Rating Rationale
September 30, 2020 | Mumbai
Brookfield India Real Estate Trust
'Provisional CCR AAA/Stable' rating assigned 
 
Rating Action
Corporate Credit Rating Provisional CCR AAA/Stable^ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
^A prefix of 'Provisional' indicates that the rating centrally factors in the strength of specific structures, and will be supported by certain critical documentation by the issuer, without which the rating would either have been different or not assigned ab initio. This is in compliance with the directive issued by the Securities and Exchange Board of India (SEBI) on May 6, 2015, on 'Standardising the term, rating symbol, and manner of disclosure with regard to conditional/provisional/in-principle ratings assigned by credit rating agencies (CRAs)'.
Detailed Rationale

CRISIL has assigned its 'Provisional CCR AAA/Stable' corporate credit rating to 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) will acquire stake in four special purpose vehicles (SPVs) comprising four commercial assets and a facility management division.
 
The rating reflects the comfortable loan-to-value (LTV) characterised by proposed deleveraging of the underlying SPVs, strong debt protection metrics supported by a cap on incremental borrowing, and stable revenue profile of the proposed assets, given the high occupancy levels and benefits from geographic diversification. These strengths are partially offset by susceptibility to volatility in the real estate sector resulting in fluctuations in rental rates and occupancy.
 
CRISIL has also considered measures taken by the central and state governments to contain the spread of the Covid-19 pandemic. Subdued economic activity or extended periods of work-from-home adopted by certain corporates may lead to build up of vacancy in the near term. Furthermore, the halt in planned construction activity during the lockdown phase, may lead to delay in project completion. CRISIL will continue to monitor events around the pandemic.  

Analytical Approach

CRISIL has combined the business and financial risk profiles of Brookfield REIT with those SPVs, which it proposes to acquire, 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. Furthermore, each of the SPVs are expected to act as a co-obligor to the other. 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 flows (post servicing of debt) to Brookfield REIT, resulting in minimal structural subordination of cash flows. Also, as per SEBI's REIT Regulations, 2014, the cap on borrowing of the REIT has been defined at a consolidated level (equivalent to 49% of the value of Brookfield REIT's assets).
 
CRISIL has treated compulsorily convertible debentures (CCDs) of around Rs 1,507 crore as on March 31, 2020 (pre-REIT) as equity as these instruments have been subscribed by the sponsor group and do not have any scheduled interest and principal redemption date. Post REIT, around Rs 497 crore worth of CCDs are expected to be converted to equity, while the balance will continue.

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:
* Comfortable LTV ratio, supports the ability to refinance: Significant reduction in external debt is envisaged ' the consolidated external debt within the SPVs was Rs 5,596 crore as on March 31, 2020. The net proceeds raised through the listing of Brookfield REIT are expected to be infused as loans in each of the SPVs and utilised to repay part of the external debt, while the balance is expected to be repaid through proposed lease rental discounting (LRD) loans of Rs 2,100 crore to be raised at the SPVs. Consequently, CRISIL expects Brookfield REIT to have a comfortable LTV ratio of 19-23% as per the external valuation at the time of listing. Low LTV ratio protects investors from the risk of decline in property prices and its consequent impact on refinancing ' the LTV ratio is expected to remain comfortable throughout the tenure of the proposed debt.

The proposed LRDs will have a tenure of 15 years. The loans will carry interest only for the initial 5 years and 60% of the principal will be amortised over the next 5 years. Debt service reserve account (DSRA) equivalent to 3 months of debt servicing obligations is also expected to be maintained.

* Strong debt protection metrics: CRISIL believes that Brookfield REIT is likely to have healthy average consolidated debt service coverage ratio (DSCR) of over 2.0 times, throughout the tenure of the debt, including for additional financing for construction and working capital requirements in the underlying SPVs. This is primarily because of financial covenants towards maintaining ' a) minimum DSCR of 1.75 times and b) gross debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) ratio of below 5.0 times. As a consequence, LTV is not expected to exceed 40%.

* Stable revenue of asset SPVs proposed to be part of REIT: Brookfield REIT's entire revenue comes from 4 commercial assets having stable operations with a track record of around 10 years of rental collection ' the consolidated revenue was Rs 958 crore for fiscal 2020. The assets had occupancy of 96.0% as on March 31, 2020, and have high mark-to-market upside for rentals, given the superior asset and service quality, favourable location in prime areas of Kolkata, Mumbai and National Capital Region (NCR), 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. Tenant (top 10) and sectoral (information technology [IT] and IT enabled services) concentration at 61.4% and 68.8% of rentals, respectively as on March 31, 2020, exposes the REIT to concentration risk. Furthermore, 40.2% of the leased area will be due for renewal between fiscals 2021 and 2025. 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. This could adversely impact cash flow, and hence, will be a key rating sensitivity factor.
Liquidity Superior

Liquidity remains strong, supported by healthy average consolidated DSCR of over 2.0 times, including for permitted additional financing. Furthermore, a low LTV ratio enhances the REIT's financial flexibility. Consolidated debt is unlikely to cause LTV ratio to exceed 40%, thus protecting investors from any decline in property prices and the consequent impact on refinancing.

Outlook: Stable
CRISIL believes Brookfield REIT will continue to benefit from the quality of its underlying assets over the medium term.
 
Rating Sensitivity Factors
Downward Factors: 

  • Depreciation in the value of underlying assets resulting in LTV increasing to over 40%
  • Higher-than-expected incremental borrowings resulting in average DSCR declining to below 2.0 times
  • Increase in average vacancy of already operational assets by more than 5% from current levels
  • Significant delay in completion and leasing of under construction assets
  • Any other non-adherence to the structural features of the transaction

The 'provisional' rating will be converted into a 'final' rating on:

  • Listing of the REIT and raising of at least Rs 3,600 crore
  • Transfer of the proposed shareholding in asset SPVs to the REIT
  • Prepayment/refinancing of part of the existing debt at underlying SPVs

Additional documents, if any, executed for the transaction will also have to be provided. A rating rationale/report indicating conversion of the 'provisional' rating into a 'final' rating will be published on the CRISIL website on receipt of these documents.

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. The REIT's portfolio assets are held through the following SPVs:
 
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 13.7 lakh square feet (sq. ft), of which 99.9% was occupied as on March 31, 2020, while an additional area of 14.2 lakh sq. ft is expected to be developed over the medium to long term. 
 
Candor One Hi-Tech Structures Pvt. Ltd (K1) owns and operates:
  1. 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 38.6 lakh sq. ft, of which 98.8% was occupied as on March 31, 2020, while an additional area of 1.0 lakh sq. ft is expected to be completed in the medium term.
  2. A commercial office park, Candor Techspace K1, in Kolkata. The property has been operational since December 2007, and has completed area of 30.6 lakh sq. ft, of which 91.0% was occupied as on March 31, 2020, while an additional area of 26.8 lakh sq. ft 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 15.2 lakh sq ft, of which 96.7% was occupied as on March 31, 2020.
 
Candor India Office Park Pvt. Ltd (CIOP) will be involved in property management, facility management and support services, for each asset under the REIT. This shall entail following services, but not be 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, for each asset under the REIT.
 
Apart from the above, the REIT will also have call options for acquiring 100% equity stake in the following SPVs:
  1. Seaview Developers Pvt. Ltd (N2), which owns and operates Candor Techspace N2, in Noida with completed area of 29.3 lakh sq. ft.
  2. Candor Gurgaon One Realty Projects Pvt. Ltd (G1), which owns and operates Candor Techspace G1, in Gurugram with completed area of 27.8 lakh sq. ft.
Key Financial Indicators*
Particulars Unit 2020 2019
Revenue from operations Rs.Crore 958 897
Profit After Tax (PAT) Rs.Crore -10 -15
PAT Margin % -1.1 -1.7
Adjusted gearing Times -5.76 -3.99
Interest coverage Times 0.97 1.37
*CRISIL-adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs.Crore)		 Complexity levels Rating assigned
with outlook
NA NA NA NA NA NA NA NA
 
Annexure - List of Entities Consolidated with Brookfield REIT 
Entity consolidated Extent of consolidation Rationale for consolidation
N1 Full 100% subsidiary
K1 Full 100% subsidiary
Kensington Full 100% subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
--  CCR  0.00  Provisional CCR AAA/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs criteria for rating debt backed by lease rentals of commercial real estate properties
CRISILs rating criteria for REITs and InVITs
Criteria for rating entities belonging to homogenous groups

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

 Sachin Gupta
Senior Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3023
Sachin.Gupta@crisil.com

Sushmita Majumdar
Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3162
Sushmita.Majumdar@crisil.com

Saina Kathawala
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3325
saina.kathawala@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.CRISIL or its associates may have other commercial transactions with the company/entity.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL