Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to the Rs.750 crore commercial paper programme of Brookfield India Real Estate Trust (BIRET) and has reaffirmed its ‘CRISIL AAA/Negative’ corporate credit rating on the trust.

 

BIRET is sponsored by BSREP India Office Holdings V Pte Ltd (part of the Brookfield group). The real estate investment trust (REIT) has stake in five companies, which include four companies comprising five commercial assets and one company which is the operational service provider. BIRET had announced acquisition of two special-purpose vehicles (SPVs), namely Kairos Property Managers Pvt Ltd (Kairos; ‘CRISIL A-/Watch Positive’) and Candor Gurgaon One Realty Projects Pvt Ltd (G1; ‘CRISIL A-/Watch Positive’), in equal partnership with GIC, a global institutional investor, for enterprise value of Rs 11,225 crore. The transaction is expected to be financed through equity of 62% and the remaining through SPV-level debt. GIC and BIRET will bring in equity in line with their shareholding in the SPVs. BIRET closed qualified institutional placement (QIP) of Rs 2,305 crore on August 2, 2023, and is in the process of raising ~Rs 400 crore and ~Rs 750 crore through preferential allotment and commercial paper programme, respectively. The commercial paper programme will act as bridge finance towards acquisition and expected to be repaid over the next 9-12 months.

 

The proposed acquisition will be funded by SPV level debt of ~Rs 4,300 crore; however, in the interim, the debt level will increase owing to bridge financing, leading to increase in the CRISIL Ratings sensitised loan-to-value (LTV) ratio to cross 40%. Nevertheless, with planned equity raise, the LTV is expected to come down in a year. Any debt-funded capital expenditure (capex) or acquisition, which may increase leverage, will remain a key rating sensitivity factor.

 

Kairos owns and operates commercial office space in Downtown Powai, Mumbai, consisting of around 27 lakh square feet (sq ft) of completed area, with occupancy of 89% as on March 31, 2023, while around 1 lakh sq ft is under construction (expected to be completed in the second quarter of fiscal 2024). G1 owns and operates a commercial office park in Sector-48, Gurugram, consisting of 37 lakh sq ft of completed area, with occupancy of 75% as on March 31, 2023, and future development potential of 1 lakh sq ft. The Brookfield group will provide income support to G1 of up to Rs 200 crore for two years from completion of the acquisition to achieve effective economic occupancy of 100%.

 

BIRET has executed definitive agreements to acquire 100% interest in G1’s property manager, Mountainstar India Office Parks Pvt Ltd (MIOP), for additional consideration of Rs 150 crore upon expiry of income support being provided to G1. 

 

The rating continues to reflect the trust’s stable revenue profile, benefits from geographical diversification and adequate ability to refinance owing to comfortable financial risk profile. These strengths are partially offset by susceptibility to volatility in the real estate sector, resulting in fluctuation in rental rates and occupancy.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of BIRET and its underlying SPVs as well SPVs that are to be acquired, in line with its criteria for rating entities in homogeneous groups. This is because BIRET will have direct control over its SPVs and will support them in case of any exigency. Post debt servicing in a 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 flow (post servicing of debt) to BIRET, resulting in minimal structural subordination of cash flow. Also, as per the Securities and Exchange Board of India (SEBI) REIT Regulations, 2014, the cap on borrowing of BIRET has been defined at a consolidated level (equivalent to 49% of the value of BIRET’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

• Moderate LTV ratio supports the ability to refinance: Consolidated external debt increased marginally to Rs 5,452 crore as on March 31, 2023, from Rs 5,199 crore as on March 31, 2022. Owing to lower-than-expected improvement, leverage remains near CRISIL Ratings-sensitised LTV threshold of 40%. Gross debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio was around 6 times as of March 2023. A low LTV ratio protects investors from the risk of decline in property prices and its consequent impact on refinancing. Also, BIRET had cash and equivalent of Rs 210 crore as on March 31, 2023. While the LTV ratio may increase in the interim owing to the proposed acquisition, the ratio is expected to moderate in a year.

 

• Adequate debt protection metrics: Debt service coverage ratio (DSCR) is expected to remain adequate throughout the tenure of the debt, including for additional financing for construction and working capital requirement in the underlying SPVs. The DSCR, though lower than initial estimates, will be comfortable over 1.5 times in the initial three years when there is very low principal repayment. Debt is expected to be refinanced prior to chunky repayments falling due beyond fiscal 2028 as there is no prepayment penalty on the debt post three 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 obligation pertaining to the increased facility in full in the fourth quarter of fiscal 2027. Liquidity or debt service reserve account (DSRA) of at least two months of peak debt obligation is to be maintained throughout the debt tenure.

 

• Stable revenue of asset SPVs: The trust’s revenue is estimated to come from seven commercial assets (including new assets being acquired) with total leasable area of 252 lakh sq ft, having stable operations with a track record of over 10 years of rental collection. Consolidated revenue from operations, for the existing portfolio, was Rs 1,197 crore and Rs 877 crore in fiscals 2023 and 2022, respectively. Committed occupancy was stable at 84% in March 2023, compared with 83% in March 2022. However, it is lower than expected level of 87-90%. Leasing is expected to pick up given ongoing discussions for 11 lakh sq ft of new leasing. Consequently, occupancy should improve over the medium term. Effective economic occupancy, post incorporating income support from the Brookfield group (for Seaview Developers Pvt Ltd [N2; ‘CRISIL AAA/Negative’]) is ~89%. The new assets are expected to add consolidated revenue and net operating income (NOI) of Rs 839 crore and Rs 687 crore, respectively (for fiscal 2023), with committed occupancy of 81% as on March 31, 2023. The Brookfield group is expected to provide income support up to Rs 200 crore for two years from completion of the acquisition for G1.

 

The portfolio has mark-to-market upside, given the superior asset and service quality, favourable location in prime areas of Mumbai, National Capital Region (NCR) and Kolkata, with good demand and competitive rental rates.

 

Weakness

• Susceptibility to cyclicality 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. Also, the top 10 tenant and sectoral (information technology [IT] and IT enabled services) gross rental concentration is 63% and 46%, respectively. While this is expected to improve to 45% and 32%, respectively, with acquisition of new assets, BIRET continues to be exposed to moderate concentration risk. Furthermore, for the existing REIT assets, leases contributing to ~22% of rentals will be due for renewal between fiscals 2024 and 2026. 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, 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 will remain strong over the medium term as the trust has low principal repayments in the next three years, and cash flow will be sufficient to meet the debt obligation. Liquidity or DSRA of at least two months of peak debt obligation is to be maintained. Furthermore, a moderate LTV ratio enhances financial flexibility.

Outlook: Negative

CRISIL Ratings believes BIRET will continue to benefit from the quality of its underlying assets over the medium term. However, improvement in leverage and occupancy will remain essential.

Rating Sensitivity Factors

Downward Factors

• No improvement in current leverage, such that the CRISIL Ratings sensitised LTV ratio does not improve to below 40% on sustained basis
• Occupancy level consistently below 85%
• Significant delay in completion and leasing of under-construction assets or acquisition of assets of lower quality affecting portfolio health
• Any non-adherence to the structural features of the rated debt
• Any impact on independence of BIRET’s operations due to but not limited to change in sponsorship of the trust or ownership of the BIRET’s manager

About the Company

BIRET is registered as an irrevocable trust under the Indian Trust Act, 1882, and as a REIT with SEBI’s REIT Regulations, 2014, as amended.

 

Shantiniketan Properties Pvt Ltd (N1) owns and operates a commercial office park, Candor Techspace N1, in Noida. The property has been operational since January 2011 and has completed area of 19.73 lakh sq ft, of which 96% was occupied as on March 31, 2023, while additional area of 8.6 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:

a)                   A special economic zone (SEZ) park, Candor Techspace G2, in Gurugram. The property has been operational since 2011 and has completed area of 39.2 lakh sq ft, of which 85% was occupied as on March 31, 2023, while an additional area of 1.0 lakh sq ft is expected to be completed over the medium term.

b)                   Candor Techspace K1, in Kolkata, which is part SEZ and part commercial office park. The property has been operational since 2008 and has completed area of 30.65 lakh sq ft, of which 84% was occupied as on March 31, 2023. An IT park and mixed-use led development worth additional area of 5.6 lakh sq ft is under construction, while another 21.2 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 2009 and has completed area of 15.6 lakh sq ft, of which 87% was occupied as on March 31, 2023.

 

Seaview Developers Pvt Ltd (SDPL) owns and operates N2 in Noida. The property has been operational since 2011 and has completed area of 37.8 lakh sq ft, of which around 77% was occupied as on March 31, 2023, while an additional area of 7.7 lakh sq ft is expected to be completed over the medium term. BIRET acquired the asset on January 24, 2022.

 

Candor India Office Park Pvt Ltd (CIOP) is engaged in property management, facility management and support services for assets owned by N1, SDPL and K1. This entails services such as accounting, procurement of materials and services, supervision of annual maintenance contracts and insurance, transition, operations, supervision of repairs and maintenance, and legal, secretarial and compliance services.

 

Proposed acquisitions

Kairos owns and operates a portfolio of nine commercial properties spread across three clusters totalling 26.5 lakh sq ft of operating area and 1.0 lakh sq ft of area under expansion. It had occupancy of 89% as on March 31, 2023.

 

Candor Gurgaon One Realty Pvt Ltd owns and operates commercial office park, Candor Techspace G1, in Gurugram. The property has been operational since 2012 and has completed area of 36.9 lakh sq ft, of which around 75% was occupied as on March 31, 2023, while an additional area of 1.0 lakh sq ft is expected to be completed over the medium term.

Key Financial Indicators*

Particulars	Unit	2023^	2022^
Revenue from operations	Rs crore	1197	877
Profit After Tax (PAT)	Rs crore	131	246
PAT Margin	%	10.9	28.1
Adjusted gearing	Times	0.65	0.58
Interest coverage	Times	1.9	3.0

*CRISIL Ratings-adjusted numbers

^Key financial numbers do not include financials for the proposed assets

Any other information: Not applicable