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Leasing in NCR assets key to achieving guidance

Brookfield India REIT (BIRET) reported a steady quarter with overall committed occupancy increasing to 85% (84% in 1QFY25) as gross leasing (0.97msf) outpaced expiries (0.6msf). Accounting for income support at the Candor G1 asset, the effective economic occupancy also increased to 89% (88% in 2QFY24). The company declared distributions of INR 2,208 mn / INR 4.6 p.u., which was in-line with our estimates. The REIT has witnessed 2x growth in its operating area to 24.3msf along with a 500bps increase in occupancy over the last 12 months. Future growth will be led by lease-up of vacant area, contracted rental escalations and a MTM potential of 8-10%. Going forward, the management is confident it can achieve committed occupancy of 87-89% by Mar’25. Furthermore, with income support at G1 coming to an end in Mar’25, leasing will be a key monitorable at this asset in 2HFY25E. We roll forward our estimates to Sep’25 and maintain BUY with an increased TP of INR 310 (12.7% total return; 6.1% capital appreciation; 6.7% dividend yield).

* New assets driving growth: In 2QFY25, income from operating lease rentals (OLR) increased to INR 4.3bn (+55% YoY; flat QoQ). The strong growth on YoY basis was on account of a low base as contribution from Downtown Powai and G1 commenced from Aug’23. The growth was also supported by new leasing and contractual escalations in N1, K1 and Kensington assets. NOI increased to INR 4.9bn (+40% YoY; flat QoQ) including income support of INR 346mn (for G1) which is coming to an end in Mar’25. The management highlighted that the strong leasing pipeline coupled with escalations and MTM potential can more than offset the end of income support.

* Gross leasing picking up: Total area under lease has marginally increased to 20.6msf (vs. 20.3msf in 1QFY25) as 0.6msf was vacated and company achieved 0.96msf of gross leasing (0.7msf of new leasing + 0.3msf of renewals; 0.44msf in its SEZ assets) with 19% spread in rentals. Expiries of c. 1msf in 2HFY25 are concentrated in G2, N1 and Downtown Powai and the management expects 0.5msf of such areas to be renewed. It is aiming to increase committed occupancy to 87-89% by Mar’25, which implies incremental leasing of c. 1.4msf in 2HFY25 considering potential exits.

* Stable distributions: Adjusted for INR 200mn reserves created for interest servicing, the NDCF at REIT level came in at INR 2.3bn (+19% YoY; +5% QoQ) vs. INR 2.5bn at SPV level. The company declared distributions of INR 2,208 mn / INR 4.6 p.u., comprising i) interest = INR 1.66 p.u., ii) dividend = INR 0.5 p.u. and iii) repayment of SPV level debt = INR 2.38 p.u.; thus, 63% was tax-free. The capital reduction scheme proposed in 3QFY24 has been approved for three assets, which will enhance dividend component (tax free) in distribution. The benefit will be reflected over the next 2 quarters with dividend component increasing to 20-25% from c. 11% currently.

* Maintain BUY, TP increased to INR 310: We roll forward our estimates to Sep’25 and maintain BUY with an increased TP of INR 310 (12.7% total return; 6.1% capital appreciation; 6.7% dividend yield).

* Key conference call takeaways: - Anticipate strong leasing momentum in the portfolio and retain occupancy guidance of 87-89% by year-end. This implies net leasing of 1.3-1.4msf.

* The company has taken an enabling resolution for INR35b capital-raise to be ready to capitalise on growth opportunities. In the interim, this may also be used for debt reduction.

* 18% YoY growth in same store NOI is driven by 8% lease-up, 4-5% escalations and MTM gains and minor cost savings.

* Share of dividend in the distribution should increase to 20-25% from 10-11% currently after the capital reduction scheme is implemented in three SPVs.

* While the leasing pipeline remains strong across all key assets, G2 will ramp up with a bit of lag compared to G1 and N2.

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