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

Ladies and gentlemen, good day, and welcome to the Mindspace Business Parks REIT's Earnings Conference Call for Financial Results for the Quarter and 9 Months ended December 31, 2021. [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 third quarter financial year 2022 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 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 August 1, 2020. Condensed consolidated first 9 months and full year 2021 numbers, therefore, reflect 5 and 8 months financial performance of the Asset SPVs. However, for the purpose of comparison in the earnings presentation and for the purpose of this call, we have provided pro forma revenue from operations and net operating income for Q3 and 9-month FY '21. I would now like to welcome Vinod Rohira, CEO; and Preeti Chheda, our CFO. Vinod will share the business update, growth opportunities and his views on macro environment and the sector. 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, Kedar. Good afternoon to all participants. Hope you and your families have been safe and are doing well. Thank you for joining Mindspace REIT's earnings call. As envisaged during our last quarter earnings call, the sectoral tailwinds continued during quarter 3 financial year '22. We witnessed leasing of circa 1.8 million square feet in December quarter, taking the cumulative leasing to 3.8 million square feet in the first 9 months of fiscal '22. The preference of occupiers towards well-managed top-notch grade A assets, which offer the best in terms of health, safety, sustainability and wellness has grown stronger, and we have benefited immensely from this shift. During calendar year 2021, we were able to capture a significant market share of the gross leasing volumes recorded in our gateway cities. Well-being of our building occupants has been at the core of our health and safety initiatives, and we continue our journey towards providing our occupiers with best-in-class assets. Our efforts towards this cause continue to be recognized by the prestigious British Safety Council. We have won 7 Sword of Honour awards across 5 of our business parks, which recognize and reward these organizations that have reached the pinnacle of health, safety and environmental management. The last quarter of 2021 saw a healthy pickup in leasing momentum. However, the third wave led us by the Omicron variant has caused a temporary disruption. Unlike previous waves, the restrictions imposed this time were not akin to a full lockdown and most states permitted almost all economic activities, including offices to continue. While economic activity continued to remain stable and resilient with technology companies continuing to grow and perform, the back-to-office plan [indiscernible]. Compared to the impact of the second wave of infections, this wave has been thankfully largely mild and has not caused a strain on the health care infrastructure, having peaked much faster in line with the trend observed across several nations worldwide. Observing the pickup in the leasing momentum post the decline of the second wave, it is evident that offices continue to be in the mainstay in the post-pandemic era as occupiers and employees alike have recognized the importance of having a collaborative work environment and the requirement for a deeper engagement. With the third wave already on the decline, we are confident that occupiers would resume their back-to-office plans in the coming months. On ground, we continue to see large technology companies evaluating spaces for new expansion and consolidation requirements. The leasing momentum that we have witnessed across our parks in this quarter is in tandem to the growth of technology companies and global captives. The IT industries and the GCCs in India have hired a record number of people over the past 1.5 years to cater to the changing technology landscape and increased focus on digitization. Few companies have already started formulating their footprint expansion plans to accommodate the increased headcount. Many new RFPs have started floating across micro markets and we expect to see this activity assume greater momentum in the coming quarters. Coming to the updates on the specific micro markets. The established business districts of Hyderabad are witnessing recovery in demand as key commitments and additional space take up by GCCs continue to provide momentum to the absorption, and we are excited about the mark-to-market opportunity for our portfolio that Madhapur has on offer. In the Mumbai region, Thane-Belapur road micro market is expected to witness 3-dimensional demand driven by fintech, support activities of MNCs and data centers. The recent budget announcement conferring the infrastructure status to data centers will provide an impetus to the development of this sector. This move coupled by data localization norms and upcoming launch of 5G is expected to enhance the attractiveness of our assets in the Mumbai region for data centers. Also, the budget announcement to reform the SEZ regulations to aid ease of doing business and allowing inclusive participation in domestic businesses would augur well for the demand for our SEZ spaces in this region. Pune is witnessing strong traction for technology companies, and we expect this to lead to a buoyancy in demand. Our assets across the city have envisaged strong interest from occupiers, which has helped us achieve robust leasing and occupancies. We have also successfully pre-leased our under construction asset, which is a part of a larger business park at Kharadi, Pune to a leading e-commerce company. On the back of these encouraging trends and limited space availability at our parks, we are looking at advancing our future development pipeline to bring in new supply early. On the back of these macro tailwinds and strong leasing performance demonstrated by our team, we are gearing ourselves to cater to the demand upswing. We are exploring construction and redevelopment opportunities at our existing parks and continue to evaluate attractive inorganic opportunities from time to time. Our under construction pipeline now stands at 1.8 million square feet. In addition, we are seeking necessary approvals for redevelopment of 1.3 million square feet at Mindspace Madhapur, Hyderabad. We're excited to have received the ROFO notice for the sponsor of -- from the sponsor for Commerzone Madhapur located in one of the prime business districts of Hyderabad. It is substantially complete and fully pre-let, circa 1.8 million square feet asset leased to a marquee tenant. We shall evaluate this and such other opportunities in the coming months. On the financial performance, our net operating income for the quarter grew by 3.4% sequentially to INR 3.7 billion. The 9 months NOI stood at INR 10.9 billion, recording a growth of 7.3% year-on-year. Our collections have continued to remain strong at over 99% throughout the pandemic. We continue to focus on having high-quality tenants in our portfolio. Our distributions for the quarter stood at INR 2.75 billion or INR 4.64 per unit. I would now like to take you through the specific operational updates for the third quarter. We achieved a gross leasing of circa 1.8 million square feet across 26 tenants for the quarter ended December 31, 2021. Of this, circa 0.8 million square feet was on account of re-leasing and 1 million square feet was under construction, vacant and new area leasing. Average rent realized of this 1.8 million square feet of leasing was INR 64 per square foot per month. We achieved a re-leasing spread of 27.8% on the 0.8 million square feet area re-leased. We pre-leased our entire under construction building of circa 0.7 million square feet at Commerzone Kharadi, Pune. In the first 9 months of this financial year, we have achieved leasing of over 3.8 million square feet across our portfolio. 82.1% of the leasing during the quarter was to existing tenants, while balance was to new tenants. Committed occupancy for the December quarter stood at 84.6%. The 0.7 million square feet of pre-leasing of under construction area at Pune done during the current quarter and the pre-leasing of under construction area done in earlier quarters are not factored while computing committed occupancy. These areas will add to committed occupancy post-completion. The in-place rent in our portfolio has grown from INR 58 per square foot in the previous quarter to INR 59 per square foot at the end of the December quarter. Of the total leasable area of 31.3 million square feet, our portfolio has 24.2 million square feet of completed area, constituting to 91.8% of our portfolio value. 1.8 million square feet is currently under construction, and we have another 5.3 million square feet available in the portfolio for future development. The portfolio is leased to more than 170 marquee clients with a weighted average lease expiry of 6.9 years. One of the buildings at our project Mindspace Madhapur has won Best Commercial Development award at the CREDAI Create Awards 2021. We continue to focus on building an ecosystem that prioritizes on environment, social well-being and governance, health and safety, sustainable development and mainstreaming the principles of rightful business conduct continue to be our primary driver. We are certain that these measures will strengthen our position as a responsible entity committed to creating a measurable and positive impact. With this backdrop, I will now hand over to Preeti to walk you through our financial highlights of the quarter and full year.

Thank you, Vinod. Good afternoon, everyone. On the financial performance, we closed the third quarter of the financial year 2022 with the revenue from operations of INR 4.4 billion. Net operating income for Q3 FY '22 stood at INR 3.7 billion, a 3.8% Y-o-Y increase over NOI for Q3 FY '21 and a 3.4% increase on a sequential basis. The 9-month NOI stood at INR 10.9 billion, a growth of 7.3% Y-o-Y. We continue to maintain NOI margins at 80% plus. We announced a distribution of approximately INR 2.75 billion, which is INR 4.64 per unit for the quarter ended December 31, 2021. The distribution comprises approximately 93%, which is INR 4.31 per unit of dividend, which is not subject to tax in the hands of unitholders and approximately 6.9%, which is INR 0.32 per unit of interest and other income of approximately 0.2%. This translates to an annualized yield of approximately 6.7% on the issue price. With this, the total distribution for 9 months FY '22 is approximately INR 8.2 billion, which is INR 13.8 per unit. On the funding side, our leverage on the portfolio on a consolidated basis stood at 15.8%. Our net debt as on December 31, 2021 was INR 40.5 billion. We have undrawn lines of worth INR 2.1 billion from financial institutions. Our low leverage levels and the strength of our balance sheet provides us the flexibility to pursue both organic and inorganic opportunities. Post the quarter end, we raised another INR 5 billion through issue of listed nonconvertible debentures at an attractive coupon of 6.35% per annum. With this, our pro forma cost of debt has further reduced to 6.6%. We have achieved a substantial reduction of approximately 260 bps in our average cost of borrowing over March 2020. We continue to pursue opportunities to further reduce our borrowing cost. Our Board has approved sale of approximately 43 acres of land at Mindspace Pocharam, Hyderabad as per the terms of the MOU as was disclosed in our IPO offering documents. To conclude, we expect the improving market environment and the positive leasing trends to help the growth of NOI and distributions from the portfolio in the coming financial year. With this backdrop, I request the operator to now open the floor to Q&A. Thank you.

[Operator Instructions] We have the first question from the line of Adhidev Chattopadhyay from ICICI Securities.

My first question is on this early re-leasing you have done in F '23 and '24 of almost 0.5 million square feet. If you could just help us understand, is it like initiated by the tenants? And if so, then what is the thought process? And versus what you were expecting the lease rental, whenever these would come up for expiry, do you -- is the rent which you have achieved now higher or lower or -- on the market, if you could just help us understand?

So, primarily, it's very healthy business and a very happy moment when you have a client who's been with you for 10-plus years wanting to continue and renew and who's in this environment seen visibility of stability and growth and wants to renew early instead of renewing later. So, we would grab that opportunity with both hands. Having said that, we have got the mark-to-market rents that we were looking for from this tenant and, in fact, preponed that number gave them the average values for the 1-year preponement, accordingly adjusted for that rent and renewed early. So, NOI went up, while the rent that we got from them is the expectation of rent that we were expecting from that space on renewal. So, it was a win-win for both.

Okay. And sir, could you share what is the re-leasing spread we would have achieved across these deals?

It's about 28%.

28%, okay. Sir, this excludes -- is it included in the 9 months number? Just a clarification. This 37% on re-leasing spread we have for 9 months.

Yes, yes. So, whatever gets re-leased, it's factored in this.

Okay. Sir, and just following up, so are we expecting many more such early re-leasings to happen now considering how the market is shaping up with things opening up?

So, a lot of times, this is part and parcel of business. We will always find the mix, some tenants start talking of things early and some tenants talk closer to expiry. But those who want to renew are far more advanced in their discussions and they come quite early in the day to rent. So, this is normal.

Okay. This is normal. Okay. Sir, and just the second question is, heading into FY '23, the expiries, which are there, the balance expiries, so how confident are we of retaining now considering the improved...

Have visibility of 60%-odd of that renewal clarity with us.

Okay. So for FY -- out of the 1.4 --

1.08.

Sorry?

So, we already pre-leased some. So, what we're left with is 1.08. From there, we already have 60% visibility going forward.

Okay. Sir, sorry, just I got confused in numbers. So, you were saying it is 2.5, right, which is expiring in '23, the area?

No, no, no. It's 1.4. It was 1.4. 0.4, we already pre-renewed early. So, from the 1.08-odd area, we have 60% visibility of that getting re-leased already.

Okay. So, just 4 lakh square feet of area is the balance, which needs to be -- okay.

And we have the whole year for this.

We have the next question from the line of Puneet from HSBC.

Yes. Just a bit of clarification on FY '23 expiry. So, you said number is 1.4, but as per the presentation, only 0.23 of FY '23, which is pre-leased. So, does it still mean that you have to lease 1.1 or is it 0, can you just clarify that up again?

It's -- say -- it's 1 point -- go with 1.1 as a gross number, circa 1.1. From there, we have visibility of 60% already.

From -- on 1.1, 60% --

On 1.1, we have 60% visibility of renewals already.

Okay. Okay. Understood. That's helpful. Secondly, if you can talk a bit about Hyderabad as a market? The vacancies have gone up and a lot of construction is also due. How are you looking at your positioning in Hyderabad market? If you can qualitatively comment more on supply coming from other players as well, and obviously the demand side as well?

Okay. So, cumulative, first, I'll speak for myself, Puneet. We had -- we started the year with almost 1.6 million worth of vacancy and under construction asset of 1.8 million. We will end the year with 800,000, 900,000 of vacancy this year. And the rest of it, we've already managed to pre-lease. So, we see a far more healthier environment for our assets in Hyderabad. And we are actually eager to start construction faster on the 1.3 million piece because the under construction ROFO asset also has got pre-leased. So, we want more supply, in fact, of our grade A assets. While yes, there is an overhang of visible vacancies in the macro market, each asset is going to be looked at very differently as we have been mentioning to you in the past as well. They are far more choosier about what they want to pick on and what suits them best for their business. And if that asset stacks up, you're getting it leased first, and that's what we're seeing.

Understood. So, even the new construction is not all grade A quality?

There are lot of aspects that may have got missed out in the volume development that generally took place prior to the pandemic. Some of those volume developments may or may not stack up for the well-being, health and safety protocols.

We have the next question from the line of Atul Tiwari from Citigroup.

Yes, sir. Sir, on this ROFO asset, just a couple of questions. Would it be possible to share how much annual rental has been leased at currently?

Unfortunately, we can't give you those numbers, Atul, but happy to address any other question around the --

Okay, sir. And sir -- okay. So, if we -- I mean, what is the kind of time line we are looking at to kind of complete or evaluate this deal? Any idea on that?

Preeti here. So, we just got the Board approval to start our evaluation. And in the next coming months, we will. So, I would say between now and the next quarter is when we'll be evaluating and then taking it back to the Board.

We have the next question from the line of Rahul Marathe from ICICI Prudential Pension Funds.

Yes. Congrats on the good set of numbers. So, sir, my question is regarding the 2 related party transactions that we are seeing in this quarter. One is the sale of that land of approx. 40 acres and other is with respect to the [indiscernible] hotel deal. So, if you could just throw some more clarity on both these transactions?

Yes, Preeti here. So, firstly, regarding the 43 acres at Pocharam, so this transaction was already envisaged at the time of our offering. This was already disclosed in our IPO offer document. But since we were awaiting certain SEZ denotifications, we could not conclude. We've now received the denotifications and, therefore, we will be concluding this. So, this is -- 43 acres is a part of our Pocharam Mindspace development in Hyderabad. And this 43 acres was already contemplated to be carved out. So, we are just concluding the transaction, which was already disclosed. So, that's on Pocharam. The second one was, we also have disclosed another MOU, which we had signed with [indiscernible] hotel for a small 2-odd acre piece of land at our Mindspace Airoli asset. This is, again, a part of our offering disclosure. Again, we are awaiting certain approvals there. So, in the meantime, we have extended the MOU. Yes?

And at what valuation is that 40-acre deal happening?

So, that's at INR 80 crores, which has been disclosed in the offer document.

So, for unitholders, will the proceeds be passed on in the form of distribution or how it will happen?

So, if there is no alternative immediate investment plan, then we would make this a part of the distribution. We'll have to just evaluate that, but that's broadly how it will work.

We have the next question from the line of Kunal Tayal from Bank of America.

Two questions from my side. Firstly, Vinod, wanted to better understand the reset you are expecting on your SEZ assets post the development of the budget. And then the second question was around the ROFO opportunity. I guess, you broadly know that some of the considerations include maybe next activity ought to be accretive. But given that interest rates probably are at a low point right now and [indiscernible] to increase sometime in the near future, would there be a special consideration you would bake in for such a scenario, maybe have more than normal expected accretion from an acquisition?

So, first to address your question on the SEZ, it's broadly in lines with what we were envisaging in the legislation that is likely to come through, will allow us far greater flexibility to have rupee billing and coexist equivalent of STPI occupiers on the denotified portion, which will hopefully be unit-wise, and that will just open up the supply to be offered to non-SEZ demand, which we have seen very well turnout for us from the building we denotified in our Airoli park last year and we've seen huge amounts of traction of demand there and done significantly well on our leasing in that building as well. So, we are hopeful of that coming through soon. To the second part of your question, on the ROFO asset, primarily this is a grade A asset, which was customized and build-to-suit for a very high-end technology company who's just taken this entire building up for their primary office in India. And in the right micro market of Madhapur, it's a very attractive asset from its intrinsic value and from the way it has panned out from a value perspective, we would be excited to look at that ROFO opportunity. Interest rates, yes, short, medium, long term, we all know, but we are still very, very excited about looking at this asset and its value being accreted for the REIT.

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

My first question is on the mark-to-market potential. If I see for the last 6 quarters, it has been gradually declining like from 17% to now 7%. So, can you throw some color on that and as to what's driving that and -- because I thought some of the other projects which might be expiring would stabilize the mark-to-market potential going forward?

Yes. So, this mark-to-market was really in line with the estimates that we had given forward in terms of the broad rents we were hoping to achieve. As the markets are firming up and getting stronger, we see a better opportunity going upwards from there. But so far, we've just maintained this.

Right. And the second question was on the distribution. So, if I look at the NDCF levels, there is an inflow from debt of INR 2,195 million versus the CapEx is around INR 1,500 million. So, I was just trying to under -- if part of the dividends are being funded by increase in debt.

Preeti here. To answer your question, see, and this is something which we've been talking about in the previous calls as well. There's always some amount of savings, which is happening in terms of the cash flow. So, this time also some of the reasons why you see this gap between the CapEx and the overall debt drawn, so we've had certain elements. So, one, of course, is the fit-out with [indiscernible]. Part of it gets -- I mean, while we consider it as CapEx gets -- for an accounting purpose, gets clubbed under operating cash flow, so some amount is there. And for us, all our CapEx, including fit-out CapEx, generally is funded out of debt. So, you will have to look at both together. So, that's one. Also because we've done extremely good leasing in this quarter, we've had incremental brokerage payout as well. Another element has also been, because of certain power disruptions, which all of us have heard of in the last quarter, the power cost has gone up. But given our arrangement, the true-up of this, which -- true-up as in you can recover that from the tenant, that happens subsequently. So, to that extent, you have an interim -- I would say, a mismatch. So, all of these factors have contributed to this gap. But, again, as I said, because these are all saving issues, we generally try to normalize this. That's the reason you are having this gap in this quarter. And, of course, there are again certain prepaid expenses for both the quarters, which were paid in the starting of the second half. So, all these factors have contributed to this gap.

We have the next question from the line of Sameer Baisiwala from Morgan Stanley.

Yes. Preeti just picking up from the previous question, which is in your EBITDA to NDCF flow, it's not the only quarter where we have about INR 50 crores, INR 70 crores excess borrowing versus the CapEx. And you do cited some of these cost heads every quarter. So -- but this has been sort of there for last -- actually all the last 5, 6 quarters that I can see. So, how should we model this? Do you think this is something that's a recurring thing will continue or at some point in time this should taper down?

So, Sameer, just to answer, let me just start with the second half of last financial year when we did our cost distribution. At that point in time, we did for the -- we did the distribution early in the second half, we did not do in the first half. And in fact, I've mentioned even in the earlier calls that a big chunk of our tax refunds, which were envisaged in the second half, we got in the first half, which we used to repay the -- repay down the debt and, therefore, we had to borrow. Otherwise, in that financial year, there was absolutely no gap in our operating cash flow to meet our dividend. Now coming to this financial year, as you rightly said, there has been a gap in all the 3 quarters. So, while some of the gap we had envisaged even at the time of our offering, which I had mentioned even last. Right? And the other gaps have been contributed, one, we had almost INR 35 crore, INR 40 crore of tax refunds, which were again supposed to come in this -- in the first quarter of this financial, which we got earlier in the last quarter. Because, obviously, once we get the cash, we use that money to pay down the debt. And, therefore, in that quarter when we are actually doing our distribution, we have to draw the debt back. That's why you see some debt being drawn to fund the distribution. But that's because every time we get some earlier cash flows, we use that money and pay down the debt. And sometimes if we are falling short in this month and the cash flow is coming in the next, then we make sure that it normalizes. So, that's the reason we are seeing these mismatches. Now, again, Sameer, to broadly answer your question, some was envisaged even at the time of IPO and some of these are saving issues, which would normalize as we end the year.

Okay. That's fine, Preeti. It would be good if you can have some disclosures around this. If it's just a timing issue, that's fine. Some cash come early, some late, et cetera. So that clarity if you can provide in the presentation it would be great. So that's the request.

Sure. We'll do that.

Okay. And the second question is on the ROFO asset. How do you plan to fund that?

So Sameer, while the entire structure is something which we will start voting on and evaluating, but one could also -- one form of this acquisition could also be top of unit of the repurchases of the SPV coming in. So that also could be one probability in which as we will not need any capital for the acquisitions. So that's something still under evaluation. We'll come back to you guys once we have completed it.

Sorry, Preeti, so did you say it would be by issue of units? Is that what you said?

Yes, something one option, which is possible, could also be top of units. So in this case, we will not actually have any capital requirements. That's again still under consideration once we evaluate the asset and get to a final stage, we'll have a better clarity.

Okay. That's fine. And the other question I have is in regards to 85%, say, occupancy. So we have got 4 million, 4.5 million square foot, which is sort of vacant, Hyderabad and few assets?

3.56 million.

Sorry, my bad. 3.56 million. So which is Hyderabad and to Airoli. So how do you see this take-up going forward? And b, is it also related to physical occupancy, employee footfall coming back? And what's the visibility on that? Thank you.

So like the way we had anticipated and we saw that in the previous quarters, it's panning out in the similar direction. So we are seeing the large RFPs first come through, and those large RFPs will set the trend for demand for business soon so the customization or larger footprint for 12, 18 months to 24 months is this plan for most of these occupiers. And along with that, you will start seeing the pickup of the 50,000 and 100,000 square feet occupiers. And the immediate need for growth, et cetera, when physical occupancy start rising, which I believe will happen between March and May. And that's the time you will start seeing the smaller office take-up as well pick up. So the way we see it is Hyderabad, I'm quite excited because we have only that supply and then the demand starts coming in, we will be able to encash the opportunity or mark-to-market. From an irony perspective, we are seeing within the non-SPV space, demand picking up steadily and nicely and great occupiers looking at that space. We've done significantly well, much more than we had envisaged at the beginning of the year. And we are excited about the SPVs allowing de-notification to happen to accommodate those kind of occupiers. So while that will go slower until the de-notification comes through, we have some tailwind there because we have some under construction supply available in the non-SPV which we'll quickly keep leasing and are hopeful by then, we will get catch up on the supply of the SPV becoming de-notified, so that the continuity for our business remains in that space. So you see a slight lag there. We see above the 90s in our occupancy, as we had mentioned even last time, by the end of next financial year.

Okay. No, that's great. And then would you say that you’re in next 2 years or whatever time frame you are steady state occupancy should be, what, 97%, 98%?

We would all hope for all of those numbers, yes, absolutely.

Okay. Great. One final, if I may, with your permission. So on Airoli East, I think about 2.1 million square foot ability to do brownfield, any thoughts on that?

So we are looking at a lot of data center opportunities. While anyway is the value that we've embedded in this is nothing. So whatever comes is bonus in that sense. But there is a combination of customers we are looking at as things stabilize, we'll come back with those things.

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

My first question is regarding how do you see the FY '23 distribution now? With FY '22, it looks like the -- it's going to be around INR 1,000 crores given that we've had a similar run rate for the first 3 quarters. Could you give us a sense -- and we have seen about a 10% increase in our blended rentals over the last 4, 5 quarters, the occupancy level seems to have broadly stabilized. What kind of a growth do you envisage in the next year?

Preeti there. So I wouldn't be able to put a number to this, but directionally, we should definitely see a growth in the distribution vis-a-vis FY '22. Given that, of course, we've done a good amount of meeting in this year and the rental of those leasing should start flowing in, in the coming quarters. And of course, the routine growth in terms of estimation mark-to-market, which will come. So directionally, yes, we should be seeing a growth in the distribution, but I won't be able to put a number to that.

Yes. But at least like we have seen 10% increase in blended rentals, at least that kind of distribution growth should we expect more than that?

Most honestly, we won't be able to comment on the percentage growth. I can only take the direction.

Okay. Fine. Okay. My next question is on the Hyderabad market again. In the presentation, you have mentioned that there's about 5 million to 6 million square feet of RFPs, and Vinod has also mentioned that large deals are now coming back. Is it possible to give a sense of how this compares to the pre-COVID times? Broadly, where are we in terms of the interest and the RFPs and inquiries, if that is possible?

So in the peak, which was just pre-COVID, Hyderabad ended up with 14 million square feet of gross leasing.

Okay. Gross leasing, okay. So this is roughly about less than about 50% of where we were in this category?

Currently. That's right.

We have the next question from the line of Satinder Singh Bedi from Eon Investments.

Congratulations Vinod and Preeti for the good set of numbers.

Mr. Bedi, this is the operator. I'm sorry to interrupt, the audio from Your line is slightly muffled. Could you use the handset?

Yes. Okay. I will do that. Is it better now?

Sure. Thank you. Please go ahead.

Yes. Okay. So the first question is to the broad growth. I won't get to full hang of this in SPV in order to be -- in terms of the budget because it only was like you mentioned in the last call, once this regulatory change or legislative change happens okay, and only best should see a better time. So I just wanted to understand what is the update over there?

So we are waiting for the fine print to come through of the pointers that have come from the various government agencies seem to suggest that they are looking at these as employment generation as it's generation centers, and they want to promote and grow these businesses in these micro markets and these ecosystems. And they want to be facilitators for this allowing for flexibility of businesses to grow and coexist. Similar to the regime that was earlier there in terms of unit wise, SPV units or EOU units, which could coexist in the same building as units and allow for rupee billing and allow for domestic billing, et cetera. So all of that as a combination is being worked out. We are very hopeful that it will come out in that shape and form.

Okay. So this flows from the budget announcement, your understanding of this announcement?

Each, but they are working on this in any case in parallel. And they have said on or before September of '22, they would have announced the bill.

Okay, fine. The next question is to Preeti. We have a protein debt of about INR 3,300-odd crores. And the general market consensus is that the interest rates are at the lowest possible and they're probably ready for a move up now. Any thoughts on providing this to fixed or something like this, not in a given that probably consensus over there like close to the bottom?

Yes. So as we talk, we've already converted almost 50% of our debt into fixed cost rate. And as you rightly said, we are at the bottom of the interest rate cycle, and we do expect it in the current financial year. There could be rise in the interest rates. So we are working towards converting a little more of our floating cost debt into fixed cost. So that's something which is already in the book.

Okay. And in growth terms regarding your square BKC rent and fee rate, it's hard okay, just wanted to know it.

First quarter next year.

First quarter next year. So will it be fair to assume that maybe 50%, 60%, 70% of this rent will incrementally slow down to the distribution instead of the assumption to make that in the next financial year, we rented INR 270.1 million into 12 months and about 60% of that should flow down to the distribution is there. Is that a fair assumption to be?

Approximately in the range, I can't give you an exact number on that distribution, but yes.

Okay. Fine. Okay. Thank you very much. This answers the queries I had. And then just a small comment of taking up from what Sameer also pointed out earlier, it'd be great if the application of this industrial could be provided in terms of the debt drawdown. I think it can cause a lot of education and very confident in the whole segment. Thank you very much.

Thank you.

We have the next question from the line of Adhidev Chattopadhyay from ICICI Securities.

Thanks for taking my follow-up question. My question is on the Slide 35 on the portfolio summary. Can you just help us understand in Airoli West the gap between occupancy and complete occupancy? So when does the 7% gap get operational? That's the first question.

Sorry, can you repeat that question?

I'm seeing in your Gigaplex asset, the current occupancy is around 60-odd percent, whereas the committed occupancy 67%. So when does this gap get breached? And so when do the tenants start -- when does the rent start for the balance 7% of the area, which is the committed occupancy?

Yes. So Gemini signed the letting, Gemini takes about 4 to 6 months for every tenant to do his account. So that's exactly the time line that we expect for the rent to raise.

This is something which will start flowing from second quarter of FY '23? Is that a correct way of looking at it?

Between first and second quarter.

Yes.

Between, okay. Okay, sometime in the first half of next year.

Yes.

Okay. And similarly for this Kharadi pre-leasing you have done, sir, when does this asset become operational?

The approximate rents in these assets may start from first quarter of calendar year '23.

For Q4 FY '23, is that the other way to look at it?

That's right.

Okay. So the occupation start only 6 months prior to that, okay?

Yes, occupation is scheduled end of third quarter this calendar year.

Okay. And sir, just a pickup in leasing, so especially -- so the rent free period, do you again see them now coming down from where it or not because of timing, we are giving higher rent free periods across the board? So do you see?

No, it's really larger clients require larger amount of time. So that's what's getting translated. When the smaller areas start getting picked up, you'll anyway, that means fee that the market has really picked up. Whatever is fair and justified in the current scenario is what will become as rent free. They continue to be in part and parcel of business. There is no dramatic difference in what used to be done and what is getting done.

The next question is from the line of Sri Karthik from Investec.

I know you clarified regarding the taxes, there could be timing difference with respectful tax receipts from NDCF. But if I even take a 5-quarter view, almost 20%, 25% of our distributions are being funded by debt. So if you could further clarify as to why a large portion of it is being funded to debt draw around, that would be useful. That is one. The second question is if I probably have missed this, but the pricing of the land transaction is it in line with the recent Telangana government's land sale price of about roughly INR 40 crores an acre?

This is Pocharam which is Eastern Hyderabad, on the other end of Hyderabad. If you study that micro market, you will probably have a different view on valuations completely from what you are envisaging for Madhapur, et cetera. We have 4 lakh square feet line vacant there, and we find it extremely difficult to lead and the rents are -- the range of 2025 -- sorry?

In the price of which the transaction has happened, if you could clarify that?

Yes. So the transaction is at INR 80 crores for the 40 acres, which is about INR 2 crores per acre. This is what was disclosed in the offer document.

And the first question, Preeti?

Coming back, yes. So coming back --

Longer term view on this?

Yes. So coming back to your first question, some of the things which I mentioned earlier as well. So part of this was in any which way envisaged at the time protected numbers in the Q. And the balance is because of certain cash flow savings. Like for example, we are getting some of the tax refunds which are coming in earlier as compared to the quarters that we had in the first, some bit of working capital, which is coming up in advance. So some gap is want to continue to remain, while some of the gaps by the time we end our financial year, some of them should normalize.

Understood. But the tax that about 20%, 20-plus percent of your distributions are being funded by debt, is that correct assessment?

No. Actually, that's not the way you should be looking at. And since you mentioned 5 quarters, the first 4 quarters, if you looked at, we had almost close to about INR 100 crores of cash refund last year. In H1, which was actually contemplated in H2. So now those were our cash flows planned for H2, which we received well in advance and we have paid down the debt. So obviously, we have to draw that debt back when we were doing our distribution for H2. So a large amount of that number actually happened in H1, which we took by way of debt in H2. So similarly, again, when you're looking at this financial year, we have almost, as I mentioned, INR 30 crore, INR 40 crore of tax refund sustainment advance. We have certain brokerage payouts which are happening with the huge meetings that we've done in these quarters, which we've paid this time, we have certain power costs, which I was mentioning, which would be trued up only in the next financial year. So that gap remains for a little longer. So it's a combination. So it wouldn't be right to say that 25% is funded around it. It's more of managing the cash flows at when they come. When we get the cash flows in advance as total practice, we take that funding as pay down the debt and draw that back when we need it.

We have the next question from the line of [ Rajan from Elite Holder ].

Actually, I wanted to understand the ROFO assets that you are getting, okay. Is there any possibility of we are funding it totally through that?

Rajan, so as I mentioned that we just saw the evaluation now that we got the board approval. But having said that, one of the options which we have in terms of ROFO units of the SPV share, it is unlikely that there will be some undone. So but as I said, we've just started devaluation, and we take the next few months to evaluate what is the most appropriate capital structure on the product acquisition.

Yes, sure. Because recently, we are worth higher prices so we can be diluting us. So that's first. And second is about the lease agreement, like what -- I mean what type of escalation clauses are there 3 year, 5 year? I mean, in general, I want to understand?

There are standard escalation clauses as they used to be, in most cases, should be between 13% and 15% every 3 years. And it's moving towards a trend where some leases we are able to even get annual escalations.

Okay. And it will be better, okay, next time you more power it is call to unit holders rather than direct from the security firms, which have no relation, I mean no direct investing, so that will be great.

Sure, thank you so much.

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

I wanted to understand the committed occupancy and occupancy. If I look at the last 4 quarters, the committed occupancy has been between like 84% and 85%, but the actual occupancy hasn't improved side. And this was coming back to your previous statement that it takes like 4 to 6 months for that committed occupancy to flow into occupancy. So why haven't we seen that actual committed occupancy flowing into the occupancy numbers?

So there are 2 parts to this. One part, obviously, is whatever is take for example, when you're leasing out something at the same time, you have a customer who's exited and terminated their lease till they are physically occupying it doesn't factor into your vacancy. While we may have announced their exit because when we receive the notice is generally between 4 and 6 months after which the tenant walks away. So that impact starts to show in your occupancy vacancy numbers only after that 4 or 6 months or tenure gets over. And that's when it may drop. At the same time, every quarter, you're leasing fresh new space as well as release of vacant space. And that vacant space factors for committed occupancy at the same store. And if there's new or under construction, that gets elated. So it's a constant sequence of leasing that takes place their separate operations that are taking place parallelly. The effect is shown to you on the presentation every quarter. And sometimes where the NOI is signed, which is finding till the time it doesn't move to a binding agreement that is registered, it stays as committed occupancy versus confirmed only when we do our register document. So that's where the gas is.

Right. And just trying to understand, given the current sort of environment and given that you still sort of give a few months of pre occupant, would we see any meaningful improvement in the actual occupancy numbers in the next couple of quarters.

We should see definitely. So when we discussed about the September quarter, we were at 7% at the end of the September quarter, while we discussed with you towards in November, December, we had already leased 14% occupancy. After the Omicron wave, it does, the occupancy has dropped down. We will see them catch up, I think, in my view, from March going up to May, you will see the occupancies climb back up really quickly.

Okay. And any change in the base rent or incentives which you give given the improving environment?

For us, it's about the selection criteria about the tenant. What is the quality of tenant and what is the stickiness on the portfolio, and we will do the best rate that we want to get and for the tenant where we're satisfied with the rent number. For us, it's a win-win, we want to take volumes, take the right tenant and move forward in business as usual. And the number for grade A assets, the numbers will form up because grade A assets are going to thin out in terms of supply over the next few quarters.

And one final question. I just wanted to understand on the taxes. So what exactly are they for a REIT, given that they had some tax advantages, I just wanted to clarify what the taxes paid for are actually for? And what sort of rate should be assume going forward?

So you mean taxes at the company SPV levels or taxes in the hands of the unitholders?

So taxes, which you show at the consolidated level at the corporate level?

Right. So essentially, these are the taxes, which the asset SPVs round up in. So these taxes depend on each of the SPVs because some of the SPV still enjoy tax benefits because they are SPVs or they have IT parks in which case math is something that is applicable. I mean all the other cases, full tax, which is again around 29%, so that's what is applicable.

We have the next question from the line of Manish Agrawal from JM Financial.

My first question would be pertaining to the liability side. So we have conservatism you discussed benefit over the past 1.5 years. So how do you see the trend going forward? Because if we have a direct contribution on the NDCF, so whatever broad conversations you're having with the lender side, if you could indicate that?

Manish, I couldn't get your question?

Yes, could you please repeat?

Yes. So my question is pertaining to the liability side. So we have high the interest cost benefit going to us, which provides a buffer to the NDCF. So going forward, how do you see this trend playing out the interest cost? What are broad conversations you are having with the vendors right now?

So Manish, in terms of the debt conversation, of course, we've seen a good 250 bps reduction in our interest cost. And that's one reason why we have been converting some of our fixed variable costs into fixed costs and now a repo, we all know 50% on fixed costs. So some of our debt is already locked in at these rates for the next 2 to 3 years, depending on when we had raised the entity. So that's one thing. And we're already working on converting a little more of our variable costs into fixed cost. And of course, we will take a call, some of that can continue to remain at the SPV or as we call because these are long-term debt. So that's one thing. And of course, this year, as you will progress, we repeat the use benefit vis-a-vis our projections in terms of interest cost. What is our projected numbers in the equities will continue to receive that benefit next year because that was the cost it was has been given for the next year. So that should continue. But overall, in terms of the NDCF, as we said, because now in terms of the levy and also the rentals which are going to come from the leasing that we've seen now, we should definitely see an improvement in our NOI also as compared to FY '22, which should also add to our NDCF.

Sure. Understood. And secondly, on commerce on Porur, we are seeing traction, occupancy has committed occupancy. What sort of levels can we head towards? What is the leading pipeline over there looking like?

Yes. We are constantly looking at picking up on leasing that building out, and we are seeing the traction begin slowly, albeit for Chennai. We're quite confident we'll be able to lease this asset also.

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

Thank you.