Updated: Jun 9
Company Name – Brookfield India Real Estate Trust Ltd. (Brookfield India REIT)
Current Share Price – INR 310 (Nov 15, 2021)
Market Cap – INR 9,126 cr
1. What is interesting about the stock?
Real Estate Investment Trusts (REIT) are a relatively new concept in India. Although SEBI began evaluating REITs in 2008 and published draft guidelines 5 years later in 2013, the first REIT (Embassy Office Parks) made its debut on the bourses only in 2018. REITs are an attractive product for investors looking for an alpha on fixed deposits plus an upside on price escalation. As a retail investor we should think of return in a REIT as:
Return = Dividend + Price Appreciation/(Depreciation)
Dividend and price appreciation depend on:
Asset quality and location
Asset Management – rental increase and occupancy level
Increase in asset base which is accretive (attractive price level)
Optimal level of leverage to increase equity returns
Interest rate environment (drives the discount rate)
Currently India has three REITs – Embassy Office Parks, Mindspace Business Parks and Brookfield India Real Estate Trust. A fourth REIT of DLF’s rental arm DCCDL is around the corner.
Brookfield India REIT is India’s only institutionally managed public commercial real estate vehicle. Its sponsor, Brookfield Asset Management, is one of the world’s largest alternative asset management companies with USD 626 Bn in AUM. Brookfield Asset Management has a global presence with over 150,000 operating employees across more than 30 countries. Listed on the NYSE and TSX, it has a market capitalization of over USD90 Bn.
Brookfield India REIT has the advantage of owning high quality office parks in key locations such as Powai in Mumbai, Rajarhat in Kolkata, Gurgaon and Noida with a cumulative area of 14 Mn sq ft of which 10.3 Mn sq ft is completed with 89% occupancy. Further the REIT has 8.3 Mn sq ft of identified assets for acquisition and another 6.7 Mn sq ft of Right of First Refusal (ROFO) in the properties owned by Brookfield Asset Management. Cumulatively, as of date the REIT has 29 Mn sq ft of assets across owned and in pipeline of which 21.8 Mn sq ft is operational and 7.2 Mn sq ft is to be developed. Further, Brookfield Asset Management owns another 18 Mn sq ft in Bangalore which might get transferred to the REIT.
Pipeline additions to the portfolio include assets in Gurgaon, Noida, Mumbai (BKC) and Bangalore assets are a prospective pipeline addition. This is where the REIT creates a unique differentiation for itself. It has the potential to own large assets in all 4 zones of India – North, South, East and West. In area terms, currently 11% of the portfolio is in Mumbai, 49% in NCR and 40% in Kolkata. In terms of gross asset value, the corresponding numbers are 22%, 56% and 22% respectively. Average portfolio rental is INR 65 per sq ft per month and Weighted Average Lease Expiry (WALE) Period is 6.3 years. This suggests that the REIT’s assets operate at price points that attract bulk of the office tenants in India and have a significant lease life and hence risk of sudden jump in vacancy levels is low.
Key competitive advantages of the REIT are:
On completion of acquisition of identified assets, ROFO properties and other assets owned by Brookfield Asset Management, the REIT could have a presence in 6 of the top 7 office cities in India. A pan India presence helps in tenant management of firms such as TCS, Accenture, Cognizant etc.
Owned and managed by one of the largest alternative asset managers in the world, the REIT can benefit from Brookfield’s acquisition prowess. Acquisition of RMZ’s Bangalore portfolio by Brookfield is an example of foreseeable consolidation in the industry, driven by institutional investors.
Significant upside in growth of the portfolio with REIT owning only 14 Mn sq ft of a potential 47 Mn sq ft.
2. Key Historical Financials
* - Based on Q1 & Q2 FY2022 yield being extrapolated for the full year.
Brookfield India REIT listing took place on Feb 16, 2021 and hence Q1 FY2022 was the first quarter with reported numbers post listing.
Q1 FY2022 yield based on unit price on June 30, 2021 and Q2 FY2022 based on unit price on Nov 15, 2021.
3. What is my view on company valuation?
If COVID does not result in significant increase in vacancy in the upcoming quarters and Brookfield REIT manages to deliver 7.75% distribution yield, it would be a good alternative to investors looking for steady income. Same-store occupancy has declined to 85% (from 89% in 1QFY22) and overall occupancy has declined to 82% (from 85% in1QFY22). Also, Q2 FY2022 Net Operating Income has declined by 4% and Net Profit has declined by 8% over the last quarter. However, the REIT has still achieved a distribution of INR 6 per unit over both quarters. Fixed deposit rates are 2.5-3.5% lower and hence even with the work from home risk that continues to plague office asset owners, there is a meaningful alpha over other fixed income investment options. The yields have however already compressed from ~9% at the end of Q1FY2022 to 7.75% currently due to increase in the REIT unit price and hence capital appreciation upside over the next 2-3 quarters may be limited.
With the potential of another 33 Mn sq ft being added to the portfolio in the next 5-6 years, the REIT is poised to grow to a large cap stock which should attract higher trading volumes. The other two REITs – Embassy Office Parks and Mindspace Business Parks are operating at ~2% lower yields due to a) larger market capitalization b) better tax efficiency in the distribution. Once Brookfield India REIT also caters to these requirements, the yields could compress to ~6.5% providing current investors escalation in unit value.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Emergence of a third wave of COVID could dampen re-commencement of offices and hence could delay growth in revenues of the REIT.
Will work from home be a transient concept or a permanent fixture? It’s a multi-billion dollar question that will impact occupancy levels of office assets across the world.
WALE of Powai asset is just 2.4 years and hence will need to be re-leased aggressively. Emergence of Thane as a cheaper alternative and access through the Eastern Expressway in Mumbai could hamper re-leasing efforts.
Interest rate hardening to counter inflation could result in fall of unit prices due to a decline in the yield alpha.
About the Author
I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.