We initiate coverage on Brookfield REIT with an ADD rating and Fair Value of Rs 290. Brookfield has a portfolio of 14 mn sq. ft (10.4 mn sq. ft completed) spread across key metros that will yield an NOI of Rs 8.5 bn by FY2024E (9% CAGR). Near-term earnings growth comes largely from contractual escalations as well as build-out of new assets, the former makes Brookfield’s earnings less vulnerable to a Covid-induced weakness in the leasing market.
Valuations—NOI of Rs 8.5 bn valued at Rs 117 bn for 14 mn sq. ft across key metros: We initiate coverage on Brookfield REIT with an ADD rating and a Fair Value of Rs 290. Our Fair Value comprises an asset value of Rs 117 bn for operational as well as under-construction assets, yielding an equity value of Rs 88 bn based on September 2023E. The portfolio consists of (1) a completed area of 10.4 mn sq. ft valued at Rs 107 bn, and (2) future developments of 3.6 mn sq. ft. Brookfield REIT currently trades at a dividend yield of 7.6% and capitalization rate of 7% on FY2023E, with estimated growth in NOI of 9% CAGR between FY2021 and FY2024E.
Brookfield India REIT—commercial real estate aggregating 14 mn sq. ft: Brookfield REIT offers an initial portfolio of 14 mn sq. ft of Grade A office space that has been acquired by the Brookfield group over the past five years. The portfolio comprises 10.4 mn sq. ft of completed and 3.6 mn sq. ft of future development with office space spread across three markets—Kolkata (5.7 mn sq. ft), NCR (6.8 mn sq. ft) and Mumbai (1.5 mn sq. ft). In-place rentals of `62/sq. ft offer upside at current market rentals with a portfolio WALE of 6.8 years.
In addition, the REIT has a call option on two properties in Noida (4.5 mn sq. ft) and Gurugram (3.8 mn sq. ft) that could take the overall portfolio to 22.3 mn sq. ft. Financials—11% CAGR in revenues up to FY2024E: Brookfield REIT had revenues of Rs 8.6 bn in FY2021 that is estimated to accelerate to Rs 12 bn (11% CAGR) by FY2024E, consequently leading to improvement in NOI to Rs 8.5 bn by FY2024E from Rs 6.5 bn in FY2021. Contractual rent escalations form a substantial part of the incremental revenues ( Rs 878 mn). Brookfield REIT had a capital employed of Rs 102 bn as of March 2021.
Risks—commercial real estate market, evolving regulatory regime: A structural weakness in service sector growth in India or overinvestment in commercial real estate leading to a meaningful drop in occupancy levels, and slower-than-expected growth in rental incomes may pose a risk to the growing annuities such as those of Brookfield REIT. Expiry of lease for 90% of the area at Kensington (WALE of 3.2 years), and a large client concentration (top-10 accounts for 75%) remain other areas of risk for Brookfield REIT.