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Stable quarter; Asset acquisition plans on the anvil

Brookfield India REIT (BIRET) reported a stable quarter as overall committed occupancy stood at 84% (83% in 1QFY23) and leasing picked up marginally (127K of new leasing + 179K of renewals + 16K of expansion options). Accounting for income support at the Noida N2 asset, the effective economic occupancy stood at 89% (stable QoQ). In the coming quarters, leasing traction is expected to improve as physical occupancies inch upwards across offices. BIRET also has a 2msf leasing discussion pipeline (1msf of new leasing + 1msf of renewals) and conversion of these discussions would help increase asset level occupancy / NDCF potential. Presently, BIRET has a NDCF guidance of INR 20.25 per unit for FY23 (INR 10.2 achieved in 1HFY23) and remains on track to meet it. A possible equity dilution to fund purchase of 6.4msf of completed assets would be a key montiorable. We introduce FY25 estimates and roll forward estimates to arrive at a Sep’23 TP of INR 340 (19% total return). Maintain ‘BUY’ rating. Key risks: Slow pickup across commercial markets.

* On track to meet INR 20.25 per unit NDCF guidance for FY23: In 2QFY23, Income from Operating Lease Rentals (OLR) increased to INR 2.05bn (+32% YoY; +1% QoQ); out of the 32% YoY growth, INR 469mn (30%) increase was due to addition of the N2 asset. NOI increased to INR 2.4bn (+48% YoY; +3% QoQ) and was buoyed by income support of INR 179mn (N2 asset; stable QoQ). NOI margin improved across assets to 109% of OLR (107% in 1QFY23; 104% in 2QFY22) on higher CAM income as physical occupancies improved across assets and margins are likely to inch further upwards. NDCF of INR 1.71bn (INR 1.72bn in 1QFY23; INR 5.12 per unit) was generated and distributions of INR 1.71bn (INR 5.1 per unit) are to be paid in 2QFY23 (52% tax free). For FY23, NDCF guidance of INR 20.2 DPU is likely to be achieved (INR 10.2 in 1HFY23).

* 2msf active discussion pipeline; conversions keenly awaited: Total area leased has increased to 11.9msf (11.8msf in Jun’22) as 266K sqft area was vacated and 306K sqft of gross leasing was executed (127K sqft of new leasing + 179K of renewals). It includes i) Kensington: 60K of renewals and 58K of gross expiries, ii) G2: 117K of renewals and 125K of gross expiries, iii) N1: new leasing of 104K sqft, renewals of 2K sqft and 2K sqft of gross expiries, iv) K1: no new leasing with 9K sqft of gross expiries, and v) N2: 23K sqft of new leasing and 72K sqft of gross expiries. Moreover, the ongoing discussion pipeline stood at 2msf (1msf of new leasing + 1msf of renewals). In-place rentals have remained broadly stable across assets.

* 6.4msf of acquisition pipeline to be considered by FY23-end: BIRET has 6.4msf acquisition pipeline comprising i) Candor Techspace (3.7msf; 76% committed occupancy; INR 73psf), and ii) Downtown Powai (2.7msf; 88% committed occupancy; INR 158psf). The management remains in dialogue with the Brookfield sponsor group and is looking at ways to acquire the asset before end-FY23. Presently, Debt to GAV stands at c.31% and equity issuance would be needed for acquisition. Average cost of debt has also gone up on a QoQ basis to 7.45% (+30bps QoQ) but is likely to stabilise in this range.

* Expiries under control for FY23: In total, 972K sqft of expiries are expected in 2HFY23 (Kensington – 389K, G2 – 240K, N1 - 38K, N2 – 191K and K1- 114K; 10% of gross rentals) and 0.6msf are expected to exit. For 1HFY23, same-store expiry has increased by 245K sqft and 1.1 msf of expiries is expected in FY24 (11% of rentals) out of which 0.7msf is expected to be renewed as of now.

* Other highlights

- Occupancy in existing towers constructed before Covid stood at 86% (12.86msf area) while occupancy at new towers (1.40msf) was 60%. New towers are spread across Noida N1 and N2 assets.

- Commenced construction of retail-led 561K sqft mixed use development (174K sqft of retail +387K of non SEZ office) in Kolkata. The 174K sqft retail development will be an F&B led retail destination with multiple restaurants, cafes, large and small format retail outlets, gaming centre and an open terrace area, which will improve the customer experience at K1.

- Physical occupancies are expected to inch upwards towards 60% by Mar’23 (c.50% currently). Larger companies are taking time to recall employees and occupancies are~30- 40% in Kolkata and Mumbai while in Noida it varies across N1 and N2 assets.

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