Brookfield REIT IPO envisages to raise Rs 3,800 through a fresh issue at a price band of Rs 274-275 per unit. Brookfield India Real Estate Trust is backed by Canadian asset manager Brookfield. s $522 million in an Indian IPO The minimum lot size is 200 units and multiples thereafter which translates to minimum appllication of Rs 55,000 are the upper band of the price range. Brookfield REIT will be the third real estate investment trust (REIT) to list on the bourses after Embassy Office Parks REIT in 2019 and Mindspace Business Park REIT in 2020.

Issue PeriodWednesday, 3rd Feb – 5th Feb 2021
Issue DetailsFresh issue of Units upto ₹ 3,800 Cr
Issue Size (₹ Cr)₹ 3,800 Cr
Price Band₹ 274 – 275
Bid Lot200 Units  and in multiple of 200 units thereafter 
Institutional Investors75% of offer (  ~10.36 Cr Units- ₹ 2,850 Cr)
Non Institutional Investors25% of offer (  ~3.45 Cr Units – ₹ 950 Cr)
GCBRLMsMorgan Stanley, BofA Securities, Citigroup Global, HSBC Securities
BRLMsAxis Capital, Ambit Pvt. Ltd., IIFL Securities, JM Financial, J.P.Morgan India, Kotak Mahindra Capital, SBI Capital Markets
RegistrarLink Intime India Pvt. Ltd.

Updates:

Brookfield REIT IPO: Anchor Investors

Ahead of its IPO, Brookfield India Real Estate Trust (Brookfield REIT) raised Rs 1,710 crore from 39 anchor investors. The foreign investors included Schroder Global Cities Real Estate, BNP Paribas, Morgan Stanley, DSP Adiko Holdings, Societe Generale, Coronation Global Managed Fund, IA Opportunities and Moon Capital. were among the foreign investors that participated in the anchor book. Th anchor investors also included HDFC AMC, SBI Life, Tata AIG, HDFC Life, Kotak Mahindra AMC, Star Health and Bajaj Holdings, among others.

About REIT

REITs are investment vehicles that can be used by real estate players to attract private investment, while investors (both retail and institutional) can gain dividends generated from income-producing real estate assets like office buildings, shopping malls, etc. They are similar to mutual funds which provide opportunity to invest in equity stocks, whereas REITs allow one to invest in income-generating real estate assets.

Sebi had notified REIT’s regulations in 2014, allowing setting up and listing of such trusts, which are popular in advanced markets. SEBI requirements mandate

  • REIT must invest not less than 80% of the value of its assets in completed and rent and/ or income generating properties.
  • Not more than 20% of the value of its assets may only be invested in certain permitted forms of investments which include, among other things, under construction properties, completed but not rent generating properties, listed or unlisted debt of companies etc.
  • A minimum of 90% of net distributable cash flow to be compulsorily distributed among unit-holders, once every 6 months.

About Brookfield India Real Estate Trust:

  • The Brookfield India Real Estate Trust (“Brookfield REIT”) is sponsored by BSREP V, an affiliate of Brookfield Asset Management, one of the world’s largest alternative asset managers with approximately US$575 billion in assets.
  • Brookprop Management Services is the manager and Axis Trustee Services is  the trustee to the REIT.
  • The company owns an initial portfolio of four large campuses-format office parks located in some of India’s key gateway markets such as Mumbai, Gurugram, Noida and Kolkata.
  • It owns an Initial Portfolio of 4 large campus-format office parks, located in some of India’s key gateway markets – Mumbai, Gurugram, Noida and Kolkata. Their Initial Portfolio totals 14.0 msf, comprising 10.3 msf of Completed Area, 0.1 msf of Under Construction Area and 3.7 msf of Future Development Potential.
  • Its Initial Portfolio’s Completed Area has a Same Store Committed Occupancy of 92% (and a 87% Committed Occupancy, which includes the recently completed 0.5 msf at Candor Techspace N1) and is leased to marquee tenants with 75% of Gross Contracted Rentals contracted with multi-national corporations such as Barclays, Bank of America Continuum, RBS, Accenture, Tata Consultancy Services and Cognizant.
  • Brookfield India REIT intends to leverage Brookfield Group’s real estate holdings in India by entering into agreements that provide rights to acquire their existing properties in their markets. They have the exclusive right, at their discretion, to acquire the Identified Assets, one office park in each of Gurugram and Noida, similar to the office parks in the Initial Portfolio that are near-stabilization and currently owned by members of the Brookfield Group. The Identified Assets encompass 8.3 msf of office space. The Initial Portfolio, Identified Assets and ROFO Properties combined, creates the potential for them to almost double their Initial Portfolio’s Leasable Area to 28.9 msf.
Proposed Structure of Brookfield REIT

Brookfield India REIT: Financials

Particulars / RS. Cr.H1FY21FY20FY19FY18
Share Capital65.265.255.215.2
Reserves-2,543.98-2,284.92-2,551.78-2,634.11
Long Term Borrowings6,845.556,668.856,197.153,345.80
Short Term Borrowings174.14262.17
Revenue from Operations455.14956.71895.92821.85
Revenue Growth (%)6.79%9.01%
Net Operating Income344.69676.34628.36590.24
Adj. EBITDA 335.28618.32590.18588.19
Profit Before Tax-73.8141.4354.11173.51
Profit for the Period-73.9215.12-15.75161.08

Brookfield India REIT : Pros

  • Global Sponsorship with Local Expertise. Brookfield REIT is sponsored by an affiliate of Brookfield Asset Management, one of the world’s largest alternative asset managers and investors, with assets under management of approximately US$575 billion across real estate, infrastructure, renewable power, private equity and credit, and a global presence of over 150,000 operating employees across more than 30 nations.
  • Brookfield REIT’s owns quality office parks in India, distinguished by their size and scale and located in the key gateway markets of Mumbai, Gurugram, Noida and Kolkata. Their office parks are modern and recently built, with a median age of 7 years for their Initial Portfolio, and require limited on-going maintenance capital expenditures. Their office parks are very difficult to replace today on a cost-competitive basis.
  • The REIT has a diversified base of marquee tenants and its Initial Portfolio has a stable, long-term tenancy profile with staggered expirations and a WALE of 7.1 years, providing significant cash flow stability to its business.
  • In its Initial Portfolio, 75% of Gross Contracted Rentals are contracted with multi-national corporations such as Barclays, Bank of America Continuum, RBS, Accenture, Tata Consultancy Services and Cognizant. Its tenants operate in a diverse range of industries such as technology, financial services, consulting, analytics and healthcare.
  • Significant Identified Internal and External Growth Opportunities.

Brookfield India REIT: Cons

  • The valuation reports for Brookfield India REITT Portfolio are based on various assumptions and may not be indicative of the true value of its assets.
  • REIT is a new product.
  • Yields may be affected by slowdown in the economy and adverse government regulations.
  • Rise in interest rate
  • A Significant portion of our revenue is derived from a limited number of tenants and sectors.
  • The complete extent of pandemic’s impact on REITs business and operations is currently uncertain and its effect on business and operations in the medium to long term will depend on future developments, including the scope, severity and duration of the pandemic.
  • The manager to REIT may fail to renew lease agreements or lease vacant area on favorable terms which could adversely affect the business, results of operations and cash flows.
  • Fluctuations in the general economic, market and other conditions may affect the commercial real
  • estate market in India and in turn, our ability to lease office parks to tenants on favorable t
  • A significant portion of our revenue is derived from leasing activities at Candor Techspace G2 and any adverse development relating to Candor Techspace G2 or in the micro-market in which it is located may adversely affect the business, results of operations and financial condition.
  • 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.
  • Highly concentrated on Gurugram market, 42 percent of overall rent comes from Candor Techspace G2, Gurugram.

Brookfield REIT: Yield Guidance

As per indication given be management the distribution on the IPO price is likely to be in trange of 7.95-7.98% for FY22. At present emabassy REIT has been giving quarterly distributions. as against mandated half yearly payouts by SEBI regulations for REITs.

The yield indicated for FY23 is 8.43%. The first year distribution will be largely in from of interest which is taxable in hands of investors. Rest small portion could be dividend which is tax free in hand of investors. Over the years Brookfield REIT IPO intends to increase the Dividend component. So in future one can expect better post tax returns.

Taxation

  • Investors incur tax only on the interest component of REIT distributions.
  • No tax on REIT distributions in the form of dividends
  • Capital Gains: Short Term Gains if less than 36 months will attract 15% tax and Long term 10%. Indexation benefit is available after 3 years of investment.

Brookfield REIT IPO : Assessment

  • REIT is an investment tool that owns and operates rent-yielding real estate assets and allows individual investors to make investment in this platform and earn income.
  • REIT IPO should not be viewed like other IPOs as the product is close to a a fixed income product with return usually better than FD & and a very small possible uptick like equity.
  • This is the third IPO of a REIT in the country, the first one Embassy REIT came in the year 2019 and second was Mindspace Business Parks REIT in 2020. Both these REITs have done reasonably well on the bourses.
  • The NAV per unit of Brookfield REIT as on 1HFY21 is estimated at Rs. 311. This is about 13% premium to the issue price.
  • Brookfield India REIT has incurred loss in FY2019. In the fiscal FY20 too, it is in loss before extraordinary items. However as per projections, the REIT expects Net Distributable cash flows (NDCF) to the tune of Rs6.6bn and Rs7bn in FY22E and FY23E.
  • The IPO proceeds will be used to bring down its debt components whoch may lead to the company generating distributable cash flows.
  • The 7.1-year weighted average lease expiry (WALE) of Brookfield REIT provides a degree of stability to the cash flows.
  • Brookfield India REIT portfolio is smaller to the market leader Embassy & Mindspace and further being concentrated in NCR region, carries more risk in case of a downturn.
  • The REIT has registered a revenue growth of 7.9% CAGR for the period FY18 to FY20.EBITDA grew by 4.5% CAGR to Rs. 593.6 cr in this period. However EBITDA margins declined from 66.2% in FY18 to 62% in FY20.
  • Brookfield REIT aims to deliver a yield of 7.95% (FY22) and 8.43% (FY23) . This is based on expected revenue growth of 20% between FY20-FY23, driven by contracted rent escalations, lease-up of vacant area, re-leasing of existing areas and lease-up of Under Construction Area.
  • There is risk that Brookfield 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. However it claims to have Identified Internal and External Growth Opportunities.
  • SEBI has changed rules to a minimum investment limit in 200 units for attracting more retail participation. When the earlier Embassy REIT came up, investors needed to invest in minimum 800 units. from Mindspace Business Parks REIT issue onwards, investors can apply in lot of 200 units.
  • Mindspace REIT was subscribed 12.96 times. On day 2, the issue was subscribed 1.24x. the Non Institutional portion was subscribed 15.51 times. If this is a guide the Brookfield India REIT should also get at least fully subscribed today.
  • REIT is a new instrument and the robustness of SEBIs guidelines and rules is yet to be proven.
  • COVID-19 poses challenge and the projections could go haywire, but with passage of time with good management, Brookfield India REIT could offer a steady return structure. Further Brookfield India REIT did not face significant disruptions in operations due to COVID-19 and it collected ~98-99% for 6 months ending September 2020.   
  • The yields in Debt market despite COVID 19 issues have moved down and make help to attract funds to Brookfield India REIT REIT issue.
  • It is gathered that there no substantial activity in Grey Market for Brookfield India REIT IPO issue.
  • The product should not be expected to give equity like returns & returns expectation should be moderated to return level of 7-8%. Over a period of time Brookfield REIT IPO is expected increase the share of its dividend income which will in future result in better post tax returns as dividend income from REIT is tax-free in hand of investors.
  • Despite being not quite attractive, I am likely to subscribe to the Brookfield REIT IPO. This is primarily to diversify one’s portfolio, Tax benefits in future as dividend will tax free and provide some exposure to this instrument which is a proxy to investment in income generating commercial real estate sector. There is need to keep watch on subscription figures while doing so.
  • I expect the Brookfield India REIT to be subscribed fully on Day 2 and based on this intend to apply on Day 3.
  • Brookfield REIT IPO is suitable to only those investors who want to diversify their investment and can invest that part of their portfolio that they would otherwise be parking in debt component or in real estate.
  • Like other REIT IPOs, there is no separate quota for retail in Brookfield India REIT IPO and is clubbed with Non Institutional portion.
  • Also among the alterative investments, Invits like Indigrid are bound to offer far superior yields due to difference in underlying assets. Still REIT offer good diversification.

Standard disclaimer: I am not a SEBI registered analyst /investment adviser and above analysis is for educational purpose only. However I have passed NISM certifications for Investment Adviser and Mutual Fund Distributor with decent scores. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.

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