Embassy Office Parks REIT (EMBASSY) Q3 FY2026 Earnings Call Transcript & Summary

Good morning, everyone. A very warm welcome to all for Embassy REIT's Third Quarter FY 2026 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, Mrs. Sakshi Garg, Head of Investor Relations for Embassy REIT. Ma'am, you may begin.

Thank you, [ Ryan. ] Welcome to the third quarter FY 2026 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter and 9 months ended December 31, 2025, last Friday. As is our standard practice, we have placed our financial results 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 subject to any audit or examination procedures. You are cautioned not to place undue reliance on such information and there can be no assurance that we will be able to achieve the same. Joining me today are Amit Shetty, our CEO; and Abhishek Agrawal, our CFO. We will start off with remarks on our business and financial performance and then open the floor to questions. Over to you, Amit.

Thank you, Sakshi. Good morning, and thank you all for joining us today. Quarter 3 was a standout quarter for us with a strong leasing and financial performance as well as a clear focus on accelerating growth by adding quality assets through organic and inorganic expansion. Some of the key highlights for the quarter are: we announced the acquisition of Pinehurst in our prime asset Embassy GolfLinks from a third party. We received an invitation for offer for Embassy Zenith, a landmark office tower in Central Bangalore, which is leased to one of the world's largest tech companies. We have launched a new redevelopment project in Embassy Manyata at an impressive 23% yield on cost, and we are now looking to expand our hospitality portfolio with the new hotel in Pune. We also delivered a 0.4 million square feet fully leased new office tower in Chennai, a market which has seen a strong rebound and increased traction from some of the largest global companies. And we once again registered a double-digit growth across all our key financial metrics and grew our NOI by 19% and our DPU by 10%. Let me take you through some of the details. Let me start with an update on the Indian office market. On the back of a record closing quarter, the calendar year 2025 clocked the highest ever gross absorption of 18 million square feet and net absorption of 51 million square feet, which is 8% and 14% up, respectively. The GCC and the flex operators were at the forefront of this demand, contributing to about 60% of the total leasing. Bangalore again outshined with the highest market share of about 27%. With vacancies tightening, rents have started to grow across key micro markets. For our portfolio, market rents have gone up by 9% year-on-year with a 19% growth in Mumbai, 16% in Noida and a 7% in the Bangalore assets. This has resulted in increasing the total mark-to-market potential of our portfolio to 11%, a 600 basis point jump just in the last 3 months. We see this as a positive momentum to continue for the Indian office with over 170 million square feet of absorption expected versus around 130 million square feet of new supply over the next 2 years. With this backdrop, let me delve deeper into our quarter 3 leasing performance. We leased 1.1 million square feet across 22 deals, bringing our total YTD leasing to 4.6 million square feet. Our quarter 3 leasing included 0.8 million square feet of new leases signed at an impressive 17% re-leasing spread, implying a 5% premium to market rents on an average. This was over and above the 9% year-on-year growth already seen in the market rents of our portfolio assets, demonstrating the superior quality of our portfolio and the strength of our leasing teams. With limited vacancies available in these properties, we believe that this rental growth momentum will continue, further solidifying the mark-to-market opportunities available in our portfolio. Our core Bangalore portfolio contributed to over 2/3 of the total leasing and 3 out of our 5 properties in this city are now 100% occupied. We are also noting early green shoots in our Pune properties with an increase in leasing inquiries and around 0.5 million square feet of leases signed across our 3 assets in the last 9 months. Overall, we maintained our portfolio occupancy of 90% by area, 94% by value and 3 out of our 5 cities are at over 95% occupancy. Next, on our portfolio development. We launched our third redevelopment project at Embassy Manyata aimed at increasing the leasable area of E1 Block from 0.2 million square feet to 0.8 million square feet through utilization of unutilized SAR. The project is highly attractive at an yield on cost of 23%. We continue to evaluate more such opportunities in Bangalore and we will update the market in due course. We received occupancy certificate for 0.4 million square feet Block 10 in Embassy Splendid TechZone in Chennai, which is leased to a global health care company. We expect to receive the occupancy certificate for another 0.6 million square feet Block 4 in the same park by the end of this month. With this, our total development pipeline now stands at 7.6 million square feet which will result in an area increase of 19% organically. With a total capacity -- sorry, with a total capital outlay of about INR 4,000 crores, we expect these projects to add around INR 740 crores in stabilized NOI by FY 2030. The 518 key Hilton hotels at Embassy TechVillage remain on track for October '26 delivery. We are also exploring a new 116 key mid-scale hotel in Embassy TechZone in Pune, similar to our hospitality portfolio in Bangalore. This new hotel is envisaged as a strategic ancillary offering for our tenants in our park and the vicinity areas. Moving ahead to updates on our inorganic growth and capital recycling. We have received an invitation to offer to acquire Embassy Zenith, a 0.4 million square feet office tower located in CBD Bangalore. The building is fully leased to one of the world's largest tech companies, which can add meaningfully to our tenant roster. We will start our evaluation and we'll update the market as we progress. During the quarter, we announced a third-party acquisition of Pinehurst, a fully leased 0.3 million square feet office building aim to consolidate our ownership in Embassy GolfLinks. The transaction valued at INR 852 crores implies an NOI of 7.9% and aligns with our strategy of disciplined accretive growth. In addition, we continue to evaluate multiple third-party acquisition opportunities available in the market. We also completed the divestment of 376,000 square feet of 2 strata owned blocks in Embassy Manyata for a total consideration of INR 530 crores. In summary, we delivered another strong quarter to wrap up the calendar year. We're happy to report that during the year, we delivered a total return of 25%, significantly outperforming the Nifty's 12% return and Nifty Realty's 16% decline, reinforcing the strong risk-adjusted appeal of REIT asset class. We are determined to carry forward this benchmark and continue our growth trajectory to the benefit of our 125,000-plus investor base. I will now hand over to Abhishek to present our financial updates.

Thank you, Amit, and good morning, everyone. Let me take you through the key financial highlights for the quarter. We delivered strong double-digit year-on-year growth across our financial numbers and reported our highest ever revenue and NOI. We grew our revenue by 17% to INR 1,193 crores and NOI by 19% to INR 985 crores year-on-year. The increase was mainly driven by new lease-up at high re-leasing spreads, contracted rent escalations and new buildings delivered during the period. Our hotel segment NOI grew by 13% year-on-year due to an occupancy uptick of 100 basis points to 60% as well as an ADR growth of 11%. We declared distributions of INR 613 crores or INR 6.47 per unit for the quarter, representing a 10% year-on-year growth. This increase was driven by an uptick in our NOI, which was partially offset by net SD refunds and an increase in our interest costs. During the quarter, we successfully raised INR 400 crores through a commercial paper at an impressive effective rate of 6.44% per annum. Post this, our net debt stood at INR 20,631 crores as of December '25, implying a 32% leverage ratio at 7.29% average in-place interest rate. I want to highlight that we have successfully reduced our in-place debt cost by 61 basis points in the last 9 months through our active debt management. Lastly, on the forward financial outlook. Based on our YTD performance, we remain on track to achieve our FY '26 guidance. We continue to expect our NOI to be in the range of INR 3,589 crores to INR 3,811 crores and DPU to be in the range of INR 24.5 to INR 26 per unit. At midpoint, this guidance implies a 13% growth in NOI and a 10% growth in DPU on a year-on-year basis. With this, let's move to Q&A, please.

[Operator Instructions] We take the first question from the line of Puneet from HSBC.

Congratulations on good performance once again. My first question is with respect to the market rentals that you've disclosed in your presentation. Bulk of it, Embassy Manyata, ETV, FIFC, 24/7 have all gone up meaningfully in this quarter. Can you talk about 2 things, whether -- is it this quarter phenomenon? Or are you just recognizing it? And second, how different are these from your last leasing rentals?

Pritesh, do you want to continue your next question as well? So we'll take that together.

Yes. Secondly, on your hotel at Hinjewadi, if you can talk a bit more about what is the CapEx you're looking at and where will it really come up? And also lastly, how much did you spend during the quarter in terms of CapEx? That's all.

Okay. So let me take the first question. The market rentals that you're seeing, just to give you a broader picture, the market saw about 82.6 million square feet of absorption and about 80 million square feet in the top 7 cities of the country. Now what it did was the vacancy was declined, which was 21% has now moved to 20%. And thereby, there's an increased demand given the supply that came into the market was about 57 million square feet itself. If you see the net absorption that's taken place in the market is about 14% and thereby, across the country, we have seen tightening of the rental values. Given this, we've seen -- particularly we've seen a 70% re-leasing spread across our 0.8 million new leasing that we've done. And from a market potential, we have now reassessed to 11% mark-to-market opportunity that we have seen with a 9% rental growth across our portfolio. Some of the outliers being Mumbai. Mumbai, like we said, has seen double-digit rental growth. Noida has seen double-digit rental growth as well. Right, with Bangalore being at about 7%. And we believe that the Bangalore, given the market and the supply, I think in the coming days, the Bangalore rents will also climb higher. Now moving on to the next question, which is the hotel at Hinjewadi. We believe, like we've always said to the market that we believe in building a larger business ecosystem, and this is again aimed at that. We are planning to build a 116 key mid-scale hotel in Hinjewadi in Embassy TechZone with a capital outlay of about INR 45 crores.

Okay. Just a bit on the rental part again, right? So in your Embassy Manyata, the market rentals you claim is INR 105, ETV also INR 105. There, if you can suggest that whether you've been able to lease at higher rentals than this and what are those numbers? And are these are your rentals, not just the market rentals?

See, this is our rentals to start off with. And also, we've actually been very conservative of what we've actually disclosed to the market. And we've actually achieved higher rentals as well beyond these rentals, but we just continue to see given that Manyata is at now 94% occupied and of that vacancy of about 800,000 square feet, which has H1 block, which is actually about 375,000 square feet, which is undergoing refurbishment. So effectively, the vacancy that we have is about 500,000 square feet in Manyata. So with this, we believe that the rental rates will only move up given the expiries and also some of the new redevelopments that we are doing in Manyata, we're really excited for Manyata right now.

We take the next question from the line of Mohit Agrawal from IIFL.

So I'm just continuing with the previous question on market rental growth. Particularly, Mumbai has seen very strong reset in your presentation, you've mentioned that in Express Towers, you'll be able -- you've been able to get 26% M2M and a premium of 22%, which means almost INR 400 rental for Express Towers and similarly for Embassy. So can you explain what's happening there? You've been able to get a meaningful premium to the market. Is it a trend? Are these small transactions? Or do you expect then the mark-to-market in these -- especially in Mumbai portfolio to continue to go up? Yes. So that's my first question. I just -- and again, on Pune as well, I think you mentioned about green shoots there. So what's the outlook? What is the kind of -- is it something that you mentioned about the general tightness on supply/demand? Is that driving it? Or is it something particular about the western part of Pune where things are now looking up? So comments on that, yes.

Yes, sure. So first, let me take the Mumbai market. I think Mumbai from overall market perspective, given the infra development that have happened, given the coastal road, the Atal Setu and a couple of other flyovers and also the metro lines. I think there's a meaningful demand in Mumbai. If you see Mumbai is the second largest city in terms of absorption. Having said that, Express Towers, where it is located in South Bombay, given the coastal road has seen a large increase in the demand there itself. And we believe that this demand will continue to grow -- and if you see Mumbai as a city as well, given that even Embassy 247 has done extremely well, we believe that they continue to -- we'll see this uptick going forward. So that's first. But moving on to the Pune market. Again, like we mentioned, Pune market, if you see for the last 9 months, we've actually done about 500,000 square feet of leasing and about 100,000 square feet of leasing is in Quadron itself. We've got meaningful inquiries. We've got a pipeline of about 400,000 square feet in Pune that we've already built up. The reason is that the metro is now finally in Hinjewadi with the Phase 3 trials of the metro, while the government declared that March '26 is when the metro will be officially opened. But even if you're a little pessimistic and think that June '26 is something which we are very confident that the metro will be operational, given that we're seeing about 2.1 million square feet of RFPs in the Pune market and also given the fact that the arbitrage of rent between the eastern side and the western side of Pune between INR 80, INR 100 market to a INR 50, INR 60 market, we believe that a meaningful demand will now shift to Hinjewadi given the metro operationalization.

Okay. So any Pune portfolio occupancy targets that you have like for Quadron, for TechZone, for Qubix?

Pune is currently at 62% occupancy, right? We would like to move that up. I would not like to comment on any forward-looking statements here. But like I said, there's a 400,000 square feet pipeline, which we are confident of converting. And in due course, we'll announce to the market as and when these trades happen.

Understood. Just one last clarification. This should mean that when your NAV is being revised next quarter, the previous quarter, there should be an equal revision in that as well?

Absolutely, absolutely. See, the NAV, obviously, from a leasing occupancy perspective as well as the market -- mark-to-market opportunity as well. I think these 2 factors will be considered when we revise the next NAV in the next quarter.

And this could also mean that the Quadron write-off that you have taken -- like that could again be devalued. Is that a possibility?

So Mohit, this is Abhishek. So on the revaluation, what will happen is once we see that actually leasing has happened and it's a reversal, that is when we'll want to take the reversal of that impairment.

We take the next question from the line of Yashas Gilganchi from BOB Capital Markets Limited.

Re-leasing spreads at around 17% were significantly lower than what was achieved over the past 5 years. Now with Bangalore driving leasing activity and your portfolio over there operating at up to 95% occupancy. Please help me understand what's keeping the spreads under pressure? And my second question would be for the developments that are planned to come online this calendar year, the ones especially at the Manyata and Splendid TechZone, what is the NOI contribution you're expecting to flow through over FY '27? And how long would these developments take to stabilize once they start contributing revenue?

You want to continue your next question as well?

All right. That was my second question. But I do have another question. So it is how is the approximately INR 38 billion of CapEx that is expected to be spent through FY '28 to be funded? And how do you think LTV is likely to evolve over the period?

So Abhishek, do you want to take the second and the third question, and I'll take the first question later.

Yes. So, Yashas if you look at the total 2 million square feet that we will be delivering, you can expect an NOI of almost around INR 100 crores in FY '27. And on the third question, see, our strategy is to fund all the CapEx through debt only. Now if you look at the LTV position, which we are expecting in the next 1 to 2 years, we are expecting that it will go down because of 2 reasons. One, the GAV today doesn't factor the increase because of the deliveries of this project. Once this project gets delivered, the GAV will also increase. And hence, we expect it -- see, in the long term, we expect the LTV to be around 30%.

Just one clarification here. Like when do you think the projects are going to stabilize once they start contributing rent Manyata and Splendid TechZone? Like how many years approximately?

See, after the deliveries, each of this we have given in the SD. So once the delivery happens, after this, let's say, you can take 6 months for them to start generating the rent.

Understood.

Also on your first question, my request to the market is that please don't see quarter-on-quarter trends of leasing spreads. My request is to see the mark-to-market potential that is there in the portfolio organically.

We take the next question from the line of Pritesh Sheth from Axis Capital.

First is on the inorganic growth that we have started seeing emerging now. So between these third-party opportunities and sponsors, assets, which keeps on getting offered, what kind of opportunity we are looking at over the next 3, 4 years in terms of our portfolio addition? Like are there still those third-party own areas, if you can quantify that overall and once where we have a ROFO on those third-party areas and other sponsor assets which are completed and might not be offered, but just a broader sense on how the sponsor portfolio now stands in terms of completed portfolio. Yes. And second question on the interest rates. With this now bank channel getting open, how do you see interest rates trending forward? Will there be a meaningful downward shift in terms of interest cost or we are already at 7.3%. So already pretty optimized on that front. So yes, those would be my 2 questions.

Let me take the first question. This is Amit here. In terms of inorganic growth, third-party acquisition as well as sponsor acquisition, while we've always maintained this, we are continuously evaluating the marketplace to look at opportunities that are actually accretive, which have similar asset quality, which match our portfolio, and we want to be in the top 6 cities. So having said that, the team is building a strong pipeline on the third-party acquisitions. With respect to the sponsor assets, we have 2 ROFO assets. One is Embassy Zenith and the other one is Embassy Concorde in Whitefield. So these are the 2 assets that we're currently evaluating. And when we are ready, we'll come back to the market. But having said that, we are also planning to do an Analyst Day, which will give us -- which will outlay the entire plan that we have in terms of acquisition, both from a third-party acquisition as well as from the sponsor assets. And Sakshi will come back shortly to the market.

So on your second question, Pritesh, if you look at the interest rate, what's happening is it's tightening up in the market. We are currently around 7.2%, 7.3%. We think this is almost the bottom where we are. There can be -- I mean, you know better, there can be a max 1 rate cut, which can come in. So hence, what we are preparing is we are going for more longer-term debt and that to fixed rate. And hence, you see our debt book is around 60% fixed. Now what this RBI revised proposal can do is it can allow us to get more and more longer-term debt at trust level because earlier, we were only dependent on the capital market for NCDs. Now banks can also participate in that. And banks can do longer-term debt. What it will do is there will be more liquidity in our debentures. There will be more participation in our debentures, and we can see some rate reducing, but I don't think that it can be meaningful from here on.

Got it. Got it. And just on the first one, while obviously, we can wait till the Analyst Day, but the third-party area owned by -- I mean, third-party owners in our assets already in the portfolio. Can you quantify some number to that? Obviously, we won't extrapolate that everything will be offered to us, but just trying to understand how the portfolio stands between what we own and what third-party owns.

So I mean, you're actually driving me to give you forward-looking statements. Probably we can pick this up separately.

[Operator Instructions] We take the next question from the line of Kunal Lakhan from CLSA.

My first question is more to do on -- it's a little bit generic side in terms of like some of these MNCs have been announcing these layoffs, just as recent as Amazon announcing their shutting down of their AWS business last couple of weeks. Just trying to understand like what are you hearing incrementally from your tenants, especially GCCs in terms of like, firstly, the road map for the next 3 to 5 years because some of these leases they're signing are like really, really long term in nature. So just trying to understand what kind of outlook they have or road map, they have in terms of like job creation and so to speak, like office demand for the next 3 to 5 years. Yes, that will be my first question.

You want to talk about your second question as well, and then we'll take both together.

Yes. Okay. My second question was more to do with your -- when you look at your -- just a breakdown of your distribution, right, the reconciliation from the NDCF -- from SPVs to the NDCF at the REIT level, there's a big dent because of the interest cost. And if you look at your overall debt levels have gone up by about 10-odd percent, 10%, 15%, maybe, but your debt interest cost has gone up by 33%. And incrementally, when you look at your CapEx also that you spoke about INR 4,000 crores of incremental CapEx and mostly that will be funded by debt. When do you see this trend kind of reversing where your SPV, NDCF is growing at about 18%, 19% but DPU is getting dragged because of this interest cost. When do you see that trend reversing or like DPU growth to be in line with your NDCF at the REIT level or SPV level growth?

Let me take the first question, and I'll hand over to Abhishek for your second question. From an overall market perspective, like I mentioned, the market has actually been robust. And what we predict for the next 2 years by the industry analysts or the IPCs is that the markets will outperform this calendar year as well. So the expected absorption is about 82 million, 83 million square feet for the next 2 years. Having said that, what we are seeing is while there are cases of layoffs here and there, that is very business specific when businesses are migrating from one process or one technology to another technology, there will be some layoffs, there will be some productivity recalibration. But having said that, what we are actually seeing in the market is that given the fact that India has the largest or the second largest AI talent pool and the largest data science pool, we're seeing a large number of projects of the existing occupiers also moving in this direction. And then therefore, they are doing a lot more hiring in these domains. Now the second trend that we're clearly seeing is a lot of mid-tier companies from the U.S., Australia as well as Europe are actually coming down into India. And a case in point is that we have about 18.5 million square feet of RFPs in the market floating, which we believe that given that the U.S. has just come out of from a holiday season and there will be more RFPs, meaningful RFPs that will start floating in the market. Given this kind of traction, given the mid-tier GCCs coming in, we're doing a lot of new leasing inquiries, inspections, traction in the market has been really high. So we feel that for the next 2, 3 years, the market will see increased leasing velocity.

Just a follow-up on that, Amit. Just -- I mean, do you see that the demand that we're seeing currently or even FY '24, '25 as a function of like the kind of hiring that the tech sector did between 2020 and 2025, almost like 1.2 million square feet -- 1.2 million employees added during that time. And then obviously, like during COVID times, we saw like none of these guys signed up new spaces because the physical attendance was low. Do you think that was a pent-up effect of that hiring that happened between that time? And today, we are seeing that residual pent-up effect playing out, but incrementally, like for us to sustain this demand going forward, we'll have to depend on new job creation that would happen over the next few years.

Yes. So if you see the entire leasing, if you break it down, see the pent-up demand that kind of got a little bit consumed is through the ITES players only. right? So it's the TCS, Wipros and Cognizant, those kind of guys who actually meaningfully came out into the market. But having said that, a lot of other guys like Accenture, Capgemini have still not come into the market to consume that pent-up demand. Now if you see the leasing itself, 65% of our leasing is actually GCCs, right? 20% of leasing plus has come from co-working guys. Now the ITES actually is a very small fraction, right? But we will -- some of these names that I've taken will continue to elevate that leasing from an ITES sector as well. So that's why we are very confident about this 80 million growing to about 80 million, 85 million square feet over the next 2 years.

Sure. Understood.

So Kunal, on your second question, so my request would be to look at the total interest at SPV and REIT level together because we have a choice to take the loans at SPV or take the loans at the REIT level and push it down to SPVs. It depends on the interest rate. I mean, if we are getting lower interest rate in NCDs, we go for REIT loan. So all of those things are there into play. Now if you look at the trend, what's going to happen to our interest cost is and what is actually happening to our interest cost is when we are delivering -- when we are constructing some assets, the interest is getting capitalized and it doesn't hit the NDCF. Now once we deliver, the time we get the OC, the interest starts hitting the NDCF, but the income only starts getting generated after a gap of 6 months. And hence, there is a temporary gap. Now this gap will continue for some time because of all the deliveries that we are doing and every year, we have plans to deliver some building or the other. So this gap will continue till the time all these deliveries are finished, let's say, 3 to 4 years. And post that only, this -- you can see the interest rate doesn't go up much commensurate to the income. Also, in this 9 months, you see we have delivered 1.3 million square feet. So the interest should have gone -- interest cost should have gone even higher, but it was not that high because of the interest saving because of the interest rate, which went down 61 basis points in the last 9 months. And hence, you see that it is also in line with the guidance that we had given.

We take the next question from the line of Vasudev from Nuvama.

My first question is on the new MAT provisions which were announced in the budget. So is there any impact of that on us? And going ahead, what kind of cash tax rate should we look at? And also the second question is on the SEZ conversion. So how much have we converted till Q3? How much is still in process? And if you can help me with the occupancies in the SEZ and non-SEZ portfolio?

Yes, Vasudev. So if I have to take the first one. See, this new MAT provision is still a proposal, and we'll wait to see whether it becomes an act in the same form because there are a lot of representations which the industry is doing. However, having said that, what we see is that for the near future, there is not much impact on the NDCF because we were any which was expecting these credits to be utilized after 5, 6 years. And we have always guided that our tax percentage to revenue is around 5% now, which can go up to 6%. So we think that for the near future, it will be still in that ZIP code only. On the second one, if you look at the SEZ conversion, we have been able to -- I mean, till date, we have been able to convert almost 8.6 million square feet. And one portion, which is Parcel 6 is still under construction. So if you strip that out, then we are at 84%, 85% occupancy in the converted space. If you look at the total SEZ space, I mean, out of the total vacancy, 3.7 million square feet is in SEZ and only 0.7 million square feet is non-SEZ vacant space. So that's...

And underway, we have about 3 million square feet of SEZ that we are trying to convert into non-SEZ, both through demarcation and de-notification routes.

Ladies and gentlemen, as there are no further questions, we conclude the question-and-answer session. On behalf of Embassy REIT, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.