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

Ladies and gentlemen, good day, and welcome to Brookfield India Real Estate Trust Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management. Thank you.

Thank you. This is Alok. A very good evening to everyone. Welcome to the earnings call for Q1 FY 2024. At the outset, I'm pleased to say that we are on track to completing the acquisitions of Downtown Powai and Candor TechSpace G1 in partnership with GIC. Likewise, we have stated at the time of announcement of acquisition, these transformative acquisitions will significantly increase our operating scale and diversify our portfolio. We've secured INR 27 billion of equity to finance acquisitions, thanks to the support from our existing unitholders and new investors, we raised INR 23 billion to the recently concluded institutional placement. Further, we have commitment to raise INR 4 billion from the sponsor group through our professional issuance, subject to the unitholders' approval, which is scheduled for end of August. With this, we are well placed to complete acquisitions of Downtown Powai and G1 during the ongoing quarter. These acquisitions will lead to our total area increasing by 35% and our operating area increasing by 44%. There will be significant improvement in geographic diversification with Mumbai and Gurugram, becoming the largest geographies by value in our portfolio. The top 5 tenant concentration is reduced from 51% to 31%. The share of BFSI tenants increasing by approximately 10%. During the quarter, our current portfolio witnessed gross leasing of 0.3 million square feet at a re-leasing spread of 42%. Additionally, 0.1 million feet of LOIs are under execution. We renewed our deal with a market tenant at N1 at a 49% higher range than the expiring rent. Our existing leases have delivered a robust embedded growth with a 9% average escalation on 1.7 million square feet during the quarter. The physical occupancy at our campuses continue to improve that, combined with our robust leasing pipeline of 1.2 million square feet gives us confidence that we'll be able to backfill the expiries in this year. We have achieved a 5% increase in our adjusted NOI run rate over the same quarter last year and have generated NDCF per unit of INR 4.91 per unit in line with apparently our current quarterly run rate. Considering the impact of the additional units that were issued as part of the institutional placement, we are distributing INR 3.85 per unit for the quarter. Our portfolio has robust embedded growth that we grow our NOI organically by approximately 16% from balance leasing and growing physical occupancy adding margin recovery. This organic growth, coupled with potential inorganic growth from the 25 million square feet of high-quality sponsor assets in Bangalore, Mumbai, Chennai, Delhi and Pune provides a strong medium- to long-term growth [indiscernible] for our REIT. We have continued to achieve success on the ESG front. We are transitioning our campuses to consuming green energy and approximately 28% of the electricity consumption in the last quarter was from green sources. Candor TechSpace K1 achieved a 100% green energy status in the last quarter. We achieved an IGBC Gold rating for Kensington and IGBC Platinum rating for the recently completed tower, Tower 11 and 11A at Candor TechSpace N2. With this, the entire campus of Candor TechSpace N2 is IGBC Platinum rated. We also won the Golden Peacock Award for energy efficiency in the Real Estate and Construction Category for 2023. We continue to take incremental measures to ensure that our assets are green, efficient, resilient and future fit, so that we can achieve our net zero target by 2040. now I would like to invite Sanjeev to provide the financial updates.

Thank you, Alok, and good evening, everyone. Our fundraising program for the acquisition of Downtown Powai and Candor TechSpace G1 has progressed very well over the last month. I am delighted to announce that we have successfully raised INR 2,305 crores through our first institutional placement, which saw robust participation from both existing unitholders and new investors. We issued [ 9.1 crore ] units to 64 institutional investors with participation from all categories of investors. This institutional placement has also led to approximately 60% increase in free float. New investors has subscribed to approximately 65% of the issue, which has led to significant diversification of the investor base. We have secured a commitment of INR 400 crore from our sponsor group through the proposed preferential issuance, which is subjected to approval at the unitholders' meeting scheduled on 26th August 2023. The proposed preferential allotment is at around 25% premium to the current price demonstrating the long-term commitment repulsed by the Brookfield sponsor group in the Brookfield India Real Estate Trust. Post the completion of fundraise, the Brookfield Group would continue to be the largest unitholder with approximately 44% of the unit holding. With the combination of this institutional placement and preferential issuance, we have secured the funding for the acquisition of Downtown Powai and Candor TechSpace G1. We expect to achieve closure of our first commercial paper of INR 750 crores this month and have secured investor commitment from several reputed mutual funds. The proceeds from the commercial paper issuance will be issued to rightsize the SPV level debt at Downtown Powai and Candor TechSpace G1. We have achieved a stable NDCF of INR 164 crores, in line with our quarterly run rate, that is INR 4.91 per unit. Considering the additional units that were issued as part of the fundraising through the institutional placement that adjusted NDCF per unit is INR 3.86 per unit for quarter 1 FY 2024. The Board has approved the distribution of INR 164 crore or INR 3.85 per unit this quarter. With completion of the acquisition in quarter 2 FY 2024, we expect the full benefit of the acquisition to flow through to our distribution from quarter 3, 2024 and organically grow thereafter. We have witnessed a growth of 4% in our operating lease rentals to INR 211 crores compared to the same period last year. The adjusted NOI for this quarter grew by 5% to INR 245 crores compared to quarter 1 of financial year 2023. We continue to hold a significant organic growth potential of 16% in our existing assets, which can be achieved through the lease-up of vacant area and margin recovery. Further, our NOI potential will significantly increase upon the addition of downtown Powai and Candor TechSpace G1 to the portfolio. Our robust balance sheet had a loan-to-value ratio of 33% and average interest rate of 8.2% as on 30th June 2023. Our debt structure has ensured that we have limited amortization of only 5% till financial year [ 2023 ]. The SPV level debt at Downtown Powai and Candor TechSpace G1 is also at a repo rate linked competitive rate of 8.5% per annum with limited amortization over the next few years. With this, I would request the moderator to open the floor for Q&A, and thanks to all.

[Operator Instructions] First question is from the line of Puneet from HSBC.

My first question is....

Sorry to interrupt you, your voice is coming a little muffled. Can you please speak through the handset or get closer to the handset.

Is it better? Can you hear me well?

Yes.

Yes. So my first question is when does this acquisition finally get through and post-acquisition, do you still have rights to the cash flows from the acquired assets from first [indiscernible] or does that start accruing from Q3 only?

So Sanjeev here, Puneet. The acquisition, we expect to complete by end of the current month. And as far as cash flows are concerned, it's on all earnings post-acquisition, plus whatever will be as an opening cash balance on the day of acquisition in these SPVs, REIT will have right over there.

Yes. And Puneet the income support on [ G1 ] will kick in from the first of this quarter, which is the first of July.

Right. But the cash flow, would it have changed from what you first indicated or the opening cash balance? Or will that also be the same?

So opening cash balance as far as Powai is concerned, there is about INR 23 crores of opening cash that will continue to remain unvalued and the REIT will not pay value for it, but that will become available for distribution and the -- quarter ending 30 September.

And the earnings that the asset would have grown in the first 5 months.

Not in the first 5 months. So the earnings of any cash flows from end of August onwards. But by which point in time, we should have closed the acquisitions will accrue to do it. So the 3 components, one is income support starting first July. There is 23 crores of opening cash in Powai and there is any cash flows that may have accrued after 31st August.

After 31st August, understood. And what is the plan on the debt side, there was some repayment of debt, which was planned. I presume part of it will go through, what happens to the rest?

Puneet, this is Ankur. We're just like with every acquisition, there will be a change in the capital structure to align with what capital structure of our REIT owned SPV should be both in terms of type of amortization as well as the quantum of debt. And part of the proceeds of capital raising is used for that debt capital structure that befits the REIT on SPV. That's all it is.

No, last time, you had indicated almost INR [ 1350 crores ] of repayment of debt I presume after the INR 2,700 crores that you've raised, INR 2,400 crores or INR 2,600 crores will go into your share and the balance would go into repayment of debt, right? And some debt will still remain and that will remain so?

The SPVs will have the right amount of leverage.

And these SPVs are currently privately held. So there is higher leverage, slightly higher leverage than what the public [ REIT ] should have. So part of the capital raising are going towards that debt resizing.

So Puneet, I'll just add, [indiscernible] the INR 1,350 crores of debt will fully get replaced at the SPV level by a shareholder loan. 50%, this will be contributed by the REIT and this will be effectively through the CP issuance that is underway. The balance half comes from our counterparty where, again, the transaction is committed. So effectively, whatever we articulated on the INR 1,350 crore happens in entirety.

And lastly, what are the roadblocks to this acquisition? I presume it's just procedural now?

Yes, that's correct. It's also procedural. We expect to conclude both the transactions between the 20 to 30th of August, this month.

Just one on the operational side. I noticed that the average escalation for the 1.7 million square feet was about 9.1%. How should one read that? Should it not have been between 12% to 15%.

Let me retain that in....

Sorry to interrupt you, but you're not audible. Can you please come a little closer towards the speaker.

We've explained that in footnotes below. The Candor asset had an average escalation of 13% and the Mumbai asset had an average escalation of -- this is because the Candor asset have escalation once every 36 months.

[Operator Instructions] Next question is from the line of Kunal Tayal from Bank of America.

My first question is that your loan to value on a post-acquisition basis, seems like it might move into the high 30s by next quarter. Is the plan to maintain that level of LTV? Or would you intend to bring this down in the subsequent quarters?

So Kunal, the long-term plan would be to bring it down as we stated historically. We would be up 35% on an ongoing basis. Again, if we basically look at the debt, including the CP issuance that we are doing, will be just -- it will be somewhere in 30% to 37% range which you would look to bring down in due course over a period of time.

And just to add here, what Shailendra mentioned, this high 30s is coming because of one accounting treatment also because the partners shareholder loan is going to be treated as a loan while calculating LTV. Otherwise, it fits as good as shareholder loan from REIT and shareholder loan from the partner.

The next question is on the physical occupancy. It seems to have a very solid improvement. I just want to refresh what your definition is. Is this like any seat getting utilized or occupied anytime during the week? Or is there a filter like it needs to be occupied twice or thrice a week at a minimum?

Yes. So actually, when we say 66% physical occupancy, so what we are saying is that the 1,000 seats in the campus on a partial day, then 66% is occupied. And of course, this is a peak and general physical occupancies high on 2 space, [indiscernible] that's how you should treat it.

Is that a daily -- is that an average across the week or like on a daily basis that you calculate I mean -- I'm just trying to understand if someone was to come in once a week, will that count as part of the 66%? Or will it count as [indiscernible] occupancy?

See now, what is happening is, generally most of the companies have mandated 3 times in a week -- and as time is progressing, they're kind of making it mandatory till now while they had mandated, but they were not very, very particular about it. So I would say in most of the companies, I mean, exceptions leave a part, people are coming at least 2 times in a week. But we should take it as a maximum on a particular day, which would be Tuesday, Wednesday or a Thursday. But yes, if somebody comes once in a week on that particular week it will get counted.

Correct. Okay. And then last one would be great if you could just sort of help us with what is the latest you're hearing from your IT services tenant base both in terms of incremental space requirements as well as the return to office space?

Yes. So I think the ball is clear, people except leave a part, and I would not say what statements I'm making these are universally applicable to everybody. But I would say a large number -- large percentage of companies are very clear. They want people back to office there's no 2 ways about it. Of course, everybody has gone for a hybrid culture. That's true. See they want people -- some of the people they 3 days in a week that's where they want people. And also please understand that most of the companies have kind of downsized considering this hybrid work culture. So what we are seeing is, at least most of the companies are saying at least 5% to 6% growth in terms of employees they're expecting year-on-year and they only have downsized. They already have rationalized their real estate kind of a portfolio which is present right now. So as people will come back, and as we see businesses grow, incremental real estate requirement will come up quarter-on-quarter. That's very, very evident.

Next question is from the line of [ Shirish Waze ] from Moneylife Advisory.

So my question pertains to the acquisition. Sir, average dilution price comes out to somewhere about 260, including both the institutional placement and the preferential issue which represents a 22% discount to our pre-acquisition NAV while we are acquiring assets at a 12% discount to NAV, the new assets. Just wanted to understand, would this lead to a reduction in NAV for existing investors before the acquisition? And how should existing investors look at this acquisition?

This is Ankur. The largest existing investor is Brookfield in this case, and as a Board and a sponsor, we are supportive of growth simply because of the quality of assets that are adding to the portfolio. While we can -- while all of us would like to believe that everybody can time the market. But we are also in the phase of the growth of the REIT business in the country. And some amount of dilution with prospects of long-term value creation is important for all of us in this business. And that's how I would like to read these numbers. If you look at the quality of income profile that have been that are being added to the REIT, the stability and the diversification that will provide. And again, I would reiterate the quality of portfolio that we are on track to develop with this acquisition and with the pipeline that we can demonstrate. I think investors today long-term will be better served with a larger business and with a demonstrated part of both liquidity creation in terms of more float, as well as also more diversified portfolio.

Do we have a number for what the -- or an estimate, rough estimate, what the post-acquisition NAV would look like for the -- on a per unit basis?

For the regulations, we have to -- we are supposed to update NAV on a 6 monthly basis. But you can take the March NAV with the INR 260-ish piece per unit and do the math. But Brookfield's contribution will be right around the NAV mark. So you can use that as a proxy as well. It's about INR 315-odd approximately, I could be wrong by a few cents here.

My next question is on -- so we have used about INR 750 crores in commercial paper as a bridge financing. So what are -- how are we looking to retire this? Like are we looking at additional equity raise down the line? Or will be replacing with this -- with a longer-term debt?

So Shailendra here, there are basically 2 ways to eventually settle the CPs. One could be to roll this over through an NCD program at the REIT okay? As you may see, there are no maturities that are coming in our existing debt portfolio, both on the existing assets, including and the assets that we are acquiring. Those are all long-term facilities with no near-term maturities or very limited near-term maturities. So we could very well do a bond. The other part that we could potentially take is to effectively replace this with an equity raise. If you actually look at the stated intent when we had announced these acquisitions was to look at a INR 3,400 crore fundraise potentially in one or more tranches. With the QIP and the preferential allotment, we have done a INR 2,700 crore effective fundraise and the balance could over a period of time, be done to retire the CP. Eventually, these are the 2 possible [ routes ]. We will take our own calls based on various other parameters that are appropriate at that point in time to eventually deal with this.

My last question relates to our committed occupancy. So in our existing portfolio across all our assets, we have seen a declining committed occupancy in this quarter. So are we seeing any system-wide reason for this because this is across geography.

So, this is Alok. Not really, I would say, I would say, obviously, what's happening is we are kind of predicting 1.2 million square feet of expiries and we're also projecting kind of a 1.2 million square feet of our gross leasing there could be some timing gap, which could be leading to a decline in occupancies. But also keep in mind that some -- some of the assets they have really gone up in last 2 to 3 quarters. So there's no trend. I mean there's really no trend, it's just a question of timing here. And we'll -- as the leasing would happen, what we're predicting, it should pick up.

[Operator Instructions] Next question is from the line of Puneet from HSBC.

My question is on the CapEx for G2. So that has gone up to almost INR 200 million. Can you explain the nature of this CapEx? And can you also explain broadly what sort of maintenance CapEx would you need to do for these properties going into the future.

So Sanjeev here, Puneet. There is some regulations which require CapEx to be incurred for green energy in NCR. So we are going to do that in G2 as well as Noida assets. So you may find that some increase there because of that green [indiscernible], which is going to be used for gas-based green energies.

You mean the genset, the gas-based gensets you will have to put?

Yes. The kits will be required for gas-based generation. So you see these regulations almost have been coming from last 3, 4 years, and they have been kind of then gone on a back seat. Probably we have to be ready for these -- even if you go in a back seat, we have to gradually take it up. But right now, we want to cater for it because it's a requirement.

And would you need similar CapEx in other geographies also given that genset regulations have changed in [ 2 to 4 ] for cross the country now?

Right now largely for NCR and Gurgaon and Noida.

And what kind of maintenance CapEx should one assume on a yearly basis?

Sorry, come again?

What kind of maintenance CapEx should one assume on a yearly basis for your assets?

Maintenance CapEx will not be there. This is -- this will be a onetime CapEx. There's no further maintenance CapEx required.

And any comment would you want to make on the Kensington vacancy, which has gone up a bit?

Kensington, no. I mean, I would say if you talk about Kensington, yes, we had an expiry, but we have a good, I would say, a good pipeline, and we should be able to gradually fill up the vacant spaces at, I would say, good mark-to-market.

So Puneet, again just to add. There was 1 IT services player who -- about 100,000 square foot of space, which has largely contributed to this. But you have also seen that we did about -- we've done about 1 million square foot -- just under 1 million square foot of renewal with TCS. On an overall NOI basis this is far more additive, and we have a fairly healthy pipeline in Kensington -- so we think all of this will get back to normalization and presents a good opportunity for us to scale up.

So what kind of timeline should one assume for this fill-up of this vacancy?

Actually, we can be somewhere 90% plus sometime next year.

Next fiscal year.

I mean sometimes next year, [indiscernible] timing. But yes, we should be 90%, we should cross 90%.

Next follow-up question is from the line of [ Shirish Waze ] from Moneylife Advisory.

I just have 2 more questions. So after the completion of the acquisition, on a consolidated basis, what would be your total floating rate debt percentage?

So we are entirely floating rate at this point in time at the SPV level. Post our CP issuance, the CP issuance will be a fixed-rate instrument.

Got it. And we also have a few ROFO assets in Powai. So do we have a sort of a timeline in mind when that acquisition will sort of come up for us?

This is Ankur. We just completed a massive acquisition. So let's take a moment to consolidate that. Many of the assets in Powai that are in the ROFO are still some time away from stabilization or being the right fit for the REIT. So the Board will take a call as those -- but those are again smallish assets at this point.

Next question is from the line of Kunal Lakhan from CLSA India.

Yes, -- I just wanted to we reconcile...

Kunal, your voice is breaking.

Is it better now?

Slightly better.

Sure. So on NDCF, right, this quarter, we did about [ INR 1,642 million ] exclude the impact of the income support from the acquisition, how much would that be? Because you said that income support started from first of July. So how much would that be?

So Kunal, income support will reflect in the next quarter distribution. This is the distribution for the period until 30 June.

And lastly, may -- your distribution per unit 3.85% adjusted for -- this is adjusted only for the QIP done INR 23 billion QIP done, right -- it's still the 12.7 million of -- from a preferential issue would again reflect would probably get that number lower than 2.8%.

That's correct. That's about 3% of post-money holding. So this number would have looked like 3.75% if we had those units in the month as well.

Sure. And just-post acquisition that I think Q3 would be the -- Q3 would be the fourth full quarter which will reflect the full impact of acquisition -- would you expect a to DPU to roll back to [ INR 5 ] per unit, which was there last year on an average.

So look, this quarter and the next quarter has a bit of noise. This quarter because the distributions are from previous year's earnings on a larger equity base. Next quarter will have -- or of the quarter that we are sitting in right now will not have full income on all the units from the 2 acquisitions. So there will be some between, call it, the quarter that we're reporting right now and the current quarter that we are in. But on a steady-state basis, as we laid out the income profile of these assets, which are on double in size to almost INR 2,000 crores steady-state. So I would expect our distributions to go back to levels that we previously reported, which is INR 5 a quarter.

From Q2 onwards, you're saying -- I didn't catch that actually, which quarter onwards?

Q3 onwards. That would be our expectation.

Ladies and gentlemen, I now hand the conference over to the management for closing comments.

Okay. So we had an eventful quarter, and the business is looking pretty solid. I think the worst is kind of behind us. And so that's the message I want to give. The worst is behind us and we are looking for occupancies to move up, and we are able to achieve our performance. Thank you very much.

Thank you very much. On behalf of Brookfield India Real Estate Trust, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.