Brookfield REIT IPO analysis!

Brookfield REIT is set to raise up to ₹3,800 crore via IPO which opens on 03rd February, Wednesday. Here are the details:

About Brookfield REIT

• Brookfield India Real Estate Trust is India's only institutionally managed public commercial real estate company, sponsored by an affiliate of Brookfield Asset Management (BAM), part of Brookfield Group.
• Brookfield Asset Management has a nearly $17-billion portfolio across real estate, infrastructure, renewable power and private equity in India. It owns and operates 42 million square feet of real estate space, besides seven toll roads totaling more than 600 km of roadway, solar and wind assets, a construction business, and real estate management services.

How does Brookfied REIT operate? 

• Brookfield India REIT has a quality portfolio with 4 business parks in the prime business locations of Gurugram, Noida, Mumbai and Kolkata having an area of 14 million square feet. Out of this, 10.3 msf is the completed area, and 0.1 msf is under construction, while 3.7 msf is for future development. Its completed area has an occupancy rate of 92%.
• The clients include reputed MNC technology and financial services clients such as Accenture, Pine Labs, Cognizant, Sapient, Cap Gemini, Bank of America and Barclays. Further, these properties have 7.1 years of weighted average lease expiry (improves visibility) and potential 36% mark to market on rentals.
• Brookfield REIT will list the portfolio of these assets, and investors who want to own part of this portfolio can invest in the units of the REIT. 

Objective of Company

The primary objective of company’s strategy is to provide attractive risk-adjusted total returns to its Unitholders derived from:

• Stable yield supported by its Initial Portfolio’s long-term contracted cash flows (from rental yields)
• Property level income growth that is embedded in their Initial Portfolio through contractual rent escalations, mark-to-market gains and development potential;
• Acquisitions of other properties which look attractive, asset value appreciation through upgradation of properties

Peer Comparison

Brookfield REIT has mentioned Embassy Office Parks and Mindspace REIT as its listed peers. Both of these are quoting at a discount to their NAV.  In case of Brookfield REIT, the issue is priced at Rs 275 per unit, which is a 11.6% discount to the NAV. NAV is calculated based on assumptions of cash flows (from rentals) and other income for the REIT.

Financials

• Brookfield REIT has seen a steady 7.8% increase in topline from 2018-2020. The revenue for Apr-Sep 20 period dropped to ₹455 crore due to the impact of Covid-19.
• The company’s loss widened to ₹74 crore in H1FY21, as some of the tenants faced issues and sought deferrals of their rent payments. The company had agreed to defer the commencement date of certain new leases and a limited number of lease agreements have been terminated.

About the issue 

• Issue open: 3rd Feb- 5th Feb 2021
• Price band: ₹274- ₹275 per share
• Issue Size: ₹3,800 crore
• Issue Size: 13.87 crore units
• Bid lot: 200 units, and in multiples thereafter
• Minimum bid amount: ₹54,800- ₹55,000 (for lower and upper bands respectively)

INDmoney Recommendation

The issue is priced at a discount of 11% to its NAV, as compared to a 5.3% discount in case of Embassy Office Parks and a 3% discount in case of Mindspace Business Park REIT. This seems to be reasonable. 

At the higher end of the price band at ₹275, the pre-tax yield indicative yield is around 7.95% in FY22. While this seems attractive, there are risks associated with investing in Commercial Real Estate. The company’s financials have also taken a hit in Apr-Sep 20 period. As work -from-home gains traction the demand for commercial real estate may remain subdued in the medium-term. Given these factors, we remain ‘Neutral’ on the prospects of the issue.