Mindspace Business Parks REIT (MINDSPACE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Mindspace Business Parks REIT's Third Quarter FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Deepak Aswani, General Manager, Corporate Finance and Investor Relations. Thank you. And over to you, sir.

Thank you, and good afternoon, everyone. Welcome to the Third Quarter FY '21 Earnings Call for Mindspace Business Parks REIT. At this point, we would like to highlight that the management may make certain statements on this call that may constitute forward-looking statements. Please be advised that our actual results may differ materially from these statements. Mindspace Business Parks REIT does not guarantee these statements or results and is not obliged to update them at any time. We would like to reiterate that the acquisition of asset SPVs by Mindspace REIT was effected on July 30, 2020. Consequently, consolidation of financials of these asset SPVs with Mindspace REIT has been done effective 1st August 2020. Consolidated year-to-date quarter 3 FY '21 numbers, therefore, reflect 5 months financial performance of the asset SPVs. However, for comparison purpose, in the investor presentation, we have provided pro forma revenue from operations and net operating income for the 9-month period from 1st April 2020 to 31st December 2020. I would now like to welcome Vinod Rohira, CEO; and Preeti Chheda, our CFO. Vinod will share his views on the macro environment, commercial real estate in general and business update. Preeti will further share an update on the financial performance. We will then open the call to Q&A. I now hand over the call to Vinod.

Thank you, Deepak. Good afternoon, everyone. Thank you for taking time out to join us on this call today. The management team is joining the call from our office as the country has opened up gradually over the past few months. Social life is moving to the new normal with people back in malls, restaurants and resuming leisure travel. A steady and significant drop in COVID-19 cases and stable ramp-up of the drive towards vaccinations is going to play a critical role in quarters to come in bringing workforces back to the office. We are seeing new waves of COVID-19 across key geographies leading to disruptions and delay towards stability and the new normal. We saw some moderation in demand for office space in our micro markets due to the interim deferment of growth and CapEx decisions by some of our clients. While the long-term fundamentals of Grade-A office space remain intact, we expect the leasing pickup to take longer than projected. We continue our focus on health and safety of our tenants and to collaborate with them to ensure their business continuity and stability. We are excited to witness some of our large occupiers indicating gradual ramp-up of return to the workplace. The first phase of our upgrade program to reenergize our parks at Madhapur, Hyderabad; and Airoli East, Navi Mumbai have been substantially completed. We expect this to help keep our parks well poised to offer high-quality, ready-to-move-in spaces as the demand picks up. New supply has contracted significantly due to uncertainty of demand and limited availability of capital. Additionally, we are seeing consolidation by tenants in most of the micro markets that we are present in, with focus on retaining existing footprints of occupancy and working towards bringing back employees to the workplace. While the demand side has seen moderation, rentals in our micro markets continue to remain stable. In Mumbai, we entered into a letter of intent with a large MNC to lease 31,500 square feet space at our CBD asset, The Square BKC. We are in the early stage of discussions with multiple tenants for the balance space. At Mindspace Airoli West, we await de-notification of the building currently under construction for the -- from the SEZ authorities. We shall complete the construction of this building in a phased manner to match supply with potential demand. Also, we await policy changes to the existing SEZ framework based on the recommendations of the expert committee set up by the Ministry of Commerce and Industry to study the existing SEZ policy and prepare a policy framework to adopt strategic measures, which will further strengthen India to capitalize on global growth opportunities while developing its own competitive manufacturing and technology services base. Further in the Mumbai region, work on various infrastructure initiatives, which would drive seamless connectivity, has resumed. The region continues to receive inbound interest for data center opportunities given Mumbai's geographical and infrastructural advantage. We hope to benefit from this demand led by increased Internet usage and anticipated data localization norms. Hyderabad is beginning to see some movement around consolidation RFPs for the year -- financial year '22 and '23. We expect demand for spaces to gain momentum after the next few quarters. In Pune, while most of the tenants continue to renew leases, fresh leasing activity is expected to pick up after the next few quarters. Demand for Grade-A office space in Chennai continues to be muted across micro markets. A tightened liquidity environment with reduced interest rates is expected to provide Grade-A developers and REITs with consolidation and growth opportunity. Low gearing of our portfolio provides us with a headroom to pursue such opportunities that are long-term value accretive for our unitholders. I would now like to take you through the specific operational update for the third quarter of the financial year 2021. As of December 31, 2020, our portfolio had 23.9 million square feet of completed area, which constituted 94% of our portfolio value as at September 2020. The portfolio is leased to more than 165 marquee tenants with an average in-place rent of INR 55.2 per square foot and a weighted average lease expiry of 5.8 years. 83% of the portfolio is leased to foreign multinationals. We achieved a gross leasing of 0.96 million square feet across 16 clients at an average rent of INR 60 per square foot. Gross leasing included area re-leased and extensions at a re-leasing spread of 13.3%. 92% of our gross leasing was to our existing clients while the balance was to new clients. New clients added the portfolio -- added to the portfolio included marquee names such as Arcelor Mittal, AGC, Alphasense, besides others. We continue to collect over 99% of our gross contractual rentals during the period. Our committed occupancy of the portfolio stands at 86.9%. On same-store basis, our committed occupancy is 89.9%. While physical occupancy continues to remain low across the parks, our tenants continue to consume approximately 50% to 60% of their power requirements from these offices to ensure their delivery targets are met. We are happy to announce that Gera Commerzone Pune and Mindspace Airoli West were awarded the British Safety Council's prestigious Sword of Honor. At this point, I will now turn the call over to Preeti to walk you through our financial highlights of the quarter.

Thank you, Vinod. Good afternoon, everyone. We completed the first full quarter post listing and are happy to announce the first distribution of approximately INR 2.8 billion, which is INR 4.78 per unit, for the quarter ended December 31, 2020. We also delivered net operating income in line with our projections. We continue to collect over 99% of our gross contracted rentals. Our revenue from operations for YTD Q3 2021 stood at INR 12 billion. Revenue from operations for Q3 FY 2021 was at INR 4.2 billion, which was approximately 3.8% higher than Q2 FY 2021. This is mainly on account of rent commencement of certain areas, contracted escalations kicking in and re-leasing spread being achieved. Our NOI for the portfolio for YTD Q3 2021 remains in line with our projections at INR 10.2 billion. Our Q3 FY 2021 NOI has been 6.3% higher than our Q2 FY 2021 NOI largely driven by higher revenue from operations and cost optimization measures. We continue to maintain NOI margin at 80% plus. Also, we commenced our facility management business under the brand name CAMPLUS in the portfolio effective 1st October 2020. As regards funding, we achieved substantial reduction in our funding cost from approximately 9%, which we had assumed for projections to approximately 7.3% as at 31st December 2020. During the quarter, we issued NCDs of 2 point -- INR 2 billion at 6.45% interest cost, which is per annum per quarter. We also availed a green loan of INR 5.6 billion. We shall look at similar refinancing opportunities to further optimize our debt cost. As stated previously, our strategy would be to deploy a combination of short- to medium-term debt with different maturities and long-term debt. With the net debt at INR 33 billion, our leverage stands at 13.8% of market value of the portfolio. In addition, we have undrawn committed facilities of INR 5.7 billion. This gives us enough headroom for growth in the portfolio. We are also happy to announce, during the quarter, Mindspace REIT was included in MSCI India Domestic Small Cap Index and various other MSCI and FTSE indices. As Vinod already mentioned, this quarter saw some moderation in demand and additional expiries. This is likely to impact the projected revenues of the next financial year, though the impact would be partially offset by saving in interest cost and other cost optimization measures. Management shall closely monitor the business developments and their possible impact on the financial performance of the portfolio. With this, I thank you all for the patient hearing. And I now hand over to Vinod to conclude this briefing.

Thank you, Preeti. While COVID has impacted businesses globally, it has also brought about a renewed focus on digitization, which has changed the way businesses across the world function. India, being an effective provider of these solutions with bandwidth of intellectual capital for technology services, stands to benefit from this. We expect the demand for office space to take a few more quarters before it begins to return. Once the global environment recuperates and office occupancies rise, India's Grade-A offices will be the foremost beneficiaries of the demand surge.

[Operator Instructions] The First question is from the line of Karan Khanna from AMBIT Capital.

So my first question is on the Hyderabad micro market. We've been hearing about a lot of upcoming supply in that market. So how would this impact the Mindspace Pocharam where you have 0.4 million square feet of completed assets with a WALE of around 2 years? And that asset has seen vacancies recently with occupancy at 71.1% versus 92% in the previous quarter.

Hyderabad is, of course, about 2 different micro markets, right? So when we are looking at Hyderabad, we are predominantly looking at the western quadrant, which is the Madhapur micro market. And there, you've seen a significant drop of supply, and we don't see supply catching up to the volumes envisaged earlier till '23. What that's going to do is really when the demand returns back, whatever are the vacancies of Grade-A assets will catch up demand really quickly. Having said that, from a Pocharam point of view, which is the eastern quadrant, that was always a low-cost option being offered for occupiers in Hyderabad. It's seen a bit of a hiccup right now. But I think at the cost offering, it will catch up as it is going to take time to fill up that portfolio considering the way the demand is right now.

Sure. And in the last call, you mentioned about increased inquiries for the data center demand, especially in Bombay. However, construction of your 1 million square feet of under construction area in Mindspace Airoli West has been delayed, to be completed in a phased manner over FY '22. So in that context, we've also seen that vacancies across assets in Mumbai has increased during the quarter. Can you give us some sense on nature of tenants who would have terminated the contracts and any updates on the new sign-ups?

So this 1 million is a new building that is getting constructed. We are waiting for de-notification of that asset. And we have already seen early traction of the BFSI and the movement around moving to locations where they are closer to proximity to large residential catchments, and that's actually catching favor. Data centers are a build-to-suit opportunity or a customized opportunity. So those, in any case, will fit into a different block of construction, which is more customized for data centers. So we are seeing those opportunities additionally because we have space to build those kind of assets within our portfolio.

Okay. And the nature of tenants who would have terminated the contracts during the quarter?

So currently, it's basically where the expiries have taken place of your 10-year or 12-year cycle and you finished off with the occupancy and the lease was to expire, we've seen some compression of that footprint for the short term, and that's what's really happened. When the clients come back, they will then again sign for 10-year leases with lock-ins, et cetera. So a significant number of those occupiers have actually renewed. And 80% of whatever we spread out for re-lease, we've already re-leased that to mark-to-market opportunities we saw.

Okay. And last question before I come back in the queue. Given increased vacancies and the delay in fresh lease-ups along with deferred construction time line, can you give us some sense on the expected deviation versus your estimates which are forecasted during the IPO?

Sorry, can you repeat that? We missed you in a bit.

Yes. Saying that given the increased vacancies and delays that we've seen in the fresh lease-ups along with the deferment in your construction time lines, can you give us some sense on what are the expected deviations versus your estimates which you had forecasted during the IPO?

Yes. So that overhang is about 1 million square feet, which we will now lease over this coming next financial year and onwards.

But anything in terms of the forecast that you had given out? The distributions and...

Yes. So Karan, in terms of translation of the expiries which have happened into the rental impact, of course, as I mentioned during the speech itself, there will be an impact on the rentals, but we have some positives also happening from a distribution perspective. We've saved almost 1.7% in our interest cost versus what we had projected. So that's a substantial saving on approximately INR 3,500 crores of debt. So that's going to be one positive. Plus, we are also working on various other cost initiatives, which is, again, are to some of the savings and operating costs. So both of these put together will partially offset any form of rental reduction that will happen on account of this expiries.

And of course, you will take that 1 million square feet overhang will take longer than what we had expected earlier to lease. So we are preparing ourselves for that.

The next question is from the line of Manish Agrawal from JM Financial.

Yes. One clarification. In the last question, you mentioned that you would perhaps see some delays. So perhaps the NOI figure would -- there'd be some sort of amiss. And NDCF, we would be able to meet because we get interest cost benefits. Is that the right understanding?

So Manish, I wouldn't say we will be able to fully meet our distribution targets. That's something it's a little premature to say because we will partially offset the reduction in revenue on account of these expiries and delays of rent starts because of interest and -- on the cost saving side, as I mentioned. So I would say, substantially, the variation in distribution will be taken care of by the interest savings and the cost measures.

Okay. Okay. And second question is on the debt front. So I'm looking at Slide 32 (sic) [ Slide 27 ] where you have given the NCDF build-up. Over here, the net debt drawdown shows INR 291 crores. But if I look at the total lease structure, the net debt seems to be at similar $33 billion -- INR 33 billion. So also, what exactly is happening? What are the adjustments which are happening?

So Manish, essentially, our debt has remained the same as it was in September '20. All the operating cash flows that we generated during the quarter were used to pay down the debt. Now of course, you are seeing a number of 2,914 -- INR 2.916 million here because this is only for the SPVs, and it doesn't take into account the cash which is sitting in the REIT level. So if you look at the consolidated basis, then the debt has not moved. It has remained the same. So of course, once we made the distribution before the end of this month, then obviously, the debt will rise to that extent.

Okay. Okay. And one last question is the ROFO asset at Madhapur. So what is the progress over there? Is the construction company -- what is the broad time line?

So that was scheduled to finish in the calendar year '22, and it's on schedule.

[Operator Instructions] The next question is from the line of Sameer Baisiwala from Morgan Stanley.

Yes. First question, Vinod, is what's really causing this delay in the recovery in demand? I mean is it to do -- I mean how is the occupier thinking? No expansion and just consolidation versus some travel restrictions? So what's really driving this delay?

So really, the sad part is that you are seeing, Sameer, broadly COVID hitting a second wave in most of America and Europe, which was something that they've not expected to the scale and degree and which has kind of paused the decision-makers there while we are seeing early signs of actually occupiers, the large occupiers in India starting to speak about wanting to get back to the workplace quickly. So there's a mixed bag of signals we are getting. I think by end of March, April, you will be far more clearer about how quickly they want to get back to the workspace. It's a good sign that the clients want to come back to offices, and we have started seeing the larger occupiers talk about it. So in my view, really once that level of stability returns, you will see immediate need for whatever the immediate requirement for demand, which will come first in terms of smaller take ups of ready space that they need quickly to fill up. And then it will go to larger consolidations and future growth opportunity to kind of combine their consolidation and growth trajectories, which you will see probably to the beginning of '22 and onwards. But you will start seeing demand come, in my view, 2 quarters, 3 quarters from today. You're already seeing a little bit of that early need for urgent space, but that's not really much compared to what we are used to in terms of transactions. But the interesting thing and the better thing is that most of the clients want to continue their occupancies. And they're already in advanced discussions for leases that are going to expire 6, 9 months down for a longer-term recontracting discussion to actually continue with their footprint. So that's a really good sign we're seeing.

Okay. Got it. Very useful. And was this understanding correct that within their businesses, all your large occupiers -- I mean those businesses are doing well, and they're actually expanding. I mean the IT services, BFSI, et cetera. So the health of these occupiers is actually pretty okay.

Yes. Absolutely. Absolutely right. And actually, internally, they are seeing far more stabler growth pointers than what they'd like to speak about because the demand for those services is rising.

Okay. And so, Vinod, my next question here is based on the expiries that we are seeing in Q4 I think pretty substantial and then going into next year. How do you see the vacancies trend? Will it first go down before it goes up if you were to take next 6 months' view?

Yes. It will be a mix of both. While -- yes, you're right, there are vacancies. We have about almost close to 1 million getting vacant around 31st of March. So obviously, those will get leased in the coming year forward. However, with a lot of the discussions we are having with our occupiers, whether some for early, some for expansion and consolidation opportunity for whatever is contiguous to them, we are seeing good healthy signs of most of that getting leased early. So we are actually focused on that and engaged with clients. We have decent amount of visibility around that.

Okay. And, Vinod, another question is, what's the sort of footfall that you're seeing? I know you mentioned it's low, but how low by the occupiers?

10%.

10%.

Yes.

And versus that you said the power consumption is 50% to 60%.

That's been the same for the last 12 months. Because the gateway of all of their data is actually through their offices. They're consuming power and the services in terms of the intangible connectivity is actually flowing through there. Most of these being SEZs, all the export obligations flow out from these SEZs.

The next question is from the line of Adhidev Chattopadhyay from ICICI Securities.

Yes. The first question is, what is the CapEx incurred for the 9 months? I know you've given the figure for the quarter. Could you just share that number, please?

Yes. Hi, Adhidev.

Yes.

We can take your second question while we give you that number.

Okay. Okay. Fine. Fine. The second question, now in terms of the trends on the -- we had earlier, I think, moved to a 5% sort of annual escalation. So in all the new contracts, whatever leases are expiring and whatever is coming up for renewal, what is the sort of -- are you sticking to the 15% every 36 months? Or is there some change in the contract? Are you looking for some longer-entry periods? Or what is the trend overall?

No. No. So the escalations continue to be either 4.5% to 5% annual or 15% every 3 years. That hasn't changed.

Okay. And this 5% -- so the other annual escalations which you're doing earlier, are those involved still? Or is it something...

Yes. Yes. Yes.

Okay. Okay. Fine. Yes. The next first thing on the CapEx number, if you could just tell us.

Yes. He's just pulling that out for you.

Do we move to the next question?

I'm just waiting for the number.

Yes.

Maybe I could squeeze in another question until that time.

Sure.

Yes. On this early expiries trend, so for next year, based on whatever expiries are there, do you anticipate any more such early expiries coming in with the portfolio for next year based on whatever discussions you had with tenants? Or is this more or less what is done for this year?

I think most of it is taken care of. You will continue to see depending on how businesses react to whatever is going on currently in those markets. But otherwise, you -- I don't see any dramatic change from the trajectory that you're seeing this year.

Okay. Fine. Fine. That's it from my side. If you have that number, maybe you can share later during the call as some other callers -- yes?

Approximately it's about INR 400 crores, Adhidev.

INR 400 crores, is it? Okay. Okay. Yes.

The next question is from the line of Atul Tiwari from Citigroup.

Yes. Sir, just to understand it clearly, you said that the footfall in your offices is about 10% of the usual level. Is that right understanding?

That's right. Yes.

Okay. And sir, just to -- just some more color on this early expiry. So -- I mean so what happens exactly? So if a client expresses a desire to kind of break off lease early, you get to retain the deposit, et cetera? Or is there some kind of penalty associated with that? Or how does it work?

No. So unless there are clients that are walking away within the lock-in term, which we haven't seen at all, this is just a notice period, which they serve. They pay you the rent for the notice period and then they exit.

Okay. Okay. So there is no like forfeiture of deposits or anything like that?

No. No. No. Absolutely not.

Okay. And then just the last one. So I mean over the past 2 quarters, the re-leasing spreads have come down for the new leases you are signing. So is it like -- has it got something to do with the market rentals coming down because of COVID? Or is it a mix issue or et cetera?

No, Atul. That's not the case. What's happening exactly is that the re-leasing that we've done -- in fact, last time, also, if you look at the numbers, we had re-let the spaces at INR 70. So of course, it depends on which micro market the maximum leasing has happened. So this time also average rent that we've achieved is about INR 60. So the market rents have been in line with expectations. So the reason why your re-leasing spread is over the period coming down is also a reason of what is actually expiring. So suppose if I have an average expiries, which is I'd say around INR 51, but some expiries which are coming are already at INR 60, then to that extent, in that quarter, the re-leasing spread is lower. So -- and also, if we look at our rentals, like they moved from INR 52 to INR 54 and now they moved to INR 55. So to that extent, we've been realizing those re-leasing spreads also as we are going along. So it's a function...

Okay. So more of a mix issue? Okay. But any commentary on the market rentals because of COVID? I mean is it stable or down marginally, broadly speaking, according to you?

So in the markets that we operate, whatever were the projected rents, we are pretty much in that band, and we're able to get those rents.

[Operator Instructions] The next question is from Kunal Tayal from Bank of America.

Sure. Vinod, I just want to go back to your point on early expiries. To make sure, are you saying that basically customers are temporarily reducing their footprints and not moving away to a different office space?

Yes. It's broadly that.

Okay. Got that. And the second one is around the WALE of your new leases. It seems to be about 10 years, so higher than typical. Is it just some kind of nature of services for the new contracts? Or is there a tendency on part of customers that a good deal is available, so might as well lock in for a longer duration?

So essentially, it's like this. Like we've mentioned, even earlier in the past, it's more about capturing and retaining and nurturing talent and spending monies to create an experiential workspace because the quality of services have moved upwards. So you don't want short-term contracts. You're looking at 10 and 15 years now in terms of contracts.

Okay. So it seems like this is pretty much a trend that could sustain into the next few quarters as well.

Yes. Yes.

[Operator Instructions] The next question is from [ Vishwanathan ], who is an individual investor.

Yes. Congrats for a good set of results. On the dividend front, you have said that distribution will be INR 4.78. What is the breakup of that between interest and dividend? And you have also said that the dividend is tax exempt in the hands of the unitholders. Under which section of the Income Tax Act are you claiming this exemption? Just -- I would just like to get enlightened.

Sure. So the mix of this INR 4.78 is INR 4.25 is dividend. So about 89% is dividend and 11% is interest. 10(23FC) is the section of the Income Tax Act, under which you can claim this exemption.

10(23...

FC. 10(23FC).

FC.

FC? FC?

Yes. Yes.

[Operator Instructions] The next question is from the line of Shashank Savla from Somerset Capital Management.

Hello? Can you hear me?

Yes. We can hear you now.

Okay. I had a couple of questions. The first was in terms of the incentives, like do you offer any incentives to new contracts? Or what level would they be on?

They have been very similar to what we've always been doing traditionally because if you see even the footprint of our tenants, currently, 90% have been existing tenants have renewed and continue to take the reducing spaces, and we've added new marquee tenants as well. The trajectory remains the same. There is no any additional frills and fancies or incentives, so to speak.

Okay. So -- no. I'm just -- like I'm just thinking, is there a particular number because if I compare, let's say, to Australian REITs or something, generally, the incentives are around 13%, 15% and higher now due to COVID. So have you seen any increase in incentive levels? Or -- I'm just trying to understand what the level of incentives would be. Is it 5%, 10%? What level is it?

Incentives to the clients, if I've got your question right.

Yes. Yes. So at the beginning of the contract, any incentives given to help them sort of settle in like a few months of rent or something?

So generally what we do is we give clients a rent-free period for them to fit out and commence operations.

Right. And what is that typical rent-free period?

That ranges from 3 months to 6 months, depending on size and client and location, et cetera.

Okay. And you -- have you been able to maintain that? Or have you had to increase any of that rent-free period?

Except for customers who during COVID had commenced fit out and were not able to continue, at that point in time, we were a bit flexible with our occupiers. Otherwise, no.

Okay. The second one was on -- just looking at the Mumbai slide where you've had vacancy rates like between 18% to 22%, how does that impact the leasing profile for your office or upcoming construction?

So actually, that portion is the SEZ portion of our new Mumbai development, and we are eagerly awaiting the next steps that the government is chalking out for SEZs going forward, and that will make a big difference to the way and pattern of clients that will occupy these parks.

Right. But am I correct to understand that of the Grade-A overall market space, around 20% is still vacant in Mumbai?

No. It really depends on -- you see Mumbai as a region has got very different micro markets. You have BKC market at INR 300. You've got new Mumbai markets between INR 50 and INR 60. You've got the Parel market, which is INR 150, INR 175. You have Worli markets. You have Nariman Point. You have Malad markets. So very different east, west. All these zones are very different. You can't bundle them together. The vacancies are scattered around different locations.

I'm just looking at Slide 33 on your presentation pack where you've mentioned that for 2020, vacancy rates have gone up in Thane Belapur, for example, from 15% to 20%.

So essentially, Thane Belapur area in the Airoli quadrant, we are the guys who have the supply. And on the other quadrant, there is 1 new building that has brought in supply right now, which was 1.1 million. So that's just getting completed or just actually got completed, which has ballooned up the supply. That's in the Juinagar area.

So typically, for your under-construction projects, how much is pre-leased before it is -- it can be occupied?

So generally, if the building sizes are larger, you would see a 30%, 35% occupancy before completion, and then you'll see scale up and ramp-up in terms of occupancy thereafter.

Right. Right. Okay. And then a final question. Given the occupancy levels have come down from 95% in the previous quarter to 90% now, it's sort of a mix between getting a higher occupancy or reducing your rentals a little bit. So how do you see that mix? And then if given a chance, what would you be doing, like trying to reduce the vacancy rates or trying to keep your rents stable and then not mind keeping it vacant for some time?

For us, it's very important to ensure the quality of our tenants. And once we are comfortable with the quality of our tenants, we are extremely flexible because we want growth with those tenants. Having said that, at INR 50 and INR 60 rents, it's less than 2% of their operating costs. So they are not going to take space just because there's a rent difference of INR 3 or INR 4 or INR 5. They are looking at the quality of the asset and the other enablers for their businesses. And if you're right up there in the quality and relationship and the asset management platform, you will see clients choose you versus anything else because they don't want to compromise on Grade A. So it's not really a rent call at all. It's about the business, where it wants to be and how it wants to grow. And we're always there aligned to support because we are always aligned to growth.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

I'm on Slide #27, which takes us from EBITDA to NDCF. So just a couple of questions over here. What's the negative INR 46 crore of working capital changes? That's number one. And are there any one-offs in this flow-through?

Yes, Sameer. So Sameer, in this INR 46, a substantial amount is fit-outs, which we do for tenants. So ideally, we consider that as CapEx. But from accounting representation perspective, it's getting clubbed under working capital changes. So that's a substantial chunk. And then besides that, of course, you have your routine things like your prepaid expenses and your capital -- I mean your normal creditors. So -- but a substantial portion of this is fit-outs. And there are no one-offs here.

Okay. Great. And second question here is, how should we think about the net debt? I mean should this not be more or less be matching with the CapEx in this quarter as much as many quarters going forward?

No. I didn't get your question. So what do you mean by should it not match the CapEx?

See, in the net debt that we have taken, inflow is INR 290 crores and the CapEx is INR 175 crores. So we are almost getting a helping hand, if that's a good word to use, about INR 115 crores from debt to fund the NDCF. So just what's the framework of net debt as we go forward?

Yes. So Sameer, if you want to just look at SPV, it's just going to give you part picture because you have similar INR 300 crore of cash, which is sitting at the REIT level. So if you look at the overall movement in the debt, there has been no movement in the debt since September. We were about INR 3,300 crore of debt at September '20, and we are at INR 3,300 even on December '20. So essentially, if I were to give you a broad picture, all the operating numbers that we generated, most of that got used to pay down the debt and, of course, fund the CapEx. So as such, we've not had any incremental debt, which we had to think. Now of course, the distributions which have happened, currently, the cash has not moved out to the unitholders. That's going to happen after -- in the next 2-odd weeks. So that's when you'll actually see the debt going up. So currently, because this is just an SPV picture, that's why you're not getting the entire picture. Otherwise, there is another INR 300 crores sitting there. So as such, from a CapEx perspective, it's not moved, but we are going to have close to about INR 300 crore increase over the next quarter. So that should approximately, I would say, take the debt to INR 3,600 crores by the end of this quarter -- by the end of this financial year.

Okay. And if going forward, we are going to have more exits and less new leasing, so when tenants exit, I presume you'll be paying them back their deposits. So will that be a meaningful outflow with no matching inflow that is 3 months, 6 months and therefore pressure on NDCF?

So Sameer, overall, because of the exits which have happened and also some of the RCD rates which have got pushed, there is going to definitely be a reduction in the revenue from operations versus what we projected and also the security deposit, as you rightly mentioned. But from a distribution perspective, a substantial portion of that reduction will be offset by the interest cost savings and also some of the cost optimization that we'll be doing. But yes, both revenue reduction as well as security deposit reduction will have a bearing on the cash flow. But of course, this is going to be an interim thing because as you will keep leasing them, you will again start getting back your security deposit and your rentals also will come. So to the extent you have that loss because of the leasing period, that's the only period of impact on the overall cash flow.

Okay. That's fine. And the other question is on the Hyderabad ROFO asset. I think it's, if I'm not wrong, about 1.8 million square feet. And I think your presentation says it's going to get completed by end of fiscal '22, so just about 12 months from now. So not too far. So couple of questions. So a, I mean are they having any free leases, free commitments over there? And second, is it a given that we will be acquiring this asset?

We are quite confident about this asset, Sameer. So -- and we are quite excited that it's getting ready on time when there is no real supply coming in Hyderabad as was envisaged. So we are actually excited to complete this really quickly, and we believe we should be able to lease these.

Okay. Okay. This is very helpful, Vinod. And one final question, if I may. See, in last call all through 2020, it was more of an intellectual or academic discussion of work from home and de-densification and stuff like that. But today, I guess you must have had many rounds of discussions with the occupiers. So what's the assessment, Vinod, that going forward in the midterm, would many of these employees will be sitting and working from home? Is that the way the managements are thinking? And are you seeing anything very concrete in terms of de-densification or that's not quite the case?

So while we move on the streets, we have seen everything is opened and everything is occupied. So leaving aside the office space, especially in the technology spaces, everything else from domestic businesses to MSMEs, et cetera, their offices are full. And you're seeing malls full. You're seeing restaurants going full. You're seeing all the other spaces being occupied. So it's a matter of time where you will see a series of ramp-ups of workspace occupancy. In the next few quarters, I think you will see that go up. We are already hearing clients say that we want to get back to the office in a structured manner. And they're already having advanced discussions with us around that. So you will see early movers, and then you will see followers. So that's happening. It's started.

Okay. No. Vinod, I get that. But even they may get 80 people out of 100, and that would still be a large number. 15, 20, they may permanently be work from home or -- are you seeing any of that kind of a collateral damage as you go forward?

No. So today, it's all about health and safety until we are uncertain about the way the vaccine pans out and how COVID tapers down in India, et cetera. Hopefully, in the next few quarters, we'll have more stability around that assumption. The minute that happens, you will -- it's not about permanency of people being kept out at working from home, et cetera. It's more to do with health and safety. The minute the health and safety aspect is covered for, you will not want to keep some part of your employees outside. You may restructure to have different offices at different places. But otherwise, you're not going to really force people to sit at home and work. You may bring in some flexibilities, but your de-densification story is going to pan out where you will move from the high-dense offices to a slightly lower-dense office environment. So it will more than compensate for that. We don't see that as a challenge at all. See, when growth really starts to return back, you will have to get into an organized workplace. And that's the trend we are seeing from clients. And if that happens, then by default, you will start filling up. So there are a few new clients that we've signed up for and haven't been signed in the last 2 quarters. They're still doing between 90 and 100 square foot density. So they know the new normal will come back to somewhere close to the old normal. There's no significant difference there. And they are fitting out in that pace. We have signed a few new clients and they are signing new clients, and they're filling it up similar. It's moved from an 80 to 100 to 110 for sure. But it's not 200 and 300 square feet worth of space. So they know they're going to come back to the workplace.

[Operator Instructions] The next question is from Vishal Khandelwal from Bajaj Allianz.

So my question is also with respect to the lease expiry profile that you have given on Slide #15. So just correct me if my understanding is right. What you are saying is that 1.6 million SFT is the additional area that has become vacant due to early terminations. Is my understanding correct? And that, too, this has happened only in this year?

So the 1.6 million is not vacated. Not all of that has got vacated yet because some of it is also going to happen in this quarter. So 1.8 million is what we had put up in our offer document. And 1.6 million are the additional expiries, which have happened over and above what we had projected at the time of our offer document. So 1.6 million is what we will end up the year with, but not necessarily as of today, all the 1.6 million has vacated.

1 million is vacating on 31st of March or thereabouts.

Okay. Okay. So this 1.6 million is sustained guidance for the entire FY '21...

That is true.

Yes. Yes.

Okay. And so I was just trying to understand this chart. So this negative of 0.02 million and the negative of 0.2 million that you have mentioned for FY '22 and '23. Since you have mentioned this as negative, could I assume that these are extension of the leases that are going to happen?

So what has actually happened is some of the leases, which we have projected would expire in FY '22, '23, have got preponed. So they have moved from FY '22 to -- from FY '23 to FY '21. So they have got into the 1.6 million, which you see on top of FY '21 on the expiries. So they are reduced from the last -- next 2 years and have got into FY '21.

Okay. Understood. So one more question. So since this 1.6 million actually looks a little on the higher side, can you give some idea about who are the tenants and from which sectors? As in not who are the tenants, as in the tenants was from which sector? And were they occupants in which of the properties? So which market has particularly seen this kind of early termination?

So this is across between Bombay and Hyderabad. They are uniform, similar tenants in both places doing BFSI and financial services, et cetera. Having said that, for example, in Hyderabad, because our densities were really low, and these were single-occupier buildings, we are actually seeing an opportunity going forward to evaluate those assets, which we can easily densify because we are in a gated community where we are in a controlled environment, and we control the development. So we are actually seeing that as a positive for us because most of our early occupants were large footprint, single occupiers of smaller buildings on a large footprint of land, which kind of comes out as an opportunity.

Okay. Understood. So I know these are uncertain times because of COVID. But still, can you give some guidance on whether there is a likelihood of seeing similar kind of combination in FY '22 also as in some guidance on that?

We can't give any forward guidance in that sense, but we are seeing businesses coming back to stability really quickly from a services provision point of view. And we are seeing -- like if you see a lot of the re-leasing that has already taken place has a layer of leases that were going to expire in '21 and '22. They were pre-leased in '20. And there, we are seeing the same trajectory. They want to re-sign for 10 years with 5-year lock-ins, even though they have 1 or 2 more years of leasing left. And in some cases, contiguous area, which is coming up as vacant, they want to take that as well and combine with their growth. So we've done a few of those as well. So there are mixed bag of stories. We are seeing some of them who really want to stay there and grow. So we are not really worried in that sense because if the asset quality is right and you're in the right quadrant and you spend money and time on upgrading and creating an environment for the workspace, the minute demand comes back, it won't come for an under construction 2 years later. They're going to ask you space immediately to fill up. We've seen that way back in the financial crisis. When they came back, they said, no, I want the space as of yesterday. And fortunately, we have those spaces ready and available and in a lot of cases, fitted-out spaces, which the earlier client has left behind. So all we do is marginally retrofit, and we can offer a fully furnished experience to the occupier at prices that can be reasonable for him. It's a win-win for both. So we are seeing that as an opportunity. While we know few quarters is going to be choppy because new demand is going to take time to come back, having seen the second wave of COVID, but you will see that absorb quickly because you have ready quality space available.

Okay. Understood. Just one last question. You mentioned about the savings and interest cost. I remember you mentioned the number also as in what percentage in terms of the cost of debt it has got reduced. Can you just repeat that for me as in the cost of debt earlier versus the cost of debt now?

Sure. So we had projected approximately 9% in our offer document when we did our projection. As against that, as at December '20, we are already at 7.3%. So it's almost a 1.7% reduction in our cost.

The next question is from the line of Sumit Kumar from Max Life.

My first question is on the early expiries. Could you help me with the nature of these early expiries? Is it a partial surrender of spaces or more the client completely moving away from the asset?

In most cases, it's just partial surrender of space.

Okay. So the next question would be on the payouts, the distributional cash flows. Given that there have been some expiries and you're going to refund the security deposit, so are we still maintaining the FY '22 distribution guidance as of what was there in the listing document?

We may not be able to meet our distribution guidance for FY '22, which was projected, because of these expiries and also some rent starts getting deferred. But as I mentioned earlier in this call, a part of that reduction in revenue on account of the reasons I mentioned should be offset by the interest cost saving and other cost optimization measures that we're already undertaking.

Sure. Sure. Understood. One last question is, what is the total area that is up for leasing across the portfolio taking into account those new completions, the already vacant area and the earlier expiry? If I can -- or you can point it out if there is -- if this figure is there in the presentation.

So we have about 3.2 million, 3.3-odd million square feet of carryforward vacancies we see next year and we have 1 million square feet under construction, which we will infuse into the portfolio. That's where it is.

And of course, we'll have the re-leasing also.

Yes. And the re-leasing spread that comes, a lot of that is already in advanced discussions with clients, and that will continue to come.

So would it be safe to assume that you have around 4 million square feet space that you can -- that you have to lease?

Yes.

The next question is from the line of Swagato Ghosh from Franklin Templeton.

A follow-up to the previous question. This early exits, which are, as you said, partial exits, then would these be very difficult to fill up because these will be small, small spaces, which are new tenants might not be able to or might not be inclined to take up and we would be kind of dependent on existing tenants to expand their portfolio?

No. Actually not because we've been fortunate that some of these exits were, for example, we have accommodated those tenants into newer buildings within our parks with the idea of being able to retrofit those assets to give it to independent occupiers. Suddenly, if you want a 400,000 square foot independent building in Hyderabad, it's very difficult to get because of the density that you've built so far around the Madhapur area. So a client is very happy if he gets that kind of density for himself in a gated community. So we see that as an opportunity going forward. And like I also mentioned that because our occupiers are single occupiers in most of these smaller development -- smaller-size building but with the correct DNA in terms of land and circulation space, et cetera, we are seeing that as an opportunity to look at redevelopment and enhance our future supply in these parks where our densities are really low. And we are right in the middle of the CBD of Hyderabad, for example, and that's a good opportunity we want to evaluate. So it's a combination of both these things.

Got it. And these -- the existing tenants who have given up the space like partial space, so then it kind of signals that they are not really like consolidating, but rather -- or moving out, but rather just cutting down on the requirement of space. Is that a fair reading?

Yes. Absolutely. So what happens is, see, when you don't have a long-term mandate and you've been told to freeze your cost, then by default, you will take these measures. And you will then come back when growth come back -- comes back, and you will say I'm within the park, can you give me more space. We've seen that happened in the past where some surrendered early, and then 6 months, 9 months after stability returned back, they quickly came back, can you give us some more space quickly? And we've seen that happen in the past. I think the same trajectory is going to happen again.

Yes. But I'm just like wondering and trying to get your view that then the option might not be available. So are these guys actually being flexible or they have that kind of factored in when they actually come back, the space might not be available and they would be okay in operating with what they have currently? So what I'm just trying to think is whether this is a long-term thinking and not really a short-term thinking from their perspective.

Absolutely. So there are different clients who are probably having a different plan of action for themselves. There are some who have taken the contiguous spaces that someone else left out immediately and said we need growth right now for trajectory. And there are some that said, we'll come back to you when we need it. Right now, we've been asked to shrink the footprint, and that's the mandate we've got.

The next question is from the line of Khyati from Tata AIG.

My question was as follows. The INR 4.78 distribution, which is announced, is it for 3 months? And if yes, then what about the cash accrual of the earlier 1.5 to 2 months?

Yes, Khyati. So this is for the quarter. And all the cash accruals, which have happened earlier, have been used to pay down the debt.

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

Just one quick follow-up from my side. Vinod, I think you were mentioning earlier that now the large tenants are leaned to make a big return to office. Are they talking about a time frame under which they plan to do so? Or are they pegging it to some sort of a vaccination level getting achieved in the population?

No. So I mean we haven't engaged with them on their vaccination strategy, et cetera. But some of them are quite clear by March, they want to do 20%; and then by June, they want to be 40%.

Got it. So this is like this financial year?

Yes. Yes. Yes. Absolutely. Absolutely. Absolutely.

The next question is from Sameer Baisiwala from Morgan Stanley.

Vinod, just in your comment, you mentioned in Hyderabad for a single-occupier building you would be looking to densify, it's an opportunity. I mean are you talking about taking it down and rebuilding it? Or...

Yes. We see that as a very good opportunity.

Okay. Okay.

So Sameer, we are still evaluating to see how exactly can we create value out of this opportunity.

Okay. And I presume it's a sizable number over here?

We're still working on it, so we can't mention much, but yes.

Okay. Excellent. And I guess I know it's not a good time to ask, but any thoughts on the brownfield expansion in Airoli East?

So like I mentioned earlier, we are looking at certain data center occupier or business or data center guys looking at these spaces actively. If we are able to convert these into transactions, then we will definitely see some activity there happen because we are seeing quite a lot of interest for data center occupiers for that micro market.

Okay. And that is for east and not for west?

East, west, both.

Thank you. That was the last question in queue. As there are no further questions, on behalf of Mindspace Business Parks REIT, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may disconnect your lines.

Thank you very much.