Detailed Rationale

CRISIL Ratings has renewed and reaffirmed its ‘CCR AAA/Stable’ rating on Brookfield India Real Estate Trust (Brookfield REIT).

 

Occupancy of the Brookfield REIT reduced to around 83% as on December 31, 2021, from around 87% as on March 31, 2021, on account of vacancies induced by the pandemic. With the opening of offices given a decline in Covid-19 cases and pick-up in hiring in key sectors, namely, information technology (IT)/IT-enabled services (ITeS), the leasing is expected to pick up from this quarter and occupancy should improve over the near term. Nevertheless, effective economic occupancy, post incorporating income support from Brookfield group (including the N2 asset) is ~87%.

 

On January 24, 2022, Brookfield REIT completed the acquisition of Seaview Developers Pvt. Ltd (SDPL) which owns and operates the asset Candor Techspace N2 (N2) for an enterprise value of Rs 3,966 crore. The asset, situated in Noida, consists of 36 lakh square feet (lsf) of completed office premises (with occupancy of around 83% as on December 31, 2021); 2 lsf of under-construction office space and future development potential of 8 lsf. The sponsor, Brookfield group, will provide income support to N2 of up to Rs 150 crore (~Rs 20 crore per quarter to begin with, which will gradually taper down as leasing picks up) from Q4 2022 till Q4 2024

 

The acquisition has led to an improvement in the operational metrics of the REIT, with economic occupancy improving to 87% from 83% and reduction in tenant and sectoral concentration, with top 10 tenants and technology sector now contributing 68% and 52%, respectively, to gross rentals (against 76% and 53%, respectively, pre-acquisition). However, this acquisition has led to increase in debt of the REIT to Rs 5,155 crore as on February 1, 2022, as compared to Rs 2,250 crore as on December 31, 2021. CRISIL Ratings believes that although the additional debt contracted for the acquisition has materially impacted Brookfield REIT’s financial risk profile and increased its loan-to-value (LTV) to 33% from 19% earlier (as per external valuation), it is expected to remain below 40% at all times. Any further debt-funded capital expenditure (capex) or acquisition will remain a key rating sensitivity factor. CRISIL Ratings does not expect the leverage to increase beyond the current level and come down gradually over the medium term.

 

There have also been certain changes in the financial covenants of the debt, with cap on LTV revised to 49%, in line with regulatory cap from 35% earlier. 

 

The rating continues to reflect Brookfield REIT’s comfortable LTV which supports the ability to refinance, strong debt protection metrics and stable revenue profile of the assets, 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.

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 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) Real Estate Investment Trust (REIT) Regulations, 2014, the cap on borrowing of the 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:

• Comfortable LTV ratio supports the ability to refinance

Consolidated external debt has increased to Rs 5,155 crore as on February 1, 2022, as compared to Rs 2,250 crore as on December 31, 2021, due to acquisition of N2. However, the debt protection metrics still remain strong with LTV and debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) ratios expected to remain comfortable at less than 40% and 6 times respectively.  CRISIL Ratings does not expect the leverage to increase beyond the current level but come down gradually over the medium term. A low LTV ratio protects investors from the risk of decline in property prices and its consequent impact on refinancing.

 

• Strong debt protection metrics

Although the average debt service coverage ratio (DSCR) has reduced due to the additional debt on account of the acquisition, it is expected to remain adequate throughout the tenure of the debt, including for additional financing for construction and working capital requirements in the underlying SPVs. The DSCR is comfortable, at over 2.0 times, in the initial 5 years where there is very low principal repayment. The debt is expected to be refinanced prior to chunky repayments falling due beyond 5 years as there is no prepayment penalty on the debt post 3 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 obligations pertaining to the increased facility in full on the date falling at expiry of 5 years from drawdown date. Liquidity / debt service reserve account (DSRA) of at least 2 months of peak debt servicing obligations is to be maintained throughout the debt tenure.

 

CRISIL Ratings expects Brookfield REIT to maintain – a) minimum DSCR of 1.75 times in each year till fiscal 2028 and b) gross debt-to-EBITDA ratio at 6.0 times or lower at all times. The LTV is also expected to be maintained at below 40% over the medium term. In case of stress in any of the parameters, Brookfield REIT has the ability to defer capex, raise equity or refinance debt. These aspects will remain key rating sensitivity factors.

 

• Stable revenue of asset SPVs

Brookfield REIT’s entire revenue comes from 5 commercial assets with total leasable area of 186 lsf having stable operations with a track record of over 10 years of rental collection. The consolidated revenue from operations was Rs 626 crore and Rs 863 crore for 9 months ended December 31, 2021 and fiscal 2021, respectively. Committed occupancy has declined from around 87.0% in March 2021 to around 83% in December 2021 due to consolidation of area by tenants and sluggish leasing demand for new area of 5.0 lsf completed in fiscal 2021, due to the pandemic. The leasing is expected to pick up from this quarter. 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. Top 10 tenant and sectoral (IT and ITeS) concentration at 68% and 52% respectively exposes the REIT to moderate concentration risk. Furthermore, leases contributing to 26% of rentals will be due for renewal between fiscals 2023 and 2025. While majority of tenants are established corporates and may continue to occupy the property, any industry shock, especially due to the pandemic, 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 very low principal repayments in the next 5 years and cash flows will be ]sufficient to service the debt obligations. Liquidity / DSRA of at least 2 months of peak debt servicing obligations is to be maintained. 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 the underlying assets or higher than expected incremental borrowing resulting in LTV ratio of over 40%
• Occupancy level remaining below 85% on a sustained basis
• Significant delay in the completion and leasing of under-construction assets
• Any non-adherence to the structural features of the rated debt

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.

 

Brookfield REIT is sponsored by BSREP India Office Holdings V Pte Ltd (part of the Brookfield group). The REIT has stake in five companies which includes four companies comprising of five commercial assets and one company which is the operational service provider.

 

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 lsf, of which around 74% was occupied as on December 31, 2021, while an additional area of 9.5 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 38.8 lsf, of which around 81% was occupied as on December 31, 2021, while an additional area of 1.0 lsf 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 lsf, of which around 87% was occupied as on December 31, 2021, while an additional area of 26.8 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 15.4 lsf, of which 87% was occupied as on December 31, 2021.

 

SDPL, owns and operates N2, in Noida. The property has been operational since 2005 and has completed area of 36 lsf, of which around 83% was occupied as on December 31, 2021, while an additional area of 9 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.

 

Apart from the above, the Brookfield REIT also has the right to acquire 100% equity stake in Candor Gurgaon One Realty Projects Pvt. Ltd (G1; rated CRISIL A-/Negative), which owns and operates Candor Techspace G1, in Gurugram with completed area of 37 lsf.

 

For the 9 months ended December 31, 2021, revenue and profit after tax (PAT) were Rs 626 crore and Rs 202 crore, respectively

Key Financial Indicators*

Particulars	Unit	2021^	2020 ^^
Revenue from operations	Rs crore	131	958
Profit after tax (PAT)	Rs crore	26	-10
PAT margin	%	19.5	-1.1
Adjusted gearing	Times	0.26	-5.76
Interest coverage	Times	2.2	0.97

*CRISIL Ratings-adjusted numbers

^Fiscal 2021 financials are not comparable with that of fiscal 2020 and pertain to 2-month period since February 16, 2021, post listing of Brookfield REIT

^^Fiscal 2020 financials are prior to Brookfield REIT listing and based on condensed consolidated financials provided by the issuer

Any other information: Not applicable