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

Good afternoon, ladies and gentlemen, and welcome to the Mindspace Business Parks REIT's Earnings Conference Call for Financial Results for the Quarter Ended June 30, 2022. [Operator Instructions] Please note that this call is being recorded. I now hand the call over to Mr. Kedar Kulkarni. Thank you and over to you, sir.

Thank you and good afternoon, everyone. Welcome to the first quarter financial year 2023 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. I would now like to welcome Vinod Rohira, our CEO; and Preeti Chheda, our CFO. Vinod will share a business update, growth opportunities and his views on the macro environment. Preeti will further share an update on the financial performance. We'll then open the call to Q&A. I now hand over the call Vinod. Over to you, Vinod.

Thank you, Kedar. Good afternoon. Welcome to Mindspace REIT's first quarter financial year 2023 earnings call. Our financial results for the first quarter reflect the start of a return to normalcy and gradual return of employees to their workplaces. We continue to see the rise in demand for institutionally-owned Grade A office spaces with the best asset management ecosystems. We had recorded 1 of the best ever years of leasing in financial year '22 and the tailwinds witnessed during the previous financial year continue to grow. We recorded leasing of circa 0.9 million square feet during the first quarter and committed occupancy of the portfolio has jumped up by 130 basis points quarter-on-quarter from 84.3% at the end of quarter 4 financial year '22 to 85.6% at the end of quarter 1 financial year '23. If you analyze the leasing activity, the best parks are capturing a significant share of market demand. During the quarter, Madhapur was the best performing market in the portfolio followed by Airoli West. We have highlighted on previous occasions that the vacant spaces in these parks would witness heightened traction when the demand returns and the strong leasing activity in these parks is a testament to that. Occupiers across most segments are progressing well with their back to office plans. The physical occupancy in our parks have been improving each month since March. The current physical occupancy at our parks has increased from circa 23% in April to over 36% in July. The trends are much stronger in Mumbai region where average physical occupancy at our parks was circa 47% for July followed by Pune where average physical occupancy stood at circa 32% and Hyderabad at circa 28%. During the previous financial year, we had witnessed strong demand from large occupiers who were taking up spaces to cater to their long-term back to office strategies and consolidation needs. This quarter, we saw demand pick up for smaller office spaces as well. We expect this trend to further accentuate as the demand recovery becomes more widespread. Fragmented vacant spaces in our parks are witnessing demand from the expansion of large occupiers as well as mid-sized companies to cater to their new hiring over the past 2 years. We are seeing a greater preference for any spaces, which can be taken for fitout on an immediate basis and this is helping us lease up the vacant spaces. As highlighted over the past 2 years, Grade A occupiers are gravitating towards institutionally owned office spaces with the best quality asset management practices and this trend has become profound. Occupiers today are clear about who they want to be associated with. Strata sold assets are no longer considered to be at par with institutionally managed Grade A spaces as institutionally managed Grade A spaces have best-in-class asset management practices, are upgraded frequently and adopt some of the best health, wellness and safety practices. There is a discernible shift in demand towards institutionally managed office spaces in the occupier segments that we target. Our efforts of using the downtime to upgrade our offerings, improve our asset management practices, ease navigation within our parks and create experiential asset ecosystems have helped us attract this demand. The ability of Indian services sector to deliver even during the peak of pandemic has won it accolades globally. This coupled with the vast availability of STEM talent at lower costs has aided the entry of new GCCs/GICs into India. India had 1,430 plus GCCs at the end of financial year '21. This count is expected to grow at a CAGR of 6% to 7% to reach 1,900 plus GCCs by financial year '25.The existing GCCs/GICs have also hired a record number of new people to widen the bouquet of services offered to their onshore counterparts. As more managers and organizations realize the importance of offices in fostering teamwork, collaboration, creativity and transmission of organizational culture and strategy from senior management down to all levels of the organization, they are calling employees back to their base cities with a defined plan of bringing them back to desks. The return of employees to their base cities and eventually to office is putting pressure on occupiers to hasten the office space take up, to cater to their increased head counts. Both these factors are providing further [ affiliate ] to office demand as physical offices offer an excellent ecosystem to nurture and build best talent. Globally as well as domestically, Central Banks are increasing the policy rates to contain rising inflation. Domestically, stricter lending norms stipulated by the Reserve Bank of India and rising interest rates are expected to impact the speculative development of non-institutional developers and would lead to deferment of certain upcoming supply. The institutional developers may be able to adhere to their delivery time lines, but they are likely to bring the new supply at higher rentals to compensate for the increase in costs. This is likely to add upward pressure on market rents, further improving the mark-to-market opportunity in our portfolio. We are excited to hear about the progress being made on rehaul of the SEZ Act. As we have been reading, the proposed law Development of Enterprise and Service Hubs or DESH is intended to convert existing SEZs into engines of economic growth and employment generation. To promote this objective and aid the growth of current SEZs, the government is expected to allow partial denotification and permit rupee billing thereby allowing SEZ occupiers to service domestic clients as well. The government is also intending to provide a single window mechanism for easier denotification of SEZ space. We are eagerly tracking updates on this front as this should provide massive support for demand in SEZs. This instills remarkable confidence in leasing out most of the vacant SEZ spaces post the change in law, accelerating the trajectory of occupancy movement. I would now like to take you through the specific operational updates for the first quarter. We have leased circa 0.9 million square feet during the first quarter of financial year 2023, of which 0.4 million square feet was re-leasing and 0.5 million square feet was on account of new and vacant area leasing. The committed occupancy of the portfolio stood at 85.6% recording a jump of circa 130 basis points on a sequential basis. We have achieved an average re-leasing spread of 36.4% on the circa 0.5 million square feet area relet. The average rent achieved on the 0.9 million square feet leasing was INR 63 per square foot per month. Our in-place rents have grown from circa 9.3% year-on-year to INR 62.4 per square foot per month. Our revenue from operations for the quarter grew by circa 16.3% year-on-year to INR 4,916 million. We continue to demonstrate steady growth in our net operating income over the past few quarters. Our NOI for the quarter grew by circa 10.9% year-on-year to INR 4,014 million. Our distribution stood at INR 2,811 million or INR 4.74 per unit, up by circa 3% on a sequential basis. The weighted average cost of debt stood at 6.9% at the end of quarter 1 financial year '23. Our portfolio is now further diversified with over 175 plus tenants. We are proud to announce that Mindspace REIT featured in Great Mid-size Workplaces 2022 in our [ debut ]. To summarize, we look forward to another year of strong growth, setting up new benchmarks as we continue to be amongst the most preferred asset manager partners for the growth needs of tech-enabled workspaces. We continue to upgrade our offerings and create experiential work spaces necessary for attracting the millennial workforce of India. We are proud to announce that the share of green buildings in our completed portfolio has increased from 77.3% in the March quarter to over 90% now. We received LEED Platinum and O&M certifications across 6 new buildings and LEED Gold O&M certification across 5 buildings during the quarter. We also continue in our endeavor to develop the ecosystem we operate in and thrive to improve it. As a part of our community outreach initiative, we have partnered with the local government in Telangana and built a new school in Gambhiraopet. The school spread over 10,000 square feet has been designed to accommodate 400 children. It is equipped with well-designed classrooms, a library, dining area, training rooms and an outdoor play area. With this backdrop, I hand the call over 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 first quarter of the financial year 2023. We closed the first quarter with revenue from operations of INR 4.9 billion registering a growth of approximately 16.3% year-on-year. Our net operating income stood at INR 4 billion recording a strong approximately 10.9% year-on-year growth. We continue to maintain NOI margin at 80% plus. We announced a distribution of approximately INR 2.8 billion, which is INR 4.74 per unit for the quarter. The distribution grew by 3% on a sequential basis. The distribution comprises approximately 93%, which is INR 4.41 per unit of dividend, which is not subject to tax in the hands of unitholders, approximately 6.8% which is INR 0.3 per unit of interest and approximately 0.2% of other income. We have concluded the sale of approximately 40 acres of land at Pocharam, Hyderabad for a consideration of INR 1.2 billion in the previous quarter. This consideration is not envisaged for an immediate reinvestment opportunity. In view of the same, it is proposed to pay out the sale consideration as per the terms of the REIT regulations. Accordingly, NDCF for the quarter ended June 30, 2022 includes INR 300 million of distribution of part of such proceeds to unitholders. On the funding side, our leverage on the portfolio on a consolidated basis continued to remain low at approximately 16.6%. Our net debt as on 30th June 2022 was INR 44.4 billion. We have undrawn committed lines of our INR 3.8 billion from financial institutions. Our strong balance sheet provides us the flexibility to pursue organic and inorganic opportunities for growth of the portfolio. During the quarter, we refinanced INR 4.9 billion of debt through issuance of listed non-convertible bonds at SPV level and raised another NCD of INR 5 billion at the REIT level post the quarter-end. With this NCD raise, around 41% of our debt is now at fixed cost. Our borrowing cost remains low at 6.9% at the end of the first quarter though we expect the changing interest rate scenario to move our cost of debt higher in the coming quarters. We continue to pursue opportunities to optimize our borrowing cost in the current macro environment. Our evaluation of the potential acquisition of the ROFO asset, Commerzone Madhapur, Hyderabad for which we received the ROFO notice from sponsors is in progress. We hope to complete our evaluation and present the opportunity to the Governing Board soon. In furtherance of the Memorandum of Understanding executed between Gigaplex Estate Private Limited and Asset SPV of Mindspace REIT and K. Raheja Corp Private Limited in relation to the transfer of leasehold land measuring approximately 16.4 acres at Mindspace Airoli West by Gigaplex to KRCPL, which was subsequently reduced to approximately 5.7 acres. We have decided to retain the 5.7 acres in Gigaplex to explore development of a data center or office space. REITs have demonstrated steady performance and have witnessed growing interest from all category of investors. The product is continuing to gain traction amongst retail investors, which is very encouraging. Our investor base expanded by over 8,000 unitholders in the quarter ended June 30, 2022 largely driven by the addition of retail investors. We expect positive regulatory reforms to help enhance liquidity in the instrument. It gives me immense pleasure to announce that we published our first Sustainability Report in the first quarter of this financial year. The report presents our commitment to drive a responsible business with high standards of governance and transparency. We are committed to investing in initiatives that benefit all our stakeholders and the communities around. To conclude, we expect the growth in NOI and distributions in the current financial year to be led by improving leasing environment, revival of demand for our SEZ spaces post implementation of DESH Act and the rules thereunder and, as Vinod mentioned earlier in his speech, tenants' preference for institutional high quality asset managers. With this, I request the operator to now open the floor for questions-and-answers.

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

I had a couple of questions. So first, can you elaborate on the SEZ vacancy? How much of the total vacancy is related to that, which you will be able to fill now?

So in our portfolio about 1.6 odd million square feet is SEZ, which is waiting to get leased in terms of vacant spaces in the Navi Mumbai area and the other park combined, I think totally about 2-odd million square feet.

So is everything based in Bombay or New Bombay?

Yes. Predominantly Bombay, New Bombay. That's right.

Okay. The second question was on the net operating income margin. So if I compare it this quarter, it was around 82%; first quarter of last year it was around 86%. Is there any reason for the fall in that operating margin?

So Shashank, essentially what's happening is with the occupancy in the parks increasing, our maintenance expenses are going up, rather I would say returning back to the normalized levels. We enjoyed the benefit in the last 2 years of lower CAM expenses, obviously not a pleasant situation but because of the lower occupancy. But now since the occupancy is getting better, the expenses are getting back to normal. So we still continue to maintain 80% plus, which we were doing pre-COVID.

Okay. And more general question is regarding the inflation, we've seen the inflation numbers higher and with that your costs would be increasing, but your annual rent escalations are almost fixed at I think 5% per annum. So how do you manage in this environment when the inflation is very high?

So there are 2 things that happen. One is whatever is built in any case is leased so there is no inflation impact on constructed buildings. What it does is it moves the needle up towards increase on the base rent in markets where inflation for new assets becomes higher, cost becomes higher to build, rent goes up. So all your vacancies gain dramatically because they start catching up mark-to-market at higher rentals. Supply diminishes because more supply that's speculative in nature does not come when costs are going up. Fortunately, the inflation has tamed itself down now and we're seeing it under control levels. But yes, it's been higher than what it was. But I think at these levels, we will see firming up of rent and we're comfortable with building.

Okay. And final question on the interest rate outlook. Given that I think around 40% of your debt is fixed, is there any plan to fix more of your debt? And then what's the impact on your NAV or the market value of your properties?

So Shashank, we continue to look at opportunities to see if we can fix some more debt. If it's making economic sense, we will go ahead and do that. As far as the overall impact, obviously in this financial year we don't see a very great impact because obviously 40% of our debt is fixed and of course we have resets even for the variable debt. So it's not necessary all of it will increase. Of course we will see an increase versus where we are today. We've already seen that in Q1. We moved up from 6.6% to 6.9%. So you will see that directionally the interest rates will move, but we don't see I would say a very substantial impact on distributions at least in this financial year.

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

Vinod, my first question was on the rental rates. Are you already seeing those go up for, let's say, the new supply when you rent them out in advance or will this be contingent on, let's say, the occupancy of existing assets crossing a particular threshold and it starts to go up after that?

No, we're already seeing rents move up. Like Hyderabad, we did the new area that we lease is now in the range of 68, 69, 70 and the earlier areas were between 58, 59. So we're already seeing rents firm up.

Okay. And then just a follow-up on the SEZ part of it. Heard you that so far so good in terms of the drafts that have come out. Does it sort of make you stay with your existing plan as to from when the SEZ spaces start incrementally getting leased out or do you think you can lease it out faster now? Will it still take time? Any color there?

So it's like this. While in each micro market we have seen demand rise, we were not able to offer the SEZ space because we didn't see SEZ demand. Now with the DESH policy, that opens out those to any tech player domestic or otherwise to refi within the SEZ infrastructure. That will push the demand and move the demand into these parks. So we're kind of very bullish on filling that space up. It will take its own trajectory how you fill up in each micro market depending on the demand supply dynamics there, but certainly it helps because you bring in infused supply where there's no supply in markets and you're seeing demand come.

Yes. Broadly if I may, is that an expectation for some time within fiscal '23 or most likely for next year?

Most likely next year. We may just about start getting the tailwinds in Jan., Feb. based on when the DESH policy comes in. But you'll see the real traction in the next financial year.

[Operator Instructions] We have our next question from the line of [ Tanveer Surae ], an individual investor.

I had a question about REITs in general, but you could also answer it from Mindspace perspective. So I understand that assets are being acquired by REITs. But is there any nice lifespan of the asset that is acquired or what is the decision or what makes the management get rid of an asset? Like I know what is -- so I know how they acquire it. But in case of if an asset has to move out of the portfolio, what are the things that the management would be looking at?

So there are 2, 3 things. Primarily we are too early in our cycle I think for us to start evaluating whether we want to exit from an asset or not. It all depends on how the value translates. Currently what is happening in most of the environments we developed, we have become dominant players and those micro markets have emerged from suburban business districts to primary business districts in most of those cities. We still see a very strong upswing in the way those assets are going to be perceived in the coming years. So I think there's a lot more that asset can give back to the marketplace. Probably we are 5 and 10 years away from thinking about any of these assets that we may want to exit or not. But there is a process that is involved and we will obviously follow that process by taking the requisite approvals. If at all we think of deciding to exit some asset in that micro market, we will certainly look at what the process will be.

Okay. But are there any parameters specifically that you are looking at in case of exit of an asset?

No, nothing really. If someone is really paying me 2x the value now, very happy to exit. But keeping it more rational to what the market is, it depends on where the asset is in the cycle, what we believe is the future of a particular type of asset and micro market, whether it is strategic for us or not and it continues to be value accretive or not. We will take a call based on that.

Okay. And just 1 more question. I see that the occupancy level in Mumbai is slightly on the lower side and is that because of the whole SEZ thing that you just spoke about?

Actually, you're seeing occupancy in terms of vacant area or occupancy in terms of physical occupancy?

No, vacant area.

Yes. So that was primarily the SEZ footprint and the SEZ demand didn't pan out the way it was -- we were hoping SEZ demand would pan out, which is why it's vacant. The minute it moves and merges with the DESH policy, then suddenly that becomes a quality offering for the non-SEZ occupiers. And we've seen demand traction of the non-SEZ occupiers in some of our non-SEZ assets in the Navi Mumbai region, which has seen a lot of leasing traction.

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

A few questions, sir. First of all, can you update us on where we are on the ROFO discussion currently?

So Abhinav, as things stand, we are in the process of evaluating and we're almost reaching, I would say, the closure of our evaluation and I guess in the next few months we should be able to go to the Governing Board to present the opportunity.

Okay. And any thoughts on its likely financing mix between debt and equity?

So Abhinav, that's still under discussion and hopefully when we've concluded, we should be able to come back to you with the exact structure.

Okay. But target remains to conclude this in the current financial year, right, as you had mentioned?

Yes, absolutely.

Okay. Secondly, so on the CapEx part, can you guide us with the pace that we have seen in the current quarter? Is it sustainable or do you see it tapering down as some of those buildings come up?

So the way we see it is in the current financial year 2 new building projects have started, one is a 1.3 million square foot in Hyderabad and the other is 1 million square feet in Pune. And we see similar trajectory continue to be there in the coming quarters and years as and when we get opportunity to develop more assets. So this will continue in the same trajectory that you see.

Okay. And roughly the same sort of spends that we are seeing should be broadly what we should expect, INR 1.5 billion, INR 2 billion a quarter?

Yes, that's right.

Okay. And just going back to the SEZ discussion, can you just remind us what is the total portfolio area that you have in the SEZ side and is there a number for occupancy there versus the overall portfolio?

So the total size of our SEZ portfolio is 14.4 million square feet and that is currently 86.2% leased occupied.

Okay. So not much of a difference overall, right? But do you see a rental difference here?

No, no. See, what is happening is the minute you create the right ecosystem and you're in the right quadrant of space and you've done the right experiential offering, these are similar office spaces whether it's SEZ or not. So it becomes an active ecosystem, then it attracts the top talent to come and work there and that's why top companies want to lease.

Right. But your excitement on converting from SEZ to say a normal sort of an office space, is it because of incremental demand or is there any other reason?

So 2 things. One is the SEZ policy had an expiry date so by default after that expiry, most clients had no clarity on the continuity of wanting to take an SEZ occupancy and continue with that. So this policy they were all waiting for and because it was quite defined in terms of dollar billing and 100% EOU dollar income only, et cetera, companies didn't want to be in a regimented environment. What this new policy will do is allow them to subsume in the DESH Act, continue to grandfather the guys who are doing the exports and bring in all the new domestic players or tech companies that don't necessarily want to be under the framework of the existing SEZ law to occupy and be in this DESH environment where their focus is really employment and economic growth. It's nothing to do with a regiment of dollar earning and stuff like that. So it just changes the game.

Okay. So basically it gives more flexibility to your occupiers and you believe that's the right way for this to grow?

Completely, absolutely.

Okay. And just 1 sort of last question from my side. We have seen this ramp-up in committed occupancy, which is quite good to know. Now I mean when does the actual occupancy follow and what should be the trend say for the next 9 months there?

So what happens is whatever you lease, generally the period between closing the transaction and signing a lease is a couple of months and then you have between 6 and 8 months of rent free depending on size, client. If it's a smaller client, it could be even 3, 4 months. So the minute that period gets over, you generally start seeing the rent coming in.

Okay. And that is where you will basically call it actual occupancy. So by FY '24...

Actual occupancy at that point in time. The lease commences when you sign the lease deed. So you have a rent commencement date and a lease commencement date. The lease commencement is really 6 months prior to actual rent commencement.

[Operator Instructions] We have our next question from the line of Samar Sarda from Axis Capital.

Please don't mind the background noise. I have 3 questions. One, the 120-day extension you've taken for the ROFO like Preeti did mention that you're still evaluating, what is the possibility that it might be extended further because like from an asset acquisition perspective like given the SPV, the occupancy seems to be pretty straightforward thing? Any likelihood that it might get extended further?

Samar, we don't really at this stage envisage this being extended further. We should -- I think within the time we've asked for should be able to present the opportunity to the Board.

Okay. My second question was on the area you decided not to like sell back to the KRCPL Group. Given the vacancy at Airoli West, any particular reason you want to keep back the area right now or not monetize it? And if I'm not wrong, there is some sort of encroachment of full occupancy or position not being there of the property. So what's the rationale behind keeping the property back?

Most importantly, 2 things have happened in the last 12 months. One is we've seen a surge in data center demand and in the same piece of land abutting this piece of land, we are now doing 2 independent buildings of data center. So we believe there will be an opportunity to do a third if we can retain this land back. Secondly, coming back to the STPI demand, which is the non-SEZ demand, we had 1 million square foot building which we had denotified. We have significantly leased out. I think I wouldn't be surprised if before the coming quarter end, we come and tell you we fully leased that building out and we have no STPI supply. So that also gives us a heads up if we want to add more supply to that micro market in that park, then we should retain the land for that. So we are right now towing with opportunities and which is why we want to retain it to ourselves.

Okay. My third was a follow-up basically on Airoli West itself so the 0.9 million square feet, which is like complete more or less leased out. So a, for the area you've retained, would we also see a possible new start to construction by the end of this year possibly for a third data center building? And what is the time line of denotification because we are still in draft stage for building B5 to be denotified and that 0.5 million square feet to be leased out?

So what is happening is -- I'm glad you remember the asset and the building. Very happy to note that you're aware of the asset and I'm glad you asked that question. What is happening under the new DESH policy is we'll have to not be required to denotify because DESH is allowing the occupancy of non-SEZ profile of customers directly to come in. So we may save the complete time of denotification and from the day DESH is activated, we will be able to lease these spaces. So that's a big game changer that is envisaged in the new act in the way currently the draft bill has been represented.

Great. And the query on like possible construction start to one other data center building since you've like retained that land this year?

Right now we are exploring opportunities. We'll be very happy to lease as fast as we can. But we see potential, which is why we want to retain the land.

We have our next question from the line of Shashank Savla from Somerset Capital.

So 1 follow-up question on the data center. In terms of the actual returns, how does the data center compare to the office segment?

So it depends on place to market, time to market. At least 10%, 15%, 20% top in terms of value you can achieve if it is a build-to-suit data center in this market environment.

Right. So I'm just trying to understand if you have a vacant plot of land, how would you decide whether to sort of build a data center or an office in that area?

We will not build speculative data centers. We will always build a data center if it is a pre-committed build-to-suit transaction. So till then, it's pure land unless you want to transact in a future leasable buildable area kind of an arrangement. But otherwise you would build only if you had a customer for the data center.

And the existing data center project, is that complete or is that yet to be completed?

So there are 2 blocks committed by the customer. The first block is under construction, which is 315,000-odd square feet, which is scheduled to be delivered by December this year. We are about 15, 20, 30 days ahead of schedule so we might hand over earlier. And then the second building was to be built within 12 months of handing over the first building. Most probably we might see the tenant ask us to build earlier, but otherwise that's the schedule.

Right, okay. And then I had a question for Preeti on the NDCF. Just wanted to understand a few of the items in that. One is in terms of the redrawal of the Pocharam sales. So I think last quarter there was an amount of INR 1.2 billion in there both plus and minus and there's a plus of INR 300 million. So is that something which you're not using for your existing purposes so that's why you're paying it off?

Yes. So currently we are not contemplating any immediate reinvestment opportunity and that's the reason we chose to pay a part of it in this quarter and the balance we'll evaluate as we go along and decide in course of the year if we had something to invest in, otherwise we may decide to distribute the entire thing. But we'll take that call as we go ahead.

But is there a limit in terms of period as to how long you can retain that?

Yes. In a year's time, we need to decide as per the REIT regulation.

Okay. And I also wanted to understand in terms of the debt drawn, there's a plus and a minus of around INR 5.5 billion. Is that just refinancing of existing debt?

Yes, that's right.

And is it both at the REIT level or at the SPV level?

The refinancing was at -- so the payment which happened, repayment happened at the REIT level. And any which ways earlier when we had taken this loan at the REIT level, the proceeds had gone to repay the SPV loan. So now we are just drawing as a SPV and repaying as a REIT. And then we obviously, as I said, we subsequently raised another debt in July towards the quarter-end.

Is there any tax impact or difference whether you raise at the SPV or the REIT level?

No, it doesn't really matter. It's only just that in terms of the rate, we get better rate at the REIT level because of course of the AAA rating. So that's why the preference is to raise at the REIT level. That depends. Sometimes the capital structure also plays a deciding factor. But otherwise broadly if it's a fixed cost debt, we generally prefer to raise at the REIT level. And as I've said even earlier, we would like to retain some of the LRDs at the SPV level as well. Those are long term and even from a financial risk management, we prefer to have some long-term LRDs at the SPV level.

And finally, assuming that there are no new assets coming in, the quarterly distribution, is that expected to remain at these levels because your higher income might be offset by higher expenses or interest cost?

So as I said, this year we don't expect a material impact on account of the interest rate on the distribution. So we hope that the current distribution we should be able to maintain and do.

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

Congratulations on a very good set of numbers. So as we could see that during the quarter bulk of your leasing happened in the Hyderabad micro market. So if you can just provide some more color on the physical occupancy there?

About 45%.

So currently we are at 45% and how has been the trend like quarter-on-quarter?

We were about 23%-odd, it's moved from 23% to between 36% and 45%.

Okay. And how does it compare to, say, your Mumbai micro market?

Mumbai micro market is actually same and slightly higher. It is in the region of about almost between 45% and 50%. Some parks in Bombay, it is even 60%.

So in the Hyderabad market, do you see this stabilizing at current levels or do you see it improving from here onwards?

It will keep improving from here on.

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

Preeti, just a quick one on the previous participant, INR 1.2 billion from Pocharam sales. Why do you say that you don't have any investment requirement because you are doing CapEx, you have a ROFO asset which may come on board very soon? So why are you using that money for distribution?

So Sameer, generally as I have been saying earlier also, most of our CapEx is funded out of debt. Most of the CapEx is at the SPV level and that gets funded out of debt. So in terms of distribution -- so in ROFO since you've specifically mentioned, we are still to work on the capital structure to finalize that. But if it happens by way of [indiscernible], we really won't need any capital for the ROFO. So that's the reason we have taken a call to distribute part and, as I said, as we go along in course of the year depending on the requirement of funds, we'll take a call whether we need to retain this money or distribute.

Okay. Preeti, going by the logic that you are giving that CapEx will be debt funded and ROFO so it looks like you will be using this money for distribution. So I don't see where you can use this, which investment can you use this for?

Yes. So Sameer, in the course of the year if any new investments or any other acquisition opportunity comes our way and we're able to use this, well and good. Otherwise, as you said, we would look at distributing this money.

Okay. And Vinod, any number that you have in mind or you can take a guess at what could be the exit committed occupancy by the end of this year?

We have 1.1 odd million square feet cumulatively that comes in for expiry this year. At the beginning of the year, if you remember, I had given a visibility of 600,000 odd square feet. The way I see it now we have more than 800,000 square feet visible as renewables for sure and the rest of it we'll tackle as it comes along at that point in time. That's where we are, Sameer, with that. So we don't see any hiccups there at all.

Okay. But for the vacant area, would you not have some number and therefore occupancy?

For the vacant area what we discussed also, we are moving towards the target to reach that 90% plus of occupancy by the end of the year.

Okay. So then if I understood correctly, 85.6% that you have for this quarter may move up to 90% by end of this year?

That's what we are hoping for. That's right.

Okay. That's fine. And the last question is on the ROFO asset. When does the tenant rent generation begins and is that something that's important for you to decide on the time line?

No, actually they are mutually exclusive. But the rents will start between October and November this year and we should be ready by then to look at the asset to be brought to the Board for taking the next steps to closing.

We have our next question from the line of Satinder Singh from Eon Infotech Limited.

Congratulations for a stable set of numbers. So I've got 2 queries, 1 for Vinod. Vinod, so besides the return to office, what are the Top 3 challenges that you see for yourself as you drive this business?

I see challenges more as opportunities honestly because after a 2-year lull, we're seeing an hybrid environment and that hybrid is quickly changing towards physical occupancies moving up. So everyone is watching that space and we are seeing tenants slowly inch up towards physical occupancy. What that does is 2 things. One is the minute they reach that 50%, 60% occupancy number, they will suddenly come back with need for more real estate and at that point in time, they are not seeing too much supply in most micro markets. We are fortunate we have vacancies in some of our parks, which we can quickly fill up. We just want the DESH policy to come as quickly as it can so that we can infuse that supply in the marketplace. Otherwise we are focused more on trying to even bring our under construction supply quicker than what our estimates are. So that's an opportunity we want to encash by bringing in supply at the right time so that we can further leave as demand moves up. Essentially, inflation seems to have capped out so we are quite comfortable now compared to what it was earlier. Interest rates hopefully will find a stable even plateau soon. And then I don't see any other roadblocks into our targets and our posturing for moving forward.

Okay. And Preeti, while we have about 35%, 40% fixed debt, from your Slide 45, it appears that if one were to look at the weighted average of debt, then the fixed component goes down much more because most of the fixed component expires early. If you were to refinance today, what are the kind of the rates that you're able to refinance today at?

So we just did 1 transaction post the quarter-end, we have done that at a 7.95% coupon fixed for 5 years. So that's the kind of pricing we are seeing currently. Of course the prices have moved up in the last 3, 4 months because of the policy rate changes, but that's where we are.

This is before the last repo movement, is it right.

That's right. We did it before the last repo movement.

Okay. And I think it will be good for you to point so we can understand that Pocharam is used to even out the distribution and I think that should be fine. It would I think help to kind of maybe include that as a part of your visibility. If Pocharam to support distributions for this year, I think it'll be great. This is just a feedback to bring it upfront only. Otherwise I think great set of numbers so congratulations.

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

2 questions. Firstly on Commerzone Porur, if you could highlight what sort of exit occupancy rate can we have for FY '23 or what sort of traction are we seeing in the asset?

So Chennai has been slightly slower, but we still maintain we will be able to significantly lease out this asset by the end of the financial year.

Okay. And secondly, on the taxation part. So is the P&L, the taxation seems to be slightly on the higher side. What exactly is happening over there?

So generally when you're going to look at PAT -- PBT so you're going to have some SPVs, which are obviously not profit making because they have a lot of under construction component. So therefore, you'll see it higher because those losses are offsetting those profits and that's the reason the tax will be looking higher. So that's clearly one of the reasons. So it may not be right to straight away do a tax on PBT. So that's clearly 1 reason. And then of course there are certain deferred tax positions, which have also led to a little bit of higher notional tax so to say.

So the deferred tax is actually not paid out. So this is being used currently, right? It's not actual cash out?

It's not an actual cash payout.

And so it will remain at elevated levels going forward in FY '23-'24?

So it's not actually at elevated levels. It will remain at the levels at which it is. It's just that you're seeing is higher because of some assets which are loss making, which are offsetting those profits. Once those start moving into the profit territory, you'll start seeing the effective tax rate move up.

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

And my first question is, Vinod, you talked about rental movement in your portfolio. Can you give some more color on what is the magnitude of rental movement that you are seeing in the marketplace and specifically for your assets?

So we've seen stable firm up of rents and we continue to see that trajectory because supply is thinning out. Grade A supply is not there so each micro market will behave in its own way. But all micro markets we have seen firming up at different degrees pressure moving upwards because the quality of supply is thinning out. We envisaged a year ago that everyone will run for Grade A and Grade A will get a lion's share of the demand and when that lion's share of the demand comes forward, rents for Grade A will firm up significantly higher than the market average. That's what's happening.

And is that applicable for Hyderabad as well? There was some fear of...

Our average rent of what was vacant was at INR 58, INR 59, we leased at INR 69-odd that vacant area. So what we were envisaging actually happened and we are now getting the rent pop there.

So the new supply which was envisaged to come in Hyderabad hasn't come to the expectations?

New supply Grade A is not there. See, there's a big difference between experiential real estate asset managed with the quality of the experience you provide to your tenant will decide what profile of tenant wants to come to you and that tenant is willing to pay a price for the experience and the quality of asset management and that's exactly what is making a significant difference to asset quality and preference.

Understood. My second question is if you have any stance on whether you want to lease out your spaces to manage workspace provider or co-working space providers and what kind of rental agreements are those guys currently working with for you?

So most of the players who we would engage with are guys who already have a back-to-back client, which is a AAA grade tenant who is looking for flexibility, but is signing the back-to-back contract. We are happy to do transactions with those kind of arrangements and the rents have been in line with what rents we are charging. There are no special freebies or advantages passed on to any of those occupiers. For us, it's business as usual.

So there are fixed centers not revenue share kind of contract?

No, not at all. These are vanilla leases with the rent that we want.

Okay. Understood. And Preeti, for you on your variable cost, what is the cost of borrowing leading to? Is it more MCLR linked, more repo rate linked? How should one think about that for the variable cost?

So Puneet, generally the way these interest rates for variable cost debt moves is they move with a lag. It's happened in both ways. When the cycle is the other way also, we've seen the rates decreasing with the lag. Now when the cycle is reversing also, we are seeing the rates increasing with a lag. And also what happens is sometimes we have debt which has annual resets, some of them have quarterly resets. So even if the repo rates move or so, generally the change is on resets. So we do have the benefit of some loans where the reset is a year later so to that extent, for a year at least we enjoy benefit of those rates. So not everything will move exactly in tandem with the repo rate. Directionally that's the way it will happen, but not necessary it will translate to exactly the same proportion of change.

So it would not be in line with repo or we would think it will largely be?

I would say eventually it would be in line with repo, but not immediately. In the short term, it will not be Generally it's not necessary the bank will transmit those interest rates exactly the way repos move.

Okay. So underlying it is not necessarily repo for your case?

No, not necessarily. Directionally, yes Puneet, that's the way it will move. But directionally if the repo rate is on a rise, you will see the interest rates moving up. But it's not necessary that a 50 bp change here will immediately lead to a 50 bp change in the variable cost debt cost also. That's not the way this works.

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, everyone.