Brookfield India REIT - Resilient performance - ICICI Securities

The Brookfield India REIT (BREIT) delivered a resilient FY21 performance with over 99% of rental collections and flattish FY21 NOI of Rs6.5bn. We reiterate our BUY rating on BREIT with an unchanged March 2022 DCF based target price of Rs296/unit. We expect the REIT to deliver a NOI CAGR of 9.3% over FY21-23E. At CMP of Rs249, we expect BREIT to deliver NDCF distribution yield of 8.7% in FY22E and 9.1% in FY23E. We expect over 30% of the distribution to be in the form of tax-free dividend and capital return with balance returns from interest post the conversion of Rs10.1bn of CCDs in Candor Kolkata (G2+K1 SPV) to equity shares effective April 1, 2021. Key risks to our thesis are the large-scale adoption of Work-from-Home by occupiers over the long term and rising interest rates globally.

- Resilient FY21 performance: The BREIT which listed on exchanges on February 16, 2021 achieved a resilient FY21 performance in its operational portfolio with rental collections of over 99% and achieved a 9% average escalation on 3.7msf of area. FY21 operating lease rentals grew 2.5% YoY to Rs6.1bn while overall operating revenue (including CAM) declined by 9% YoY to Rs8.6bn owing to a YoY reduction of Rs1.1bn in CAM revenue owing to Covid and mid-year termination of CIOP operating services with identified assets. Comparable FY21 Net Operating Income (NOI) was flat YoY at Rs6.5bn. The operating portfolio of 10.3msf is stabilized with 91% Same-Store Occupancy and a Weighted Average Lease Expiry (WALE) of 6.5 years.

- Renewals of FY22E expiries a key monitorable: In FY21, of the 1.0msf of scheduled expiries, the REIT manager has achieved 54% renewals on term expiries while discussion on balance FY21 expiries of 0.40msf has been postponed to FY22E. As a result, the REIT now has 1.1msf of area expiring in FY22E (including FY21 rollover) of which the REIT manager is expecting to renew at least 40-50% of the area based on conservative estimates. In our view, the outcome of renewal discussions for FY22E will hinge on the trajectory of the second wave in India with an earlier than expected return to offices increasing the chances of renewals/new leasing while an extended WFH situation may lead to tenants giving up space and remains a key monitorable.

- Share of tax-free distribution to rise from FY22E onwards: At the time of listing, over 80% of BREIT's FY22-23E NDCF distribution was expected to be in the form of interest with balance returns from dividend/capital repayment. Effective April 1, 2021, the REIT manager has now converted CCDs having face value of Rs10.1bn to equity in the Candor Kolkata SPV (G2 + K1 assets) which will result in Rs1.2bn of annual interest being re-classified as capital repayment resulting in share of interest falling to below 70% of FY22-23E NDCF. For H1FY22, the REIT manager has provided a guidance of Rs12.75/unit of NDCF vs. our FY22E NDCF estimate of Rs21.7/unit.

Source : Equity Bulls

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