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Leasing traction picks up

Brookfield India REIT (BIRET) reported a stable quarter as overall committed occupancy stood at 83% (82% in 2QFY22) in the pre-acquisition portfolio led by leasing at Kensington and Noida N1 asset. Moreover, it has successfully completed the acquisition of Candor Techspace N2, Noida on 24th January 2022 for an EV of INR 40bn through a combination of debt and equity. The pro-forma portfolio committed occupancy stood at 83%. However, N2 asset has an effective committed occupancy of 100% on account of rental support being given by Brookfield Group to the REIT thereby taking the effective committed occupancy to 87% for the pro-forma REIT. Total area leased has increased to 8.5msf (8.4msf in Sep’21) and management expects companies to start returning to office over the next 1-3 months. Going forward, management guides for an NDCF of INR 22 per unit for the period from 8Feb to 31Mar’22. We believe BIRET remains well placed to benefit from any pickup in leasing activities and trades at an attractive yield. We maintain a ‘BUY’ rating with a Mar’23 TP of INR 315 (10% total return; 3% capital appreciation + 7% dividend till Mar’23). Key risks; Slow pickup across commercial markets

* Portfolio holding up: In 3QFY22, Income from Operating Lease Rentals (OLR) declined to INR 1.44bn (down 4% YoY; down 6% QoQ) as vacancies impacted the portfolio. Going forward, operating lease rentals are expected to improve due to the new leasing of 0.4msf achieved in 3QFY22 (contributes c.INR 90mn per quarter to OLR: 82.4psf*0.36msf area leased) along with rentals / income support from N2 asset. NOI declined 1.50bn (down 8% YoY / QoQ) and BIRET generated NDCF of INR 1.4bn (INR 4.74 per unit) thereby totalling to INR 5.3bn (INR 17.59 per unit) since listing. Management plans to distribute INR 1.5bn (INR 5.00 per unit) in 3QFY22, with 34% of distributions tax free for unit holders. Total cumulative distribution stood at INR 17.00 per unit since listing.

* Leasing momentum: Total area leased has increased to 8.5msf (8.4msf in Sep’21) as 237K sqft area was vacated and 536K sqft of gross leasing was executed (359K sqft of new leasing + 177K of renewals). It includes i) new leasing of 90K sqft in Kensington, ii) new leasing of 211K sqft and renewals of 19K sqft in G2, iii) new leasing of 57K sqft in N1 and iv) renewed 158K sqft in K1. Moreover, additional expansion options of 291K sqft were signed in G2 and the ongoing discussion pipeline stood at 0.78msf and LOI of 56K sqft are under consdieration. In total, 0.3msf of expiries are expected in 4QFY22E (individual asset contribution, G2 – 49K, N1 - 24K, N2 – 127K and K1- 92K; 2% of gross rentals). Out of these expiries, N2 asset already has a rental support (assuming 100% leasing at market rentals) from Brookfield Group.

* NDCF guidance of INR 22 per unit: Management continues to maintain NDCF guidance of INR 22 per unit for the period from 8Feb’21 to 31Mar’22 (INR 17.59 per unit already generated and INR 17 per unit expected distribution).

* Maintain ‘BUY with Mar’23 TP of 315; 10% total return potential; We maintain ‘BUY’ rating with a Mar’23 TP of INR 315 (10% total return; 3% capital appreciation + c.7% dividend till Mar’23). Key risks; Slow pickup across commercial markets.

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