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Rebound on the cards

The Brookfield India REIT (BREIT) delivered a resilient Q2FY22 performance inspite of a 400bps QoQ same-store occupancy decline to 85% with over 99% of rental collections and flat operating lease rentals of Rs1.56bn on YoY basis. In H2FY22, the REIT manager expects to renew 50% of scheduled expiries of 0.6msf with new LOIs of 0.16msf and ongoing discussions for 1.3msf of area, likely to result in portfolio occupancy remaining flat in H2FY22 before increasing from H1FY23 based on recovery in office leasing. We maintain our ADD rating on BREIT with a revised Mar’22 DCF based target price of Rs317/unit (earlier Rs 293) factoring in improved leasing from FY23E. Key risks to our thesis are the large-scale adoption of Workfrom-Home by occupiers over the long term and rising interest rates globally.

* Resilient Q2FY22 performance: The BREIT which listed on exchanges on February 16, 2021 achieved a resilient Q2FY22 performance in its operational portfolio with rental collections of over 99% and operating lease rentals remaining flat YoY at Rs1.56bn while Net Operating Income (NOI) declined 8% YoY to Rs1.63bn owing to reduction of Rs0.8bn in CAM revenue owing to Covid and mid-year termination of CIOP operating services with identified assets. The operating portfolio of 10.3msf is stabilized with 85% Same-Store Occupancy as of Sep’21 (89% as of Jun’21) and a Weighted Average Lease Expiry (WALE) of 6.6 years.

* Renewals of H2FY22E expiries a key monitorable: In H1FY22, of the 0.8msf of scheduled expiries, the REIT manager has renewed 0.2msf of area at a re-leasing spread of 3% while the balance 0.6msf has seen tenant exits resulting in same-store portfolio occupancy declining by 600bps to 85% as of Sep’21. For H2FY22, the REIT has 0.6msf of scheduled expiries (including 0.1msf of early expiries), of which the REIT manager expects to renew 0.3msf or 50% of the expiry. Additionally, the REIT has LOIs under execution for 0.16msf of area and ongoing discussions for 1.3msf of area which may result in the H2FY22 expected exits of 0.3msf being recouped. As per the REIT manager, there is a leasing pipeline opportunity of 3.2msf across its portfolio markets and it expects to see strong leasing traction heading into H1FY23 as more employees return to offices and relocation/expansion/consolidation plans fructify.

* On track to meet FY22 NDCF DPU guidance: At the end of Q4FY21, the REIT manager had given a NDCF DPU guidance of Rs12.75/unit for H1FY22 and has delivered a H1FY22 NDCF DPU of Rs12.85/unit of which it has distributed Rs12.0/unit. For FY22 overall, the REIT manager has given a NDCF DPU guidance of Rs22.0/unit, which implies a distribution of Rs10.0/unit in H2FY22 which factors in lower occupancies and excludes any major fresh leasing transactions. We believe that the H2FY22 DPU guidance is achievable and is in line with our estimates.

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