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.
We initiate coverage on Brookfield REIT with an ‘add’ rating and fair value of Rs290. Brookfield has a portfolio of 14 million sq ft (10.4 million sqft completed) spread across key metros that will yield an NOI of Rs8.5 billion 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 Rs8.5 billion valued at Rs117 billion for 14 million sq ft across key metros: We initiate coverage on Brookfield REIT with an ‘add’ rating and a fair value (FV) of Rs290. Our FV comprises an asset value of Rs117 billion for operational as well as under-construction assets, yielding an equity value of Rs88 billion based on September 2023E. The portfolio consists of (1) a completed area of 10.4 million sq ft valued at Rs107 billion, and (2) future developments of 3.6 million sq ft. Brookfield REIT currently trades at a dividend yield of 7.6% and capitalisation 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 million sq ft: Brookfield REIT offers an initial portfolio of 14 million 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 million sq ft of completed and 3.6 million sq ft of future development with office space spread across three markets—Kolkata (5.7 million sq ft), NCR (6.8 million sq ft) and Mumbai (1.5 million sq ft). In-place rentals of Rs62/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 million sq ft) and Gurugram (3.8 million sq ft) that could take the overall portfolio to 22.3 million sq ft.
Financials—11% CAGR in revenues up to FY2024E: Brookfield REIT had revenues of Rs8.6 billion in FY2021 that is estimated to accelerate to Rs12 billion (11% CAGR) by FY2024E, consequently leading to improvement in NOI to Rs8.5 billion by FY2024E from Rs6.5 billion in FY2021. Contractual rent escalations form a substantial part of the incremental revenues (Rs878 million). Brookfield REIT had a capital employed of Rs102 billion as of March 2021.
Risks—commercial real estate market, evolving regulatory regime: A structural weakness in service sector growth in India or over investment 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.