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

Ladies and gentlemen, good day and welcome to Brookfield REIT India Real Estate Trust Q4 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. On the call, we have the following persons: Mr. Ankur Gupta, Managing Partner, Brookfield REIT Asset Management, and Director, Brookprop Management Services Private Limited; Mr. Alok Aggarwal, Chief Executive Officer and Managing Director, Brookprop Management Services Private Limited; Mr. Ankit Gupta, President, Brookfield Properties India; Mr. Amit Jain, Chief Financial Officer, Brookprop Management Services Private Limited; Mr. Rachit Kothari from Brookfield; [ Mr. Shailendra Sabhnani ] from Brookfield. I now hand the conference over to the management for -- over to you, sir.

Good morning, everyone. 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 would like to give a brief overview of the macro picture in India and the impacts it has on the commercial office sector. India has emerged from the pandemic as one of the fastest-growing large economies in the world. The Indian GDP is expected to grow at about 7% to 8% annually, if not higher, over the next 5 years. This growth will be driven by increasing outsourcing to India; growing domestic demand; and the rapid proliferation and expansion of global capability centers, which we call GCCs. These factors will lead to -- will lead India emerging as the office to the world, which will drive the demand for grade A office assets. Over the course of 2020 to '23, we saw a lot of rightsizing and rationalization of office spaces despite significant hiring by tenants as they were adapting to the work-from-home culture. This is visible across geographies, across property owners in our country. Our [ end tenants ] are now either fully back to office or have adopted hybrid strategies. And demand for office space to house all the employees that were hired over the course of the pandemic is picking up. Even though occupancies are not back to pre-COVID levels yet, we are experiencing a clear revival in leasing. We have also witnessed a massive influx of global capability centers in India over last 2 years due to attractive talent and [ cost strategies ] that India has to offer. In fact, till 2030, India is hoping to add about 100 GCCs every year, significantly adding to the existing base of approximately 1,600 GCCs within India. The recently announced SEZ reforms have also come as a boon to property owners such as us given that we have a high proportion of SEZ spaces in our portfolio. We are progressing well on our plans on conversion of SEZ spaces to nonprocessing areas and are seeing a strong interest from occupiers for leasing such converted spaces. In addition to this, the fact that Indian economy is doing well is also driving up demand from domestic companies. And thereto, the SEZ reforms are quite a positive development for [ companies like us ]. All these factors are supporting the turnaround in the demand for office space. And Brookfield India REIT is well poised to cater to this demand. Coming to our performance in this quarter, I'm happy to report that we have achieved a third successive quarter of record new leasing since IPO at 0.9 million square feet for this quarter. This includes a 0.3 million square feet lease that we have signed at Kolkata, with a leading Indian bank, for converted SEZ space. Additionally, we have signed a short-term lease with the same bank for more than 0.3 million square feet which is to be used as an incubation space for up to a year until their primary office space becomes operational. This short-term space is not included in the 0.9 million square feet number, so overall, if you see, that number is 1.2 million square feet, in a way. We have achieved a new leasing of 0.7 million square feet in our SEZ portfolio, which is almost 4x our historical average and speaks to the strong demand that we are seeing [ for our ] high-quality campuses. The tenants that have been signed in the last quarter include the leading Indian banks that I just mentioned, Larsen & Toubro, Tech Mahindra, Concentrix, Teleperformance, R1 RCM, Mott Macdonald, Dorling Kindersley and the global capability centers [ through the ] Brookfield Group itself. With the new leasing of 0.9 million square feet in last quarter, we have already achieved approximately 40% of our new leasing guidance of 2 million to 2.4 million square feet till FY '25. This gives us confidence that we are on -- we are still on track to meet and, hopefully, exceed our guidance. Our occupancy during the quarter has increased from 80% to 82%. And we hope to have bottomed out on that front in last 2 quarters. We have a relatively low scheduled expiry [ load ] in FY '25 with only 0.4 million square feet of expected exits and 0.6 million square feet of expected renewals, given that our leasing guidance provided last quarter guide for a further new leasing of about 1 to -- 1.1 million square feet to 1.5 million square feet this year. And with low expiry [ load ], we expect a continuous improvement in net leasing and expect occupancy to show substantial improvements over the course of the next 12 months. We would like to highlight that our [ stabilization efforts is bearing ] stabilization. And it has achieved an occupancy of 95%. We also have seen strong demand in Kolkata market, something that we had alluded to earlier. And our Kolkata assets have reached an occupancy of 88%. In fact, it's currently at 98% if you were to consider the short-term lease that we have signed up with leading Indian banks. [indiscernible] long-term demand in Kolkata. And we are synchronizing to ensure that, when this short-term space gets vacated, we are able to tie up back to that with a long-term demand. For the fiscal year FY '24, we achieved a gross leasing of 2.8 million square feet, including 1.9 million square feet of new leasing and 0.9 million square feet of renewals. The 1.9 million square feet is, at best, annual new leasing we have achieved since our IPO, with expansion plans of existing tenants capturing almost [ 3/4 ] of new leasing demand. The gross leasing during FY '24 was achieved at an average spread of 17%, which indicates that we are successfully able to achieve the [ intrinsic mark-to-markets ] of our assets through new leasing and renewals. Our application for conversion of 1 million square feet of SEZ area into nonprocessing area has received positive response from both SEZ [ parties ] as well as prospective tenants. We have already received in-principle approval for conversion of 1 million square feet. And we are in process of applying for conversion of further about 0.2 million square feet. As stated earlier, we have already signed a lease of 0.6 million square feet converted space at Kolkata, split 50-50 between short-term and long-term space. We are in advanced stages of securing all necessary approvals for conversion of 0.6 million square feet space in Kolkata so that the new tenant can begin using the [ signed space ]. [ We again displayed ] strong organic growth, with our existing leases having delivered a 7.4% average escalation on 1.6 million square feet during the quarter. In FY '24, we achieved an average escalation of 7.4% on 6.8 million square feet. Our mixed-use commercial development at Kolkata is progressing well. And we have delivered and fully leased 75,000 square feet area in Downtown Powai during the last quarter. Our high-quality portfolio has an embedded growth headroom of 16%, which we'll realize through further leasing and growing physical occupancy [ aiding ] margin recovery. We're also pleased to announce that we have signed binding agreements to acquire a 50% stake in dominant grade A properties in Delhi NCR from the Bharti group. The portfolio is [ completed build ] and comprises 3.3 million square feet of operating area and has an occupancy of 91%. It primarily comprises 3 large office assets: Worldmark Delhi, which is an iconic 1.5 million square feet asset in Delhi's airport district; Airtel Centre, which is Airtel's 0.7 million square feet corporate facility located in Gurugram CBD; and last, Worldmark Gurgaon, a 0.8 million square feet mixed-use complex in Gurugram SBD. The total equity consideration of INR 12.3 billion to the Bharti group will be discharged through a preferential issue at INR 300 per unit, which is at 18.5% premium to the floor price. With this, we're welcoming the Bharti group as cornerstone investor in Brookfield India REIT with an 8.5% pro forma stake held [ by them ]. This acquisition will increase our consolidated GAV by 22% and our effective economic occupancy by 50 basis points. Our operating area will increase by 16% from 20.9 million square feet currently to 24.2 million square feet. The transaction has substantial diversification benefits and will reduce the top 5 tenant concentration to 24% from 30% while increasing the share of commercial, public IT park assets from 34% to 46%. With this acquisition, we will welcome marquee tenants such as Bharti Airtel, [ EY, Airbus, CDPQ and SMBC ] into our portfolio. This acquisition has been done at a 7% discount to the GAV and is expected to lead to NAV accretion of 0.9% and NDCF accretion of 1.1%. This acquisition and the preferential issue are subject to unitholder approval. And the date of unitholder meeting is scheduled for June 14, 2024. Post this acquisition, we will continue to have access to the approximately 25 million square feet of the sponsor group's assets in key gateway cities in India, which provide a strong medium- to long-term growth potential [ for our REIT ]. At this point, I would like to mention that Mr. Sanjeev Sharma, our ex-CFO, has moved on; and we thank him for his contribution. I would like to introduce you to our new CFO, Mr. Amit Jain. Amit has been important member of our leadership team and will be taking over responsibilities from Sanjeev -- and has taken over responsibilities from Sanjeev. Amit has more than 20 years of experience in finance and operations, tax, regulatory affairs, fundraising and investor relationships. In the past, he has worked with organizations like [ EY ], IDFC, [ Macquarie ] and [ the discovery channel ]. With this, I would like to invite Amit to provide the financial updates. Thank you.

Yes. Thank you, Alok. And good morning, everyone. I am pleased to be taking on this new role and would like to thank the Board members and other members of the team. With that, let me get into the earnings for the fourth quarter and full year of FY 2024. There has been a substantial growth in earnings this year driven by acquisitions of Downtown Powai and Candor TechSpace G1. We have witnessed growth of 91% in our operating lease rentals to INR 405 crores compared to INR 211 crores in the same period last year. And the adjusted NOI grew by 89% to INR 461 crores compared to INR 244 crores in Q4 FY 2023. For FY 2024, we have seen an increase of 35% in our operating lease rentals to INR 1,283 crores and a 57% increase in our adjusted NOI to INR 1,506 crores. The increase is primarily due to the addition of Downtown Powai and G1 to the portfolio as well as our recent leasing performance and contractual escalations. Our gross asset value increased by 78% to INR 292 billion as of March 31, 2024, compared to INR 164 billion in March last year. Our NAV as on 31st March 2024 is INR 333 per unit. We have achieved an NDCF of INR 205 crores this quarter, which translates to INR 4.66 per unit. We are distributing INR 4.75 per unit this quarter. Our current adjusted NOI run rate on an annualized basis is INR 1,840 crores. And we continue to have significant organic potential of 16% in our portfolio, which can be achieved through the lease-up of vacant areas [ and margin ] recovery. We had updated you earlier that we had filed capital reduction schemes in some of our SPVs. One of the schemes has been approved by NCLT in May 2024, while a few others [ are expecting to give us processing eventually ]. We hope that these schemes will get implemented at different points over the course of this calendar year. The dividend component of distribution should get announced significantly with the implementation of these schemes. We continue to maintain a dual AAA rating from ICRA and CRISIL on the back of our strong balance sheet, a long-dated maturity profile and limited refinancing and amortizations over the next few years. Majority of our loans are linked to the repo rate, and we expect to benefit significantly as benchmark rates begin to turn lower. With that, 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.

Welcome, Amit. And congratulations on decent numbers. My first question is if you can give some color on your new leasing pipeline. And what is the occupancy that you expect for end of FY '25?

Yes. So Puneet, thank you. Let me take this question. Puneet, if you really see, our overall leasing pipeline is about 3 million square feet. About 2 million square feet is for SEZ, and about 1 million square feet for non-SEZ space. Now if you really see, we have said in last call also, and that's something we maintain, we hope that we should be [ at or nearing ] guidance [ from ] about 2.4 million square feet, at upper end. And considering if we have about -- approximately 0.4 million to 0.5 million square feet of expiries, we should have a couple of net addition of about -- around about 1.6 million to 1.8 million square feet addition from the last quarter. So we are hoping to cross 90% by FY '25, financial year '25, around 90%...

Okay. And will it be more backward ended? Or should we see a gradual -- will it be more back-ended leasing? Or will it be evenly spread out through the year?

So gradually it will keep increasing. If you really see, we have gone up about 225 basis points last quarter. We are not considered as short-term lease. Short term is also about a year. We are not considered that. We'll see gradually increased every quarter. That's we are very confident about.

Right. And on the short-term lease, is there any chance of it getting converted into long term? And second, are you also doing some CapEx for this sort of lease?

So let me just answer the second question, first. We are not doing any CapEx for the short-term lease. There was existing pretty a lot of space available. We have provided that. There's a churn that can get converted, but luckily, we have more inquiries. We -- hopefully, we don't have to wait for getting it converted. We have more inquiries. We're just trying to ensure that, as this space get vacated, we're able to tie up with this long-term inquiries. So there is [ enough and more ] demand, at least in Kolkata, right now. It has really seen a big turnaround.

Okay. That's helpful. And secondly, on your acquisition, if you can just run us down. It was -- the EV that you guys have assigned to it is almost 6,000 crore. What is the debt that comes with this asset in our books?

I will request my colleague Rachit to take this up.

Puneet, Rachit here. So the debt that will come along on the books is about -- net debt will be about 3,100 crores and -- yes. [ I mean that's just to support ] the usual tenant deposits that will get taken over.

So essentially you're saying 6,000 crores minus 3,100 crores. So INR 2,900 crore is the equity value which is being assigned, but you guys are paying essentially 1,230 crores for 50% stake. Is that how one should read it?

Yes. I think, beyond the 3,100 crores of net debt, there are, of course, deposits and other liabilities of -- to the tune of about 300-odd crores, so you should look at a equity value of about 2,500 crores to 2,600 crores [ at a ] 6,000 crore asset valuation.

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

Firstly, on the acquisition. So I'm just trying to understand. I think Brookfield parent acquired this asset a couple of years back for 5,000 crores, and I think that transaction was completed last year. And now the valuer has put a valuation of 6,500 crore, so I just wanted to understand. What has been the incremental changes in this [ aspect ] post Brookfield taking over? And is it just on the rentals? Or on the occupancy side as well, it was very low occupied when it was acquired. And now it has gone up to 91% committed occupancy. So just your input on that.

Yes. So Rachit here again, if I can just point you to Page 14 of our acquisition presentation. The property was about 75% occupied when Brookfield's private funds had signed up the deal in 2022. It was a valuation for 2022, right? The 75% occupancy number was at a INR 120 average rent, which has now become 91% occupied portfolio at a INR 140 average rent, so the NOI has actually gone from slightly below 400 crores, which it used to be 2 years back, to almost touching 500 crores right now, so -- and that 25% uptick in NOI is what has driven the valuation change.

Sure. And on CapEx calculation, you have mentioned that it's at 97% occupancy in FY '26, so how confident are you about the leasing of this asset from here on?

So I'll request Alok to add, but these properties have been occupied at those levels in the past, pre COVID. If we were to look at asset by asset: Airtel Centre is almost 100% occupied today. Worldmark Delhi and Gurgaon are touching 90%. These are very high-quality front-office properties. There are many tenants who want to be in these properties, so there's a good amount of confidence that we will be able to take these up to 95%, which basically means the portfolio goes up to 97.5%, but I'll let Alok add, on the lease, some color as well.

Yes, yes. So if you really see, Airtel Centre is, anyway, [indiscernible] occupied. We have seen the occupancy for both Delhi and Gurgaon property moved. As in, past 2 years, we have seen it considerably moving up. And we have a strong pipeline for both of these assets, and we should be able to achieve the numbers we are projecting. We are very confident about that.

Sure. One on Kolkata. So I think, a great turnaround there. And you had, have been highlighting about really strong leasing expected in Kolkata. What is your outlook on the asset now? By when can we see that getting fully leased? Will -- the conversion of SEZ [indiscernible], is that -- be the key driver of that demand? Or we are still seeing a very strong SEZ demand in Kolkata as well; and specifically since we are aiming for another 500 lakhs, 600 lakhs square feet, 500,000, 600,000 square feet, of conversion in that asset. So what's the outlook there?

That is a good question, and -- but I will say that turnaround in Kolkata which has happened -- and we have moved from 70% to either we call 88% or actually it's high 90s. That has happened for both seasons. We have seen a good SEZ demand, but the kicker has really come in signing of this non-SEZ space by Indian leading banks which would not have taken SEZ space. So both things have worked with advantage. And we also have seen the rentals going up, especially for the non-SEZ space. They have crossed 50s. And we are also now looking to push rentals there. Having said that, there's [ more and enough ] demand; and we are very confident that we should be able to achieve occupancy in terms of high 90s. We are very confident [ how to just ] tie up so that whatever demand we have -- so as and when this short-term space gets vacated, back to back, we can tie it up. So that's something we are planning. We are working and feel very confident and positive about to take this asset to very high 90s.

Sure, sure. That's great to hear. Just lastly, on the conversion. So 1 million square feet already converted. Is it just that Kolkata one is leased out? Or we have seen any other progress in the converted space in terms of leasing. And your experience in terms of time taken for this conversion and how quickly we can convert the next 1.2 million square feet that we are eying for.

Yes. So 1 -- for 1 million square feet, we already have in-principle approval. There, Kolkata, we have applied for conversion of about 0.6 million to 0.65 million square feet. That is expected to happen in next 10 days. I mean -- and the final approval -- last stage of approval, we are going to get in next 10 days. For other assets, probably it will take maybe 4 to 6 weeks. My experience is it takes about 2 months for getting the space converted. And as you know, we move ahead. Let's -- but let's take 2 months. This time could be shortened in case there is a tenant waiting. So that's where we are but just to add that, other assets also, we have a strong demand for tenants who [ want launch ] these spaces. And we are working with these tenants to sign them up and [ parallelly ] take a space for conversion. Once we see -- once this 1 million plus 0.2 million, 1.2 million, get leased, we can take more space. We want to take in kind of a -- not all in one go, but after the 1.2 million, we'll go for the next [ tower ].

How much will be left after this 1.2 million; another 1 million square feet, is it?

So [ that will ] decide depending on the demand, will decide -- we can convert 50% of -- we can convert, [ but that will ] decide how much you want to convert.

The next question is from the line of Parvez Qazi from Nuvama Wealth.

So congratulations for a good leasing pipeline. So my question is now on the NOI and NDCF. Now with the leasing pipeline picking up, do we see a scenario where, let's say, the working capital movement might turn to our advantage? And the impact on, let's say, the NDCF front could be higher than what the NOI growth could be for the similar set of leasing.

So we are already -- see. If you see our deck, it's already saying that we are saying 15% NOI growth we are already projecting. And that's something we'll keep that number there. And as when as -- of course, as we move ahead and our leasing numbers, occupancies move higher, we can revise these numbers, but as of now we are projecting a 16% increase in the NOI. And in terms of NDCF, we already have said that, for next -- end of 2 quarters, we are hoping to distribute about INR 4.5 to INR 4.75. And after 2 quarters, we'll review these numbers.

The next question is from the line of Puneet Gulati from HSBC.

My first question is if you can talk about the confidence on leasing the new acquisition portfolio, in terms of more color, because it seems it's more Gurugram-oriented Worldmark. Aerocity seems fine. Airtel Centre seems okay, but on the other part, if you can talk a bit about what kind of tenants are you looking at. And how good is the pipeline currently?

Look, Puneet. If you really see, I've already mentioned the kind of tenants we have in Gurgaon as well as in Delhi. If we talk about Delhi, it's next to airport. We have tenants like [indiscernible]. We have [indiscernible]. We have Brookfield properties. And banks are there. There's a lot of -- Japanese companies are there. A lot of European companies are there. This is the first -- whenever somebody wants to open an office in Delhi, this is the first place of call, so -- and we have seen the occupancy moved up from -- we have already seen the occupancy moving up in last 2 years. And we are very confident -- that balance space we have. We have a strong pipeline. And gradually it should move up in Delhi also...

So these are all non-SEZ assets, right?

These are all non-SEZ assets. These are all non-SEZ. The asset -- Delhi is non-SEZ. Gurgaon is non-SEZ. And it works very well with us because we have 2 SEZ assets in Gurgaon. Of course, now we are able to convert SEZ to non-SEZ; plus this asset we have, which is again a non-SEZ asset, so it kind of complements and supplements to our existing portfolio. It's a very good addition [ in that sense ].

So I -- yes. So I wanted -- why would they still have 86% kind of occupancies, Worldmark Gurugram and Worldmark Delhi. Why would they still be at 90%. Why not higher end? And [ do you have ] the market rents for Worldmark Delhi now?

Yes. So if you see, we always have maintained that we -- of course, occupancy is important, but we just try to always maximize the NOI; and that has been our strategy. And when pipeline is strong for -- so -- Gurgaon and Delhi both, we'll gradually lease them up to increase our -- maximize our NOI. If you see -- so that's in terms of strategy. For Delhi, of course, rental is in a range of 200-plus right now.

Which is the in-place rent as well, so there is no...

[ Rents are ] 220 to 225 now. And in-place rent is about 200, yes.

Okay, so...

[ And I said ] 200-plus. [ It may be ] 225, around. And that's the number and that's what we're leasing at.

And Airtel Centre is now 100% owned. Is -- how old has that been? Because WALE is still small at 4. So how should one think about -- is there any risk that they might move or given that [ now -- and they have ] sold their stake as well and there is no vested interest? Or is that a proper...

I mean -- so Puneet, Rachit here. So Airtel has a 3-year lease left on this property. As a part of this transaction, they're willing to extend the lock-in by about 2 years, so we'll get about 2 years of lock-in in the REIT ownership. Beyond that, there's 1 year of lease term that will be left. And beyond that, there's a 1-year additional backstop that Bharti group is giving to ensure that, should the property take about a year to refurb and get leased again, we at least don't lose out on the cash flow. So from that perspective...

And [ refurb ] is your responsibility, right?

The [ lease-up ] is our responsibility, but that's a leasing risk that we'll take in our business.

But just to add here, Puneet. This is -- this Airtel Centre is in a pretty marquee location, right, on expressway. And as and when and if it gets vacated, it will not be difficult to lease. And it will -- we should be able to lease it fast and at kind of a decent rental.

All right. And is there any indication from Bharti group as to how long do they intend to keep owning the REIT units which they will get?

And we don't have any indication from them. The regulations prescribe for a 1-year lock-in. If you go through some of the press releases that have been put up: I think the intention of the group is to grow the partnership, so we see them as a long-term unitholder and also a provider of future assets going forward.

Okay, so there are more assets beyond this with them that you have in private space.