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

Good morning, everyone. A very warm welcome to all for the Embassy REIT Second Quarter FY 2027 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is recorded. I would now like to introduce your 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 to the second quarter FY 2027 earnings call for Embassy REIT. Embassy REIT released its financial results for the quarter and half year ended September 30, 2026, yesterday. 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 make certain comments on this call that one could forward-looking statements. Please be advised that the actual results may differ from Embassy REIT does not guarantee these statements or results and is not obliged to Specifically, any financial guidance and information that we provide on this call are management estimates based on certain assumptions, not subjected to any audit risk or examination. You're cautioned not to place undue reliance on such intuition and [Technical Difficulty]

I'm sorry to interrupt, ma'am, your voice is breaking away and it could come a little closer to the microphone, please?

Yes, let me try again. 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. Thank you, Amit.

Thank you, Sakshi. Good morning, and thank you all for joining us early today to discuss our quarterly results. This was our 30th quarter as a listed REIT and yet another strong broad-based delivery. Four highlights that stand out. We pre-leased 0.5 million square feet full building in Bangalore at a 15% pre to the current market trends. We registered early signs of revival in our Pune portfolio, expanding the occupancy by 30 basis points quarter-on-quarter. We declared our highest ever quarterly distribution of INR 670 crores or INR 7.07 per unit, and we've delivered double-digit growth across our key metrics, growing our revenue by 16%, NOI by 15% and our NAV by 18% year-on-year. Alongside this strong business performance, I am pleased to share that Embassy REIT is now part of the Nifty 500 and the Nifty MidCap 150, along with several other NSE and BSE indices. This has brought in a meaningful passive inflows and broadened our investor base well beyond our 1.5 lakh direct retail unitholders, as many more investors now own us indirectly through index funds and ETFs. Coming back to our leasing performance. This quarter, we leased 1.5 million square feet during quarter 2 with GCCs contributing to 85% of our total leasing. This 1.5 million square feet included 0.9 million square feet of new leases, 0.1 million square feet of renewals and 0.5 million square feet of pre-leasing. This pre-lease deal was a standout transaction as we leased an entire 0.5 million square feet block at Embassy Tech Village Bangalore to a global engineering company at 15% premium to the current market rents. One of the other encouraging trends this quarter has been the early green shoots emerging in our Pune portfolio with the metro connectivity as a key catalyst, we leased over 0.2 million square feet across our 3 assets in Puna, contributing around 25% of new leasing in quarter 2. With this, Puna occupancy grew by 300 basis points quarter-on-quarter. Turning to the rent growth. We continue to lease above market trends, new leases during the quarter, we've signed at an average 9% premium to the market trend. Also, our portfolio market trends have grown by 8% year-on-year to INR 106 per square feet. The blended market trends for Manyata and ETV have reached INR 107 per square feet, but we are signing most of the deals in Embassy Manyata and Embassy Tech Village at between INR 115 to INR 130 per square feet now. Overall, as of September '26, we've maintained our portfolio occupancy at 90% with all our cities except Puna at 94% or above occupancy level. With a healthy leasing pipeline, we remain on track to close the financial year with an occupancy of approximately 90% to 93% by area. A few other updates. We have received the occupancy certificate for 0.6 million square feet Block 1 at Embassy Splendid TechZone in Chennai and have handed over the fully pre-leased building for setting up the GCCs of a leading U.S. company. Our total development pipeline now stands at 5.6 million square feet across Bangalore and Chennai. Of the 2.3 million square feet delivery scheduled over the next 2 years, 67% is already preleased, including expansion option. Next on our hotels. We remain on track to launch the 318 key 5-star Hilton Hotel at Embassy Tech Village during the course of this year. The REITs delivered Hilton Garden in hotel in the same complex turned operating cash breakeven and clocked ADR of over INR 20,500 and an occupancy of 22% during the quarter. Overall, for our hotel portfolio, we recorded a 58% occupancy and INR 13,500 blended ADRs in quarter 2, resulting in a 22% revenue growth year-on-year. During this month, we have also concluded the acquisition of 8,048 square feet of fully leased retail area at FIFC our flagship Bombay asset, further consolidating the ownership in Mumbai. We will continue to pursue such selective value-accretive opportunities that further strengthen our portfolio. Beyond our own performance some of the macro tailwinds remain firmly in our favor. India's top 7 cities recorded their highest ever office absorption in the first 9 months of the year at 64 million square feet, up 10% year-on-year. With supply at 46 million square feet, Pan-India vacancy fell 102 basis points year-on-year. GCC and Flex players drove around 70% of this demand undeterred by the ongoing geopolitical uncertainties or AI-related narratives. I would like to refer to a recent macro study published by Embark named India's GCCs in the AI era, which highlights a few structural trends that position our GCC-let portfolio well for the years ahead. One of the interesting points that was made is India's GCC occupied area is expected to reach 390 million square feet by FY '31, growing at a 11% CAGR while BFSI and TMT sectors are expected to drive around 55% of this growth. What is interesting to note is that 80% of the headcount growth over the next 5 years is projected to come from brownfield expansion by the existing GCCs and the rest from the 120-plus new GCCs set up affected every year. The study shows that 92% of the GCC leaders are beyond selective AI adoption in India yet realized productivity gains stay below 15%. As AI mandates move from function-specific pilots to broader bid-outs, India stands to gain significantly with its AI skilled talent projected to grow threefold to around 0.8 million to 0.9 million by FY '31. So AI productivity and GCC expansion will clearly coexist. These trends play directly to our strengths. Our Bangalore anchored portfolio sits at the heart of India's AI talent ecosystem, making our campuses a natural choice for GCC scaling their AI mandate. With this, I will now hand it over to Abhishek to present our financial updates.

Thank you, Amit, and good morning, everyone. Let me take you through the financial highlights for quarter 2. We delivered another quarter of strong double-digit year-on-year growth with revenue up 16% to INR 1,303 crores and NOI up 15% to INR 1,069 crores. This was driven by our continued leasing momentum, healthy rent growth and the addition of new office and hotel buildings to our operating portfolio. We declared our highest ever quarterly distributions of INR 670 crores or INR 7.07 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 higher interest expenses. During quarter 2, we raised INR 2,050 crores of debt at 7.14% per annum blended interest rate, which was 18 basis points lower than our Q1 in place debt cost. This included INR 1,000 crores raised through a 3-year floating rate NCD fully subscribed by a leading multinational bank at an initial coupon of 6.97%. This is the first financing by scheduled commercial bank to an Indian REIT at the trust level under the RBI's new framework, opening up an important new source of long-term capital for us and the wider REIT sector. With this, our net debt stood at INR 22,389 crores as of September end, implying a 30% leverage ratio at 7.33% in place cost. In addition, around 57% of our debt is locked in at fixed rates. While the rate environment has turned firmer following the RBI's recent rate hike, a strong credit profile and access to diverse capital pools position us well to manage our borrowing costs. Next on our portfolio valuation. As per the independent valuer's assessment as of September '26, our portfolio JV grew by 16% year-on-year to INR 73,990 crores. and our NAV by 18% to INR 524.74 per unit. This impressive growth was mainly driven by an increase in our market rent newbuilding additions as well as cap rate compression in some of our high-performing properties. Also, I'm happy to report that due to the recent amendment in income tax loss, we have recognized MAT credit in our books amounting to INR 594 crores, which we believe can be utilized over the next few years. Also, as many of our SPVs will now move to a lower tax rate, or will stop paying MAT, we expect to save cash taxes to the tune of around INR 120 crores to INR 130 crores per year going forward. Lastly, an update on our FY '27 guidance. Based on our year 1 performance, we remain on track to achieve our annual 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 midpoint, this guidance implies a 13% growth in NOI and a 10% growth in DPU on a Y-o-Y basis. We remain committed to delivering on our growth targets for this year and growing our DPU in the years ahead, while optimizing our balance sheet and maintaining strong cash flows. With this, let's now move to Q&A, please.

[Operator Instructions] Our first question comes from the line of Puneet with HSBC Bank.

Congratulations on your great performance. My first question is on your guidance for 93% occupancy end of year. Does that include Pune as well or are you counting it excluding Pune?

Puneet, do you want to ask all the questions and then we'll answer this?

Sure. Second also is on the Splendid TechZone 0.6 million square feet, when does cash rent start? And thirdly, on your guidance, are you factoring in any potential increase in interest rates or does it factor current prevailing interest rates?

Okay. So let me begin with the first question. The 93% guidance is including the Pune portfolio as well. And 0.6 million rent, it starts from next year sometime, Puneet.

On the third question, Puneet, on the guidance for interest cost. See, if you look at the maturity, which is coming in, even if there is a, let's say, 1 or 2 interest rate hikes of 25 basis points each, we think we'll still be in the range, which we had provided earlier, which is that this year's interest cost will be around 11% to 13% higher than previous year in total for the full year. So I think we're comfortably be within the range. And the reason for that is, if you look at from here on, we have only around INR 4,000 crores of refi that is coming up. Out of that, INR 1,100 crores already refiled from the money that we had borrowed as per my prepared remarks, so that we utilize to refi. The balance INR 2,800 crores, we have already tied in almost around INR 1,450 crores, we are in active discussion and almost closing it at a very attractive rate because this is a deal where we were discussing even prior to the quarter close. So it's coming to an end, so that INR 1,450 crores will be within, let's say, a week, it will be in our hands, and we'll be able to refi. The balance is at the fag end of this year, which is March '27. So even if there is a repo hike there, I mean, it's not much impact. So that's the reason we think that we will still be in the range.

Okay. And for your next year also, there is some debt coming for maturity. Is that a fixed cost debt or is it floating cost debt?

So total that is coming is around INR 4,200 crores. Most of that is fixed cost. The average interest rate there is around 7.5%.

The next question comes from the line of Girish Choudhary with Avendus Spark.

Just wanted to start with a broader demand environment. Obviously, we have seen leasing has been pretty strong for Embassy in general, the Grade A office market and GCC has driven a big part of that. But when you look at the conversations you're having with some of these global companies, are you seeing -- I mean, have they largely existing GCCs expanding operations or are you also seeing meaningful pickup in new GCCs entering India? And just a follow-up to that. Again, as per your discussions the AI and productivity? Are these companies beginning to rethink their space requirements?

So let me take these questions. Firstly, from a demand perspective in the market, we're seeing still strong demand drivers, like you rightly mentioned, largely from the GC guys as well as from the flex operators in the market. I think this quarter has been a record quarter from an overall country perspective, absorption of about 21 million square feet. The first 9 months, we saw about 66 million square feet of leasing absorption across the country. And we believe that there is a -- sorry, about 20-odd million square feet of RFPs in the market with about 85% of [indiscernible] actually towards Bangalore. So across the country as well, the demand is strong. We've got a very strong pipeline of about 1.4 million square feet across the country, and we're very confident about this. Coming to the next question on AI productivity and therefore, how it's impacting. Our conversations have been very clear. We're seeing a lot of the existing GCCs take up space. I think in the last quarter, we declared that target -- we spoke about target cooperation which actually took up space with us. And similarly, multiple of our existing clients are actually talking to us for growth. And similarly, we are seeing a lot of new incoming mid-market GCCs that are actually taking positions within our ecosystem. So overall, we feel very confident about the market at large. In terms of AI productivity, very early days, but what we've seen, and this is something which is echoed in the report that we referred to just a while ago as well, a lot of leaders are still saying that the AI productivity gains is less than 15%. And obviously, the cost of implementation of AI is very steep as well. So it's a wait-and-watch game, but at least in the short term, we don't see that productivity gains leading to job losses.

My next question is on the interest rates and -- I mean also on NAV, right, we have seen a meaningful increase in NAV in the last 1 to 2 years, right? And supported both by the market rate rentals and then also the interest rate, right? But how do you see that going ahead in a rising interest rate? Do you see pressure on cap rates and property valuations?

So Girish, a couple of things. Yes, I agree, interest rates are going up. But what we are seeing in the market is that the cap rates are still not widening. So the impact will start coming in once the cap rates see some winding, which we are not seeing as of now. So I mean, we'll have to wait and see how the markets react to this interest rate cycle, whether this is a sustained cycle. Because even the value-add doesn't take cognizance of any increase for the first 1 or 2 quarters, similar to what they had done when the interest rates went down for 3, 4 quarters, they waited and then they saw that this is a sustained one and then they took that call. Similarly, when the interest rates are going up, they will see what is happening for -- on a sustained basis. If it sustains, let's say, for a couple of half years that is when -- and the market sees that the cap rates are broadening, that is when the value will take an impact on that.

And how -- from clear on, how do you see the headroom on NAV purely led by the rental growth?

We see -- there are a couple of things. One is the disclosed MTM. we have disclosed around 10%. But then the actual leasing that we are doing is far more than the 10%. So we'll have to wait and see how the market rents are growing, which we see that there are in shoots that the market rents are still growing. So if that happens in the next valuation will take impact of that. Also, the leasing is happening. So if you see now we are at 92%. Amit said in his prepared remarks that we are planning -- sorry, now it's 90%, we are going for 90% to 93%. So all those also will be taken. So we think that there is still quite some headroom which is left for the NAV to grow.

The next question comes from the line of Kunal with Bank of America.

A couple of questions from me. Amit, this GCC 0.5 million deals sounds very interesting and a good one. So any additional color you could give as to is this just 1 more typical case of what you have been describing as brownfield expansion or is there something different about it as a company wanting to shift an entirely new process to India, so on and so forth? And then the second question is the survey you were referring, if you could just give a little bit more color around it as to who were the participants? You just very to know as to who the feedback is coming from.

On the first question, the 0.5 million square feet. It happens to be an existing tenant of ours in our ecosystem who is actually expanding by keeping the existing footprint within our portfolio, right? So this was an RFP that was out in the market that we won the RFP. And interestingly, like I said, that it's 9% premium to the market and probably one of the the highest ever rent in that micro market that we have achieved. Next, Sakshi, do you want to add color on the...

So this survey, Kunal, was done with about 100 GCCs in India. And also there have been around 55%, round 80 conversations, which we done by with GCC leaders, which are either already in India looking towards setting up pieces in India. And it's very widespread actually look at from a geography perspective, how they covered the regions, how they cover resignation, how they cover the people, almost 50% to 60% were CXO or GCC India heads, which you've interviewed. There's a lot of detail in the report as well, I can also send that around.

Of course, of course. Yes. It's a pretty interesting outcome, so [indiscernible].

The next question comes from the line of Mohit Agarwal with IIFL Capital.

Congratulations on a good quarter. Two questions. Firstly, on the Pune demand seen green shoots on that. Where is the demand, the mix of demand based on your discussions? Is it similar to what you are seeing in your Bangalore markets? Is GCC and Flex driving demand? Or is it different kind of tenants that are talking to you? So some color on that. Secondly, on the previous question around rent growth, where do you see broadly we are in terms of the cycle on the rental growth? And is there like a big difference in, let's say, how a Mumbai market probably has seen a sharp rental growth. So we see like from a rental growth perspective, different markets being in different stages or you see that generally we have a fair bit of running for rental growth increases going forward as well?

Okay. Let me take the first question, the Puna demand. Interestingly, the demand comes from GCC, mostly from GCCs. Given the fact that it's a market. But obviously, if you see Puna as a whole overall market, both flex players, GCCs, as well as domestics have been contributing to the market. But we're seeing more traction from the GCC operators. And interestingly, we have done 2 deals, significant sizes, both of it, overall about 200,000 square feet in as well as in So that gives us a lot of confidence because with the metro that is being scheduled to be inaugurated by the Prime Minister and it's finally announced in the media, we see a lot more traction and a lot more inquiries coming our way. The second, on the rent growth runway, across the country, we're seeing the rental rates firming up anywhere between 5% to 10%. But key micro markets where activity is, I think we're seeing rental growth of about 10%. Like you rightly said, I think 2 markets, one is Bombay, which has just been an outlier, and that's something that we've been reporting quarter-on-quarter is that the premium to the market as well as the in-place market rents that have grown in Bombay just been has been very healthy. And second, I think also just from 1 micro market, which is high tech, we've seen the rentals almost double in the last 2 years. So apart from that, Bangalore is seeing very healthy rent and similar trends to Hyderabad is outer ring road as well as the white field market.

Okay. And just 1 clarification from Abhishek on the leverage levels. For the last 4 to 5 quarters, we are seeing the LTV coming down from a peak of 33% to 30%. Obviously, this is driven by a very healthy NAV growth. But how do you see this trending, let's say, over the next 4 quarters? Some color on that? And lastly, on the -- you mentioned INR 120 crores, INR 130 crores of cash tax savings, you still maintain the 5% to 6% tax rate on revenue? Or will that meaningfully come down?

The second 1 first. So earlier, I had said that it will be around 6%, but now we think that it will be closer to 5%. Second point on leverage levels, yes, I mean, we are around 30% now. So I think for the next couple of quarters, it will hover around 30% only because of all the CapEx spends on the 5.2 million square feet that we'll be doing. Post this getting capitalized, I think this project 5.2 million getting capital, I think it will start coming down to around 28%, 29% levels.

Okay. So 28%, 29% level still about -- in about by end of FY '28?

Or '29, yes. Somewhere around in FY '29. Because see, we want to maintain it below 30%. So we think that 28%, 29% is a healthy level of tech.

The next question comes from the line of Pritesh Sheth with Axis Capital.

First is on Manyata occupancy outlook there. So I think we have being the bulk of the exits in the first 2 quarters and have been consistently leasing around 5 lakh square feet in last 2 quarters, can we maintain like same run rate going ahead in the second half which would mean that occupancy should plan to like 95%-plus kind of levels? Is the visibility assisting that kind of increase there? [indiscernible] take the second as well, and you can answer both together. With regards to the recent job cuts now announcement from some of the larger corporations. So what is your reading on that? Because they are also talking about some of those in India as well. So what kind of processes -- if you have had conversations, what kind of process is it's where we are seeing this just job cuts? And how do you read that? So just 2 questions.

Yes. So firstly, on Manyata, we will continue to see this run rate simply because in Manyata, we're now moving to a rate strategy given the occupancy levels that we have and the rate that we are actually able to get. So some of the expiries that you see are front-loaded simply because we're moving on to the rate strategy there. Also, in terms of pipeline, I think we've got some very interesting pipeline there, a healthy mix of existing occupiers taking up -- wanting to take up positions, rather, and also a lot of new demand that's actually coming our way. So it's -- for one, I can say it's a problem of plenty for us in Manyata. Moving on to the second question in -- on the job cuts. Look, we've always maintained this, right? It's a city of scales actually. Basically, there is 1 side where there has been a little bit of churn, especially in the IT sector, and now we're seeing this with corporations like you mentioned right now. But on the other hand, there is a lot of new entrants that are actually coming into the market. And the existing GCC world is also increasing their footprint by bringing more functions into the country, right? And therefore, we're seeing these mixed 1 side does churn and 1 side, there is growth. But the overall construct is that the pie has become larger, and therefore, the volumes have increased, and that's just purely on data, if you see 66 million square feet of absorption in the first 9 months is a record year compared to any time across the commercial real estate era in the country. So -- and we continue to see this in the form of RFPs that are there in the market and also the market activity. So with that, we are very confident about the demand and the office story in the country.

[Operator Instructions] The next question comes from the line of Abhinav Sinha with Jefferies Group. .