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 Q4 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; Mr. Pawan Kakumanu, Senior Vice President, Strategic Finance; and Mr. Shailendra Sabhnani from Brookfield. I now hand the conference over to Mr. Rachit Kothari. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and welcome to the call. We are pleased to report to you the Q4 and full year results for financial year 2023. I'd start by saying that this has been a transformative quarter for our REIT. On one hand, we have made significant operating leaps on our existing portfolio, and on the other, secured a large INR 11,200 crore acquisition, which will completely change the scale, diversity and the operating outlook of our business. In that breadth, a couple of things to cover at the beginning. Firstly, great operating progress at 2 of our assets. Our early renewal of 900,000 square feet of space in Kensington with TCS secures over INR 100 crores or 10% of portfolio's operating income every year for the next 15 years with a 5-year lock-in. Our asset N1 in Noida has also touched 96% occupancy with very limited lease-up left. Trends in both these properties are great testament to the confidence that our occupiers continue to show in us. We expect the other 3 assets to follow similar trends as return to work progresses and clarity on SEZ reforms comes through. We're also very pleased to announce, with the approval of our independent Board members, a transaction that is transformational to the inorganic growth story of our REIT and a big validation of Brookfield's commitment towards growing this vehicle. We have signed binding agreements to acquire Candor TechSpace G1 and Downtown Powai. These assets were on our pipeline for the last 12 months or so, a very high-quality irreplaceable portfolio of 6.5 million square feet. The deal is in an equal partnership with GIC, the sovereign wealth fund of Singapore, one of the largest investors in Indian real estate, and is on the exact same terms, but majority board seats and management will continue to stay with the Brookfield India REIT. GIC has committed approximately INR 3,300 crores towards these transactions, and the REIT will look to raise a similar amount post the unitholder vote to conclude the transaction. The deal is priced to an INR 11,225 crores enterprise value, which implies a 6% discount to GAV and a 12% discount to our estimate of NAV based on the independent valuations. These properties have an income potential of over INR 900 crores, which implies an 8.1% capital and a 4% to 5% DPU accretion. This deal will also take our consolidated assets to over INR 28,000 crores making us the second largest REIT in the country, putting us on the path to be the largest as we add more assets and new cities. I will now request Alok to walk through the business updates.

Thank you, Rachit. A very good afternoon to everyone. I'm pleased to announce that we had another strong financial year and have delivered on our strategic objectives for the year. With the announcement of a distribution of INR 5 per unit this quarter, we have met our NDCF guidance and have announced distribution of INR 20.20 per unit for FY '23. We have displayed strong organic growth during the year with our contracted NOI run rate crossing INR 1,000 crores, growing almost 15% from the run rate in Q4 last year. We're also delivering on our inorganic growth strategy and excited to announce the proposed acquisition of 6.5 million square feet of Grade A commercial office real estate in Mumbai and in Gurugram. We'll acquire Downtown Powai and Candor TechSpace G1 for a total consideration of INR 11,225 crores. The acquisition will be carried out through a unique 50-50 partnership with GIC, a renowned global institutional investor. GIC is one of the largest foreign investors in India real estate and has a 25-plus years' investment track record in India. The equal partnership between Brookfield India REIT and GIC for the acquisition of Downtown Powai and G1 will be extremely beneficial for both parties, with strong alignment of interest towards value creation. Under the management of our sponsor, Brookfield Group, both Downtown Powai and G1 have been established as dominant assets in their respective micro markets. These assets are highly complementary to our REIT and are being acquired at a discount of 5.8% to the average fair value assessed by 2 independent valuers. Axis Capital has provided our fairness opinion of the acquisition price of INR 11,225 crores. These acquisitions will significantly increase the scale of the REIT with the operating area increasing by 44% and the consolidated gross asset value by 73%. The top 5 tenant consideration will reduce from 52% to 32%. The prominent BFSI tenants such as Deloitte, JPMorgan and Nomura being added to our top tenant roster. This transaction will significantly improve our geographical diversification with Mumbai's share of our JV increasing to 33%. The acquisition will enhance the pro forma effective economic occupancy by approximately 200 basis points to 91%. We anticipate a 4.5% increase in NDCF per unit as a result of these acquisitions. We propose to fund this transaction through our institutional CapEx of up to INR 3,500 crores and have taken Board's approval for the same. This institutional placement will significantly enhance the [indiscernible] of the REIT units and diversify our investor base. With the COVID-led disruption largely behind us, we are seeing an upsurge in the return to office trend with strong month-to-month growth in footfall at our assets. This trend, coupled with the quality of assets, has resulted in us achieving a gross leasing of 2.1 million square feet in FY '23, which is approximately 1.8x of our historical leasing average. We have added additionally -- we have additionally signed 0.4 million square foot of expansion options during the financial year. We are delighted to announce the renewal of 0.9 million square feet with TCS at Kensington at a renewal spread of approximately 35% signed during the quarter. The renewal would take place in 2 phases and will significantly derisk our income profile. The weighted average lease expiry of the overall portfolio has improved from 6.8 to 7.9 years and the expiries due till FY '26 have reduced from 32% to 22%. During the financial year, we signed deals with marquee tenants at all our assets such Aristocrat at N2, Accenture at G2, Baker Hughes at Kensington, LTIMindtree at N1 and Capgemini at K1. We renewed space with TCS at Kensington, British Telecom at G2, Mercer at N2 and GenPact at K1. The leasing success that we have seen during the year coupled with our robust leasing pipeline of 1.1 million square feet gives us confidence that FY '24 will be a strong year. Our effective economic occupancy has improved to 89% with our total leased area at 12 million square feet. Our existing leases have delivered a robust embedded growth with an 11% average escalation on 4.1 million square feet during the year. ESG continues to be a key component of our overall strategy, and we continue to fervently work towards a sustainable future with our target to achieve a net zero by 2040. We have signed a power purchase agreement through the IEX Platform to procure renewable energy up to 60% of the energy requirement at our assets in Noida. This will potentially reduce our greenhouse gas emissions by 7.5% from our Noida assets. We're also working on a long-term solution for the procurement of renewable energy for the REIT entities and a third-party open access agreement, which will potentially reduce our greenhouse gases emissions by 48%. We continue to take incremental measures to ensure that our assets are efficient, resilient and future-ready. Now I would like to invite Sanjeev to provide our financial update. Thank you.

Thanks, Alok. Good afternoon, everyone. I'm pleased to announce that we have achieved an NDCF of INR 167 crores, means INR 4.99 per unit in quarter 4 of financial year 2023 and were able to deliver on our guidance. For 12 months of financial year 2023, we have achieved an NDCF of INR 679 crores, means INR 20.25 per unit. The Board has approved the distribution of INR 168 crores means INR 5 per unit this quarter. We have achieved a near 100% distribution of INR 677 crores, means INR 20.20 per unit for the full financial year 2023. Final version of budget clarified the issues on the taxation of a component of distribution, which is in line with our expectations. Further, as commercial office business parks picks up, REITs are well positioned to provide capital appreciation from the underlying business in addition to distribution yields. We have witnessed a growth of 14% in our operating lease rentals to INR 211 crores as compared to the same period last year. The adjusted NOI for this quarter, including income support from the sponsor group, also witnessed a stellar growth of 15% to INR 244 crores compared to quarter 4 of financial year 2022. The addition of Candor TechSpace N2 into the portfolio and a significant improvement in our CAM margins over financial year 2022 lifted our operating lease rentals by 28% to INR 827 crores and adjusted NOI by 38% to INR 961 crores over the same period last year. We have witnessed an expansion in our NOI to OLR ratio by 4% to 107% in quarter 4 of financial year 2023 as compared to the same period last year. The improvement in our CAM margins was driven primarily by some of the occupiers moving to higher hours of operation and because of higher physical attendance we have seen at our assets. Our robust balance sheet with a 32% loan-to-value ratio has enabled us to see a limited increase in the average interest rates to 8.2% as on 31 March 2021 -- 2023. This is a 144 basis point increase in the interest rates during financial year 2023 compared to a 250 basis point increase in the repo rate during the same period. Additionally, our debt structure has ensured that we have limited amortization of only 5% over the next 3 years. With this, I would request the moderator to open the floor for Q&A. Thanks to everyone.

[Operator Instructions] The first question is from the line of Pradyumna Choudhary from JM Financial.

Yes. So a couple of questions. The first one being the assets that have been acquired. Somewhere I read that the NDCF yields from those would be around 4.5%, and the discount to GAV is 5%. So in that sense, has it been slightly expensive acquisition? Would it be right to say that? Like how do you see it? And second, on the same thing would be that, from my understanding, we are even around INR 35 billion and the asset would be 50-50 priced at INR 112 billion. So I think the debt-to-equity comes out to be -- for the asset [indiscernible] comes out to be 37.5% debt and 62.5% equity. So is the debt a bit on a higher side for the acquisition? And second would be related to the current demand scenario. Are you seeing any sort of weakness because of what's happening more globally? So -- yes, these 2.

This is Ankur. I'll just start off about the transaction and my colleagues would take it forward. I just want to make sure that the understanding is correct. The NDCF accretion over the baseline is by 4% to 5%, which means we are enhancing the NDCF accretion the implied yield on an asset value basis is in excess of 8%. So all in all, this is an accretive transaction. And it's also at a discount to average of fair value of 2 assets. So I think -- and lastly, in the context of the quality of the assets, assets of this scale are very, very hard to acquire, to amass. These are irreplaceable assets, if I may use that word. So on all accounts, this is a fantastic transaction, underlined by the fact that a strong institutional investor with decades of experience in this space is coming in at the same basis as the REIT is coming in at. So that's point number one. And on point number two, we have stated, as a large owner of real estate assets across the world, that high-quality assets continue to be in top demand, both from an occupier perspective as well as from a capital perspective, which is also reflected in the strong performance that our REIT has had with the overhang of the COVID-led situation almost behind us. So I would say that on all accounts, this is a fantastic opportunity for the REIT to significantly increase its breadth and enterprise value. Lastly, on the question of LTV, sorry, I forgot to answer that. On a look-through basis, if you look at the value and not look at the costs, in fact in the zone about 1/3 or thereabouts that we think is prudent capital structure for high-quality income generating 90%-plus lease assets with long-term lease tenure. And as capital markets evolve, we've always stated that our LTV will toggle in the region of 25% to 35% because the value uplift that happens through income increases cannot always be captured on a static basis as far as debt stack is concerned.

Understood. And secondly, on the demand side, like, can you just give us an idea, are you seeing any sort of weakness, or are we still seeing larger deals happening or for now dispersed. Some idea there?

Well, as I mentioned, we have completed some marginally large transactions in our portfolio in REIT across our portfolio in the country. And as I mentioned, high-quality real estate needs to be separated from some of the commentary that's happening around media. That has always been the case. It is just pronounced right now, but our assets and the quality of our portfolio in India and worldwide continues to do very, very well.

The next question is from the line of Sri Karthik V. from Investec.

My question again is pertinent to the transaction. And I'm referring to the Slide #18 in the presentation on the acquisition. There's a INR 2.6 billion working capital and debt financing drawdown, against which the CapEx number is INR 1.1 billion number. So the gap of INR 1.5 billion, in fact, for the year in reference is being used to support the NDCF. If we were to adjust for that decline, NDCF looks much lower. How should we think about this bit? That is question one. Second, again, I'm going to take this valuation question in a slightly different way. You announced, let's say, a discount of approximately 5.86% on the GAV. However, our REIT assets today approximately trade at a 12% discount at the current market price. So -- in fact, the acquisition discount seems to be much lower than where the REIT is currently trading. So how do we triangulate these 2 things?

Sure. Sri Karthik, Pawan here. I will take the first question. I think here, there is a presentation which has been made on a pro forma basis. But I think a better way to look at NDCF or to that extent, NDCF yield is that, we are doing this acquisition at an 8.2% rental yield adjusted for 1/3 of that being through debt, which is coming at a cost of 8.5%. We get an NDCF yield of 8% on the remaining 2/3, which will be funded through equity is on the overall transaction level. Now typically, with the lease-up, which is expected over the next 2 years, taking into account G1 as well as for the lease-up remaining in Downtown Powai, we anticipate that there is INR 100 crore of lease-up rental, which is -- which will come up in G1 and approximately INR 50-odd crores, which comes up in Downtown Powai and INR 75 crore of security deposit inflows will come up in the next 2 years. Adding that into the fray as well, I think there is north of 8% of NDCF yield, which is coming from these assets. And I think that's the right way of looking at what value these assets are bringing in. On the second question...

Yes. So on your second question, Sri Karthik, look, again, I mean, the valuation of assets that you're purchasing from private sellers, again, I mean, the stock trading at a certain level should not really impact valuation of assets when you look to purchase them. Our endeavor has been to, of course, get the best deal for the REIT. And the discount to NAV that I mentioned in my opening remarks, is still 12%, which is double digit, which is, I would say, in line or maybe slightly short of where the discount to NAV of our current stock is. So what I would say is that is one way to look at it. But the other way to look at it is the fact that you're getting an asset at an early 8% cap rate with a 5% to 6% growth profile, so you're looking at 14% asset level IRR. And on top of it, if you add the 35% LTV, you look at about a 17% equity IRR on this transaction, which is going to be immensely beneficial for the existing unitholders as well as new unitholders who choose to participate in the fund raise.

Okay.

I would also add that stock valuations are set by the large share that's sold or bought, always using that as a representative of how private capital markets or transaction capital markets behave. Our endeavor in the REIT has always been to grow with high-quality assets, not take development risk. You can always purchase discounted assets, which will not qualify for the quality or take undue development and operating risks. These assets check the box on every parameter, dominant assets, almost no operating risk, certainly no development risk and fantastic income profile from credit tenants and coming at a discount towards an independent view on valuation. So on all counts, we are very excited that it allows us to motor ahead on our business plan for the REIT.

Sure. Could I ask a couple of questions on the results also, if that's okay?

If that's okay with you, maybe you can come back in the queue, if that's okay because there's a lot...

Yes, yes. Okay. No problem.

The next question is from the line of Atul Tiwari from Citigroup.

Yes. Congratulations on acquisition. Just one question. So you mentioned that NDCF per unit, it is accretive by about 5%. In that calculation, you have assumed issuance of new units in the QIP?

That's correct.

Okay. And obviously, the price, whatever has been built in is similar to the today's market price? Is that right understanding?

That's right.

[Operator Instructions] The next question is from the line of from Pritesh Sheth from Motilal Oswal.

Just 2 questions. One on the acquisition. So for the assets that we have acquired, is there any mark-to-market opportunity that we see on the existing occupancy?

Pawan here. So there is some amount of mark-to-market in both these assets available in about 4% to 5% mark-to-market on a consolidated level on the entire 6.5 million square feet.

And any thoughts like when it can be realized? I mean, are the expiries of those under-rented tenants very soon or it's longer?

Yes. This is Ankur. And I'll just answer that question slightly differently. My colleague stated that these assets are coming at an equity IRR of about 17%, unlevered IRR of about 14%. So starting with about 8%-ish yield with all the cash from accretion that's happening, I think the best way to look at it is on a total term scenario that you are getting 8% yield, which is growing at about 6% annually assuming that cap rates remain the same. So that's probably the easiest way to look at. We can go tenant by tenant on 6.5 million square feet, but there are profiles that are different. And I would also like to state that these markets have tremendous supply gap of high-quality spaces with almost no operating risk, the ability to increase rents as expiries come through is very high. So you're kind of trading stability. This consistent growth in some of these portfolios rather than a spike which is also good. So overall, on the portfolio basis, it adds tremendous value to our business. But I think the best way to look at it is unlevered 14% return from these assets. That shows the real compounding impact of growth.

Ankur, that's very clear. And secondly, since we have good chunk of exposure to the IT services guys like Cognizant, TCS, Accenture, anything we are sharing on their outlook about hiring slowdown or office space take up, while -- I mean I saw we had a good renewal this quarter from TCS. But in terms of new space absorption, how do they think about next 6 months, 12 months?

This is Alok. Let me answer this question. So we have seen a 0.9 million renewal for 15 years. So that -- in SEZ. That itself validates the kind of attractiveness of our assets in SEZ. And even in Capgemini, they have taken new space in Kolkata. And we have -- and we're talking about markets, we're talking about different tenants. Kolkata market has done pretty well. It has kind of revived. We're expecting 2 million square feet kind of leases this year and we hope we can capture some of them and a lot of [indiscernible] services companies. So while they are not taking space in those, but they're taking small leases 50,000 or 1 lakh square feet they're taking. We also have -- Accenture has signed, Mercer has signed. So there's a demand. Of course, they have not grown their numbers in last quarter, but that's okay because they have grown by almost 20% per annum in last 2 to 3 years. So I mean, 1 quarter, 2 quarter, 3 quarter of consolidation is okay. But I think the icing on cake is they're back to office. And more and more of their staff will keep coming back to office. They will take more and more space for existing employees. Forget about the new additions. And that's what happened with one of the tenants in Kolkata. As soon as they crossed 50% people coming back to office, they needed more space. So even if their numbers are not increasing, that's okay. I mean we -- and we have seen the back-to-office numbers going almost up to 65% on average in our campuses. As soon this -- and every month, these numbers are going up. So leasing will continue. There's absolutely no issue on that.

Sure. And no exit or no discussions with Cognizant as well, right? No concerns on that versus what we've seen on media?

See, I would not go -- and Cognizant probably will leave. They have some space in Kolkata, some in Bombay. They could leave some space in Bombay. But that's okay because that's happened. We have seen many of these companies leaving some space was not filled. Most of the spaces have good mark-to-market. Some churn will happen in best of times and in worst of times. So one tenant here and there is something that will keep happening. Yes.

The next question is from the line of Adhidev Chattopadhyay from ICICI Securities.

Am I audible?

Yes, please go ahead.

Yes. Just a couple of questions. This is on the NDCF, specially. So sir, considering what is the leasing scenario for the existing portfolio, any NDCF guidance you'd like to share for the coming years in terms of what growth we can see organically in the NDCF? That is the first question. Secondly, sir, in this transaction you mentioned the NDCF onetime we have given for the proposed asset in future, there is a large working capital adjustment of INR 263 crores. Could you just explain what is the nature of this adjustment? And going forward, how should we look at this? Is it onetime? Or it is more of a recurring mix when we arrive at NDCF accretion number?

Adhidev, Sanjeev here. Let me take first question, and then I will hand over to Pawan for the second one. As far as NDCF guidance is concerned, I will take you back to the previous year. Even after increasing the interest cost in financial year 2023, we maintained a run rate of INR 5 NDCF or DPU. Though we are not giving any guidance for NDCF, but don't see a significant volatility in our distributions.