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 '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. We have with us on the call today, Mr. Alok Aggarwal, CEO and MD; Mr. Ankit Gupta, President; and Mr. Amit Jain, CFO of Brookprop Management Services Private Limited; Mr. Rachit Kothari; and Mr. Shailendra Sabhnani from Brookfield. I now hand the conference over to the management team. Thank you. And over to you, sir.

Good afternoon, 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. Let me start by giving an update on office markets in India. The India office market witnessed exceptional momentum in leasing activity in year 2024, cementing India's reputation as the office of the world. Across the top 8 cities, gross leasing activity hit at an all-time high of 89 million square feet for calendar year, underscoring the robust demand for high-quality office spaces. We believe that demand for Grade A office spaces will remain strong in 2025 as well. This optimism is driven by sustained revenue growth among IT companies and growth of GCCs in India. Notably, GCCs accounted for over 3% of total space take-up in 2024, with both new entrants setting up global hubs and existing firms scaling up their operations. With a rising focus on AI, emerging technologies, engineering and R&D, headcounts across organizations are expected to grow further and this growth combined with the continued back office trend augurs well for higher space adoption in year 2025 as well. Turning to Brookfield India REIT. I'm delighted to report another outstanding year of growth and a fantastic last quarter. For the second consecutive quarter, we achieved 1 million square feet of gross leasing, reflecting strong demand for our premium Grade A office assets and office campuses. Our committed occupancy has increased by approximately 770 basis points over the past 12 months, crossing 87% occupancy. Importantly, we have already achieved the lower end of our stated occupancy guidance for financial year 2025 3 months ahead of schedule. With robust market demand, we are confident of further improving occupancy levels in financial year 2025. Additionally, we successfully completed INR 35 billion QIP fund raise this quarter, which was oversubscribed by 1.5x. This resounding support from institutional investors reaffirms their confidence in our high-quality portfolio and strengthens our ability to pursue strategic growth opportunities. Looking ahead, we expect leasing momentum to remain strong in 2025. With a dual offering of SEZ and non-SEZ spaces across the campuses, we are well positioned to attract a diverse tenant base and accelerate our journey towards high occupancy. Let me now invite Ankit to take you through details on key highlights for the quarter.

Thank you, Alok. Good evening, everyone. As Alok mentioned, we successfully closed the INR 35 billion QIP in the previous quarter. And the QIP issue saw strong demand from marquee long-term investors like IFC, LIC, SBI Mutual Fund, Ipru Mutual Fund, amongst others. In fact, this is the first ever equity investment by both IFC and LIC in any REIT in India. The commitment by these reputed long-term institutional investors is a testament of our high-quality portfolio and positive business outlook. As a result of the QIP, our LTV has gone down from 35% approximately to now approx. 25%, which gives us enough headroom to pursue strategic inorganic growth opportunities for the REIT. We are in conversations with our Sponsor Group to evaluate acquisition opportunities in Bangalore spanning 9.5 million square feet of assets. We continue to deliver on our stated leasing guidance, and we have registered the fourth consecutive quarter of upward movement in occupancy crossing 87%. This quarter, we delivered 1.1 million square feet of gross leasing, marking the second consecutive quarter of exceeding 1 million square feet in gross leasing. Some of the key large wins for us this quarter are Capgemini of 240,000 square feet, Teleperformance of 125,000 square feet and General Mills of around 77,000 square feet, amongst others. Interestingly, all these tenants have expanded their footprints in the REIT portfolio. Capgemini and Teleperformance growing their footprint by around 70% each to 580,000 square feet and 36,000 square feet, respectively, and General Mills increasing their space by 53% to 220,000 square feet. And this speaks volumes about the stickiness of these large tenants in our high-quality assets. There is strong demand revival in our SEZ portfolio, with occupancy growing from 76% to 83%, a 700 points increase in the past 12 months. The conversion of SEZ spaces to NPA has further boosted the leasing in these properties. We have achieved a gross leasing of around 2 million square feet in the past 12 months in our SEZ properties, of which about 40%, which is 0.8 million square feet has been in the NPA space. This quarter, we converted an additional 0.7 million square feet of space to NPA, which is 0.5 million square feet in G1 and 0.2 million square feet in N2. With a robust leasing pipeline on 3.7 million square feet across our SEZ properties, we are confident of continued occupancy growth in our SEZ properties in 2025. With sequential occupancy improvement in the last 4 quarters, we have seen an increase in the same-store NOI growth by 17% over the last 12 months. This was also supported by the contractual escalations as well as the spreads achieved on re-leasing and renewals. We achieved an average 8% escalation on 1.6 million square feet during the quarter and 17% re-leasing spread. On the ESG front, we continue to make significant strides towards our net zero carbon goals by 2040 or sooner. Currently, 40% of our total energy requirement at our Delhi-NCR campuses is sourced from renewable energy, and we are on track to achieve 100% green power across all campuses by 2027. In recognition of our efforts, we received the Golden Peacock Award for ESG in 2024, and 5 of our assets, G1, G2, N1, N2 and K1 earned 5-star ratings and the Sword of Honor from the British Safety Council. Now, I would like to invite Amit to provide the financial updates.

Thank you, Ankit, and good afternoon, everyone. Our operating lease rentals have grown to INR 443 crores in Q3 FY 2025, 4% higher Q-on-Q compared to INR 426 crores in the previous quarter, and 13% higher Y-o-Y compared to INR 393 crores in the same period last year. The adjusted NOI for Q3 FY '25 is at INR 504 crores, 4% higher Q-on-Q compared to INR 486 crores in the previous quarter and 11% higher Y-o-Y compared to INR 453 crores in the same period last year. The Y-o-Y growth is primarily on account of new leasing, renewals and contractual escalations. We are distributing INR 4.9 per unit this quarter, translating to a total distribution of INR 298 crores. For 9 months in FY 2025, the total DPU number is at INR 14. In the short term, the proceeds that we raised through QIP would be utilized towards reducing debt in the portfolio as stated in use of proceeds of QIP, thereby creating LTV headroom, which can be utilized for strategic inorganic growth. Reduction in debt in the short term would increase the total distribution to unitholders on an absolute basis due to reduced interest burden on the debt. Based on our current run rate of NOI on an annualized basis, we would have total NOI of approximately INR 1,800 crores. This takes into account 50% NOI from assets where we have 50% economic interest. Steady leasing recovery can drive approximately 16% growth in our NOI run rate. This, coupled with reduction in the interest burden due to debt repayment from QIP proceeds shall lead to approx. 25% growth in distributions. This would translate to a distribution per unit on a stabilized basis of INR 24.7, without accounting for any impact on account of rent growth, contractual escalations, MTM and changes in the interest rates. 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 would request the moderator to open the floor for Q&A.

[Operator Instructions] The first question is from Puneet from HSBC.

Congratulations on good progress on occupancies. My first question is, if you can talk a bit about the NOI margins. We've seen a bit of improvement on the Q-on-Q side, year-on-year side. What's driving this? And how far do you expect this to go from current levels?

NOI margins?

NOI margins are basically -- obviously, the occupancy has contributed in the growth of NOI margins. In the last 9 months, the occupancy levels have increased by around 7.7%. And the contractual escalations is other factor, as well as the MTM. The spread in re-leasing is contributing towards the growth in NOI margins.

And should one think of the 107% type of lower LRD peak levels? Or is there more room within the assets to deliver?

Sorry, I didn't capture that, Puneet. Can you repeat, what 107%?

107% of lease rentals is where you're currently trending at, at your portfolio. Is there more room to grow from these levels? Or this should one consider this as peak level of margins?

I would say this would remain at the same level broadly. So yes, that will be the answer to your question.

Yes. But just, Amit, I agree with Amit. But there's a scope for upside as a lot of people would come back to offices. There's a possibility that some of the tenants may keep -- move from 12/6 to 24/7, and then our margins could improve. I think historically, Amit, we should check. We used to have slightly more, 109 to 110. So, that's a possibility. But right now, we'll stay at what Amit is saying, but there's an upside possible. That's the point I want to make there.

Understood. Secondly, there seems to be improvement in the dividend from the North Commercial Portfolio. What's driving this? And is that the new level?

For this quarter, we have received certain income tax refunds in the North Commercial Portfolio that is contributing to a higher dividend. So, tax refunds are lumpy in nature. You can't predict which quarter we'll get these refunds as such. So for this quarter, that was the reason for increase in dividends from North Commercial Portfolio.

However, having said that, Puneet, while this quarter, it has been this season and maybe next quarter, it will go down. But in -- like we had mentioned in one of our earlier quarters, over the end of the next year, we see the overall dividend component approaching to 20% of the overall share in a steady state anyway. So, that we will see as an improvement.

Okay. And lastly, on the DPU walk down, would it be fair to say that some bit of equity raise, net of adjustment, et cetera, has also been used to pay out DPU or everything is coming from operational, if you can elaborate a bit on the walk down part?

Nothing. So, nothing from capital raised has definitely been used for the DPU purposes. Obviously, once we utilize the QIP funds to repay debt, the interest savings will contribute to the DPU, but no proceeds of QIP have been distributed back to the investors.

Because when I look at the gap from cash flow from operations to the gap between the NDCF REIT, it's about INR 40 crores more. So some bit -- in fact, interest, et cetera, would have gone up, CapEx has gone up, but you can fund CapEx by debt. Where is the balance coming from?

It's primarily tax refunds. As we said earlier, that is a lumpy part in the current quarter that is contributing to DPUs.

So Puneet, if I may add, the NDCF generation this quarter is in the -- on an undiluted basis is INR 4.80, INR 4.90 and Amit can probably add the exact number there per unit. Add on to that, the tax refunds that have come in, in the December quarter. Also add on to that, the impact of the expanded capital base. That basically gets to the INR 4.96 that we have generated and INR 4.9 that we have distributed, and that's the way to probably read it. Incrementally, in the next quarter, we will have till such time as, let's say, we do the next acquisition, the tax -- the interest savings will further contribute as we keep progress and replace some of what we've seen in the last quarter.

So, what I'm trying to understand is, if I look at broadly on cash flow from operations basis, you've got INR 30 crores more. Extra dividend is about INR 40 crores. So, that's the INR 70 crores of addition you're saying. That's how it has come.

No. So, Puneet, I'll just break it down for you, right? If you just look at the NDCF SPV Level 9, we generated about INR 11 crores more just at the NDCF level, right, without North Commercial Portfolio. North Commercial Portfolio has generated about INR 45 crores more in the last quarter because of tax refunds. So, that INR 10 crores plus INR 45 crores, that's INR 55 crores. And if you see the line -- the cash retained at SPV level, last quarter, we retained about INR 16 crores at the SPV level that did not get reported in our NDCF. This quarter, we have not retained that much. We've only retained INR 3 crores. So, add another INR 13 crores on it. So, your INR 11 crores plus, INR 45 crores plus INR 13 crores, that's your bridge to INR 70 crores.

Next question is from Jatin from Bank of America. Jatin, we can barely hear you. If you could maybe speak a little louder or closer to mic?

Can you hear me now?

Yes, much better. Please go ahead.

So just to your point on the Bengaluru opportunity, what's the plan here? Are we looking at phase-wise acquisition? Or is there a plan to sort of go for the acquisition all at once? So that's number one. And second, you've been sort of very consistent on your inorganic additions. So beyond this Bengaluru portfolio, are there any other opportunities that you're evaluating maybe outside the sponsor portfolio?

This is Ankit here. Look, I think our Sponsor Group owns a large portfolio. And a large part of it, which doesn't sit in the REIT today is focused on Chennai, Bangalore and Pune. Bangalore continues to be of high interest to the REIT given it's highly complementary and a very attractive market to begin with. So, that's a focus for us. The Sponsor Group owns about 10 million square feet of assets, or 11 million square feet of assets where there's a conversation today to figure out depending on the amount of capital that the REIT has and can raise in the future, what is the right deal that could be done in a short period of time. So, we continue to have those conversations. It may take us a couple of rounds to get the entire portfolio. But at this point in time, the good news is we have about INR 3,500 crores, and we can put it to work very quickly. So based on that size, we are having a conversation on a 50% stake in a large portfolio.

[Operator Instructions] The next question is from Pritesh Sheth from Axis Capital.

Congrats on a very strong progress in terms of occupancy. First is on, again, the occupancy guidance. You already mentioned that we have achieved the low end of the guidance. But next quarter, there's similar expiries coming up, which we had this quarter as well. Do you think you are a little bit conservative in terms of guidance and then there is significant upside on the occupancy number that we want to achieve by end of FY '25?

So there, Pritesh, I would say that we have already achieved our lower end of the guidance. For this quarter, we continue to put our heads down and focus on delivery. We maintain -- for now, we maintain our occupancy guidance that we have. Obviously, if things go very well, we will try and over deliver on it. But right now, we continue to maintain the occupancy guidance of 87% to 89%.

Sure. Just to get a sense on how next 2 years would look like in terms of occupancy, I think key pillars of further occupancy growth would be our SEZ assets in Gurgaon and Noida, right? So, we have applied for further conversions. You've mentioned about strong leasing pipeline in Slide 16. How should one look at these 3 assets, specifically in terms of occupancy ramp-up? This pipeline that you have mentioned should get converted in probably next couple of quarters? How is the visibility like?

So Pritesh, this is Alok. I think a good observation kind of signaling out 3 assets where we have to really ramp up. If you see, most of other assets are 90% plus, and we have always maintained that our assets will cross 95% and move towards 98%, [ 99% ]. That's our strong belief that we have operated them for many years. So if you look at G2, N2 and G2, N2 and K1, largely SEZ assets, I think our occupancy level, including SEZ is about 83%. So, bulk of new leasing probably comes from G2, N2 and G1. Now in N2 and G1, we already have areas, which are de-notified. And in G1, we already have achieved about 200,000 square feet of de-notified leasing along with the SEZ leasing, which is moving in parallel. Again, in N2, pipeline is very, very strong, and we can have conversions any day. G2 also -- G2 probably, as we have always maintained in last calls also, probably would last to follow the curve and the reasons for that, even the conversions also happen. But yes, in all these 3 assets, we expect over a period of time, I'm not stressing the time, overall occupancy to cross 90% and then move towards 95%.

Got it. Sorry. Go ahead.

Does that answer your question or any more...

No, absolutely, I think it answers my question.

[Operator Instructions] The next question is from Parvez Qazi from Nuvama Group.

We have seen steady improvement in occupancy across most assets, probably except G2. Now, you had mentioned earlier that G2 will probably be the last one to see it fill up. But in general, across the 3 large SEZ properties that we have, which is G2 and G1, given where currently, occupancies are, let's say, somewhere around 75% to 80-odd percent, what is your estimate by when, let's say, can we reach 90% occupancy across these 3 assets? Will it be, let's say, by end of FY '26? Or do you think it will take longer?

Okay. So this is Alok. Now if you see G1 today, we are at [ 78% ]. And I think maybe 2 quarters back, we were at probably around 70%. So, we have seen a strong almost, percentage when they are almost 9% to 10% going up in last 2 quarters. So, I'm taking asset-wise. G1 momentum is very strong. We are seeing SEZ, as well as non-SEZ leases picking up and some of the leases what we've done in this quarter in SEZ space as well as non-SEZ space. So G1, I think we'll see a very, very rapid growth in occupancy. I think let's hold on for next quarter to say when it will become 90%, but there's quite a good chance that by end of next 12 months to 15 months, we could be -- we'll cross 90%. So, that's on G1. N2, again, very strong leasing momentum, both from SEZ as well as non-SEZ tenants. And again, here, even N2 also -- I mean, we should see occupancy crossing 90% in a short time, I think this year itself actually, assuming there are no kind of expiries or any kind of surrenders, but that we are not anticipating for N2. Now G2, why we are still taking time because they are large tenants, there are large RFPs actually. And those we are working on. Larger RFPs take a little more time actually. That is one reason why G2 probably will follow last one to get kind of that. That's how it has been planned, and that's how it has been thought about it. So, G2 will take some more time. But G2, I'm not committing a number right now, but we have large RFPs. If one of them gets converted, we can see good improvement in G2 as well. But end-to-end, G1 are very, very imminent in next few quarters.

Sure. My second question is regarding future SEZ conversion. I mean, what is the pipeline there? And specifically with regards to G2, what do you think will drive the increase in occupancy there? Will it be the conversion of SEZ into non-SEZ space? Or will we need an improvement in leasing in the SEZ area to improve the overall occupancy level?

Yes. So good question. But if you have seen our leasing numbers, we have been able to kind of leverage on SEZ tenants as well. Our existing tenants have taken a lot of space. We have attracted new tenants to SEZ spaces because still SEZs do offer value in terms of taxes, while it's not direct taxes, but in terms of indirect taxes, they still do offer value. So, we continue to kind of let our tenants grow and keep attracting new tenants in SEZ. In non-SEZ also, we have seen many new tenants coming and taking space across our campuses. So in G2 also, we again see a combination of SEZ as well as non-SEZ. And when I talk about non-SEZ, it will be largely new, but some of the existing tenants also probably will -- we probably can bring the non-SEZ portfolio into G2, but we'll see. In SEZ, it should be new as well as old. So it's a combination of all 3 SEZ tenants, 2 non-SEZ tenants and existing SEZ tenants getting the non-SEZ portfolios like in [ Tata ], Capgemini, they have SEZ presence, they have non-SEZ presence. And that would get repeated in all campuses. So, that is where our occupancy ramp-up would come.

Parvez, I would just add that now in the current market, we are uniquely and favorably positioned as having supply in an asset of both SEZ and non-SEZ products, which is fairly unique. And like Alok mentioned, the kind of strong demand we are seeing from both SEZ and non-SEZ is helping us get the kind of growth we are referring to, right? I mean, for example, G1, we have now already de-notified about 0.5 million square feet. And of that 0.5 million square feet, 200,000 square feet is leased up, while also the SEZ area, which we did not notify continues to get taken up by the SEZ tenants. This is just one example. Calcutta, we de-notified 6 lakh square feet. It's already leased up and so on. So, that dual product story is playing out in our favor.

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

So, I'm assuming there are no further questions. Thank you, everyone, for joining today's call. We look forward to connecting with you all next quarter. Thank you. Bye.

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