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

Good afternoon, ladies and gentlemen, and welcome to the Mindspace Business Parks REIT's First Quarter Financial Year 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Kulkarni. Thank you, and over to you, sir.

Thank you, and good afternoon, everyone. Welcome to the First Quarter Financial Year 2022 Earnings Call for Mindspace Business Parks. 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 REIT does not guarantee these statements or results and is not obliged to update them at any time. We are pleased to announce that the trading lot for Mindspace REIT to net has been reduced to 1 from 200 earlier, effective August 11, 2021. This much anticipated move by SEBI is expected to enhance debt and liquidity for the instrument and encourage a wider participation. I would now like to welcome Vinod Rohira, CEO; and Preeti Chheda, our CFO. Vinod will share the business update and his view on macro environment and commercial real estate. 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. Over to you, Vinod.

Thank you, Kedar. Good afternoon, everyone, and thank you for joining Mindspace REIT's earnings call. When we conducted our last earnings call, the nation was tackling with a huge second wave, which delayed the return to normalcy. During most part of the first quarter, various movement related restrictions were in place across geographies. However, our parks offered and we updated support to our tenants, ensuring their business continuity. Since then, the vaccination program has seen an uptake with over 500 million doses administered so far across the country and decline in overall active cases from peak seen during the second wave. Various state governments have announced gradual relaxation of lockdowns and other restrictions as a step towards return to normalcy. We have seen a resurgence of economic activity, a continued rise in employment numbers and robust financial performance within our clients and the world, a continued push towards vaccinations at a fast pace is key to tackling the possible third wave. Once we have seen the workforce vaccinated, we will begin to see momentum shift towards return to workplace. We continue to remain optimistic on the long-term business outlook of Grade-A office spaces. Global multinationals are increasingly looking at India as a center for innovation, knowledge and technology. As per the NASSCOM report, the revenue for IT and BPM services is anticipated to grow from USD 190 billion in 2020 to USD 300 billion to EUR 350 billion by 2025. Top 10 IT firms have exponentially increased their headcount even during the pandemic and the hiring trends are expected to remain strong in the coming year. The pandemic has also fueled the GCC growth trajectory in India with direct employment expected to increase significantly from 1.3 million at present to 2.2 million to 3 million by 2025. We anticipate these strong underlying trends to translate into a demand upswing towards the best managed asset ecosystem. We are also considering to achieve significant mark-to-market opportunities for the vacant spaces at our Park. Globally, employers are seeking to bring their employees back to office as they are putting the return to work plans in motion. We anticipate Indian firms to follow suit as the situation on the ground continues to improve. This is well supported by rapid employee vaccination programs undertaken by India Intech. Offices are reemerging as the most preferred places to work, providing an inclusive environment for employees to ideate, collaborate, optimize and grow. We have already facilitated circa 60,000 and more vaccinations across our parks in all geographies for our occupiers, employees and their families. We achieved a gross leasing of 1.2 million square feet within the portfolio in this quarter. Additionally, we are pleased to announce that our under construction group of assets at Commerzone Madhapur at Hyderabad has seen a preleasing of 1.8 million square feet. Our collections continue to remain strong at over 99% throughout the pandemic. Our net operating income for the quarter stood at INR 3,596 million, marginally up on a sequential basis. Our distribution stood at INR 2,728 million or INR 4.6 per unit. In our endeavor to maximize stakeholder value throughout the life cycle of assets, as announced during the previous call, we have formed our plans to proceed with redevelopment for 2 wings at Mindspace Madhapur, subject to requisite approvals. This shall potentially increase the leasable area of the building under redevelopment from 0.36 million square feet to circa 1.3 million square feet, subject to final designs and approval. On the other hand, we remain focused on reenergizing our path and maintaining high standards of health and safety to keep them ready for our tenants as they return to office. On the demand side, we continue to see increased activity for evaluation and assessment of new consolidation needs of large technology occupiers. This is a welcome indicator towards pickup in demand activities once substantial workforce returns to office. We continue to see sizable contraction in new trade-in supply in most micro-markets. With available ready-to-offer Grade A spaces, we expect to realize a healthy mark-to-market opportunity as we fill up our vacancy. Rentals in our micro markets continue to remain stable, and we do see -- do not see any pressure on the same. We continue to witness strong pickup in demand from flexi office space providers as they move towards offering enterprise solutions. Tenants continue to consolidate their presence in most of the micro markets that we are present in. We are focused on ensuring higher renewals from existing footprints of occupancy, leasing our vacant spaces and bringing back employees to the workspace as the situation improves. Reduced interest rates and low gearing of our portfolio provides us with room to pursue asset enhancements and other growth opportunities at our parks, which are long-term value accretive to our unitholders. I would like to take you through the specific operational updates for the first quarter. We achieved a gross leasing of 1.2 million square feet for the quarter ended June 30, '21. Of this, 1.1 million square feet was on account of re-leasing and 0.1 million square feet was new area leasing. Average rent realized on this 1.2 million square feet of leasing was INR 60 per square foot per month and achieved re-leasing spreads of 56.3% on 1.1 million square feet area released. 91% of the leasing during the quarter was to existing tenants, while balance was to new tenants. We signed up 3 new tenants during the quarter. Our ROFO asset at Hyderabad is set to be completed in phases during financial year '22. We are pleased to announce that 1.8 million square feet area of the asset is pre-leased to a telecom giant. We received occupancy certificate for the hotel building at Madhapur. The building is already leased out completely with rent commencing in quarter 3 financial year '22. We have also received partial occupancy certificate for our building at Airoli West. These are area additions and proposed redevelopment Hyderabad park has resulted in our portfolio size increasing from 30.2 million square feet as of March 31, '21, to 31.2 million square feet as of June 30, 2021. Of the total leasable area, our portfolio had 23.8 million square feet of completed area, which constituted 91.7% of our portfolio value. 1.8 million square feet is currently under construction and we have another 5.6 million square feet available in the portfolio for future development. The portfolio is leased to more than 165 monthly clients with an average in-place rent of INR 57.1 per square foot and a weighted average lease expiry of 6.6 years. Our collections continue to remain robust at more than 99% of the gross contractual rentals during the quarter. Our committed occupancy of the portfolio stands at 84.4%. On same-store basis, our committed occupancy stood at 84.4% as compared to 86.8% at the end of March '21. Decrease in same-store committed occupancy is primarily on account of addition of 0.8 million square feet area in Chennai, for which we had received occupancy certificate during quarter 1 financial year '21. During our previous conference call, we had guided towards releasing visibility of 0.8 million square feet out of the scheduled expiries due in the first half. We remain on track to achieve the number as we have already released 0.44 million square feet during the quarter. We remain on track with the development of our 2 under construction projects, 1 building at Gera Commerzone Kharadi, Pune and 1 building at Mindspace Airoli West, Mumbai region to be completed in a phased manner. We continue to invest in further energizing our parks, providing our tenants with a renewed experience when they return to the workplace. Our building at project Gera Commerzone Kharadi received a platinum certification from IGBC, while our building at Mindspace Madhapur received LEED Gold certification from USGBC. At Mindspace REIT, our endeavor to emerge as a responsible organization motivates us to implement sustainable business practices across our operations. In further into past sustainability agenda, we became India's first holistic entity to join Climate Group's RE100 initiative. As a part of this initiative, we have committed to transform to 100% renewable energy usage across areas serviced and maintained by us by 2050. On a normalized basis, our parks have an annual electricity usage of over 100 gigawatts hours, which represents a sizable opportunity to transform to clean energy. Previously, we have also pledged our commitment to the EV100 initiative of Climate Group to transition to 100% electric mobility within our parks by 2030. We extended our support to construct an additional floor at a government hospital in Hyderabad. The project was completed within a short span of 45 days and is expected to enable capacity enhancement of 127. In addition, we also continue to assist frontline warriors and marginalized COVID patients. We continue to work with various stakeholders in this hour of need. At this point, I will now hand over to Preeti to walk you through our financial highlights of the quarter and full year. With this, I thank you all for the patient hearing, and I hand over, please.

Yes. Thank you, Vinod. Good afternoon, everyone. We are happy to announce the financial results of Mindspace REIT for the first quarter of the financial year 2022. Despite the challenging market conditions, we maintain our net operating income for Q1 FY 2022 at INR 3.6 billion. Our revenue from operations for Q1 FY 2022, stood at INR 4.2 billion. Cost optimization measures had achieved NOI of INR 3.6 billion for Q1 FY 2022, which is marginally higher than Q4 FY 2021. We continue to maintain NOI margin at 80% plus. We announced a distribution of approximately INR 2.7 billion, that is INR 4.6 per unit for the quarter ended June 30, 2021. The distribution comprises approximately 92%, which is INR 4.23 per unit of dividend and approximately 8%, which is INR 0.37 per unit of interest. This translates to an annualized distribution yield of 6.7% on the issue price. On the debt side, our net debt as of 30th June 2021, stood at INR 37 billion. Leverage on the portfolio continued to remain low at 14.9%. Besides, we also have undrawn committed facilities of INR 4.5 billion. Over the last few quarters, we have achieved substantial reduction in our funding costs from an average cost of debt of 9.2% as of 31st March, 2020, to 7% as of June 30, 2021. Over the last one year, we have converted approximately 28% of our current outstanding debt to fixed cost debt. We continue to pursue opportunities to further convert part of our variable cost to fixed cost debt to reduce our overall cost of debt. As stated previously, our strategy would be to deploy a combination of short to medium-term and long-term debt with different maturities, as also a combination of fixed and variable debt. That's all on the financial performance. With this, I thank you all for your patient hearing. And I now hand over to Vinod to conclude this briefing. Over to you, Vinod.

Thank you, Preeti. Although a major part of the last quarter witnessed COVID-related restrictions, we are encouraged to see the return to normalcy as various state governments have started relaxing the restriction. The economic outlook continues to look strong. Our business has demonstrated high degree of resilience, and we are more confident to benefit from the upcoming demand revival. We shall also continue to partner with the government and other institutions to offer necessary support to augment health infrastructure while tackling the pandemic. With this, I request the operator to open the floor for question-and-answer session.

[Operator Instructions] The first question is from the line of Adhidev Chattopadhyay from ICICI Securities.

So my first question is on Slide 15, pertaining to the lease expiry profile. Just a few clarifications. So we have said we have leased 0.4 million square feet released in the current in Q1. And it says that we have released area vacated in FY '20 of 0.5 million square feet. So just wanted to clarify the area which has been released. Is that reflected in the asset-wise occupancy tables which was shared later in the presentation? I mean I think a difference between the same-store occupancy and net occupancy.

Yes.

So 80% is net of this releasing of area vacated in FY '21. That's the number for the portfolio?

Sorry, can you repeat that question clearly?

I'm just saying instead we have backfilled, right, out of the area vacated in FY '20, you have released 0.5, right, in the quarter?

Yes, that's right.

So in the -- there is another slide behind which shows the portfolio level occupancy. So there is a current occupancy and a competitor occupancy. There are two occupancy figures, right? Current occupancy 80%, and competitive occupancy 84%. So this 0.5, which we have done, so that corresponds to this 80% or to 84%?

84.4%.

Okay. So that is yet to be reflected. So the leasing which we have done, right, is yet to be reflected in the coming quarters, right? That area will go up, area in the...

Part of it is already reflected here as committed occupancy. It just translates into a formal lease date, then it moves into the occupancy bucket.

Okay. So sir, just following up on that. So would that mean that we are almost now nearing the bottom of this occupancy, the -- sorry, do we see occupancy is bottoming out now, and we should see it going upwards...

So we are definitely seeing businesses doing very, very well, especially in the universe of our tenants because of the technology push that's needed, and we are seeing them push up the employment numbers. So we are feeling very confident that coming back to the workspace is going to be sooner than later. We just have to be cautious about making sure that globally, we are fine over the next few quarters from a third wave perspective and we are good to go.

Okay. Just one more question now. Our Q1, there's still financing. It's fairly resilient. So far, would you like to share some lower or upper end of distribution guidance for the year? Or would you like to hold that?

So, Vinod if I may take this. So as you have seen this time, despite all the challenging conditions that we've gone through, we have given a pretty attractive distribution. And at 6.5%, 90% of that is [ taxes ] on a post-tax basis. It still stands a healthy distribution. But in terms of guidance, we would like to see how things unfold. But having said that, as I told in my last conversation as well, we have -- while we've had some of the leases which have taken longer to lease and the rents have taken longer to start, but we've achieved a very significant reduction in our interest costs, which has helped us offset a very large portion of our rental, which has not come in. So I would maintain that, and we will see as we go along. But having said that, for the quarter, I would say we've delivered a pretty attractive distribution.

Yes. So just -- sorry to just continue. So adjusting all-in working capital and CapEx adjustment on the rent business, should we at least expect the current quarter's run rate to be ramping if not higher?

So Adhidev, again, I would not want to comment on any specific number, but we would, I would say, continue to work towards delivering our performance.

The next question is from the line of Murtuza Arsiwalla from Kotak Securities.

Just wanted to...

Sir, if we can speak closer to the handset, please?

Is this clearer?

Yes.

[indiscernible]

Excuse me, we are not able to hear you. Sorry. Your voice is cracking.

Sir, if you could move to a better reception area, please. Your voice is breaking up a lot.

Is this any better?

No sir, it's still breaking up.

[indiscernible]

Sure, sir. The next question is from the line of Mohit Agarwal from IIFL.

My first question is on the distribution and the distribution walk down. Could you help us understand, not only this quarter but last 2, 3 quarters. You're seeing that the debt drawdown number is higher than that of the CapEx that you would have incurred. So the understanding was that probably this would be closer to the CapEx is funded by debt and remaining distributions flow down as is and then they are distributed. So could you explain why? Because from last 3 quarters, I see the CapEx is about INR 375 crores. but the debt drawdown is INR 640 crores. So could you explain that better?

Yes. So let me take that. So two things here. First and foremost, one, as you rightly said, CapEx is to be funded out of debt. There have been working capital changes also. In working capital, of course, we have had some of [ down ] cost, which we considered as CapEx. But from an accounting perspective, it gets classified as working capital. So to that extent, that is also funded by debt although what has happened is there have been certain cash flows. Now of course, given the nature of these working capital changes, there is always a timing issue. So that's especially tough to address this quarter. We've had about INR 35 crores of tax refunds, which were actually expected in this quarter, which we received in the previous quarter itself. Similarly, this being the first quarter of the financial year, we've had several expenses, which were prepaid for the entire year and therefore, you've seen the working capital being on a higher side in the quarter. So there are these timing issues, which will happen. And of course, part of the debt, as we had guided in the IPO document also, has been out of debt, but that's a part of it, which was as it is, part of our IPO disclosures as well. But otherwise, the other movements are broadly because of working capital changes, as I alluded to.

Okay. So over time, do you think these numbers would converge over the next few quarters as the one-offs...

Some more these -- yes, some of these one-offs, which have happened, like I told you, from prepaid expenses, which have happened in this quarter, some of the timing issues in terms of the cash flow coming earlier or later, those all, I would be normalizing.

Okay. Sure. My second question is, you mentioned about the ROFO asset. It has now been fully preleased 1.8 million square feet. So the building is now complete and it's preleased. So is it time that will be inducted into the REIT?

The ROFO asset is really still under construction. So we will manage -- it's really while it is under construction. It gets ready by second quarter next year and the rent [ signed ] freezes. So at the right opportune time where we can create an accretive acquisition and yield accretive sequence, we will do that.

Okay. So just to understand this better, what would be a good time? Like, typically, when the OC comes in and probably rent-free period ends, is that the time that you would like to add the asset into the REIT?

That's right.

Okay. Okay. And just last one -- just one clarification. You've added this redevelopment. You've taken this asset for redevelopment. What would be the time taken typically to bring this asset back into -- and any more plans to redevelop assets in Hyderabad?

So this is a first for us. We are quite excited, subject to all the approvals coming through. We would like to deliver -- see this asset delivered very quickly. It will take between 27 and 30 months to bring it in, and we want to see more of these going forward in the future once we've demonstrated this successfully.

The next question is from the line of Shashank Savla from Somerset Capital Management.

My first question was on the re-leasing spread of 56%, which seems quite high. So I just wanted to clarify whether that's just on the ones which you had leased earlier and doesn't include any vacant space? Or does that calculation include the vacant space as well?

No, it includes both. So it's a combination of assets, some that were lying vacant and some that got released to mark-to-market. That is what the opportunity we've been always talking about because our average rents for those assets, for example, some of them are as low as INR 41, and we were able to get INR 65 when we released in these markets. So that's where the mark-to-market opportunity really resides.

Sir, as that -- so sorry for [ implied sign ], but does that mean that it also includes assets where you are not receiving any rent for the denominator, in that case, is 0?

No, no. So there were certain buildings, which had expired and the tenants had just about vacated them. We were fortunate to get another tenant to fill up that building in this last quarter, and then those rents start. By default, we are getting this mark-to-market opportunity.

Okay. Okay. Okay. So I just wanted to clarify that it doesn't include -- when you say vacant, it doesn't sort of take 0 into the calculation in the denominator for rent, but you give it the...

That's right. No.

And overall, can you also elaborate on -- in terms of the sales trends and also incentives which you have to provide, had there been any significant changes? Or are you still seeing positive sales rent increases?

So there are no real major tectonic shifts taking place. People have just asked for slightly longer periods for fitting out because of uncertainty. Otherwise, it's all normal leases.

Right, right. And the mark-to-market potential, which has been trending lower, is there a reason why it's sort of trending lower now?

No, because we only gone realizing mark-to-market -- the residual mark-to-market opportunity looks like it's going lower. But cumulatively, from INR 54.9, we move to INR 55 to INR 57. So we have gone on realizing our mark-to-market, which is why the residual mark-to-market starts looking lower.

Right. Okay. And -- There were a couple of things like for Malad, your in-place rent, that's the only property where actually, in-place trends have fallen. Is there any particular reason for that?

The rents there haven't clearly fallen. Actually, it was -- there were some which were with the fitted out facilities, their tenures were over. The newer tenants which have come in are paying us the market rents that we have got for -- and that's the market trend we're getting.

Right, right. And there are four properties where your committed occupancy is relatively low. So Airoli West, The Square BKC, Pocharam and Porur. So what are the, sort of, plans to improve the occupancy over there?

So Airoli West, the significant waiting was SEZ, and we are actually quite excited about the opportunity that now SEZs may open up to allow for the non-SEZ occupiers, that means generally the STPI, all technology companies to be able to participate in occupying spaces which were reserved for SEZs. Once that comes through, we will see traction of leasing take place there as well. The Porur asset is a new asset that just got completed, which is why it's taking slightly longer release because we entered that asset, completed right in the middle of the pandemic. And we've seen numbers now start to begin to rise in terms of interest. So these will catch up and they will lease up.

And finally, you mentioned that as vaccination improve and you'll see an improvement in demand and -- but... [Audio Gap]

[Audio Gap] So what happens is when we take committed occupancy, that also includes the lease agreements which we have signed, but not the properly [ cleaned ]. So the rent of those leases will happen in the months to come. that's the reason you are seeing a betterment in terms of a committed occupancy, but the rent will start in the months to come. That's why you're not seeing an increase in the revenue.

Yes. So what I see is that the occupancy has fallen from 66% to 63.8%. But the committed sales stayed. So normal occupancy fall would show that some clients has moved out. Is that the only way occupancy will fall? Because the increase in space is relatively smaller. You've added 100,000 probably, but the committed occupancy stayed. So even a client has gone out and maybe another one is selected or something, like that, but with a revenue of only 10%, we need to keep little fall over just a quarter.

Yes. So in terms of the revenue fall, because there would also be certain exits, which we would have announced in the previous quarter itself. The revenues have not come in this quarter. So therefore, you would actually see that revenue tapering for this quarter.

Okay. Okay. Okay. Fine. Another question on the data centers. So last quarter, you mentioned about data center, just on the slide on top of that. So we hope the progress is on track on the data center project?

Yes. We continue to see interest in -- especially in the Navi Mumbai region for data centers, and we continue to be engaged with tenants. That's all that I can tell you right now.

Okay. And the project that you announced last time, that is on track?

Yes, that's right.

Okay. Okay, fine. One last question on the -- JPMorgan seems to have dropped out from the top 10. Okay, so they are about 3.8% and now they're already top 10, which is -- okay, below 3.5%, okay. Can you ensure a lot of this moments at '21?

So JPMorgan, right, before the pandemic, actually had taken two build-to-suit facilities for themselves to consolidate because they were fragmented in each of their markets. And that space that they actually were to vacate 1.5 years ago. That project of theirs has got delayed. They continued to occupy. They are now vacating, and we already have found a tenant to take that space, which we will talk about in the next quarter.

Okay. Okay. And sir, Airoli West?

This was Hyderabad.

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

The question is on the early exit. So is this 0.2 million square foot that you've shown on Slide #15. Is this a new one? And I think that in the previous quarter, we had 0.5 million. So if you can talk about this, are we at the end of it? And who are these tenants who are moving out are distress for COVID or some other reason?

So this is an additional small tenant about 100,000 square feet in Hyderabad, and another miscellaneous 40,000, 50,000 square foot worth of tenants across the portfolio, which we have visibility. They will leave in the next 6 months.

Do you see more of this coming?

As of now, so let me tell you about 1.6-odd million square feet of ours is due for terminations and expiry. We have already visibility of 1.2 million out of that. So we are not seeing too much hiccups there going forward.

When you say you got the visibility for 1.2 million out to 1.6 million, you're seeing of releasing renewals.

That's right. Just at the end of the first quarter, yes.

Fair enough. What I was asking was about the early exits. Are we end of that cycle? Or do you think there could be more coming through?

I would be reasonably confident we are at the end of that cycle is. But we still have to be careful going forward, but I don't see too many hiccups coming.

Okay. Excellent. Now if I were to think through the vacant area in the sense -- or the task of leasing through next 9 months. So I take the current vacant areas, maybe 3.5 million square foot, I think, a shade below that. And then the excess and the expiries, which are not committed for, maybe that's another, what, million square foot. And the new completion that should be, I think, Airoli West 1 million. So roughly 5.5 million square foot is what we need to do. Is that fair? And second is your gross leasing for Q1 was 1.2 million square foot. What is it that you can expect in Q2, Q3, just to arrive at there for the net number?

So we continue to see similar traction for transactions of gross leasing going forward, at least for the next quarter and hopefully going forward for the other quarters as well. We are seeing grass roots to the inquiry begin to happen in different micro markets, and we are seeing the necessity of clients who want to continue with their footprints and are already speaking about renewals on their scheduled expiries. So all of those things are happening. Large new clients with large RFPs are still early days, but they've started to begin to talk. So you will see that traction happen in the next few quarters, where they will then start talking of hard real estate decisions.

Okay. So Vinod, that means that until that doesn't happen, which is large RFPs by new tenants, our vacancies are probably going to continue the way they are, if not come off -- if not go up even more?

So it's like this. Obviously, the large vacancies will go with the large kind of clients. But we are seeing small demand between 50,000, 100,000, 200,000 square feet coming. So we are reasonably confident we'll be able to fill these up.

Okay. And you agree with that gross number of 5.5 million square foot that you probably would want to lease up by the end of this year?

It's not 5.5. But I mean, the numbers are given to you broadly in that presentation, happy to get those addressed for you separately as well. But having said that, if you see our same-store increase, then we added 300-odd square feet, even that is pre-leased 84.4%. So we are getting traction even on the under construction buildings for pre-leasing. Which is also a very good sign, including the ROFO asset you saw, which is under construction a year away to complete. We've already preleased 1.8 million. So it's a combination of demand that's coming for future and present. We don't want to lose any demand in any of the micro markets.

And I think someone asked you earlier also in the call, and I'm just trying to get an answer to that, that at 84% occupancy. Are we really at the bottom of it? Or do you think there could be another 100, 200 basis points? And how long can we -- even if it's a stable number, how long this bottom can continue?

We feel the market is quite stable now. We are not seeing too many companies uncertain about their footprint for occupancy.

The next question is from the line of Ashwini Agarwal from Ashmore Investment.

I am referring to Slide 22, and this also goes back to a question that one of the previous participants had asked. In Airoli West, you've written that you received the [ Acid Red ] de-notification. So is that what you're waiting for to bring in non-SEZ clients? Or is there something else because your response seems to suggest that you're waiting for some more permissions?

So you're right, the one building that was independently getting constructed could be de-notified. We got that building de-notified successfully finally. And we already saw traction there where we've leased 250,000 square feet in that under construction building. and we are seeing more traction for demand as we go along forward. So we are reasonably confident that the STPI demand is picking up for that micro market, which is why the residual SEZ, which is in a cluster together, if we get the opportunity to lease that in combination with the SEZ and non-SEZ occupiers, that may change the game for us.

But you'll have to apply for more de-notifications for those buildings?

That's right. So that's the process we are waiting for, clarity from the government, and they are moving forward in that direction really quickly.

And how long does it take to get this de-notification?

De-notification, if it's independent building, which you can isolate, between 6 and 9 months.

Okay. But it's not tricky for clusters?

Sorry?

For clusters, it will be more tricky?

For cluster, there's a new guideline that they are proposing, which will allow for coexistence. That'll make it even more easier, then you don't necessarily need to carve out buildings. Because we -- there's a whole lot of visibility they want to create for long-term occupancy of the SEZ parks across of India. So they are cognizant of that fact, and they want to come back with a policy, which helps everyone.

Okay. And how much of that square -- how much space is vacant in those clusters, which would benefit from this new proposal, assuming it were to come through?

Within our portfolio?

Yes.

1.5-odd million square feet.

Okay. And that's already part of the vacant area of 16%, roughly.

That's right.

All right. Second question is that if I read the note #1, there is INR 1,345 crores of ongoing projects expenditure that's balanced CapEx. Could you break it down as to which projects are these?

So these are projects which are in Kharadi. So we have one under construction project in Kharadi. We have another project that Vinod already mentioned in Airoli West. So these are the two projects which are currently under construction. And then, of course, we have -- just to take this forward, we have upgraded expenditure, which will happen. We are already upgrading 2 of our parks. We've done major work. There's still some work to happen to all of that. So today, essentially, in terms of under construction, it's broadly the Airoli West project and the Kharadi project. And then, of course, there is -- yes, go ahead.

Sorry, sorry. Sorry to interrupt, but this doesn't include the Madhapur 1.1 redevelopment?

It does. It does. It does. So the entire INR 17,900, the breakup of that is in North one, also includes the Madhapur redevelopment.

[Operator Instructions] The next question is from the line of Manish Agarwal from JM Financial.

So my first question is on the breakup of lease expiry profile slide. So we have 1.3 million square feet, which is getting expired in 9 months FY '22. So out of this, how much is expected to be released?

So I just mentioned previously on the call, out of the -- from an annual visibility of 1.6 million that is coming for scheduled terminations in expiry. We have visibility for at least 1.1 million to 1.2 million out of that.

Okay. Okay. So broadly, 75% on 1.3 million also, is what we can think of?

Out of 1.6 million.

The slide mentions 1.3 million. This is 9 months FY '22?

Yes. So I was telling you, for the 12-month period cumulative.

Okay. Okay. Sure. And secondly, on the CapEx plan for this year and the like. Sir, how much will we spend individually here?

So this year, for the balance 9 months, we would be spending approximately INR 500 crores on the existing projects and some on the newer. And we will have approximately, I would say, next year depending on when these projects get completed and when the approval for a redevelopment, et cetera, concern. We would see a slightly higher number next year.

Okay. And Madhapur redevelopment would take, 27 to 30 months, starting from June?

No. So the starting will be in the second half of this financial year, depending on when we get the approvals, and we expect completion sometime in FY'25, because depending on when the approvals actually come in.

Okay. And we have started work on the data center on?

Vinod, do you want to take that?

We are waiting to start. We've started the early groundworks, et cetera.

And how much would be the total spend on that data center?

So that will be somewhere around -- in terms of the construction cost should be somewhere around INR 300 crores to INR 350 crores.

That is included in CapEx figures on the slide, the INR 1,700 crores figure?

No. Our -- that's -- for balance, yes. It does include. You're talking about the INR 17,900...

Yes.

[Operator Instructions] The next question is from the line of [ Anil Jain ] individual investor.

My -- I have two questions. This one is for Preeti. So first, I wanted to ask what determines the split between the dividend, the principal repayment and the interest from a REIT structure perspective? And the second question is on Slide #19, in the NDCF buildup. So there are 2 line items: one is for working capital changes and other adjustments; and one is CapEx, including capitalization interest. I mean, if you could please explain the difference between these two line items.

So sure. So let me take the first one. So you talked about 3 components, which is return of capital dividend and interest. In our case, we don't have a written off capital as of now. All the distribution that we are making currently, 90% of that is dividend and 10% of that is interest. Now if I have to just generally talk about this point, then, of course, the nature of distribution would depend on the capital structure of the SPVs as well as the REIT. So it depends upon how much is the equity, how much is the debt? What is the profitability of every SPV. So there are numerous factors which come to play in determining what will be the nature of distribution. So therefore, it can change over a period depending on what is the capital structure. But in our case, in some of these SPVs in the portfolio are matured SPVs, which are in existence for a very long period of time. And almost a lot of debt is already repaid. So the profit of those SPVs are higher, and therefore, we've been able to pull out more dividend. And that's the reason, in our case, you would see that 90% distribution is by way of dividends and about 10% by the of interest. So that was on your first question. The second question was what is CapEx and what is working capital. So CapEx is nothing but the construction cost, which we are incurring on our project. Working capital has a couple of components. So one is, as I've mentioned, the fitouts. In some of the cases, the tenants require us to do fitout for them. For our practical purpose, we treat that also as CapEx for us. But from an accounting perspective, that gets classified as working capital, and that's the reason you see that finding place under the heading Working Capital. As I had mentioned earlier in the call, given that this is the first quarter of the financial year, there are certain expenses which we have prepaid for the entire year, and that's the reason you see the working capital on the higher side. So working capital, essentially, has put out certain prepaid expenses, your normal creditor outgoes. So those are generally the kind of expenses which are sitting in working capital. and CapEx is purely construction costs for the projects. I hope that answers.

Just one last clarification. Is there any way to model -- I mean do you expect this 90%:8% to be fairly stable going forward? Or is there any way to model this? Or I mean, do you expect a change?

So as I said, this is what we have guided to for our projection period. And then as I said, as we go along, it depends on the capital structure of the SPVs under it. So at least, during the projection period, this is what we believe will be the composition.

[Operator Instructions] Next question is from the line of Satinder Singh Bedi from Eon Infotech Limited.

Yes. Thanks again. So this question is for Preeti, and again, it goes back to the NDCF buildup on Slide 19. So Preeti, you had this net debt drawdown of INR 256 crores for the quarter. And if we add the CapEx and this working capital, this becomes about INR 192 crores. So that still leaves about INR 64 crores of debt drawdown, which has not been applied either for CapEx or working capital. So where has INR 64 crores been applied?

Yes. So if you just look at the NDCF construct, thus below the net debt line, you also have 3 other expenditure lines, which are the interest cost. Then we have -- in the Hyderabad entities, we have the Telangana government undertaking also which is one of the shareholders of that, still holding 11%. So the dividend, which goes to them is subject to dividend distribution tax in their hands, not for the REIT. And then of course, you have certain expenses at the REIT level. So the balance INR 60 is accounted that way. So if you add the other 3 items, it gets to that number.

But Preeti, that 11% of Telangana state is any way not our income, so that's not reaching anywhere, because we are owners to the extent of 89% in those 3 SPVs.

Correct. Correct.

So my thought is, okay, can you please confirm that all of the debt drawdowns has gone towards CapEx and none of the debt has been used for the distribution payment and the distribution payment is a flow-through from the actual earnings?

So let me put it this way. So what happens is as I just explained earlier, some of the working capital changes and cash flows have based on timing as well. The one example which I had given was we were expecting INR 35 crores of tax free funds in this quarter, but we received it in the previous quarter itself. So to that extent, what happens is when we received the cash flows earlier, we paid down the debt. And in this quarter, when we actually have to make distribution, we draw that debt back because there's no point keeping that money in our bank account. So we pay down the debt temporarily and then draw the debt again. So therefore, these timing cash flow issues are bound to happen. Similarly, as I said, today, we have certain prepaid expenses, which we are paying in advance for the rest of the year. And then you may not have those expenses coming in the next quarter. So it will not be right to say that you're not -- the debt which you are seeing here is also a function of certain cash flows having come in earlier because of which the draw down -- the debt repayment has happened earlier and new debt is drawn again this quarter. And also, of course, as I said earlier, also some of this was already factored even at the time of IPO. So that's broadly how the NDCF has been working.

Yes. Okay. There is that expense, okay. And one small query regarding the slide [indiscernible] [ INR 318 ] of your quarterly debt, this is not in the presentation. This is in the results document. It talks of 22% with landowner in a JV, okay. And so what is that 22%? What project is that for the next year?

Okay. So that's the Chennai project, which is Commerzone Porur, which is in Chennai. So in that project, the land owner, the sharing and the land owners in the space, it's not in the JV. There's nothing 100% of the ownership of the SPV is the [ debate]. There is no other shareholder in the SPV. But in the overall project, in terms of the area, 22% of that area is going to the land owner in lieu of the land which has contributed for the project.

As there are no further questions, ladies and gentlemen, on behalf of Mindspace Business Parks REIT, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.

Thank you.