Embassy Office Parks REIT Ltd (EMBASSY) Q3 FY23 Earnings Concall Transcript

Embassy Office Parks REIT Ltd (NSE:EMBASSY) Q3 FY23 Earnings Concall dated Jan. 25, 2023.

Corporate Participants:

Abhishek Agarwal — Head – Investor Relations and Communications

Vikaash Khdloya — Chief Executive Officer

Ritwik Bhattacharjee — Chief Investment Officer

Abhishek Agrawal — Interim Chief Financial Officer

Analysts:

Kunal Tayal — Bank of America — Analyst

Puneet Gulati — HSBC Securities — Analyst

Mohit Agrawal — IIFL Securities — Analyst

Kunal Lakhani — CLSA — Analyst

Karan Khanna — Ambit Capital — Analyst

Ravi Agarwal — Mirae Asset Investment Managers — Analyst

Arun Kumar — Unifi Capital Private Ltd. — Analyst

Samar Sarda — Axis Capital — Analyst

Presentation:

Operator

Good evening, everyone. A very warm welcome to all for Embassy REIT’s Third Quarter FY2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Mr. Abhishek Agarwal, Head of Investor Relations for Embassy REIT. Sir, you may begin now.

Abhishek Agarwal — Head – Investor Relations and Communications

Thank you, operator. Welcome to the Q3 FY 2023 Earnings Call for Embassy REIT. Embassy REIT released its financial results for the quarter and nine-month period ended December 31, 2022, a short while back. As is our standard practice, we have placed our financial statements, earnings presentation discussing our performance, and a supplemental financial and operating databook in the Investors section of our website at www.embassyofficeparks.com.

As always, we would like to inform you that management may make certain comments on this call that one could deem forward-looking statements. Please be advised that the REIT’s actual results may differ from these statements. Embassy REIT does not guarantee these statements or results and is not obliged to update them at any time. Specifically, the financial guidance and any pro forma information that we will provide on this call are management estimates based on certain assumptions and have not been subjected to any audit, review, or examination procedures. You are cautioned not to place undue reliance on such guidance and information, and there can be no assurance that we will be able to achieve the same.

Joining me today are Vikaash Khdloya, the CEO; Abhishek S. Agrawal, the Interim CFO; and Ritwik Bhattacharjee, the CIO. Vikaash will start off with business and industry overview, followed by Ritwik and Abhishek. We will then open the floor to questions.

Over to you, Vikaash.

Vikaash Khdloya — Chief Executive Officer

Good evening, and thank you for joining us today to review our Q3 results. We are pleased to report another robust quarter of business performance and a continued positive outlook for India office market. We signed a total of 1 million square feet leases, improved our same-store occupancy to 88%, generated healthy 13% NOI growth, announced 15th consecutive quarter of 100% distributions, and remain on track with our full year guidance. Additionally, we unlocked further growth in Bangalore at our Embassy TechVillage property by launching the new 410,000 square feet office block at a highly accretive 24% yield. Our active development pipeline now totals 6.6 million square feet and sets us up to deliver an incremental INR8 billion annual NOI upon stabilization at an attractive 24% yield.

So, another quarter of resilient business activity and a clear path — pathway towards accelerating growth, which we are well pleased to finance, given our low 27% leverage, competitive debt costs, and AAA/Stable rated fortress balance sheet. Even amidst a highly volatile global macro environment, India continues to attract more and more global companies to set up and grow their offshore captive centers. Morgan Stanley, in its recently published report, Why this is India’s decade, has highlighted offshoring as one of the key megatrends, which will continue to fuel India’s growth.

The dual drivers for this phenomenon are structural, namely India’s abundant STEM talent and the cost efficiency offered by India’s gateway cities, relative to more expensive and less scalable markets globally. As we have highlighted previously, these global captives continue to pursue premium quality, wellness-focused properties to attract and retain talent and to grow their presence in India. Our year-to-date leasing performance, our highly-accretive active developments, and our resilient distributions demonstrate a continued strong conviction in the long-term growth opportunity offered by India office.

Let me now update you on our leasing performance. During Q3, we leased a total of 1 million square feet across 19 deals and added seven new occupiers across healthcare, financial services, and tech firms. We achieved robust new leasing of 0.5 million square feet at impressive 5% premium to market rents. Additionally, we renewed another 0.5 million square feet leases at 21% renewal spreads, including 0.4 million square feet of early renewals by four large multinationals. We also secured 13% rent escalations on 2.1 million square feet, which further contributes to our NOI growth. Physical attendance in our properties also continued its upward growth trajectory and stood at around 46% last week, a 30% uptick compared to last quarter, majorly led by banks and global captives.

Bangalore continues to drive demand with the occupancy of Embassy Manyata now touching 90%, and a strong deal pipeline for both Embassy Manyata and Embassy TechVillage, reflecting continued strong demand from global captives. Further, Pune witnessed early signs of demand pickup, with 152,000 square feet new leases in Q3, including by an American healthcare major. With this, our Q3 occupancy stood at 86% and our same-store occupancy rebounded to 88%. Our active deal pipeline of 850,000 square feet sets us on the path to pre-COVID occupancy level of 90s in the next few quarters.

Our strategy of attracting higher growth occupiers has helped us diversify occupied concentration, deliver above market rents, and more importantly, embed growth into our portfolio. For instance, in the last 18 months, we added an impressive 52 new occupiers across sectors such as cloud infrastructure, cybersecurity, fintech, healthcare tech, and renewables. These deals were across 1.4 million square feet and at 4% premium to market rents. Notably, based on our on-ground discussions, around half of these occupiers are already looking to grow their India footprint, which will further aid our new leasing.

On the SEZ front, the industry is currently awaiting further regulatory clarity around the proposed DESH bill. Excluding a 3.3 million square feet set vacancy, our Q3 same-store occupancy would be at even higher levels of around 97%, and enabling regulatory framework around de-notification and flexibility of usage of existing SEZs will boost demand for such spaces and further drive leasing traction.

Next, an update on our ESG program. ESG remains a core pillar of our strategy, and our sustainability-focused buildings continue to receive recognition from globally renowned organizations. Our operational portfolio was awarded nine Swords of Honor by the British Safety Council, acknowledging the best-in-class safety and wellness aspects of our buildings. In addition, we are proud to report that we have been recognized as the world’s largest USGBC LEED platinum-certified office portfolio.

We continue to progress on our three-year ESG roadmap, supported by INR3 billion committed investments. We remain focused on reducing our carbon footprint through green initiatives such as our 20 megawatt solar rooftop project, and we are progressing well on a 75-25 renewable program — that is our commitment to achieve 75% renewable energy usage across our properties by FY2025. Our team recently launched a dedicated microsite to provide details on our ESG program and we encourage you to visit the same.

Finally, moving to the outlook for India office. 2022 was a resurgent year for India office, with total absorption of around 55 million square feet, closer to pre-pandemic highs. While globally, there maybe an increased caution around office demand, the long-term fundamentals of India office remain strong as ever. Apart from banks and financial services captives, which continue to drive demand, many global retailers, insurers, and healthcare majors are now setting up their Indian offices. Increased focus on cost and efficiencies by global corporates is likely to further accelerate this India offshoring trend disproportionately to the benefit of institutional landlords like us. On the other hand, the supply of quality office stock continues to consolidate towards fewer and larger institutional-quality landlords, who are well-funded, invest in sustainable growth.

A combination of cost inflation and rising interest rates is likely to increase the replacement value of properties, thereby impacting supply and driving rent growth in the medium-term. As you may recall, we had given a 5 million square feet total leasing guidance for FY23, which was meaningfully above our pre-pandemic five-year average of 3.3 million square feet. We are happy to report that year-to-date, we have already leased 4.4 million square feet, achieving around 90% of our annual guidance despite Q3 traditionally being a seasonally slow quarter. Notably, we are tracking ahead on both our fresh leasing and pre-leasing guidance, and our active deal pipeline remains robust, which will further accelerate our NOI growth.

Let me now hand over to Ritwik to expand further on our growth initiatives.

Ritwik Bhattacharjee — Chief Investment Officer

Thanks, Vikaash. Hello, everyone. Our key growth initiatives for Q3 include, we delivered a new 900,000 square foot block at Embassy TechZone in Pune and we’ve launched an additional 410,000 square feet new office building at Embassy TechVillage in Bangalore. We’ve accelerated development of our 6.6 million square feet of active growth pipeline, with approximately 90% concentrated in Bangalore, which is India’s best-performing office market; and we continue working on the non-binding offers to acquire the 7.1 million square feet of sponsor assets in Chennai and Bangalore.

First, an update on the development portfolio. At Embassy Manyata, we’re developing 3.5 million square feet across five blocks. The 1 million square feet M3 Block A is nearing completion, and we expect to receive the occupancy certificate in Q4. We’re seeing good lease — leasing traction with three deals in active discussions. Further, we’ve seen encouraging progress on obtaining the transferable development rights or TDRs and other statutory approvals that we need for the 600,000 square feet M3 Block B. This block has already been pre-leased to ANZ Bank and superstructure work is underway.

Our recently launched new-builds across the 700,000 square feet L4 Block and the 1.2 million square feet D1 and D2 redevelopment blocks are progressing well, and we are witnessing early traction from global banking, cloud computing and other tech players. At Embassy TechVillage, we’re developing our 1.9 million square feet Block 8, of which 550,000 square feet has already been pre-leased to J.P. Morgan. We continue to see surging demand for the balance.

We’ve always been optimistic about the leasing dynamics of ETV, in particular, and Outer Ring Road — the outer Ring Road micro-market in general. To that end, we’re launching another 410,000 square foot block, named Helenium, by unlocking the available FAR potential at ETV. This new block is in addition to ETV’s development potential that we underwrote at the time of its acquisition. This project is expected to generate a highly accretive yield on cost of approximately 24%. Also, in Q3, we received the occupancy certificate for the Hudson and Ganges blocks, the 900,000 square feet blocks in Embassy TechZone, Pune, and the 700,000 square feet Tower 1 at Embassy Oxygen in Noida, which is also nearing completion.

To summarize, our total development pipeline now stands at 6.6 million square feet. Over 90% of this growth sits in Embassy Manyata and ETV in Bangalore. Our reasons for concentrating development in our best parks in Bangalore is simple. Bangalore is the Indian city, which leads global occupier demand, and the development economics in two of India’s best business parks, which we own, are simply too attractive to ignore. With INR30 billion of total committed capex, of which INR21 billion is spending as of Q3, these 6.6 million square feet of projects are expected to deliver approximately INR8 billion of annual NOI upon stabilization. These projects set us up for impressive 24% yields on costs and they validate our strategy to accelerate our growth pipeline.

Our four — next, an update on our hotels and our total business system. Our four operating hotels continue their marked rebound in Q3, with 47% occupancy, a 15% quarter-on-quarter ADR growth, and year-to-date EBITDA of INR704 million. This performance is significantly better than what we initially guided to. We’ve always believed that our hotel business complements our office offering perfectly and that it will continue to positively reflect in our leasing and our rents over the long term. We expect this to be no different, as we develop the 518 key dual-branded Hilton hotels at ETV. The ORR market, where ETV is located, is underserved, with only approximately 1,400 rooms serving over 50 million square feet of office space.

Additionally, we continue to provide a total business system — ecosystem experience to our occupiers by constantly upgrading our properties with an eye on occupiers’ future needs. Our 200,000 square feet of Refurbishment Block K at Embassy Manyata is nearing completion and will enhance the leasable area of this block by 18%. Additionally, we look forward to the upcoming launch of the NXT Retail Plaza at Embassy Manyata. This is an 85,000 square feet F&B hub that will further boost employee experience, as well as widen Embassy Manyata’s competitive moat.

And finally, an update on our acquisitions. We’ve made significant progress in our discussions with Embassy Sponsor and other stakeholders to acquire the two properties in Bangalore and Chennai, which total 7.1 million square feet. This includes the 5 million square feet of Embassy Splendid TechZone business park in Pallavaram, Chennai, and the 2.1 million square feet Embassy Business Hub property in Yelahanka in North Bangalore. Both properties are strategically located in fast-growing micro-markets and are anchored by renowned global occupiers in banking, financial services, healthcare tech, and the IT services sectors.

Of the 7.1 million square feet, 2.1 million square feet is completed or nearing completion, with 91% of committed occupancy, which provides us with stable cash flow visibility. And of the balance 5 million square feet, construction is underway for 3 million square feet, which aids further growth. Potential acquisition will account for less than 4% of the REIT’s current GAV and remains subject to ongoing diligence, negotiations, funding, and requisite approvals.

We’re also evaluating certain other acquisition opportunities from third-parties. We are focused on prudently financing potential acquisitions through an optimal mix of debt and equity, and we are closely monitoring the challenging financial markets for appropriate transaction windows. We remain committed to ensure that all our growth initiatives deliver value to our unitholders, as we’ve demonstrated by our earlier ETV acquisition, which has outperformed our underwriting on numerous metrics.

Over now to Abhishek for the financial updates.

Abhishek Agrawal — Interim Chief Financial Officer

Thanks, Ritwik. Good evening, everyone. Let me take you through the key financial highlights for Q3. We grew net operating income by 13% year-on-year to INR7,049 million, with operating margins of 81%. We announced distributions of INR5,033 million or INR5.31 per unit, with a 100% payout ratio, and we continue to maintain our strong balance sheet with 27% low leverage and attractive 7.2% debt cost.

Let me take you through the details. First, an update on our Q3 financial year ’23 income performance. Revenue from operations grew by 17% year-on-year to INR8,654 million. This was mainly driven by our new lease-up at higher spreads, contractual rent escalations, delivery of our 1.1 million square feet J.P. Morgan campus at ETV, and ramp-up of our hotel business. This was partially offset by the impact of exits in our office portfolio over the last year.

Net operating income and EBITDA grew by 13% and 14% year-on-year, respectively. This was primarily driven by an increase in the revenue from operations, partially offset by the increased hotel operating expenses corresponding to our hotel business ramp-up. Our overall NOI and EBITDA margins stood at 81% and 80%, respectively, and continue to be the best in class. Our NOI margins consistently remain around 86% for the commercial office segment, demonstrating its scale and efficiency.

Net distributable cash flows stood at INR5,045 million, up 2% year-on-year. The year-on year increase in our NOI and EBITDA contributed positively to our NDCF, which was primarily offset by an increase in our interest cost. These incremental interest costs mainly related to the debt expense of our recently delivered buildings, as well as the INR46 billion coupon-bearing debt raised to refinance our earlier ZCB.

Further, earlier today, our Board of Directors declared Q3 distributions of INR5,033 million or INR5.31 per unit, representing a 100% payout ratio. This brings our YTD distributions to INR15.3 billion or INR16.1 per unit. In the 15 quarters since our listing, we have now cumulatively distributed over INR73 billion.

Moving to our balance sheet updates. We continue to maintain our fortress balance sheet with 27% low leverage, attractive 7.2% debt cost, AAA/Stable credit rating, and a INR108 billion pro forma debt headroom to finance growth. Our debt strategy remains focused on active capital management and interest cost optimization by locking in fixed rates, given the inflationary environment.

Over the last three quarters, we have cumulatively refinanced or renegotiated over INR42 billion debt at 120 basis points spread. As a result of this and our earlier refinancing, 65% of our INR139 billion debt book carries a fixed rate of 6.7% for an average maturity of two years. Additionally, 27% of our debt carries a yearly reset date, and the interest rate is fixed for the next seven months on an average. Further, we are in advanced discussions for refinancing an additional INR16 billion floating rate debt and are targeting around 45 basis points positive spreads.

Given our access to various debt capital pools across mutual fund, insurers, FPIs, banks, and NBFCs, we are well placed to refinance any upcoming debt maturities at best-in-class industry rates. Further, in line with our ESG commitments, I am happy to report that our sustainable finance portfolio has now grown to INR39 billion, representing 28% of our total debt book, which is one of the best in the industry.

Lastly, an update on our financial year ’23 guidance. As a recap, during April ’22, we had provided our full year guidance with a midpoint NOI of INR27,030 million and a midpoint DPU of INR21.7 per unit, both within a range of plus/minus 5%. This guidance implies a year-on-year increase of 9% in NOI and an in-line DPU, considering the mid point guidance. On a like-to-like basis, post factoring the impact of our November ’21 ZCB refinancing, this DPU guidance was also 9% higher year-on-year, reflecting the efficient flow-through of our NOI to distributions. Based on our YTD performance, I am pleased to reconfirm this guidance.

There has been a positive rebound in office leasing, as well as hotel business, both of which are currently tracking at or ahead our estimates. On the other hand, we expect interest cost to be higher than our initial assumptions, given the rapid rise in rates over the last three quarters. While rising interest rates have severely impacted the global REIT distributions and resulted in widespread guidance downgrades, we are happy to report that the positive operational levers of our NOI have been able to largely mitigate the increase in interest cost.

Looking beyond financial year ’23, our new lease-up contractual rent escalations, mark-to-mark [Phonetic] rent growth, and scheduled deliveries will act as significant growth levers, thereby accelerating our growth to the benefit of our unitholders.

Over to Vikaash for his concluding remarks.

Vikaash Khdloya — Chief Executive Officer

Thank you, Abhishek. So, we continue to deliver consistently and are moving forward on a good trajectory. On the business front, Q3 was another strong quarter, with 1 million square feet leasing and uptick in our same-store occupancy to 88%. With 4.4 million square feet leases already signed year-to-date and a promising 850,000 square feet pipeline, we are well positioned to deliver on our annual guidance. We continue to unlock value as demonstrated by the FAR enhancement projects across Embassy Manyata and ETV, which will add 1.2 million square feet to a total leasable area at highly accretive 22% yield. And we remain focused on our 6.6 million square feet development growth investments, estimated to add around INR8 billion to our NOI upon stabilization.

On the capital markets front, amidst significant declines in global REIT stocks, Indian office REITs have been resilient and, in fact, significantly outshine the global peers. This was largely driven by the continued offshoring demand, impressive leasing spreads, development growth at attractive yields, and low leverage of Indian REITs.

Given wider understanding of the yield plus growth total return story, combined with our consistent 15 quarters of business delivery, Embassy REIT provides one of the best risk-to-reward profile. Our unitholder register continues to expand with a retail base increasing around 18x since listing to over 70,000 investors. We continue to focus on growing our NOI and distributions by developing and acquiring quality properties and delivering long-term value to our unitholders.

With this, let’s now move to Q&A, please.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment, while the question queue assembles. The first question is from the line of Kunal Tayal from Bank of America. Please go ahead.

Kunal Tayal — Bank of America — Analyst

Sure. Thank you. Hi, Vikaash. Vikaash, my first question is around leasing intensity for…

Operator

Kunal, your line has been unmuted. Please proceed with your question.

Kunal Tayal — Bank of America — Analyst

I hope you can hear me. I’m unmuted.

Operator

Yeah. Now, yeah.

Kunal Tayal — Bank of America — Analyst

Okay, great. Awesome. So, Vikaash, hi. My first question was around the leasing intensity for corporates. Now, it is all — there’s been this news flow around layoffs in the tech sector. And I very well understand that the direct impact on India or the plans for direct layoffs in India could be quite less, and there’s the long-term offshoring trend as well. But I was just wondering if this kind of news flow might be enough for corporates to start thinking about pushing out new lease plans for six to 12 months. But is that something that you have seen, or does it continue to be unchanged versus three, six months back?

And then the second question is around DESH policy. Any clarity as to when that could get done? We’ve seen it get pushed twice over. And I was just thinking about the 97% occupancy of ex of your SEZ spaces. I’m wondering if policy clarity could become a bottleneck to losing next year. Thank you.

Vikaash Khdloya — Chief Executive Officer

Thank you, Kunal. So, just let me take the first question. So, on leasing, there are couple of interesting things that’s happening right now. One, obviously, we are hearing the overall macro commentary globally and a bit in India as well on layoffs. But I would just like to state that employment or recession trends are cyclical, whereas the talent in cost advantage that India has is structural. So, I think that’s a huge advantage we have.

What we have seen in India, specifically on the workforce, there’s comparatively limited and concentrated — this is the — the layoffs are concentrated to a few pockets. The elimination of roles is happening in fewer areas, but companies continue to hire in other strategic areas, including R&D, and we are seeing a lot of that. In general, I would say that we are seeing couple of trends. One, demand continues to be led by global captives. We do think that large deals, 800,000 square feet to 1 million square feet plus, we will see increased caution and hence decision-making may be slow over the next two quarters. But we continue to see robust deal pipeline and momentum, if you also look at our advanced leasing pipeline that we’ve indicated of 850,000 square feet for Q4, you’d see that the smaller and mid-sized requirements we are continuing to see momentum going.

So, we do think that large deals will slow down for the next two quarters, but then pick up in the second half of this calendar year. And the reason is simply that the global corporates right now are evaluating their strategy and they are firming up the decision on overall cost optimization method — measures, given the macro uncertainty. But once they arrive at a decision, I think the India cost advantage will stand in stark contrast and more work will come to India. We are firm believers of that, you’ve seen that in the past. We continue to believe in that. So, I think we are well positioned to continue to focus on the smaller and mid-sized requirements till we see the large — like, momentum on the large requirements.

Interestingly, even within the deals that we are seeing, we are seeing that the geographical mix is expanding. So, besides just U.S. banks and U.S. captives, we are now seeing many European and Australian banks setting up and expanding offices in India. We have done couple of deals in this quarter and the previous quarters. Also — we’re also seeing newer sectors of global captives setting up shops or expanding. For example, apart from banks and financial services, we are now seeing lot of retailers, insurers, and healthcare majors setting up their R&D centers, and lot of those examples as well. I think the key is to be nimble and flexible in the solutions, and we think that we’ll continue to see demand momentum, albeit for the larger deals, we’ll see that pickup only in second half of this calendar year.

So, that’s on the leasing trend. Coming to DESH policy, I think there are two things here. One, the industry as a whole is awaiting clarity on the DESH policy, where the ask simply is to provide flexibility, especially on the start of flow-by-flow de-notification. I think it’s an industrywide issue. Kunal, my personal view is, we may see one or two quarters before there is a final resolution to this. Of course, there has been a lot of advocacy by the industry participants on this.

But in the meantime, the way we have approached this, given it’s an external factor, is in a two or three-pronged strategy. One, we are full up on our occupancy, as you mentioned, 97% excluding the SEZ vacancy. On the — all the new developments we are doing, we have converted a plan that has non-SEZ, including all the developments that are coming up later half of this year. So, we deliver about 1.7 million square feet in the next two quarters. So, all of that is planned as non-SEZ so that we can offer to market. Two, we are exploring and already initiated about 1.3 million square feet of the existing SEZ vacancy, which we are converting to non-SEZ by exploring, moving some of the tenants to — SEZ tenants to other buildings and de-notifying the entire building. So, the 1.3 million square feet is in process under that rule. And then finally, obviously, the advocacy efforts continue.

Given that we have more supply coming up in terms of new product and given also that we are focused on pre-commitments on the 6.6 million square feet. We think we’ll be reasonably fine in terms of the leasing momentum for the full year next year. We’ll obviously lay out a guidance next quarter. But initially, the first two quarters, the applicability or announcement of the DESH or SEZ policy may definitely hamper slowdown the starter [Phonetic] SEZ vacancy that we have and the leasabilty of that.

Just in terms of numbers, we have about total — today, we have about 4.8 million square feet vacancy as of December. Of that, 4 million is SEZ. And as I mentioned, 1.3 million of that, we are converting to non-SEZ, which we have ability to under the existing framework and 0.7 million of non-SEZ already. So, yes, it means that, for the next two quarters, there will be a little bit of challenge, given the conversion. But at the same time, given we have a massive under-construction and about-to-be-delivered pipeline, I think we’ll be reasonably better off, compared to the market.

Ritwik Bhattacharjee — Chief Investment Officer

Yeah. Can I just add one small piece to that, Kunal? I think there have been a — we can’t understate sort of the efforts of the advocacy program here, right? I think the ministry and the government, I think, everybody has been really lobbying hard to make sure that this happens. This is a big year for India, right? I mean, at the end of the day, we’ve differentiated. I mean, the markets held up well relative to where China is, and yes, China is opening up. But India has done very well. This is a year that we host the infrastructure, the G20.

There’s a lot of focus from tenants as well, who are clearly looking sort of for non-SEZ space. As we said, the demand for that’s off the chart. And my sense is, thinking sort of a couple of quarters down from now is when you probably see sort of a resolution start to kick in. But we are all focused on it, the government’s aware of that, and I think it’s something that, I think, we will be able to get some clarity on.

Kunal Tayal — Bank of America — Analyst

Sure. Understand that, and it seems like the new addition is very timely. If I can push in the follow-up here, wanted to understand this 1.3 million of conversion. Is that expected to be operationally and financially smooth, or what might that involve?

Vikaash Khdloya — Chief Executive Officer

Yeah. I mean, so Kunal, what we have done is, one of the recent deliveries in Pune, 0.9 million square feet, that gets converted. So, we expect that to happen anytime in the next one month or so. And one of the earlier buildings where we have a legacy IT services-occupied Manyata vacate, that we have kind of also relocated fewer, smaller tenants within other SEZ buildings in Manyata and ensure that the whole building is vacant and available for de-notification under the existing regulations. So, that also we expect to happen in the next two or three months, and we are already in discussions to back-fill the space. So, I think the 1.3 million square feet is very near term.

Kunal Tayal — Bank of America — Analyst

Got that. Okay. Thank you so much.

Vikaash Khdloya — Chief Executive Officer

Thanks, Kunal.

Ritwik Bhattacharjee — Chief Investment Officer

Thanks, Kunal.

Operator

Thank you. The next question is from the line of Puneet from HSBC. Please go ahead.

Puneet Gulati — HSBC Securities — Analyst

Yeah. Thank you so much for the opportunity, and very heartening to see making extra efforts here on converting it to non-SEZ. My question again is on Manyata. So, the 0.36 million square feet, which will be expiring next year, is that also SEZ? And is there any visibility on that getting released?

Vikaash Khdloya — Chief Executive Officer

Yeah, Puneet, sure. So, roughly, next year, we have — of all the vacancies that we have, we — the SEZ component is what you mentioned. About 30% of our expiries in next year is SEZ, overall in the portfolio, and 70% non-SEZ. We expect a large majority of our expiries next year is 0.9 million square feet as per our deck. But in a business of this size, we may always have 100,000 square feet, 200,000 square feet extra. We think a large majority of that is — will be renewed. So, we don’t think extra SEZ space will be added to stock if you — let’s say, if we’re talking in end of March ’24. I think it will be about 100,000 square feet or 200,000 square feet additional SEZ space, which will not be renewed at the end of FY24, as per our estimates as of today.

Puneet Gulati — HSBC Securities — Analyst

Oh, so you’re saying 0.3 million square feet, 0.4 million square feet, you will still be able to renew at least half of it — half of the SEZ space?

Vikaash Khdloya — Chief Executive Officer

Yeah. We think a little higher than that, yes.

Puneet Gulati — HSBC Securities — Analyst

Okay, understood. The second question is on the NDCF for ETV. That seems to be lower on a Q-on-Q basis from INR208 crore to INR172 crore. Anything to highlight there?

Vikaash Khdloya — Chief Executive Officer

Abhishek, would you want to take that?

Abhishek Agrawal — Interim Chief Financial Officer

Hi, Puneet. So, if you look at quarter-on-quarter, the NDCF is lower because — largely because of the fact that during the current quarter, we have received lower security deposit as compared to the previous quarter.

Puneet Gulati — HSBC Securities — Analyst

Okay. So, just the security deposit…

Vikaash Khdloya — Chief Executive Officer

Lastly on just…

Puneet Gulati — HSBC Securities — Analyst

Sorry.

Vikaash Khdloya — Chief Executive Officer

Sorry, Puneet. I just wanted to mention that, in general, we just look at more — while we appreciate quarter thing, but we — in general, we look at it more from a year-to-date or full year, because there will always be some movements in — on security deposits and working capital quarter-to-quarter.

Puneet Gulati — HSBC Securities — Analyst

Understood. That’s helpful. Lastly, on — just on the hotels, from industry commentary, we seem to be hearing that occupancies are much higher. But all your hotels are still sub-50% [Phonetic]. What should we read into that?

Vikaash Khdloya — Chief Executive Officer

Yeah, sure. Puneet, so if I can speak through the slide 34 of our earnings deck, what we have seen is that Hilton at GolfLinks, the occupancy was low this quarter; one, for seasonal reasons and two, because the back to work, given the holiday season, was lower during the month of November/December. But we are seeing pre-pandemic levels, both on ADR and this quarter is looking pretty strong. On Four Seasons, if you may recollect that this was the hotel where we had pretty low ADRs to start with. So what we have done is we have restrategized, we have changed the entire team at the hotel at the operating level, and we have raised the ADRs now to over INR15,000. So, you’ll see a nice uptick in EBITDA, even though the occupancy still remains low at around 31%, but the target is to take it up to 50% in the next two quarters. And Hilton Manyata, in fact, actually is a good success story, because within the first year of operations, it’s throwing a positive EBITDA for a hotel of this scale, 619 keys, and as of today, the occupancy is 50%.

Hilton Garden Inn is doing pretty well. While we have not split occupancy numbers between Hilton Garden Inn and Hilton in our materials, Hilton Garden Inn is doing pretty well. There — the objective there is to hike the ADRs. But Hilton, the larger hotel, which was launched later and the more premium offering, that we are still — the occupancy level’s at about 40% and we’re trying to move the occupancy levels higher there. That’s the segment, which depends on business travel from senior executives. And that’s where in November/December, we saw some amount of slowdown.

Overall, I would say, we are well on track and, in fact, the EBITDA, which we expect to deliver on hotels to be more than double than our underwriting. So, I think our hotel is on good trajectory. We’ll continue to see quarter-on-quarter improvement. Q3 has been slow a little bit for two reasons; one, the holiday season and two, some of the festive season that’s happening and most of the Bangalore hotel — our hotels in Bangalore are more — offer more position to corporate travels and not leisure travel.

Puneet Gulati — HSBC Securities — Analyst

Got it. Understood. That’s very useful. Thank you so much, and all the best.

Vikaash Khdloya — Chief Executive Officer

Thank you, Puneet.

Operator

Thank you. The next question is from the line of Mohit Agrawal from IIFL. Please go ahead.

Mohit Agrawal — IIFL Securities — Analyst

Yeah, thanks. My first question is on the new supply. So, you’ve mentioned that the 0.9 million square feet in Pune, that you’re now getting converted into non-SEZ. So, what is the kind of demand that you’re seeing there? Considering, in earlier calls, you’ve mentioned that Pune has been slow and you’re — you’ve mentioned today that you’re seeing some recovery. So, if you could give some color on that? And also on the 1.7 million square feet that is going to come up in the next six months between M3 and Oxygen?

Vikaash Khdloya — Chief Executive Officer

Sure, Mohit. Thank you. So, on Pune ETZ, we delivered the 0.9 million square feet, which I mentioned earlier, that we are converting to non-SEZ and expect it to be successful — expect it to go through in the next one or two months. So far, what we have seen is that Pune, as a market, is recovering, but the traction is more on the east side through the banks and financial services client base. For West Pune, demand still remains muted, while we have done some deals, but mainly, it is awaiting clarity on DESH bill, although we have seen some early signs of pickup.

What we have done in Pune is we have done two or three leases on the new building, which you mentioned, at about 150,000 square feet. Our pipeline currently is about 400,000 square feet for Pune. 120,000 square feet of that is in advanced discussion and that’s included in the 850,000 square feet overall leasing pipeline for Q4 that we indicated. And most of the inquiries are for non-SEZ. So, of the entire vacancy or vacant data that we have in Pune, half of it is SEZ, and hence, that’s been a marketing challenge.

We have seen existing occupiers expanding. So, we have seen, in the pipeline, some of the European captives to automobile and renewables, we are speaking to them, and that’s included in the pipeline. We’re also seeing some new tech players across healthcare looking at space. And maybe two or three quarters down the lane, while it’s included in the 400,000 square feet pipeline, we have some large Fortune 500 American corporates, who are looking to set up centers in Pune.

I would say that Pune will — is expected to be slow for the next two quarters, awaiting both clarity on DESH bill on the non — on the SEZ side, and the back to office on Pune has been slower than what we have seen overall in our portfolio, as well as in Bangalore and ETV, especially. So, I think we’ll have to just be patient on Pune. We — the good thing about our portfolio, with the scale that we’re operating, is we can play the patient game in markets where there is a muted demand. We think it will come back. But as of now, next one or two quarters, we expect the traction to be similar levels at what we have seen.

Ritwik Bhattacharjee — Chief Investment Officer

Yeah. And I think just on that as well, just one thing. When we build, I mean, our entire strategy of building is building to where we sort of foresee demand in the future, right? I mean, given that it takes three years to put sort of — from putting a shovel in the ground to actually getting a building up and running, I think we never want to be in a situation where we’re caught offside simply — and particularly, in these kinds of volatile markets, where interest rates have been rising, where the cost of construction and everything has been sort of swirling around a bit. We just want to make sure that we have sort of the buildings ready, we are able to sort of — obviously, to put — 900,000 square feet is effectively two buildings, right? I mean — and for us to sort of put that into a market where there is obviously demand from automotive, from renewables, from people looking to do EV, over time, I think we’ll — we feel pretty good about the project and the prospects.

Vikaash Khdloya — Chief Executive Officer

And Mohit, if I can just add, on the 1 million square feet in Manyata that we deliver next quarter, there, we are seeing pretty robust pipeline. So, we have about 400,000 square feet of advanced discussions, which is included in our 850,000 square feet pipeline number. And just to give you a flavor of the occupiers we are talking to, we are talking to an IT infra services occupier. We are talking to a global engineering and consulting occupier there. And we’re looking to convert 400,000 square feet by the time the building is delivered next quarter, in line with our usual target of having 50% of the building pre-committed by the time it’s delivered.

And on Oxygen, which is the 0.7 million square feet tower in Noida, again, Noida, given that most of the buildings are SEZ, this is also an SEZ and being — in the process of being converted, here, we — the delivery comes up sometime in June or July of 2023. We are talking to one Fortune 500 big tech company. We’ll see how it goes. So, that’s in intermediate discussions. But I would reiterate that Bangalore continues to see a lot of strong traction. Pune and Noida, we think it will take a little bit more time to lease up.

Mohit Agrawal — IIFL Securities — Analyst

Sure. And how much time does it take to de-notify from the time you start the process?

Vikaash Khdloya — Chief Executive Officer

Yeah. Usually, it takes about three months. But in some — certain states like Noida, it’s the first time that it’s being done in the state itself. So, that takes a little bit more time for the regulators to kind of — just figure out the processes internally. But typically, in Bangalore, we see it happening in three months.

Mohit Agrawal — IIFL Securities — Analyst

Okay, thanks. And my second question is on the rental growth. So, in an inflationary environment, one would want to believe that you’d be able to push higher rentals to account for the overall inflation, higher interest rates. So, I wanted to get your thoughts. Have you been able to do that, or if the market force is not allowing that?

Vikaash Khdloya — Chief Executive Officer

Yeah. So, Mohit, the short answer to that is, yes. We are seeing rental growth. In fact, [Indecipherable] reports earlier this month had mentioned that Bangalore has seen a year-on-year increase of 11% in rent just for the market overall. We continue to lease at premium to the rents that CBRE expects for our properties this quarter. I mentioned overall, not just for Bangalore. Overall — for our overall leasing, we have leased at 5% premium to market trend and, obviously, the spreads are much higher if you take into account the renewals and the increased rents.

So, we are seeing it, and you’re absolutely right. In an inflationary environment, we will — especially with interest cost rising, we will see the replacement values of the properties go up, which will mean two things. One, it will mean that supply declined, and we’ve already seen that last year. Announced supply, which the IPCs expected to be delivered versus what was actually delivered was lower. We continue to believe that supply will be constrained. And two, we’ll also see rental growth. It’s — already we are seeing that in Bangalore. Many of our discussions in Bangalore are not centered around rent. It’s just centered around solutions, timing, and flexibility to the occupiers, and quality and wellness. And we think over time, that will flow through to Noida, Pune as well.

So, yes, rental inflation is likely. We are already seeing that in Bangalore. And we are trying to see how best we can convert that into NOI growth on our portfolio. If you see our in-place rents versus market rent and the gap, over the last four to six quarters, we have narrowed that gap considerably. So, that’s obviously because of the renewals happening at mark-to-market and higher spreads; plus, as we see better back to work ramp-up, which you’ve already seen a good uptick this quarter, we’ll also start seeing even healthier rental growth, not just in Bangalore, but in other cities over the next two, three quarters. And that will also mean that the portfolio will start catching up to those newer rents as leases expire or come up for renewal or new leases as we commit [Phonetic]. So, yes, rental inflation is something we are seeing, and we believe it’ll be demonstrated in the leasing as we move forward.

Mohit Agrawal — IIFL Securities — Analyst

Great. Thanks. That’s all from me.

Operator

Thank you. The next question is from the line of Kunal Lakhani from CLSA. Please go ahead.

Kunal Lakhani — CLSA — Analyst

Yeah, hi good evening. Vikaash, you mentioned that your physical attendance has been ramping-up and you’re at 46% last week. Just wanted to understand, in your discussion with your occupiers, say, at what level of physical attendance, do you think occupiers will — will be compelled to look at new office options?

Vikaash Khdloya — Chief Executive Officer

Sure, Kunal. So let me give a little bit flavor. We have a slide in the deck which I can point to, but let me give a flavor of what’s happening in the portfolio, but it’s pretty interesting, the trends that we’re seeing, it’s not similar for all the cities, for all the kind of occupiers, as well as for all properties.

If you see, Slide 13 [Phonetic], let me walk you through that and what we believe would be a trigger point. So overall, we saw that the physical attendance was 46% for our properties earlier this — in the month in January. Mumbai is already at pre-pandemic levels of 75%. Bangalore has shown a nice uptick and it’s now at around 45%. In fact ETV is already at 60% and that’s why we see a lot of pre-commitment activity and pipeline at ETV. ETV, again, if you recollect has the highest — has a very high proportion of global captives. Pune and Noida back to work has been slow. It’s around 40% or slightly lower and that’s simply because the IT services back to work has been slower, overall compared to the captives and compared to the big tech.

We believe that at around 50%, 55% occupiers will be compelled to just look at their space strategies and to firm up the decisions both on medium-term, as well as on long-term. We’re already seeing that happening for banks, healthcare, and retail captives. We think that will also translate and trickle down to the big tech, the product tech companies that we speak of. And I think the IT services companies will be last to come in. I think the back to work is slower in IT services, although we have seen very positive commentary by the CEOs who are pushing — trying to push and nudge people back to work. So, I think at 50%, 55%, we’ll see a trigger.

We are already seeing that in certain segments. If you see, we have renewed — early renewed with a healthy uptick, although we have contracted for much later timeline with a global retail captive and leased out additional space to them in Manyata, the banks continue to feature in our pipeline. And I think, a 50%, 55% overall physical attendance will require the companies to look at their plans. Because, I think, it will never be 100%. It was never 100% pre-pandemic. I think, somewhere around 70%, 75% is what is being expected and that is the level at which they will need to start factoring in more space.

So I think 55%. We have not seen conversations around desk sharing. I think that’s not — that’s the conversation that’s not happening. There will be flexibility. So there will be certain amount of work-from-home. But majority of the time, the business leaders want people to back to work and there’s a lot of requirement of space to be remodeled that the discussions happening both on creating more social spaces and on larger per person seat — seat space.

Kunal Lakhani — CLSA — Analyst

Sure, sure, that’s helpful. So 50%, 55% going by the traction that you’re seeing, say, about one or two quarters, we should be there?

Vikaash Khdloya — Chief Executive Officer

Yes. We think so too as well, Kunal. And that’s why we said, the second half of this year, we believe that we’ll see traction on the larger leases and by that time global corporates will also firm up their — both their long terms plans. So because if they come to India, they have to think of a five year or 10 year commitment, if they are offshoring an R&D process or any other center. And I think, by that time, we will also be able to get internal approvals on the capex requirements to setup or offshore more to India.

Kunal Lakhani — CLSA — Analyst

Sure, sure, that’s helpful. My second question was on again the financials. So, on a nine month basis, right, YTD, we have seen a 12% growth in the NOI, but on NDCF basis, we’ve seen a decline. And understandably so, because of the conversion of the Zero Coupon Bond and so on and so forth, but like going into next year, should we expect or can we expect NOI growth to also reflect into NDCF growth? Or there could be a disconnect there?

Vikaash Khdloya — Chief Executive Officer

Yeah. So, Kunal, while I’ll request my colleague Abhishek to answer, but in general, I think we will not — we will refrain from commenting on next year. But in general, given the leasing momentum for next year, we are targeting to deliver double digit NOI growth and there are couple of factors which will determine the DPU trajectory, interest rate and DESH Bill being two of them, but certainly again, we’ll give more flavor in the coming quarter when we layout our annual guidance.

But, Abhishek, do you want to speak through what you’re seeing for FY ’23 this year?

Abhishek Agrawal — Interim Chief Financial Officer

Yeah. So Kunal, actually what is happening is for this YTD basis for this current year, it is also the Zero Coupon refinancing and also the interest rates on the loan with — interest cost on the loan for the deliveries that we have done during this year. That has also come and hit the NDCF. Going forward, you see all this leasing that has happened during the current year, those will definitely go to the NOI and will flow through because of our efficient flow through from NOI to NDCF. However, the interest rates have risen, we will have to resize [Phonetic] certain loan.

So all of those factors will also play into it and we will give a guidance, the way we are giving every year.

Vikaash Khdloya — Chief Executive Officer

Yeah, let me jump in here for a quick second if you don’t mind, Abhishek. So Kunal, I think — I mean if you just layout sort of the picture right now, right, I think for the longest time, we’ve actually sort of hit guidance in the past. We are very cautious about this, right? You have to understand that our distribution flow through unfortunately is also dependent on absolute interest rate environment that isn’t really conducive to sort of financing, right? I mean if you think about global reach, if you think about people who are financing at 2%, 3%, historically they have obviously moved into a sort of a volatile financing scenario where now effectively they go from 2% to 4%, that’s sort of doubling their interest cost and their cost of capital.

We move from, call it, 7% to somewhere in the 8% and we’re still sort of the best creditor in the industry. I think overall, what we tried to make sure that we don’t sort of over promise something on a distribution basis that then it’s very hard for us to sit there and manage, right? At the end of the day, we build sort of growth through the scale that we have sort of in the portfolio we try to buy sort of [Technical Issues] sort of growth from outside.

And then to the extent we can manage sort of the drop downs efficiently, we do. And, I think in this kind of an environment, I think the biggest risk — we’ve already sort of managed the interest rate risk, right, if you will, it’s baked into our stock. It’s baked into our ability to still get sort of the financing that we do and we’re getting some very, very sort of attractive offers as well.

So, I think with that in mind, we just got on a sort of overstep and tell you that we’re going to be able to deliver some kind of growth which clearly in a volatile environment would be a bit imprudent.

Abhishek Agrawal — Interim Chief Financial Officer

Yeah. And if I can just conclude that, Kunal, we are really as management focused on NOI growth, because, I think NOI growth in the long-term will deliver value and will translate into flow through into the NDCF or distributions. For example, if you’re seeing newer buildings being built and delivered, of course, as — till the time the building gets stabilized, let’s say, one year, right, the interest costs will be a drag to the NDCF. But if you look at it from a three year horizon from a unit holder perspective, what we need to be doing is keep delivering newer building and start trying to stabilize them as soon as possible.

So, NOI growth is our focus. Given that 100% of our debt is coupon-bearing. They will be efficient flow through as and when the building start getting stabilized and the rent start flowing in. And given the lever that we have both on mark-to-market, lease up which we have already seen a rebound on the same store as well as escalation to the new deliveries and their revenues, we think, we are well-placed to target a double digit NOI growth in this coming year.

Kunal Lakhani — CLSA — Analyst

Sure. All right, thanks.

Operator

Thank you.

Abhishek Agrawal — Interim Chief Financial Officer

Thank you, Kunal.

Operator

The next question is from the line of Karan Khanna from Ambit Capital. Please go ahead.

Karan Khanna — Ambit Capital — Analyst

Hi, thanks for the opportunity. Just a couple of clarifications. So, on the mark-to-market side, while Bangalore opportunity remains strong, Mumbai and Pune have seen a downward mark-to-market on the expiries in FY ’24 to FY ’26. So can you help elaborate this further as in case of FIFC which is in BKC, we are seeing new leasing been done in excess of INR300 per square feet, while the mark-to-market report is only INR275?

Vikaash Khdloya — Chief Executive Officer

Yeah. So, you know, Karan, just to answer that, I think the market trend assessment is a third party assessment of CBRE and they have kind of been more conservative on Pune given that Pune market has been sluggish. Some of the leases that come up for expiry and renewal next year in Pune as well as in Mumbai — in Mumbai, it’s pretty typical, but in Pune as well given the contracted escalations that these are eight, 10, 12 year leases. There may be a slight mark-to-market downward, but I think, that’s not material. I think, it’s a judgment thing whether it’s a INR48, INR50 [Phonetic] or INR52 market in Pune. So, we are not overly — we’re not overly worried about that. In FIFC, of course, we are trying to see if we can push rents higher. Given Mumbai contributes a small portion I think and the fact that this building has a cona [Phonetic], I think the values have been conservative, but we have consistently tried to lease at above — about INR285 to INR290 per square feet or higher.

Karan Khanna — Ambit Capital — Analyst

Sure, and secondly, on your — that while you did touch upon your hotel portfolio, while we have seen the physical occupancy increasing, the hotel occupancies have stagnated or perhaps declining in the last quarter. So just wanted to understand at what office park level of physical occupancy do you see the hotels starting to benefit as well?

Vikaash Khdloya — Chief Executive Officer

Yes, so, honestly Kiran — Karan, there are couple of things here. I don’t — while the hotel occupancy Q3 has declined, but let me just kind of break down this into two or three pieces, I mentioned it earlier during the call. So the GolfLinks hotel occupancy was obviously linked to two factors, one, the GolfLinks back to work in November-December, given holiday season and given all our hotels cater to corporate — corporate clients, there’s no leisure travel. There is very minimal leisure travel involved. So it’s all corporate and hence Q3 generally has been a slower quarter comparatively, still much better than the pandemic period, right?

So GolfLinks maybe has been slightly impacted, but at about 40%, 50% levels back to work, we think the hotel can reach pre-pandemic occupancy levels of 70%, 72%. Coming to Four Seasons, as I said, here we are focused on repositioning the hotel given that it contributes negligibly to our NOI. And we have raised the ADR substantially from earlier what we were achieving to the standard of Four Seasons Hotel should be — should be — should be charging. So, that’s second.

And third, on Manyata Hilton, given that’s a large hotel, still stabilizing. And I mentioned the larger Hilton format was launched later, and the senior-level business travel is still picking-up. We saw occupancy levels of 49%, which I think for a 619 key hotel within a first year of its launch is still fantastic. So overall, I would say hotels will see a consistent overall growth trajectory. For example, if I were to give you a forward-looking flavor, there are city wide events such as G20, Aeroshow, sector conference, which are expected to generate additional demand, especially in Embassy Manyata Hilton in Q4. So we think, hotels will continue to stabilize and continue to deliver incremental NOI, quarter-on-quarter. We are well-placed for that.

Karan Khanna — Ambit Capital — Analyst

Sure, and just lastly, if you could just give us some ballpark understanding in terms of having seen the entire commercial real-estate space over the last couple of decades, by when do you expect the occupancies to perhaps touch across your pre-COVID levels of 95% and if you think that the same is achievable even without the — without the SEZ benefits?

Vikaash Khdloya — Chief Executive Officer

Yeah, so that’s very interesting question, Karan. Let me put it this way. We are looking by the end of this year to go back to the early-to-mid 90s, so we have a path towards that. If you see the expiry profile next year, of 0.9 million square feet and even factoring for additional vacancies or expiries that usually come up as normal part of business, we expect a large proportion of next year’s expiries to be renewed, plus we have seen uptick in positive momentum in net leasing, given the large occupier who had legacy leases who was vacating in staggered basis, that’s — that ended in September. We think, we have a path to occupancy levels of early 90s in the next two to three quarters on a same-store basis. Again, I would like to impress, what I mentioned earlier that we would like to emphasize and focus on NOI growth, simply because we think — we think leasing let’s say at a Manyata or TechVillage and achieving premium rents, at a faster velocity contributes higher to NOI growth, than let’s say at a Pune or Noida.

It’s not to say that the efforts are not there in Pune, Noida. So I think NOI growth is purely what we would like to guide you and to request you to focus on. Physical occupancy levels can be misleading, because we would not do deals just for the optics purposes, we are very selective on occupier profile, who will continue to grow. So as I mentioned earlier, one, we have path towards early-to-mid 90s in the next three to four quarters, on a same-store basis. We’ve already seen an uptick. And if you see our guidance on the leasing pipeline 850,000 square feet, roughly half of that is fresh leasing and half of that is under — under-construction pipeline, and if you see our exit profile for Q4, it’s negligible. So just if you do the math. I mean, we will be close to 90% on a same-store basis by next quarter itself. Obviously, it all depends on if we can execute and get the leases signed.

And on the NOI front, as I mentioned already earlier that we are targeting a healthy double-digit NOI growth next year and that’s our core focus.

Karan Khanna — Ambit Capital — Analyst

Great. That’s it from my side. Thank you and all the best.

Vikaash Khdloya — Chief Executive Officer

Thank you, Karan

Operator

Thank you. The next question is from the line of Ravi Agarwal from Mirae Asset Investment Managers. Please go-ahead.

Ravi Agarwal — Mirae Asset Investment Managers — Analyst

Thank you for the opportunity. My question is largely a clarification. On the loan — the CF loan taken by the Embassy Property Development. So, I just wanted to — and there was a delay in the servicing of repayment citing some regulatory issues. So, I would just like to have an update on the status of that? And is there — I would like to also confirm that is there any liquidity issues or delays in repayment still going on? Thank you.

Vikaash Khdloya — Chief Executive Officer

Ravi hi, thank you for the question. Let me take this and Ritwik or Abhishek feel free to add-in. So couple of things, one, it’s more appropriate for this question to be directed to the Embassy Sponsor. As a principle, we don’t want to comment on-market speculation and news, especially around our sponsor. As we have highlighted in our Q3 results and as Abhishek spoke, our operational and financial position remains strong. On-track to deliver on our guidance and we have AAA stable rating both from CRISIL and ICRA on our balance sheet. We have very conservative leverage, best-in class interest rate and negligible debt maturities this fiscal. We have access to wide debt — investor debt pool across mutual funds, insurers, FDIs, banks, NBFCs, corporate treasuries. And we don’t see any impact on the REIT itself. And we don’t want to comment on market speculation.

Ravi Agarwal — Mirae Asset Investment Managers — Analyst

Sure. Thank you. Good luck.

Operator

Thank you, the next question is from the line of Arun Kumar from Unifi Capital. Please go-ahead.

Arun Kumar — Unifi Capital Private Ltd. — Analyst

Hello. Thanks for the opportunity provided and hearty congratulations on the leasing traction. Two questions. One, on an average over the last three years, the NOI margin has been, on an average around 85%, but in this financial year over the last three quarters, it is somewhere between 81% to 82%, and as it has been explained in the presentation, it’s due to the product mix between the commercial office space and the hotels. So is the new 81% to 82%, the new range or is there any scope for improvement in the NOI margin, sir?

Vikaash Khdloya — Chief Executive Officer

Yeah, thank you Arun, and why don’t I ask my colleague Abhishek to take this question.

Abhishek Agrawal — Interim Chief Financial Officer

Ya Arun. So thank you for the question. Actually, you have picked it right. So earlier, the NOI margin was around 85%, 86%. Now, you see that the NOI margin has gone down to 81%, this is because of the product mix and what has happened is during the current quarter or the just previous quarter, the NOI — the revenue from office has not increased so much, but the revenue from hotel business has increased a lot. So the product — the mix has changed. But having said that, while we have done so many leasings during the current nine months, the revenue from that will start flowing in from the next quarter or the quarter next, so the mix can again go back to almost a similar range. So you can expect anything between 81% to 85% to come back.

Vikaash Khdloya — Chief Executive Officer

Yeah but Arun, can I just add here and there is a little bit more flavor on the segment mix and segment-wise margins in page number 13 of our supplemental data book, but Arun the way we look at it is we will have more hotels come up, and as hotel revenues increase with ETV hotel and all coming up, this — the overall — the overall ratio — consolidated ratio NOI margin will be misleading. That’s why we’ve segregated for office and other segment. Office, we consistently had been at around 86%, if you see the year-on-year and the quarter-on-quarter trend in that Slide 13 of the supplemental data book. So, I think — I think we’ll have to just factor for the segment mix and see the segregated ratios. Office remains best-in class, hotel margins obviously the nature of the business are different than office.

Arun Kumar — Unifi Capital Private Ltd. — Analyst

Got it, sir. And my second question, with the 6.6 million square feet that we are planning to add in ROFO assets. And do we need additional equity to fund them? And we have also approved raising of debt by another INR5,000 crores. So what would be the — what is the level of leverage that you’d be comfortable with? And does AAA rating warrant you to maintain some specific level of leverage?

Ritwik Bhattacharjee — Chief Investment Officer

Yeah, let me — it’s Ritwik, Arun. Let me take that. Firstly I think — I mean, we’ve got to break down sort of the square footage, Right. So you got 616 of development that’s in-house. That we typically fund sort of through debt, right, that’s either sort of, you could think about bonds at the REIT level, term loans that are the [Phonetic] at the SPV. So and that’s something that we don’t think about sort of any other source of fund — financing beyond sort of just what we’ve laid out in our supplemental deck and we’re very comfortable with that.

Now, the acquisition is something that’s a little different, right? I mean that’s obviously a function of the financial markets where it could be debt — a mix of debt, mix of equity depending on sort of market conditions. I mean, take ETV for example, right, when we did Embassy TechVillage that we did effectively when it was — we did do a placement for that. Market conditions were obviously sort of also played a big role in the way we look to finance that transaction.

So again, but then typically what we don’t do is for the in-house construction and development, we wouldn’t be looking to go out there and raise equity in these kinds of market for that.

Vikaash Khdloya — Chief Executive Officer

Yeah, and that’s absolutely right, Ritwik. And Arun, just to add to what Ritwik said, the INR5,100 crores that you referred to are in terms of approval for that rate. That — that’s just a provision. We are not — it’s not the intent that we go head and raise it right now. We don’t have a use of proceeds. We’ve never raised that unless we have a clear sight of where we are using it. That’s an enabling resolution because they have maturities that are coming up.

So let me break down the thought process on INR5,100 crores. INR1000 crores of that today as we speak, we have refinanced some of the existing loans close to INR950 crores at sub 8% rate. So we have used INR1,000 crores of that — of that limit to refinance existing debt again to manage and optimize on interest cost. That’s one.

The balance INR4,100 crores is towards an enabling resolution, as we have in the second half starting October and February, as we’ve included in the deck — that in the deck, we have expiries coming off of existing bonds and we can — we have the data in our presentation on Slide number 37. So it’s an enabling resolution to ensure that we have flexibility to refi the existing debt. So there is no intent to borrow additionally. The only borrowing, as Ritwik mentioned, we will do is for new construction and if and when we go ahead with an acquisition.

Again, if we were to do the entire 6.6 million square feet development, even assuming that the value of the buildings does not increase which means the denominator for the leverage ratio, when we calculate does not increase will still not reach the 30% leverage and we as management are very comfortable with debt levels of around 30% net debt to GAV.

On the acquisition front as Ritwik indicated, the size of the acquisition is expected to be less than 4% of the GAV of the company. So the acquisition is a pretty — it’s not — it’s strategic if — as we’re looking at it, if we were to negotiate and announce, but it is less than INR2000 crores. And it will typically be funded by a mix of debt and equity. So overall, I would say that we’re not looking at breaching the 30% margin — 30% figure on the leverage that we as management are comfortable. However, in the medium term, if there is a transformative acquisition, like an ETV, we are comfortable at around 35% overall. We would not like to breach 35% in the next three to five years.

Arun Kumar — Unifi Capital Private Ltd. — Analyst

And, I think to your last point on the AAA rating that it required…

Vikaash Khdloya — Chief Executive Officer

Yeah, they are typical covenants and at being able to access a INR1,000 crore debt at sub 8% in today’s market, just speaks to the fact how we’ve managed and maintained our balance sheet. Yes, they are couple of — they’re covenants typical to AAA rating, Arun, including EBITDA coverage and we are very comfortable with those leverage ratios, including for factoring for any potential organic or inorganic growth. We always factor what it means to our debt covenants when we undertake additional growth.

Arun Kumar — Unifi Capital Private Ltd. — Analyst

Got it, sir. One final question, we are targeting a double digit NOI growth next year. So, would the same double digit target into a DPU as well?

Vikaash Khdloya — Chief Executive Officer

So, You know, Arun, again, we didn’t want to give a guidance or an indication for next year. What we were alluding to is that given the levers that we have, we should be back to the double digit, we’ve always stated that mid-teen is something — NOI growth is something we would like to target as a business, given the four levers that we have of mark-to-market, lease up, escalations, and new delivery.

We would not want to layout a guidance on NOI and DPU today. We will come out with a guidance next quarter. But again I would want to impress to — and request everybody on the call that our focus is on NOI growth, simply because NOI growth will eventually translate and flow through into distributions. The DESH Bill, as well as the rising interest rate will have a bearing on the distributions, but we are looking at growth and we think if we can deliver the growth at those 24% yield on the construction having a fantastic spread given our cost of financing is at around eight handle and the yields we are doing on new development in ’24, we think, we’ll be able to deliver DPU growth in the medium-term if we can focus on NOI and grow that.

So, I will leave it at that. But, yes, our focus is to enhance the overall value. We’re not overly focused on distributions. Distributions will come in and it will flow through. We are focused — we’re also not focused on occupancy, we are focused on NOI growth.

Arun Kumar — Unifi Capital Private Ltd. — Analyst

Thank you, sir. Thank you. Thanks, Ritwik.

Operator

Thank you. Ladies and gentlemen, due to time constraint we’ll take one last question which is from the line of Samar Sarda from Axis Capital. Please go ahead.

Samar Sarda — Axis Capital — Analyst

Yeah, thanks. Good evening. I had a follow up question with respect to the SEZ and then the de-notification. While we’ve seen a lot of landlords who like denotified vacant lands of the residual cases and then a couple of instances also under construction buildings. If you could help us if there is any precedent of the number of months, like how much time does it take? Or any other buildings which are like ready occupied and then like vacant, which have been denotified in the past?

Vikaash Khdloya — Chief Executive Officer

Yes. So, Samar, thank you for the question. Typically, assuming that you have that the building complies with the requirements of denotification with specifically that entire building needs to be vacant and also that the support infrastructure needs to be segregated, it typically takes around three months in states which have done it previously. In Noida, we have experienced that it’s taking longer, but it’s very typical in Bangalore to get denotified within three months of application.

Abhishek, would you want to add something?

Abhishek Agrawal — Interim Chief Financial Officer

Yeah. There are other conditions also like contiguity of…

Vikaash Khdloya — Chief Executive Officer

Yeah.

Abhishek Agrawal — Interim Chief Financial Officer

All of those conditions are need to be met for these timelines to be basically adhered to.

Vikaash Khdloya — Chief Executive Officer

Yeah.

Samar Sarda — Axis Capital — Analyst

Yeah, but we have presidencies of that happening in Karnataka?

Vikaash Khdloya — Chief Executive Officer

Yeah. I mean, this is — we have done the denotification, not post-acquisition, but pre–acquisition. ETV has happened couple of times. And similarly monetize well. So there is — I mean denotification of a full building block and denotification is a procedural routine business as usual, we would say. The challenge we are facing today — the first question by Kunal on the DESH policies that what do we do of buildings, which are half vacant and half occupied on a SEZ. The law today does not provide for denotification of strata or floor by floor and that’s the challenge.

So if the entire building is vacant and we compile with other conditions of contiguity and infrastructure segregation from non-SEZ, it’s pretty procedural. Three months is a fair timeline and it’d been done in the past.

Samar Sarda — Axis Capital — Analyst

Yeah which we believe they are trying to change in the digital with respect to the floats?

Vikaash Khdloya — Chief Executive Officer

Absolutely, you’re right. So the request from the industry as a whole is that we — the government allows floor by floor and also does it in a single window clearance on a declaration — self-declaration basis. So that they are — there is — we can just speed up the conversion process and the verification happens post facto. So that even that three months, we can kind of bring it down to seven days, so that is the request from the industry.

Just to give you context of SEZ space, India today would have about 180 million square feet of SEZ spaces of which around 30 million square feet is vacant. And I’m talking about Grade A spaces. Roughly. This is based on some published reports and that’s why, this is a critical component of regulation that needs to be addressed — that needs to be addressed and that’s where the industry has been in advocacy with the government.

Samar Sarda — Axis Capital — Analyst

And just a small follow-up on this, again, a little more operationally, like the DESH bill might come in over the next three months or over the next six months? It might like because it is a government-driven procedure. We have seen some other landlord peers who have been leasing space in their SEZ, because most of SEZ are campus style developments and for expandability options, other things. Obviously, it’s not on 100 out of 100 the activity might probably be 20, 25 out of 100. Are you guys also like still evaluating options where tenants do come here or that’s a complete no no until and unless the digital is clear.

Vikaash Khdloya — Chief Executive Officer

Yeah, so Karan — Samar, that’s a good question. So, let me break it down into two things; one, what we’ve done and what’s happening in the posturing to where India is headed. In general, it would be fair to say that given the tax holidays have — tax holiday have been phased out on SEZ. The demand has moved disproportionately to non-SEZ.

That’s also — that also reflects the fact that Indian occupiers and office demand has moved up the value chain, right? Because the larger occupiers are in India not to save on rent cost, where in India to access talent at scale. So we have seen global captives. They’re just not bothered about the tax incentives. They want non-SEZ spaces, because they want flexibility of operations and flexibility to grow their business. SEZ, obviously, there are bunch of conditions that need to be complied with.

So India office in general, has moved towards that, which is a great sign because it shows that the market is maturing. And the propensity to pay rents, higher rents have increased by the occupiers. We are moving more and more towards global captive and big tech, whereas in the past, IT services would be — would have been a large component of the new demand. So that’s one.

So, directionally India has moved there. I would say, for demand that we see in the market and pipeline, it is safe to say over 90% of that would be non-SEZ inquiries and demand today. Having said that, we do see SEZ demand, for example, year-to-date, we have done 2 million square feet of SEZ leasing, both pre-leases where we did a large prelease with a banking occupier in Manyata that was SEZ, large renewal, SEZ renewal.

So we are seeing SEZ renewals and new leasing. Even in Q3 alone, we did about 230,000 square feet of SEZ leasing. These are huge, mostly existing occupiers who are expanding their existing SEZ benefits going on, but we have seen any new global captive or large big tech taking up space or growing, it’s all non-SEZ.

So yes, we are being opportunistic where we can do SEZ leasing. We have done that in Q3, as well as year-to-date, 2 million square feet including precommitments on new buildings. But I think that is the more usual inquiries we get is of non-SEZs.

Samar, does that help?

Operator

Thank you. He is out of the queue now. I will now hand it over to Mr. Abhishek Agarwal for closing comments.

Abhishek Agarwal — Head – Investor Relations and Communications

Thank you so much for joining us on today’s call, and for your great questions. Most of the data points covered today can be found on our website and in the published materials. And we are always happy to engage further if any additional classification are required. Thanks again.

Vikaash Khdloya — Chief Executive Officer

Thank you. Thank you, everyone. Have a good evening.

Operator

[Operator Closing Remarks]