should have got the OC honestly in the month of January because the building is ready but it just got deferred due to some procedural issues at the relevant authority. So the moment that gets done, we believe it's another 3- to 4-month process. So that's broadly the time lines on the buildings, which are under denotification.

Next question is from the line of Pritesh Sheth from Motilal Oswal.

First is just a follow-up on the previous question. So rentals for the pre-leasing that you have done, you said it's above average market rentals. But just comparing in your existing rentals in that asset, how have the performance been, any signs of seeing a rental increase considering both these assets are doing well exceptionally on the non-SEZ side. So how has the rental trend been? Are we seeing any signs of rental increase happening?

Sure, Pritesh. You have any more questions? It will be good if we can take off all.

Yes. First, probably you can take and maybe I'll follow up with that later. Second one.

Okay, sure. I think in terms of trends we've been seeing consistent increase in rentals in our Bangalore assets, all 3 of them, honestly, which is Manyata, TechVillage and GolfLinks. I think on average, we've been able to increase in place rent with almost 25% in Manyata in the last 18 to 21 months. TechVillage, there has not been too many expiries and subsequent renewals. So the rentals are holding fort versus GolfLinks, if you look at it, we've been able to increase the rentals with almost 15% in the last, again, 18 to 21 months. So overall, all 3 assets, are good rental increase. And to your point, the fact that we have been able to achieve substantial pre-leasing in these future towers, I think our ability to increase rentals for the balance space should be much stronger.

Yes, sure, sure. That's helpful. And second question is on the distribution. So while we had a good increase in revenue and NOI this quarter because of higher interest expenses, we had a flattish distribution. Considering the next renewals of debt comes in the later part of the calendar year, would next couple of quarters be where we see increase in distributions on quarter-on-quarter or there is some other line item which can offset that increase in NOI? So your comments on that.

Pritesh, I'll request Abhishek to take this.

So Pritesh, as we have mentioned that this is our last quarter of bottoming out of occupancy. And in this current year, all the leases that we have done because of those, there are a huge amount of noncash NOI also which will start converting into cash from next year and the NOI also will start increasing from the next year. Considering the efficient follow-through, we think that this should start making it into NDCF. Only thing that, as you said rightly, that there is interest rates, so we'll have to wait and see what is the interest rate trajectory because that is one thing which has an impact or a drag from NOI or EBITDA to NDCF. So that is where it is, and the taxes part on the increased NOI.

And some sense from my side, Pritesh, of course, I don't want to be guessing on where the interest rate lands, but we will have some negative impact because of the refinance we've done post the quarter, as Abhishek mentioned, that was an average 8.25% versus the in-place was around 6.4% that will have a negative. But overall, our sense is, the rates have peaked out, and it should start reducing in due course, of course, the due course when that will happen is subject to debate. So that's broadly my take on interest.

Sure. So that's what I wanted to know in terms of refinancing, when it happened and how it's going to impact the NDCF for next quarter. So thanks for that. And just lastly, on this 1.1 million square feet of demarcation that you applied for, is it kind of speculative in nature or we are already seeing some kind of demand there and hence, you are going ahead with this first phase of demarcation. And how should one think about the balance 0.9 million square feet of SEZ space because 1.4 million square feet you said is in Quadron and Oxygen in Pune and Noida so what about the balance 0.9 in terms of time lines?

Yes. If you look at the 1.1 which we have applied for right now, Pritesh I think substantial portion, almost 0.6 million square feet is in Manyata while to be very frank, none of the 1.1 is backed up by any existing tenant. But in Manyata, we've gone aggressive and tried to demarcate almost all of the vacant SEZ spaces except one recently completed tower. So that has been our strategy in relation to Manyata and in other cities, what we have done is, we've kind of picked and chosen a few floors as a test case to start off with. Just to give you a sense why we've done that is if you look at Pune, Embassy TechZone, Hudson & Ganges where we de-notified the 9 lakh square feet new building. While overall Pune market demand has been low, but in Hudson & Ganges, we've been able to reach almost 70% occupancy and there is good traction, I would say, for non-SEZ. So based on that, we have picked up a few floors in the other properties. And our strategy around those will be to apply for demarcation more on a back to back because our sense is -- at least basis discussion so far with SEZ authorities, Ministry of Commerce the process for demarcation is expected to be much simpler, less time-consuming, and hence, I think we can -- Phase 2, we can do more on a back-to-back basis. That's broadly the way we are thinking.

Next question is from the line of Mohit Agrawal from India Infoline.

Congratulations for a great leasing in the quarter. Staying with the demarcation question, so do we know what kind of CapEx and what all needs to be paid back for demarcation now that we've applied for 1.1 million square feet. And what is the kind of ROE that we expect to generate. So is the incremental SD that we expect from new leasing sufficient to cover the CapEx? So some color on that. How is the ROI in the new set?

Sure, Mohit, I'll ask Abhishek to take this.

So on the demarcation CapEx, the way we understand is that we will have to give away the GST that we saved, which is basically 18% of the cost of construction with some depreciation on the plant and machinery and the furniture and fixture. For the 1.1 million that we are demarcating now, we expect the cost to be in the range of INR 300 to INR 400 per square foot. If you talk about ROI actually for Bangalore assets, this price actually is around 3 to 6 months of rentals, which will be covered by the SD and for non-Bangalore Parks, which is Noida and Pune, it should be around 9 to 10 months of SD -- sorry, 9 to 10 months of rentals. So it will either be covered by SD or some debt drawdowns.

Okay. And this includes -- Abhishek, this includes everything in terms of the common area charges and all also that have to be paid. So this includes everything, right?

Yes. Yes.

Just not the GST. Okay. Okay. Understood. Secondly, on the -- you have mentioned in your presentation on the pipeline demand of 1.5 million square feet. So could you give some color on where this demand is coming from in terms of like is it largely global captives and for which assets is this demand for? And second part to that question is, Aravind, you mentioned in your opening remarks that you are seeing some early signs of recovery in Pune and Noida. So if you could give some color because our understanding has been that even for non-SEZ the demand has been weak in those assets. So some color on that will be great.

Sorry. In terms of the 1.5 million pipeline, honestly, it's the 2 main cities where we have demand are Bangalore and Pune and a little bit in Noida. So that's broadly the demand and most of the demand are for our existing spaces, not pre-leasing. So that's number one. Number two, in relation to Pune and Noida, some sense over there, while we have Pune, all 3 assets in Hinjewadi. The TechZone and Qubix assets are in Phase 1 of Hinjewadi and generally, the demand for non-SEZ space in these 2 assets are reasonably okay versus Quadron, which is in Phase 2, where I would say the demand is not that great. So that's a sense of Pune. In relation to Noida, it's a similar story where we have Galaxy, where there were quite a few large exits in the early part of this year. That's in Sector 62 closer to Delhi, better market, fully non-SEZ building. You see that we've been able to up the occupancy to around 84% this quarter, and there's some decent pipeline for the balance as well versus Oxygen much further in the Expressway Sector 144, the demand continues to be subdued, for honestly, both SEZ and non-SEZ space.

Okay. Perfect. And just one follow-up to my previous question on the first question. So Aravind, from what I understand that if suppose if a whole vacant building is available, do you still have an option of applying under the old rules or with the new notification, the old rules, the option of applying under that goes away. What I'm trying to understand is that if you have a fully vacant building, will you stick to the old rules and is that better to apply with? Or you will for all the new denotification have to go with the new rules?

Honestly, both are independent and both of them continue. The denotification is a denotification of land itself. So that becomes a non-SEZ land, and you just move on as non-SEZ as the demarcation is just a floor-by-floor demarcation where the land is not denotified. So there are 2 different concepts and both of them continue.

Next question is from the line of Parvez Qazi from Nuvama Group.

Congratulations for a great set of performance on the deal side. So my question is, again, regarding your Pune and Noida assets, we have seen some amount of pickup this quarter in occupancy largely due to non-IT, ITES occupancies. So in your sense, based on your discussion, with occupiers in this segment, do you see any movement, any green shoots there? Or do you think for CY '24 largely IT, ITES demand will continue to be at least weakest type?

Yes, Parvez, I would call it, our guesstimate as of now for calendar year '24 is IT, ITES will continue to be subdued or sluggish for this calendar year, while there have been a lot of growth in that sector prior to, let's say, last 6, 9 months in terms of head count, they have only given up space in the last 3 years, not taken up any space. But given where we are in terms of their overall business, we -- as we believe that it might be some time before they come back into the market. So the demand is largely going to be from non-IT ITES. Having said that one-off project-related deals still come to us in these respective cities. What I mean by that is let's say, IT is a company, which has won a big, let's say, deal, which has to mobilize resources physically, these guys are taking up some space, but that's far and few.

Next question is from the line of Vishal Parekh from Kotak Alternate Asset Managers.

On the time lines date for the projects, I think I took the feedback on the shift in time lines and costs. I think hotels also some time lines have moved. Just wanted to check any specific thoughts around it.

Vishal, to the best of my knowledge, we've not really moved the ETV hotels time lines. I mean, of course, this is something which is still early stages in terms of construction. If there is any change in time lines we will come back in due course. But as of now, we have continued to...

Sir, sorry you are sounding a little distant.

Is it better?

Yes, sir.

Yes. So I was just saying, as of now, we've stuck to the earlier time lines on hotel but it's still early days in terms of hotel construction.

The next question is from the line of Satinder Singh Bedi from Eon Infotech Investments.

Congratulations for great leasing numbers. It seems that the great performance on leasing and also the increase in revenues have been held back by the increase in interest cost and the working capital changes. So on the interest cost, so what is the occupancy in M3 Block A and the Oxygen Tower 1 because now they seem to be in a position where they are loading or will be loading the cost fully, but the occupancy is not known. So what is the occupancy on these 2, please?

Yes, sure. On M3, the current occupancy is 45%, and we have some leased pipeline for the balance. On Tower 1, as of now, it's nil occupancy and expect it to be completed this quarter, Satinder, that is Q4.

Okay. This quarter, okay, fine and the next is on this -- we had this -- we can see -- or whatever -- the renewals coming up for Qubix in 4Q FY '24, which is sizable, about 347,000. And then in the next financial year TechZone, which is, again about 420,000. So Aravind any visibility on the releasability of this?

Sure, Satinder, on Qubix, as I mentioned in my initial remarks, this is an additional exit, which has come from a large IT services player during the quarter, and they've exited post the quarter. So it's an exit which has happened post the quarter. In terms of the expiries for next year, I would suggest we will give you better color along with our Q4 results and next year guidance, Satinder, these are still moving pieces, I think we'll be in a better position to comment on FY '25 expiries in the next 3 months.

And Abhishek, on the working capital changes. So could you amplify as to what explains nonavailability of support. While part of it has been answered because the earlier expectation was that because of the strong leasing, the security deposits might have supported. But since they have not come in, so probably that exposes part of it, okay. But so a good increase on top line has not been supported by the subsequent line item. So especially on working capital, there's a large move. So if you could amplify that, please?

Yes. So Satinder, what has actually happened is, as you rightly said that the SDs have not come in. But instead of that, the expiries that we have for that, we had to repay the SDs, which was already there. So this time, there is a hit of a -- net hit of around INR 45 crores for this quarter on that. And also the property tax for the half year was paid during this quarter as per the regulatory requirement. So there is an impact of another INR 15 crores, INR 16 crores because of the property tax of half year getting paid in Q3. So these were the major movers.

Okay. And ETV Block 6, in this quarter, the time line for completion has been shifted from December '25 to '26. So any reasons for the same Ritwik or Aravind?

Yes, Satinder, I think we just delayed the project a bit due to certain approval related matters. And we also had to do certain pre-site works of shifting some of the existing DG sets et cetera, which were there, which took extra time than what we anticipated because of which there is a delay in that project. And hence, we shifted the time line.

Next question is from the line of Abhinav Sinha from Jefferies India.

Congratulations on strong leasing and a couple of questions. So firstly, on the portfolio occupancy, you guys had guided for, I think, 85% for the portfolio and 88% on same-store for 4Q. So does it still stand?

Yes, Abhinav, I think based on current trends, what we're seeing in the pipeline, we believe we should be able to meet that guidance.

And this will include the 0.7 million building, which is getting added to the portfolio?

Yes, that's correct.

Okay. So you are expecting another pretty strong quarter, right? I mean, close to 2 million, 1.5 million, 2 million for leasing?

Yes. And I'll refrain from giving a number, but I think we're still on track for that guidance.

Okay. Excellent. Secondly, on -- see you were alluding to the inorganic growth plans now. So I just wanted to check, I mean, this is within the ROFO pipeline that we have or outside it? And within that, how comfortable you will be on taking the gearing up for those acquisitions?

Thanks, Abhinav. Ritwik was feeling a little left out. Thanks for this.

What an opportunity. Yes, Abhinav look, I think ROFO for us is something that we've always had as an option. And with that, I think, front and center there is Chennai, just as a matter of form we had sort of looked at it. But again, I think we reiterate that anything that we buy has to be funded, right, given that we push out cash in the form of distributions. And frankly, the market just has not been there for us in this interest rate environment. And this is not just applicable to us. I think globally as well, if we just look at sort of how REITs have been impacted. So I think raising debt for us has tended to be more of a sort of binary exercise. We wanted to make sure we got the refi done. We wanted to make sure that there wasn't sort of obviously pressure on any covenants, and I think the team has done a fabulous job of that. But I think now in this environment, given that we are seeing sort of a slight re-rating, sort of looking at the way the stock has been moving, a couple of the overhangs have obviously disappeared. The first one was leasings coming back, driven by GCCs. The second is, obviously, you've had sort of the sponsor stake overhangs have obviously disappeared as well, and that's reflected on the stock price. What we want to do is actually have maybe more of a sort of a bigger plan to think about inorganic growth, right? There is clearly the market's improving, number one, from a leasing perspective, driven by the GCC demand. And so if there is a way we can think about of injecting sort of a quality asset into the portfolio with the right mix of equity or debt, we'll do that. At this point in time to lever up or take on more there, I can't say what the optimum thing is. But most importantly, number one, the deal has to be accretive. Number two, it has to -- I mean just make strategic sense for us to do it. And number three, we have to just fund it in a way that doesn't pressure either the balance sheet or result in heavy dilution. But yes, in this -- I think over the last sort of 5 years, we've been through so much volatility. I mean we've been through so many pressures. I think for the first time, we feel really good about sort of the runway ahead of us. If you just look at sort of all the macro and people talking about what's happening in India and companies coming in. I mean 78% of our leasing was to GCCs and the pipeline is also sort of the majority, the 1.5, which is also GCC-led. So I think if that sort of filters into the acquisitions, we will certainly see it how we can best do it.

Next question is from the line of Kunal Tayal from Bank of America.

A couple of questions from me. The first one is on your pre-leasing success. So the question then is the pre-leasing basically is suggesting that some of these deals will go live 1 year, 1.5 year from now. What should be the read for that? Is it that it just so happens that some of these clients are in their stage of India ramp-up, and that's why need capacity on these like 12 months down the line? Or is it a reflection of the fact that if the environment on leasing is starting to improve now, but the time it translates to real demand, it should be this much of a gap in any case? So that's sort of the first question. And then second one is just a follow-up on the acquisition plans. If good assets were to come along today, can they be NAV accretive at the current levels of interest or debt levels? Or would you have to wait for debt levels or cost of borrowing to go down and then you could consider them.

I think in terms of pre-leasing, to be very frank, completely dependent on where the respective company is in terms of their current headcount and the projected ramp-up in the headcount. Some of these guys -- I think all the 3 are existing companies, existing global captives. Some of them relatively new, some of them have been there for some time. They have grown significantly, and we also expect to grow significantly in the next 1 to 2 years. Honestly, the factors, all of these while they enter into these deals, that's the only thing which I can comment on, probably Ritwik can answer your second one.

Yes, I think on the second, it's a little more nuanced than that. If you were to sort of fund an acquisition today, I think it really depends on sort of number one, the size of the acquisition and number two, just really thinking through sort of what the pricing expectations of that are, right? At the current interest cost, I think fundamentally, the biggest issue then for us is obviously making sure that it doesn't break the bank either from an earnings perspective or actually where -- thinking about where NAV comes in. Ideally, we would obviously like to do an acquisition as close to NAV -- just thinking about sort of where we'd like to issue equity or just make sure that the funding is obviously done at numbers that aren't completely egregious to how we sort of price the deal, but I think it's really a function of size and pricing expectations from any seller. Which in this environment, Kunal, just so that you're aware, I have not completely -- we've looked at a lot of stuff over the last sort of 1 year, 1.5 years or even beyond. I think on the sell side, the expectations are still very, very tight, so -- and I think with that, it becomes difficult for us to think about NAV accretive deals or DPU accretive deals, which we're obviously very, very focused on. Hence, we've actually held off.

Yes, right. Okay. Just one quick follow-up on the first one. Really just trying to get a sense that would you expect any large deals to come along and move at a fast pace from here and close, let's say something like in the next 6, 9 months? Or is the typical conversion tenure closer to like 1 year, 1.5 years in any case?

The deals of these size can vary Kunal, sometimes they get done in 6 months, sometimes it takes longer. Really it's dependent on where the respective company is. Let me give you a couple of examples. One, if it's not just expansion but also relocation, it could be faster time line to completion because they want to move fast. If it's more growth option generally, it could take a little more time because they would want to factor in much longer lead time in terms of the demand requirements. So that could take a little more time. If the question is, would you have an instance where you could do another big deal in the next 6 to 9 months? Probably yes, but it really depends on what the requirement is.

Thank you very much. Ladies and gentlemen, we'll take that as our last question. On behalf of Embassy REIT, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.