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

Ladies and gentlemen, good day, and welcome to the Brookfield India Real Estate Trust Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. On the call, we have the following persons: Mr. Alok Aggarwal, CEO and MD; Mr. Ankit Gupta, President; Mr. Amit Jain, CFO of Brookprop Management Services; Mr. Rachit Kothari; and Mr. Shailendra Sabhnani from Brookfield. I now hand the conference over to the management for opening remarks. Thank you, and over to you, sir.

This is Alok. Good afternoon, 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. Let me start with a brief overview of the Indian office market. The Indian office market continued to see strong demand in the quarter gone by, especially from high-quality commercial spaces. Gross leasing is starting at a quarterly run rate of about 18 million square feet, an increase of almost 45% over the same quarter last year. This demand is being driven by both domestic and global corporations as well as GCCs who continue to expand their footprint in India. The SEZ reforms have been a significant positive development for the industry and for our REIT. We have already applied for the conversion of 1.5 million square feet of SEZ space to nonprocessing area across our SEZ campuses. This includes 0.6 million square feet at K1, which has already been converted and leased to HDFC Bank. 0.4 million square feet at G2 and N2, for which we have in-principle approvals and which should get converted soon and 0.5 million square feet at G1, conversion of which we applied for during this quarter. These conversions should help attract a wider segment of tenants to our campus. And we already have a strong pipeline of prospective tenants for the space to be converted across all our campuses. Also, the recent announcement in the budget, reducing the holding period for the long-term capital gains from 36 to 12 months for REITs is a positive development and should boost investor appeal for deals. We are pleased to inform that we have completed the acquisition of the 50% stake in North Commercial Portfolio from Bharti Group in June, having discharged the equity consideration of INR 12.3 billion through a preferential issuance at INR 300 per unit, at an 18.5% premium to the floor price. The transaction has added modern assets with Bharti front-office tenancy to our portfolio, expanding our operating area by 3.3 million square feet. The transaction is both NAV and NDCF accretive. This transaction, along with the recent acquisition of Downtown Powai and Candor TechSpace G1 is in line with our stated strategy of adding accretive assets to our REIT and forms one of the key pillars of growth for our REIT. Let me now invite Ankit to take you through the key highlights for this quarter.

Thank you, Alok, and a very good afternoon, everyone. Let me touch upon our leasing performance during the last few quarters. As compared to our new leasing guidance of 2 million to 2.4 million square feet for 5 quarters from Jan 2024 until March 2025, we have already achieved 50%, that is 1.1 million square feet in the last 2 quarters, leading to our occupancy increasing by 400 basis points from 80% in December 2023 to 84% in June 2024. We achieved a gross leasing of 2,42,000 square feet in Q1 2025 with the signed rents at INR 135 per square foot versus the in-place rent of INR 94 per square foot. This has been possible due to strong demand for our high rental assets with demand from other assets to follow in the subsequent quarters. The tenants that have been signed in the last quarter include Amdocs, Landis+Gyr, Loccioni and Mercer amongst others. As mentioned earlier, we have also received the approval for conversion of 0.6 million square feet SEZ area to nonprocessing area at K1 in the last quarter, which has been completely leased to HDFC Bank. The leasing transaction at our assets has been driven by strong demand from both SEZ tenants as well as non-SEZ tenants such as HDFC Bank, and we continue to have a robust pipeline of 3 million square feet for both these sets of tenants. With sequential occupancy improvement in the last 3 quarters, we have seen an increase in the same-store NOI by 17% over the last 9 months. This was also supported by the contractual escalations as well as the spreads achieving re-leasing and renewals. We have achieved a 11.1% average escalation on 1.5 million square feet during the quarter and 13% re-leasing spreads. Building on our leading performance from the previous quarters and with the acquisition of the North Commercial Portfolio, we have updated our new leasing guidance for FY 2025 to 1.5 million to 2 million square feet. We have a relatively low expiry load in FY 2025 with 0.6 million square feet of expected exit and 0.8 million square feet of expected renewals. Given our strong leasing guidance and the low expiring road, we expect a sustained improvement in net leasing and, therefore, our occupancy. We are guiding for an exit occupancy of 87% to 89% by March 2025. Backed by the continued strong leasing traction expected in FY '25, we are giving a distribution guidance of INR 18.5 plus or minus INR 0.25 per unit for the year. Our distribution will be in line with the recently announced SEBI NDCF regulations. For our ongoing 0.6 million square feet mixed-use development at K1, we have received recognition for our use of sustainable materials and processes. We have received the Precertified Platinum IGBC Green New Building Rating in June 2024 and the International Safety Award from the British Safety Council in April 2024. At our Noida assets, our green energy transition is progressing fully. We have already achieved our Phase 1 goal of meeting 40% of and energy requirements through renewable energy, leading to a reduction of carbon emissions by 11,000 metric tons annually. Our target is to reduce -- our target is to achieve 100% transition by 2027 or sooner. Now I would like to invite Amit to provide the financial updates.

Thank you, Ankit. Good afternoon, everyone. As Alok mentioned, we have successfully consummated the acquisition of the North Commercial Portfolio in the June quarter. With this transaction, we welcome the Bharti Group as a cornerstone investor in Brookfield India REIT with an 8.5% stake held by them. Please note that the North Commercial Portfolio is accounted for using the equity method of accounting wherein we pick up our share in the profit and loss of the investing companies instead of going line-by-line consolidation. We have witnessed a growth in our operating lease rentals to INR 420 crores, 4% higher quarter-on-quarter compared to INR 405 crores in the previous quarter and 99% higher year-on-year compared to INR 211 crores in the same period last year. The adjusted NOI for Q1 FY '25 is at INR 475 crores, 3% higher Q-on-Q compared to INR 461 crores in the previous quarter and 94% higher Y-o-Y compared to INR 245 crores in the same period last year. The Y-o-Y growth has primarily been driven by the acquisitions of Downtown Powai and Candor TechSpace G1. We have achieved NDCF of INR 217 crores this quarter, which translates to INR 4.52 per unit, and we are distributing INR 4.50 per unit this quarter. We are pleased to highlight that the dividend component of the distribution has increased from nil to 11% this quarter. This increase in the dividend component is driven by the acquisition of North Commercial Portfolio and the implementation of capital reduction scheme in Candor TechSpace N1. On account of the capital reduction schemes in Candor TechSpace K1 and Downtown Powai SEZ, the dividend component is expected to improve further to 20% to 25% of the next 4 to 6 quarters. Our current adjusted NOI run rate, including the North Commercial Portfolio is INR 2,408 crores on an annualized basis. We continue to have significant organic growth potential of over INR 250 crores in our portfolio, which can be achieved through the lease of our vacant areas and margin recovery. 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 amortizations over the next few years. A majority of our loans are linked to the repo rate, which will benefit us as the benchmark rates begin to trend lower. With that, I will request the moderator to open the floor for Q&A.

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

Congrats on decent performance. My first question is with respect to your guidance of INR 18.5 of DPU. Can you also talk a bit where will it originate from? What is the NOI you are building in? And what are the cash flows you're building it? Just to get a sense of how much can potentially come from the newer deposits and how much from this floor income growth?

Sorry, Puneet. Can you just repeat the question once?

Yes. So just wanted to understand the assumptions behind INR 18.5 DPU in terms of what would be your assumptions on NOI and cash flow from operations.

Yes. So please, I would basically break this into 2 parts. One, as you have seen with the leasing already done and the 3 quarters of increase in our overall occupancy that in itself is providing us for a solid base as we are today in terms of our distributable income. Along with that, as we've given a leasing guidance over the next year, we expect our occupancy also to go up from the 84% currently to 87% to 89%. And that performance will also help kind of give us the cash flow from operations to be able to achieve this distribution that we are giving a guidance on.

Any numbers you can share on the NOI part that is needed for INR 18.5 of DPU?

So Puneet, maybe we'll add on, right, to what Ankit said. Basically, what we are clocking right now, if you just take Bharti, as I said, 100% share is about INR 2,400 crores, right? At this point in time, we have a vacancy of give or take about 3.5 million square feet. What we are saying is that we'll do about 1/3 of that pick up. From 84 to 100, we'll do about 1/3 of that pickup in this financial year, which is in total about INR 2 crores to INR 3 crores of NOI pickup. So we will see INR 80 crores of incremental NOI or INR 20 crores of incremental quarterly NOI flow through by end of the year, right, in the NOI numbers. On a full year basis, this will be a distributed impact because bulk of this leasing is going to be in the second half of the year that we're guiding you to. Does that answer your question.

Yes, partly. I'll take it separately as well. But just on the CAM side also, we are seeing an increase in CAM charges. Is it to do with a part incorporation of Bharti's portfolio as well? Or is it just higher utilization rates?

So this is broadly a seasonal impact as is the par and fuel cost for the current quarter was higher as compared to the last quarter, but that's a pass-through cost to the tenants and there was again other repair and maintenance charges that were incurred again a pass-through. But to answer your question, the primary contribution is of the fuel and power cost because of the seasonal impact.

Understood. So INR 153 crores is not the normal, INR 131 crores is what -- INR 130-odd crores is what one [indiscernible] typically, on a quarterly basis?

Sorry, where are you getting the INR 130 crores from?

Over the last 2 quarters, you were at INR 138 crores, INR 131 crores. It jumped to INR 153 crores. So just wondering...

Yes. Like Amit mentioned, these are also very seasonal impacts. So the number will land somewhere in between as an average for the full year.

And can you also comment upon what kind of underlying market rental growth you are seeing for your portfolio?

Yes. So see, I think we talked last time also. If we see really Kolkata and I will take asset wise. If we Kolkata and because now we are showing at 90%, but [indiscernible] in the entire space, so right now it's fully used out. And there are 2 elements to that. One is non-SEZ and one is the SEZ. Now in non-SEZ what we have denotified, we always -- almost about INR 55 per square feet, which is about 18% more than our kind of an in-place end. But because now our vacancy is very limited, we're also confident that even SEZ rental, we should be able to kind of do it around that number. Now whether it's 18%, 16%, that's a matter of debate, but around INR 55, so almost 18% to 20% increase has happened in Kolkata, and we are confident of maintaining that. Then when you come to Noida. Noida again, N1, N2, I mean, there's really -- we are able to get about mid-60s kind of a rental, mid-60s, mid-70s. Rentals have been flat from last 2 quarters, but also because we had a strong run-up in last 1 year. In N1 it was, from 50 became 65. N2, again, 55 became 65. So rents are consolidating at that level. And N1, there's no vacancy. N2, as our vacancies move up, we are confident of able to push that rental also higher. So that we are there. Then if you talk about Powai. Powai, we are hovering -- depending on which building we are talking about, we are hovering between 150 to even 180, 185, depending on which building, how much space tenant has taken. But if there's a growth right now, I would say it's flat, but I think we are consolidating. Gurgaon, both if we take G1 and G2, again, we would see the growth as occupancies move towards mid-85 to 90. That is the time we should see the growth. Right now rents are consolidating at the early 80s to mid-80s in G1, and early 90 to mid-90s in G2. But you would appreciate growth would come when we reach around -- more growth will come when we reach around late 80s or early 90s.

Understood. That's helpful. And for the Worldmark, et cetera, should one assume the last updated market rentals, which were disclosed in the earlier presentation of...

Yes. Sorry, I missed that Worldmark. Yes, Worldmark, so we are like around 222 and 225, 5% annual growth again in Gurgaon. 5% kind of annual growth, 4% to 5%, we should keep getting actually, at least. I am saying 5%, 6%. 4% to 6% will keep happening. And the occupancy is really above 90, so not difficult to at least get 5% to 6% rental growth.

The next question is from the line of Kunal from Bank of America.

My first question, again, with the same goal of trying to get to what NOI could look like for the full year. I just want to check this updated leasing guidance of 1.5 million to 2 million square feet. Is that all organic? Or does it include Worldmark as well?

So the distribution for this quarter includes a little bit over than INR 100 crores run rate from Worldmark.

Okay. I was actually checking on the leasing guidance that you've put out, 1.5 million to 2 million square feet.

Yes, that includes the entire portfolio. Like I mentioned, the 1.5 to 2 million square feet is for the full year and it includes the Worldmark portfolio as well.

Got it. Okay. And second one is just a quick check. I think you are just about 1 year shy now of the rental support in G1 sort of coming to maturity. Generally, what are your thoughts or visibility when you're trying to replenish some of that?

Yes. So if you really see, given we are seeing good leasing traction. We are hopeful of -- now what's the number that something has to be worked out, but we should -- our occupancy should move up in a good measure by end of this year. But if you really see what is going to happen is our escalations and increase in NOI is going to more than offset if there's a shortfall, which may happen after let's say from Q1 in 2025 calendar year.

And let me just add Kunal to that. Our share of that income support is about INR 40 crores a year to the REIT. So that's about, I would say, INR 0.80 of DPU on an annual basis, that's coming from that income support. As Alok said, I think, we should be able to fairly offset it. With 1 year of escalation, which close to our portfolio is about INR 85 crores on a 5%, we should be able to more than offset it as our rents grow even if -- and leasing is on top of that.

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

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

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