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

Ladies and gentlemen, good day, and welcome to Mindspace Business Parks REIT's earnings conference call for financial results for the quarter ended June 30, 2023. [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. Good afternoon, everyone, and thank you for joining this first quarter financial year 2024 earnings call of Mindspace Business Park REIT. At this point, we would like to highlight that the management may make certain statements 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 our CEO, Vinod Rohira, and our CFO, Preeti Chheda. We'll first talk you through the business update and the financial performance during the quarter. We'll then open the call to Q&A. I now hand over the call to Vinod. Over to you, Vinod.

Good afternoon, everyone. Thank you for joining Mindspace REIT's earning call for quarter 1 financial year '24. Continuing the steady performance, our committed occupancy now stands at circa 88.8%. The non-SEZ demand continues to remain strong with over 96% of our non-SEZ portfolio being now leased. Our assets in Pune, Chennai and Malad and BKC, Mumbai are over 98% leased, while our asset in Madhapur is also 96% leased. Anticipating this scenario, we have strategically brought forward non-SEZ supply in our key markets of Pune and Hyderabad with 2.5 million square feet under construction. During the quarter, we have leased 0.4 million circa of which 0.2 million square feet was on account of re-leasing and 0.2 million was on account of new and vacant area leasing. We have achieved a re-leasing spread of 10.1%. Revenue growth of our portfolio continues to be led by core portfolio growth. In quarter 1 financial year '24, revenue from operations grew from -- by 14.1% year-on-year to INR 5,604 million, and the net operating income grew by 13.8% to INR 4,570 million. As envisaged, India, like its Asian peers, has seen a strong preference for work from office, and the office footprint continues to grow, unlike the West. This trend augurs well for office demand in India and would lead to rise in physical occupancies from the current levels. Acceptance towards returning to office further aids the attractiveness of India as a global destination for GCCs and GICs, et cetera. In addition, the normalization of attrition rates and compensation across the technology sector has resulted into favorable employer/employee dynamics, which is creating a faster return to office. Majority of the tech companies continue to announce return to work plans and the number of days employees are expected to be in office is rising. Occupiers and employees are both becoming selective about where they want to work. This is leading to opportunities for creators of Grade A aspirational ecosystems like us. We are developing ecosystems that aid [ world wide ] talents and promote employee well-being and safety. Our parks have been upgraded to offer easy navigation, hassle-free connectivity to transport nodes, avenues for recreation and entertainment, Occupiers are able to distinctly identify the value added by the institutionally managed spaces. A very strong endorsement of our value add is demonstrated by the fact that over 62% of the expansion space leased since financial year '21 has been leased to existing tenants. We value our occupiers and understand the importance of establishing a strong connection with their employees. During the quarter, we have conducted multiple tenant engagement activities across our parks like food festivals, music and sports events, along with various recreation and entertainment activities. These events attracted massive participation from over 40,000 employees across our parks. In addition to demand from GCCs and GICs, large domestic institutions have begun to desire institutionally managed Grade A ecosystems for their growth requirements. This is a very encouraging trend. As the Indian economy moves in the direction of becoming a USD 5 trillion economy, with a focus on indigenization, this demand from domestics would fuel the growth of Grade A ecosystems in the coming years. At Mindspace we take ownership of creating sustainable workspaces that inspire excellence. To this end, we have adopted a robust ESG strategy with initiatives that are implementing across our portfolio. Our approach goes beyond our operations as we partner with our tenants in reducing our combined carbon footprint. This enables us to create workspaces that foster harmony with the external environment and provide a healthy ecosystem. Over 95% of our portfolio is now LEED or IGBC certified with the rating of platinum or gold. We have begun our journey towards green leasing as we actively engage with occupiers to include ESG clauses in our lease agreements. I would now like to take you the specific operational updates for the first quarter. We have leased circa 0.4 million square feet quarter, of which 0.2 million square feet out of re-leasing and the remaining was on account of new and vacant area leasing. Re-leasing spreads stood at 10.1%. The average rent achieved for the area leased during the quarter was INR 68 per square foot per month. The committed occupancy of our portfolio stood at circa 88.8%. The occupancy of our portfolio stood at circa 87%, recording a growth of over 480 basis points year-on-year and 355 basis points quarter-on-quarter. The in-place rent of our portfolio grew by 7.4% year-on-year to INR 66.2 per square foot per month. Our revenue from operations for the quarter grew by circa 14.1% year-on-year to INR 5,604 million. We continue to demonstrate steady growth in our net operating income over the past few quarters. Our NOI for the quarter [indiscernible] by circa 13.8% year-on-year to INR 4,570 million. Our distributions for the quarter stood at INR 2,846 million or INR 4.8 per unit. The physical occupancy of our -- at our parks stood over circa 57% at the end of the [indiscernible]. The physical occupancy at our parks at BKC and Malad was circa 90%. At Kharadi, the physical occupancy was about 78%. At Porur, the physical occupancy was above 65%. We remain hopeful that the government will soon bring in suitable amendments to the current SEZ framework to allow floor-wise de notification. Demand for non-SEZ remains strong in our micro markets, which is reflected in the occupancy of these spaces in the portfolio. This is a testament of the inherent strength of the micro markets and our asset quality. We believe this regulatory change would go a long way in channeling the non-SEZ demand in our markets into the vacant SEZ spaces in our portfolio. With this backdrop, I hand the call over to Preeti.

Thank you, Vinod. Good afternoon, everyone. I'm happy to present our financial performance for the first quarter of the financial year 2024. [Technical Difficulty] the first quarter [Technical Difficulty] from operations of INR [Technical Difficulty] million, registering growth of about [Technical Difficulty] year-on-year. Our net operating income stood at approximately INR 4.6 billion, recording a strong 13.8% Y-o-Y growth. Excluding facility management business and distribution licensee business, the NOI margin stood at 87%. We announced a distribution of approximately INR 2.85 billion, which is INR 4.8 per unit for the quarter. The distribution comprises approximately 90.2%, which is INR 4.33 per unit of dividend, which is not subject to tax in the hands of unitholders, approximately 9.6%, which is INR 0.46 per unit of interest and approximately 0.2% of other income. Our cost of debt stood at 7.7% at the end of Q1 FY '24. We continue to follow the strategy of optimizing the mix of fixed and variable cost debt to reduce our overall interest cost. During the quarter, we raised INR 5 billion through fixed coupon NCDs at the REIT level. The issuance carried a fixed coupon of 7.7% and was used to repay the variable cost NCD at SPV level, helping us achieve 100 bps saving in interest cost on this borrowing. We expect the interest cost rate to remain stable in the near term, which should help us keep our interest cost around these levels during FY '24. While REITs are gaining traction amongst investors, more particularly domestic investors, there is still a need to improve awareness among retail investors. We are working with other REIT participants and regulators towards this and also for the growth of this product. Mindspace REIT has continued to see its domestic investor base rise quarter-on-quarter. We added over 3,000 new unitholders during the quarter, taking the total unitholder count to over 55,000. To conclude, we expect NOI growth for this financial year to be driven by rent commencement on areas which are committed, but not operational yet, leasing of new and vacant areas and contractual escalations. SEZ policy changes, when implemented, should help leasing of the SEZ spaces in the portfolio, which should add to the future NOI growth. With this, I request the operator to now open the floor for question and answer.

[Operator Instructions] Our first question is from the line of Mr. Kunal from Bank of America.

A couple of questions from me. The first one is that on the increase in exits for FY '24, would you still say that this is mostly the periodic recalibrations that your tenants do? Or is it a different driver? And the follow-up there is that a good amount of these exits seem to be coming in your Madhapur asset. Would you think that re-leasing here is much easier than maybe in other parts of your portfolio? Because one at the end of the year that Madhapur market is quite tight in terms of supply.

Hi, Kunal. Yes, absolutely. I think this is part and parcel of business. A lot of this keeps coming through. Obviously, there's a lot of highlight when there's a lot of uncertainty when you're looking at the Western markets, et cetera, you start to believe that physical occupancies are not there, offices are going to get surrendered. We don't see this at all as anything different from part and parcel of business. And you're right, Hyderabad Grade A is very tight supply, and the demand for 50,000 - 100,000 square feet is very strong. So we are very confident of re-leasing this and happy we're getting churn because we have no supply for the next 18 months. We have a very small supply left, which is vacant. We're 96% leased in Madhapur.

And my second question is directionally is the kind of leasing you've seen in Q1 is what you would expect for the rest of the year? Or you think that as we go into later part of the year, the momentum around leasing could also shift?

I think for the next 2 quarters, we will continue to see stable demand as we are seeing right now. But first quarter calendar year, next year, you might see grassroots of larger demand coming on the table for discussion, which I think will be the start of the next cycle for growth.

And then just the last one is, just as a quick hygiene check, what would be the rationale behind a smallish deal, like 0.25 million square feet for a developer? Is this an operational convenience? Or does it clear the decks or something else, just wondering, why is it a small deal?

No. I mean, for us, nothing is small or big. It's the client that matters. The client was already there in that building and he wanted to scale up. So are you saying that 23,000 square feet is a small demand?

I mean I was wondering that if 2 floors were left out earlier, right, there must have been a business reason behind it. So is that sort of coming to the REIT now?

You mean acquisition of space.

Correct. Exactly. The 2 floors that you have indicated in Porur asset.

For us, it's strategic because we want to own the full asset, and we want to control the asset [indiscernible] pick up in terms of asset, which is why we are very keen to look at this asset.

Our next question is from the line of Mr. Vivek from DSP Mutual.

In terms of there seems to be a clear dichotomy between SEZ and non-SEZ zones, so my question was what percentage of the SEZ leases are coming up for expiry, or what -- or how many million square feet, any which way you want to answer it? And how confident are you of re-leasing those?

So different markets are behaving differently. The Bombay and Pune markets don't seem to be seeing too much demand for SEZ footprint, but a very high demand for non-SEZ footprint. And BFSI primarily is the clients, so they are looking at more non-SEZ spaces. While in Hyderabad, we are seeing more demand for SEZ, whatever vacancies are coming are actually getting leased out. So we've continued to see leasing happen in Hyderabad, for example, for whatever space has got vacant in the SEZ footprint. And we're continuing to see that trend going forward.

Could you just then clarify on Mumbai and Pune alone in terms of -- I mean, what is the area that you expect to come up for re-leasing and…

So for us, in Pune, we have 99 point odd percent that will be fully leased out. We have no SEZ vacancy at all. Cumulative portfolio is 99% leased out almost, and we have no SEZ vacancy. In Bombay, in the Airoli Park, we have vacancy in the SEZ. But fortunately, for us, we are able to denotify individual buildings that are vacant, and that gives us pipeline for leasing, and we are seeing demand for those assets. So the minute we get the relevant building de-notified we'll be able to lease it quickly. And by then, hopefully, we will be having the SEZ partial de-notification formula in place, which we hope to kind of see in the next couple of months latest. And then we will be able to bring that supply in as well for leasing for non-SEZ.

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

Just a couple of questions from my side. So at a portfolio level, when I'm referring to the committed occupancy, do we expect this number to be higher than what it is by March '24? I'm just asking directionally, I'm not a penny on a number, but just directionally I wanted to understand how we see the leasing activity? But is it contingent on this SEZ de-notification coming in, a lot of your -- whatever is built into your business plan?

Some part of it is, yes.

So second question is on our NDCF distribution. I know we don't give formal guidance. But on the current run rate and the expected scale up in the -- between the actual occupancy and the committed occupancy, should we expect a higher distribution in the second half of this year?

Adhidev, Preeti here. As we had mentioned last time as well that our endeavor in this financial year is to do away with any form of debt support to the extent we are able to. So I think that will be our primary focus. So the incremental revenue, which you see coming because of the rent commencing on some of these areas, we would rather use that to taper off the net support.

So assuming a flattish sort of distribution year-on-year is a reasonable assumption on that case...

So I won't be able to give a guidance, but at least, I would say, we would try to retain what we are giving today. And if there is any upside, which comes along our way, then we can look at more.

And the final question is on the hiring of GCCs. Now there have been some media reports that the GCC hiring seems to have again picked up. The initial signs are being seen. So in the context of third-party IT service providers versus GCCs, could you give us over the medium term, how are you seeing the pick up based on discussions with the tenants so far?

So the space pick up will kind of get translated, I think, 2 or 3 quarters from today. But yes, you're right, hiring has seen pick up in these quarters.

Our next question is from the line of Mohit Agrawal from IIFL.

My first question is, of the completed area of 25.9 million square feet, how much is the SEZ space in total? And what would be the occupancy there or vacancy levels?

So we are about 2 million-odd vacant in the SEZ footprint. Cumulatively, I think anywhere between 83% to 84% of our SEZ is occupied. And if the ratio would be 55-45. SEZ 55%, non-SEZ 45%.

And Vinod, you mentioned just now that in Airoli, you are de-notifying buildings. So right now, as we speak, how much of the space would be under this process of de-notification.

400,000 square feet.

400,000 square feet. And when do you expect this to come -- to be available for leasing?

I think by the end of next quarter, we should have that building hopefully de-notified so that we can start marketing in the subsequent quarters.

Preeti, my next question is, you mentioned about -- so 2 comments. One is about the NOI growth you mentioned. So from the presentation, you mentioned that B9, B10 has started contributing. So could you quantify what kind of NOI addition we can see in this year for the remaining part of the year? If you could quantify that? And the second question is you also -- I think I heard that you mentioned that you expect the interest cost to remain at these levels. Is that correct? And in that case, do we see that the distribution growth could happen? Because if NOI goes up and interest cost remains the same. I'm just trying to link the 2.

Yes. Thanks for this question. So to answer your first question, while I can't categorically give you how much the NOI would grow by. But since we are having a decent amount of area, which we're going to start generating rent, we should definitely see an upside on the NOI. But not all of this NOI is going to translate to NDCF growth because while the interest cost will remain at these levels for the year to go, but versus the last year, we are definitely seeing the interest cost having gone up. So that's going to eat up some part of it. And as I had said earlier in the day, that we would be taking this opportunity to minimize our debt support and therefore, to that extent, we'll be using those extra revenue numbers to normalize and make sure that at least we are able to maintain. And then as I said, if we have positive upside that come along, then we could look at NDCF growth.

And my last question is on the debt numbers. So while your net debt has gone up by INR 250-odd crores, which is exactly the CapEx number, the gross debt has moved up by about INR 600 crores. So anything -- any particular reason for that?

No. So we -- you just need to look at the net debt numbers because we have almost close to INR 600 crores, which is lying in liquid instruments, like fixed deposits or so. So we had some unwinding, which we did between the SPVs, the borrowings between SPVs because of which towards the end of the quarter, we landed up with surplus funds and the SPVs, which got the money back. So those will be deployed in the quarters to come, but that's why you are seeing the gross debt being higher. And -- but if you look at the net debt numbers and the margin -- the growth in the debt is equivalent to the CapEx.

So this will normalize going forward, right?

Yes, yes. [indiscernible]

Our next question is from the line of Pradyumna Choudhary from JM Financial.

So the first question is that there was a slight decline in occupancy in the current quarter. So what would be the reason for that?

It's part and parcel of business. So I mean, obviously, we will look at it from a fraction and a percentage point of view. To us, areas are coming back and we are able to get mark-to-market opportunity. If it is in markets where there is demand, there is no real supply for Grade A, we are happy to actually see the churn come through.

Like my concern comes most from the broader global slowdown you're talking about and seeing like generally now most of the IT companies have also started reporting a significant slowdown. So is there any clear visible signs of slowdown affecting us in general? Are we getting requests from our clients for the incurred loss?

No, not at all. Absolutely not. I don't see this like a indicator of slowdown for India at all.

And no issue with regards to the demand for our space as such?

No. For Grade A spaces, you will continue to see demand because if you want to attract talent and you want to be in the right quadrant of space, then these are the very few Grade A asset opportunities, which quality tenants that we cater to are looking for. And for that, there is always a need for quality space, which is getting filled up by whatever vacancies come through in the non-SEZ footprint.

And any particular sector where we are seeing strong demand from like, I think, last time you mentioned third-party IT service providers. So is it the same segment or something there?

While BFSI and technology footprint is growing, what is interesting is the need for domestic demand of BFSI is actually starting to take a strong participation in Grade A assets. So we are seeing domestic India's growth represented in greater occupancy. And that, I think, will be an increasing trend, which you will continue to see over the years to come, which was earlier not really visible because you were catering to the global tech footprint alone, and 90% of India was really catering to that. But I think very strong domestic growth is starting to become visible at Grade A spaces.

Our next question is from the line of Pritesh Sheth from Motilal Oswal.

Just one question. Since you have had experience of converting an SEZ space into non-SEZ, how much time is generally taking for this de-notification? And while I understand we are doing it for whole towers, if we do it like by floor by floor, would it be any different than the usual de-notification process in terms of time lines, it takes?

See generally, a building to de-notify would take anywhere between 4 to 6 months. But once this rule comes into place, I think it will be much, much faster because once they set a process in place in a few months, we may be able to get unit-wise de-notification, and you will do it in reasonable chunks of units. So you don't have to wait for a single floor or 2 floors. You might do a cluster of floors together to de-notify so that you're taking care of your pipeline of demand.

And any time line you have in mind of this de-notification amendment coming through in sort of [ decisions ] that you're having in the market?

Sure. We are hopeful that by the end of this current quarter, we should have clarity on that and then start moving forward towards actually processing the de-notification applications.

Our next question is from the line of Kunal Lakhan from CLSA.

Vinod, just again on the de-notification side, right? I mean it's the part by part or floor by floor de-notification has been in the fray for some time now. I mean I'm sure industry is lobbying for it. Just wanted to understand like what's the holdup -- what's holding back here? Like, I mean, what is causing the whole process to get like delayed because as such in the industry is not really asking for any tax benefits here, right? And it's a pretty straightforward amendment to be done in the SEZ act. So what's causing the delay?

Actually, there are multiple stakeholders and each stakeholder has had their own understanding and agenda. Now between finance and revenue, both have understood that this is cumulatively a benefit, where there is no advantage being passed on to the developer or the SEZ park holder. It's actually initiating employment. It will get occupancies, you will get indirect employment and you will get revenue in terms of taxes, et cetera. So all departments are completely aligned. They are just making sure that there are no hiccups in the future, so they're realigning the rules, which will allow this to become an enabler for debonding de-notification, however you might phrase it on a floor-by-floor basis. So because, for example, infrastructure, support services, all of these in an SEZ were catering to an SEZ. So they have made sure now they have covered all of those aspects also, so you don't have any other hiccups. So I think time is much longer taken than what it should have. But yes, I think it's moving in the right end.

Sure, sure, sure. Just like kind of taking your brain on the same topic. But are there certain tax sops that the custom duties and excise benefits that we enjoyed would also need to be returned to the government back if once when -- yes. Would that be a material amount for developers?

No. Considering the cost of vacancy, it doesn't stack up. It's fine. Yes.

And also lastly, again, on the notification bid, how would the -- would there be any logistic hassles in terms of like de-notifying to certain floors in an SEZ. Because when you look at the whole compliance burden, right, and the whole compliance logistics that one needs to follow the ingress and egress of like people and materials and also, do you think partial de-notification can be successful in terms of managing the logistics?

It certainly can be. Actually, that's exactly the right question, Kunal, which is the reason why they have taken longer than usual to close this because they want to stitch up all of those things. But on a physicality of asset basis, we don't see a challenge.

Lastly, on the demand. You did mention that the larger guys are now -- have now started to become a little more active. Can you give a little more color on this, like in terms of like what is driving this positive sentiment now? And you mentioned that in Q1 of next year, next calendar year, you'll see this demand getting converted, right? So can you just elaborate a little on that?

So the way we see is that the large occupiers have started to rehire and most of their employees who are working from home have in some shape or form been asked to start coming back to office. So the office footprint is becoming active. And that office footprint has not catered to, in the last 3, 4 years, for any growth, including the growth you saw in the spike of hiring 12 months ago, that has not got translated to space. So as they are insisting on employers asking their employees to come back, they are figuring out what they need to do with their footprint. And the questions about consolidation, immediate need for space for growth within the vicinity, scaling up, contiguity. All of those aspects have been -- now we are beginning to see larger occupiers start the discussions around that subject. So that is the reason why we believe in the first calendar year -- first quarter calendar year next year, you will start seeing more interest for those occupiers to come and look for space.

And this trend in pick up in physical attendance, are you seeing that both in GCCs as well as IT players? Or it is more prominent in GCCs?

So it was more prominent, in fact, earlier in the third-party service providers and the smaller occupiers. But in this last quarter, you are seeing a spike in the GCC physical occupancies as well. And they have started to take the call of asking people to get back to work.

So the physical attendance number would be very different say for GCCs and third-party service providers or they are broadly similar?

No. It used to be. Now it's kind of bundling in the same basket. And then different markets are working differently. So if you see Bombay, it's almost 80%, 90% in most places. Pune, we are at 70-odd percent. Chennai, we have 75%. Hyderabad we have 52%, 53% moving up towards 58%. So you're seeing occupancies move in the positive direction. And you must remember that in the pre-COVID era, when we said full occupancy, it meant 80% to 83% because you had 10% absenteeism and there was some bench strength left for growth. So there was never a 100% footprint occupancy ever. To us 100% is really when you reach 80%, 85% you are 100%.

Which is 57% currently.

It is 57% across parks, average.

Our next question is from the line of Murtuza Arsiwalla from Kotak.

Just 2 questions. One, just to clarify again, the non-SEZ piece occupancy stands at about 96%. Is that correct? And in that sense, what would be the SEZ vacancy today. And if I were to point out 2.9 [indiscernible] being vacant area, how would that break up between SEZ and non-SEZ. That's just the first question. And my second one...

I think we have got close to about 2.2-odd million will be SEZ and about 400 to 600 will be non-SEZ.

And second question I wanted to ask is, when I look at the trend of the mark-to-market that you have been sort of putting in your presentation over the quarters, between 4Q '22 and 1Q '24, it's gone from high double digits to more like 15%, 16% down to about 7%. Obviously, it's a good thing that your in-place has moved up. But have market rentals for the portfolio largely been stagnant? Or it's something that we need to or the market needs to recalibrate.

No, I don't -- I wouldn't say it's stagnant. I think whatever demand is coming for Grade A, they are paying you market rents. And your portfolio now has reached -- we still have a mark-to-market opportunity going up, but obviously, there was a much larger opportunity when the churn was from the original lease that expired or the sudden vacancies we witnessed 18, 24 months ago. Those spaces, we were highly opportunistic to be able to get a much higher pop in the rent when we re-leased.

So would it be fair that at least in the near term, that pop would be more limited from here on?

The way I see it is, if you're to look at it slightly more largely, there is no new supply coming in most micro markets of the category of Grade A that clients would be looking for. With inflation densities, the time of delivery of those assets has also gone in longer. The minute you start seeing demand stabilize and start rising there will be a frantic rush towards Grade A, and I don't see too much vacancy or available space in the Grade A, which is certainly going to see rising interest for the prime assets in prime markets. You'll certainly see that.

Our next question is from the line of Pradyumna Choudhary from JM Financial.

Yes. Thank you for the follow-up. Just another thing, which previously you answered to one of the participants was that in Bombay and Pune, we are not seeing good demand for SEZ whereas in Hyderabad, the demand for SEZ is also quite strong. So what would explain this difference across areas?

So BFSIs are the primary large space takers that have shown interest in real estate for commercial real estate in the last 6, 9 months. And those guys, for some reason, prefer non-SEZ. But the tech guys are still looking at SEZ. So we are seeing a different combination of tenants in Hyderabad looking at SEZ. Not that it's the same volume and scale of what non-SEZ demand is. But you're certainly seeing demand in the SEZ space in markets of Hyderabad, but you're not seeing them in Pune, in Bombay to the same degree. There is some demand, but it's proportionately very small compared to non-SEZ demand.

And any particular reason why BFSI guys prefer non-SEZ and why tech guys prefer SEZ in particular?

So it's more about guarding their information protocols and the restrictions that SEZ would bring in, in terms of data sharing and all of those aspects, they don't want that. So BFSI has always mostly stayed out of SEZ.

Our next question is from the line of Abhinav Sinha from Jefferies.

So just a couple of quick questions, Preeti, and you were saying that you would like to reduce the debt support for the payout. Now if I see the current quarter's NDCF, the CapEx is slightly higher than the debt that we have drawn down. So are we already in this situation or you would like to even make this number go towards 0 or something like that on the debt drawdown.

Yes. So today, obviously, this time we were a little surplus, but what happens is your working capital movement keeps changing quarter-on-quarter. So I think you should be looking at the full year picture as it unfolds going forward. Our endeavor is to minimize the debt support this year. And what you're seeing this quarter is also moving in that direction. But as I said, it is not necessary that you will see the same surplus situation in the next quarter also, it all depends on the working capital movement. But over the year, our endeavor will be to minimize that.

So for the year, for example, if the CapEx is say INR 1,000 crores, then debt drawdown should also be INR 1,000 crores, assuming working capital is neutral. That's right?

Yes. So that's what our endeavor would be to have our CapEx and debt broadly aligned. And this quarter, obviously, as you are seeing, we have not taken any debt support rather we are in a surplus situation.

Just a second quick one on the acquisition of the [indiscernible] so what is the time line for that?

In the next few months.

In the next few months. So they should conclude in the current fiscal basically.

Yes.

And how much area does it give us? I mean we have the 0.9 million they're built out, I thought...

200-odd square feet.

Our next question is from the line of [ Tanvi Suresh ], an investor.

So my first question is regarding the revenue from operations in the MMR region. The Square BKC is -- remained kind of flattish. So just wanted to understand why -- I mean, why it is not like the other -- the Airoli and Madhapur that has done much higher?

So this is a single tenant occupied building in east -- that's the reason why there's no variable areas for variable leasing. It was a done with one client. So that rent continues to come.

And my second question is around the vacancy trend that you guys have shown in your presentation, the only 2 regions that are showing an uptick in vacancy is Pune and Hyderabad, if I'm not mistaken. Is that like regular business churn that you are seeing? Or I mean, any particular reason for that?

No, absolutely not. Regular business churn. And it's like 97,000 square feet on a 4 million portfolio in Pune. So I count that as a rounding number. But in any case, we are seeing demand for that space.

And the last question, actually, was Preeti also mentioned this regarding awareness about REITs as a product. So I mean, as I'm an investor, I look at stock prices. Of course, that is not your focus. But I've seen a lot of pressure currently for REITs as a product. I mean everything on the ground is looking -- everything is hunky-dory, is all looking good. What do you see? Like why is there so much pressure -- like we are right now almost at 19% or 18% discount to the NAV. So any thoughts you can maybe throw some light on it as to what you think?

It's like this, obviously, under the larger horizon of the Western part of the world seeing lots of vacancies and people not coming back to work. That's kind of haunting us in our mindset to assume that the same story will pan out for India. But that's truly not the case, and it's shown to be demonstrated in India and the other parts of Asia, which are actually robustly back on the footprint of office. So that is playing out a lot. And obviously, there were some hiccups on the legislative piece, which kind of disrupted the understanding on tax implications, et cetera, during the time of the budget, which kind of created some confusion. We are behind that right now. But -- and if you can see a disproportionate amount of time on this call was spent on SEZ. So all of those things are kind of distracting from the core, and we continue to see a stable growing economy for India with adequate demand for Grade A office driven by tech and domestic footprint. So if you look at the larger picture, I think that's what we believe will continue to pan out.

So what are the kind of efforts that you guys are taking from your end to promote these REITs and these other products reach for you…

So we are, as I said, working with all the other REIT participants as well as regulators to roll out programs, to have a better reach to the retail investors. Some of them, of course, are well aware of this product, but there's a lot of them who still need to be educated about the product. So I think collectively, we are working towards rolling out quite a few programs in the year to come, which would help improving the knowledge of this instrument. And there are other things also which we can jointly work with the regulators and see what are the other ways and means and by which we can help growth of these instruments. So I think it's a collective effort, and we would be doing a lot of it as the years go.

I think there was an effort in the middle that REITs and this should be a part of the frontline indices as well. Probably that. I don't know what happened to it later on, the whole news just fizzled out. But if you could push that, that would also increase the liquidity overall for these kind of products. It will be really helpful for retail investors actually.

Yes. So NSE has made the first move by forming a REIT and with index. So we are hoping that in the quarter for the years to come, we should be able to find a space in the mainstream indices. But as I said, it's an effort and we will be working with the regulators for this.

Our next question is from the line of [ Shrish Vaze ] from Moneylife Advisory Services.

First question pertains to our SEZ de-notification strategy. So I just wanted to understand, like as and when vacancies come up in our SEZ space, so is the strategy to sort of wait for the entire building to get vacant and then apply for de-notification. Or are you also looking at leasing vacant space in SEZ even if sort of it fetches a lower rent?

So it will be a combination of everything. First, primarily, we are hopeful that the partial de-notification will come through really quickly. And that then solves for all of these questions. Having said that, in some of our parks, most of our buildings up are single occupier and are smaller in size. So we have that opportunity in case this gets slightly more delayed, and we are seeing some vacancies. We can churn around our portfolio of occupancy within the park to unlock buildings at a time and de-notify that. So we are watching that space as well, very closely so that we can bring in more of our vacant supply in a clustered manner by de-notifying smaller blocks of buildings, each are being 350,000 400,000-odd square feet. Fortunately, for us, a lot of our portfolios of that size, we are able to then de-notify quicker and start offering that also as part of the non-SEZ offering.

And my second question pertains to the Pocharam property. So this -- so the occupancy here has been constant and low for a while now. So I just wanted to understand the reason behind that. And like is it because of the micro market dynamics or something related to the property itself?

It's completely to do with the micro market of -- that micro market and the demand dynamics in that micro market. So fortunately, in a weird way because that space now stands fully vacant in a few months, we will have the opportunity of de-notifying that block and then finding out alternative uses for that asset. So in fact, we are happier now that it's kind of vacant. We are then able to apply for de-notification and unlock their assets completely as a building and then decide what we want to do going forward.

Our next question is from the line of Karan Khanna from AMBIT Capital.

So Vinod my first question, just continuing on -- from one of the previous participants. If I look at Slide #47, where your portfolio increased rentals at INR 66. And in Slide #10, where you have mentioned that the mark-to-market potential is around 6.5%, 7%. Is it possible to understand the breakup at a more granular level, say, Mumbai region, Pune, Hyderabad and Chennai?

So we may not have that instantly available for you. We can get someone to reach out and give you that information. But broadly, I think if you look at the portfolio, the Airoli rents are in the range of between INR 58 and INR 60. The Pune rents are for the churn spaces are between INR 60 and INR 65 markets are between INR 75 and INR 80. So when you start stacking up in some markets, you'll have a higher mark-to-market and some you may have a lower, but you will average out with these minimum and more.

So as a follow-up, what I'm curious to understand is if I look at the Hyderabad market, where in the last 6 months, we've seen 5.3 million square feet supply and 18% vacancy in the last 3.5 years, the supplies continue to outpace demand. How should one think about the realistic mark-to-market potential for this market?

I think Grade A, you will see a much higher rent spike because there is not enough Grade A. While you will continue to see an overhang of 18% supply vacancies in the micro markets and primarily if you break this up, you have 13-odd million in the financial district where customers are not liking to go there. In Madhapur, which is the prime market where 80% of the demand is actually shaping up, in that Grade A space is very limited. So if you actually break down the micro market analysis and understand Grade A versus cumulative supply and then Grade A in Madhapur as a market, which is preferred today compared to anything else in whole of Hyderabad, you'll probably realize that there is hardly any vacancy and the rents might even further firm up.

And just a follow-up, you did touch upon this point earlier during the call. But I think in the last call, you mentioned that in 2 to 4 months time, you are likely to see larger ticket [ RFCs ] to circulate in the market. So if you can highlight any trends that you're picking up in terms of the size of the RFCs? How is that today versus what it was 1 or 2 quarters back and say before COVID was the difference that you were seeing in terms of the sizing?

So I mentioned at least 2 quarters more before we start seeing grassroots. But having said that, the demand this time around, I see will be a combination of consolidation growth and offering a new work environment and experience to the cumulative set of employees because in the last 4, 5 years, as high as 60% and 70% of their old footprint of employees has got churned and with people now coming back to the office, unlike earlier, which was really hiring online and you could be wherever you wanted to be. It's a very different dynamic panning out where you want to be in locations which get you a top talent, where your last mile connectivity is high, where the infrastructure is very robust and you're able to offer them well-being, wellness, recreation, entertainment, all of that. So those assets will get an exponential demand. And that's really where the game is going to change and all of those demands, which will come in the beginning will be a combination of consolidation and some growth as well as primarily re-jigging your portfolio. So you will see that as the first step. And then you will continue to see GCCs, GICs who are now actively looking at India again. The minute they unfreeze CapEx, you will start seeing them asking for space. So that should begin within the calendar year first quarter, second quarter next year.

And my last question, when you talk about the renewals that you're seeing. So I think post COVID, we've seen a lot of discussion around the densification by tenants because of COVID. So is that a trend that you're seeing in terms of new or renewals of leases that you're seeing with the tenants?

Yes, absolutely. Everyone that's fitting out new is working on a much lower density than what they used to be and what we envisage is actually panning out.

That was the last question of a question-and-answer session. 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.