Brookfield India Real Estate Trust, the only 100 percent institutionally-managed public commercial real estate vehicle in India, opens its initial public offering for subscription on February 3 with a price band of Rs 274-275 per unit.
The issue will close on February 5.
The company owns an initial portfolio of 4 large campuses - format office parks, which are 'business critical', located in Mumbai, Gurugram, Noida and Kolkata. Its initial portfolio consists of 14.0 million square feet (msf) of which 10.3 msf is completed, 0.1 msf area is under construction along with 3.7 msf of future development potential.
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Its initial portfolio's completed area has same store commitment occupancy of 92 percent (and a 87 percent Committed occupancy, which includes the recently completed 0.5 msf at Candor Techspace N1) and leased to marquee tenants with 75 percent of Gross Contracted Rentals contracted with multi-national corporations such as Barclays, Bank of America Continuum, RBS, Accenture, Tata Consultancy Services and Cognizant.
Its 7.1-year weighted average lease expiry (WALE) provides stability to the cash flows and is well positioned to achieve further organic growth through combination of contractual lease escalations, 36 percent mark-to-market headroom to in-place rents, lease-up of vacant space and near-term completion of under construction area to meet tenants' expansion needs.
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"We expect Brookfield to register a stable cash flow with current portfolio and headroom to further expand the space to lease out. Brookfield REIT has exclusive rights at their discretion to acquire the identified assets," said KR Choksey.
At higher end of unit price of Rs 275, it is available at steep discount of 11.6 percent to its NAV per unit as of September 2020 which stands at Rs 311 NAV per unit, the brokerage feels.
"As of December 14, 2020 its peers Embassy office Park REIT and Mindspace Business Park REIT were trading at discount of 5.3 percent and 3.0 percent respectively of its NAV per unit. Brookfield at 11.6 percent discount of its NAV per unit provides a comfort to its valuation. Thus, we recommend a subscribe rating for the IPO," KR Choksey said.
Brookfield REIT is sponsored by an affiliate of Brookfield Asset Management (BAM), one of the world's largest alternative asset managers with approximately $575 billion in assets under management, as of September 2020.
Brookfield REIT would be managed and sponsored by one of the largest real estate investors in the world, with a decade long track record in India. Its manager has grown their net operating income (NOI) from Rs 590.24 crore for FY18 to Rs 676.34 crore for FY20. Their NOI was Rs 344.69 crore for the 6 months ended September 2020.
The company is going to raise Rs 3,800 crore via maiden public offer, of which Rs 1,710 crore has already been mopped up from anchor investors on February 2. The proceeds from the issue will be used for debt repayment of Asset SPVs.
"Post the utilisation of the net proceeds from the Offer, their total outstanding indebtedness in principal amount is expected to be less than 18.5 percent of their initial market value, providing them significant financial flexibility to grow through economic cycles," said Sharekhan.
At Rs 275 per unit, "it is expected to give pre-tax yield of 7.95 percent in FY22 and 8.43 percent in FY23. However, the payout of the first year will have 85 percent interest component (taxable in hands of investor) and 15 percent dividend (tax free). The interest component will be reduced over a time as the dividend component increases," said the brokerage.
Brookfield REIT did not face significant disruptions in their operations due to COVID-19 during the financial year 2020 and the 6 months ended September 2020. They collected 98 percent, 98 percent, 99 percent, 99 percent, 97 percent and 98 percent of the gross contracted rentals for the months of April, May, June, July, August and September 2020, respectively.
As on September 2020, the Committed Occupancy, Same Store Committed Occupancy and in-place rent of the Initial Portfolio was 87 percent, 92 percent and Rs 62 psf per month, respectively.
"Though the REIT has incurred losses in FY20 and has not paid out any dividends, they expect to pay a yield of 7.5 percent in FY23 which we believe is aggressive and may be difficult to achieve. Due to the current uncertainties around COVID-19 and proliferation of work from home we expect that demand for commercial real estate to be muted," said Angel Broking.
Given the uncertainties, weak financials and high debt on book, the brokerage would recommend a 'neutral' rating on the issue.
The brokerage highlighted some investment concerns which are: (1) Increase in Work from home (WFH) can lead to higher vacancy in key market geographies and can create slowdown in demand for commercial space in near term. (2) Highly concentrated on Gurugram market, 42 percent of overall rent comes from Candor Techspace G2, Gurugram. (3) REIT will take long time to increase its revenue as REIT has under development property of 0.1 msf only along with this 92 percent of committed property has already been leased out.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.