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Resilient performance

The Brookfield India REIT (BREIT) delivered a resilient Q1FY22 performance with over 99% of rental collections and flattish NOI of Rs1.7bn on YoY basis with samestore occupancy remaining healthy at 89% (down 2% QoQ on fresh expiries). We cut our rating on BREIT to ADD from BUY with a revised March 2022 DCF based target price of Rs293/unit (earlier Rs296) as we incorporate further expiries in FY22E.

At CMP of Rs267, we expect BREIT to deliver NDCF distribution yield of 7.5% in FY22E, 8.5% in FY23E and 8.9% in FY24E. We expect over 30% of the distribution to be in the form of tax-free dividend and capital return with balance returns from interest. Key risks to our thesis are the large-scale adoption of Work-from-Home by occupiers over the long term and rising interest rates globally.

* Resilient Q1FY22 performance: The BREIT which listed on exchanges on February 16, 2021 achieved a resilient Q1FY22 performance in its operational portfolio with rental collections of over 99% and operating lease rentals grew 7.3% YoY to Rs1.6bn while overall operating revenue (including CAM) remained flat owing to a YoY reduction of Rs1.1bn in CAM revenue owing to Covid and mid-year termination of CIOP operating services with identified assets. Comparable Q1FY22 Net Operating Income (NOI) was flat YoY at Rs1.7bn. The operating portfolio of 10.3msf is stabilized with 89% SameStore Occupancy and a Weighted Average Lease Expiry (WALE) of 6.3 years.

* Renewals of remaining FY22E expiries a key monitorable: In FY21, of the 1.0msf of scheduled expiries, the REIT manager had achieved 54% renewals on term expiries while discussion on balance FY21 expiries of 0.40msf had been postponed to FY22E. As a result, the REIT had 1.1msf of area expiring in FY22E (including FY21 rollover) of which the REIT manager was expecting to renew at least 40-50% of the area based on conservative estimates. y monitorable. In Q1FY22, the REIT manager was able to renew 0.2msf of space but an additional 0.2msf of fresh exits led to same-store occupancy declining by 200bps QoQ to 89%. With another 0.9msf of exits/expiry in the remainder of FY22E, renewals of these expiries remain key. As per the REIT manager, while near-term pain may persist for another one to two quarters, leasing momentum should pick up from Q4FY22 resulting in occupancies recovering again.

* On track to meet H1FY22 NDCF DPU guidance: At the end of Q4FY21, the RIET manager had given a NDCF DPU guidance of Rs12.75/unit for H1FY22 and has declared a Q1FY22 NDCF DPU of Rs6.0/unit or 93% of the Q1FY22 NDCF of Rs6.42/unit. Factoring in lower occupancies across assets owing to fresh exits, we lower our FY22 NOI/NDCF estimates by 6%/8% to Rs7.0bn and Rs6.0bn, respectively and retain our FY23-24E estimates. We expect the REIT manager to meet its implied Q2FY22 NDCF DPU guidance of Rs6.75/unit.

Valuation

REITs derive cash flows in the form of interest, debt repayment and dividend payments from owned assets which have differing cash flow profiles. Unlike assets in Infrastructure Trusts like toll/annuity roads or power transmission assets which have a fixed tenure of operations, the underlying assets in REITs which consist of offices, malls and hotels are perpetual in mature and carry an element of capital appreciation as well through escalation in rentals, addition of new assets and ramp up in occupancies.

Hence, the total return offered by a REIT should be measured as a mix of annual distributions and capital appreciation of the units of the REIT. Hence, we prefer a DCF based approach which captures the upside from uptick in rental income along with the annual distribution of at least 90% of the Net Distributable Cash Flow (NDCF) to REIT unitholders.

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