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

Good evening, everyone. A very warm welcome to all of Embassy REIT's First Quarter FY 2027 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce our host for today's conference, Mrs. Sakshi Garg, Head of Investor Relations and Strategy for Embassy REIT. Ma'am, you may begin.

Thank you. Welcome, everyone, to the First Quarter FY 2027 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter ended June 30, 2026, a short while back. 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'll 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 information, and there can be no assurance that we'll be able to achieve the same. Joining me today are Amit Shetty, our CEO; and Abhishek Agrawal, our CFO. We'll start off with brief remarks on our business and financial performance and then open the floor to questions. Over to you, Amit.

Thank you, Sakshi. Good evening, and thank you all for joining us today to discuss our quarter 1 results. We're happy to report a strong start to FY '27 with another successful quarter. We delivered a robust financial performance, growing our revenue and our NOI by 17% and our DPU by 9% year-on-year. On the leasing front, we signed 1.3 million square feet across 17 deals, welcoming 10 new occupiers into our portfolio. But what really stands out is the quality and profile of these tenants. The majority of them are large global enterprises with annual revenues exceeding USD 1 billion. And a significant number of them are deeply embedded in the AI ecosystem, spanning sectors like semiconductors, cybersecurity, robotics and automation, and networking infrastructure. Beyond the new entrants, established GCCs continue to expand; over 60% of India's GCCs' leasing during the quarter was by these existing companies. The growth is being increasingly led by an influx of newer functions and a mandate to drive innovation and efficiency on a global scale. With over 250,000 AI or machine learning professionals already employed within the Indian GCCs, India has emerged as the largest hub for this talent outside the U.S. Bangalore, in particular, remains central to this narrative, and we believe it will play a pivotal role in the strategic AI build-out for these global organizations. Market data continues to validate this thesis. India's office sector recorded its highest ever absorption this quarter at 23 million square feet, up 14% quarter-on-quarter and 12% year-on-year. Not surprisingly, 44% of this was contributed by GCCs and around 30% was led by Bangalore. With this backdrop, let me dwell deeper into our quarter 1 leasing performance. We leased a total of 1.3 million square feet during this quarter, including 0.7 million square feet of new leases and 0.6 million square feet of renewals. GCC contributed up to 81% of our total leasing, with this demand primarily driven by the telecom, technology, research, consulting, and analytics sector. 86% of our new leasing was contributed by 10 new entrants in our occupier register. Interestingly, of this, 21% demand was driven by AI-related sectors. Turning to rent reversions. We achieved 10% combined leasing spread in quarter 1 and continued to lease above market rents. New leasing during the quarter was signed at an average of 8% premium to the market rents, reflecting the strong occupier demand and pricing power embedded in our portfolio. Let me now give you a closer look at Embassy Manyata, our flagship asset. For newer blocks in this asset, we are signing leases at about INR 125 per month, implying around a 20% premium to the market rents. Over the last 2 years, we've increased the in-place rent of this asset by around 16% and expanded occupancy by 10 percentage points to 93%. Around 0.5% of vacancy in this asset is in Block H1, which is currently undergoing refurbishments and is due for completion within the next 3 months. We have a robust leasing pipeline for the entire block and are targeting to convert it within this financial year. Overall, as of June 26, we maintained our portfolio occupancy at 90%, with now 4 out of 5 cities at an overall 90% occupancy level. A few other quick updates. During the quarter, we completed the construction of 0.6 million square feet of Block 1 at Embassy Splended Tech Zone in Chennai. This building is fully leased, and we expect to receive the occupancy certificate by the end of next month. Our total development pipeline now stands at 6.2 million square feet, with around 60% already pre-leased for delivery scheduled over the next 24 months. We also launched a new hotel last month, a 211-key 4-star Hilton Garden Inn at Embassy Tech Village. I'm happy to report that this hotel has clocked ADRs of over INR 19,000 for the full first month of its opening. Another 318-key 5-star Hilton Hotel, a 37,000-square-foot convention center and a 75,000-square-foot retail area at the same complex are all slated for launch during the course of the year. Also today, we have announced that Four Seasons will conclude its management of the hotel at Embassy One in Bangalore with effect from February 28, 2027. We are currently evaluating potential new hospitality operators and look forward to finalizing a new partner in the near term. Moving on, we are pleased to have been included in some of the newly launched domestic indices, the Nifty REITs and the Reality Index, the Nifty REITs and InvIT 90-10 Index, and the BSE REITs and Commercial Real Estate Index. These benchmarks are expected to pave the way for the launch of new index-linked products, support greater market visibility and broader investor participation. We also look forward to securing inclusion in the mainstream domestic equity indices in the upcoming rebalancing cycle. From a return standpoint, Embassy REIT delivered a total return of 19% in the last 12 months, driven by 12% price appreciation and a 7% distribution yield. These returns are particularly noteworthy in the context of broader equity markets, which generated negative returns over the same period, reinforcing the stable and differentiated risk-return characteristics of the REIT product. Also, our unitholder base has continued to grow steadily and has now surpassed the 150,000 mark. I will now hand over to Abhishek to present our financial update.

Thank you, Amit, and good evening, everyone. Let me take you through the financial highlights for the quarter. We delivered strong double-digit year-on-year growth and reported our highest ever revenue and NOI. We grew both our revenue and NOI by 17% year-on-year to INR 1,241 crores and INR 1,020 crores, respectively. This increase was mainly driven by an uptick in our portfolio occupancy and rentals as well as the new buildings delivered during the previous year. Our hotel segment NOI grew by 6% year-on-year with an occupancy uptick of 100 basis points to 61% as well as an ADR growth of 5%. Our solar plant continued to run at optimum capacity and generated 44 million units in Q1 and recorded a stabilized quarterly NOI of INR 23 crores. We declared distributions of INR 598 crores or INR 6.31 per unit for the quarter, representing a 9% year-on-year growth. This increase was driven by an uptick in our NOI, which was partially offset by the higher interest expense. During the quarter, we raised around INR 3,045 crores of debt at a 7.46% per annum blended interest rate through a combination of commercial papers, NCDs, and bank loans. Post this, our net debt stood at INR 21,879 crores, implying a 31% leverage ratio at a 7.3% average in-place interest rate. In addition, around 60% of our debt book is locked in at fixed rates. Lastly, on the forward financial outlook. Based on our YTD performance, we remain on track to achieve our FY '27 guidance. We continue to expect our NOI to be in the range of INR 4,150 crores to INR 4,350 crores and DPU to be in the range of INR 27 to INR 28.6 per unit. At the midpoint, this guidance implies a 13% growth in NOI and a 10% growth in DPU on a year-on-year basis. We remain committed to delivering this growth to our unitholders while optimizing our balance sheet and maintaining strong cash flows. With this, let's now move to Q&A.

[Operator Instructions] The first question is from the line of Girish Choudhary from Avendus Spark.

Congrats on a good set of performance. My first question is on the DPU guidance and the quarterly run rate. I mean, this quarter was 6.31. The full year guidance, as you mentioned, was 27 to 28.6%. So this implies a meaningful step-up for the rest of the year in terms of quarterly distribution. So if you can just highlight the specific drivers of this acceleration, anything for us to understand on the working capital or the taxes? So that would be my first question.

And any other question that you have, Girish?

Yes. So the other one would be in terms of the blended one. You mentioned OC coming in a month from now. So when should we build the rentals to start from that asset once the OC comes in? And the third one is on the Four Seasons transition. If you can just explain to us what prompted the change? And incrementally, what type of operator or positioning are you evaluating? And then should we expect any closure or renovation expenses as and when the transition happens? Yes. So these are my questions.

So, the first question on guidance. See, we are on track to meet the guidance. Now, if you look at 6.3 that we are distributing this quarter, if you compare it with the previous years, the same June quarter, it is 9% higher. At midpoint, we have guided around 10% higher. Now what typically happens is the property tax gets paid during the first quarter. And hence, the first quarter number looks a little lower, but it catches up. That has been the trend always. And we are confident that this year also, we will be able to meet the guidance.

Moving on, Girish, to the second question regarding the Stenditech zone. This is Block 1. The construction is fully complete, Girish. We're just waiting for the occupancy certificate from the authorities, which we expect between 15th of August and 30th of August. However, to your second part of the same question regarding whether there is a rent-free period. I would not like to discuss the quantum of the rent-free, but it's a standard rent-free as per market practice. Moving on to the third question regarding the FS transition. It was a mutual decision between Four Seasons Pathways and us. And we've just secured the Board approval to execute the termination agreement. We will now go out into the market and solicit a new operator for this hotel. And in due course, we'll come back and update the market. There will be some upgrade costs. It's too early for us to comment on the upgrade cost. We will come back and update the market in due course once we have finalized the operator. I hope that answers.

[Operator Instructions] The next question is from the line of Yashas Gilganchi from Bank of Baroda Capital Markets.

I see that you have approximately 13 million square feet of potential acquisition opportunities. I'm trying to understand what drives the decision to acquire a ROFO asset? Is it largely contingent on the sponsor? And when it comes to third-party acquisitions, how do you describe the current market? So what I'm trying to understand is what would make you decide to acquire an operational asset?

We've always maintained the fact that there are 3 principles on which we acquire our assets. The fundamental principle being that it has to be in the top 6 cities of the country and in the relevant micro market where there is corporate leasing activity. So that's the first one. The second one being the asset quality should match our current asset quality, and the third one is that it should be DPU accretive. So if it meets these criteria is when we actually acquire these assets. And having said that, we are looking at sponsor and third-party acquisitions like we've disclosed in the past; this 12 million to 13 million square feet of pipeline is across these 5 cities in India.

And with approximately 50% of your outstanding debt maturing over the next 3 years, do you expect to refinance a larger portion of your debt into fixed rates? Also, how do you expect your average cost of debt to trend over this period?

Yes. See, as of now, we have around 60% of our debt, which we have moved to fixed cost. We will continue to see where the interest rate trajectory is. And based on that, we will decide. At one point in time, the fixed-rate debt was around 66% to 67% of our portfolio. I think if we get a good rate, we can go to that. If we see that the interest rate trajectory is moving upwards, we may want to lock in more debt at fixed rates. But what will be the final number that we will have to decide based on how the market moves, because you know the market is very dynamic right now. On the average rate, we expect that if there is no change in the repo, I think we should be in the ZIP code of 7.5% by year-end. But I mean that number keeps moving based on how the interest rate trajectory is.

The next question is from the line of Raj Khan from Nuvama Group.

Congratulations on a great quarter. I had a question related to the property tax demand relating to Manyata business park. Can you please elaborate what is the reason for not recognizing any provisions for that? And if there's any adverse impact of that, what would be the impact on distributions.

So Raj, what we have done is that if you look at our financials, there are 2 cases that are related to property tax. One of the case where we have a very strong position, we have not recognized most of the provisions. But on the other case, we have provisions in the financials, which will cover the impact if there is any adverse which comes out. Also, we have paid significant amount under potash for this case, which is already paid for. So even if it goes adverse, I don't think any impact is coming on the distribution anymore.

The next question is from the line of Parvez Qazi from Nuvama Group.

So I mean, except Pune, our assets in most of the cities already have pretty high occupancy level. What is the outlook for the Pune asset? Just wanted to get your views on that.

Parvez, Pune, as we've always been maintaining, there are large city-wide infrastructure projects that have been actually getting completed. The first one being that of the Metro, 3 trials of that metro is already complete. And we are hopeful that at least in Palibadi, it will be operational in the next month or 2. And by the end of the year, the complete line will be operational. So with that, we hope to see more traction from the Pune market. But having said that, Parvez, we've actually done about 140,000 square feet of leasing, predominantly renewal, but also there has been one new leasing trade that we have done in Pune. Also, we're seeing new inquiries coming up in the city simply because from an arbitrage perspective, the markets also moved up. The eastern side of Pune is already at about INR 100 to INR 120 and the central Pune is about INR 80, while we are in the INR 55 to INR 60 bracket. So therefore, we are seeing some traction from the IT sector, the technology sector as well. So early days, though, but we are hopeful with all these improvements that it's just a matter of time that it will actually, the occupancy will take up.

[Operator Instructions] The next question is from the line of Pritesh Sheth from Axis Capital.

A couple of questions. Firstly, on the projects under development, I see like a couple of projects time lines have been pushed out, Manyata Block and the Phase 2 of business by almost like 9 months. So any specific reason for that? Second, on the ADRs that you are now getting for the newly opened hotel, which is 19,000, and this, I suppose it's not a luxury one. It's, I think, a 3-star property for which we are getting this area. So what would be the expectations for the 5-star hotel that would come up? Yes, those are my 2 questions for now, yes.

Pritesh, you're right, there is a delay in 2 of our properties, that's Manyata Block B. And this is primarily because of rerouting of Nala, which is a man-made Nala that's actually passing through our property. And hence, there was a delay in approval. But having said that, this is a fully pre-leased block and the tenant is fully aligned and they are aware of this. So there is no risk to the tenancy. But having said that, there is a 9-month delay in that delivery of that building. Coming to Hub, again, there was a design change that we did. Also the metro that is opposite this building will actually be operational by the end of '27. And therefore, from a timing perspective, we also believe that timing this closer to Metro we'll see more leasing velocity as well. So these are the 2 reasons for the delay of these 2 blocks. On the hotel side, you're right, this is the Hilton Garden Inn that we've currently opened. This is the 211 keys Hilton Garden Inn in Embassy Tech Village in Bangalore. Currently, we are achieving INR 19,000 ADR. The Hilton 5 Star will definitely be north of this, but it's too early for us to comment because the launch is planned towards the end of the year. So closer to that, we will update the markets.

Sir, and this INR 19,000, should we take it as a stabilized rate? Or these are like initial retail demand and once corporate demand starts coming in, this should get down to like maybe INR 13,000, INR 15,000 as an average rate?

Interestingly, you asked this question, Pritesh. This is probably the most, would you say, demand or the highest demand or the most supply-constrained hotel market in the country. It's got about 1,200 room keys in that micro market with about 71 million square feet of corporate occupier in that 12-kilometer stretch. So we believe that this will only grow from here, and we don't see any slump of this rate.

And one last on the cash taxes part. As a percentage of EBITDA, it was closer to 10%. Usual average has been like 5%, 6%. Should we consider this as a new normal in terms of cash taxes, or was there some one-off this quarter?

So Pritesh, actually, the way we look at cash taxes as a percentage of revenue, it was always around 6% or lower. If you look at the INR 97 crores that we have for this quarter, it includes some amount, almost around INR 30 crores, which was basically paid for previous year. It took us some time to finalize the number and pay it out. So we paid that amount somewhere around in April. And hence, if you strip out the INR 30 crores of last year, which we paid now in cash, it's around INR 67 crores, which is around 5.4% to 5.5%. So it is in line. It's just that INR 30 crores got actually paid in cash this time.