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New assets adding scale and diversity

Brookfield India REIT (BIRET) reported a subdued quarter with overall committed occupancy declining to 80% (82% in 1QFY24) as expiries (851K sqft) outpaced leasing (476K sqft). Accounting for income support at the Candor N2 asset and Candor G1 asset, the effective economic occupancy also decreased to 88% (89% in 1QFY24). In Aug’23, BIRET completed the acquisition of Downtown Powai and Candor Techspace G1 in an equal partnership with GIC. This acquisition has increased its scale, further diversified its tenant base and improved GAV by 74% to INR 285bn (as on Sep’23). Going forward, the management is confident it will achieve positive net leasing by 1QFY25E and a distribution of c. INR 5 per unit from 3QFY24. Furthermore, with income support at N2 coming to an end in Mar’24, leasing will be a key monitorable at this asset in 2HFY24E. We revise our estimates and maintain a BUY rating with an unchanged Sep’24 TP of INR 280 (23.6% total return; 15.7% capital appreciation; 7.9% dividend yield).

* New assets driving growth; income support at N2 coming to an end: In 2QFY24, income from operating lease rentals (OLR) increased to INR 2.74bn (+33% YoY; +30% QoQ); out of the 33% YoY growth, INR 724mn (+35%) increase was due to addition of the Downtown Powai and G1 assets. However, this was marginally offset by a loss of INR 40mn (down 2%) due to same store expiries. NOI increased to INR 3.47bn (+44% YoY; +41% QoQ) buoyed by income support of INR 514mn (for N2 and G1 assets). Income support for the N2 asset is coming to an end in Mar’24 and the management has indicated its key focus will be to ramp up occupancy at this asset.

* Expiries concentrated in G1 and G2 assets: Total area under lease has decreased to 16.5msf (16.8msf in Jun’23) as 851K sqft area was vacated and 476K sqft of gross leasing was executed (418K sqft of new leasing + 58K sqft of renewals; 318K sqft in its SEZ assets) in 2QFY24. A significant portion of the expiries were noted in G1 (314K sqft), G2 (303K sqft) and N2 (134K sqft). On the other hand, leasing was more evenly spread across N2 (134K sqft), N1 (94K sqft) and Kensington (86K sqft); 37% of the total gross leasing in 2QFY24 was by GCCs.

* NDCF temporarily impacted by dilution and partial contribution from new assets: NDCF of INR 1.93bn was generated and distributions of INR 1.93bn (INR 4.4 p.u.) are to be paid in 3QFY24. The pre-acquisition pro-forma NDCF stood at INR 5.03 p.u. The difference in NDCF is due to the i) impact of dilution from the units issued at QIP and the preferential allotment, and ii) partial contribution from the two new assets as they were added to the REIT only in mid Aug’23. BIRET is also in the process of filing a capital reduction scheme for Downtown Powai (SEZ), N1 and K1 in order to enhance the dividend component (tax free) of distribution.

* Maintain ‘BUY with a Sep’24 TP of 280: We revise our estimates and maintain a BUY rating with an unchanged Sep’24 TP of INR 280 (23.6% total return; 15.7% capital appreciation; 7.9% dividend yield).

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