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

Ladies and gentlemen, good evening, everyone, and a very warm welcome to all for Embassy REIT's First Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce you to our host for today's conference call, Ms. Sakshi Garg, Head of Investor Relations for Embassy REIT. Thank you. And you may begin, ma'am.

Thank you. Welcome to the first quarter FY 2025 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter ended June 30, 2024, a short while back. 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 it's not obliged to update them at any time. Specifically any financial guidance and pro forma information that we will provide on this call are management estimates based on certain assumptions and have not been subjected to any order to review or examination procedure. You are 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. Start off with brief remarks on our business and financial performance and then open the floor to questions. Over to you, Aravind.

Thank you, Sakshi. Thank you all for joining us today to discuss our first quarter results. Happy to report on another successful quarter to start off the financial year. Quarter, we reached a total of 1.9 million square feet and completed the acquisition of the 5 million square feet Embassy Splendid TechZone asset in Chennai. We also started a new redevelopment project in Embassy Manyata aimed at increasing the leasable area from 0.3 million square feet to 0.9 million square feet, with an expected yield on cost of around 20%. Most importantly, I'm delighted to announce our Q1 distributions of $5.6 per unit, which implies a growth of 7% quarter-on-quarter and 4% year-over-year. As I had highlighted in our previous earnings call, FY '25 is expected to be a year of growth for our business on all fronts, our [ sales ], occupancy, NOI and DPU. We are on track to deliver the growth to our investor base, which has crossed the 1 lakh mark recently. On another positive note, the recent budget announcement has reduced the holding period for long-term capital gains on REIT units from 36 months to 12 months. This puts us at par with listed equity shares and should further enhance the attractiveness of the REIT product amongst investors. A bit on the macro front. Indian office market continues to do well and recorded a strong first half with 31 million square feet absorption in the top 7 cities, a 26% jump year-over-year. Almost all independent property consultants are now expecting calendar year '24 to create a new absorption record, beating the all-time high of 61 million square feet in 2019. Amongst cities, Bangalore and Chennai stand out accounting for over 40% of H1 absorption and over 50% of active RFPs in the market. With 100% of our developments coming up in these 2 markets, we are very well positioned. The key demand driver continues to be global corporates for setting up or expanding the GCCs in India. In the past 3 years, almost 70% of the leasing has been to GCC clients. Our GCC exposure continues to rise with 87 such companies, occupying close to 20 million square feet total area, forming part of a 250-plus tenant roster. Moving to our Q1 leasing performance. We leased 1.9 million square feet across 22 deals, including 0.7 million square feet of new leases and 0.6 million square feet of renewals at 11% combined sales. This included early renewal of 2 leases totaling 2.2 million square feet which were due to expire in FY '26. In addition, we secured another large precommitment of 0.6 million square feet, along with an expansion option for 0.3 million square feet. This prerelease is one of the largest GCC tenants and will construct a build-to-suit tower by redeveloping Block B in Embassy Manyata with an expected yield on cost of around 20% on this redevelopment.

Sir, we are losing your audio in between.

Okay. We have once again unlocked additional value at our prime asset Embassy Manyata. At Embassy Manyata in the last few years, we have also initiated 5 refurbishment projects post large tenant exits spanning 2.2 million square feet area. Of this, we've already backfilled 1.3 million square feet at 75% spreads. These refurbishments have been instrumental in adding value to the asset and have enhanced the in-place rents of Manyata by 10% just in the last 12 months. In terms of lease expiries, which are front loaded this year, we noted 0.9 million square feet of tenant exits during Q1. We have received an exit notice for an additional 0.4 million square feet from one of our IT services tenants in Pune, which we had indicated as a potential risk last quarter. We ended the quarter with an occupancy of 85% by area and 88% by value. Our Mumbai portfolio is already at 99% occupancy, Chennai at 95% and Bangalore at almost 90%. And 3 of our properties are now 100% occupied. So currently, we have a 5.8 million square feet vacancy in our portfolio with 2.5 million square feet area in Bangalore and 1.3 in Noida. I want to highlight that we have a strong traction for this 3.8 million square feet vacancy across Bangalore and Noida with a good pipeline for Manyata, TechVillage and Oxygen. On the SEZ front, during Q1, we successfully de-notified the 0.8 million square feet F2 block and the under development 1.4 million square feet D1 and D2 blocks in Embassy Manyata. With this, we have de-notified a total of 3.4 million square feet area since April 23 and have already leased up over 70% of this. Another 0.3 million square feet block in Pune is under the denotification process. In addition, we have successfully demarcated another 0.1 million square feet in Noida this quarter to nonprocessing area under the new guidelines, taking the total demarcated area to 0.8 million square feet. Of this, over 40% is already leased up, and we have a strong pipeline for the remainder. Another 1 million square feet area in Bangalore is under the demarcation process, and we expect to complete this the next month. Moving to our development portfolio. Our current development pipeline now totals 8.6 million square feet with a CapEx outlay of INR 4,600 crores. This is expected to result in incremental stabilized NOI of around INR 1,000 crores, implying around 20% yield on cost. If you look at the delivery schedule still end of FY '26, 6 blocks spanning 5.8 million square feet will come up in Bangalore and Chennai. We have already pre-leased around 70% of this area, including expansion options. This 15% area addition to the existing 37.7 million square feet of completed space gives good visibility of the REIT's growth runway in the midterm. Lastly, on a recent acquisition. We have completed the acquisition of the 5 million square feet Embassy Splendid TechZone asset in Chennai and fully integrated asset from June 24. With that, we are now a 51 million square feet office portfolio and have strong embedded growth levers, giving us a clear pathway to continue delivering DPU growth. I will now hand it over to Abhishek to present the financial updates.

Thank you, Aravind, and good evening, everyone. Let me take you through the financial highlights for Q1. Our revenue from operations stood at INR 934 crores, up 2% year-on-year and NOI at INR 758 crores, up 3% year-on-year. If you look at the commercial office segment, both revenue and NOI were up 4% year-on-year. The increase was mainly driven by new lease-up at high releasing spreads and contracted rent escalations. For our solar segment, which represents less than 5% of our top line, the NOI dropped by 34% year-on-year, mainly due to a seasonal reduction in solar unit generation as well as a reduction in the government tariffs. On the other hand, our hotel segment NOI grew by 16% year-on-year due to an occupancy uptick of 800 basis points to 61% as well as an ADR growth of 5% year-on-year. We declared distributions of INR 531 crores or INR 5.6 per unit for the quarter, representing an increase of 4% year-on-year and 7% quarter-on-quarter. This increase was mainly driven by an uptick in our NOI as well as positive working capital changes, which was partially offset by an increase in our interest costs. During the quarter, we raised around INR 1,450 crores of debt at an average rate of 8.06%. This debt was primarily used to refinance commercial paper as well as other high-cost debt at the recently acquired ESTZ asset in Chennai. The debt raise was done through multiple term loans at a steady level, tapping various new banks and hence, expanding our debt investor base even further. Our net debt book now totals around INR 18,000 crores, implying a 32% leverage ratio and a 7.8% in-place cost and our balance sheet remains solid with dual AAA stable credit ratings. Lastly, on the forward financial outlook. We remain on track with the FY '25 guidance that we had provided last quarter. We continue to expect our NOI to be in the range of INR 32.15 crores to INR 33.45 crores and DPU to be in the range of INR 22.4 to INR 23.1 per unit. At midpoint, this guidance implies a 10% growth in NOI and a 7% growth in DPU on a year-on-year basis. I will now go through some of the key assumptions on which our guidance is based. We have updated our annual leasing guidance from 5.4 million square feet to 5.6 million square feet, post-factoring the 0.2 million square feet early renewals signed in Q1. This comprises 3.8 million square feet of new leases, including new building deliveries planned for the year, 1 million square feet of precommitments and 0.8 million square feet of renewals. We now have 2.7 million square feet of lease expiries due for the year, implying 1.9 million square feet of total exits. With that, we are updating our March 25 occupancy guidance to 88% by area or 91% by value. We expect an 18% to 20% increase in our interest cost on a full year basis. We remain on track to achieve our scheduled rent escalations and the NOI guidance for our hotels and solar park that we provided last quarter. We have delivered on our distribution guidance every year, and we remain focused on delivering this year's growth numbers to our unitholders. I will now hand it back to Aravind.

On last update, Ritwik has informed us of his decision to leave our organization at the end of September to pursue other interests. Ritwik joined the REIT in 2018 prior to its listing and has been instrumental in Embassy REIT success as well as the growth of the REIT asset class in India over the last 6 years. He has been a guide and mentor to many within the organization and well respected by all our stakeholders. On a personal note, he's been a great friend and a colleague to me over the years. We thank Ritwik for everything he has done for the REIT, and we'll definitely miss his wisdom and sense of humor. Ritwik, would you like to say a few words.

Thanks, Aravind. I'll keep it brief. It's been 6 wonderful years, and I'm immensely proud to have worked with this fantastic team at Embassy REIT. I'd especially like to thank Jitu, Aditya, Blackstone, the Board, Aravind, the entire management team and every single member of this organization. It's been a real privilege. I believe the REIT structure has enormous potential in India. And thanks to all the unitholders, the bondholders and other stakeholders for your continued support. Lastly, I've built some fabulous friendships with a lot of you on this call, and I look forward to many more chats in the future. So I'll definitely be in touch. Thanks a lot. Let's move to Q&A, please.

[Operator Instructions] Our first question is from the line of Puneet Gulati from HSBC.

Congrats on improving DPUs. My first question is with respect to your guidance of 91% occupancy by value. Where do you qualify your current occupancy in terms of value?

Sure, Puneet, do you want to finish your questions?

Yes. And the second is if you can give more color on what's happening with some of the expiries essentially in quarter 1 and also Manyata?

Sure. I think it's just first question, easy answer. Right now, we are 85% by area and 88% by value that's the number, which goes up to around 91% by guidance by end of the year. In terms of expiries, Quadron, we kind of called it out last quarter that we see a potential risk with one of our tenant over there and broadly in line with that, we received a notice from them for about 0.36 million or 0.4 million square feet to leave by latter part of this calendar year. It's been a tough asset for us. I mean we could value a bit more on that in due course. But Manyata again, the exits in first quarter are a bit more front loaded, but largely in line with what we put out last quarter. Last quarter, we had said that there is a potential exit of around 1.6 of the 0.9 exits are in line. There's no further increase in that as of now, number one. Number two, having said that, yes, a large portion of these 0.9 exits are from the Manyata asset, because of which occupancy has dipped to 83%, and we believe that it's a temporary dip. If you look in the last 2 years, Puneet, what we have done is, yes, some of the older blocks as they've reached the ultimate expiry, some of them are exited. We've used that opportunity to refurbish buildings. We actually refurbished 3 buildings in the last, I think, 1.5 to 2 years. All of them have reached close to 100% occupancy post refurbishment with rentals increasing anywhere from 2.5 to 3x. Similarly, we are refurbishing now 2 blocks, pursuant to these exits. And we believe we'll have -- we'll see similar results in terms of both occupancy and rental growth. And when you look at it collectively for Manyata as an asset, besides the 12.3 million square feet, which is completed, we have 3.7 million under construction. Of the 3.7 under construction, literally, I mean 92% is pre-leased. We just have very, very little space left to me. So when you look at it collectively, as a part, I would say that it is doing phenomenally well. The dip in occupancy, what you've seen this quarter is temporary or transitional in nature.

And these 2 blocks, will you refurbish where does the area move?

Yes. Redevelopments, we are doing. Refurbishment, Puneet doesn't increase the area, which we change the look and feel. But redevelopments, we are doing 2 now in Manyata. One is the D1, D2 block, which we started last year, which increased from $0.4 million existing. We broke it down. Now what we're developing is $1.4 million and new block, which we spoke about, current is 0.3%, that goes up to 0.9%.

This is block L4?

No, the Block B or Magnolia.

Okay, Block B where you have A and B.

Not really. We'll probably not refer to a specific tenant on this call.

The next question is from the line of Kunal Tayal from Bank of America.

My first question is that the acquisition seems to be debt financed for now. Are you largely good with that? Or is the plan to sort of reduce it by raising equity still on. So that's the first one. . Second, Abhishek, you were mentioning that the total interest expense will go up by about 18% to 20% this year. Any sort of early views as to some of that increase? Does it carry forward into FY '26? Or is it really that bulk of the increase sort of comes through and then stabilizes during the year. And then the third one is on the distribution guidance. Given that in Q1, the starting off at 4% Y-o-Y and then between what you've laid out that occupancy goes up from 85 to 88. Is it a bit easy to see how this goes up towards, let's say, the low half of the range or towards the midpoint. I just wanted to understand what would it take to still strike the upper end of the guidance from current levels?

Thank you. I'll allow Ritwik to take the first question.

Yes. Look, just on that acquisition. Yes, we are very bluntly, we are comfortable doing it with debt. I think the broader picture when we went out there with the equity raise, clearly, there was some discomfort in the market. But that -- I don't think that really changes our overall strategy of at some point in time, thinking about using our unit as currency. We've got -- I mean, I think if you just look around markets tend to be volatile. And I think we don't want to sort of be short-sighted in the view that at some point in time, we might be out there at the prices there to go out there and think about tapping the markets to delever or say, "We have capital for any an day." That's effectively how we think about acquisitions and capital raising. It's always -- I mean, effectively still a very sort of new instrument. I think there's always been sort of a lot of conversations around from the market about how we should actually raise funding, but ultimately, we'll also sort of keep that at our discretion and making sure that we do what's right for the REIT.

And Abhishek will take the second one.

Yes. So Kunal, on the interest expense, this 18% to 20% increase is because of, one, the capitalization deliveries that we have done last year, deliveries that we will do this year, refinancing impact, increase in the interest cost because of refinancing and also because of the debt that we have taken to fund the acquisition. Now how much will roll forward to '26, 2 points, it will depend on the interest rate trajectory. And the second is will -- I mean it's too early, what we will do is at the start of the next year when we come back with the guidance, that time we will give the guidance of what -- how much we'll roll forward to next year.