Rating Rationale
December 31, 2020 | Mumbai
One BKC Realtors Private Limited
Rating outlook revised to 'Negative', rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1725 Crore
Long Term Rating CRISIL BBB+/Negative (Outlook revised from 'Stable' and rating reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised the outlook on its rating on the long-term bank facility of One BKC Realtors Private Limited (OBRPL; a part of Nucleus Office Parks [the Blackstone group's India office platform]) to 'Negative' from 'Stable', while reaffirming the rating at 'CRISIL BBB+'.
 
The outlook revision reflects weakening of the credit risk profile on account of lower-than-expected occupancy and lease rentals. Occupancy has declined to 79.8% as of September 2020 (including for tenants who have given notice for vacation and excluding signed LOIs) from a high of 94.7% as of June 30, 2019. Part of this decline can be attributed to acquisition of additional space of 0.3 lakh square feet (sq. ft) of leasable area in wings B and C of the complex; of this 94.0% (excluding signed LOIs) of area was vacant as of September 2020. However, vacancy for existing area also increased on account of tenants relocating to owned assets or assets with lower rental rates. Furthermore, rental collection for fiscal 2021 may also be impacted due to delays in payment by one tenant.
 
OBRPL collected lease rentals of Rs 110 crore for 7 months ended October 2020 against debt repayment obligation of Rs 82 crore for the same period. The company also availed moratorium on debt servicing due in July and August 2020, to support liquidity for meeting working capital requirements. Even though cash accrual for fiscal 2021 is expected to be impacted due to higher vacancy, it should remain sufficient to cover the debt servicing obligations. Furthermore, the company has received letters of intent/enquiries for more than 1 lakh sq. ft of leasable area and that too at higher rentals. This should result in occupancy level improving to erstwhile levels and support future cash flow generation, and will remain a key rating sensitivity factor.
 
CRISIL has also factored in measures taken by the central and state governments to contain the spread of the COVID-19 pandemic. Subdued economic activity and work-from-home practice adopted by most corporates may also result in increase in vacancy in the near term. CRISIL will continue to monitor developments with respect to the pandemic.
 
The rating continues to reflect OBRPL's steady cash flow, supported by the advantageous location of the property and good clientele, and the established track record of the sponsor group. These strengths are partially offset by modest debt protection metrics, and susceptibility to volatility in interest rates and occupancy level.

Analytical Approach

For arriving at its rating, CRISIL has taken a standalone view of OBRPL as there is only one asset on its books, and there are no financial linkages with other companies in the group.
 
Compulsorily convertible non-cumulative debentures (CCDs) of Rs 600 crore (as on March 31, 2020) been treated as equity, in line with the audited financials. This is because these instruments have been subscribed by the sponsor group, there is are no scheduled interest and redemption date; interest rate is negligible at 0.001% per annum (p.a.) and these are fully and mandatorily convertible into equity shares on expiry as of June 30, 2022.
 
Short-term loan of Rs 106 crore (as on October 31, 2020) has also been treated as equity. The loan is backed by a standby line-of-credit (SBLC) from sponsor and will be repaid once corresponding amount is infused by the sponsor group.

Key Rating Drivers & Detailed Description
Strengths
* Advantageous location and good clientele aids cash flow
OBRPL's commercial building is in Bandra Kurla Complex (BKC), the central business district of Mumbai Metropolitan Region (MMR). The company is expected to benefit from limited supply in the BKC micro-market as well as recent infrastructure development in the vicinity. BKC is an attractive destination for leading domestic and global corporates, and banking and financial services companies. Additionally, the asset is leased to marquee tenants such as Bank of America, DSP Merrill Lynch, Trafigura, Amazon, Facebook and Cisco. Furthermore, the top 5 tenants occupy close to 63% area, resulting in moderate concentration.
 
The rating also factors in the well-secured lease structure, with lock-in and lease period of 5-12 years and an in-built revenue escalation clause of 5-15% for most tenants. OBRPL had leased out 79.8% of the total leasable area of 7.33 lakh sq. ft as on September 30, 2020, while committed occupancy was higher at around 95%.
 
* Established track record of the sponsor group
The Blackstone group owns and operates the largest portfolios of commercial real estate in India, spread across all major micro markets in the country. The sponsor group's experience in asset management and sizeable portfolio of properties in India has resulted in healthy occupancy and steady improvement in rentals across assets. Additionally, the company benefits from the management's proactive approach towards asset maintenance to ensure tenant stickiness and quality, in line with its global portfolio.
 
Weaknesses
* Modest debt protection metrics
While there was a significant reduction by 145 basis points in the interest rate on the bank facilities, the average debt service coverage ratio (DSCR) is expected to remain modest at around 1.1 times over the tenure of the debt. This is because the reduction in interest rate has been subsumed by a corresponding reduction in the operating margin. Furthermore, the leverage of the asset is high with loan to value ratio of around 70%.
 
OBRPL also availed incremental debt of Rs 135 crore with a bullet repayment in March 2021, exposing the company to refinancing risk. Nevertheless, benefits are likely from the sponsor group's track record of successfully refinancing loans/renegotiating terms of debt for their other entities.
 
* Exposure to volatility in interest rates and occupancy
The cash inflow is susceptible to volatility in occupancy or realisations (a function of rentals per sq. ft), while cash outflow is relatively fixed in nature except for fluctuations in interest rates (as they are floating by nature). Around 35% of the agreements would be coming up for renewal over the next three fiscals through 2023. Time taken for renewal/leasing of this area at similar or better terms in comparison to the existing agreements will be critical. Although cash flow will be able to absorb the impact of fluctuations in interest rates and occupancy partially, these remain rating sensitivity factors.
Liquidity Adequate

Liquidity is adequate, DSCR is expected at around 1.1 times for fiscal 2021 and should remain at similar levels throughout the tenure of the debt. Cash accrual should sufficiently cover the yearly debt servicing obligation of Rs 155-186 crore for the three fiscals through 2023. Liquidity is also supported by cushion available in the form of overdraft facility of Rs 25 crore, equivalent to 1-2 months of debt servicing obligation, which stands unutilised as on September 30, 2020 and cash and cash equivalents of ~Rs 20  crore as on November 15, 2020.

Outlook: Negative

CRISIL believes OBRPL will benefit from the track record of sponsors and advantageous location of its asset, which will support future cash flow generation. Credit risk profile will remain constrained given high leverage over the medium term.

Rating Sensitivity factors
Upward factors
* Substantial increase in rental income by over 10% p.a., year-on-year while maintaining costs, thereby strengthening surplus generation and debt protection metrics
* Reduction in debt level through prepayment
 
Downward factors  
* Weakening of debt protection metrics due to lower-than-expected cash flow, resulting from vacancy of more than 10% or lower-than-expected lease rental rates
* Draw down of any incremental debt
About the Company

OBRPL owns and operates a commercial asset, One BKC, in BKC, MMR. It is one of the marquee assets in the region, with leasable area of around 15 lakh sq. ft of which 7.33 lakh sq. ft is owned by OBRPL; it has been operational for over five years. OBRPL acquired the space from the Radius group on June 21, 2019. Additional area of 0.3 lakh sq. ft was acquired in October 2020. The company has a well-diversified clientele, with occupancy of 79.8% as of September 2020.

Key Financial Indicators
As on/for the period ended March 31, Unit 2020 2019*
Operating income Rs crore 175 NA
Profit after tax (PAT) Rs crore (119) NA
PAT margin % (68) NA
Adjusted debt/adjusted net worth Times 149.2 NA
Interest coverage Times 0.43 NA
*Operations started in June 2019, post transfer of business from erstwhile promoters through a business transfer agreement

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 level Rating assigned with outlook
NA Term loan* NA NA 30-Aug-34 1725.0 NA CRISIL BBB+/Negative
*Includes sub-limit of overdraft for Rs 25 crore
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
Fund-based Bank Facilities  LT/ST  1725.00  CRISIL BBB+/Negative      10-10-19  CRISIL BBB+/Stable    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Term Loan* 1725 CRISIL BBB+/Negative Term Loan* 1725 CRISIL BBB+/Stable
Total 1725 -- Total 1725 --
*Includes sub-limit of overdraft for Rs 25 crore
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs criteria for rating debt backed by lease rentals of commercial real estate properties

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