Detailed rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA’ corporate credit rating of Brookfield India Real Estate Trust (Brookfield REIT), while revising the outlook to ‘Negative’ from ‘Stable’.

Brookfield REIT is sponsored by BSREP India Office Holdings V Pte Ltd (part of the Brookfield group). The real estate investment trust (REIT) has stake in five companies which includes four companies comprising of five commercial assets and one company which is the operational service provider.

The outlook revision reflects delay in improvement of leverage and operating performance of Brookfield REIT. The debt of the REIT increased materially last year after acquisition of Candor Techspace N2 (N2), resulting in high loan-to-value (LTV) ratio. Expectation of gradual reduction in the LTV ratio over the last one year has not materialised yet and CRISIL Ratings’ sensitised LTV is currently near the threshold of 40%. Gross debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio is around 6 times as of March 2023.

Furthermore, the occupancy of the portfolio, which was expected to improve to 87-90%, remained at ~83% which also curtailed improvement in the financial risk profile. Nevertheless, effective economic occupancy, post incorporating income support from the Brookfield group for the N2 asset stands at ~88%. Going forward, the occupancy is expected to improve, backed by the leasing pipeline and demonstration of the same at adequate rates remains important, especially in the context of slowdown in leasing momentum in India due to global economic headwinds. With improvement in occupancy and leverage, CRISIL Ratings expects the LTV ratio to come down to well below 40% on sustained basis and debt to Ebitda ratio below 5 times, which will augur well for the credit risk profile.

Any future acquisition of assets, their funding pattern and consequent impact on the financial risk profile of the REIT will remain key rating sensitivity factors.

The rating continues to reflect the stable revenue profile of Brookfield REIT’s assets, benefits from geographical diversification and adequate ability to refinance due to comfortable financial risk profile. These strengths are partially offset by susceptibility to volatility in the real estate sector resulting in fluctuations in rental rates and occupancy.

Key rating drivers and detailed description

Strengths:

• Moderate LTV ratio supports the ability to refinance: Consolidated external debt has increased marginally to Rs 5,423 crore as on December 31, 2022, compared to Rs 5,199 crore as on March 31, 2022. Given lower-than-expected improvement, the leverage remains near LTV threshold of 40%. The debt to Ebitda ratio is expected to remain at around 6 times as of March 2023. A low LTV ratio protects investors from the risk of decline in property prices and its consequent impact on refinancing. Any debt-funded capital expenditure (capex) or acquisition will remain a key rating sensitivity factor.

• Adequate debt protection metrics: Average debt service coverage ratio (DSCR) is expected to remain adequate throughout the tenure of the debt, including for additional financing for construction and working capital requirement in the underlying SPVs. The DSCR, though lower than initial estimates, will be comfortable, at over 1.5 times, in the initial three years when there is very low principal repayment. The debt is expected to be refinanced prior to chunky repayments falling due beyond three years as there is no prepayment penalty on the debt post three years from the date of disbursement. There is a put option as well, which gives the lender the right to require the borrower to prepay the secured obligation pertaining to the increased facility in full on the date falling at expiry of five years from the drawdown date. Liquidity / debt service reserve account (DSRA) of at least two months of peak debt servicing obligation is to be maintained throughout the debt tenure.

• Stable revenue of asset SPVs: Brookfield REIT’s entire revenue comes from five commercial assets with total leasable area of 187 lakh square feet (lsf) having stable operations with a track record of over 10 years of rental collection. The consolidated revenue from operations was Rs 895 crore and Rs 877 crore for the nine months ended December 31, 2022, and fiscal 2022, respectively. Committed occupancy has remained stable at around 83% in December 2022 as compared to similar levels in December 2021. However, it remained lower than the expected level of 87-90%. Nevertheless, leasing is expected to pick up given ongoing discussions for 9 lsf of new leasing and 13 lsf of renewals as on December 31, 2022. Consequently, occupancy should improve over the medium term. Effective economic occupancy, post incorporating income support from the Brookfield group (including the N2 asset) is ~88%. The rentals have 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 volatility 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. Top 10 tenant and sectoral (information technology [IT] and IT enabled services) concentration at 64% and 48%, respectively, exposes the REIT to moderate concentration risk. Furthermore, leases contributing to 32% of rentals will be due for renewal between the fourth quarter of fiscal 2023 and 2026. While 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 has been witnessed over the past few quarters. This could adversely impact cash flow, and hence, will be a key rating sensitivity factor

Outlook: Negative

CRISIL Ratings believes Brookfield REIT will continue to benefit from the quality of its underlying assets over the medium term. However, improvement in leverage and occupancy will remain essential.

Annexure - Details of instrument(s)

Annexure – List of entities consolidated

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