Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programmes (CP) of Brookfield India Real Estate Trust (BIRET). It has also reaffirmed its corporate credit rating on the trust at ‘CRISIL AAA/Negative’.  

 

BIRET is sponsored by BSREP India Office Holdings V Pte Ltd (part of the Brookfield group). The real estate investment trust (REIT) owns seven companies, of which six own and operate six commercial office assets, and the remaining is the operational service provider. BIRET has entered into an option agreement under which BIRET has an option to acquire all the share capital of Candor Gurgaon One Realty Projects Pvt Ltd (G1)’s property manager, Mountainstar India Office Parks Pvt Ltd (MIOP) on a fully diluted basis for a consideration of Rs 150.4 crore, in accordance with the terms of the option agreement.

 

BIRET operates a total area of 207.4 lakh square feet (sq ft) as on December 31, 2023. Committed occupancy reduced to 80% as on December 31, 2023, from 83% as on March 31, 2022 [excluding G1 and Kairos Properties Private Limited (Kairos)], on account of the increase in vacancies in the SEZ (special economic zone) areas with limited renewals of scheduled expiries. Of the total leasable area, 160.9 lakh sq ft is SEZ area wherein the occupancy is lower at 76% against 93% for the non-SEZ areas. Effective economic occupancy, after incorporating income support from the Brookfield group for the REIT’s N2 and G1 assets, remains healthy at 88%. The occupancy level is expected to improve to around 85% or higher next fiscal, supported by a strong leasing pipeline of ~26 lakh sq ft and limited expiries of ~12 lakh sq ft over the next five quarters. Recent amendments to the SEZ Act will also support leasing of SEZ areas with denotification of part of the area already underway; BIRET has applied for denotification of ~10 lakh sq ft of gross leasing area for which the REIT has applied for requisite approvals.

 

While average rentals remained stagnant for the portfolio due to impact of some of the expiries, rental escalations are happening as per contracts, and BIRET has entered into new agreements for 9.9 lakh sq ft of area and has also renewed 8.5 lakh sq ft of area at ~19% higher rental rate during the nine months of fiscal 2024. Impact of this will be visible in average rentals from fiscal 2025 onwards.

 

The CRISIL Ratings sensitised loan-to-value (LTV) remains around threshold of 40%, and with no major additional debt expected, the LTV is estimated to improve gradually. A low LTV ratio protects investors from the risk of decline in property prices or operating underperformance and its impact on refinancing. Debt service coverage ratio (DSCR) is expected to remain adequate throughout the tenure of the debt, including additional financing for K1 capex and asset upgrades. Debt is expected to be refinanced sufficiently prior to chunky repayments falling due beyond fiscal 2027. Liquidity in the form of debt service reserve account (DSRA) of at least 1-2 months of peak debt obligation is to be maintained throughout the debt tenure. Cash and equivalent stood at Rs 387 crore (excluding DSRA) as on December 31, 2023. New proposed CP limit will either be used for repayment of existing debt or may be used for future requirements. Any significant increase in debt without commensurate improvement in income/cash flow can impact the profile and will be a key rating sensitivity factor.

 

The ratings continue to reflect the trust’s stable revenue profile, benefits from geographical diversification and adequate ability to refinance owing to comfortable financial risk profile. These strengths are partially offset by susceptibility to volatility in the real estate sector, resulting in fluctuation in rental rates and occupancy.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of BIRET and its underlying special-purpose vehicles (SPVs), in line with its criteria for rating entities in homogeneous groups. This is because BIRET will have direct control over its SPVs and will support them in case of any exigency. After debt servicing in an SPV, excess cash flow may be made available for debt servicing of other SPVs, which may require support. The SPVs have to mandatorily distribute 90% of their net distributable cash flow (after servicing debt) to BIRET. Also, as per the Securities and Exchange Board of India (SEBI) REIT Regulations, 2014, the cap on borrowing of BIRET has been defined at a consolidated level (equivalent to 49% of the value of the trust’s assets).

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Moderate LTV ratio supports ability to refinance: With addition of G1 and Kairos, consolidated external gross debt increased to Rs 10,722 crore as on December 31, 2023, from Rs 5,483 crore as on March 31, 2023. The CRISIL sensitized LTV remains around threshold of 40% and with no major additional debt expected, it is estimated to improve gradually. A low LTV ratio protects investors from the risk of decline in property prices or operating underperformance and its impact on refinancing. Any significant increase in debt without commensurate improvement in income/cash flow can impact the profile and will be a key rating sensitivity factor.

 

• Adequate debt protection metrics: The DSCR is expected to remain adequate throughout the tenure of the debt, including additional financing for K1 capex and asset upgrades. Debt is expected to be refinanced sufficiently prior to chunky repayments falling due beyond fiscal 2027. Liquidity in the form of DSRA of at least one to two months of peak debt obligation is to be maintained throughout the debt tenure.

 

• Stable revenue profile of asset SPVs: The trust’s revenue comes from six commercial assets with total leasable area of 207.4 lakh sq ft, having stable operations with a track record of over 10 years of rental collection. Committed occupancy reduced to 80% as on December 31, 2023, from 83% as on March 31, 2022 (excluding G1 and Kairos), on account of the increase in vacancies in the SEZ (special economic zone) areas with limited renewals of scheduled expiries. Of the total leasable area, 160.9 lakh sq ft is SEZ area wherein the occupancy is lower at 76% against 93% for the non-SEZ areas. Effective economic occupancy, after incorporating income support from the Brookfield group for the REIT’s N2 and G1 assets, remains healthy at 88%. The occupancy level is expected to improve to around 85% or higher next fiscal, supported by a strong leasing pipeline of ~26 lakh sq ft and limited expiries of ~12 lakh sq ft over the next five quarters. Recent amendments to the SEZ Act will also support leasing of SEZ areas with denotification of part of the area already underway; BIRET has applied for denotification of ~10 lakh sq ft of gross leasing area for which the REIT has applied for requisite approvals.

 

While average rentals remained stagnant for the portfolio due to impact of some of the expiries, rental escalations are happening as per contracts and BIRET has entered into new agreements for 9.9 lakh sq ft of area and has also renewed 8.5 lakh sq ft of area at ~19% higher rental rate during the nine months of fiscal 2024. Impact of the same will be visible in average rentals from fiscal 2025 onwards. The portfolio has mark-to-market upside given the superior asset and service quality, favourable location in prime areas of Mumbai, National Capital Region (NCR) and Kolkata, with good demand and competitive rental rates.

 

Weakness:

• Susceptibility to cyclicality in the real estate sector: Rental collection remains susceptible to economic downturns, which may constrain the tenant’s business risk profile and, therefore, limit occupancy and rental rates. With the top 10 tenants and sectoral (information technology [IT] and IT-enabled services) concentration of rentals at 42% and 30%, respectively, as on December 31, 2023, revenue concentration risk persists. Furthermore, leases accounting for ~24% of rental revenue will be due for renewal between the fourth quarter of fiscal 2024 and fiscal 2027. While the majority of tenants are established corporates and may continue to occupy the property, any industry shock leading to vacancies may make it difficult to find alternate lessees within the stipulated time, as witnessed over the past few quarters. This could adversely impact cash flow and hence will be a key rating sensitivity factor.

Liquidity: Superior

Liquidity will remain strong over the medium term as the trust has low principal repayments in the next three fiscals, and cash flow will be sufficient to meet debt obligation. Liquidity is supported by DSRA of ~Rs 89 crore (one to two months of peak debt obligation in SPV loans) and cash and bank balance of ~Rs 387 crore as on December 31, 2023. Furthermore, a moderate LTV ratio enhances financial flexibility.

Outlook: Negative

CRISIL Ratings believes improvement in operating performance without increase in leverage remains essential to sustain the BIRET’s financial risk profile. BIRET will continue to benefit from the quality of its underlying assets over the medium term.

Rating Sensitivity factors

Downward factors:

• Lack of traction towards achieving healthy occupancy levels.
• Significant rise in debt resulting in CRISIL Ratings-sensitised LTV ratio increasing above 40% on a sustained basis.
• Significant delay in completion and leasing of under-construction assets or acquisition of assets of lower quality affecting portfolio health.
• Any impact on the independence of the operations of BIRET due to, but not limited to, change in sponsorship of the trust or ownership of the BIRET’s manager.

About the Company

BIRET is registered as an irrevocable trust under the Indian Trusts Act, 1882, and as a REIT with SEBI’s REIT Regulations, 2014, as amended.

 

Shantiniketan Properties Pvt Ltd (N1) owns and operates a commercial office park, Candor Techspace N1, in Noida. The property has been operational since January 2011 and has completed area of 19.87 lakh sq ft, of which 96% was occupied as on December 31, 2023, while additional area of 8.6 lakh sq ft is expected to be developed in the long term.

 

Candor One Hi-Tech Structures Pvt Ltd (K1) owns and operates: An SEZ park, Candor Techspace G2, in Gurugram. The property has been operational since 2011 and has completed area of 39.34 lakh sq ft, of which 78% was occupied as on December 31, 2023, while an additional 1.5 lakh sq ft is expected to be completed over the medium to long term.

 

Candor Techspace K1 in Kolkata, which is part SEZ and part commercial office park. The property has been operational since 2008 and has completed area of 30.7 lakh sq ft, of which 74% was occupied as on December 31, 2023. An IT Park and mixed use-led development worth additional area of 5.8 lakh sq ft is under construction, while 21.1 lakh sq ft is expected to be developed over the medium to long term.

 

Festus Properties Pvt Ltd (Kensington) owns and operates an SEZ park, Kensington, in Mumbai. The property has been operational since 2009 and has completed area of 15.9 lakh sq ft, of which 88% was occupied as on December 31, 2023.

 

Seaview Developers Pvt Ltd (SDPL) owns and operates N2 in Noida. The property has been operational since 2011 and has completed area of 38.03 lakh sq ft, of which around 76% was occupied as on December 31, 2023, while an additional 7.7 lakh sq ft is expected to be completed over the medium to long term. BIRET acquired the asset on January 24, 2022.

 

Kairos Properties Pvt Ltd (erstwhile Kairos Property Managers Pvt Ltd) owns and operates a portfolio of nine commercial properties in Mumbai spread across three clusters totalling 26.6 lakh sq ft of operating area and 0.8 lakh sq ft of area under expansion. It had occupancy of 90% as on December 31, 2023.

 

G1 owns and operates a commercial office park, Candor Techspace G1, in Gurugram. The property has been operational since 2012 and has completed area of 36.97 lakh sq ft, of which around 69% was occupied as on December 31, 2023, while an additional area of 1.0 lakh sq ft is expected to be completed over the medium term.

 

Candor India Office Park Pvt Ltd (CIOP) is engaged in property management, facility management and support services for assets owned by N1, SDPL, K1 and Kairos. This entails services such as accounting, procurement of materials and services, supervision of annual maintenance contracts and insurance, transition, operations, supervision of repairs and maintenance, and legal, secretarial and compliance services.

Key Financial Indicators*

Particulars	Unit	2023^	2022^
Revenue from operations	Rs crore	1197	877
Profit after tax (PAT)	Rs crore	131	246
PAT margin	%	10.9	28.1
Adjusted gearing	Times	0.65	0.58
Interest coverage	Times	1.9	3.0

*CRISIL Ratings-adjusted numbers

^Key financial numbers do not include financials for G1 and Kairos acquired in August 2023

Any other information: Not applicable