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Gradual recovery

The Brookfield India REIT (BIRET) saw Q2FY23 NOI rising marginally QoQ by 3% to Rs2.4bn owing to inch up in portfolio committed occupancy by 100bps to 84%. For H2FY23, the REIT portfolio has expiries of 1.0msf of which the REIT manager expects to see fresh exits of 0.6msf and expects to achieve at least 0.5msf of new leasing to backfill these exits, implying flattish portfolio occupancy in H2FY23. For Q2FY23, the REIT manager has given distribution of Rs5.1/unit (same as Q1FY23) which is in line with its guidance for Rs10.2/unit of distribution in H1FY23. For H2FY23, the REIT manager has given FY23 DPU guidance of Rs20.25/unit (I-sec estimate of Rs20.3/unit), which implies H2FY23 distribution of Rs10.05/unit (marginally lower than H1FY23) owing to higher blended interest costs for REIT debt. We upgrade our rating to ADD from HOLD rating with an unchanged target price of Rs318/unit post the 9% correction in the REIT’s unit price over the last one month which factors in asset level adjustments and balance sheet adjustments for N2 asset infusion. Key risks are slower-than-expected ramp up in office occupancies and lease rentals and rising interest rates globally and in India.

* Steady Q2FY23 performance, H2FY23 expiries a key monitorable: The BIRET achieved Q2FY23 operating lease rentals (OLR) of Rs2.1bn (up 1% QoQ) as N2 asset infused in Jan’22 contributed Rs469mn of incremental OLR (same as Q1FY23) while NOI stood at Rs2.2bn (ex N2 rent support) and adjusted NOI stood at Rs2.4bn (with N2 rent support of Rs179mn). H1FY23 has seen exits of 0.10msf vs. new leasing of 0.13msf resulting in portfolio committed occupancy rising by 100bps to 84%. However, owing to downsizing by a large occupier in G2 (Gurugram) asset of 0.25msf, H2FY23 scheduled expiries stand at 1.0msf of which the REIT manager expects to renew 0.3msf of area and 0.6msf of exits. Against these exits, the REIT manager expects to backfill at least 0.5msf from its lease discussion pipeline of ~1msf which implies flattish portfolio occupancy in H2FY23. While the REIT manager continues to focus on bringing back portfolio occupancy levels to over 90% in the medium term, it is also targeting to achieve higher rental rates across the portfolio to drive NOI/NDCF growth. Physical occupancy across parks continue to range between 30-60% and the REIT manager expects portfolio physical occupancy levels to cross 50% by Mar’23.

*H1FY23 distribution guidance in line, H2FY23 distribution to be marginally impacted by higher interest costs: In Q2FY23, the REIT manager has announced distribution of Rs5.1/unit (same as Q1FY23) resulting in H1FY23 distribution of Rs10.2/unit. For FY23 overall, the REIT manager has given a distribution guidance of Rs20.25/unit (I-sec estimate of Rs20.3/unit) which implies H2FY23 distribution of Rs10.05/unit which is marginally lower than H1FY23 owing mainly to rise in average interest costs at portfolio level to 7.45% from 7.1% earlier

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