While second wave of Covid-19 caused a slowdown in the recovery of business and economic activities with restrictions put in place, some of the companies in the office space market managed to maintain stable collections and steady occupancy levels. Two key factors i.e favourable location of the properties and a large and quality client base have helped a few specific office players including Brookfield REIT manage the situation better. The REIT maintained 91 per cent occupancy during March quarter of FY21 with the restrictions that were put in place across the country between January and June. For the same reason, the occupancy came down to 89 per cent in Q1FY22. The REIT’s collection was at 99 per cent in Q1FY22 of its rent.

Given the occupancy-related concerns on the back of Covid-19, Brookfield REIT has remained range-bound since its listing in February this year. The slowdown in demandof office spaces since January this year could also be a factor.

But despite these uncertainties, the REIT was able to achieve 6 per cent rental escalations from its clients in June quarter this year. Its presence, predominantly in micro-markets too could have helped, as it enjoys advantage of low rental costs when compared to those operating in urban cities. While there are concerns about the slowdown in leasing activities, it has a healthy client base, stable financials and a comfortable debt position. For the first quarter of FY22, its revenue was flat year on year at ₹219 crore, while net operating income grew 4 per cent to ₹170 crore. Its debt to equity ratio stands at around 0.2 times. Further, at the current market price of ₹254.57, the REIT is trading at a near 20 per cent discount to its NAV of ₹317 as on March 31, 2021.

The REIT made its first distribution to investors in the recent June quarter (₹6 per unit) and ₹6.75 per unit is expected to be made in the December quarter according to the management. Assuming quarterly distribution continues at this level, the yield for Brookfield REIT’s investors is expected to be around 9 per cent for FY22, higher than Embassy REIT and Mindspace REIT, which are around 7 per cent each.

Those investors who had entered at the time of IPO can continue to hold the shares as the risk reward remains reasonable.

Steady collections

Brookfield REIT derives about 75 per cent of total revenue from rental incomewhile 25 per cent comes from maintenance services. It has 10.3 million square feet (sq ft) of income generating commercial properties spread across four office parks, predominantly in micro-markets of Noida, Gurugram, Kolkata and Mumbai. With rents in most prime locations having declined in the past six months, most office property players might face rental pressure. But considering Brookfield REIT’s property locations, the pressure might be minimal, giving it an advantage to retain and attract new clients.

These factors, coupled with long-term lease contracts (3 to 15 years), could help the REIT to maintain steady cash flows. The REIT has 12-15 per cent lease rental escalation every three years (about 5 per cent rental escalation every 12 months). The quality of client base, including Amazon, TCS, Cognizant and Pine Labs, should help going ahead as well. The REIT reported about 7.3 per cent y-o-y growth in lease rentals to ₹162 crore, primarily driven by contractual escalations in the recent June quarter.

Brookfield REIT has multiple property upgrades and new on-going projects and. According to the management, despite the labour shortages, the REIT is likely to meet its target completion.

Factors to monitor

Despite the various positives of REIT, there are a few factors to monitor by the investors.

One, the REIT has about 1.1 million sq ft of area expiring during FY22 of which nearly 18 per cent of area has already been leased during the June quarter and the REIT is in ongoing discussions with tenants for around 40 per cent of its expiring leases. Brookfield’s presence in SEZs (micro-markets) could work out in its favour as developers and companies operating in these zones enjoy various incentives such as 100 per cent (profits) tax deduction. This should aid in the leasing activities going ahead. Further, the REIT is expecting to renew minimum of 40-50 per cent of FY22 expiries.

Two, with continuing uncertainties related to Covid and many corporates extending work-from-home (WFH) until first half of next year, companies may put their expansion plans on hold, and may result in slowdown in leasing.