Brookfield India Real Estate Trust (BIRET) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Brookfield India Real Estate Trust Earnings Call for Q3 FY '23. [Operator Instructions] Please note that this conference is being recorded. On the call, we have the following persons: Mr. Ankur Gupta, Managing Partner, Brookfield Asset Management and Director, Brookprop Management Services Private Limited; Mr. Alok Aggarwal, Chief Executive Officer, Brookprop Management Services Private Limited; Mr. Sanjeev Kumar Sharma, Chief Financial Officer, Brookprop Management Services Private Limited; and Mr. Shailendra Sabhnani from Brookfield. I now hand the conference over to the management. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and welcome to the third quarter FY '23 earnings call for Brookfield India REIT. We continue to deliver a robust performance with around 1 million square foot of leasing year-to-date, with around 2/3 being contributed from new leasing and the balance of the malls. We have also achieved 10% average escalation on 3.5 million square foot of lease areas today. Our occupancy has remained stable while achieving a 9% NOI run rate growth over FY '22. And our NOI run rate as of December '22, which stood at INR 961 crores, has a further embedded growth potential of 18% through a mix of new leasing, re-leasing and MTM potential, that is well supported by a robust 2.2 million square foot leasing pipeline. We also continue to evaluate select sponsor assets, which will further grow the REIT portfolio organically. And the balance sheet continues to remain robust with a 32% LTV, a AAA rating, which has enabled us to achieve highly competitive pricing. On the recent budgetary announcements, we are putting together a representation along with industry participants, which my colleague, Sanjeev will further elaborate. With this, I will hand over to Alok for a deep dive into the business update. Thank you.

Thank you, [indiscernible]. A very good afternoon to everyone. I'm pleased to announce that we have delivered another quarter of stable performance for our unitholders. We have seen a consistent improvement in the physical occupancy at our assets in the quarter ending December. Comprising the holiday season in many organizations, our assets have continued to witness physical occupancies of over 50%. This increase in physical occupancy is driving increase with the inquiries. We continue to attract new tenants to our world-class portfolio, and many of our existing high-quality tenants are looking to expand their footprint in our portfolio assets. Our leasing remains on track and we have a healthy leasing pipeline. During the last quarter, we leased 332,000 square feet, comprising a 241,000 square feet of new leasing and 91,000 square feet of renewals. Additionally, we signed expansion options of about 40,000 square feet. The total lease area of the portfolio has remained stable at 11.9 million square feet, and we have maintained our committed occupancy at 83% and effective economic occupancy at 88%. Our existing leases have delivered robust embedded growth with a 12% average escalation on 1.5 million square feet during the quarter. In the last 9 months, we have achieved leasing of 949,000 square feet, with a healthy mix of existing and new tenants taking up space. Additionally, we have signed expansion options of 117,000 square feet and have a robust leasing pipeline with 2.2 million square feet of ongoing discussions. This will provide a further fillip to our leasing recovery. We have added many new office tenants into our portfolio in the year-to-date, including Aristrocrat Technologies, LTIMindtree and McGraw Hill. Backed by robust cash flows from our underlying assets, the Board has approved a distribution of INR 5 per unit this quarter. We remain on track to achieve our H2 FY '23 NDCF guidance. It has been 1 year since we completed the acquisition of Candor TechSpace N2. We are pleased with the leasing success we have achieved in this asset, with the last new lease signed at a rental 15% higher than the income rental -- income support rental of INR 60 per square feet. The newly completed tower at the asset Tower 11A has been 77% leased to Aristocrat, a leading mobile game developer. The balance 23% is available with them as an expansion option, making the tower fully committed within 7 months of completion. ESG continues to be a key component of our overall strategy and we continue to work towards a sustainable future with our target to achieve Net Zero by 2040. [indiscernible] we have received GRESB 5-star rating, and the prestigious Golden Peacock award [indiscernible] that we are making meaningful progress and integrates us to increase our efforts to create sustainable campuses. We remain closely connected with the communities that we operate in. And we recently launched the Trees of Hope campaign with the objective of providing education to children, which have seen a fantastic response from all our stakeholders. BIRET has an attractive acquisition pipeline and is evaluating 6.5 million square feet across 2 assets, Candor TechSpace G1 in Gurugram and Downtown Powai in Mumbai. These acquisitions, if materialized, would help broaden the lead and diversify our offering to our tenants. Backed by our high-quality portfolio, we continue to remain focused on the path of [ diversification ] for our unitholders, and we continue our efforts to deliver long-term value to our partners and communities. Now I would like to invite Sanjeev to provide the financial updates. Thank you.

Thank you, Alok. Good evening, everyone. I'm pleased to announce that we have achieved an NDCF of INR 168 crores, means INR 5.1 per unit in quarter 3 of financial year 2023 and are on the track to achieve our full year guidance of INR 20.25 per unit. For the 9 months of financial year '23, we have already achieved an NDCF of INR 15.26 per unit. The Board has approved the distribution of INR 168 crores or INR 5 per unit this quarter. With this, we have distributed INR 509 crores or INR 15.20 per unit for the 9 months of financial year 2023. There were recent budgetary announcements regarding taxation of a component of distribution that accounts for around 50% of our current distributions. It is pertinent to note that apart from distributions, REIT provide capital appreciation driven by embedded growth drivers in the underlying assets, and the taxation on capital gains of REIT remains unchanged. We are examining the impact of the budget announcement and, along with industry participants, are evaluating next steps, including making appropriate representations. Our operating lease rentals for the quarter are INR 207 crores, which is 43% higher than the same period last year. The adjusted NOI for the quarter, including income support from the sponsor group, is INR 240 crore, which is 60% higher than quarter 3 financial year 2022. For the 9 months of financial year 2023, we achieved a 33% growth in our operating lease rentals at INR 616 crores and a 48% growth in our adjusted NOI at INR 716 crores, which is primarily driven by the addition of Candor TechSpace N2 into the portfolio and a significant improvement in our CAM margins over financial year 2022. The improvement in our CAM margins was driven primarily by some of occupiers moving to the higher hours of operation and because of the higher physical attendance we have seen at our assets. We continue to maintain a strong balance sheet with a 32% loan-to-value and robust cash flow generated by our high-quality assets have ensured that our debt is rated AAA Stable by CRISIL. This has enabled us to see a limited increase in the average interest rate to 7.95% as on 31st December 2022, which is 119 basis points increase in the interest rate during 9 months of financial year '23 as compared to a 225 basis point increase in our repo rate during the same period. With the highest credit quality and minimal refinancing risk, we have witnessed only a partial pass-through of an increase in benchmarking to our borrowing costs. Thanks, everyone. With this, I would request the moderator to open the floor for Q&A.

[Operator Instructions] The first question is from the line of Puneet Gulati from HSBC.

My first question is obviously with respect to the tax. So based on your assessment, what is the implication of the budget proposals go through? And secondly, what is the industry and you are trying to do about it? And then related to that, how does it impact the ROFO preparation?

Puneet, this is Ankur. So one is this is not taxation that you're talking about as applicable uniformly for everybody. So let's just make a distinction. So to say that this impact is not going to be a holistic answer. Second, we've heard a lot of commentary around that this was a -- principal repayment to the REIT, et cetera, is almost relates to not paying taxes. Debt repayment, the way we've all learned happens from post-tax income as applicable. So I think there is a little bit of commentary that's required and there's some confusion needs to be plugged in. As Sanjeev mentioned, we are making representations to make some of the points that's well established. Just like dividends are paid from post-tax income, debt repayment on the principal side also happens from net operating profit after tax, right? And then finally, the capital gains nature of suitable capital adjustment as it relates to principal payments are already in the code right now. So on all 3 counts, I would say that this needs a clarification, and we have, as Sanjeev said, made representations or are going to make representations because this just impacts -- clarity is required. So sorry, there was another question that you had.

Yes. So what does it do to the ROFO proposition, right? In case there is no change in the budget proposal and it does get passed through, how does it impact the ROFO proposition?

These are long-term assets. This is a product which has dividends, which has a product that has capital appreciation, et cetera. So I don't think fundamentally things change. Of course, it's not great if tax costs -- either are incurred with -- too frequently for the decision that gets created, which I don't think is going to be the case. India has a very robust REIT environment. We've learned our regulations from the best places in the world. And I think clarification will come through is my understanding or at least my hope, to grow the readthrough acquisitions remains our strategy.

Yes. So just related to that, if I may, Ankur, on the news article, which related that Brookfield Powai portfolio might get sold to GIT. Is that something that you would even evaluate? Or should we think that everything that portfolio will ultimately flow into the REIT?

I don't think it's fair for me to comment upon a media articles here. But even the presentation we put out and in the speaking notes that Alok just mentioned, Downtown Powai is being considered as part of the ROFO portfolio.

Understood. That's helpful. My other 2 questions are just a bit on financial side. There was a positive tax impact of almost INR 309 million for this quarter. Are we likely to see more of this in the remaining year? Or all those refunds are done with now?

So Puneet, Sanjeev here. As you know, how our tax regime works, the withholding tax gets deducted every quarter. And then in some quarters, refunds come. So over a period of time, it's tax neutral, I will say, because some -- in some quarters, you will see negative, where withholding tax is deducted and some quarters you will see refunds. So it's a continuing process, which will happen with perpetuity.

For this year, is there more to come? Or are we done with fiscal '23?

So there are certain refunds in the balance sheet outstanding. We can't exactly comment on the timing, whether we will be able to get those refunds in the current quarter because we are only 1 quarter away from the year-end or in the coming quarter.

Okay. Understood. And can you also clarify how much of your unoccupied portfolio is SEZ now?

What was the question?

How much of the unoccupied portfolio is SEZ?

By square footage, I would say most of our vacancy right now is in the SEZ portfolio.

Okay, understood. And last, if I may squeeze in. There are some big expiries due in FY '24, especially from Kensington. Any update or color you want to give there?

so Puneet, this is Alok. I think we have mentioned in the past that decisions have progressed well. And it's just a question of time, we should be able to get confirmation from tenant for further renewal and confirmation. We are in advanced stage of discussions, very advanced stage.

[Operator Instructions] The next question is from the line of [ Kunal ] from Bank of America.

I just wanted to follow up on the developments that came through as part of the budget. Ankur, on the repayment of debt, is the representation about trying to get it reversed or see what workarounds might be possible? If you could clarify that one.

So -- the industry is making a joint representation. It's not probably fair for me to make my assessment. But as I said, that there are clarifications rather than reversals that are required right now, because, as I said, one is there was -- again, there's a lot of chatter around that this was a channel which was the kind of, I would say, "loophole" around taxation. That's not the case, right? So that's a clarification required. And the existing costs provide for dealing with such repayments of debt leading to distribution. So I would say it's a matter of the tax code of the country to be interpreted properly and clarifications required from the budgetary -- from the announcement within the budget. But we'll have to wait and see how this turns, how this plays out.

Right. Okay. And then on the SEZ part of it or the [ base bill mind space ] of the view -- was of the view that, again, the industry would sort of talk about trying to make adjustments to the existing policy itself. So do you have any thoughts there as to how fast could we see progress on this particular front, et cetera?

[ Kunal ], this is Alok. So we had multiple discussions with government and regulatory bodies. I think there's sufficient progress has been made here, and that's the integration we have, different commit time lines, but there's sufficient progress has been made. At the same time, what we also is -- and you've seen the -- what has been done. We are re-pitching all our properties and we see sufficient attractiveness for SEZ properties also. So both angles, sufficient progress with government, different commit time lines, I think 2 months more. But at the same time, we are seeing interest also there for SEZs and we continue to work with tenants for leasing of SEZ properties also.

Yes. Okay. And then the last one from me. Your average rental at INR 64, it basically feels unchanged over a span of 8 quarters. I was wondering as to why should that be because you've been getting the escalations. Is that mainly because of any sort of a mix change may be caused N2? Or anything else going on there?

So 1 lease, so we can look at the details. But of course, we have seen a lot of leasing in N1. And of course, leasing in N1, we have kind of now gone from almost INR 50, INR 52, now INR 60 -- INR 60, INR 63. So that is 1 reason where -- and when the leasing rental is lower.

Okay. So this should all be mix led is your guess, correct?

Absolutely. Absolutely.

We'll take our next question from the line of Sri Karthik Velamakanni from Investec.

Just a quick clarification on the tax portion came in the budget. In the current form, will there be any benefit to the cost basis on the capital gains?

Sorry, Sri Karthik. If you could just clarify your question. And I mean we tried to clarify from our position on the [indiscernible] as you would appreciate that it's all -- we all have the same information. But if you could just clarify your question, then we'll try to see what best we can do.

Yes, if the principal repayment instead of being classified as principal repayment, they're classified as income. Earlier, the cost basis would have been lowered because of the now -- the capital gain component at least would be adjusted upward, right? So there'll be lower capital gains and has lower capital gains tax. Is that the right understanding?

I mean that's -- so when we stated that there is existing law or tax framework to deal with the entire picture, you're right, that both can coexist. So we won't be in a position to answer what part of it is the right answer because there is a little bit of confusion there, and that's the clarification of the industry has thought. Repayment, in our opinion, is not -- repayment is repayment. You try to become classified as -- instead, right?

Understood. So just to clarify this, effectively, the outcomes are if they sort of roll this back, then effectively your capital gains increase. If they do not, then you get a benefit there. Is that the right understanding?

Your first part is probably the right understanding as it relates to the statement to date, anyway, before the recent announcement came in. So I didn't see anything changing on that front.

Understood. This is very helpful. The second question is what percentage of our operating assets are classified as SEZ? And could you also quantify what percentage of that area is the vacant currently?

Yes. So this is Alok. Out of -- SEZ has. N1 is non-SEZ, other assets are SEZs. And as we have mentioned that 90% of the vacant area is in SEZ.

Okay. And are you also looking to selectively de-notify some of this -- depending on, obviously, approval of theirs?