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

Ladies and gentlemen, good day, and welcome to Brookfield India Real Estate Trust Q3 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. On the call, we have following persons: Mr. Ankur Gupta, Managing Partner, Brookfield Asset Management and Director, Brookprop Management Services Private Limited; Mr. Alok Aggarwal, Director and Chief Executive Officer, Brookprop Management Services Private Limited; Mr. Sanjeev Kumar Sharma, Chief Financial Officer; Brookprop Management Services Private Limited; Mr. Ankit Gupta, President, Brookprop Management Services Private Limited; Mr. Ashank Kothari and Mr. Shailendra Sabhnani from Brookfield. I now hand the conference over to management.

Good morning, everyone. This is Alok. On behalf of the Brookfield India Real Estate Trust, I extend a warm welcome to all participants joining us today for this conference call. At the outset, I'm happy to say that we continue witness an influx of GCCs into the country, resulting in demand for high-quality offices. Hundred GCCs are expected to be added every year almost till 2030, so another about 700 GCCs are expected in the next 7 years. The recently announced SEZ reforms are expected to provide a big boost to our portfolio, especially the far side, 80% portfolio in terms of area is SEZ. Over the last few years, we have seen IT firms and IT services firms have significantly ramped up their headcount while optimizing their office requirements. With increasingly return to office, we are poised to witness a sharp growth in demand for offices. Over the last 6 months, these trends have resulted in growing demand from GCCs, multinational companies and also Indian companies. I'm delighted to report that we've achieved a second consecutive quarter of record new leasing since IPO at 0.5 million square feet for the quarter. This has resulted in our gross leasing for the quarter surpassing 1 million square feet, about 1.05 million, I would say, reflecting the increasing demand for our high quality Grade A office assets. We have witnessed robust demand from GCCs and IT/ITeS tenants and 54% of our new leasing was through GCC tenants. Marquee tenants such as Accenture, Amdocs, Genpact, Ion Trading, L&T Hydrocarbon, Newgen and Wipro took up space with us across our assets. Additionally, we renewed space with Deloitte, CRISIL and Evalueserve, amongst others. Our SEZ portfolio has seen robust demand over the last few quarters, and we are continuing to see this demand moment continue. The new leasing that we achieved in our SEZ portfolio during the quarter at 4,40,000 square feet was more than twice the historical average. We believe that the portfolio rebalancing and rationalization by our SEZ tenants is behind us. And in fact, some of our tenants who had rationalized space are now increasing their footprint at our campuses as their employees return to office. With low scheduled expiries of 0.3 million square feet in FY '25 in our SEZ assets, we expect occupancy to show substantial improvement over the course of next 12 to 15 months. We expect the recent reforms to further boost the demand for our SEZ assets and have applied for conversion of 1 million square feet of SEZ area into nonprocessing area across our portfolio. We are hopeful of receiving the relevant approvals to complete the process over the next few months. We also have a healthy pipeline of 0.8 million square feet and growing from tenants looking to lease the converted space at our campus-style office parks. Discussions with select tenants are at advanced stage and expected to close -- and we expect to close the term sheet shortly. Approvals, too, are expected shortly. With favorable leasing dynamics and the tailwind of increasing physical occupancies, we are well poised to continue the recent leasing momentum and are providing a new leasing guidance of 2 million to 2.4 million square feet over the next 5 quarters, therefore, by March '25. With new leasing expected to remain robust and limited schedule expiries in the near term, we foresee substantial occupancy improvement to our portfolio and in the range of about 88% by March '25. We have displayed strong organic growth with our existing leases having delivered at 7% average escalations on 1.3 million square feet during the quarter. In 9 months FY '24, we achieved an average escalation of 7% on 5.2 million square feet. We have continued to progress on our development projects with a mixed-use commercial development at K1, which is Kolkata, progressing well. The 75,000 square feet under development area in Downtown Powai has been completed in February with OC received, 18,000 of which was pre-leased Croma and the rest is under advanced stages of discussions and closure. We continue to explore additional avenues to convert office areas into high street retail in Downtown Powai to unlock further value for unit holders. Our high-quality portfolio has an embedded growth headroom of 14%, which will be realized through further leasing and the growing physical occupancy, aiding margin recovery. We continue to have access to almost 30 million square feet of the sponsor group's assets in key gateway cities in India, which provides a strong medium- to long-term growth potential for our REIT. Now I would like to invite Sanjeev to provide the financial updates.

Thank you, Alok. Good morning, everyone. This is the first full quarter of earnings after the acquisition of Downtown Powai and Candor TechSpace G1, which has led to a significant increase in our scale. We have witnessed a growth of 90% in our operating lease rentals to INR 393 crores compared to INR 207 crores in the same period last year. And the adjusted NOI grew by 89% to INR 453 crores as compared to INR 240 crores in quarter 3 of financial year 2023. For the 9-month period, we have seen an increase of 43% in our operating lease rentals to INR 878 crores and a 46% increase in our adjusted NOI to INR 1,045 crores. The increase is primarily due to the addition of Downtown Powai and -- given to the portfolio as well as our recent leasing performance and contractual escalations. We continue to have significant organic growth potential of 14% in our portfolio, which can be achieved through the lease-up of vacant areas and margin recovery. We have achieved an NDCF of INR 209 crores this quarter, which translates to INR 4.76 per unit. We are distributing INR 4.75 per unit this quarter. As disclosed in the last quarter, we have filed capital reduction schemes in some of our SPVs, which are at various stages of processing at the NCLT. The dividend component of distribution should get enhanced significantly post the implementation of these schemes. We are pleased to report that the ICRA has assigned a long-term rating of ICRA AAA with a stable outlook. This is on the back of our strong balance sheet, a long-dated maturity profile and limited refinancing and amortization over the next few years. As we continue to lease our properties in the wake of recently announced SEZ reforms, we will target to distribute in the range of INR 4.50 to INR 4.75 per unit per quarter over the next 2 to 3 quarters. With that, I thank all of you. And now I would request the moderator to open the floor for Q&A.

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

Congratulations on a good leasing once again this quarter. My first question actually is with respect to the unexpected expiries that you phased in Q -- K1. And how do you think about re-leasing this space? And do you see further risk in K1 going into FY '25 as well?

Yes. So let me take this question, Puneet. I mean we have seen space being vacated by Cognizant, but I think the good news here is, if you see we have applied for almost 0.6 million square feet of space for de-notification at K1 and with the SEZ reforms, this K1 asset has totally got rerated. It was fully SEZ area, now we can of course lease space to SEZ tenants as well as non-SEZ tenants. Last 4 years, we had a good demand from non-SEZ tenants, but we could never offer them. But as we're in advanced stage of discussions with non-SEZ tenants for closure and signing of term sheets and we see no risk of any kind of surrenders. Rather, we are hopeful that in a very kind of a foreseeable future we should be able to backfill the vacant space at much better rentals and much better lease profiles.

Interesting. That's very good to hear. Second, on the Downtown Powai also, about 3,34,000 square feet is due for renewal in FY '25 as well. So how is that shaping up in your discussions?

See, Downtown Powai, if you see, we already have said CRISIL got kind of renewed, Deloitte got renewed and whatever tenants are there, they are keen to renew. So some surrenders would happen, but otherwise momentum is pretty good. And wherever we are renewing, we are able to get good mark-to-market rentals and escalations we are able to get.

Understood. If I can ask 2 more. One was in terms of CapEx. In the CapEx projects, there is a mention of tenant improvement. Now can you comment on what exactly are you doing for tenants? Is it more in the nature of interiors or is there something else as well?

See, what happens is we commit a budget of maybe, let's say, for a particular tenant, we commit a budget of INR 100 per square feet or INR 150 per square feet, this could be about a month or two months of rental and tenants are free to utilize wherever they want to put it. It can be used for upgradation of lobby, upgradation of toilet and generally we are okay with that because that adds to our value of the assets. So generally, it goes in kind of the area which I mentioned like lobby, toilet...

Okay. So common areas, not the tenant's, basically...

Generally, it's common areas, which remains with us.

And Puneet, we will just add that these are more exceptions, these are not norms for us. Generally, when a large tenant comes through, these are finishes that we'll end up doing anyway. So it is just that we sometimes add it as a sweetener to the tenant, but we would have incurred it anyway.

Right. So it should be categorized as asset upgrades rather than tenant improvement is just I'm trying to understand.

Yes. I mean, that's a fair way to look at it. Yes, I mean, this is just nomenclature, but that's really the nature of it.

Understood. Sir, lastly, on your NOI margin, especially for N1, that seems to be down. How should one read that?

So Puneet, Sanjeev here. The NOI margin in N1 is 94% in this quarter. This has happened because of one of the exception in this particular quarter. I will say it's not a recurring or permanently down. What happens in the cycle of CAM true-up, we do CAM true-up once in a year, which normally comes in either in the September quarter or in December quarter and in the current year's true-up, we have ended up with some of the expenses which were exception in the nature, which could not be recovered from the tenants. That's why a dip in the CAM recovery in N1 has come and resulted into OLR to NOI percentage is down in this particular quarter.

Okay. But they were not capitalized?

No, they were not capitalized. They were in the nature of, I will say, repair, but towards -- more towards asset upgrade, which, by accounting terminology, we could not capitalize.

Okay. And same from cash flow perspective also, it has negatively impacted your NDCF?

Yes, but it's too small a number. If you just see as of -- the current numbers are INR 299 million and that means INR 29 crores, INR 30 crores of NOI and that number was INR 7.5 crores. So on the overall NOI of INR 405 crores pre-income support, INR 7 crore is not a very significant number.

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

My first question is on your new leasing. It looks pretty interesting to see quite a few IT services names in there. So could you just talk about what exactly is driving the new space taken up by the IT services companies? And if you think that we should extrapolate this therefore to potentially being a trend from here and at a bare minimum the fact that this lot should not be at least giving up more space from current levels?

Kunal, I will take up this question. Yes, I think this is an interesting observation, Kunal. And if you see this trend, this is continuing from last 2 quarters and will continue -- it will keep continuing now. And this is what when we said that if you really see pre-COVID and now, the employee headcount is anywhere between 40%, I would say, 60% to 80%, depending on which company we're talking about. And If we see their real estate portfolio, they're down. For every company, the real estate portfolio is down. And as employees keep coming back to offices, they need space. As on yesterday, we get calls even people want a floor and they want to close in 5 days and that has happened, first. And we see a lot of demand is there. So that is a trend which is continuing. We can't neglect this sector, and we'll continue to see momentum here and that is very much visible.

Understood. Very interesting. The next one is just in the same spirit in which you've shared the leasing outlook for FY '25. I was wondering if you also have a view on what the renewals of the projected expiries look like in the forthcoming year? I know it was on the lower side in FY '24, but your historic trend has been closer to 60%, 70%.

Yes. So I think again we are -- in the next 15 months, we have about 1.1 million square feet of expiries on a kind of a -- we are taking assessment that 50% would get vacated, 50% is something we will be able to renew. We are being slightly conservative considering the last year what we saw. Hopefully, number could be better, but our estimate is 50% would get vacated and 50% would get renewed, that's how we are considering.

Got it. And then final one just 2 data points. Just a general time frame you are expecting for the dividend component to get enhanced. Now that you have applied for it, is there better visibility on the time line of that coming through and likewise what would the physical occupancies stand as of end of the quarter or if you have any view on let's say the month of December or January?

So Kunal, let me take the first question, Sanjeev here. As far as the dividend component enhancement is concerned, we are expecting the NCLT to approve these schemes anywhere in the September quarter -- around September, and thereafter, so the quarter ending on December, we will be seeing increase in the dividend component. And as far as the physical occupancy is concerned, I think Alok you can...

Yes. So Kunal, physical occupancy is in the range of about 74% to 75%, and it's kind of growing -- every month, every quarter, it's kind of growing.

Next question is from the line of Satinder Singh from E.ON Infotech Limited Investments.

Yes. Congratulations on a strong leasing. You've indicated you're working towards...

Satinder, we are unable to hear. Can you be a little louder?

Yes. So it's like this, you mentioned about a capital reduction scheme which would lead to enhancement in dividends. So based on the plans that you have, what percentage of distribution could let's say be in the form of a dividend, let's say one year out or maybe March '25, what could be a rough figure we could model into our projections, please? So is it fair to say 30% -- yes?

No, Satinder, Sanjeev here. You can model it in the range of 15% to 20% of the total distribution is going to be flowing through dividend post approval of these schemes.

Okay. Okay. Fine. And when do we expect the approvals to come in, please?

It will be anywhere -- maybe if approval comes, in the quarter of September, but otherwise as I mentioned it should flow in December quarter.

Okay. And so we've had a committed occupancy of 80% as of now and is it fair to say that this can be assumed to be the bottom given the leasing momentum that we are seeing and the inquiries that you have in the pipeline, is it a fair assumption to say that 80% committed -- while obviously economic is 88%, but this 80% committed is the bottom line and the things hopefully should look up only from here?

Yes. Definitely, 80% is bottom. Actually, if you really see, this quarter also -- very, very marginally, kind of a occupancy has only gone up, very marginally. So this is definitely the bottom and definitely it is going to go up from here. We already have said that in next 15 months, we expect the occupancy to be 88% and it could be plus, so definitely that is where we stand.

So just adding here. So we have spoken about the gross leasing guidance of 2 to 2.4 million square foot, and we have spoken about half a million square foot of effective expiry. So if you do the math there, it effectively gets to high 80s by the end of March’ '25 in terms of the effective occupancy that we see the business going towards.

No, Ankur, it clearly helps. I think this guidance of 2 to 2.4 clearly helps kind of build the confidence, okay? And we talked of INR 6 per unit of embedded growth headroom. So I just wanted to understand what are the assumptions in arriving at this figures in terms of, let's say vacancy, the rental increases and the time frame by which we expect this INR 6 annualized, okay, to flow into the distribution?

Satinder, as far as components there, those are already mentioned there that lease up and the margin recovery. As far as the lease-up is concerned, we have not considered any escalations in this lease up. This is at the current rates which we are seeing in the market. And as far as time frame is concerned, it should be anything between 2 years to 2.5 years.

Okay. Okay. So 2 years for us to recover this, okay. Okay, okay, fine. And you mentioned about 4.5 to 4.75 as the guidance. Given all this, is there a case for 4.75 to really go down from here given that okay, we expect the leasing momentum and whatever, okay, and the interest cost repricing would have already happened by now. So is there a case for this 4.75 to come down?

So Satinder, we -- as I mentioned that it is going to be in the range of 4.5 to 4.75, and we are confident that this current quarter which is going on which is March quarter should land up around 4.75 and thereafter for 1 or 2 quarter it should be in the range of 4.5 to 4.75, but thereafter definitely, it should improve upon considering the lease up which is going to happen which will flow ultimately into the NDCF and DPU.

Right, sir. Right. Right. One final question if I could squeeze in. Sir, G2 and K1 has seen no renewals this year. So while you've already amplified that K1 you were seeing a lot of non-SEZ demand and okay, this should pick up, any views on G2 per se, okay, what is the challenge specific to this property that, okay, renewals are not happening? And is there a case for us to apply for greater area under non-SEZ out of the 0.8 million? We've applied for about I think 0.2 so far.

So Satinder, G2 has actually no challenge. It's a great property, just on the border of Delhi and Gurgaon. We have seen existing tenants take more space. Accenture has taken more space. We have given that number. There is the another tenant which has really -- if you see, it has grown up there. And if you see our Page #10, so this is -- okay, this tenant information here, but Amdocs is taking more space. Every quarter Amdocs is taking more space. This quarter also discussions are going on. Absolutely no challenges in the property. Right now we have applied for 0.2 million. I think we are comfortable with that. And see, every month we can apply. Now the flexibility is every month you can apply. Every month there's going to be a DOA meeting that has been mandated by the government. So I think we want to be strategic. Apply, get it leased out and then again apply because there's a lot of demand from SEZ tenants also. We can't lose out on them. We can't kind of apply and then lose out on SEZ tenants, so -- and we will see strong recovery in this asset also. K1, I have already talked about.

Next question is from the line of Pritesh Sheth from Motilal Oswal.

So first is on our leasing or occupancy guidance which you said in initial commentary that by March 25 we should be at 88%, which is where the economic occupancy is right now. So, I mean, does that mean that including the adjusted for income support, I mean, there won't be much increase in the total rental or NOI income? I mean how should we look at that math? Or are we a bit conservative on stating that 88% kind of committed occupancy?

Pritesh, let me answer this question in 2 ways. Now, of course we are giving a leasing guidance and you would appreciate that we want to achieve this guidance. So I can say that. I would not say we are conservatively aggressive, but we want to achieve this and do better than what we guide. So that is one thing. Having said that, our economic occupancy will be much higher because today we have economic occupancy at 100% of vacant space of G1. So there, on balance vacant space of G1, that would still get added and we can work that number out and share that with you, but economic occupancy will be much higher. I hope that answers your question.

Yes, sir. I mean, so we are already getting the income support for N2 and G1 for that economic occupancy, right? And as you said, I mean 88% committed occupancy by end of FY '25, I mean, would eventually lead to your income growth or rental growth as well, right, that should be the direction we should look at?

Of course. I mean, because your 88% is average, and GI will be at 100%.

And first of all -- The pickup in occupancy, Pritesh, will be across assets, right? To the extent that increase is not in G1, you will see it translate to income growth. So today if we think about our occupancy or vacancy area, it's about 3.8 million square feet across assets, right, which is distributed in 4 or 5 assets. Except G1, wherever we are able to lease things up. So for a minute if we assume that 2 million square feet was lease equally across 4 of our parks, about a 1.5 million square feet of growth will be visible in the income and 0.5 million square feet that let's say we end up doing in G1 will replace the income support. The value will not be picked up in G1's income growth unless it's on account of higher rentals, everything else will straight translate into NOI growth for us.

Sure. Got it. That's helpful. And second on Kolkata since we are applying 0.6 million square feet to be denotified into non-SEZ, how do you see the rental growth there which is at 45 now, would our initial targets be to first leave that out or we would equally focus on increasing the rental potential there?

See, when we are applying for 0.6 million square feet, we have kind of a discussions or a hard and soft pipeline for that kind of area. Of course, rental -- and we're expecting rental growth and with this lot of vacant space going out of from SEZ to non-SEZ, our SEZ area also will reduce. This means we have a better ability to increase rentals in SEZ space also. So we are expecting rental growth in SEZ as well as non-SEZ space.

Okay. If you can quantify? I mean you mentioned that assets can get rerated. How much should one expect that increase to be around 10%, 15%?

I think in Kolkata, we can consider about 10% to 15%, Kolkata, yes, for this particular asset.

[Operator Instructions] The next question is from the line of [ Vasudev ] from Nuvama.

Sir, what will be your LTV for this quarter, if you can just quantify?

Same as last quarter, [ Vasudev ], at 34%.

Okay. So including the shareholders debt and excluding, so we have given 2 numbers last quarter, so both of them are same, by and large?

Yes, broadly.

Okay. And sir, out of the 0.5 million square feet of the fresh leasing that we've done in this quarter, how much of it would be -- was the re-leasing?

Sorry, could you repeat your question?

Sir, I was saying that out of the 0.5 million square feet of fresh leasing that we've done, how much of it will be towards re-leasing?

It's about 3,20,000.

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

Just a couple of questions. So for N2 income support, was this the last quarter or there is some amount still left for Q4?

So Pritesh, there is an amount left for Q4. So it is more or less hanging in the middle of this Q4.

Okay. Okay. Got it. And just lastly on releasing at CRISIL house that we saw this quarter. I mean you have mentioned in presentation about 180 per square feet of rental for those renewals, is that reading right? I mean was it renewed to 180 per square feet? And what is your sense, could we have managed a better rentals with some other tenant or this was the amount that was expected anyways? So just your comment on that?

CRISIL house we have leased at 187.5. Now I think that's good rental for Powai as well. And -- some of the leases happening at depending on which location, what are terms around 170, 175, so 187.5 is a good number, I would say.

And this is for 3-year term again or they're signing now a little longer?

This is for a shorter term. This is for a shorter term.

Next question is from the line of Puneet Gulati from HSBC.

On CRISIL house, can you remind us what was the rent previously now that's 187?

140 was the rent earlier.

So 140 was the rent when it was done. And also can you give some color on what are you seeing on the market rentals for all of your core markets? Are you seeing any growth there or still largely flattish?

Yes. So Puneet, if you really see, depending on which asset we're talking about and if you see last year's top 7 cities had the maximum leasing almost about -- gross leasing was almost about -- top 8 cities almost about 70 million square feet and while supply is equal, but supply is coming on the fringes, whereas in core markets in marquee locations, there's limited supply and that is where the rentals are not only holding out, they're also kind of moving up and that is the trend across most of the properties.

Can you give indicative market rental for your property?

So, let's take example of Powai, Downtown, let's take example there. There, rents are almost about 165 to 185, that's a range, depending on which building, how much area you'’re taking, it's commercial, IT and retail could be much more. So wherever we are able to convert office to retail, again 40%, 50% rental upside we can get. That’s where we are in terms of Powai. When we talk about G2, we are signing some of the new leases. Again, there range is about around 90 to 95. That is the kind of rental. In N2, it's around 65, 67. N1 is about 62, 63 because N1 saw phenomenal growth in last -- I would say it got rerated from 50 to mid-60s and probably it will consolidate at mid-60s. Kolkata we have moved up now. We are probably looking at large leases, some of the large leases we're looking at 50. We might do at lower number also, but we want to do, at least non-SEZ space, we can do at 50. SEZ space we can do at 45 and with better terms. And which one? I think I've covered all of them. G1 is somewhere in mid-80s.

As there are no further questions, I would now like to hand the conference over to management for closing comments.

Thank you, everyone, for joining today's call. We look forward to connecting with you all next quarter.

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