Brookfield India REIT: Operational turnaround to kick in; valuations compelling

27 Mar 2024 , 11:14 AM

Analysts of IIFL Capital Services’ recent interaction with Brookfield India REIT (BIRET) indicate that the occupancy could see a sharp improvement over FY25, with a recent pickup in leasing momentum, SEZ reforms and low scheduled expires. It is also poised to benefit from a potential reduction in interest rates, with 87% of the loan book being repo-linked. BIRET offers the highest gross yield within the listed REITs; and trades at the steepest discount to NAV that could narrow, as the operating performance is set to improve. Reiterate BUY with 23% upside from CMP and 31% total return potential.

Leasing uptick/SEZ reforms to drive higher occupancy levels in FY25:

BIRET has the highest exposure to SEZ assets (77% of the portfolio). SEZ leasing in Q3 was 2x of the historical average, with an overall pick-up in the leasing momentum (and few IT companies returning back to lease space), which is set to accelerate further with SEZ reforms now in place. Over FY25, mgmt expects occupancy levels to improve ~8ppt from 80% (in Q3FY24) to 88%, driven by 2-2.4msf of leasing guidance (for the next five quarters) and scheduled low expires of 1.2msf (of which, 50% are expected to be renewed). However, the risk of unscheduled expiries remains, which could offer downside risk to these estimates.

Distribution likely to improve with a lag; to be more tax-efficient:

BIRET’s FY24 distribution has been negatively impacted by declining occupancy levels and rising interest costs. While the current quarterly run rate in distribution is likely to continue for the next two to three quarters — a potential leasing uptick, and reduction in interest rates (50bps cut in interest to impact distribution by ~Rs1/unit) are likely to drive distribution growth H2FY25 onwards, with double-digit growth expected in FY26. The distribution mix is also likely to improve meaningfully from Q3FY25.

Steep discount to NAV; reiterate BUY:

BIRET’s net debt to GAV at 36% is the highest among the REITs; however, its debt maturities are staggered with a 9-yr average maturity. The sponsor pipeline of ~19.1msf (vs 20.7msf of BIRET operating area) offers high visibility on inorganic growth opportunities. Analysts of IIFL Capital Services believe the operating performance has bottomed out, while the interest rate cycle is at its peak. BIRET is trading at compelling valuations with the steepest discount to NAV of ~20%.