Detailed Rationale

CRISIL Ratings has converted the provisional rating assigned to Candor Kolkata One Hi-Tech Structures Pvt. Ltd (K1, part of the Brookfield India Real Estate Trust [Brookfield REIT]) to a final rating of ‘CRISIL AAA/Stable’. CRISIL Ratings has received final documents, which are in line with transaction terms at the time of extension of the provisional rating on January 25, 2021. Hence, CRISIL Ratings has converted the provisional rating to a final rating.

 

Brookfield REIT is sponsored by BSREP India Office Holdings V Pte Ltd (part of the Brookfield group). The real estate investment trust (REIT) has acquired stake in four special purpose vehicles (SPVs) comprising four commercial assets and a facility management division.

 

The rating continues to reflect the comfortable LTV characterised by significant deleveraging of the underlying SPVs, strong debt protection metrics supported by a cap on incremental borrowing, and stable revenue profile of the assets, given moderate 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.

 

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 Ratings will continue to monitor events around the pandemic.

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 and equated the rating of K1 to that of the REIT. 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 flows (post servicing of debt) to Brookfield REIT, resulting in minimal structural subordination of cash flows. Also, as per Securities and Exchange Board of India’s (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 Ratings has treated compulsorily convertible debentures (CCDs) of around Rs 1,010 crore as on February 28, 2021 as equity as these instruments have been subscribed by the sponsor group and do not have any scheduled interest and principal redemption date.

 

Please refer Annexure - Details of Consolidation, 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: Consolidated external debt was Rs 5,649 crore as on September 30, 2020. The net proceeds raised through the listing of Brookfield REIT were infused as loans in each of the SPVs and utilised to repay part of the external debt, while the balance was repaid through draw down of lease rental discounting (LRD) loans. Consequently, Brookfield REIT’s consolidated debt was Rs 2,100 crore as on February 28, 2021, resulting in comfortable LTV ratio of around 19% 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 LRD loans have a tenure of 12 years, will be interest-only for the initial 5 years while 52% of the principal will be amortised over the next 5 years. Debt service reserve account (DSRA) equivalent to 2 months of peak debt servicing obligations will also be maintained. The debt is likely to be refinanced prior to chunky repayments falling due beyond 5-7 years as there is no prepayment penalty on the debt post 3 years from the date of disbursement.

 

• Strong debt protection metrics: CRISIL Ratings believes that Brookfield REIT is likely to have healthy average consolidated debt service coverage ratio (DSCR) of over 1.75 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. The LTV is also expected to be maintained at below 40% over the medium term.

 

• Stable revenue of asset SPVs: 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 467 crore and Rs 958 crore for 6 months ended September 30, 2020 and fiscal 2020, respectively. Committed occupancy has declined from 96.0% in March 2020 to 87.0% in September 2020. This is partly because new area added of 5.0 lakh square feet (sq. ft), is to be leased out gradually; committed occupancy for completed space was healthy at over 90.0%. The rentals have high mark-to-market upside, 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 1.75 times, including for permitted additional financing. No principal repayments are due for the next 5 years and cash flows will be sufficient to service the interest payments. Liquidity is also supported by maintenance of DSRA equivalent to 2 months of peak debt servicing obligations. 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 Ratings 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 1.75 times
• Decline in average occupancy of already operational assets below 90%
• Significant delay in completion and leasing of under construction assets
• Any other non-adherence to the structural features of the transaction

About the Company

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 38.6 lakh sq. ft, of which 91.4% was occupied as on December 31, 2020, while an additional area of 1.0 lakh sq. ft is expected to be completed in the medium term.

b)      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 90.5% was occupied as on December 31, 2020, while an additional area of 26.8 lakh sq. ft is expected to be developed over the medium-to-long term.

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 18.6 lakh sq. ft, of which 72.0% was occupied as on December 31, 2020, while an additional area of 9.5 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 15.4 lakh sq ft, of which 87.0% was occupied as on December 30, 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 also has the right to acquire 100% equity stake in the following identified SPVs:

a)      Seaview Developers Pvt. Ltd (N2), which owns and operates Candor Techspace N2, in Noida with completed area of 29.3 lakh sq. ft.

b)      Candor Gurgaon One Realty Projects Pvt. Ltd (G1), which owns and operates Candor Techspace G1, in Gurugram with completed area of 33.1 lakh sq. ft.

Key Financial Indicators (standalone)*

Particulars	Unit	2020	2019
Revenue from operations	Rs crore	635	605
Profit after tax (PAT)	Rs crore	134	53
PAT margin	%	21.1	8.7
Adjusted gearing	Times	3.74	3.58
Interest coverage	Times	1.01	1.58

*CRISIL Ratings-adjusted numbers

 

Key financial indicators (consolidated)*

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 Ratings-adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Lease rental discounting loan	NA	NA	31-Jan-33	1,250.0	NA	CRISIL AAA/Stable
NA	Line of credit	NA	NA	31-Jan-33	145.0	NA	CRISIL AAA/Stable

 

Annexure – List of entities consolidated

Entity consolidated	Extent of consolidation	Rationale for consolidation
N1	Full	100% subsidiary
K1	Full	100% subsidiary
Kensington	Full	100% subsidiary
CIOP	Full	100% subsidiary