Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Negative’ corporate credit rating of Brookfield India Real Estate Trust (Brookfield REIT).

 

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 five commercial assets and one company which is the operational service provider.

 

CRISIL Ratings has noted the announcement made by Brookfield REIT on May 19, 2023, regarding acquisition of two special purpose vehicles (SPVs), namely Kairos Property Managers Pvt Ltd (Kairos) and Candor Gurgaon One Realty Projects Pvt Ltd (G1, rated ‘CRISIL A-/Watch Positive’), in an equal partnership with GIC, a global institutional investor, for an enterprise value of Rs 11,225 crore, subject to approval from unitholders. The transaction is expected to be financed by 62% equity and remaining through SPV level debt. The REIT has also executed definitive agreements to acquire 100% interest in G1’s property manager, Mountainstar India Office Parks Pvt Ltd (MIOP), for an additional consideration of Rs 150 crore upon the expiry of income support being provided to G1

 

Kairos owns and operates commercial office space in Downtown Powai, Mumbai, consisting of around 27 lakh square feet (sq ft) of completed area, with occupancy of 89% as on March 31, 2023, while around 1 lakh sq ft is under construction (expected to be completed in the second quarter of fiscal 2024). G1 owns and operates a commercial office park in Sector-48, Gurugram, consisting of around 37 lakh sq ft of completed area, with occupancy of 75% as on March 31, 2023, and future development potential of 1 lakh sq ft. The Brookfield group will provide income support to G1 of up to Rs 200 crore for a period of two years from completion of the acquisition to achieve effective economic occupancy of 100%.

 

While the proposed acquisition will eventually be funded by SPV level debt of ~Rs 4,300 crore, in the interim, the debt level may increase due to possibility of bridge financing which may lead to an increase in the CRISIL Ratings sensitised loan-to-value (LTV) ratio to cross 40%. However, with planned equity raise, the LTV is expected to come down in a year. Thus, the acquisition is not expected to have any material impact on the credit risk profile of the REIT. Any debt-funded capital expenditure (capex) or acquisition, which further increases the leverage level, will remain a key rating sensitivity factor.

 

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.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Brookfield REIT with those of its SPVs, in line with its criteria for rating entities in homogeneous groups. This is because Brookfield REIT has direct control over its SPVs and will support them in the event of any exigency. Post debt servicing in one 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 (post servicing of debt) to Brookfield REIT, resulting in minimal structural subordination of cash flow. Also, as per the Securities and Exchange Board of India’s (SEBI’s) Real Estate Investment Trust (REIT) Regulations, 2014, the cap on borrowing of Brookfield REIT has been defined at a consolidated level (equivalent to 49% of the value of Brookfield REIT’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 the ability to refinance: Consolidated external debt has increased marginally to Rs 5,452 crore as on March 31, 2023, compared to Rs 5,199 crore as on March 31, 2022. Given lower-than-expected improvement, the leverage remains near CRISIL Ratings sensitised LTV threshold of 40%. The gross debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio was 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. The REIT also has cash and cash equivalents of Rs. 210 crore as on March 31, 2023. While the LTV may increase in the interim due to the proposed acquisition, it is expected to come down in a year.

 

• Adequate debt protection metrics: The 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 fiscal 2028 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 in Q4 fiscal 2027. Liquidity / debt service reserve account (DSRA) of at least two months of peak debt obligation is to be maintained throughout the debt tenure.

 

• Stable revenue of asset SPVs: Brookfield REIT’s entire revenue is estimated to come from seven commercial assets (including new assets being acquired) with total leasable area of 252 lakh sq ft having stable operations with a track record of over 10 years of rental collection. The consolidated revenue from operations, for the existing portfolio, was Rs 1,197 crore and Rs 877 crore for fiscals 2023 and 2022, respectively. Committed occupancy has remained stable at around 84% in March 2023 as compared to 83% in March 2022. However, it is lower than expected level of 87-90%. Leasing is expected to pick up given ongoing discussions for 11 lakh sq ft of new leasing. Consequently, occupancy should improve over the medium term. Effective economic occupancy, post incorporating income support from the Brookfield group (for Seaview Developers Pvt Ltd [N2, rated CRISIL AAA/Negative]) is ~89%. The new assets are expected to add consolidated revenue and net operating income (NOI) of Rs 839 crore and Rs. 687 crore respectively (for fiscal 2023), with committed occupancy of 81% as on March 31, 2023. The Brookfield group is expected to provide income support of up to Rs 200 crore for a period of two years from completion of the acquisition for G1 as well.

 

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 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. Also, top 10 tenant and sectoral (information technology [IT] and IT enabled services) gross rental concentration is at 63% and 46%, respectively. While it is expected to improve to 45% and 32% respectively with acquisition of new assets, the REIT continues to be exposed to moderate concentration risk. Furthermore, leases contributing to ~22% of rentals will be due for renewal between fiscals 2024 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.

Liquidity: Superior

Liquidity remains strong as there are low principal repayments in the next three years and cash flow will be sufficient to service the debt obligation. Liquidity / DSRA of at least two months of peak debt obligation is to be maintained. Furthermore, a moderate LTV ratio enhances the REIT’s financial flexibility.

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.

Rating Sensitivity factors

Downward factors:

• No improvement in current leverage, such that the CRISIL Ratings sensitised LTV ratio does not improve to below 40% on sustained basis
• Occupancy level consistently below 85%
• Significant delay in completion and leasing of under-construction assets or acquisition of assets of lower quality affecting portfolio health
• Any non-adherence to the structural features of the rated debt
• Any impact on independence of REIT operations due to but not limited to change in sponsorship of the trust or ownership of the REIT manager

About the Trust

Brookfield REIT is registered as an irrevocable trust under the Indian Trust 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 (NCR). The property has been operational since March 2011 and has completed area of 19.73 lakh square feet (lsf), of which 96% was occupied as on March 31, 2023, while an additional area of 8.6 lsf is expected to be developed over the medium to long term. 

 

Candor One Hi-Tech Structures Pvt Ltd (K1) owns and operates:

a)      A special economic zone (SEZ) park, Candor Techspace G2, in Gurugram (NCR). The property has been operational since December 2007 and has completed area of 39.2 lsf, of which 85% was occupied as on March 31, 2023, while an additional area of 1.0 lsf is expected to be completed over the medium term.

b)      Candor Techspace K1, in Kolkata, which is part SEZ and part commercial office park. The property has been operational since December 2007 and has completed area of 30.65 lsf, of which 84% was occupied as on March 31, 2023. IT park and mixed-use led development worth additional area of 5.6 lsf is currently under construction, while another 21.2 lsf is expected to be developed over the medium to long term.

 

Festus Properties Pvt Ltd (Kensington) owns and operates a SEZ park, Kensington, in Mumbai. The property has been operational since April 2009 and has completed area of 15.63 lsf, of which 87% was occupied as on March 31, 2023.

 

Seaview Developers Pvt Ltd (SDPL) owns and operates N2 in Noida. The property has been operational since 2005 and has completed area of 37.8 lsf, of which around 77% was occupied as on March 31, 2023, while an additional area of 7.7 lsf is expected to be completed over the medium term. Brookfield REIT acquired the asset on January 24, 2022.

 

Candor India Office Park Pvt Ltd (CIOP) is involved in property management, facility management and support services, for assets owned by N1, SDPL and K1. This entails following services, but not limited to – a) accounting, b) procurement of materials and services, c) supervision of annual maintenance contracts and insurance, d) transition, operations, supervision of repairs and maintenance, and e) legal, secretarial and compliance services.

 

Proposed acquisitions

Kairos owns and operates a portfolio of nine commercial properties spread across three clusters totalling 26 lsf of operating area and 1 lsf of area under expansion. It has occupancy of 89% as on March 31, 2023.

 

Candor Gurgaon One Realty Private Limited owns and operates commercial office park, Candor Techspace G1, in Gurugram (NCR). The property has been operational since 2012 and has completed area of 37 lsf, of which around 75% was occupied as on March 31, 2023, while an additional area of 1.0 lsf is expected to be completed over the medium term.

Key Financial Indicators*

Particulars	Unit	2023^	2022^
Revenue from operations	Rs crore	1,197	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

*CRISIL Ratings-adjusted numbers

^Key financial numbers do not include financials for the proposed assets

Any other information: Not applicable