We've distributed Rs 4,800 cr over past 10 quarters: Embassy REIT Dy CEO

In a Q&A, Vikaash Khdloya talks about how demand is reviving in the office space segment as it comes out of the pandemic hit

Embassy REIT on Friday said that its net operating income grew 30 per cent to Rs 624 crore in the quarter ended September on a year on year basis. Revenue from operations shot up 36 per cent to Rs 7,352 crore in Q2 year on year. As multiple sectors indicate a recovery from the second wave, Embassy REIT deputy CEO and COO Vikaash Khdloya in an interview with Deepsekhar Choudhury talks about how a demand revival is happening for office spaces and the health of the business as it comes out of the pandemic hit.

How is the recovery from the second wave shaping up?

The leasing enquiries and site visits have increased 65 per cent this quarter compared to last quarter. Bangalore is the number one city in the Indian office market currently and it's expected to drive the leasing rebound in India. We have a leasing pipeline of five lakh square feet of new leases.

The majority of the occupiers whom we serve have not taken up space for the last six quarters. And now there is a ramp up of offices -- physical occupancy has already increased to 10 per cent, and based on our conversations with occupiers post-Diwali they're targeting 20 per cent physical occupancy and gradually move it up till March next year. Most have completed 100 per cent of the first dose and a major major chunk of the second dose of vaccination of their employees.

Your operating margin is at 85 per cent. Where does this figure go from here?

This business is all about scale. Today, we are at 43 million square feet and one of our assets, Embassy Manyata, is 14 million square feet in size. This scale gives us a lot of advantages such as several of our occupiers own space in more than one of our properties. Also, we run a pretty efficient business and operations. I think we want to target to continue to be at 85 per cent of operating margin. We will try and improve it if we can without compromising on the quality that we offer.

What is the update on your construction costs? Has the Evergrande episode impacted you?

For construction, there has been a slight spike in material cost of the steel, cement and labour. I would not say because of the China impact, but in general, due to pandemic restrictions and other factors. We have been able to keep our costs within the budgets because we have a robust procurement strategy and long term relationship with vendors.

What it also means is that there are barriers for others in the market, who are not able to keep the construction costs at similar levels as they do not have the advantage of scale like us. And that will mean either an increase in cost for the other landlords or it will slow down the supply, both of which will benefit us. But, we have not seen a material increase in our costs although there has been a two to four per cent increase in general since the pandemic struck last year.

Your distribution of income to unitholders is quite high. Does that mean growth prospects are muted?

We have distributed a total of Rs 4,800 crore over the last 10 quarters since we got listed. This is more than what all the Nifty realty companies put together have given as dividend in this period.  Now, coming to the growth side, we have given 32 per cent of total return to unitholders since we got listed, based on the 30th September stock price. Moreover, there has been a 13 per cent capital appreciation to the price at which we got listed.

Now, the reason we continue to distribute these monies, and our distribution payout ratio is 100 per cent, is because we cater to a large segment of retail investors. Our retail investor base has grown three times since we got listed.

Our leverage or gearing is just 24 per cent at present, one of the lowest in the real estate sector if not the lowest. So, whenever there's an acquisition or inorganic growth opportunity, we look to finance it both through new equity issuance, as well as debt. This is how we did the Embassy TechVillage transaction a year back -- through 50 per cent debt and 50 per cent equity.

Are you looking at more refinancing to service borrowings given that money is cheap right now, but policy might turn hawkish soon?

That is exactly why we refinanced a Rs 4,600 crore debt recently. It was not due until next year, but we made a huge saving of 300 basis points by raising debt at a rate of 6.5 per cent to pay off the earlier debt which was at 9.4 per cent.

There's a lot of positive momentum because now insurers have been allowed to invest in REIT debt. Also, a new notification has allowed FPIs to invest in REIT debt. As a result, the pool where we can raise credit from has increased from banks and mutual funds.

Post this refinancing, we don't have any debt that will mature for the next two years. And the average cost of the outstanding Rs 11,173 crore debt is now 6.8 per cent. We have locked in about 65 per cent of this outstanding amount at fixed interest rates for the next four years, given that the rates are expected to increase.

I think we have really optimised it. But of course, we'll continue to see if we can do it further.

Blackstone sold off Rs 2,000 crore of Embassy REIT units a month or so back. How should a unitholder perceive it?

Honestly, we would not want to comment on our sponsor’s plans because we are an independent and separate entity.

But even so, Blackstone still owns 32 per cent which is quite a significant stake. And Blackstone has always publicly stated that it will exit in a phased and controlled manner, given they have their own fiduciary responsibility to their limited partners and shareholders.

So, they may exit in the long term eventually, but I would imagine that Blackstone likes the way the business has been resilient over the last six quarters.Also, their sell down increases our public float and helps diversify the investor base. The public float was at 30 per cent during our IPO in April 2019, but today it is at 56 per cent which is great.