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Chalet Hotels Ltd
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Ladies and gentlemen, good day, and welcome to Chalet Hotels Limited Q3 FY '22 Earnings Conference Call. We have with us today from the management, Mr. Sanjay Sethi, Managing Director and CEO; and Mr. Milind Wadekar, CFO. There will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Sethi, Managing Director and CEO from Chalet Hotels Limited. Thank you, and over to you, sir.
Thank you, Zaid. Good morning, ladies and gentlemen. I do hope that you're all doing well. Well, while we are currently in the midst of a very volatile environment, Chalet Hotels did have a very good quarter 3. We're also encouraged by the lower severity of the current variant of the virus. Having been through 2 post-wave recoveries, we do believe that the bounce back after the current wave will be equally strong. And the general opinion is that future waves, if any, will be mild and may not require restrictions. We've also already seen U.K. and some other countries lift restrictions, indicating a belief that the worst has passed off. India, too, has removed the mandatory quarantine for international arrivals, and many countries are discontinuing testing requirements for fully vaccinated travelers, giving further confidence. By December 21, India's air traffic numbers had already reached 79% of pre-COVID levels with significant contribution from business travelers. Allow me to share a perspective, the monthly occupancy of our hotels had dropped to 17% in April of 2020. That is the first wave. In the second wave, the occupancies had dipped to 23% in May of '21. And as of month-to-date for January, once we're in the midst of the third wave, our occupancies are at 36%. So 17%, 23%, 36%. And this in the midst of our most transmissible variant of the virus. While this has resulted in some setback, we are confident that this is temporary, and we have no reason to believe that the third wave will any way change our mid- to long-term outlook. Overall, the Q3 performance of the company is very satisfying, especially in the second half of the quarter. For this quarter, the consolidated revenue grew by -- grew sequentially by 43% to INR 1.66 billion and adjusted EBITDA for Q3 was INR 474 million, a quarter-on-quarter improvement -- sorry, a sequential improvement of 82%. Chalet's hospitality portfolio crossed the 60% occupancy mark for the first time since the beginning of the pandemic with reported occupancy a shade over 60% for the quarter and December clocking 64% occupancy. Our star performance for the quarter, Novotel Pune and Four Points Sheraton Vashi, recorded 81% occupancy for the quarter and 85% for the month of December. And JW Marriott at Sahar in Mumbai had an occupancy of 79% for the quarter and 70% for December. The average room rates for the portfolio at INR 5,078 for Q3 was up 26% from Q2, and the rate of INR 5,558 for December was up 33% from 3 months earlier, indicating a robust northward trajectory. Revenue from rooms grew sequentially by 40%, and F&B saw a very healthy growth of 72%, led by easing of restrictions. The Hospitality segment reported total revenues of INR 1.42 billion, a sequential growth of 55%. This segment EBITDA was INR 367 million of sequential growth of 167%. As a reference point, Hospitality delivered about 85% of the total revenue for the company. The Annuity business remained steady with the operating assets clocking revenues of INR 221 million and delivered EBITDA of INR 175 million for the quarter. Some quick updates on the pipeline of the projects. The renovation work at Renaissance Mumbai is nearing completion, and the hotel is gearing up for a rebranding to Westin in the next few weeks. Site work for additional 88 rooms at Novotel at Pune will commence next week. On Hyderabad and Hyatt Regency Airoli, we continue to value demand dynamics to assess the opening of these hotels or in the case of Hyatt Regency, starting work there. On the commercial assets, Bangalore building is delayed due to labor situation during lockdowns, an increase in building height, yielding a higher leasable area and is expected to be completed in the next 2 quarters and overall delay of 1 quarter. The new Powai commercial building is on track for commissioning early next year. As we had mentioned in the last call, we've restarted our dormant residential project at Koramangala in Bengaluru. The demolition work of the floors above the tenth floor is underway, post which further development will be undertaken for additional residential towers and for the 1.5 million square foot of commercial space. I'm sorry, that should read 150,000 square foot of commercial space. Chalet's ability to pivot to different asset classes allows us to reassess the dynamic -- the market dynamics of our projects on an ongoing basis. Based on our study of the demand dynamics of hospitality and commercial rental spaces in the Powai market, we've taken a call to change the use of the proposed 150-room W Hotel project at Powai to a commercial building. This project could potentially have 750,000 square foot of leasable space subject to requisite regulatory approvals. Ladies and gentlemen, in summary, whilst we are in the midst of another slowdown, we believe the ramp-up will be swift and the robust occupancies and rates of the previous quarter gives us confidence for a back-to-normal business performance for the company before the start of FY '24. Allow me to now hand you over to Milind, who will take you through the financials in some more details.
Thank you, Sanjay. Good morning, everyone. Reported revenue for the quarter was at INR 1,657 million, which was higher by 43% as against adjusted Q2 FY '22 revenues. During the quarter, company recorded INR 54 million under expenses towards repurposing retail assets to commercial and some costs for the same. Adjusting for this, EBITDA was at INR 474 million against like-to-like performance in Q2 FY '22 of INR 261 million, a growth of 82%. PBT post charges on depreciation and interest for the company was a negative of INR 264 million as against negative of INR 278 million in the sequential quarter of Q2. After taking credit for deferred tax assets of INR 120 million, loss after tax for that INR 144 million. The Hospitality segment contributed to 86% of the total revenue of the company in Q3 FY '22. Occupancy for the quarter averaged at 60%, higher by 4 percentage points sequentially. The RevPAR for the same period was at INR 3,035 as against INR 2,161, a growth of 40%. Revenue from hospitality was at INR 1,420 million in a quarter, a growth of 55% sequentially. EBITDA was at INR 367 million, a growth of 167%. On the cost front, we continue to maintain lower fixed and variable costs compared to our pre-pandemic performance. Fixed cost was lower by approximately 35%, and variable costs were lower by 47% for the year-to-date as compared to the comparable period of FY '20. Payroll costs within Hospitality, reached 17% of revenue as compared to 15% of revenue in the financial year FY '20. Utility as a percentage of revenue was at 9% as against 7% in the financial year 2020, clearly indicating efficiencies built over the last 2 years at play while business catches up to pre-COVID levels. We have renamed Retail and Commercial segment as Rental Annuity business. Steady rental income from operating commercial assets have kept a revenue and EBITDA from Rental and Annuity segment at INR 221 million and INR 175 million for the quarter, respectively. As mentioned by Sanjay, we are repurposing Inorbit Mall at Bengaluru and the Orb at Sahar, with the conversion of retail spaces to commercial office business -- sorry, conversion of retail and commercial office spaces will be EBITDA and return accretive and stabilize earning from rental assets products. Net debt for the company from April to December has increased by INR 2.8 billion, which included INR 2.6 billion of CapEx spend. The net debt of the company as of December '21 stands to INR 21.5 billion. Our cash PBT, that is EBITDA less finance cost, for Q3 FY '21 has been at INR 30 million, a positive number for second consecutive quarter. This was led by prudent cash flow, working capital management, along with strategic mix of assets. The average cost of rupee loan as at December '21 stands at 7.55%, an improvement of 49 basis points since March 2021. We have cash and cash equivalents of INR 460 million, INR 46 crore as of December 21, and undrawn lines of credit for project and general corporate purpose at INR 9,093 million, that is INR 909 crores. Koramangala, there has been no new subscription from promoters on 0% nonconvertible redeemable preference for funding the outflow relating to this commercial -- sorry, this residential project during the quarter under review. Total subscription stands at INR 1,750 million as at December 31. With this, we now open the floor to questions.
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Archana from IDBI Capital.
I have 2, 3 questions. So firstly, you spoke about this Westin Hyderabad and Hyatt Regency, Airoli. Does that mean that there will be further development of this hotel construction?
Do you want to ask all your questions, Archana? Or should I answer this first?
No, no. Sir, please answer this.
So Westin Hyderabad is some -- just as a reminder, is a hotel, which was half done. This is a warm shell lease. So majority of the work was done by our landlords. We spent not too much money on it as of now, and the balance time to complete this project is 6 months. So we continuously evaluate the demand dynamics in that particular micro market. And depending on how the demand shapes up, we will restart the project and get it operational in 6 months from the date of start. So yes, we continue to put that on hold because you've got to remember, we have 427 rooms already in that market, which are clocking occupancies ranging from 40% to 55% in the last 4, 5 months. So we'd like to wait and watch on how this progresses before we take a call. Airoli, where the Hyathat Regency was supposed to come back -- come up. It's something that we've not started any works. There's no shovels in the ground as yet on that one. So the amount tied in right now is limited to INR 5 crores, which we have paid as a part payment for the use of the land. So there's very little cash tied up in that one. And again, whilst Airoli looks probably a bigger start, we would like to be dead sure before we commit new capital to it.
Sure. Sir, my second question is on the Bangalore market. This market has been agar compared to rest of the markets in the last, let's say, 3, 4 months. Although there has been some improvement, still it is not that at par. So how we should look at the inventory in the Bangalore market? And when do we see some revival -- the meaningful revival?
So look, good question. From our perspective, we've seen the hotel ramp-up occupancies from as low as 24% in Q3 the previous year to 40-odd percent in this current year. And this includes the inventory size of 67 rooms that were occupied by ALC, and they've paid us right up to 2024 in advance. So that money is already in. If you take those 67 rooms out, the occupancy climbs up to about 47 -- 46%, 47%. And that's doing -- it's getting there. The rates are also up in that market. So we do hope that this hotel will come back to speed in the next 3 or 4 months' time. Bangalore, Whitefield and Orb Outer Ring Road market is a little challenged market. And probably this is one of the hotels, which is the one that has had the slowest amount -- slowest ramp up. But we do expect steady business inflows in the near future. We've also got some special groups that have been checking in there. So we started opening up this hotel to various events ranging from sports events to weddings to conferences and social events. So we do expect this hotel to ramp up.
Sure, sir. And maybe my last question on this international travel, hopefully, if the international travel starts by Feb end. Sir, how we should look at the mix between these domestic retail, corporate and the international business travel?
Sorry, I don't think international travel will start at full swing in mid-Feb. In fact, the government has extended the ban on regular flights till end of February, in any case. But there are enough airlines flying in through the alternate route that the government has created, I think it's called -- it's a certain name today, I can't remember, I don't know. Rajesh, you remember that name?Okay. So there are enough flights coming in. Now just to give you a reference, the Chalet portfolio has 15% of its rooms occupied by foreign travelers. And with the occupancy going up to 60%, which means 15 out of the -- sorry, 9 out of the 15 -- 60%, 60% occupancy came out of foreign travelers. So it is growing on a room per day basis. And once the regular flights start, I think we expect that to ramp up very quickly. But the domestic business travel has kicked in pretty sharply, and this is pretty evident in the month of November, December.
Next question is from the line of Karan Khanna from AMBIT Capital.
Good morning to the entire management team, and congratulations on a reasonably strong quarter. So Sanjay, firstly, since the pandemic has started, we've noticed that there has been a change in the management's philosophy from having 3 or 4 verticals, that is hotels, commercial, retail and residential, to now focusing just on hotels and commercial while banking your existing residential portfolio. In that context, can you spend a couple of minutes here and help us understand how do you see the mix across these verticals changing, say, over the next 3 to 5 years? That's the first question.
Sure. So Karan, good morning and thank you for the question. So look, you're right. We've moved out of the retail business. We did realize pretty quickly in the cycle that that's going to be a challenged vertical. It hadn't been performing very well, in any case, in advance earlier to -- so we've done the pivot on that and readjusted the buildings to accommodate the commercial office spaces. That's happened at JW Marriott Sahar location and it has happened in the Bangalore Inorbit Mall, which is being converted to a commercial building. So in both these cases, we have reached -- sort of repurposing the buildings. At JW Sahar, we've already had some success, 2 tenants have moved in. We are in advanced stages of conversations with some more tenants. And we're pretty confident that 2/3 of the square footage will be sort of taken up in the next quarter or so. At Bangalore, right now, we're in the process of civil work that has to take place on account of this repurposing of the asset. And in fact, in our financials, if you look at our EBITDA numbers, you'll find that, that is reflected because the cost of redoing that work and the write-offs of the previous work that was done, as well as paying formerly terminations to some of the retail tenants, has had an implication of roughly around INR 9.5 crores. And what we've done is in the last quarter, done that correction and absorbed it. So yes, and the demand seems to be strong from our earlier thought process that we'd probably be able to lease out Bangalore at INR 50, INR 52, the current trends indicate somewhere between 8% to 10% higher rentals in the market. And the square footage there is fairly large. We've now got the new building has scaled up to almost about 650,000 square foot, and the Orb mall is about 300,000 square foot, so roughly 950,000 close to 1 million square foot of office space to be leased out over there. And at INR 255-odd , it looks like an extremely wise decision to do what we've done. Mumbai, at the Powai location also, the 750,000 square foot of office that we are building -- sorry, 600 -- 750,000 square office new building that we are building, which is half way up, is expected to be rented out at today's rates of about INR 130 to INR 135. And by the time we get in the market, it's about a year out, we expect slightly more improvement on that. So you can do your math, 0.75 million square foot, INR 131, INR 140 a square foot. Clearly, something that adds immense value to the balance sheet of Chalet.
Just to follow-up on your Powai project, a proposal to convert the proposed 150K hotel into commercial space. Can you give us some sense on the office supply and absorption dynamics in the micro market? And how many quarters do you think it would take to fully lease up your portfolio whilst acknowledging that there are different completion timelines for the upcoming 0.78 million square feet are likely to be completed by 4Q FY '23 and the new 0.75 million square feet project?
So I was coming to the new announcement today, which is the conversion, the empty plot at Powai in the same Renaissance complex, which we had earlier thought of putting up a W Hotel. Since we have already 771 rooms in that -- on that land parcel, we thought it wise not to add more inventory there. And we've decided to put an office building. The demand dynamics seem to be strong for commercial. Just to give you a reference point, the net absorption in the Mumbai market, even in FY '22, the forecast that we have is roughly 4-odd million square feet, and that's about 80% of the supply that's coming in. So the Mumbai doesn't seem to have a challenge on absorption. The office rentals are doing very well. In fact, my own Mindspace has done a great job of leasing out in the previous quarters. And the vacancy rate in Powai area is 12-odd percent, which is basically in line with what the normal trend is. And also, a lot of the buildings over there in Powai are old buildings, so that's what's causing some of the vacancy there. And the rate of office rentals in Powai currently or for this current year is averages out INR 141 a square foot. So with all of that together, I think it's a -- we've taken the right decision. In terms of the phasing of the leasing, we believe that our Powai building, which is -- sorry, the first building in Powai, which will be completed in the last quarter of the next financial year, should be leased out 90% in about 1 year, 12 months from then. And the Bangalore one, we should be able to lease it out by end of this financial year with the same 90%. We're keeping about 10% as an offer.
But given the high entry barriers in the micro market, especially for the Hotel segment, can you help us understand what would the expected IRR be for had you done a hotel, have you completed the hotel project versus now the commercial real estate that you're coming out with assuming market peak occupancies and ADRs in the Mumbai market 2, 3 years out?
So look, you've got to understand why we are doing this. We are not doing this by -- on a standalone basis. We're doing this in existing land assets where already large box hotels are there. So whilst in Bangalore's case, we've converted the mall, which made a lot of sense. We have not displaced a hotel out there, right? In Bangalore -- in Mumbai's case, in Powai's case, we've displaced 150 rooms because we already have 770 rooms in that market, in that location. So again, if we can get 750,000 square foot at INR 140, INR 150 a square foot and EBITDA flow-through of 90-odd percent, it's a no-brainer that you'd rather look at INR 100 crores EBITDA number as against -- take the risk of adding 150 rooms to an already room inventory heavy location that we have. So we are basically derisking the portfolio by getting annuity assets come to combine with our hotel operation assets.
Sure. And lastly, on the cost side, will it be fair to assume that your staff-to-room ratio at 0.79x in December '21 has bottomed out? And where could we see this to sustain when you see a complete recovery in terms of the quarterly employee costs?
So Karan, as we have said earlier, we expect this to climb to about 0.9 employees to a room at -- when we are back to full occupancy and full F&B business, which is still 25% more efficient than pre-Covid numbers.
[Operator Instructions] Next question is from the line of Vikas Ahuja from Antique Stockbroking.
And congrats on decent results and good execution. My first question is, if I look at the hospitality revenue, it's more than doubled compared to last year. But if we compare a similar quarter pre-COVID, that is Q3 FY '20, we are still down 43%. And clearly, the pricing remained depressed with occupancy picking up. Now assuming if things normalize in the next 3 to 6 months, how should we look on the time lines around getting back to maybe pre-pandemic pricing? I understand a lot depends on international travel coming back, but any color around that would be great. That's my question.
Thanks, Vikas, and very happy New Year to you, too. Yes. So look at the trend, right? The ADR movement between quarter 2 and quarter 3 was up by 26%. And the reason I gave a reference of December, and I said compared to 3 months earlier, which is September, was to give you an indication on the trend line. So the September to December ADR movement was 33%. Now if you're moving 33% month-on-month -- sorry, within 3 months and 26% quarter-on-quarter, clearly, the ramp-up on the ADR is also pretty sharp. The good part is, and I think I probably missed that in my opening statement and I can talk about it now, is that in January, whilst occupancies have fallen on account of the Omicron situation, our rates haven't fallen, we've been able to hold rates from where we were in December. So clearly, the rates are on an upward move and as the restrictions get removed and regular travel starts back in our hotels, we expect rates to again start growing at a similar pace to what we have seen in the previous -- in fact, you see quarter 1 to quarter 2, there was a good growth, quarter 2 to quarter 3 has been a sharp growth. Right now, we are flat, but it is held rate. So I'm very confident the rates will also get to where we want them to be. On -- in terms of full recovery, when are we going to reach, now I'm hazarding a guess there, but putting my neck on the line, I think H2 next year and definitely Q4 next year, we should be pretty close to where we were in the pre-pandemic numbers. And for a full year, we should cross the FY '20 numbers in FY '24 for sure.
Sure. My second question is how much of the drop this quarter in commercial and retail has come through because of your changing Inorbit to a commercial? Also, do you think if there was no pandemic, you would have still gone through this plan of moving from retail to commercial? And what kind of incremental benefits we are expecting from this move maybe from a medium-term perspective? I understand Milind said that it's margin accretive. But in terms of revenue, is it revenue accretive as well? And secondly, if any rough numbers around it would be great.
So look, Milind will come in with a couple of numbers, but I want to give you some sort of a color on this to begin with. Would we have done this had the pandemic not been there? We should have done it. I think this pandemic accelerated the decision because clearly, yield per square foot in the office space is higher than the yield per square foot on the retail, even when we look back to pre-pandemic numbers. Just the pure rental rate that we will get realizing on a mix of fixed rent and the revenue share was lower than what the rental in the market was. So that's the short answer to this. And maybe, Milind, if you have anything else to add to this?
Vikas, if you look at quarter-on-quarter retail, I mean, rental and annuity business income, we were giving discounts and rebates to retailers in Bangalore in Q1. So revenue was in the range of INR 2.5 crore to INR 3 crore in Q1, which has now become 0 in Q3. But we started earning revenue from Sahar retail, that is the Orb. It is, to some extent, compensated. And from next quarter, we'll have revenue coming from the Orb. Around 70% of the property is leased out and will start earning revenue from that. Otherwise, our Sahar commercial office, our rentals are steady, around INR 17 crores, INR 18 crores on a quarter-on-quarter basis. And we are billing them, and the amount is getting collected. Hope I have answered your question.
Yes, one final input, Vikas. I'm so glad that we did this in the current times because in any case, the retail guys weren't going to pay us anything with this whole Omicron and the second wave coming in. There will be no revenue share. They have resisted fixed rental, et cetera, and they would have infused you in paying cap. So this is the best time to repurpose the assets, and we've made use of this time.
Sure, sure. I just have one final question. You have explained about the drop in occupancy of a Bangalore market to the earlier participant. Just to add on, is it fair to say that Bangalore is more linked to the tech-related travel and looking at the demand and hiring what these, all these tech companies are doing right now, not only the IT services, overall, the tech ecosystem, that once travel will open the Bangalore, we will see a very, very strong occupancy and pricing. Is it a fair assumption?
I don't want to give so much of details, but my general belief is that the combination of pent-up demand on IT, the new hires that have joined the IT companies. And the presence of a lot of the DPOs and outsourced companies within that market are going to be definitely an enabler for a ramp-up as soon as the IT travel and IT offices open. You've got to remember that with China out of play for most of U.S. and U.K., a lot of the outsourcing will again move back to India, and the reliance in India is improving significantly on the BPO front. So we do expect Bangalore to come back very, very strong when things mobilize.
The next question is from the line of Amandeep Singh from AMBIT Capital.
Whilst most of my questions have been answered. Can you give us some update on the remaining CapEx for the entire upcoming portfolio? And will it be possible to break it asset or as a segment, please?
Amandeep, Milind here. See, our major CapEx will come in next financial year of around INR 530 crore, INR 540 crores. There will be INR 118 crore, INR 120 crores CapEx in Q4 -- and then CapEx will taper down from FY '24. We have not yet planned time lines for construction of new commercial office, which Sanjay just spoke about. And out of that, around INR 200 crore or INR 220 crores will be hotel CapEx. Everything else will be commercial office buildings.
So you wanted to breakup also, maybe we can give you a quick breakup.
So, the balance cost to spend on Powai Phase III is around INR 405 crores. we'll be spending INR 55 crores in Q4, INR 260 crores in FY '23 and around INR 90 crores in FY '24. Bangalore, the balance spend is around INR 150 crores. Out of that, major cost will be incurred in FY '23 around INR 90 crores and INR 30 crores in the current year and INR 30 crore spillover creditor's payment in FY '24. These are 2 major commercial office CapEx. And on housing side, we'll be spending INR 20 crores in the next quarter, that is Q4 and in current quarter, around INR 135 crores in FY '23 and around INR 75 crores in FY '24.
I -- so I think big picture item, we impact the CapEx of INR 537 crores in FY '23 and INR 324 crores in FY '24, out of which INR 23, INR 400-odd crores will go towards commercial assets and INR 20 crores towards -- INR 135 crores towards office assets in '23.
So this is really helpful. Just one breakup between the Novotel and Hyderabad Hotel CapEx?
Novotel is not a very big CapEx. It's 88 rooms, a small staff and we are adding some F&B facilities by the pool side. But total CapEx on Novotel in the range of INR 120 crore to INR 122 crores, which has all been completed in the -- between current and next financial quarter or next quarter itself actually. The other question, which was the other one?
So vesting, balance CapEx is around INR 75 crores. So it will be spread over 2 financial years, FY '23 and FY '24. Major portion will be incurred in FY '23.
Sure. And secondly, on bookkeeping questions. So can you help us with breakup between rooms, F&B and other revenue for the hospitality business in 3Q?
In Q3? Sure. Just give me a moment, we'll just pick that up for you.
Yes, maybe you can get back or maybe we can take that offline also.
Sure.
The next question is from the line of Adhidev Chattopadhyay from ICICI Securities.
Yes. Question is meaning on the industry side, firstly. See, considering that players like yourselves, the leading guys are not entering significant hospitality CapEx. And we've also seen other leading players taking the franchisee or the management contract for expansion. So then demand does come back, right, when the leisure and business have fully fixed up. How do you see the demand and supply outlook for the sector, especially in 4 and 5 star hotels? And is the possibility of ARR in FY '24 growing quite significantly? Just wanted to get a reason of that. That's my first question.
Sure. Adhidev, allow me to address that. Before I get there, a quick answer to the previous question, I'm sure all of you are interested. In Q3, our room revenue is 50%, F&B revenue was 42% and other revenue was 8%. On the demand and supply side, Adhidev, to answer your question, the supply side is expected to be very muted for the next 4 or 5 years. So pre-pandemic, the expected growth in supply CAGR for 5 years was 4.5%. We believe that's half now to about 2.5%, 2%, 2.5% for the next 4 best years for sure, maybe even 5 years. That -- and you combine that with the ramp up back to normal in occupancy, the occupancy demand -- sorry, the occupancy should rise very aggressively. And when occupancy rise to an extent of beyond 65%, 70%, the upward movement of rate is natural and tends to go up pretty sharply. We saw that happen in our portfolio pre-pandemic. The moment we crossed 70% occupancies, our rates started growing pretty well. So that's the overview.
Okay. Fine. And the second question now considering that we are adding so many office assets, right, in the portfolio in a couple of years time, we'll have a significant rental business as well. So is there any plans to maybe sell all these off maybe at a good valuation when the office market also fully revised by that time? And bring down the debt on the balance sheet, is it something which is on the table? Or you'd like to hold on to these assets?
Quick answer. The opportunity could -- is there. I mean it's an opportunity that's there's in the market. Have you given thought to it? No. And as long as they continue to be value creative, why not. I think the only thing that we are looking at selling is the residential project, which we have in Bangalore, and we have about 1.5 lakh square foot of office space there, which we'll be selling off through startup sales. Again, as I said, is the opportunity there? Absolutely. Are we -- do we plan to do something like this? Not at the moment.
So Adhidev to answer your question further, I mean, if you look at LRD entitlements, I mean, the parameters used by banks for giving LRD. And once commercial assets start earning rental, I mean, it will be in self-finance mode. I mean LRD entitlement servicing will be taken care of by lease rentals earned.
Now but to the answer your question, no, we don't have any plans right now, to tell you that.
Next question is from the line of Prateek Poddar from Nippon India Mutual Fund.
Yes. Sir, just 2 questions. One is on staycation, if you can just talk a bit about how is the trend this quarter versus last quarter in your properties? The second question, I just wanted to clarify that you talked about 2.5% supply. Was it your micro markets? Or you were talking about pan-India? And last question, sir.
Could you repeat the second one, please?
So when you talk about 2.5% supply post pandemic, right, to the previous participant's question, I just wanted to ask whether it was your micro markets which you were referring to or this was a pan-India scenario?
Okay.
And last question, sir, even if I were to adjust for the INR 5 crores of one-off, which is there this quarter, do you see a massive increase in other expenses? So maybe if you can just help me understand because the occupancy just went up by 2% on an average basis. So just wanted to understand that.
Sure. Right. So staycation continues to stay pretty strong. As you know, a lot of people are either looking at leisure destinations or looking at local destinations for stay to overcome the lockdown and the feeling of getting lockdown at home. As reference point in December, we did roughly around 1,600 room nights of staycations in our portfolio. So it continues to contribute, but we also see regular business come back. And I think December story was also a lot around the wedding and social functions over there. On the supply side, the question was -- the answer was, yes, it is pan-India. So therefore, the pan-India growth on supply side, we believe it to be 2.5%. On the cost side, I think there are 2, 3 things. I mean, as you are looking at hospitality-based costs, there are 3, 4 things that are moving the needle. One, the revenue mix where F&B improved as a percentage of contribution to total revenue, up to 42% of total revenue was one thing because the F&B comes in with its operating costs and supplies. The second thing is that we did sort of cut away from any salary cuts for employees in the hotels. So we've removed all that some time in the middle of quarter 2 of last year. And if you look at the overall companies or rather the consolidated performance, you got to keep in mind if it were a quarter-on-quarter comparison, that the previous quarter, we had the Accenture Learning Centers compensation that came in to drive the EBITDA up, and there was some narrative rebate as well as some ACI's income that came in. So these 3 had impacted the previous quarter. If you take those out, the adjusted EBITDA is sharply up from INR 26 crores in Q2 to INR 47 crores in Q3, which is somewhere around 82% growth. Milind wants to add something to this.
So Prateek, to answer your question on other expenses, our other expenses have increased by around INR 19-odd crores quarter-on-quarter basis. Out of that, INR 5.4-odd crores are nonrecurring one-off expenses for repurposing retail assets into commercial. So balance INR 14 crores are incremental cost on account of incremental revenue, which includes repairs and maintenance, heat light and power, royalty and management fees, which paid to Marriott, other hotel operating cost. So incremental revenue for the quarter sequential increase is around INR 50 crores. And if we take out these nonrecurring expenditure, other expenses increased by INR 15 crores -- INR 14 crores.
So the other way to argue, sir, is when I look at Slide #6. And when I look at incremental revenue and the flow-through to EBITDA, that seems quite low given the cost structure or the fixed cost structure we have. So I'm just trying to understand that, look, you see sequentially the improvement in revenue base is Slide #6, right, is roughly around INR 50-odd crores, if I'm not wrong. And you have a INR 22 crores sequential improvement in EBITDA. So the flow-through is just 44% despite most of your growth this quarter coming from ARR increase and not occupancy. So I would have thought for a sort of a higher flow-through to the EBITDA, which is not happening. Any thoughts?
Add back the INR 5 crores that we spoke about, the EBITDA growth works out to about INR 27 crores. On INR 50 crores, it's 50-odd percent. But keep in mind, there's an F&B element where the F&B revenue has gone up significantly, and that comes with its own costs. The contribution margin of F&B alone.
So on Slide 6, the INR 36 crores EBITDA is up, is like it has a one-off element included, right? Just to clarify.
It doesn't have that one-off element. It's a result of 2, 3 things. One is salaries being sort of coming to full pay from quarter 2 and the revenue mix of the 2 of the business. Also, the hotel has moved into GOP or operating profit status. The incentive fee for the brand kicked in.
Okay. Okay. Got it. Got it. Got it. Okay. And just -- sorry, just going back to the staycation question, just wanted to check this 4% improvement in incremental occupancy and maybe exits are quite strong. But can you help me understand whether it was driven again by staycation or this incremental for was by business? Or has stayvacation on a quarter-on-quarter or on an exit basis come down or it has remained flat?
Staycation marginally come down this quarter. So the increase in occupancy is driven largely by regular business and the banquet business -- the group-based business.
Next question is from the line of Amit Agarwal from Nirmal Bang.
My question was...
Sorry to interrupt, Mr. Agarwal, but your voice is not very clear.
Am I clear now?
Yes, much better. Please go ahead.
My question pertains to a sharp rise in the ARR, especially in Bombay, even when the occupancy remained flat. So I was just wondering what would be the reason for that? Was it that overall -- I mean ARRs are going up in Bombay or I mean, what is the reason for the 25%, 26% raise and occupancy? And one second question, overall train -- we're looking at such a strong growth in the potential ARR because of favorable demand/supply mix, then wouldn't it be try more. So to put more other hotel features because we see about [indiscernible] year still to come.
I'm sorry, Amit, I can't hear you. I heard the first part, and I'll answer that. But if you can repeat the second part, I just couldn't catch the second part at all.
In general. Is it better?
It's not clear.
No, Mr. Agarwal, your voice is choppy at times, so.
Let me answer the first one while maybe you can try and improve your signal. The ADR increase in Mumbai is genuine area increase, and overall portfolio grew by 26% quarter-on-quarter. The 36% that you see on the slide is over the same quarter previous year. But the regular business coming back is the reason why the rates are going up. So when you have business travel, coming back, you have social functions coming back. They tend to take your average room rate higher. So that's what's happened.
Next question is from the line of Sumant Kumar from Motilal Oswal.
I had 2 questions. Number one, overall, what we get a sense from the -- our strategy change from say, hotel -- 150 hotels we are converting to commercial retail space, we are converting to commercial space. So I would like to understand our overall, we have changed whatever we were doing earlier, focusing more on hotels and retail space. Now we are shifting our focus toward commercial space. So can we expect going forward, our focus will be more on commercial side?
So Sumant, we are a hotel company. As we said last quarter, also 86% of our revenue came from the hospitality business. That may go to -- in fact, in the last, I think, previous calls the call before that, we have indicated that the hospitality revenue may drop to over 75% of the total revenue and 25% could be out of commercial. That's the vision that we have, right, and I think it's more or less panning out in that direction. Retail, we dropped because we realize that it's just not making sense on the yield per square foot. And they were not driving large assets, whether it's Bangalore -- the Inorbit Bangalore or the Orb in Mumbai. And the volatility with retail came to the 4 during this last 2 years. So we, as a company, have an ability to pivot asset classes, given our in-depth understanding of the real estate business. and we've applied that knowledge to do the pivots and thereby, strengthen the balance sheet for the years to come.
So assuming the overall industry is moving towards a hybrid working culture, where we have a work from home, plus also a combination of our office working. So do you think these are entering into our focus on converting the hotel into commercial space in Mumbai, 150 rooms to commercial space is the right decision because in hotel industry in Mumbai, that supply is very lower and going forward, there will be a higher pricing power in hotel space.
Sumant, I'll answer your question one-by-one. So as far as Powai is concerned, the 150 rooms are not being converted. It was still to be built. So instead of putting that CapEx for hotel, which will be far more capital intensive and the fact that we in the same land parcel, we have 770 operating rooms already, that was the driving part of this decision. The leasing patterns in these markets in spite of work from home continue to be strong. Can this be done all over India?, Absolutely not. But in select markets and micro markets of those select cities, can it be done? Yes, absolutely, it can be done, and that's what we've done. It is very, very location and asset specific. Let me again clarify, we are not reducing existing rooms. We had a plan to build 150 more rooms, which we're not doing any more. We have instead of doing 150 rooms, which could have given us an EBITDA maybe of INR 15 lakh, INR 20 lakhs a room of roughly around INR 40-odd crores -- INR 40-odd crores, we are potentially talking about INR 100 crore EBITDA with less CapEx.
Okay. When it is going to complete?
So this has not started as yet, as announced. This is something that we have to take a final decision on the plans, the designs, the approvals. So this will -- this work will start a little later. We also want to make sure that the current building that is under construction of another 750,000 square foot on the same plot get some leasing traction before we start committing to this.
Okay. So the completion plan has not been. In the last question, what were the costs we have done on anticipation of business recovery in, say, Q4 and upcoming quarters? Is there any potential to reduce cost if the business is going to be down from Q3 to Q4?
No. So look, if you look at our history over the last 7, 8 quarters, we've been able to do that turning -- squeezing off the taps, squeezing it on and then when the market conditions require us to do so. We did that in the first wave. We did that in the second wave, and the third wave also, whatever is required to be done without putting our -- all our stakeholders through undue stress. We have done what needed to be done. I would also like to remind you that as I said, in wave 1, our occupancy was 17%. In wave 3, it is 36%. So it's more than double of what wave 1 occupancy was. So the cost-cutting measures need not be as strong as they were in the wave 1. Also, the ADRs are significantly higher than the previous waves.
My question was, as we have increased the cost in Q3 on anticipation of better business in Q4, so that might go down in Q4 whatever we have seen in Q3?
Some of there were variable costs that went up on account of revenue, especially on revenue and F&B. As and when revenue comes down, those variable costs come down.
Okay. And employee cost, which has increased Q-o-Q, there might be some variable cost reduction over there in the Q3?
There will be proportionate variable cost reductions, yes.
As there are no further questions, I now hand the conference over to Mr. Sethi for closing remarks. Over to you, sir.
Thank you, Zaid, and thank you, everyone, for taking time to have this conversation with us. It's always very fulfilling to have this conversation and some of your questions do allow us to reflect on important matters for the company. Once again, stay well, and we look forward to engaging with you either one-on-one or in group calls in the near future. Thank you.
Thank you very much, members of management. Ladies and gentlemen, on behalf of Chalet Hotels, that concludes today's conference. Thank you all for joining us, and you may now disconnect your lines.