The Phoenix Mills Limited (503100) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 Conference Call of The Phoenix Mills Limited. The management will be represented by Mr. Shishir Shrivastava, Managing Director; and Mr. Varun Parwal, Senior Vice President, Finance and Investor Relations. [Operator Instructions] Please note that this conference is being recorded. At this time, I would now like to hand the conference over to Mr. Shishir Shrivastava. Thank you. And over to you, sir.

Good morning, ladies and gentlemen. May I extend a very warm welcome to all of you to discuss our company's performance for the third quarter and 9 months of the financial year 2020. We are pleased to inform that we have delivered a robust financial and operational performance across all our business segments, despite the overall challenging macro environment. Growth in our Retail portfolio was led by strong operational performance at Phoenix MarketCity in Mumbai, Pune, Bangalore and our flagship asset, High Street Phoenix and Palladium in Mumbai. Trading density remains one of the key metrics to determine a success of a retail asset, and we are pleased to report that figures at our mall -- at across all our malls in quarter 3 of FY 2020 were the highest ever. In particular, we would like to highlight. High Street Phoenix and Palladium traded -- trading density averaged at INR 3,620 for the quarter, and it is amongst the highest trading density for any retail asset in India. Phoenix MarketCity, Bangalore reported a trading density of INR 2,085 per square foot per month, becoming the first of our MarketCity malls to cross the INR 2,000 square foot per month barrier. Phoenix MarketCity, Mumbai reported a trading density of INR 1,415 per square foot per month, closing the gap between itself and other MarketCity malls. To put things in perspective, Phoenix MarketCity, Mumbai had a trading density of INR 942 per square foot per month in FY '17, which has grown over 50% in under 3 years. This is a testimony to the efforts that we have put into this asset, in improving its performances. These trading density numbers reaffirm our confidence in our MarketCity malls, which we believe are on course to achieving a trading density similar to what High Street Phoenix and Palladium achieved today in the coming years. It is a constant endeavor to keep our malls relevant and at the epicenter of communities that we serve. This strong consumption growth was a result of various initiatives we had planned at the mall during the quarter. At High Street Phoenix and Phoenix MarketCity, Bangalore, we celebrated Christmas with the World of Christmas event, showcasing the theme of European Christmas markets. Al Fresco food pop-ups were put up to give an opportunity to F&B brands in the mall to showcase the uniquely curated food and beverages. We hosted a variety of music events, comedy shows, concerts by leading artists, which helped drive record consumption at our malls. Christmas decor at our malls is a big attraction for consumers. Phoenix MarketCity, Bangalore, for example, has been putting up the tallest Christmas tree in the country for 3 years in a row. Our endeavor has always been to innovate and provide a refreshing experience to our customers and we hope to continue doing this better for the time to come. Getting the right brand mix by bringing in a new set of brands to cater to the evolving taste of our consumers is another area that we extensively focus on. Our retail teams engage with global brands and help facilitate their entry into India by providing a pan-India platform for them to launch their brands in the country. Our malls recorded a consumption of INR 20,672 million, which was up 10% year-on-year in quarter 3 FY '20 and INR 55,435 million, up 5% year-on-year in the 9 months ending December 2019. Strong consumption growth led to aggregate retail rental income growth of 8% year-on-year at INR 2,777 million in Q3 FY '20. For 9 months FY '20, rental income was up 7% year-on-year at INR 7,972 million. On that note, I'm happy to announce that we are fully ready to launch Phoenix Palassio, our newest mall offering in Lucknow. We have put together a very strong product, which will cater to a large and fast-growing market in Lucknow and the surrounding areas and emerge as a district consumption hub for the state. Speaking a little bit about our other projects under development in the Retail segment. Work across the new malls in Pune, Bangalore, Indore and Ahmedabad is on in full swing. Our Commercial segment, which forms an integral part of the mixed-use development model, continues to be a steady performer. Art Guild House, Mumbai and Fountainhead Tower I at Pune are close to full occupancy. Structural work at the upcoming Fountainhead Towers II and III in Pune is almost complete, and we expect it to be ready for fit-outs in the coming 2 quarters. We also intend to add commercial offices at our flagship property, High Street Phoenix, Mumbai and Phoenix MarketCity, Bangalore as well as on our under construction retail-led mixed-use developments in Pune at Wakad and Hebbal at Bangalore, which will give us strong impetus to our annuity-led commercial portfolio in the coming years. The St. Regis, Mumbai, our flagship hotel property continues to be an outperformer, and it recorded the highest ever average room rental of INR 13,857 in Q3 FY '20. Occupancy for Q3 FY '20 was strong at 84%. On a RevPAR basis, the hotel continues to be the market leader in Mumbai. Total income grew 15% during the third quarter to INR 962 million, while it was up 8% to INR 2,335 million in the 9-month period of FY '20. For Q3 FY '20, EBITDA was strong at INR 403 million, which was up 14% year-on-year. While for the 9-month period, EBITDA came in at INR 893 million, up 6% year-on-year. Strong operating performance has allowed us to continuously bring down the debt on this asset. We have repaid another INR 242 million in this quarter, and the current debt stands at INR 4,530 million. The current pipeline of projects looks very promising, and we are on course to double our retail portfolio and significantly increase our commercial portfolio by FY '24. Our endeavor is to add projects which can add a further 1 million square feet of retail area each year across key Tier 1 MarketCity -- markets post 2024. With this, we would be happy to take on any questions that you may have.

[Operator Instructions] The first question is from the line of Abhishek Bhandari from Macquarie Securities.

Congrats on a very resilience performance in this quarter, this consumption growing double digit. I have a few questions. The first one is around this 24/7 in Bombay. I know it's very early, but have you guys evaluated the pros and cons of keeping your key malls in Bombay open for a longer period?

Yes, Abhishek. Thank you for your question. We genuinely believe that this is certainly going to add to consumption. As you mentioned, it's a little too early to evaluate the impact. Also, it's important for many of our partners to be very -- to participate in the 24/7 program. And for example, F&B, while they can be open, it would greatly help consumption in the event their liquor licenses were also extended beyond 1:30 a.m. Therefore, I think it's -- there are certain other regulations that we hope, which will come into place -- come into play, which will help improve consumption at the F&B spaces. Even for the multiplex, I think, for them to operate 24 hours, they will need some assistance from the local authorities and law enforcement. We remain positive that in the long run, this will have a positive impact. And I think we should look at a period of 6 to 9 months, during which it will release -- we will really understand the true impact of this.

Sure. No, where I was coming from, will the CAM charges rise meaningfully for the tenants? Because, if you have to provide around security -- around-the-clock security and other facilities, probably, there'll be another shift of support staff needed. So I was coming from that point of view.

So really, we have evaluated what the OpEx is going to move up by. It's not really a very large number. It's not a very significant number or a needle mover. I think, between our CAM collections and a slight, perhaps, very nominal increase, one will be able to address that. So I don't think it's a needle mover for the retailers nor for us.

Sure. My second question is, this union budget proposal to remove the DDT, which probably will have an impact on future REITs, which will try to get listed in India. I know, we guys have not filed for a REIT yet, but it has been there in our pipeline that at some point in time, we might evaluate doing a REIT. So do you think the current taxation actually could be a dampener for those kind of listing? Or there's a way out to ensure a healthy yield for the investors?

See, I think all of us understand that the impact of this policy is going to be quite adverse for future REIT listing. We also have faith that in -- that the government may consider a different structure for REITs, because that was the original intent, and then that -- this kind of nullifies their entire efforts in promoting the REIT structure. So one will have to wait and watch. In any event, we don't have any plans to go for a REIT listing in the immediate future. We may have considered that -- we may have considered evaluating this maybe 2 years, 3 years, hence. So at that relevant point in time, whatever our -- we will obviously have to take into consideration whatever is the policy at that point in time and what is the appropriate structure at that point in time. But clearly, it's a negative for the REITs today, and we hope that there's going to be some representation by the -- by our peer group. And that will be taken into consideration by the policymakers.

Sure. My third question...

And also having said that, let's look at the impact of DDT, let's look at the impact of this change in policy today for Phoenix Mills. So not necessarily in the context of REITs. It's clearly a huge positive. If you look at our shareholding structure, which is largely institutional investors and many of them are offshore institutional investors, I think it's a huge positive for them. And also in the flow-through of cash flows from SPVs up to the parent company, I think that's a huge positive for us again.

Okay. My third question is on your residential portfolio. Can you remind me, how much of inventory is left in your Chennai project, the Crest project? And the -- are there any steps you're taking to accelerate some of the ready inventory in Bangalore? Because that's a sizable value, almost INR 1,000 crore worth sitting there, where the velocity seems to be slow.

Yes. So what was your specific question on Crest Towers?

Do we have any inventory left?

We have very, very negligible inventory remaining there, which, in fact, we have not relieved in marketing. I think there are some -- sorry, just one moment. There are some 15 units there. Some of them we were actually using for our own -- we have a lot of travel that happens from corporate office and other places. So we use it as our own guest house. But 15 units is a negligible inventory. We're not seeing significant impact there.

And Bangalore?

Bangalore, in fact, in this -- I would say that -- just give me one moment. Hello?

Yes, sure. Go ahead.

Abhishek, so in this last quarter, we've seen some good movement in One Bangalore West. We've seen some 5 apartments totaling to about 10,000-odd square feet at an average of INR 16,000 per square foot plus-plus being transacted. In Kessaku, we have seen 4 transactions for a cumulative area of some almost 44,000-odd square feet. And we were also doing some, I would say, some resizing or reconfiguration of some apartments. So we've done some -- we have bought back or canceled some of the apartments that we had sold in Kessaku, 4 apartments. So that was about 27,000 square feet. So 27,000 square feet, we have canceled. 44,000 we have sold in this last quarter.

Shishir, still, if you look at almost 1 million-odd square feet remaining. And it's a pretty high-value inventory out there. Ideally, wouldn't you like to accelerate the sales when the carrying cost is almost 10%, if not more?

Yes, you're absolutely right. And we have developed a proper strategy for the next 2 quarters for sale at Bangalore. We have announced very attractive subvention schemes. So I think we're taking all those necessary steps from a marketing point of view and also from a sales perspective, to create a higher velocity now. But I think our experience in -- what we've seen in November and December, I think that is giving us a good confidence that the demand seems to be coming back in.

Sure. And my last question, Shishir, would be on the preleasing for your upcoming properties. If you could just give some ballpark number? The Palassio, I'm assuming, is opening in next few weeks towards the...

Correct.

End of this last quarter. So how much are we there? And some of the properties where the construction is now progressing well on track. So how much of preleasing would -- you would have done in those portfolio? That will be my last question.

Yes. So Phoenix Palassio, Lucknow, we have currently targeted to commence operations in the first -- within the first 2 weeks of March. Palassio is about 85-plus percent leased. And Indore, we have commenced leasing there. We must -- we are at roughly around 60%. We have just launched Hebbal. We had informally launched Hebbal sometime back for anchor leasing, which was all done. So Hebbal, we have just launched, and Wakad, we have just launched. I'm pretty confident in the -- that in the next 2 quarters, we'll be at about 40%, 45% prelease in those 2. Ahmedabad, Palladium is about 65% leased. And the average rentals that we have accomplished in all these places are, I would say, reasonably higher than what we had underwritten in our business plans when we had made the acquisition.

The next question is from the line of Puneet Gulati from HSBC.

Congratulations on great show on consumption side. Would you have a comment as -- are you seeing these current consumption numbers continuing into this quarter as well?

So Puneet, thank you for your questions. At least the initial set of numbers that we are seeing for January as well are very encouraging there. Across the malls, they may be anywhere between 8% to 12% kind of a consumption growth compared to last year, January. So that gives us a reasonable indication of what this quarter is going to be like.

Okay. Okay. That's good. Also, any color on the preleasing for the commercial office space also that you're building?

We are now going to start. Now for example, Pune Fountainhead II and III will become -- we expect to complete all our work in the next quarter or next 2 quarters. That's when -- that would be the appropriate time to start leasing. But if you look at Tower I, which is more or less fully occupied today, 95% occupied and at reasonably good rentals averaging at close to INR 80 a square foot, the demand seems to be high. So we are -- we would be launching probably, at the end of the last quarter or early first quarter, next financial year we would be starting with the leasing on those 2 towers.

Okay. And this INR 80, excluding CAM, I would presume, right?

Yes, that's correct.

Okay. Thirdly, if you can give some comment on what's happening on the Chennai? This time, you've clubbed up the numbers. So separately, how Chennai is planning? Is there an improvement there? And also on the Palladium, how is the traction? If you can give some more color on the 2 malls, separately?

So there are quite a few initiatives that we have undertaken for Palladium and for Phoenix MarketCity in terms of marketing activities there. I think the impact of that, we will only see in the next financial year. This year, we have seen, I would say, growth of about -- just give me one second. Sorry. Puneet?

Yes.

Yes. So we have -- we've seen more or less -- I mean, consumption has been flat in Chennai. However, when we look at the overall consumption in Chennai compared to, let's say, another mall -- similar size mall, let's say at Pune, consumption has been more or less similar. It may be INR 3 crore, INR 4 crore here or there, but it's more or less similar. Now we understand that the Chennai market has a little -- much more potential going forward, which is why we -- our marketing activities, et cetera, which we will commence again, in the first quarter of the next financial year, will translate into a higher consumption, plus the occupancy improvement with all the changes that we are doing, we have vacated some stores, we are making -- reconfiguring some stores, making some changes on the brand mix. So once those stores start trading again, we will see consumption growth again on that account as well.

Okay. So basically, in this quarter, there was no meaningful change, but an improvement should happen from 1Q FY '21?

Yes. I mean, if you just look at Palladium itself, if you compare the -- this third quarter performance to last year, consumption growth has been 11%, and trading density growth has been about 10%, just Palladium Chennai.

So okay, consumption growth at 10% and trading density at?

Consumption growth at 11%, trading density growth of 10% compared to same quarter last year.

Okay. And the Chennai mall ex of Palladium?

So if we look at the MarketCity portion, it's at about consumption growth of about 3%, and trading density is similar to what it was last year. But Palladium because we had opened late and it took a little while to get the correct brand mix and occupancy to ramp up, that is now reaching -- it's going to catch up soon with the MarketCity consumption levels as well -- or trading density levels as well.

Great, great. That's good. And lastly, just on the Lucknow mall, I know you're doing quite well, but there is a competitor mall by Lulu as well. Any color you can give what's happening there?

Honestly, -- I mean, while we know what they're doing, it's a very different product. I don't believe that -- I would much rather talk about the fact that our mall is going to be operational much earlier. And we have, I would say, the first-mover advantage in terms of getting the best brand mix in our malls, so -- at Phoenix Palassio as compared to the competition.

The next question is from the line of Swagato Ghosh from Franklin Templeton.

Congrats on good set of numbers. So firstly, I want to ask the various initiatives that you have taken, the shows and the Christmas market, et cetera, what would be the cost of that as a percentage of revenues maybe? And are those completely passed on to the clients, like our tenants?

Yes. Swagato, thank you for the question. See at an average at each mall, this Christmas event is not -- it's -- if we just look at for the full quarter Q3, which includes October, November, December, Diwali as well as Christmas, cumulatively, the gross spend might be about INR 4 crore or INR 4.5 crore per mall for all the events and the decor, et cetera. And we do get -- we have alliances and sponsorships coming in as well. So the net cost will be somewhere in the region of about INR 2.5 crore -- INR 2 crore to INR 2.5 crore each mall.

Okay. And we cannot pass this on to our tenants?

Contractually, you have the right to, but we look at all our nonrental income, we plough that back into our assets to -- for promotion, events, marketing, et cetera. So we do not pass this cost to our retailers, though contractually, you may have the right to do it. But we try and reduce the occupancy cost to that extent.

Got it. And this net cost of INR 2.5 crore in the third quarter, can we consider a similar rate? Or would it be much lower in like March or a June quarter?

No, it would be -- see, for the full year, each mall budget is somewhere in the region of -- the net cost would be in the region of INR 8 crore to INR 9 crore. It depends from mall to mall. That's the full year expenditure that we would get.

That's very helpful, yes. And the next question is currently, from what I understand, we are upstreaming some cash flows from SPVs and then spending it on under construction assets as equity infusion. I want to understand that, in what form are these cash flows upstreamed? Is it in dividend form or in any other form? And if it is in dividend form, how much we probably will save on this because of the DDT exemption that has come in?

So we are actually not upstreaming. I mean, aside from the dividend that we intend to distribute from Phoenix Mills, some part of that will get upstreamed from the subsidiary, we are not upstreaming by drawing down debt and then upstreaming to Phoenix Mills and then Phoenix Mills infusing, no. That's not the structure that we have. We have -- yes, we have increased debt in some of our assets and because that is lower cost debt, right? That is an LRD debt and you have the ability based on your NOI to increase that. And those funds may be going to other projects or other entities, like, for example, Vamona may have funded as by way of an intercorporate deposit to Alliance, which are both 100% owned by us, by Phoenix Mills, but it may have gone in an ICD from Vamona to Alliance to fund some of its construction cost, which, otherwise, that debt would be at a much higher cost as a term loan as compared to the cost of the LRD.

Okay, okay. But this would be in the form of ICDs, like you're saying?

Yes, absolutely.

Got it, got it. Okay. And just quickly, I just want to get a color on the overall health of how the -- how our tenants are doing. While our consumption trends have been very strong, but is there any particular segment which is lagging? Like, you give this segment-wise color every quarter, so something similar would be very helpful.

So if we just look at the Q3 performance and consumption growth across categories, across all our malls, it's very interesting to see how multiplex and entertainment has grown at about 19%, right? Department stores, hypermarkets have grown at 8%. Cosmetics, footwear, these have grown anywhere between 16% to 21%, 22%. Electronics also has grown at 13%. Watches and jewelry, which are the high-ticket items are -- have grown at 15%. So I think, overall, at a macro level, this is indicative of the health and performance of our retailers. And just to highlight, in Bangalore, in this last quarter, 7 of our anchors, actually in December 2019, 7 of our anchors have hit their highest ever consumption of about INR 150 crore, only in December.

Okay. And what about F&B?

F&B has grown at about 7% -- 6%, 7%, but that was already at a high base, generally across our malls. And there are changes because some F&Bs we may have shut and they were getting reconfigured. So overall this thing -- overall consumption growth may have been at about 6%, but that's pretty -- I would say, for F&B, that's a strong one as well.

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

Firstly, I just wanted to ask on the portfolio basis now for the year, our rental income is marginally ahead of our consumption growth. So in Q4 and as you head into FY '21, from your operational malls, what is the sort of consumption rental growth figure would you like to work with? Will it, like be similar, track each other? Or do you expect rental income growth will be much higher next year, considering the first half this year was not that great, overall?

Correct. So actually, what happens is rental income growth kind of trails by a few quarters behind the consumption growth. So if you look at our consumption growth last year versus rental growth last year, you will look at rental growth has probably been at about 13%, 14% in this year, while -- so consumption growth was significant last year. And going forward -- see, our -- what one has to actually look at is, what is the average cost of rent to consumption, which is tracking in the region of about 12%, 13% for most of our malls. At High Street Phoenix, of course, where the trading density itself has crossed INR 3,600, the cost of rent is slightly, maybe closer to about 17%, 18%. But generally, the -- a good benchmark to understand whether retailers are doing reasonably well is what is the cost of rent on consumption which is, in all our MarketCity malls it's at about 12%, 13%.

Okay. So to just come back...

The other important point that we would like to explain here is in FY '21, we are looking at anywhere between 16% to 25% renewal across -- area coming up for renewal across all our malls. So High Street Phoenix and Palladium is 16%; Phoenix MarketCity, Bangalore, we will see 26% of the area coming up for renewal; Phoenix MarketCity, Mumbai, Kurla is going to see about 24% coming up for renewal; Chennai and Pune will see about 20% coming up for renewal. This is a significant event for upside in the rental income.

Okay. Sir, so with all these, whatever the variables we have discussed, so do you see a double-digit rental growth being possible, like next year from '21?

Yes, sure. I think there's no reason why we should not expect a double-digit growth.

Okay. You are reasonably confident even -- okay, okay. That's good to hear. Secondly, on our Lucknow mall now with the opening, you said 85% preleased, so how many of the tenants would be operational initially in first 6 months? I mean, is the entire 85% will be operational or it would gradually scale up? Yes...

It will gradually scale up. We expect to see about 75% to be trading within -- by the end of the 6-month period of -- from opening.

75%, fine. And so Indore, any time line roughly when you'd like to open around Diwali this year? Or when exactly is the opening scheduled for that?

It will be in 2021 -- calendar year 2021. Work is progressing at a significant pace there. We expect it to open in about, say, 12 to 15 months after Lucknow.

12 to 15 months after, okay, Lucknow. And our Hebbal and Pune, we are on track as per the original whatever time lines?

Yes, absolutely. We are on track. We expect these malls to be operational in FY '24. Fully operational in -- they may become operational in FY '23 last quarter or thereabout, sometime in '23. But one full year of operation, we will see at a very high occupancy level by -- in FY '24.

Okay. Sure. And a final question is on our business development plans. So beyond, obviously, what is there on the table, so do you -- as yesterday you had highlighted, you want to add one more new property each year beyond what we have. So any -- should we expect to hear something on that over next few months?

So our activities -- B dev activities are progressing at, I would say, at a good pace. Clearly, we would be happy to make announcements as and when we are able to conclude on some transactions. And we will do that at the appropriate time. Our goal doesn't -- our goalpost has not shifted.

The next question is from the line of Girish Choudhary from Spark Capital.

Firstly, on the -- as per the slide on renewals. We are seeing quite a high renewal rate in HSP in FY '20 with around 21% of the area. So my question is, how much of this has already been done? And also, the reason why I'm asking is that, we have seen only 4% increase in rental rates till 9-month FY '20, despite even, let's say, this quarter, we have seen a high consumption growth.

Yes. So in FY '20, we had about 21% of area coming up for renewal or releasing. We've completed about 15% or 16% already out of that. And the MG growth, the minimum guarantee growth, has been about a 20% from the previous transactions.

Okay. So this has broadly happened around, let's say, more majority of...

Sir, may I request you to speak up a little. I'm not able to hear you clearly.

Yes, so the reason I asked is that we've not yet seen a commensurate increase in rental rates till FY -- 9-month FY '20?

Yes. So because these have all happened in the second and third quarter of FY '20, the impact of this you will start seeing from the first quarter of FY '21.

Okay. Sure. And secondly, if you could share the cash flow from operations for 9-month FY '20 and also the CapEx spend?

Sure. Just give us a moment to pull that up for you.

Varun, this side. Our cash flow from operations for the first 9 months is approximately about INR 430 crores. This -- and if we include Chennai, which is not consolidated in our financials, it's approximately about INR 510 crores for the first 9 months. The -- we have, of course, used these cash flows, some of it has gone towards our equity contribution under our -- for our under-construction subsidiaries, such as Lucknow and Ahmedabad. We have also used this to buy back some of the areas, tenanted spaces at High Street Phoenix, which we had spoken about on our quarter 2 conference call. And to your question specifically on the spend on under-construction assets. This year, in -- across our 5 malls, which are under construction, plus the commercial tower in Pune, which is under construction, combined, we have spent about INR 170 crores in quarter 3 and 9 months to date, we have spent about INR 432 crores.

The next question is from the line of Dhaval Somaiya from PhillipCapital.

I just had a follow-up on the CapEx. So what is the expected CapEx in the next year that we'll be spending?

Varun, this side. Dhaval, currently, we are at a run rate of about INR 140 crores a quarter. This will move up a bit because we have the retention money for Lucknow, which would get paid out towards the end of next year, basically 9 to 12 months after the mall is completed and operationalized. Besides that, the spend on our under-construction assets should also ramp up. So a reasonable estimate to have for next year would be about INR 700 crores, INR 750 crores. We were -- for the full year FY '21. We will, of course, come back to you in quarter 4 and give you a more up-to-date estimate on the spending figures as well for FY '21.

The next question is from the line of Alpesh Thacker from Motilal Oswal.

Congratulations for a very good set of numbers, sir. Fortunately, all my questions have been answered. So I do not have any other questions.

Thank you.

The next question is from the line of Biplab Debbarma from Antique Stockbroking.

Congrats on the results. You are -- we are quite on an expansion mode. I think you have plans to set up malls in various cities in India. We also see that other players -- hello?

Yes, we are listening.

Other players with PE platform and all are also expanding. So I just wanted to understand because see, most of these malls will be in the city center only, and I just want an insight from you how -- what -- would it be a case of very -- large number of players chasing very few land parcel and cost -- acquisition cost escalated? I just want an insight on your land acquisition. Could it derail our growth strategy? That is one.

Thank you for your question, Biplab. Our growth strategy is actually not very aggressive. We have identified specific cities, and even within those cities specific micro markets that we want to have a presence in. Our approach is very clear. We only want to be at locations where we have the ability to become the first preferred destination center or consumption hub or the dominant consumption hub in those markets. So we are not spreading ourselves all over the place. We are not going to typically Tier 2, Tier 3 cities. We are looking at Tier 1 opportunities. So having said that, coming across a city center land parcel, greenfield for development, in today's market, there are not too many people who are out looking to purchase land. Even at the current pricing, which one may say is distressed pricing, liquidity is an issue, there aren't many people competing for the same land parcel. If we look at our peer group, there are very few in our peer group who look at acquiring greenfield opportunities for developing a commercial or a retail development, retail-led commercial development. So I believe that with our ability to acquire these land, put cash down and purchase them -- purchase these land parcels on the back -- on the stack of our own balance sheet or with other partners, gives us a edge compared to our peer group.

Okay. Okay. Sir, my second question is, it seems you have a preleasing in Lucknow is 85%, that's a very good thing. And in most of other under-construction projects, similar kind of preleasing would expected, there is no doubt about it. But sir, is it okay -- is it prudent in terms of getting good rentals to completely fully prelease the entire mall? Because if I'm a vanilla stores, I would like to see what kind of footfalls they have, then only I would be -- I would pay high rental that Phoenix Mills malls command. So why would vanilla stores, those who don't have that kind of brand awareness would want to pre-lease, commit, before even the malls operated at high rentals? So this is my second question, sir.

Sure, Biplab. That's a very, very intelligent question, I must say. If I may clarify, we commence preleasing of our malls somewhere around 12 months or so prior to opening. We may enter into some of the larger anchors transactions first, because that requires planning. So for example, every multiplex operator has a different specification, which needs to be provided for at the construction space itself, okay? In terms of the height, et cetera. So we get into preleasing, with some of the anchors, it may be at project stage, but generally, around 12 months prior to opening. The vanilla stores, we lease maybe even 8 to 6 months prior to opening, we commence our leasing. Now your question on whether a vanilla store will be very happy to come and take a place in a mall where he's not sure of footfalls, et cetera, that may be very relevant to single-brand local retailers. If you visit -- if you come to any of our malls, you will really understand the distinction. We work mostly with company-owned brands, and we work with brand houses. So most of our vanilla stores get leased with this group leasing that we do out of our relationships with the larger retailers, they may be Reliance brands amongst others, okay? So that's the clear distinction. Therefore, having worked with many of our retailer partners in the past, I think they have enough confidence in the ability of the -- or the performance of the mall.

So sir, I hope -- and so basically, we are not losing out high rentals from vanilla stores, the preleasing is okay. There -- we are getting the same kind of rentals in preleasing also?

I think, yes, your concern is generally addressed.

Okay, sir. Okay. Sir, one final question, sir, in general, if Lucknow malls get stabilized, say, 90%, 95% occupancy and the kind of rentals you get, what kind of rental you do generate, yearly rental in stable state?

So Lucknow, the transactions that we've done so far are giving us an average of about INR 105 per square foot per month rent, and it's about 1 million square foot mall.

The next question is from line of Saurabh Kumar from JPMorgan.

Sir, just 2 questions. One is on this cash flow. So effectively, our free cash flow is about now INR 135 crores, INR 140 crores a quarter, right? Effectively, that gives me about INR 520 crores, INR 530 crores a year. So is it fair to say that now substantially, all your cap -- and even if you take out that INR 50 crores, INR 60 crores dividend you pay, is it fair to say that a large part of the CapEx now gets funded out of internal accruals? So effectively, we should have rise in EBITDA with largely stable net debt?

Saurabh, I think you have just answered my question -- or rather, I haven't really understood. May I request you to repeat the question. You're correct in your estimate of about INR 550 crore to INR 600 crore of free cash being generated from across all our assets.

And your CapEx is, from what I understood, was INR 700 crores based on the comment, I think, Varun made earlier. So my thing was essentially now since all your CapEx -- I mean, so if you net out the dividends, which are about INR 50 crores, INR 60 crores, effectively, should one assume that the gap between CapEx and free cash flow is only about INR 150 crores now. So effectively, over the next 2, 3 years, you consistently have rise in EBITDA and your net debt should largely be stable?

So your question -- yes, it's a very astute, I would say, estimate. You're right. To answer in short, about INR 150 crore to INR 200 crore would be -- in this year, would be the gap between the free cash generated and the CapEx.

Which next year will come down because your EBITDA will probably...

Yes. But Saurabh, we are also planning -- in the following year, we also are evaluating when to launch the expansion projects at all of these assets. So when we are talking about a INR 700-odd -- INR 700 crore, INR 750 crore CapEx in this current year, this is going to relate to the mall portion across 5 locations. And then, again, we have -- and including the Tower II and Tower III at Fountainhead, Pune. Now we also have expansion potential, which will -- where we will commence construction on the towers at Hebbal, which is going to be on top of the mall or at Wakad, which is going to be on top of the mall, which will come in the coming years. So it's possible that in the next year, the CapEx may be slightly higher. So the gap will not get closed, but there will continue to be, let's say, between INR 200 crore to INR 250 crore kind of a gap between CapEx and free cash in the following year.

Okay. And any Kessaku sale, basically, covers some of that.

Yes. Kessaku sales, of course, comes into -- there is really not much cost in Kessaku. We are going to have some cost on Tower 7 and Tower 8 of OBW.

Okay, okay. And sir, I just want to understand the way this interest expense works on your P&L? So effectively, you just explained that you securitize the existing malls to fund the construction of your new projects, right? So the point is that under accounting standards, you could have capitalized the interest cost for an under-construction mall, but -- so effectively, is it fair to say that your interest expense is probably running ahead of what it should -- what was actually running at, if you had just followed a regular construction cycle at those projects?

Okay. Firstly, I just want to clarify that it's not a general rule that we increase the LRD debt to fund under-construction projects. So now for example, we are also ring fencing this geographically to some extent. Pune -- the mall in Pune sits under the entity called Vamona, Fountainhead Towers I, II, III sit under an entity called Alliance. Both are owned 100% by Phoenix Mills. So we had some elbowroom to increase the LRD in Vamona and that was given -- some part of that was given as ICD to Alliance. Now there is an interest cost there as well, which you can capitalize.

No. But the under-construction interest costs, you're probably capitalizing. This INR 460 crores of under-development cost which is there for the under-construction assets, that have been capitalized, right?

Yes. Okay. Now INR 460 crore, which is there some -- big part of that sits in Lucknow. A big part of that sits in Lucknow on the under-construction. And that, of course, we are going to fully capitalize.

Yes. No, my point is, sir, on your development properties, I don't have your balance sheet, I don't know what your work-in-progress number is, but effectively, I thought, it should be closer to INR 800 crores, INR 900 crores, I'm guessing, at least. So point is that your existing assets, [ you've taken ] LRD to capitalize, fund a part of these, the interest expense is still showing on the P&L is my -- is what I just want to understand? And this interest expense, part of it, just relates to an under-construction project?

Why don't we take this offline? I think the answer may be a little more detailed, and we'll have to pull up some more data. We are happy to take this question offline. But I think there's a little gap in probably -- in what we have presented and how it's being interpreted. So we'll fix that.

Okay. Maybe I'll take this offline. And just one final question, sir, what is the cost of this Lucknow mall now, total construction cost?

INR 720 crore is the overall estimated cost by the end of the project. We hope that we'll be well within that because the current indicative numbers on what we've incurred so far and balance cost to complete, we may be a little shy of that only.

So this is including land cost?

Including land, of course.

So effectively, this is a 15% yield on cost on day 1 for you?

Correct.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.

Thank you, ladies and gentlemen. Thank you for joining us on our Q3 and 9-month FY '20 financial results call. We look forward to interacting with you soon again.

Thank you. Ladies and gentlemen, on behalf of The Phoenix Mills Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines. Thank you.