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 Year ended March 31, 2022. [Operator Instructions] 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 fourth quarter and full year 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 01, 2020. Condensed consolidated full year 2021 numbers therefore reflect 8 months financial performance of these 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 FY '21. I would now like to welcome Vinod Rohira, our CEO; and Preeti Chheda, our CFO. Vinod will share the business updates, growth opportunities and his views on macro environment and the sector. Preeti will further share our 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. While the year saw major disruptions caused by the pandemic, putting the fundamentals of our business to test, we have emerged stronger and more resilient from this crisis. Financial year 2022 ended as one of our best years, with a 4.5 million circa square foot lease in the lead portfolio and an additional 2.9 million square feet in our ROFO portfolio taking the cumulative number to 7.4 million square feet. Almost all our under-construction buildings witnessed pre-commitments. Our net operating income for the year stood at INR 14.9 billion, a growth of 8.2% over the previous year. We have achieved re-leasing spreads of 31% during the year. Our on-campus developments led to an increase in total leasable area from 30.2 million square feet to 31.8 million square feet as on March 31, 2022. The growth in the portfolio is primarily on account of increase in area of our new building at our Pune asset on account of additional FSI, redevelopment of old buildings in Hyderabad, and commencement of construction of new recreation and entertainment areas in Hyderabad and Mumbai parks. The market value of our portfolio now stands at INR 264 billion as on March 31, 2022, up by circa 5.7% over March 31, 2021. We have completed refinancing of over INR 9 billion via debenture raises from mutual funds and insurers as our overall cost of debt now stands reduced by circa 50 basis points during the year to circa 6.6%. Our distribution for the year stood at circa INR 10.9 billion or INR 18.4 per unit. A number of factors played out during the year, which helped us clock strong numbers, robust business performance. Primarily of the IT industry, sharp jump in employment occupiers intend to provide an [ experiential ] work environment to their employees and the rising preference towards quality Grade A assets managed professionally. Let us elaborate these factors in more detail. As envisaged occupiers do not want to risk or compromise on asset quality as they restart their journey towards office occupancy, there is a strong desire to create and provide wellness and experienced work environments. We had anticipated this trend to play out. As highlighted during our earlier calls, we have been using this downtime to upgrade our assets, which would have been tougher to carry out at full occupancies. The upgrades have been executed laying special emphasis on improving sustainability, building aesthetics, wellness, health and safety, providing recreation, amenities and thereby offering the right balance at the workplace. The positive impact of these actions has begun to show with top-notch occupiers gravitating towards such offerings. To quote one such example. We have recently inaugurated the one kilometer long skywalk within our Mindspace Madhapur at Hyderabad allowing seamless connectivity from the metro station to their office doorstep. The skywalk has not just have to reduce the discomfort caused by vehicular traffic to pedestrian movement, but also led to significant reduction of carbon footprints generated by last mile transportation of vehicles, as well as reducing the noise and traffic within our parks. The skywalk also houses a vantage cafe along with kiosks and breakout spaces providing food, recreation and entertainment offerings. As our occupiers and their employees begin to return to office, they are pleasantly surprised by the transformation and the stress fee travel to their office spaces. It is fast becoming a new landmark for the city of Hyderabad. Many such interventions will change the face of workspaces. The IT industry has reached another [ infliction ] point, led by increased spend on digitization by companies globally. Unlike the previous [ infliction ] point of Y2K, which was led by cost arbitrage models, this time around it is led by intellectual value-added services like data analytics, cloud management, and artificial intelligence amongst others. The record addition to head count of IT companies in India is testament to the renewed growth prospects. As per the NASSCOM reports, the strength of IT companies is expected to grow at a circa 5.1 million in financial year '22, reaching a record high with additions of circa 4.5 lakh employees during the year. Hiring of freshers by top technology companies is expected to be up 2.5 times over financial year 2021. India had 1430 plus GCCs at the end of financial year 2021. This count is expected to grow at a CAGR of 6% to 7% to reach 2000 plus GCCs by financial year 2025. In the same period, the head-count of GCC is expected to grow 2 times at a CAGR of circa 12%, reaching 2 million by financial year '25. These new hiring trends are estimated to translate into significant addition to new office space demand. Back to office plans of occupiers has started gaining momentum. Today's industry leaders clearly understand the importance of workspace in shaping the culture of organizations to promote collaboration, innovation, and growth. Employees have come to realize the importance of having a dedicated and distinguished work environment. With effort to the recent earnings call of several top Indian IT companies, a definite return to workspace plan is in motion. We are witnessing this return to office play out on the ground as well. The physical occupancy in our parks has increased from [ circa 23 ] to circa 23% in May 2022 from just 14% during March 2022. Based on our conversations with our occupiers, we expect it to cross 50% by the second half of this year. Over the past 2 years, many companies have expanded and hired a record number of people, and they intend to host their employees back in [ experiential ] work environment by replacing the densified spaces with more focus on recreation and wellness. As employees start returning to office, we anticipate occupiers to expand their footprint to cater the increased head count, coupled with de-densification requirements. This will generate demand for more space. Large occupiers have begun their search for consolidation and expansion leading to a spike in demand for under-construction assets. Our ROFO assets have also witnessed similar trends. We expect the strong uptick in demand for under-construction assets to continue. To cater to this demand, we have brought forward the construction time lines of our under-construction buildings across parks. At Mindspace Madhapur, we have now commenced a 1.3 million square foot redevelopment project with an additional potential to create more attractive tenants to come to our path. Additionally, we have commenced work on creating an experience center for recreation and entertainment within that park. At our Mindspace Airoli park, we are developing a similar high street experience for food, entertainment and recreation. All these additions are part of our endeavor towards changing the workspace landscape by bringing fresh energy for the young millennials who form a major part of the nation's workforce. We continue to explore opportunities for growth organically and inorganically. At present, we are evaluating the opportunity to acquire the 1.8 million square feet fully leased asset at Commerzone Madhapur, which was announced during quarter 3 financial year '22. I would now like to take you through the specific operational updates for the fourth quarter. We have leased cira 0.7 million square feet during the fourth quarter, of which 0.2 million square feet was re-leasing and 0.5 million square feet was on account of new and vacant area leases. The average rent achieved on the 0.7 million square feet leasing was INR 63 per square foot per month. Rents have remained steady in our micro market, and we continue to see the same trajectory. The committed occupancy of the portfolio stood at 84.3%. Our net operating income for the quarter grew by 6.6% sequentially to INR [ 3960 ] million. The weighted average cost of debt stands at circa 6.6%, which is among the lowest in the industry. The cost of debt has come down by circa 260 basis points since March 2020. Our distributions for the quarter stood at INR 2.7 billion or INR 4.61 per unit. Our portfolio is now further diversified with over 175 plus tenants compared to 160 plus tenants at the end of financial year '21. Following up from the third quarter announcement on British Safety Council 7 Sword of Honour awards, we have won an additional 2 Sword of Honours taking the total of 9 Sword of Honour. These awards reward those organizations that have reached the pinnacle of health, safety and environmental management. We are proud to announce that Mindspace REIT is a great place to work certified. We look forward to another year of resilience and growth, setting up new benchmarks at our parks and continue to be amongst the most preferred asset manager partners in the growing need for increased tech-enabled workspaces. The region budget had acknowledged the importance of SEZs had on the Indian economy, we expect the policies to be suitably reformed during this financial year, which would allow SEZ and non-SEZ spaces to coexist within the same park. The strong leasing demand we are seeing for our de-notified buildings gives us confidence to lease out the vacant SEZ spaces post the de-notification with large occupiers firming up on their back-to-office plan, we expect smaller ones to follow suit. The strengthening of rents has offered an opportunity to greater mark-to-market leasing along for an upside by leasing the current leasing spaces. With this backdrop, I hand over the call to Preeti to take you through the financial updates during the year.

Thank you, Vinod. Good afternoon, everyone. I'm happy to present our financial performance for the quarter and year ended 31, March 2022. We closed the fourth quarter of the financial year 2022 with a revenue from operations of [ INR 4.7 billion ], net operating income for Q4 FY '22 stood at INR 4 billion, a strong 10.6% growth over Q4 FY '21 and a 6.6% increase on a sequential basis. Our net operating income for the year stood at INR 14.9 billion, a growth of 8.2% over the previous year. We continued to maintain NOI margins at 80% plus throughout the year. We announced a distribution of approximately INR 2.73 billion which is INR 4.61 per unit for the quarter. The distribution comprises approximately 93.5% which is INR 4.3 per unit of dividends, which is not subject to tax in the hands of unitholder and approximately 6.5% which is INR 0.31 per unit of interest. This translates to an annualized distribution yield of 6.7% on the [ interest trends ]. Cumulatively for the financial year 2022, we distributed INR 10.9 billion, which is INR 18.4 per unit. On the funding side, our leverage on the portfolio on a consolidated basis, continued to remain low at 15.7%. Our net debt as on March 31, 2022, was INR 42 billion. We have undrawn committed lines of INR 6.8 billion from financial institutions. Our robust balance sheet provides us the flexibility to pursue both organic and inorganic growth opportunities. During the quarter we raised INR 5 billion through issuance of listed, non-convertible debentures at an attractive coupon of 6.35% per annum. We converted INR 9 billion of variable cost debt to fixed cost debt during the year, thus taking our fixed cost debt as a percentage of the total outstanding debt of the portfolio to 45.9%. In aggregate, we further reduced our borrowing cost by approximately 50 bps during the financial year 2022. We continue to pursue opportunities to further optimize our borrowing costs. The gross value of our portfolio as valued by the independent valuer stood at INR 264 billion as of March 31, 2022, which is a 5.7% increase over the value as of 31 March 2021. Our NAV per unit has increased to INR 364.9 per unit as on 31 March, 2022 from INR 345.2 per unit as of 31 March, 2021. Post the approval of the Board, we consummated the sale of approximately 40 acres of land at Mindspace Pocharam, Hyderabad for a consideration of INR 1.2 billion. Further to the ROFO notice received in respect of Commerzone Madhapur and basically approval from the governing board to evaluate the opportunity, the manager has onboarded advisers and have progressed with the diligence. Our investor base continues to expand, especially since the reduction in trading loss size since listing our unitholder base has grown threefold to approximately 24,000 unitholders as on March 31, 2022. We expect positive regulatory reforms to help improve liquidity and deepen the market for these instruments. To conclude, the improving market conditions for commercial real estate and the positive leasing trends are expected to help the growth of NOI and distributions from the portfolio in the coming financial year. With this, I request the operator to now open the floor for Q&A. Thank you, everyone.

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

Firstly, congratulations on doing very well in a very tough and challenging overall environment for the office leasing space. Sir, you spoke about a lot of traction in the leasing and you expect things to improve significantly going forward. Sir could you just quantify this in terms of what is gross leasing expectation for the year we have done 4.5% last year. So for this year, what is the lower or upper end for leasing? And if you could break it up into -- of the expiry, the 1.1 million square feet, which you have in '23, how much do you expect to retain? How much exits? And versus that, how much fresh leasing in the existing assets -- and so any guidance on precommitments on leasing for the upcoming assets? That's the first question.

[indiscernible] not supposed to communicate. Having said that, [indiscernible] seems to be quite reasonably strong. We're quite excited about the market demand dynamics in each of our micro markets. I can just give you a broad highlight on primarily the re-leasing space that comes with terminations stroke expiry this year, only 1.1 million square feet in our portfolio comes for the churn this year. Out of that, we already have a visibility of almost 600,000 square feet of re-leasing and we are just at the beginning of the year. For under construction, most of our assets we pre-lease with last year.

Ladies and gentlemen, we have lost the line for the management. Kindly stay connected until we connect them. Ladies and gentlemen, we have the line for the management reconnected. Sir, please go ahead.

Yes. Sorry about that. Just got cut. So we are seeing demand on under construction assets across the book.

Okay. Sir -- and if you could -- this question is for Preeti. So is there any broader guidance on NOI and [ DPU ] for the growth being single digits or double digits, any lower or upper end again for the DPU.

Yes. Adhidev, we're not giving any guidance in terms of exact numbers. But as Vinod said, we are pretty positive about the growth numbers for next year. And obviously, given the amount of leasing that we've done this year also we'll start generating rent as we move ahead in the quarter. Obviously, we're not going to see all the rents starting from quarter 1. But as we move ahead in the financial year, we should be able to see increasing rent and therefore, that should translate and the dividend yield. So I would end at that.

[Operator Instructions] We have the next question from the line of Mohit Agrawal from IIFL.

My first question is in the NDCF walk down, we see that the CapEx number has gone up substantially on a Q-o-Q basis from about INR 140 crores to more than INR 200 crores. So any reason for that?

So that's essentially because of some of the assets also which are almost nearing completion. We've also incurred spend on upgradation of our parts, which, of course, has been continuing, but some of them are almost seeing conclusion. And also some of the projects which have just started off some of the billings, which we started off. So it's cumulative impact of seeing the assets almost nearing completion of buildings which were under construction. So that potentially is the [ true theme ]. And obviously, as the asset comes to the end at that point in time, you'll see more spend. All our [ bond finishing ], et cetera, happen towards the year. So that's why, we see higher towards the end.

Okay. The second question is on your gross leasing numbers, specifically for you, what we've seen is that you've been able to lease a lot of under-construction assets. Just trying to understand what's the thought process of the tenants there? If you could give some color. Who are these kind of tenants? And probably what is the inclination to lease out under construction assets versus ready inventory where also you have vacancy available. So could you give some color on which kind of tenants are these? And what is their thought process?

Sure. If you can just rewind back a few quarters in our conversation, we had said that we will start seeing the bigger demand for the 12, 18 months scheduled supply, which will come up first when people want to see growth in the next 12 to 18 months. So all of those customers actually came forward where they had a sizable need for space, whether it is 0.5 million to 1 million square feet or more. For that, if the building is under construction, it can suitably get customized for the newer age office space requirements that most of these customers are looking for. And just as we have looked at it in the past, you've got those opportunities in the right place at the right time for the right assets. And they were very concerned about health and safety protocols, budget management, et cetera, which kind of trigger the need to go into safe havens in parks where they could see all of that as the right mix for their employees and they want to come back to work. And that's really the opportunity with that [indiscernible].

Okay. Understood. And my last question is just wanted to get your thought process of the sponsor or management on the non-ROFO sponsor-owned assets. So let's say, we talk about the Ultimus asset at [ Vale ]. Just trying to understand, could these assets be also considered by the REIT to be purchased directly from the sponsor? Or will they first have to be a part of the ROFO arrangement and then it can be inducted into the REIT?

So as per what we had envisaged is projected out right at the start, we are excited about a lot of ROFO opportunities wherein -- wherever the assets are 1 million plus and preidentified or assets which will be under construction and the sponsor group, which could be offered first as a ROFO to the REIT. So a lot of those opportunities exist across markets. and we are looking at those assets very closely because that will give us the growth we want for having besides looking at inorganic opportunities.

Okay. So the way I understand is that it's not necessary for it to be a part of the ROFO.

So all the assets which are above a particular pressure as per ROFO arrangement would be offered to the REIT. And now obviously, assets where we have other joint venture partners, those are the arts, which, of course, before they come to the REIT, we would have to ask those questions. So -- but otherwise, largely a large tank of the sponsor assets should be available to us.

Typically ultimate so in any case, being bid where we bid there.

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

A couple of questions from my side. The first one, I did hear your comment that demand generally should be strong as you look out into fiscal '23. Any additional color as to whether the leasing momentum has already picked up? Or should we expect to -- this to build up gradually through the course of the coming year? And likewise, by market, would you think that between your 2 big exposure areas of Mumbai region and Hyderabad, one could do significantly better versus the other because there have been certain comments saying that the return to office has just been somewhat stronger trend in Mumbai and that trend is to better. So any comments there would be great.

Sure. So the way I see it is primarily the large big ticket demand drivers have started coming on to the street to get quality assets. Most of these guys are looking at something in the pipeline which keeps them 12 to 18 months to start occupying those assets. And following that, we will start looking at the 100,000, 200,000, 300,000 square foot demand, which is beginning to start to come in most micro markets. So that is what we doesn't start 6 months ago and 3 months ago, and that's what's panning out in the marketplace right now. So you will see both kind of demand in each of these markets. Now coming back to Hyderabad and Mumbai. So our Hyderabad asset has about 1 million square feet worth of churn opportunity. And we are quite excited actually about that purely because rents have formed up in those micro markets. So today, to me, that vacancy is actually far more valuable because we've already done the hard work of upgrading. And now we are waiting for demand to come and grab the faster asset prices that we want. For the Mumbai asset, like we mentioned to you, we have de-notified 1 million square feet, which is under construction. We saw significant demand for that asset. Half of that is already pre-leased. And the rest of the half, I wouldn't be surprised if it gets released really quickly in this financial year while we are completing the billing in this quarter. So the demand is certainly there the way we have projected. We're just waiting for the SEZ clarity on allowing for non-SEZ occupiers, and then we start looking at filling up those spaces as we are ending [indiscernible].

Got it. The second question, Preeti, just in terms of the NDCF outlook for the year, should we expect that the NDCF growth trend could mirror the revenue growth trend because I'm assuming that because of rental advances, that might be one factor, which aids your distribution. But CapEx, again, could be on the higher side. So any color on how could NDCF compared vis-a-vis the revenue growth our there?

So no, that would not be the case because the revenue growth, there are reductions after NOI before we reach the distributions in terms of entrants, et cetera. So the revenue growth will not necessarily translate towards similar distribution growth. But directionally, as I said, with the revenue growth happening next year, we should see an increase in the distribution cost. But it may not be compensated.

We have the next question from the line of Kunal Lakhan from CLSA.

So Vinod my first question was on Airoli West. So our vacancy has kind of increased in this quarter there. But just 2 related questions over there. Like we have received occupation certificate for 0.5 million square feet. Have the tenants commenced the fit-outs there? And when can we see the rentals commence here?

Yes, Kunal. They've already commenced it out, and there is -- we are seeing strong demand trajectory for the balance 0.5 million that we lease.

Okay. Great. And my second question was on your slide 21 in your presentation, the balance CapEx number. If you can just help us reconcile that number because that INR 23 billion seems a bit on the higher side, what does this include like which -- because the access that the under construction projects that you have listed out here, I'm unable to reconcile this number.

Sure, Kunal, let me just check the reconcile numbers. So essentially, the balanced CapEx largely driven by assets which are under construction. And as you said, the bigger chunk of this is the redevelopment building of over 1 million square feet, which we are doing at our Hyderabad project. So that's taking a big chunk of that cost, this will be almost up of the INR 600 crores out of this INR 23 billion. We also have, as Vinod mentioned, we put another building in pooling also to construction. So that again takes a bit chunk of this construction cost. So that's coming. We also have the data center, which is under construction, which is also adding to this number. We've also taken new upgrades now. So one is club house in Hyderabad. We are also upgrading our Pune asset. So those costs also come into this balance construction cost to be incurred. So essentially, you actually are seeing even an increase versus what we had given out last one. So that's also again essentially because of the few leasing which is coming up in Pune and the entry.

Just to add to what Preeti said, the pure building, for example, was earlier 600,000 square feet. Now it's become 1 million square feet. So we've got 400,000 square foot more of area because of extra SSI that came about with the new change in the development control who is in Pune, which became an opportunity. So we revised the building plan quickly, and that construction has comenced. So that's why that budget also has gone up to accommodate for the additional 400,000 square foot.

Yes. Got it. Preeti, one more question for you. So we -- had we did an NCD this quarter at 6.35%. So that's great. But how do you see interest rates going on from here in, say, FY '23 and more so in the midterm?

Yes. So Kunal, obviously, we've seen the interest rates on the rise as [ a due], and we do expect some more increases as we go along in the year. Now in terms of our cost of debt, today, about 45% of our debt is fixed cost rate. So we're obviously announcing an increase. But on the variable cost rate, obviously, we will see increase depending on the trajectory in which the interest rates [ are ].

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

Congratulations on a stable set of numbers and also for managing expiries very well. I think, so you've got very small expiry count, which bodes well. I've got 2 questions, sir. One for Vinod. Vinod, can you give us some flavor on the overall return to office? Is it slower than what was 6 months ago? Because otherwise, like in last 2 years, the total number of increase in IT staff in large organizations, the kind of clients that you have is typically about 25% higher, but somehow, it is not translating into a great break up. So probably hard, return to office is working out slower than was anticipated. And is it going to be something that will get more embedded, because 2 years okay, people continue to work from home, TCS is 5% return to office and so on and so. So if you could give us color on that. And also on your Pocharam and Porur, what are the plans, because you seem to be struggling in these 2 places?

So first part of your question, out of the 2 years, 18 months, pretty much everyone was working from home. In the last 6 months, you've seen domestic India get back to the debts pretty much between 80% and 90%, all the CBD. As you can see, the traffic is back on the street. All the public places are packed. In the airline, you don't have space to stand in the [ end ], possibly, if you didn't have a seat. So you're seeing everyone back where the action is. From a tech footprint point of view, 2 things have happened. They've seen tremendous amount of growth in their businesses, and they have gone on hiring. The online hiring opportunity has given them a better opportunity of expanding the business footprint at that point in time when the need was there. However, they are realizing that for a lot of collaboration and for a lot of ideation, they want their employees back on the desk. They have just been very, very careful about bringing footprints back so that they don't have to trip on their [ pre-leases ], which is why you've seen only the tech footprint moving slowly back to the office, everyone, else actually in every other place is back. So the way we see it is -- it's like between March and May, our occupancies within our parks have moved from 14% to 25%. The way we see it is, it can move really quickly towards the 50% number. And what is also happening is, as you've seen new growth in new space and retrofitting of current space, they have started accommodating for recreation, entertainment, oven spaces and [ boardroom ] for collaboration. So by default, they are de-densifying very slowly, but very smartly on their footprint. And because of that, they are asking for more space, that's continuous. So we have started seeing even that as clients are coming back, they're trying to lock up more contiguous space within the [ roots ] for accommodating the same number utilized and the growth in a far more open manner than the densified manner they were used to early. So all of those trends have started becoming visible. It's just that it's moving slowly, but you must remember that the volume of people working -- working in the tech footprint is massive. So even when I say 10% change, it converts to 50,000 people. And that's how the number is changing across the board. So we are seeing the footprint coming back. Our food courts are getting full. People are waiting in line to get their dosa in the afternoon. It's a very pleasant site in most of our parks now.

Mr. Bedi, does this answer your question?

Yes. Okay. Vinod, there's second part to it, but somehow I seemed to have lost the line.

Last 2 callers has [ said the same problem ].

Yes, yes.

Sorry, what was the second part of your question?

Second was our plans to address the challenges at Pocharam and Porur. What is it that we plan to do because the occupancy seems to be struggling and stuck?

So we are not seeing any challenge in Porur, Chennai market is the way it is, and we are beginning to see it picking up. So we will get, we feel very confident of leaving the sales out significantly in this financial year. For Pocharam, we've not seen strong demand. I don't see strong demand coming back to that path. We are watchful of it, but I wouldn't give you any direction on leasing that space in this financial year. It's a fairly negligible area that we have left there to lease it.

Yes. Okay. Okay. Fine. Okay. And a question for Preeti. Preeti, the -- have you done a sensitivity analysis of what the interest rate increase will have in terms of the impact on the distribution. Because while we do have about a 40% fixed, I think it's also a reality that a lot of it, that almost 40% of that matures in this financial year '23, so a percentage of fixed will fall. And given the way the interest rates are headed, okay, so I think there could be a material impact on the DPU. So any view on that?

Yes. So we don't have a substantial part of the fixed debt maturing this year. We just have about one issuance, which happened immediately after the listing is matured. Otherwise, everything else remains intact. And yes, of course, it's the fact that the variable cost debt, that's something which will see a rise. Now it depends on how much of rise do we see in the financial year. But that should not have a very material impact on the overall cost. Of course, it will have some bit, but I don't expect that to have a very significant impact. Some impact, of course, will remain because to that extent, your interest cost is going to be higher.

I just want to add to what Preeti said. What's important in all of this really is speculative supply has paused. And is that's not going to be easily available. We are seeing a significant opportunity in the micro markets where we are dominant to be able to bring in collaborative supply and take a larger market share going forward. So actually, we are more keen to build much faster, because we have so much headroom for that. We want to take that, use that right. And as we have seen, because of the inflationary pressures, we are seeing rents moving up, and that's a big opportunity going forward.

Yes. No, you're right, Vinod. I think rent inflation, okay, with the lag is a clear opportunity for this sector. That's because the occupancy is still low to probably, it will take about 4 quarters more to flow in, but I think you are bang on. One housekeeping question, Preeti, is Mindspace Malad, our RFO revenue from ops has gone up quarter-on-quarter from INR 206 million to INR 287 million. So that's a material 40% jump. What has caused this? But the NOI is stuck at the same level. So NOI is [ INR 181 million ] has moved to [ INR 186 million ]. So anything we are missing here?

So...

This is slide -- yes, slide 26.

Slide 26, that's actually the square, we take the number.

Look, I'm talking about Mindspace Malad, the line above that. Okay.

Okay. So actually, I think that's typo there, so this has [ moved ] the project, so this is basically for the SPV Avacado, which has both the projects, Malad as well as the city bank building in BKC. So this actually is a combination of this one. BKC building is generating the increase. We have part of the rent, which is commenced in this quarter. Which is not...

Okay. So you are saying the RFO against Mindspace Malad, covers the revenue both from the Malad and BKC. And the NOI's data. Okay. Fine, fine. And one final word. Preeti, I think the NDCF buildup is looking much better this time than previous so complement for that also. I think it's much cleaner. Complements.

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

My first question is on the occupancy. So if you look at the micro markets, we've seen vacancies increase in Mumbai, Pune, Hyderabad, even though the environment is getting better. So overall, when do you see the actual occupancies improve for the micro markets as well as for yourself?

So most of the micro markets we are in, if you give you an example for Pune out of a large portfolio that fits for us in Pune we have less than 23,000 square feet of vacancy currently. And they're desperately wanting to bring in more supply to these as fast as we need. So the Grade A assets will see traction of leasing disproportionately higher to the cumulative supply in the micro markets. We've been saying that time and time again, and you will see that pan out even more strongly in the coming quarters, where Grade A assets will be lapped up and the rest of the assets will still show vacancy. So while your macro numbers will show vacancy there will be a disproportionate occupancy rise on the grading in each of the micro markets.

Right. Because -- and just for example, I'm looking at Madhapur, which you've been mentioning is a very strong market. But on the overall macro numbers, the vacancy rate has increased from 2.6% in 2019 to 6% in 2020 to 10% and now large quarter increased to 12%. So it seems that the supply is increasing at a much faster rate, even though demand is stronger.

Yes. So what happens is, Hyderabad has a unique scenario where there's nothing called [ FSI ], so they basically vary from site to site. Then each of those blocks are [ 1 million ] or [ 2 million ] that certainly adds to the supply bucket. They're not necessarily all created. So when you start looking at them and breaking them out into Grade A and other supply, you will see that Grade A has started to see traction of occupancies, which are rising. If we were constructing in the neighborhood of INR 1.8 million asset right through COVID, we started pouring concrete right at the beginning of COVID and even before we could complete the asset, we have fully leased that asset to a Global 100 client. So if you're building the right asset in the right mark-to-market, you work -- you got demand even in those markets. So you're already seeing demand drive right now.

All right. And overall, your current occupancy levels are around 84%, like what -- how much time do you think it will stay to reach the pre-COVID levels of like 90% plus.

So we are hopeful of this financial year getting us in the [ 96 ].

Right. Okay. And the second question was on the CapEx bit, which the INR 23 billion, which is mentioned, approximately what time line is that for? Is that over the next 3 years, 4 years?

Yes. So it will be between 3 to 4 years because some projects have just started, and we'll take about 3 to 4 years to be completed. Major chunk will be within the 3 years. You will have some spill over to [ defend you ].

Okay. And is it safe to assume that the CapEx will be funded from debt. So the other revenues would then fall into the NBCF?

Exactly.

Okay. And for the ROFO, I just wanted to understand what is the evaluation criteria and as well as what the funding for the ROFO, is that also predominantly through debt?

Yes. So in terms of the evaluation, I would say, the Board decision, the management decision, also the acquisition being accretive. So that's what we have to monitor and look at. In terms of how we are going to do the acquisition. Now obviously, in all likelihood, it could be a swap of units of the [indiscernible] of CFPB. While the other options of data available, given that the more debt that we are sitting on, but in all likelihood, this could be, like -- so we still need to conclude it, but this is initial.

Okay. And is there any plan to increase the share of the fixed portion, given that going forward, there is -- there seems to be a rising rate environment, is it easy or economical to increase that share from this current 46%.

Yes, we would still look at converting some of our variable costs into fixed. We know that we already entered a rising interest rate situation. So we still work towards converting some of our variable to interest, let's say, how much [indiscernible]. We plan to do a little more of fiscal.

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

If I look at the whole of fiscal '22, then there is roughly about INR 240 crore gap between the CapEx and the debt drawn. So how should we think about it for fiscal '23.

So Sameer, as I have mentioned last time as well, there will be little amount of the gap which is under our debt. It's going to be a small component. But otherwise, we should not see too much of a gap. Some will still remain, that always been maintaining. But major chuck of your distribution should be funded out of the FFO.

Okay. Okay. So how do you plan to make up for this INR 240 crores. You said some would still be there, so maybe INR 150 crores, INR 200 crores. How will you make up for this big number?

So Sameer, that's one number which will only, I would say, utilize eventually over the period as the NOI growth happens on account of the results, escalation, occupancies, et cetera. So that's something which, hopefully, over the next 2, 3 years, we should try to rationalize. But then some of this will continue. Hopefully, I'm hoping that should keep reducing. But from this, I wouldn't say that's too significant, but some that you may be able to see in the coming.

I'm then confused will this go down substantially in fiscal '23? Or will it take 2, 3 years. So I'm not very clear on your answer on that.

So I don't say it can go down substantially from where it is today, but it will definitely see a decrease in trend over the next 2 to 3 years I will say. So I wouldn't say that you will see a straight big reduction, but it will neutralize over the next 2 to 3 years.

Okay. And is this what you had in mind when you were answering previously that the rental growth or the topline growth may not necessarily translate into NDCF growth? What is the big item out there?

Some bit of that, but also other parts also come in, Sameer, you likely will have interest costs with all the tax, et cetera, all those also come into play. That's why you not see exactly the same growth in NOI translating to NDCF growth.

And another question is on Airoli East. We had roughly about 2.1 million square feet which we need to develop. So what are thoughts on this rough time lines, when do you expect to start on this?

So Sameer, while it was 2.1 million square feet, the valuation we have taken only for approximately 800,000 odd square feet. That still -- that gives us room to be more, and we want to take that up, just waiting for the SEC regime to settle in, so that we can bring in a non-SPV building into that whole landmass.

Okay. Vinod, but does it mean that you are taking only a small portion, and your valuation is one thing, but you've disclosed a much bigger volume number. So are you tentative that the balance may or may not happen?

I think you can remember, we had just entered into COVID. And so to be conservative, we have taken 800,000 square feet for the value, while the potential was to be 2.1 million. Whatever gives us maximum value accretion, we will exactly do that for the asset. So we are seeing how the demand trajectory is moving. Nothing stops us from increasing the density, if we see the demand is going to give us return.

[Operator Instructions] We have the next question from the line of Abhinav Sinha from Jefferies.

Just had a few clarifications. So did I hear correctly that you're expecting occupancies to rise to 90-odd percent pretty soon, maybe in the next one, 2 years? Is that correct?

You're going to see occupancies from the current occupancy of area, yes. Typical occupancies, I think, will be around the 50% and 60% over the end of the financial year.

Sorry, physical occupancy will be how much?

Physical occupancy today is 25%. We see it will be between 50% and 60% by the end of the year.

And the committed occupancies will rise closer to 90%-odd. Yes.

So I would say...

Okay. See, second question on the various micro markets and the rents have been flat, [ understanded ] before also, but which are the ones that, as of now, you are most positive on and where we can see that movement, stay upwards in the next 3, 4 quarters.

All of these markets are seeing a strong trajectory of brand movement. Yes.

Okay. So an uptick of say, 5-odd percent is lightly in the year or you are hoping for higher numbers? I can't make statements that can directly correlate this, but I think the markets are getting stronger for accepting -- they want quality real estate. It's not really about rent and quality real estate is in a way attracting most of the tenants and you're getting the value you want once you are able to offer a quality offering. So there is definitely going to see a rising rent.

Thank you. Ladies and gentlemen, as we have no further questions, we will now close the Q&A session. Ladies and gentlemen, 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, again.

Thank you.