embassy office parks reit Management discussions
MANAGEMENT DISCUSSION AND ANALYSIS
The discussion and analysis of our financial condition and results of operations that follow are based on Audited Consolidated Financial Statements of Embassy REIT and the REIT assets/SPVs (together known as the Group) for the year ended March 31, 2023 (FY23) prepared in accordance with Indian Accounting Standards (Ind AS) and applicable REIT regulations, which include the comparative numbers for the year ended March 31, 2022 (FY22). The financial information included herein is being presented to provide a general overview of the Groups performance for the financial year ended March 31, 2023 as compared against the financial year ended March 31, 2022 based on certain key financial metrics for general information purposes only and does not purport to present a comprehensive representation of the financial performance of the Group for these periods.
Executive Overview
Embassy REIT is Indias first publicly listed REIT. We own, operate, and invest in high-quality real estate and related assets that generate rental income from our occupiers. We generate 47% of gross rents from Fortune 500 corporations. As a REIT, we are mandated by SEBI to pay atleast 90% of our Net Distributable Cash Flows as distributions to our Unitholders.
Embassy REIT comprises 34.3 msf of completed leasable area and 7.9 msf of under construction area. With the future potential development area of another 2.8 msf the total leasable area adds up to 45.0 msf as on March 31, 2023. The commercial office portfolio is spread across nine infrastructure like office parks (42.7 msf) and four prime city-center office buildings (2.3 msf) in Bengaluru, Mumbai, Pune and the National Capital Region (NCR).
The portfolio is home to 230 blue chip corporate occupiers and comprises 96 buildings with strategic amenities, including four completed hotels, two under-construction hotels, and a 100 MW solar park that supplies renewable energy to park occupiers.
Our competitive strengths include the following:
• Best-in-class office properties that are complemented by high-quality infrastructure
• Diversified, high-quality, multinational occupier base
• Simple business with embedded growth levers
• Assets strategically located in the top-performing markets with high barriers to entry
• Highly experienced management team
• Backing by renowned sponsors who bring global expertise and local knowledge to our operations
• Our focus on sustainability while executing our business
Our strategy
• Maximise NOI, distribution and NAV per unit through leasing, on-campus developments and acquisitions
• Proactive asset management to drive value with strong corporate governance
Leasing & Lease Management
- Grow NOI by leasing vacant spaces
- Manage lease expiries and capture mark-to- market upside
- Experienced on-ground teams & hands-on approach to leasing
- Best-in-class occupier engagement
On-campus Development
- Deliver 10.7 msf1" on-campus development
- Proactive pre-leasing to de-risk new development
- Select infrastructure ancillary projects (hotels, flyovers etc.) to increase entry barriers
- Provide total business ecosystem
Acquisitions
- Capitalise on fragmented office market and undertake value accretive acquisitions
- Pan-India acquisition potential from 3rd parties
- 30.0(2) msf of ROFO opportunity from Embassy Sponsor and up to 4.2 msf of ROFO opportunity from others
Capital Management
- Build leverage selectively
- Use strong balance sheet to drive accretive growth through disciplined acquisitions
- Quarterly distributions with minimum 90% of NDCF to be distributed
- Low expenses and fees enhancing Unitholders value
We aim to maximise the total return for Unitholders by targeting growth in NOI, distributions and NAV per Unit. To achieve this objective, we execute business and growth strategies that capitalise on our portfolios embedded organic growth levers, deliver new on-campus developments, undertake value-accretive acquisitions, prudently manage our capital, and balance sheet, and pay distributions to the Unitholders.
Current business environment
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 centres. Morgan Stanley, in its recently published report ‘Why This is Indias Decade, has highlighted offshoring as one of the key "megatrends" which will continue to fuel Indias growth. The dual drivers for this phenomenon are structural, namely Indias abundant STEM talent and the cost efficiency offered by Indias 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.
CY2022 was a resurgent year for India office with total absorption of around 55 msf, which is closer to pre-pandemic highs. While globally there may be an increased caution around office demand, the longterm fundamentals of India office remain strong. Apart from banks and financial services captives which continue to drive demand, many other major companies from diverse sectors such as global retailers, insurers and healthcare majors are now setting up their India offices. Increased focus on costs and efficiencies by global corporates is likely to further accelerate this India offshoring trend, disproportionately to the benefit of institutional landlords like us. Captives now account for over 55% of our annual rents and led by these captives, the physical occupancy in our properties stood at around 50% in the end of April 2023, vs 20% a year ago.
At Embassy REIT, our conviction in the India office opportunity remains strong as ever, especially for institutionally managed Grade A properties. Our view is corroborated by NASSCOMs recent industry report which outlined that just last year around 100 new captive centres were set up in India and 500 more are planned over the next three years.
On the other hand, the supply of quality office stock continues to consolidate towards fewer and larger institutional quality landlords who are well-funded to 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.
On the regulatory side, the government and regulators have been very supportive of the REIT product, and continue to improve the framework around their management, operations, financing and taxation. While the industry awaits further progress on SEZ denotification, the recent amendment to the Finance Bill brought in much needed clarity on taxation of ‘repayment of capital component of a REITs distributions. The resultant clear, stable, and tax-efficient framework enhances the post-tax distribution yields, and we are confident that REITs will continue to attract domestic and foreign capital. The recent launch of a REIT/InvIT index by NSE further helps raise awareness as well as liquidity for our ‘total return product.
ESG also has accelerated in acceptance, as occupiers and investors continue to put considerable emphasis on wellness and sustainability. In that context, companies have increased their focus, benchmarking and investments into being ESG compliant.
The resilience of our business has been clearly demonstrated despite the global macro challenges. During FY2023, we leased 5.1 msf across a record 100 deals, including 2 msf new leases at 17% mark- to-market, and added 44 new occupiers. We activated 2.3 msf new on-campus developments at highly accretive yields and announced an NAV- accretive tuck-in acquisition in North Bengaluru. We generated healthy 11% Net Operating Income (‘NOI) growth, exceeding our guidance by 2.3%. Moreover, despite the rising interest rates, we delivered on our distribution guidance with Rs.21.71 Distribution per Unit (‘DPU), marking our 16th consecutive quarter of 100% payout.
In addition to delivering on our guidance set out in April 2022, we have now completed four full years since listing, two of which have been substantially impacted by the pandemic. In this period, we have delivered over Rs.78 Bn or close to a Bn dollars in distributions and expanded our investor base by around 20 times to over 80k. We leased a total of 11.4 msf, delivered 3.4 msf of new office space and launched 7.9 msf new developments.
Business performance for FY2023 and forward outlook
We recently completed our fourth year since listing, continuing our strong business performance and accelerating our growth investments. During FY2023, we leased 5.1 msf across a record 100 deals, including 2 msf new leases at 17% mark-to-market, and added 44 new occupiers. We activated 2.3 msf new on-campus developments at highly accretive yields and announced an NAV-accretive tuck-in acquisition in North Bengaluru. We generated healthy 11% Net Operating Income (‘NOI) growth, exceeding our guidance by 2.3%. Moreover, despite the rising interest rates, we delivered on our distribution guidance with Rs.21.71 Distribution per Unit (‘DPU), marking our 16th consecutive quarter of 100% payout, taking our overall distributions since listing to over Rs.78 Bn. On the balance sheet front, we refinanced Rs.53 Bn debt at 101 bps positive spreads, maintained low 28% leverage and a competitive 7.2% debt cost.
On the ESG front, we hosted our flagship ‘ESG Occupier Connect event themed ‘In it together, for a better tomorrow where we collaborated with over 200 of our occupiers on sustainability strategies. In addition, we commissioned the first phase of our 20 MW solar rooftop project and announced plans to explore doubling of our captive renewable solar capacity. Our industry leading ESG programme received several global recognitions during the year from GRESB, USGBC LEED, British Safety Council and the ‘WELL at scale certification from IWBI.
We continue to progress on our FY2025 targets as well as our broader net zero 2040 goal and our ESG leadership remains a key business differentiator and a driver of premium rents.
Key highlights
Business Highlights
• Leased 5.1 msf across 100 deals at 16% spreads, surpassing annual leasing guidance of 5 msf
• Added 44 new high-growth occupiers across sectors like insurance, healthcare, retail, renewables, cloud, and cybersecurity and increased occupier base to over 230 marquee corporates
• Awarded global recognition for portfolio by leading ESG benchmarking and certification agencies - GRESB, USGBC LEED, British Safety Council and WELL/ IWBI
Financial Highlights
• Grew Net Operating Income by 11% YoY to Rs.27,663 Mn
• Delivered distributions of Rs.20,579 Mn or Rs.21.71 per unit, marking the 16th consecutive quarter of 100% payout
• Refinanced Rs.53 Bn debt at 101 bps positive spreads, maintained best-in-class balance sheet with low 28% leverage, attractive 7.2% debt cost and AAA/Stable credit ratings
Growth Highlights
• Delivered 3.4 msf of new office space and launched 7.9 msf new developments new development in Bengaluru at attractive yields, including first-of-its-kind 1.2 msf redevelopment project at Embassy Manyata
• Acquired 1.4 msf Embassy Business Hub, a campus-style business park in North Bengaluru, for Rs.3,348 Mn. NOI and NAV accretive deal with attractive 8.1% financing
• Accelerated active development to 7.9 msf, expected to deliver stabilized yields on committed capital investment of Rs.40 Bn
Outlook for FY2024
• The global macro-environment is facing recessionary headwinds, driven by hardening interest rates across geographies as Central banks try to rein-in inflation. Hence, after a couple of years of continued hiring which resulted in growing their headcounts by 40-100% in many cases, corporates have responded by focusing on costs and efficiency. Depending on the kind of business model, some have reduced headcounts in tranches, while others have resorted to corporate housekeeping for all cost-heads. However, the digitalisation agenda for corporates continues to occupy centre stage in boardrooms across the world, and especially in the developed economies which are facing growth headwinds. In such an environment, Indias cost advantage for both talent and real-estate get accentuated. The secular trend of global corporates offshoring more functions to India is expected to continue, and a global supply-chain realignment is also supportive of Indias move up in the worlds value-chain.
• Attrition has reduced sharply as bargaining- power shifts from employees to corporates, and COVID concerns have tapered off substantially and economic engines are normalising. While hybrid working is here to stay, IPC reports (CBRE, 2023 India Market Outlook) suggest <8% of employees are working fully remotely. Back-to- office momentum continues to build as corporate leaders have expressed the importance of physical offices in inculcating culture, driving collaboration and learning, and improving efficiency and data security. This is expected to re-establish the link between hiring and leasing and provide significant headway for growth from historical hiring over the COVID period slowly heading back to the office.
• Unlike global markets which are facing headwinds due to global uncertainty, Indias office market demand remains robust from a structural standpoint even though there might be a near- term slowdown in deal signings due to heightened caution in capex decision-making by global corporates. I PCs expect corporates to resume decision-making in the second half of FY2024. Flight-to-quality trends will continue to intensify, and ESG-compliant spaces will continue to see focused attention from global corporates as they look to cater to their ESG-priorities in tandem with attracting and retaining high-quality talent. Inflation is also making incremental supply more expensive. As a result, rental growth is likely to continue, especially in select micro-markets in key cities.
Our portfolio strategy
Operations: Amidst a short-term caution for larger deals, we have seen encouraging leasing momentum and a positive churn in our portfolio, including entry of new high growth occupiers, especially in Bengaluru and that too at premium to market rents. However, SEZ notified spaces constitute a significant portion of our existing vacancy and upcoming expiries. Hence, the timing of backfill remains dependent on anticipated regulatory amendment around denotification including flexibility of usage of these SEZ spaces, an issue which impacts the industry as a whole. It is important to note that the in-place rents on these leases are significantly below market, providing around 50% significant embedded growth opportunity for us. Further, we are confident of achieving all of our contracted escalations scheduled for FY24 - a 14% increase on 6.7 msf across 78 occupiers. Our hotel business has rebounded quite well with FY2023 EBITDA being more than double of our guidance, and we expect the ramp-up to continue in FY2024.
Development: On new deliveries, we expect to complete 2.1 msf developments over this fiscal year. While these projects are at attractive doubledigit yields, the incremental interest expense on the currently capitalized construction debt will impact our distributions in the short-term, till these buildings are stabilized.
Financing: Interest rates have risen by 250 bps over the last 12 to 15 months. Our annual interest cost is dependent on the trajectory of the market rate movement. Apart from the upcoming refinance of our Rs.41 Bn listed bonds in Oct23 and Feb24 respectively, our floating debt will eventually reprice post the negotiated fixed rate period. Given our access to various debt capital pools across mutual funds, insurers, FPIs, banks and NBFCs, we are well-placed to refinance and secure best-in-class industry rates
Our strategy continues focus on to further solidifying our business and striving for accretive growth to cater to the continued offshoring demand for Indias talent and thereby office needs. As long-term asset owners, we continue to enhance the scale, quality and reach of our properties as well as our occupier base, which shall undoubtedly deliver value across business, market and economic cycles. We have an excellent team of over 110 very talented individuals who are committed to execute this strategy and are driven by our ultimate goal of maximising value for our Unitholders.
Factors affecting our financial condition and results of operations
Our financial performance and results of operations are affected by several factors. The important ones in our view are listed here:
Commercial real estate market: We depend on the performance of the commercial real estate market in the cities where our office parks and commercial offices are located. The commercial real estate market in these cities, in turn, depends upon various factors such as economic and other market conditions, demographic trends, employment levels, availability of financing, prevailing interest rates, competition, bargaining power of occupiers, operating costs, government regulations and policies, and market sentiment.
Our office parks and office buildings are in the key markets of Bengaluru, Mumbai, Pune and Noida. Within these cities, our business significantly depends on the performance of the submarkets where our portfolio assets are located. Most of these micro-markets have historically exhibited strong market dynamics with robust absorption and balanced infusion of new office supply resulting in rent stability/growth and low vacancy on an average, even during the tough periods of the pandemic.
Our portfolio assets are strategically located within their respective markets, which allows us to attract, retain and grow key occupiers within our office parks and commercial office buildings.
Industry of occupiers: Our business also depends on the performance of the industry sectors of our occupiers. Sectors such as technology, banking, financial services, insurance, engineering, and manufacturing drive commercial leasing activity in India. Additionally, new sectors such as healthcare. retail, research and analytics and consulting have also emerged as key drivers of office real estate demand, as domestic and multinational companies in these sectors have been increasingly expanding or settingup operations in India.
Our tenant base is highly diverse with technology sector clients contributing to 38% our gross rentals followed by financial services at 20% as of March 31, 2023. We believe that the domination of technology and banking and financial services sector as key occupiers of space in Indias commercial office segment will continue to significantly influence the results of our operations.
We derive 82% of Gross Annualised Rental Obligations from multinational corporation as at March 31, 2023.
The global and other factors impacting businesses of these types of corporations may affect their ability to service contracted lease agreements.
The global and other factors impacting businesses of these types of corporations may affect their ability to service contracted lease agreements.
Occupancy rates: The success of our business depends on our ability to maintain high occupancy across the portfolio. On a total portfolio basis, our occupancy as of March 31, 2023 was at 86% as against 87% as of March 31, 2022. Occupancy rates largely depend on the attractiveness of the markets and submarkets in which the portfolio assets are located, rents relative to competing properties, the supply of and demand for comparable properties, the facilities and amenities offered, the ability to minimise the intervals between lease expiries (or terminations) and our ability to foray into new leases (including pre-leases for underconstruction properties or properties where leases are expiring).
We believe that our strategically located assets in attractive submarkets allow us to maintain high levels of occupancy. Further, we believe that replicating large infrastructure like business parks such as ours is difficult given land acquisition complexities and long development timelines in India. We believe that we enjoy greater credibility with our occupiers because of our reputation, scale of operations and the amenities and infrastructure that we provide, which generally allows our assets to be viewed as premium properties in core office markets, thereby enhancing the portfolios appeal to occupiers, which has resulted in high occupancy rates.
Lease expiries: We typically enter long-term leases with our occupiers, which provide us a steady source of rental income. The tenure of leases for our office parks are typically nine to fifteen years (assuming successive renewals at our occupiers option), with a three to five-year initial commitment period, and contractual escalations of 15% every three years.
For our city-center office buildings, the lease tenure is typically five to nine years with a three to five- year initial commitment period and contractual escalations of 15% every three years.
We endeavour to foster and maintain strong relationships with our occupiers. We maintain regular communication with the corporate real estate heads of our occupiers through a dedicated customer relationship management programme, which ensures we anticipate and cater to tenant needs. Further, across our portfolio assets, we have implemented various energy efficiency and sustainability initiatives, which help attract occupiers. However, in cases where occupiers do not renew leases or terminate leases earlier than expected, it generally takes some time to find new occupiers which can lead to periods where we have vacant areas within the portfolio assets that do not generate facility rentals.
Rental rates: Our rental income primarily comprises facility rentals and income from maintenance services that we provide to our occupiers at the portfolio assets. Accordingly, our revenue from operations is directly affected by the lease rental rates of the portfolio assets, which are in turn affected by various factors like prevailing economic, income and demographic conditions in the submarket, prevailing rental levels in the submarket, amenities and facilities provided, property maintenance, government policies and competition
Escalations: Our existing lease agreements typically have built-in rent escalations, which has led to growth in our revenues in prior years and we expect it will help us generate stable and predictable growth in our revenue from operations. Our leases typically have contractual escalations in the range of 10% to 15% every three to five years. Besides, due to the tenure of our existing leases and growth in the market rents of our portfolio, our average in- place rents are significantly below current market rents.
We believe that this presents us with a rental growth opportunity by re-leasing the same space at higher market rentals, given the demand for office real estate in respective submarkets coupled with our low vacancy levels. This allows us to be well positioned to capitalise on our Grade A office portfolio by realising the embedded rental growth within our office parks.
Development timeline and costs:
As of March 31, 2023, we had 7.9 msf of under construction area and 2.8 msf of proposed development area. The timely development of our pipeline is expected to positively impact our financial performance. We typically commence construction based on our pre-leasing arrangements and an assessment of upcoming supply and recent absorption trends, as well as various other micro and macro factors impacting the demand for our assets.
We also construct office space on a built-to-suit basis, considering the specific requirements of our occupiers. This enhances our ability to develop and maintain long-term relationships with our occupiers. An example of built-to-suit project is the 1.1 msf area we have delivered in December 2021 for JP Morgan at Embassy TechVillage in Bengaluru and also the 0.4 msf area that is currently under construction for Philips at our recently acquired property Embassy Business Hub in Bengaluru. The timeline for development will vary depending on factors such as size, complexity, and occupier specifications.
Construction progress depends on various factors, including business plans, the availability of finance, labour and raw materials, the receipt of regulatory clearances, access to utilities such as electricity and water, the operating and financial condition of the construction companies we use in our business, and other contingencies such as adverse weather conditions. While industry construction costs have increased due to rise in costs of input materials led by global factors, our nimble design and robust procurement strategy, centralised procurement team and long-term relation with key vendors enables us to optimise the construction cost.
We capitalise our construction and borrowing costs with respect to our under-construction properties and capitalise brokerage costs with respect to our investment properties. These costs are depreciated based on the straight-line method over their estimated useful lives. When construction is completed, borrowing costs are charged to our statement of profit and loss as finance costs, causing an increase in expenses.
Cost of financing: Our finance costs primarily comprise interest expense on our non-convertible debentures and borrowings from banks and financial institutions. Our ability to obtain financing, as well as the cost of such financing, affects our business. Though we believe we can obtain funding at competitive interest rates as evidenced basis the fund raising done by us during FY23, the cost of financing is material for us, as we require significant capital to develop our projects and the expected increase in interest rates might affect our distributable surplus.
Government regulations and policies including taxes and duties:
The real estate sector in India is highly regulated and there are several laws and regulations that apply to our business. Regulations applicable to our business include those related to land acquisition, funding sources, the ratio of built- up area to land area, land usage, the suitability of building sites, road access, necessary community facilities, open spaces or green cover, water supply, sewage disposal systems, electricity supply, environmental clearances, and size of the project.
We also keep abreast of the evolving SEBI REIT regulations which oversee the setup, operations and governance of REITs in India. We strive to maintain compliance with these regulations and incur various costs in the process, including fees to consultants, property tax and other taxes and duties.
In addition, some of our portfolio assets are located on land notified as part of SEZs. The leasing traction for these SEZ areas has been impacted by the uncertainty around amendments to the SEZ rules or introduction of the proposed DESH bill as a separate framework, an issue affecting the whole industry.
An enabling regulatory framework around, among other things, denotification and flexibility of usage of existing SEZs is expected to boost demand for such spaces and further drive leasing traction.
Competition: We operate in competitive markets for the acquisition, ownership, and leasing of commercial real estate. We compete for occupiers with numerous real estate owners and operators who own properties like our own in these markets. Among the factors influencing leasing competition are location, rental rates, building quality and levels of services provided to occupiers.
Competition from other developers in India may adversely affect our ability to sell or lease our projects, and continued development by other market participants could result in saturation of the real estate market, which could adversely impact our revenues from commercial operations.
Increasing competition could result in price and supply volatility which could materially and adversely affect our operations and cause our business to suffer.
Future acquisitions: We intend to selectively acquire commercial real estate assets that meet our investment criteria, from either the Sponsors or third parties. Each new acquisition that we complete may materially affect our overall results of operations and financial position. In addition, our acquisition strategy may require a significant amount of working capital and long-term funding. Our ability to acquire properties will depend on our ability to secure financing on commercially viable terms, which will in part be affected by the prevailing interest rates or the price of our units at the time of acquisition.
Operating and maintenance expenses:
Our operating and maintenance expenses primarily consist of repair and maintenance (of buildings, common areas, machinery, and others), power and fuel expenses, property management fees and expenses related to housekeeping and security services. Factors which impact our ability to control these operating expenses include (but are not limited to) asset occupancy levels, fuel prices, general cost inflation, periodic renovation, refurbishment, and other costs related to re-leasing.
For the portfolio assets we provide Common Area Maintenance (CAM) services to our occupiers. We derive income from these maintenance services that include a margin on the expenses incurred for providing such services.
Cost increases because of any of the foregoing may adversely affect our profitability, margins, and cash flows. Circumstances such as a decline in market rent or pre-term lease cancellation may cause revenue to decrease, although the expenses of owning and operating a property may not decline in line with the decrease in revenue. While certain expenses may vary with occupancy, operating and maintenance expenses such as those relating to general maintenance, housekeeping and security services may not decline even if a property is not fully occupied.
Basis of preparation of consolidated financial statements
The Consolidated Financial Statements of the Group comprises the Consolidated Balance Sheet and the Consolidated Statement of Net Assets at fair value as at March 31, 2023, the Consolidated Statement of Profit and Loss including other comprehensive income, the Consolidated Statement of Cash Flow, the Consolidated Statement of Changes in Unitholders Equity, the Statement of Net Distributable Cashflows of Embassy REIT and each of the REIT assets, the Consolidated Statement of Total Returns at fair value and a summary of significant accounting policies and other explanatory information for the year ended March 31, 2023. The Consolidated Financial Statements were approved for issue in accordance with resolution passed by the Board of Directors of the Manager on behalf of the Embassy REIT on April 27, 2023.
The Consolidated Financial Statements have been prepared in accordance with the requirements of the Securities and Exchange Board of India (SEBI) (Real Estate Investment Trusts) Regulations, 2014 as amended from time to time including any guidelines and circulars issued thereunder read with SEBI Circular No. CIR/IMD/DF/146/2016 dated December 29, 2016 (REIT regulations); Indian Accounting Standards as defined in Rule 2(l)(a) of the Companies (Indian Accounting Standards) Rules, 2015 and other accounting principles generally accepted in India, to the extent not inconsistent with the REIT regulations. The Consolidated Financial Statements have been prepared using uniform accounting policies for like transactions and other events in similar circumstances.
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standard) Amendment Rules 2022 dated March 23, 2022 to majorly amend the following Ind AS which are effective from April 1, 2022:
i. Reference to the Conceptual Framework - Amendments to Ind AS 103
ii. Property, Plant and Equipment: Proceeds before Intended Use - Amendments to Ind AS 16
iii. Onerous Contracts - Costs of Fulfilling a Contract - Amendments to Ind AS 37
These amendments had no impact on the financial statements of the Group.
There were certain amendments to standards and interpretations which are applicable for the first time for the year ended March 31, 2023, but either the same are not relevant or do not have an impact on the consolidated financial statements of the Group.
Further, the Ministry of Corporate Affairs has notified Companies (Indian Accounting Standard) Amendment Rules 2023 dated March 31, 2023 to amend the following Ind AS which are effective from April 1, 2023:
i. Ind AS 1, Presentation of Financial Statements
ii. Ind AS 8, Accounting policies, Change in Accounting Estimates and Errors
iii. Deferred tax related to leases and decommissioning, restoration and similar liabilities
The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.
Summary of significant judgements and estimates used in the preparation of the Consolidated Financial Statements
Use of judgement and estimates:
The preparation of Consolidated Financial Statements in conformity with generally accepted accounting principles in India (Ind AS) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates.
Estimates and underlying assumptions are reviewed on a periodic basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the Consolidated Financial Statements is included in the following notes:
i. Business combinations
ii. Impairment of goodwill and intangible assets with infinite useful life
iii. Classification of lease arrangements as finance lease or operating lease
iv. Classification of assets as investment property or as property, plant and equipment
v. Significant judgement involved in the purchase price allocation of the assets acquired and liabilities assumed on account of business combination and deferred tax accounting on the resultant fair value accounting
vi. Judgements in preparing Consolidated Financial Statements
vii. Classification of Unitholders funds
viii. Significant judgements is involved in the allocation of cost of acquisition to the identifiable assets and liabilities based on their relative fair values at the date of acquisition in case of acquisition that does not represent a business combination.
Information about assumptions and estimation uncertainties that have a significant risk resulting in a material adjustment during the year ended March 31, 2023 is included in the following notes:
i. Fair valuation and disclosures and impairment of non-financial assets being investment properties and property plant and equipment:
The fair value of investment properties and property, plant and equipment are reviewed regularly by management with reference to independent property valuations and market conditions existing at half yearly basis. The independent valuers are independent appraisers with a recognised and relevant professional qualification and with recent experience in the location and category of the investment properties being valued. Judgement is also applied in determining the extent and frequency of independent appraisals.
ii. Useful lives of Investment Property and Property, Plant and Equipment
iii. Valuation of financial instruments
iv. Recognition of deferred tax asset on carried forward losses and recognition of minimum alternate tax credit: The availability of future taxable profit against which tax losses carried forward can be used. Further, significant judgements are involved in determining the provision for income taxes, including recognition of minimum alternate tax credit, in SPVs entitled for tax deduction under Section 80IAB of the Income Tax Act, 1961, wherein the tax deduction is dependent upon necessary details available for exempt and non-exempt income.
Analysis of consolidated statement of profit and loss
| (- in Mn) | ||||
Particulars |
FY 2023 | As % of Revenue | FY 2022 | As % of Revenue |
Revenue from operations |
34,195.43 | 100% | 29,626.05 | 100% |
Interest income |
1,123.37 | 3% | 899.81 | 3% |
Other income |
317.87 | 1% | 369.46 | 1% |
Total income |
35,636.67 | 30,895.32 | ||
Expenses |
||||
Cost of materials consumed |
390.22 | 1% | 84.53 | 0% |
Employee benefits expense |
590.08 | 2% | 228.59 | 1% |
Operating and maintenance expenses |
968.22 | 3% | 585.64 | 2% |
Repairs and maintenance |
3,028.11 | 9% | 2,657.67 | 9% |
Valuation expenses |
10.62 | 0% | 11.56 | 0% |
Audit fees |
54.33 | 0% | 53.81 | 0% |
Insurance expenses |
180.34 | 1% | 149.49 | 1% |
Investment management fees |
934.89 | 3% | 924.63 | 3% |
Trustee fees |
2.95 | 0% | 2.95 | 0% |
Legal and professional fees |
524.73 | 2% | 408.46 | 1% |
Other expenses |
2,067.19 | 6% | 1,537.82 | 5% |
Total expenses |
8,751.68 | 26% | 6,645.15 | 22% |
Earnings before finance costs, depreciation, amortisation and tax |
26,844.99 | 79% | 24,250.17 | 82% |
Finance costs (net) |
9,760.63 | 29% | 8,285.28 | 28% |
Depreciation expense |
9,164.92 | 27% | 5,996.08 | 20% |
Amortisation expense |
2,119.24 | 6% | 1,968.55 | 7% |
Profit before share of profit of equity accounted investee and tax |
5,840.20 | 17% | 8,000.26 | 27% |
Share of profit after tax of equity accounted investee |
777.50 | 2% | 962.14 | 3% |
Profit before tax |
6,617.70 | 19% | 8,962.40 | 30% |
Tax expense |
1,558.12 | 5% | 78.55 | 0% |
Profit for the year |
5,059.58 | 15% | 8,883.85 | 30% |
Other comprehensive income |
3.51 | 0% | 0.83 | 0% |
Total comprehensive income |
5,063.09 | 15% | 8,884.68 | 30% |
Revenue from operations
| (- in Mn) | ||||
Particulars |
FY 2023 | FY 2022 | Variance | Variance % |
Facility rentals |
23,798.00 | 22,162.32 | 1,635.68 | 7% |
Income from finance lease |
217.58 | 183.83 | 33.75 | 18% |
Room rentals |
1,808.82 | 288.37 | 1,520.45 | 527% |
Revenue from contracts with customers |
||||
Maintenance services |
4,394.56 | 4,429.19 | (34.63) | (1%) |
Sale of food and beverages |
1,424.31 | 281.99 | 1,142.32 | 405% |
Income from generation of renewable energy |
1,612.10 | 1,504.98 | 107.12 | 7% |
Other operating income: |
||||
- Hospitality |
160.42 | 38.34 | 122.08 | 318% |
- Others |
779.64 | 737.03 | 42.61 | 6% |
Total revenue from operations |
34,195.43 | 29,626.05 | 4,569.38 | 15% |
Our revenue from operations comprises the following sources:
Facility rentals
Revenue from facility rentals comprises the base rental from our properties, car parking income, fit- out rentals and other rentals as below:
• Base rentals: Base rentals comprises rental income earned from the leasing of our assets.
• Car parking income: Car parking income comprises revenue earned from the operations of parking facilities located at our properties; and
• Fit-out rentals: For some of our occupiers, we provide customised alterations and enhancements as per the occupiers requirements (as opposed to warm shell premises that contain only minimally furnished interiors). For such properties, we recover the value of the fit-outs provided through fit-out rentals, to the extent such leases are classified as operating lease as per accounting requirements.
• Facility rentals for the portfolio increased by Rs.1,635.68 Mn or 7% from Rs.22,162.32 Mn in FY22 to Rs.23,798.00 Mn in FY23. A summary of movement is captured in the below table:
Facility rental portfolio
| (Rs. in Mn) | ||
Particulars |
Amount | % of total movement |
Facility rentals for the year ended March 31, 2022 |
22,162.32 | |
Add: Increase in contracted revenue |
1,701.31 | 7.7% |
Lease up, vacancy and Mark-to-Market (MTM) |
(100.31) | (0.5%) |
Others |
34.68 | 0.2% |
Facility rentals for the year ended March 31, 2023 |
23,798.00 | 7.4% |
Facility rentals increased primarily due to:
• Contracted revenue: Contracted lease escalation on 97 lease contracts.
• Lease up, vacancy and MTM:
Lease up across Embassy Manyata, Embassy Tech village, Embassy Galaxy and renewals spread across all the parks worth of Rs.1,338.92 Mn off set by reduction in facility rentals to the extent of Rs.1,439.23 Mn due to Occupier exits during the year, resulting in net decrease in revenue by Rs.100.31 million
Income from finance lease
• Income from finance leases comprise income from fit-out rentals where such leases are classified as finance leases. Leases are classified as finance leases when substantially all the risks and rewards of ownership transfer to the lessee
• Income from finance lease increased from Rs.183.83 Mn in FY22 to Rs.217.58 Mn in FY23 due to new fit- out rental contracts with occupiers.
Revenue from room rentals and sale of food and beverages
• Revenue from room rentals and sale of food and beverages comprises revenue generated from our operating hotels viz. Hilton at Embassy Golflinks, Hilton Garden Inn (HGI) and Hilton Inn (HI) at Embassy Manyata and Four Seasons at Embassy One.
• During the year, the hospitality segment witnessed significant improvement in business as compared with FY22 due to launch of new hotels (HGI and HI at Embassy Manyata) and resumption of domestic travel resulting in an increase of revenue from room rentals by Rs.1,520.45 Mn or a significant increase of 527% from Rs.288.37 Mn in FY22 to Rs.808.82 Mn in FY23.
• The segment also witnessed corresponding increase in sale of food and beverages by Rs.142.32 Mn or 405%, from Rs.281.99 Mn in FY22 to Rs.1,424.31 Mn in FY23.
Key Performance Indicators for our hotels
(Rs. in Mn) |
||||||||
Financial year ended1 |
||||||||
Hilton at Embassy GolfLinks |
Four Seasons at Embassy One |
Hilton at Embassy Manyata |
Total |
|||||
| March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | |
Keys |
247 | 247 | 230 | 230 | 619 | 353 | 1,096 | 830 |
Occupancy |
62% | 29% | 36% | 23% | 50% | 23% | 50% | 26% |
Rooms Available |
90,155 | 90,155 | 83,950 | 83,950 | 2,17,955 | 10,943 | 3,92,060 | 1,85,048 |
Rooms Sold |
56,015 | 26,528 | 29,843 | 19,482 | 1,08,756 | 2,551 | 1,94,614 | 48,561 |
ADR ( Rs.) |
10,285 | 5,105 | 13,619 | 7,551 | 7,964 | 4,302 | 9,499 | 6,044 |
RevPAR ( Rs.) |
6,390 | NM | 4,841 | NM | NM | NM | 4,715 | NM |
Total Revenue ( Rs.mn) |
846 | 227 | 920 | 365 | 1,628 | 18 | 3,394 | 609 |
NOI ( Rs. Mn) |
359 | (34) | 192 | (102) | 600 | 0.2 | 1,151 | (135) |
NOI Margin |
42% | NM | 21% | NM | 37% | NM | 34% | NM |
EBITDA ( Rs. Mn) |
319 | (35) | 157 | (115) | 506 | 0.2 | 982 | (150) |
(1) Includes HGI (353 Keys) and HI (266 Keys). HGI was launched in Mar22 and HI was launched in May22. The figures above include data since launch till Mar23.
Maintenance services
Income from maintenance services consists of the revenue received from our occupiers for the Common Area Maintenance (CAM) services provided across our commercial office portfolio. Income from maintenance services is generally a function of our maintenance expenses at the portfolio assets, with a change in maintenance expenses resulting in a corresponding change in maintenance service income, along with the impact of lease up/exits at our properties.
Income from maintenance services for the portfolio decreased marginally by T34.63 Mn or 0.78 % from Rs.4,429.19 Mn in FY22 to Rs.4,394.56 Mn in FY23, primarily due to occupier exits.
Income from generation of renewable energy
The 100 MW solar park at Embassy Energy is located at Bellary district of Karnataka and helps reduce an estimated 200 Mn kgs of carbon footprint by providing green energy to our occupiers. The solar generation from the segment increased by 8 Mn units to 185 Mn units (FY22: 177 Mn), a marginal increase of 4% from the FY22 levels. This has led to an increase in revenue by Rs.107.12 Mn from Rs.1,504.98 Mn in FY22 to Rs.1,612.10 Mn in FY23.
Solar power generation
Particulars |
FY 2023 | FY 2022 |
Capacity (MW) |
100 | 100 |
Solar units generated (Mn units) |
185 | 177 |
Solar units consumed (Mn units) |
185 | 176 |
Average blended tariff ( Rs.per unit) |
8.7 | 8.5 |
Other operating income
Other operating income primarily includes revenue from ancillary operating departments at our Hospitality segment as well as the rental compensation receivable from Embassy Property Developments Private Limited (EPDPL) in relation to M3 Block A. Other operating income increased by T164.69 Mn or 21% from Rs.775.37 Mn in FY22 to T940.06 Mn in FY23 primarily due to increase in hospitality operations during the current year.
Property-wise revenue from operations
We have provided a property-wise/ asset-wise break up of our revenue from operations for FY23 vis-a- vis FY22.
Asset-wise revenue from operation
| (Rs. in Mn) | ||||||
FY 2023 |
FY 2022 |
|||||
Asset SPV |
Name of the property |
Location |
Revenue | As % of total revenue | Revenue | As % of total revenue |
MPPL |
Elotel and Office at Embassy Manyata |
Bengaluru |
13,288.26 | 39% | 11,654.54 | 39% |
ETV Assets |
Embassy TechVillage |
Bengaluru |
8,134.59 | 24% | 6,813.16 | 23% |
QBPL |
Elotel, Retail and Office at Embassy One and Embassy Quadron |
Bengaluru |
1,781.79 | 5% | 1,126.39 | 4% |
IENMPL |
Express Towers |
Mumbai |
1,297.32 | 4% | 1,449.80 | 5% |
VCPPL |
Embassy 247 |
Mumbai |
1,453.47 | 4% | 1,315.65 | 4% |
ETPL |
FIFC |
Mumbai |
1,163.67 | 4% | 958.99 | 3% |
EPTPL |
Embassy TechZone |
Pune |
1,497.10 | 4% | 1,534.56 | 5% |
QBPPL |
Embassy Qubix |
Pune |
807.46 | 2% | 804.97 | 3% |
OBPPL |
Embassy Oxygen |
Noicla |
1,569.43 | 5% | 1,454.00 | 5% |
GSPL |
Embassy Galaxy |
Noicla |
744.03 | 2% | 782.43 | 3% |
UPPL |
Elilton - Embassy Golflinks |
Bengaluru |
846.20 | 2% | 226.58 | 1% |
EEPL |
Embassy Energy |
Bellary |
1,612.10 | 5% | 1,504.98 | 5% |
Total |
34,195.43 | 100% | 29,626.05 | 100% | ||
Interest income
Interest income includes interest on (i) debentures, (ii) fixed deposits with banks, (iii) security deposits, (iv) other statutory deposits, (v) income-tax refunds and (vi) others. Interest income increased by Rs.223.56 Mn or 25% from Rs.899.81 Mn for FY22 to Rs.1,123.37 Mn for FY 23.
The increase in interest income is majorly on account of interest on investment in debentures. During the current year, the Group had invested in debentures of its investment entity, Embassy Golflinks, for acquisition of certain real estate and CAM business at Embassy Golflinks Business Park with a view to consolidate Embassy Golflinks existing holdings.
Other income
The details of other income as per the Consolidated Financial Statements is set forth in the below table:
Other income |
(Rs. in Mn) | |||
Particulars |
FY 2023 | FY 2022 | Variance | Variance % |
Liabilities no longer required written back |
11.97 | 128.84 | (116.87) | (91%) |
Profit on sale of mutual funds |
143.79 | 140.82 | 2.97 | 2% |
Net gain on disposal of Property, Plant and Equipment/ Investment Properties |
4.58 | - | 4.58 | NA |
Miscellaneous |
157.53 | 99.80 | 57.73 | 58% |
Total |
317.87 | 369.46 | (51.59) | (14%) |
The decrease in total other income is mainly on account of one time write back of liabilities no longer required in FY22. Increase in Miscellaneous income during the current year is majorly due to receipt of insurance claims and scrap sales.
Expenses
The Consolidated Financial Statements include expenses as set forth in the below table:
Expenses |
O in Mn) | |||
Particulars |
FY 2023 | FY 2022 | Variance | Variance % |
Cost of materials consumed |
390.22 | 84.53 | 305.69 | 362% |
Employee benefits expense |
590.08 | 228.59 | 361.49 | 158% |
Operating and maintenance expenses |
968.22 | 585.64 | 382.58 | 65% |
Repairs and maintenance |
3,028.11 | 2,657.67 | 370.44 | 14% |
Valuation expenses |
10.62 | 11.56 | (0.94) | (8%) |
Audit fees |
54.33 | 53.81 | 0.52 | 1% |
Insurance expenses |
180.34 | 149.49 | 30.85 | 21% |
Investment management fees |
934.89 | 924.63 | 10.26 | 1% |
Trustee fees |
2.95 | 2.95 | - | - |
Legal and professional fees |
524.73 | 408.46 | 116.27 | 28% |
Other expenses |
2,067.19 | 1,537.82 | 529.37 | 34% |
Total expenses |
8,751.68 | 6,645.15 | 2,106.53 | 32% |
Our expenses comprises the following:
Cost of materials consumed
Cost of materials consumed includes direct material cost of our four operating hotels, i.e. Hilton at Embassy Golflinks, HGI and HI at Embassy Manyata and the Four Seasons at Embassy One (Hospitality operations) primarily towards the provision of food and beverage services to the guests at these hotels.
Cost of materials consumed increased by Rs.305.69 Mn or 362% from Rs.84.53 Mn for FY22 to Rs.390.22 Mn for FY23 in line with increase in revenue from hospitality operations. The average occupancy for the year was 62% (FY22: 29%), 50% (FY22: 23%) and 36% (FY22: 23%) at Hilton Hotel at Embassy Golflinks, HGI and HI at Embassy Manyata and Four Seasons Hotel at Embassy One, respectively.
Employee benefits expense
Employee benefits expense primarily includes salaries and wages, contribution to provident and other funds and staff welfare expenses in relation to our Hospitality operations. Improvement in hospitality operations and launch of new hotels (HGI and HI at Embassy Manyata) led to an increase in the manpower cost by Rs.361.49 Mn or 158% from Rs.228.59 Mn for FY22 to Rs.590.08 Mn for FY23.
Operating and maintenance expenses
Operating and maintenance expenses include power and fuel expenses and operating consumables in relation to our Common Area Maintenance operations.
Operating and maintenance expenses increased by Rs.382.58 Mn or 65% from Rs.585.64 Mn for FY22 to Rs.968.22 Mn for FY23 majorly due to increase in consumables and power and fuel cost mainly on account of improvement in hospitality segment operations and increase in footfall at our office parks.
Repairs and maintenance
Repairs and maintenance expense include repairs towards common area maintenance, buildings, machinery, and others.
There is an increase in expenses by Rs.370.44 Mn i.e. 14% from Rs.2,657.67 Mn for FY22 to Rs.3,028.11 Mn for FY23 primarily due to increase in business activities in parks, increased operations in our Hospitality segment and operating cost of new blocks.
Insurance
Insurance expenses increased by Rs.30.85 Mn or 21% from Rs.149.49 Mn for FY22 to Rs.180.34 Mn for FY23. The increase is mainly due to insurance charge on the newly delivered hotels at Embassy Manyata and office blocks.
Investment management fees
This includes the property management fees and REIT management fees.
Property management fees: This represents the fees earned by the Manager to the REIT pursuant to the investment management agreement.
The Manager earns property management fees computed at 3% per annum of facility rentals collected by the relevant property with respect to operations, maintenance, administration, and management of the Holdco or the SPVs, as applicable. The fees have been determined to meet the ongoing costs of the Manager to undertake the services provided to the Embassy REIT and REIT assets. Property management fees marginally increased by Rs.25.25 Mn or 4% from Rs.670.17 Mn for FY22 to Rs.695.42 Mn for FY23 in line with increase in revenue from facility rentals.
REIT management fees: This represents fees earned by the Manager to the REIT pursuant to the investment management agreement between the REIT and Manager. REIT management fees is computed at 1% of the REIT distributions. The fees have been determined for undertaking management of the REIT and its investments. REIT management fees for FY23 amounts to Rs.239.47 Mn vis-a-vis Rs.254.46 Mn for FY22, which is in line with the distributions for respective years.
Legal and professional fees
Legal and professional fees represent amounts paid to consultants for their services in relation to legal and compliance advisory, accounting and taxation advisory and internal audit. Legal and professional fees have increased by Rs.116.27 Mn or 28% from Rs.408.46 Mn for FY22 to Rs.524.73 Mn for FY23 due to non-recurring expenses incurred towards consulting and advisory services.
Other expenses
Other expenses mainly include the following:
Other expenses |
(Rs. in Mn) | |||
Particulars |
FY 2023 | FY 2022 | Variance | Variance % |
Property tax (net) |
1,115.04 | 1,025.21 | 89.83 | 9% |
Rates and taxes |
81.36 | 92.94 | (11.58) | (12%) |
Corporate Social Responsibility (CSR) expenses |
126.55 | 111.52 | 15.03 | 13% |
Marketing and advertising expenses |
271.45 | 111.04 | 160.41 | 144% |
Loss on sale of Property, Plant and Equipment/ Investment Properties (net) |
7.86 | 15.71 | (7.85) | (50%) |
Brokerage and commission |
81.52 | 28.98 | 52.54 | 181% |
Other direct and indirect expenses |
383.41 | 152.42 | 230.99 | 152% |
Total other expenses |
2,067.19 | 1,537.82 | 529.37 | 34% |
Property tax
Property tax increased by T89.83 Mn or 9% from Rs.1,025.21 Mn for FY22 to Rs.1,115.04 Mn for FY23 mainly due to capitalisation of Hudson & Ganges Block at Embassy Techzone, Block 9 of ETV and Hospitality segment.
Rates and taxes
Rates and taxes decreased by Rs.11.58 Mn or 12% from Rs.92.94 Mn for FY22 to T81.36 Mn for FY23 due to non-recurring charges incurred in FY22.
Marketing and advertisement expenses
Marketing and advertisement expenses has increased by Rs.160.41 Mn or 144% from Rs.111.04 Mn for FY22 to Rs.271.45 Mn for FY23 due to launch of Hotel Hilton Inn in Embassy Manyata and increase in operations in hospitality segment.
Brokerage and commission
Brokerage and commission represent the marketing and brokerage expenses for Hospitality segment. The expense for FY23 amounts to Rs.81.52 Mn vis-a-vis Rs.28.98 Mn for FY22, mainly due to increase in Hospitality operations during current year.
Other direct and indirect expenses
Other direct and indirect expenses majorly include management fees paid by hotels and travel and conveyance. Other direct and indirect expenses increased by Rs.230.99 Mn or 152% from T152.42 Mn for FY22 to Rs.383.41 Mn for FY23 due to increase in the hotel operations during the year.
Earnings before finance costs, depreciation, amortisation and tax (EBITDA)
Our EBITDA for FY23 was T26,884.99 Mn, an increase of Rs.2,634.82 Mn or 11%, compared to Rs.24,250.17 Mn for FY22 primarily driven by the increase in Revenue from Operations, partially offset by increased hotel operating expenses corresponding to the ramp-up in our hotel business. The EBITDA margins stood at 79% and continue to be best-in-class.
Finance costs
The Consolidated Financial Statements include finance costs as set forth in the below table:
Finance costs |
(- in Mn) | |||
Particulars |
FY 2023 | FY 2022 | Variance | Variance % |
Interest expenses |
||||
- on borrowings from banks and financial institutions |
3,245.17 | 1,847.98 | 1,397.19 | 76% |
- on lease deposits |
474.56 | 546.24 | (71.68) | (13%) |
- on lease liabilities |
34.84 | 33.77 | 1.07 | 3% |
- on non-convertible debentures |
6,006.06 | 3,831.21 | 2,174.85 | 57% |
Premium on redemption of debentures (Embassy REIT Series 1) |
" | 2,026.08 | (2,026.08) | (100%) |
Total finance costs |
9,760.63 | 8,285.28 | 1,475.35 | 18% |
We capitalise our finance costs in relation to our under-construction properties. When construction is completed, the finance cost is charged to our statement of profit and loss, causing an increase in our finance costs.
The increase in finance cost is mainly on account of:
• increase in interest expense due to our new deliveries namely HGI and HI Hotel, ETV Block 9 and Hudson and Ganges block;
• increase in interest rates. Our average interest rates had increased from 6.72% to 7.21%;
• increase in borrowings for financing acquisition of certain real estate and CAM business at Embassy Golflinks and base build and other infrastructure developments at other parks.
Depreciation and amortisation expense
Depreciation and amortisation expense increased by Rs.3,319.53 Mn or 42% from Rs.7,964.63 Mn for FY22 to Rs.11,284.16 Mn for FY23 primarily due to full year impact of depreciation of HGI and HI Hotel at Embassy Manyata, ETV Block 9 and Hudson and
Ganges block at Embassy TechZone and accelerated depreciation of D1 and D2 blocks at Embassy Manyata on account of redevelopment project undertaken to transform two of the earliest buildings comprising 400k sf leasable area with over 170% mark-to-market opportunity.
Profit before share of profit of equity accounted investee and tax
As a result of the foregoing, we recorded Rs.5,840.20 Mn as profit before share of profit of equity accounted investee and tax for FY23 vis-a vis Rs.8,000.26 Mn in FY22, a decrease of Rs.2,160.06 Mn or 27%.
Share of profit after tax of equity accounted investee
The share of profit after tax in Embassy Golflinks, our investment entity, an equity accounted investee, for FY23 was Rs.777.50 Mn as compared with T962.14 Mn for FY22. The decrease of T184.64 Mn or 19% in the share of profit from Embassy Golflinks is primarily due to higher finance cost, depreciation and tax expense in FY23.
Profit before tax
As a result of the foregoing, we recorded a profit before tax of Rs.6,617.70 Mn for FY23, as compared to a profit before tax of Rs.8,962.40 Mn for FY22, an increase of Rs.2,344.70 Mn or 26%.
Tax expense
The portfolio of assets which we own are housed in 14 SPVs, which have different tax considerations including SEZ benefits, available MAT credit, etc. and accordingly will have varying current tax percentages. On a blended basis, our current taxes for FY23 works out to ~4% of our revenue from operations as compared with ~6% for FY22 at the Consolidated Group level.
The Consolidated Financial Statements include tax expenses as set forth in the below table:
Tax expense |
(Rs. in Mn) | |||
Particulars |
FY 2023 | FY 2022 | Variance | Variance % |
Current tax |
1,527.66 | 1,670.00 | (142.34) | (9%) |
Deferred tax charge/ (credit) |
30.46 | (1,591.45) | 1,621.91 | 102% |
Total tax expenses |
1,558.12 | 78.55 | 1,479.57 | 1,884% |
Total tax expenses increased by Rs.1,479.57 Mn from T78.55 Mn for FY22 to Rs.1,558.12 Mn for FY23.
Current tax expense has decreased by Rs.142.34 Mn or 9% from Rs.1,670.00 Mn for FY22 to CL,527.66 Mn for FY 23 mainly on account of tax shield on D1 and D2
blocks accelerated depreciation.
Deferred tax has increased by Rs.1,621.91 Mn or 102% from Rs.1,591.45 Mn credit during FY22 to T30.46 Mn charge for FY23. The movement is primarily due to benefit obtained from the collapse of ETV structure in FY 22 whereby deferred tax assets were created on unabsorbed depreciation and business losses as the realisation of such tax assets had become reasonably certain.
Profit for the year
As a result of the foregoing, our profit for FY23 was Rs.5,059.58 Mn as compared with Rs.8,883.85 Mn for FY22, a decrease of Rs.3,824.27 Mn or 43%.
Non-GAAP Measures
Net Operating Income (NOI)
Based on the ‘management approach as specified in Ind AS 108, our Chief Operating Decision Maker (CODM) evaluates our performance and allocates resources based on an analysis of various performance indicators by operating segments.
We use NOI internally as a performance measure and believe it provides useful information to investors regarding our financial condition and results of operations because it offers a direct measure of the operating results of our business segments. However, NOI does not have a standardised meaning, nor is it a recognised measure under Ind AS or International Financial Reporting Standards (‘IFRS) and may not be comparable with measures with similar names presented by other companies/ real estate investment trusts. NOI should not be considered by itself or as a substitute for comparable measures under Ind AS or IFRS or other measures of operating performance, liquidity or ability to pay dividends. We define NOI for each of our segments as follows:
a) Commercial offices segment
NOI for commercial offices is defined as revenue from operations [which includes (i) facility rentals, (ii) maintenance services income,
(iii) income from finance lease, and (iv) other operating income for commercial offices] less direct operating expenses [which include (i) operating and maintenance expenses, including common area maintenance expenses (ii) property taxes, (iii) rent, and (iv) insurance].
b) Hospitality segment
NOI for hospitality segment is defined as revenue from operations [which includes (i) room rentals (ii) sale of food and beverages (iii) other operating income from hospitality] less direct operating expenses [which include (i) cost of materials consumed (ii) employee benefits expenses (iii) operating and maintenance expenses, excluding property management fees, and (iv) other expenses].
c) Other segment
NOI for other segments is defined as revenue from operations (which includes income from generation of renewable energy) less direct operating expenses [which includes (i) operating and maintenance expenses and (ii) other expenses].
Certain income (such as interest, dividend, and other income) and certain expenses (such as other expenses, excluding direct operating expenses, depreciation, amortisation, impairment, and finance cost) are not specifically allocable to segments and accordingly these expenses are adjusted against the total income of the Embassy Office Parks Group.
The table below gives the computation of our NOI and a reconciliation up to EBITDA:
| O in Mn) | ||||
Particulars |
FY 2023 | FY 2022 | Variance | Variance % |
Revenue from operations |
34,195.43 | 29,626.05 | 4,569.38 | 15% |
Property taxes and insurance |
(1,295.38) | (1,174.70) | (120.68) | 10% |
Direct operating expenses |
(5,237.25) | (3,540.01) | (1,697.24) | 48% |
Net operating income |
27,662.80 | 24,911.34 | 2,751.46 | 11% |
Other income |
1,441.24 | 1,269.27 | 171.97 | 14% |
Property management fees |
(934.89) | (924.63) | (10.26) | 1% |
Indirect operating expenses |
(1,284.16) | (1,005.81) | (278.35) | 28% |
EBITDA |
26,884.99 | 24,250.17 | 2,634.82 | 11% |
Segment-level profitability
| (Rs. in Mn) | ||||||
Commercial offices |
Hospitality |
Other segment |
||||
| FY 2023 | FY 2022 | FY 2023 | FY 2022 | FY 2023 | FY 2022 | |
Revenue from operations |
29,189.78 | 27,512.07 | 3,393.55 | 609.00 | 1,612.10 | 1,504.98 |
Net operating income |
25,029.30 | 23,650.60 | 1,150.94 | (135.47) | 1,482.56 | 1,396.21 |
NOI margin (%) |
86% | 86% | 34% | (22%) | 92% | 93% |
NOI margins
Our NOI margin for FY23 was 81% as compared with 84% for FY22, primarily due to to increase in share of hospitality segment in segment mix which have lower margins. NOI margin for commercial offices segment has remained same at 86% for FY23 and FY22. Our hospitality segment reported a positive NOI of 1,150.94 vis-a-vis negative NOI of Rs.135.47 Mn for FY22 due to ramp up of the sector post the impact of the COVID-19 pandemic. Our NOI margin from other segment is in line for both years.
EBITDA
We use Earnings Before Finance costs, Depreciation, Amortisation and Tax, excluding share of profit of equity accounted investee (EBITDA) internally as a performance measure. We believe it provides useful information to investors regarding our financial condition and results of operations because it offers a direct measure of the operating results of
our business segments. Other companies may use different methodologies for calculating EBITDA and accordingly, our presentation of the same may not be comparable to other companies.
EBITDA does not have a standardised meaning, nor is it a recognised measure under Ind AS and may not be comparable with measures among similar names presented by other companies. EBITDA should not be considered by itself or as a substitute for comparable measures under Ind AS or other measures of operating performance, liquidity or ability to pay dividends. Our EBITDA may not be comparable to the EBITDA or other similarly titled measures of other companies/ REITs as not all companies/ REITs use the same definition of EBITDA or other similarly titled measures. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other companies/ REITs.
We believe that the comparable Ind AS metric to our EBITDA is profit for the year, and a reconciliation between these two is provided here:
| (- in Mn) | ||
Particulars |
FY 2023 | FY 2022 |
Profit for the year |
5,059.58 | 8,883.85 |
Add: Tax expense |
1,558.12 | 78.55 |
Profit before tax |
6,617.70 | 8,962.40 |
Less: Share of profit after tax of equity accounted investee |
(777.50) | (962.14) |
Add: Depreciation expense |
9,164.92 | 5,996.08 |
Add: Amortisation expense |
2,119.24 | 1,968.55 |
Add: Finance costs |
9,760.63 | 8,285.28 |
Earnings before finance costs, depreciation, amortisation and tax |
26,884.99 | 24,250.17 |
Net Asset Value (NAV) and Valuation of Portfolio
We use NAV internally as a performance measure and believe it provides useful information to investors regarding our financial condition. The computation of NAV is as prescribed under the REIT regulations.
This computation takes into account the Gross Asset Value (GAV) as arrived at by our independent external property valuers appointed under Regulation 21 of REIT regulations, along with the recorded book values of other assets as well as all other liabilities recorded in the financial statements to arrive at the NAV. Our Statement of Net Assets at Fair Value as of the dates indicated, at a consolidated level, along with the NAV per unit is set forth here:
Statement of Net Assets at Fair Value
| (Rs. in Mn) | |||
Particulars |
FY 2023 | FY 2022 | Variance % |
Gross asset value (GAV) |
514,141.14 | 493,674.00 | 4% |
Other assets |
80,460.68 | 73,518.96 | 9% |
Other liabilities |
(220,294.35) | (193,819.45) | (14%) |
NAV |
374,307.47 | 373,373.51 | 0.2% |
NAV per unit |
394.88 | 393.90 |
iVAS Partners, independent external registered property valuers appointed under Regulation 21 of REIT regulations, having appropriately recognised professional qualifications and recent experience in the location and category of the properties being valued in conjunction with value assessment services undertaken by CBRE South Asia Pvt. Ltd, carried out our property valuation and valued the GAV of our portfolio at Rs.514,141.14 Mn with -93% of value from core commercial office segment and with over 75% of value from Bengaluru, underpinning Embassy REITs asset quality as of March 31, 2023.
Asset-wise GAV, along with the key assumptions used in the valuation are provided here:
Leasable Area (msf)/Keys/MW |
Valuation Assumptions12 |
G AV112 a s o f f -v. d Mar-23 ( Rs. Mn) |
||||||||
Asset |
Completed | Pro posed/ U/C | Total | Discount Rate Completed | Discount Rate U/C | Cap Rate/ EBITDA Multiple | Completed | Pro posed/ U/C | Total | |
Commercial Assets |
||||||||||
Embassy Manyata |
11.4 | 3.9 | 15.2 | 11.70% | 13.00% | 8.00% | 93 | 153,317 | 32,648 | 185,965 |
Embassy TechVillage |
7.3 | 2.3 | 9.6 | 11.70% | 13.00% | 8.00% | 94 | 103,628 | 18,596 | 122,224 |
Embassy GolfLinks2 |
3.1 | - | 3.1 | 11.70% | NA | 8.00% | 155 | 34,996 | - | 34,996 |
Embassy One |
0.3 | - | 0.3 | 11.70% | NA | 7.50% | 147 | 4,558 | - | 4,558 |
Embassy Business Hub |
0.0 | 1.4 | 1.4 | 11.70% | 13.00% | 8.00% | 67 | - | 3,751 | 3,751 |
Express Towers |
0.5 | - | 0.5 | 11.70% | NA | 7.50% | 275 | 18,252 | - | 18,252 |
Embassy 247 |
1.2 | - | 1.2 | 11.70% | NA | 8.00% | 112 | 18,684 | - | 18,684 |
FIFO |
0.4 | - | 0.4 | 11.70% | NA | 7.75% | 280 | 13,941 | - | 13,941 |
Embassy TechZone |
3.0 | 2.4 | 5.5 | 11.70% | 13.00% | 8.25% | 48 | 20,037 | 2,808 | 22,845 |
Embassy Quadron |
1.9 | - | 1.9 | 11.70% | NA | 8.25% | 48 | 13,227 | - | 13,227 |
Embassy Qubix |
1.5 | - | 1.5 | 11.70% | NA | 8.25% | 48 | 9,718 | - | 9,718 |
Embassy Oxygen |
2.5 | 0.7 | 3.3 | 11.70% | 13.00% | 8.25% | 48 | 19,301 | 3,508 | 22,809 |
Embassy Galaxy |
1.4 | - | 1.4 | 11.70% | NA | 8.25% | 47 | 9,526 | - | 9,526 |
Sub-Total (Commercial Offices) |
34.3 | 10.7 | 45.0 | 419,185 | 61,311 | 480,496 | ||||
Hospitality Asset |
||||||||||
Hilton at Embassy GolfLinks |
247 Keys | " | 247 Keys | 12.38% | " | 14. Ox | 9,250 | 4,762 | ? | 4,762 |
Four Seasons at Embassy One |
230 Keys | " | 230 Keys | 12.38% | " | 14.Ox | 11,500 | 7,939 | ? | 7,939 |
Hilton and Hilton Garden Inn at Embassy Manyata |
619 Keys | 619 Keys | 12.38% | 14. Ox | 5 Star - 9.000 3 Star - 6.000 | 11,667 | 11,667 | |||
Hilton and Hilton Garden Inn at Embassy TechVillage |
518 Keys | 518 Keys | 13.60% | 14. Ox | 5 Star-8,500 3 Star - 6,000 | 763 | 763 | |||
Sub-Total (Hospitality) |
1,096 Keys | 518 Keys | 1,614 Keys | 24,368 | 763 | 25,131 | ||||
Others3 |
||||||||||
Embassy Energy |
100MW | - | 100 MW | 11.70% | - | NA | 8.5 | 8,514 | - | 8,514 |
Sub-Total (Others) |
100MW | - | 100MW | 8,514 | - | 8,514 | ||||
Total |
34.3 msf/1,096 Keys/IOOMW | 10.7 msf/518 Keys | 45.0 msf/1,614 Keys/IOOMW | 452,067 | 62,074 | 514,141 | ||||
% Split |
88% | 12% | 100% | |||||||
1 Gioss Asset Value (GAV) considered per Mar23 valuation undertaken by iVAS Partners, represented by Mr. Manish Gupta, in conjunction with value assessment services undertaken by CBRE. Valuation exercise undertaken semi-annually Details include 50% Embassy GolfLinks except leasable area. Embassy REIT owns 50% economic interest in Embassy GolfLinks and accounts for only the proportionate profits of Embassy GolfLinks basis the equity method Comprises of Solar Park located at Bellary district, Karnataka
Valuation Technique and Frequency
The fair value measurement for all the investment properties, investment properties under development, property plant and equipment, intangibles and capital work-in-progress has been categorised as a Level 3 fair value based on the inputs to the valuation technique used and is reviewed regularly by management with reference to independent property valuations and market conditions existing at half yearly basis.
The valuers have followed a Discounted Cash Flow method. The valuation model considers the present value of net cash flows to be generated from the respective properties, taking into account the expected rental growth rate, vacancy period, occupancy rate, average room rent, lease incentive costs and blended tariff rates. The expected net cash flows are discounted using the risk adjusted discount rates. Among other factors, the discount rate estimation considers the quality of a building and its location (prime vs secondary), tenant credit quality, lease terms, seasonality in sustaining a stable average room rent and occupancy for the hotels.
Liquidity and Capital Resources
Overview
Our liquidity position of Rs.8 bn which includes cash equivalents as well as undrawn committed facilities and lower Net debt to GAV of 28% clears our pathways towards accelerating growth.
Financial resources
As of March 31, 2023, we had cash and cash equivalents, along with liquid investments of Rs.8,173.48 Mn (March 31, 2022: Rs.5,884.49 Mn).
This table depicts a selected summary of our statement of cash flows for the periods indicated:
Cash flows
| (Rs. in Mn) | ||
Particulars |
FY 2023 | FY 2022 |
Cash generated from operating activities |
25,655.10 | 23,669.74 |
Net cash flow used in investing activities |
(16,696.43) | (11,820.24) |
Net cash flow used in financing activities |
(8,689.52) | (15,139.79) |
Net increase/ (decrease) in cash and cash equivalents |
269.15 | (3,290.29) |
Cash and cash equivalents at the beginning of the year |
5,884.49 | 9,174.78 |
Cash and cash equivalents acquired due to asset acquisition |
2,019.84 | - |
Cash and cash equivalents at the end of the year |
8,173.48 | 5,884.49 |
Cash generated from operating activities
Net cash generated from operating activities for FY23 is Rs.25,655.10 Mn. Profit before share of profit of equity accounted investee and tax of Rs.5,840.20 Mn was adjusted for financing and investing activities as well as other non-cash items and movement in working capital by a net amount of Rs.19,814.90 Mn to arrive at operating cash flow of Rs.25,655.10 Mn. The operating cash flow recorded an increase of 8% vis- a-vis Rs.23,669.74 Mn for FY22. The increase is in line with growth in net operating income and EBITDA of 11% in FY23.
Net cash flow used in investing activities
We continued our focus on organic growth during the year resulting in a net cash flow used in investing activities of Rs.16,696.43 Mn. This includes Rs.10,920.56 Mn deployed primarily towards under construction blocks which include Block 8 at Embassy TechVillage, M3 Block A and B at Embassy Manyata, Tower 1 at Embassy Oxygen, as well as construction of Hudson and Ganges blocks at Embassy TechZone, capex spends towards various infrastructure and upgrade projects across our Parks including solar projects and the Master Plan Upgrades at multiple assets.
Further, we have acquired a new SPV, ECPL, for a net consideration of Rs.64.66 Mn and invested in debentures of our investment entity for acquisition of certain real estate and CAM business (March 31, 2023: Rs.8,157.82 Mn). This was partially offset by cash inflows due to redemption of treasury surplus which were invested in mutual funds and dividend income received from our investment entity.
Net cash flow used in financing activities
During FY23, we had net cash used in financing activities of Rs.8,689.52 Mn as compared to Rs.15,139.79 Mn in FY22. During FY23, we primarily raised borrowings of Rs.41,686.27 Mn and repaid debt of Rs.20,246.20 Mn; paid Rs.9,862.11 Mn as interest on our borrowing as well as distributed Rs.20,247.13 Mn in the form of distributions to Unitholders resulting in a net cash used in financing activities of Rs.8,689.52 Mn. During FY22, we had net cash flow used in financing activities of Rs.15,139.79 Mn primarily due to repayment of Series I NCD.
Distributions
Under the provisions of the REIT Regulations, Embassy Office Parks REIT is required to distribute to the Unitholders not less than 90% of the Net Distributable Cash Flows (NDCF) of Embassy Office Parks REIT and the current policy of the Manager is to comply with such requirement. The NDCF is calculated in accordance with the REIT Regulations and in the manner provided in the NDCF framework defined by the Manager. The aforesaid NDCF are made available to Embassy Office Parks REIT in the form of (i) interest paid on Shareholder Debt provided by Embassy Office Parks REIT to the SPVs/Holding Company, (ii) Principal repayment of Shareholder Debt, (iii) dividend declared by the SPVs/Holding Company and received by Embassy Office Parks REIT and (iv) Proceeds from sale of any Embassy REIT assets. Since Embassy Office Parks REIT endeavours to quarterly distributions, any shortfall as regards minimum quarterly distribution by the SPVs and Holding Company to Embassy Office Parks REIT, post interest paid on Shareholder Debt, Interim Dividend payments and Principal repayment of Shareholder Debt, would be done by declaring dividend, to the extent permitted under the Companies Act, 2013. Repayment of short-term construction debt given to SPVs, debt repayment of Series I NCD (including redemption premium) which was refinanced through debt, and interest on external debt paid and capitalised to development work in progress to the extent funded by debt, are not considered for the purpose of distributions.
The Board of Directors of the Manager of Embassy REIT have declared a cumulative distribution of Rs.21 Bn or Rs.21.71 per unit for FY23 which is in-line with our guidance, despite considerable rate hike in the market.
Borrowings
During the year, we refinanced Rs.53 Bn bank debt with a 101 bps lower cost debt. We were able to refinance at attractive terms due to our robust balance sheet and our AAA/Stable rating.
As a result of the above and earlier refinancing, 61% of our total Rs.148 Bn debt now carries a fixed rate with an average maturity of 1.8 years and an additional 39% carries a fixed rate for next 5 months.
This table presents a breakdown of borrowings as at March 31, 2023 and the corresponding ratios:
Debt analysis
| (Rs. in Mn) | |||||||||||||||
Description |
Rating |
Fixed/ Floating |
Total Facility | Balance Facility | Out standing Principal | Amor tised Cost | Interest Rate | Maturity Date | FY24 | FY25 | Principal F FY26 | Rs.epaymen FY27 | t Schedule FY28 | FY29 & Beyond | Total |
At REIT |
|||||||||||||||
Embassy Office Parks REIT Series II NCD |
CRISIL AAA/Stable |
Fixed |
15,000 | - | 15,000 | 14,962 | 6.97% | Oct-231 | 15,000 | - | - | - | - | - | 15,000 |
Embassy Office Parks REIT Series ill NCD |
CRISIL AAA/Stable |
Fixed |
26,000 | - | 26,000 | 25,911 | 6.40% | Feb-241 2 | 26,000 | - | - | - | - | - | 26,000 |
Embassy Office Parks REIT Series IV NCD |
CRISIL AAA/Stable |
Fixed |
3,000 | - | 3,000 | 2,981 | 6.80% | Sep-263 | - | - | - | 3,000 | - | - | 3,000 |
Embassy Office Parks REIT Series V NCD (Tranche A) |
CRISIL AAA/Stable |
Fixed |
20,000 | - | 20,000 | 19,929 | 6.25% | Oct-244 | - | 20,000 | - | - | - | - | 20,000 |
Embassy Office Parks REIT Series V NCD (Tranche B) |
CRISIL AAA/Stable |
Fixed |
11,000 | - | 11,000 | 10,947 | 7.05% | Oct-265 | - | - | - | 11,000 | - | - | 11,000 |
Embassy Office Parks REIT Series VI NCD |
CRISIL AAA/Stable |
Fixed |
10,000 | - | 10,000 | 9,957 | 7.35% | Apr-276 | - | - | - | - | 10,000 | - | 10,000 |
Term Loan |
- |
Floating |
10,000 | - | 10,000 | 9,971 | 7.99% | Feb-35 | - | - | - | 75 | 937 | 8,989 | 10,000 |
Sub-total (A) |
95,000 | - | 95,000 | 94,658 | 6.81% | 41,000 | 20,000 | - | 14,075 | 10,937 | 8,989 | 95,000 | |||
At SPV |
|||||||||||||||
Term Loan (Embassy Manyata) |
CARE AAA/Stable |
Floating |
15,500 | - | 15,500 | 15,466 | 7.84% | Oct-26 | - | - | - | 15,500 | - | - | 15,500 |
Term Loan (Embassy Manyata) |
CRISIL AAA/Stable |
Floating |
6,750 | 250 | 6,310 | 6,280 | 7.72% | May-33 | - | - | 269 | 602 | 708 | 4,731 | 6,310 |
Construction Finance (Embassy Manyata) |
CRISIL AAA/Stable |
Floating |
5,500 | 555 | 4,945 | 4,917 | 7.95% | May-31 | 25 | 49 | 198 | 396 | 791 | 3,486 | 4,945 |
Term Loan (Embassy Manyata) |
CRISIL AAA/Stable |
Floating |
4,500 | 2,040 | 2,394 | 2,385 | 8.15% | Dec-37 | - | 42 | 54 | 62 | 79 | 2,156 | 2,394 |
VTPL Series 1 NCD (Green Bond) |
CRISIL AAA/Stable |
Fixed |
4,950 | - | 4,950 | 4,941 | 7.65% | Aug-257 | - | - | 4,950 | - | - | - | 4,950 |
Term Loan (Embassy TechVillage) |
CARE AAA/Stable |
Floating |
7,212 | 950 | 6,262 | 6,238 | 8.27% | Oct-25 | - | - | 6,262 | - | - | - | 6,262 |
Term Loan (Embassy TechVillage) |
CARE AAA/Stable |
Floating |
4,330 | 109 | 4,175 | 4,172 | 8.06% | Oct-25 | 12 | 42 | 4,121 | - | - | - | 4,175 |
Term Loan (Embassy Oxygen) |
CARE AAA/Stable |
Floating |
2,000 | - | 1,899 | 1,899 | 8.45% | Aug-24 | 851 | 1,048 | - | - | - | - | 1,899 |
Term Loan (Embassy Business Hub) |
Rating Awaited |
Floating |
2,250 | 1,000 | 1,250 | 1,244 | 8.30% | Mar-25 | - | 1,250 | - | - | - | - | 1,250 |
Overdraft Facility (Various) |
CARE AAA/Stable |
Floating |
4,000 | 3 | 3,997 | 3,997 | 7.99% | Jul-25 | 225 | 225 | 2,550 | 997 | - | - | 3,997 |
Others8 |
- |
- |
109 | - | 109 | 109 | NM | Various | 109 | - | - | - | - | - | 109 |
Sub-Total (B) |
57,101 | 4,907 | 51,792 | 51,648 | 7.95% | 1,222 | 2,656 | 18,404 | 17,557 | 1,579 | 10,373 | 51,792 | |||
Gross Debt as on Ol-Apr-23 |
152,101 | 4,907 | 146,792 | 146,306 | 7.21% | 42,222 | 22,656 | 18,404 | 31,632 | 12,515 | 19,362 | 146,792 | |||
Debt as on March 31, 2023:9 |
|||||||||||||||
Term Loan (Embassy Business Hub) |
Floating |
1,850 | 101 | 1,749 | 1,749 | 9.95% | Feb-26 | 1,749 | 1,749 | ||||||
Total (A+B) |
153,951 | 5,008 | 148,541 | 148,055 | 7.25% | 42,222 | 22,656 | 20,153 | 31,632 | 12,515 | 19,362 | 148,541 |
1 Embassy REIT has option to redeem all or part of the debentures on a pro-rata basis at any time on a specified call option date (between Mar 23 to Sep 23) subject to terms of the Debenture Trust Deed
2 Embassy REIT has option to redeem all or part of the debentures on a pro-rata basis at any time on a specified call option date (between Jur23 to Jan24) subject to terms of the Debenture Trust Deed
3 Embassy REIT has option to redeem all or part of the debentures on a pro-rata basis at any time on a specified call option date (between Mar 26 to Aug 26) subject to terms of the Debenture Trust Deed
4 Embassy REIT has option to redeem all or part of the debentures on a pro-rata basis at any time on a specified call option date (between Apr 24 to Jul24) subject to terms of the Debenture Trust Deed
5 Embassy REIT has option to redeem all or part of the debentures on a pro-rata basis at any time on a specified call option date (between Apr 26 to Jul26) subject to terms of the Debenture Trust Deed
6 Embassy REIT has option to redeem all or part of the debentures on a pro-rata basis on a specified call option date (Oct26) subject to terms of the Debenture Trust Deed
7 VTPL has option to redeem all or part of the debentures on a pro-rata basis at any time on a specified call option date (Apr25 to Jun25) subject to terms of the Debenture Trust Deed
8 Others includes vehicle loans and other liabilities
9 Repaid on March 31, 2023 with value date of Ol-Apr-23
Key leverage metrics
Our key leverage metrics are:
Leasing & Lease Management
| O in Mn) | ||
Particulars |
FY 2023 | FY 2022 |
Net debt to TEV (%) |
33 | 25 |
Net debt to GAV (%) |
28 | 24 |
Net debt to EBITDA |
4.72x | 4.46x |
Interest coverage ratio |
||
- excluding capitalised interest |
2.9x | 3.lx |
- including capitalised interest |
2.7x | 2.7x |
Available debt headroom (fin Bn) |
104 | 120 |
We continue to maintain a strong liquidity position of Rs.8 Bn and a low leverage of 28% Net Debt to Gross Asset Value (GAV). Considering our AAA credit rating, additional proforma headroom of Rs.104 Bn and
our ability to raise debt at competitive rates, we are in a strong position to pursue growth through on- campus development and accretive acquisitions.
Capital expenditures and capital investments
Historical capital expenditure
Capital expenditure comprises additions during the year to property, plant and equipment, capital-work- in progress, investment property and investment property under development.
During FY23 we have incurred capital expenditure of Rs.10,920.56 Mn primarily towards construction of
7.9 msf of under construction blocks which include Block 8 at Embassy TechVillage, M3 Block A and B at Embassy Manyata, Tower 1 at Embassy Oxygen, as well as construction of Hudson and Ganges blocks at Embassy TechZone, capex spends towards various infrastructure and upgrade projects across our Parks including solar projects and the Master Plan Upgrades at various assets.
Planned capital expenditure
This table presents the development status and balance costs to be spent for development projects in progress as at March 31, 2023.
Development in Progress as at March 31, 2023
Asset |
Projects |
[ | Development | Pre committed/ Leased | Occupier2 | Estimated Completion |
Balance cost to be spent |
| Area (msf) | Keys | Area (%) | |||||
Base-Build Projects (Completed) |
|||||||
Embassy TechVillage |
Parcel 9 - JPM BTS |
1.1 | NA | 100% | JP Morgan | Completed in Dec-21 |
112 |
Embassy Manyata3 |
Front Parcel - Hilton Hotels |
NA | 619 | NA | NA | Completed in Mar-22 |
201 |
Embassy TechZone |
Hudson & Ganges Block |
0.9 | NA | 16% | Harman, Kaiser Permanente | Completed in Oct-22 |
243 |
Sub-Total |
2.0 | 619 | 63% | 556 | |||
Base-Build Projects (Under Construction) |
|||||||
Embassy Manyata4 |
M3 Block A |
1.0 | NA | 16% | WeWork, Esko Graphics | Jun-23 |
53 |
Embassy Oxygen |
Tower 1 |
0.7 | NA | - | - | Jun-23 |
507 |
Embassy TechVillage |
Block 8 |
1.9 | NA | 29% | JP Morgan | Sep-24 |
6,817 |
Embassy Manyata4 |
M3 Block B |
0.6 | NA | 78%5 | ANZ6 | Mar-25 |
1,992 |
Embassy Manyata |
Block L4 |
0.7 | NA | - | - | Jun-25 |
3,001 |
Embassy TechVillage |
Hilton Hotels |
NA | 518 | NA | NA | Dec-25 |
8,760 |
Embassy Manyata |
Block D1 & D2 Redevelopment7 |
1.2 | NA | - | - | Dec-25 |
5,816 |
Embassy TechVillage |
Block 67 |
0.4 | NA | - | - | Dec-25 |
1,995 |
Embassy Business Hub |
Phase 1- Philips BTS |
0.4 | NA | 93% | Philips | Sep-23 |
1,358 |
Embassy Business Hub |
Phase 2 |
1.0 | NA | - | - | Sep-27 |
6,062 |
Sub-Total |
7.9 | 518 | 19% | 36,360 | |||
Infrastructure and Upgrade Projects89 |
|||||||
Embassy Manyata |
Master Plan Upgrade |
NA | NA | NA | NA | Completed in Dec-22 |
153 |
Various |
Solar Rooftop |
NA | NA | NA | NA | Sep-23 |
304 |
Embassy TechVillage |
Central Garden |
NA | NA | NA | NA | Sep-23 |
419 |
Embassy Business Hub |
Food Court |
NA | NA | NA | NA | Dec-23 |
218 |
Embassy TechVillage |
Master Plan Upgrade |
NA | NA | NA | NA | Dec-24 |
221 |
Others |
Various |
NA | NA | NA | NA | Various |
3,906 |
Sub-Total |
NA | NA | NA | 5,222 | |||
Total (Under Construction) |
7.9 | 518 | 19% | 42,138 |
Acquisitions
With a strong focus on organic growth, we seek inorganic growth opportunities to further the interests of our investors. Recently, we announced tuck-in acquisition of Embassy Business Hub, a campus-style business park for a total consideration of Rs.3.4 Bn. Situated in high visibility growth corridor of North Bengaluru and its proximity to both the airport and to REITs flagship Embassy Manyata property, Embassy Business Hub cements the REITs dominant presence in North Bengaluru, a micromarket that continues to witness an influx of global captives. Of the 1.4 msf acquired, 0.4 msf is nearing completion and 93% pre-committed to Philips, providing stable cash flow visibility, and the balance 1 msf is in early stages of development. Additionally, we secured a Right of First Offer for future phases of this property, totaling 46 acres, which further extends REITs growth options.
Off-balance sheet arrangements and contingent liabilities
We do not have any material off-balance sheet arrangements. The table below sets forth our contingent liabilities as of March 31, 2023:
Off-balance sheet arrangements and contingent liabilities
| (- in Mn) | ||
Particulars |
FY 2023 | FY 2022 |
Claims not acknowledged as debt in respect of Income Tax matters |
252.94 | 351.31 |
Claims not acknowledged as debt in respect of Indirect Tax matters |
772.09 | 772.09 |
Claims not acknowledged as debt in respect of Property Tax matters |
3,418.89 | 3,418.89 |
Risk Management
We are the owner of a high-quality office portfolio in India that serves as essential corporate infrastructure to multinational tenants and has significant embedded growth prospects. The growth of domestic companies has resulted in robust demand for commercial office space and strong growth across Indias major office markets. We are highly dependent on the prevailing economic conditions in India and our results of operations are significantly affected by factors influencing the Indian economy.
Further, the real estate sector in India including REITs is heavily regulated. We are also subject to environmental, health and safety regulations in the ordinary course of our business. These and many other factors might affect our business, results of operations or financial condition. We are committed to maintaining our strong corporate governance standards and have a robust risk management framework in place to address risks that arise from the economic, operational, social and environmental ecosystems that we operate in.
The Board of Directors of the Manager of Embassy Office Parks Group has overall responsibility for the establishment and oversight of the Embassy Office Parks Groups risk management framework. The Embassy Office Parks Groups risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Groups activities.
The Board of Directors of the Managers of Embassy Office Parks Group oversees how management monitors compliance with the Groups risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the group. The Audit Committee is assisted in its oversight role by internal audit. Internal audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.
Internal financial control systems
Embassy REIT has a strong internal financial control system to manage its operations, financial reporting, and compliance requirements. The Manager has clearly defined roles and responsibilities for all managerial positions. These responsibilities include the design, implementation and maintenance of adequate internal financial controls that were operating effectively for ensuring the orderly and efficient conduct of its business, including adherence to the Companys policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. All business parameters are regularly monitored, and effective steps are taken to control them.
Embassy REIT has appointed one of the Big4 firms to conduct internal audit of its activities. The internal audit plan is reviewed each year and is approved by the audit committee. The internal audit is focused on review of internal controls and operational risk in the business of Embassy REIT.
Embassy REIT takes a proactive approach to risk management, making it an integral part of our business - both strategically and operationally. Our objective is optimisation of opportunities within the known and agreed risk appetite levels set by our Board. We take measured risks in a prudent manner for justifiable business reasons. Our ERM framework encompasses all our risks such as strategic, operational, and compliance risks. Appropriate risk indicators are used to identify these risks proactively. A robust internal control system and an effective, independent review and audit process underpin our ERM Framework. While management is responsible for the design and implementation of effective internal controls using a risk-based approach, external consultant reviews such design and implementation to provide reasonable assurance on the adequacy and effectiveness of the risk management and internal control systems.
The Audit Committee and the Board of Directors periodically reviews the adequacy and effectiveness of internal financial control systems and suggests improvements to further strengthen them. The internal financial control systems are adequate and operating effectively as at March 31, 2023. The effectiveness of the internal control over financial reporting for each of the SPVs as at March 31, 2023 has been attested by the respective statutory auditors of SPVs who expressed an unqualified opinion on the effectiveness of each SPVs internal control over financial reporting as of March 31, 2023.
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Risk Disclosure on Derivatives
- 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
- On an average, loss makers registered net trading loss close to Rs. 50,000.
- Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
- Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.
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