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

Ladies and gentlemen, good day, and welcome to Mindspace Business Park REIT's Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Garewal. Thank you, and over to you, sir.

Good evening, everyone, and thank you for joining Quarter 1 FY '25 Earnings Call for Mindspace Business Parks REIT. At this point, we would like to highlight that the management may make certain statements that may be forward-looking in nature. Please be advised that our actual results may differ materially from these statements. We do not guarantee these statements or results and are not obliged to update them at any point of time. I would now like to welcome our CEO, Ramesh Nair; and our CFO, Preeti Chheda. They will first walk you through the business updates and the financial performance during the quarter. We will then open the floor to Q&A. I'll now hand over the call to Ramesh. Over to you.

Thanks, Nitin. Hi, everyone. Good evening to all of you. The Indian office market maintained its strong performance again in Q2 calendar year '24. At Mindspace REIT, we have delivered one more quarter of strong business performance. With strong market conditions, we are very well positioned for profitable growth in the next few quarters. Also very happy with the recent announcement in budget, a reduction of holding period for LTCG from 36 months to 12 months, putting REITs at par with equity. Other than talking about our recent financial achievements, I would also like to throw some light on the overall market, how we differentiate ourselves from competition on the construction side and some of our recent ESG achievements. On the market front, I would like to highlight a few IPC insights, which I saw recently. Looking at the JLL report of last quarter, and it spoke about how gross leasing reached 18.4 million square feet in Q2 calendar year 2024, which is an increase of 45% year-on-year. The last 4 consecutive quarters have exceeded the 15 million square feet mark per quarter in gross leasing volumes, and H1 2024 was the best ever first half with leasing volumes at 33.5 million square feet. Again, net absorption is up 37% year-on-year to 10.6 million square feet for Q2 calendar year 2024. The main forces behind this have been both global and domestic occupiers. The JLL report also said that the previous quarter showcases India's office market strength and potential. The report also stated on how global occupiers favor India for expansion as economic conditions stabilize globally. Separately, as CBRE report spoke about how diversification of demand continues to drive activity, GCCs remain key occupiers with 41% of the leasing share during the quarter, strong leasing expected to continue also in the second half of calendar year '24. The Knight Frank report spoke about H1 calendar year 2024 being the highest ever transactions volume recorded at 34.7 million square feet. Physical occupancy levels have risen consistently across the markets and conditions being right for 2024 to record at a -- to end at a record high. The report also quoted that India remains a rare beacon of growth globally after the pandemic. To conclude, it's been a strong first half of the year -- calendar year 2024 for the industry, and IPCs have a positive outlook on the Indian office sector for the second half of calendar year 2024 as well. I'll now talk about our NOI growth numbers. This will come over the next 3 to 4 years from 2.3 million square feet of vacant area leasing, of which 1.8 million square feet is in Airoli; 4.4 million square feet of under construction projects, which is the 1.3 million square feet Building 1 in Madhapur; 1.6 million square feet Building 8 in Madhapur; 130,000 square feet Experience Center in Madhapur; 1 million square feet R2 building in Pune, in Kharadi; 300,000 square feet data center in Airoli West; and 50,000 square feet Highstreet in Airoli East. These are all are under construction projects over the next 3 to 4 years. We also have 2.8 million square feet of future development area, which includes 0.8 million square feet of mixed-use development in Airoli East; 1.5 million square feet of new development in Airoli East, which we announced this quarter; and another 500,000 square feet in Madhapur, Hyderabad. Even at current market rentals, these will generate NOI in excess of INR 8 billion, INR 800 crore-plus organically over the next 3 to 4 years. Please note that this is a conservative estimate at current market rentals, and it can only go up. These don't include mark-to-market and contractual escalations, which will further take NOI up. Any acquisition we make, whether from sponsors or third parties will drive further growth and expansion. Now coming to some key announcements regarding new developments of quarter 1 of FY '25. Navi Mumbai, specifically, Airoli is seeing good demand, be it office space or data centers. To cater to this demand, we announced a new project of 1.5 million square feet in Mindspace Airoli East. This takes our overall portfolio size to 33.6 million square feet. What is driving Navi Mumbai demand? Navi Mumbai has become a favored destination for IT and GCC companies because of the readily available talent pool. Several elements make Navi Mumbai appealing to occupants, whether it's the outstanding connectivity, numerous infrastructure projects like the Trans Harbour Link, the new airport, the new completed Airoli-Katai Naka Road, a new metro line and the Kalwa Bridge. I go office to our Airoli projects, and it takes me around 35 to 40 minutes from BKC, and it takes around 20 minutes from Vikhroli -- Godrej Vikhroli to Airoli again. Navi Mumbai again ranks very high in the top 3 cities in the country in terms of quality of living, in terms of cleanliness. In terms of traffic, again, one of the best cities in terms of minimal congestion. Also, when we deep-dive into the talent hub of Navi Mumbai, we realized in and around Navi Mumbai, there is close to 10 million talent catchments whether it's BFSI, telecom, media, tech, all available at competitive commercial leasing rates and as also Navi Mumbai is considered one of the safest cities in India. We expect our vacant space to get leased over the next 1.5 years in Navi Mumbai. We are also seeing Navi Mumbai as a data center hub. Today, 40% to 50% of the overall demand for data centers in the country is in Navi Mumbai. And we all know that India is one of the fastest-growing data center markets in the world, and Navi Mumbai has evolved as the most preferred micro market in the country for data centers. We have also been very bullish on Madhapur market in Hyderabad and the rentals there. The reasons are Hyderabad is the second largest tech hub in India. 60% of Hyderabad's leasing over the last 4 years have come from GCC. The average annual net absorption in Hyderabad over the last 5 years have been 7.7 million square feet. This is the second highest in India among any city. Hyderabad also has a very strong GCC presence with more than 180 GCCs, 72% of which are located in Madhapur, where our park is located. Within Hyderabad, the Madhapur-HITEC City area is the preferred market with the highest absorption. Madhapur-HITEC City is the second largest micro market in India and has the highest rental rate and net absorption share amongst any micro market in Hyderabad again. This is -- there is no further land available within the HITEC City-Madhapur area for new development. Mindspace REIT Madhapur Business Park is the largest park in Hyderabad, with an occupancy of nearly 97%. Our park has also achieved a 7.6% rental CAGR since listing. We have 100 large occupiers with 57% of the lease -- of the area leased to GCC. The range of SMB outlets within our parks create a very dynamic environment for our occupiers. Our new Experience Center, which is going to be ready by mid next year, will offer a very inclusive ecosystem for all lifestyle needs and is anticipated to be the best in class in the country. We are also unlocking value through strategic redevelopment projects adding 3 million square feet more in our Madhapur-HITEC City Park. On our operating performance, we have achieved strong leasing this quarter with several new leases signed. We leased 1.1 million square feet during the quarter. We are pleased to report an increase in our occupancy rate this quarter by 50 basis points to 91.1%, excluding Pocharam. It's important to note that our occupancy increased despite nearly 1 million square feet of expiries. Our market position remains strong, attracting top-tier tenants due to our strategic locations, 6 out of the 9 parks have an occupancy rate exceeding 95%. We achieved releasing spread of 24% on 1 million square feet of the area relet during Q1 FY '25. This increased our in-place rent to INR 70 per square feet per month. We also received approval for demarcation of SEZ space of 500,000 square feet. Total demarketed space now stands at 0.9 million square feet. Changes in SEZ policy have eased leasing concerns for us in Airoli. We continue to see good demand for converted space in Airoli and are confident of leasing them. Coming to the financial performance of the quarter. Our financial performance has been robust with revenue and NOI growing by 10.6% and 9.2% year-on-year, respectively. We are pleased to announce an increase of 5% in our quarterly distribution, which came in at INR 300 crores or 5 per unit. Our strong balance sheet and low debt levels provide us with the financial flexibility to pursue growth opportunities. On the development side, projects are progressing well with new office spaces scheduled for timely delivery. Our R2 building in Kharadi and our B-8 Data Center will be ready in Q3 and Q4 of this financial year. Wanted to highlight a few things we do differently on the design and construction side. On the construction side, we are also focusing on design aspects leading to a better client experience. We are ensuring efficient space planning, better planning of terraces and rooftop areas, better focus on landscape design for a better client experience, better interior design of lobbies and other common areas that meet international standards. On the structural side, we're ensuring optimal structural design aligned with internal space planning, use of composite structures. On the MEP front, we are utilizing advanced technologies for STPs. Our HVAC systems have improved chillers, AHUs and heat recovery units. We have implemented a structured electrical system design, including [indiscernible], LED lighting, chemical earth pits, multiple aspects covered there. Our elevators, again, we have enhanced our vertical transportation with increased number of -- increased numbers, speed and size of elevators, improved destination control systems. For the facade, we have ensured utilization of fire-rated aluminum composite panels, improved glass quality for better heat gain and insulation, superior facade design. On the safety and security front, we're implementing advanced technology for better access control and security systems, installing upgraded CCTV and surveillance systems, top quality fire control systems and installing centralized building management systems. On the tenant experience side, we have created a separate tenant relations team. The strong tenant retention strategies, which shows the quality of our properties and services, have been implemented by this team. They made investments in technology to enhance tenant experience. We are continuously adding amenities like pharmacies, medical centers, gyms, crèches, sports facilities, convenience stores, et cetera. This is in line with the feedback we keep getting from our clients. We take feedback from clients very seriously. Our arrival experiences have also been improved, meeting rooms in the lobbies, biophilic designs, enhanced lighting, music, aroma, among other features. We're enhancing rooftop experiences by adding games, jogging tracks, meditation areas, experiential dining and gardens. All our upgrades are mindful of 4 cool features like smart access controls, app-based food ordering, smart elevators and touchless doors. We're also strengthening workplace experience by introducing more food options and top-notch amenities across all our parks. Several F&B outlets have been added to our parks in the last quarter with plans to add more. We hosted 19 events for the employees of our clients in our parks, which were attended by over 35,000 people in the last quarter. We also take disaster management activities very seriously with multiple checks and balances put in place for flood mitigation, safety code compliance and risk assessment. Our tenant satisfaction levels are high, thanks to our dedicated and focused asset management department. Coming to ESG, our commitment to sustainability continues to yield positive results with several certifications achieved. We recently launched our third ESG report. I will quickly give some highlights of our ESG achievements. Some of you may remember that last year some of the things which we achieved. On the environment front, we were the first among REITs to report on BRSR core parameters with third-party assurance. We have put in better sustainability efforts, which led to 29% of our energy being sourced from renewables. We have also reduced our Scope 1 and Scope 2 emissions by 30%. On social responsibility, we have committed to gender diversity with 37% of the senior management being women. We have also received 9 Sword of Honour awards for our outstanding safety practices across all our sites. On governance, we have conducted climate risk assessments across our portfolio to uphold rigorous environmental standards. We have also been issued India's first sustainability linked bond raising INR 650 crores from World Bank member, IFC, to drive sustainable investment practice. All these strengthen our dedication to sustainability, innovation and governance. We plan to keep improving our environmental efforts and work closely with tenants, partners and communities on green projects. I'll conclude by saying, as 2024 unfolds, we expect the market to maintain its strong performance, positively impacting the industry and us. We are positive about our growth prospects and are well positioned to make the most of the opportunities. Our commitment remains focused on delivering value to our shareholders. In a summary, 4, 5 points, we are in 4 key markets. All the markets where we are located, we are in prime locations: Hyderabad and the Madhapur Market doing very well; infrastructure in Navi Mumbai helping us; rental growth in all markets; consolidation of the industry helping us; attendance today in our parks stands at 73%; Navi Mumbai advantages of quality talent, all that which I spoke about; inorganic growth opportunities, whether it's in terms of ROFOs; the under construction sponsors -- under construction projects of the sponsors; landlord shares and the Pocharam divestment, which we are expected to do. With this, I will now hand over the call to Preeti for the financial updates during the quarter.

Thank you, Ramesh. Good evening, everyone. I'm happy to present our financial performance for the first quarter of FY '25. We closed the first quarter with healthy revenue from operations of INR 6.2 billion and NOI of INR 5 billion. Revenue and NOI saw strong Y-o-Y growth of 11% and 9%, respectively, driven by rent increase due to new leasing and high MTM realizations. Our NOI margin from core renting continued to remain steady at 85%. We announced a distribution of INR 2.99 billion, which is about INR 5.04 per unit for the quarter, registering a Y-o-Y growth of 5%. Our NDCF for the quarter is guided by the new NDCF framework, which came into effect on April 1, 2024. A part of our distribution for this quarter shall be in the form of repayment of SPV debt as we had guided during the last quarter. Repayment of SPV debt shall not be taxable in the hands of unitholders on receipt, but will be reduced from the cost of acquisition of first unit. During the quarter, we raised INR 15 billion through NCDs and commercial papers at the REIT level at an average interest cost of 7.8% PAPM. Given some of the existing debt, which we refinanced, was at a relatively lower cost, our average cost of debt has marginally increased to 7.9% PAPM at the end of Q1 FY '25. It gives me great pleasure to inform you that we are the first REIT in India to raise funds through sustainability-linked bonds, entirely subscribed by IFC, the private arm of World Bank, at a cost of 7.89% PAPM with an interest step down as we achieve our sustainability targets as per the terms of the issuance. We continue to maintain an optimal mix of fixed and variable cost loans with varied maturities and a healthy balance between fundraising from banks and capital markets. Our fixed cost of debt is now about 58% of the total outstanding debt. Our balance sheet remains robust with an LTV of 21.9%. Our net debt as of June 30, 2024, was approximately INR 65 billion, and we have undrawn committed lines of approximately INR 7.8 billion. We have progressed well with the demarcation of some of the SEZ spaces at Airoli, Navi Mumbai Parks as non-processing areas. So far, we have received approval for demarcation of approximately 0.9 million square feet of SEZ spaces and have applied for demarcation of another 0.4 million square feet. Demarcation has helped these parks achieve significant lease up of vacant spaces. Our aggregate occupancy at Airoli Park is up by 4% since notification of the SEZ norms in December '23. As Ramesh mentioned, we estimate a healthy growth in NOI over the next 3 to 4 years, largely led by leasing of existing vacant spaces in the portfolio, development of 4.4 million square feet of area, which is currently under construction, as well as 2.8 million square feet of future development. This NOI growth should aid the growth of a DPU besides the organic growth opportunities. We continue to pursue inorganic growth opportunities in our existing markets as well as other key office markets for expansion of our portfolio. We continue with efforts to enhance awareness of REITs through various investor education programs. Through the Indian REITs Association, we are also working on policy measures to help the growth of this product. We expect all of these to positively contribute to deepening the market for REITs in India. With this, I hand over the call to the operator to open the floor for questions. Thank you.

[Operator Instructions] First question is from the line of Mohit Agrawal from IIFL Securities.

I had a few questions. So first, on your gross leasing numbers, I think 1.1 was a great number. What is the outlook now for the full year? Do you think that the current momentum can improve or can sustain? And accordingly, what do you see is the occupancy target by the end of the year?

Thanks, Mohit. So we've definitely been beneficiaries of the improved market conditions. We believe our occupancy numbers, which stands today at 91.1%, would go closer to 92.5%, 93% kind of a number in the next 12 months. And in another 12 months from then, we expect it to go to the 95% mark. We anticipate that these SEZ reforms will definitely help us. We are seeing that. Quarter-wise, there will be some ups and downs, but overall, positive about things looking better at the end of FY '25. We're seeing close to 0.7 million square feet of releasing visibility out of the balance expiry of around 1.3 million square feet. So this year, our expiries are close to 2 million square feet. And typically, in a year, we have seen that around 70% of that, we fill it up either through releasing with existing people or getting people from -- tenants from outside. So that's in a nutshell answer to your question, Mohit.

Yes. But is there a broad gross leasing number target that you keep, let's say, 1 million square feet every quarter, which would include, let's say, our fresh leasing, releasing and probably releasing as well for under construction projects?

So what -- for the REIT, the business plan we have set this year is close to 3 million square feet of gross leasing. This also includes the Kharadi asset, which will be ready early next year -- calendar year.

Okay. Understood. My second question is on your acquisitions, especially ROFO. So you had -- you have mentioned in your presentation that, I've been saying that it has been deferred due to volatility in the markets. When do you think is the right time to start looking at it? And what is that threshold, which will -- when you will start considering the ROFO acquisitions or third-party acquisitions?

Mohit, Preeti here. So the reason we deferred was, obviously, there was volatility in the market and also we had some tax changes which happened then, and because of this reason, it reflected on the market prices also. Now we will look at once -- obviously, once performance is getting better, and also when the spread, I would say, between where we are trading versus our NAV gets a little better, we would start looking at this asset again. We were still -- I'm not saying that we will -- it will be a long wait, we will start looking at it sooner than later, but we were just waiting for things to just settle little better before we consider restarting our work on the assets.

So within this year, definitely you'll be evaluating?

Yes. That's our plan that this financial year we should get the asset in.

Okay. Perfect. And my last question is, Ramesh, in your opening comments, you had mentioned about strong demand from data centers and especially Navi Mumbai being well positioned for that. So now that you've got good experience in doing data centers and everything points to a very healthy demand outlook, how do you see that from a return perspective between your commercial development and data centers in terms of IRRs? And what is the kind of investments would you want to make considering that you have space to build or your space to basically -- to build actually assets there? So what is the vision there?

So -- good question, overall, data centers' returns are definitely more than office. The main advantage we have is, if we can't consume FSI in a data center building, given that we have a large park, we can consume it in another building there. Today, from a data center point of view, to our luck, most of the data center demand, like I said, 40% to 50% of the data center demand today is in Navi Mumbai. I'm sure you know that the industry is growing at 25% CAGR. We already have 1,300 megawatt in India, all the drivers around that. The good thing is data centers is one. Most data center deals are build-to-suit. Second, data center buildings are low-rise, which is 7 story to 8 story, that's the typical data, which means we can complete these data centers quickly. We don't do the interior MEP works for the data centers. That's done by the client who takes us. And because it's built to suit, because they can finish those buildings in half the time for an office building, we also have the advantage of our returns starting quickly. And it's not any rocket science to build a data center as such. We need to upgrade -- we need to increase our specs, but it's something which we have done, and that's given us a lot of learning, so well suited given the market, given the construction capability we have to do more data centers within our parks in Airoli East and West.

Next question is from the line of Kunal from Bank of America.

Just 2 quick questions from my side. Ramesh, firstly on the demand side, you were noting that it's been quite a few quarters now that the industry has been doing well. I wanted to pick your thoughts is any of that is also rubbing off, therefore, on the market pricing trends. More broadly, if you could comment on how would you expect the market pricing to behave in the coming 1 or 2 years?

You mean market pricing, right, Kunal?

Correct. No, so the releasing spread we can see, but are the market rental rates itself going up?

Okay. So I was looking at some of the IPC data. In 2019, if the average rent in India was around INR 81, today it has become around INR 89. So overall, all markets are seeing the benefit from an improved market point of view. We all have spoken about the 40% coming from GCCs and even within that tech demand, 30%; BFSI, 20%; domestic company demand today as high as 50% in some markets; coworking/managed office coming, where that industry was nonexistent a few years back, today is like 14%, 15%. So I think we are well suited to capture all these demand, Kunal, because it's more where we're focused on upgrades, we're focused on sustainability features, all our modern buildings we are benchmarking with, not just the best in the country, but the best in the world. So market pricing, we can clearly see and a market where last year, we were doing deals in Hyderabad in the late 60s. Today, we are easily able to do deals at INR 75. And when our new building, Building 1 and Building 8, when they come up, I'm sure we're going to be doing deals in the INR 80s there, which will be at least new records in the Hyderabad office market.

Okay. That's encouraging to know. Maybe just on the gaps between the rent yieldings and the committed occupancy, it's sort of gone up meaningfully last 2 quarters. Should that just be a function of what's -- the exits and the new lease sign-ups that you've had, and therefore, expected to normalize sooner than later? Or is something else going on there?

No, no, I think it's expected to normalize. I think the next 2 quarters, most of the gaps should have been bridged.

[Operator Instructions] Next question is from the line of Parvez Qazi from Nuvama Group.

So a couple of questions from my side. First, I mean, obviously, we are seeing improvements within demand in the industry also for you. When do we expect, let's say, occupancy levels in our Mindspace Airoli asset to, let's say, improve and maybe reach these pre-COVID levels of -- I mean, let's say, 85%, 90-odd percent?

Yes, Parvez, so right now, we have between both the parks around 19 lakh square feet. We believe we should be able to lease this 19 lakh square feet in the next 1.5 years. But, Parvez, we should also keep in mind when you have a portfolio of -- in Airoli now, let's say, of close to 10 million square feet between both the parks and us adding newer space, so, let's say, we end up adding another 2 million square feet, we're talking of 12 million square feet, there will always be some amount of churn when you're having a portfolio of this size. So what I would like to believe is from a countrywide portfolio occupancy rate over the next 1.5 to 2 years, we would like to touch the 95%, 96% mark for the overall India portfolio.

Sure. Great. The second question is regarding the new 1.5 million square feet of assets that we plan to develop in Airoli East. Now, while you have given the completion timelines for that, what are possible timelines for the 0.8 million square feet mixed-use assets that we also plan to develop there? Or will that come let's say, maybe slightly later on?

Parvez, that's a good question. The very fact that we're being bullish on Airoli and announcing 1.5 million square feet is because we believe, by then, we should be able to lease all the other buildings, which is vacant today and also the 800,000 square feet. We had announced for that 800,000 square feet building, we already have a 300,000 square feet anchor tenant signed up. So we just need to lease the balance 500,000 and -- or we wouldn't have started this 1.5 million square feet if we weren't confident. The completion timelines, for this we've appointed RSP Architects, they are finishing the concept designs, multiple approval processes are already in place. We are quite confident that with this building we should be able to capture the Navi Mumbai. So we'll have space in '25, '26, and in '27, '28, there will be space coming from this building and from building the 8 lakh square feet mixed-use building coming up.

Sure. And last question, what would be our current occupancy levels in our SPVs all put together, SPV added?

Yes. If you look at our overall committed occupancies, in Airoli East for SEZ space, it's around 79%; Airoli West, for SEZ space, it's around 70% again. Overall, for SEZ, occupancy rates today is a little above 85% in the country. And for non-SEZ space, occupancy rates are 98%. So the answer is 85% and 98% is the total overall occupancy for SEZ and non-SEZ.

[Operator Instructions] Next question is from the line of Tanvir Suri, an individual investor.

Preeti, actually, I had a question regarding the way we are reporting the distribution. So currently, if I look at my AIS that I get, the tax-free component is also counted as a taxable dividend. So -- I mean, is this some kind of error on the income tax side? Or is something not right in the way we are distributing? I'm not sure about that.

So where are you seeing that taxable?

So if you look at your AIS, right, that you get from the income tax department, the AIS that is reported, right, so at the end of the section you have all the REITs are invested -- you have invested in, and then you have an entire section on how much is reported by each of the REIT's invest. Now, it's actually not just for Mindspace. This is across for everyone, okay? So whoever is saying that they have a distribution that has a tax-free component, so the income tax department is not counting that as tax-free, it is still showing -- it is still calculating it as taxable dividend. So that's something that...

Yes. So can I suggest you can actually go by Form 64B, which we send across to all the unitholders at the end of the year, clearly clarifying how much of distribution is coming under which component? So we'll give you a breakup of how much should be taxed as dividend, how much should be taxed as interest and so on. So you can strictly go by that because that will determine the taxability. And -- actually segregating it that way, but you can go by Form 64B, which you get from us.

Perfect. No, I just wanted clarity if you guys were aware about this or if this is something that we should know how to exactly show.

Yes. We can just strictly go -- as far as taxability of distribution from REITs go, you can strictly go by the 64B classification.

Okay. Perfect.

[Operator Instructions] As there are no further questions from the participants, on behalf of Mindspace Business Park REITs, that concludes the conference. Thank you all for joining us, and you may now disconnect your lines.