- Wealth PMS (50L+)
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India saw its first REIT (Real Estate Investment Trust) in 2019. Two years later there are now three (Mindspace REIT, Brookfield REIT, and Embassy REIT). REITs as an investment option have gained significant popularity among institutions & retail investors. This is in spite of the cloud over future growth of office spaces.
Why are REITs such a big success? Which is the best listed REIT in India?
Real Estate Investment Trust (REIT) is a tax-efficient vehicle that owns a portfolio of income-generating real estate assets. A REIT is created by a sponsor, who transfers ownership of assets to the trust in exchange for its units.
Think of it like a mutual fund, where money is pooled from investors. In return they were offered mutual fund units. Instead of shares of public companies, REIT units represent ownership of real estate assets.
Profits are generated in the form of dividends & capital appreciation.
The traditional valuation metrics like PE, EPS growth, Margin expansion etc do not apply here. There are certain parameters to consider while evaluating the REITs. Let’s understand each of them.
The biggest risk of running a commercial property is vacancy. WALE is used to calculate the time left for property to go vacant. It is measured in years. The higher the better.
By law REITs have to pay 90% of distributable cash flows to the investors. Distribution yield is a metric to measure these payments. However this is not a guaranteed payout. It depends on the trust performance. Again the higher the better.
Loan to Value (LTV) measures how much debt was borrowed compared to the underlying asset value. Just like any other business, the low leverage the better.
NDCF is a key metric to show how much money is left to distribute to the unit holders. Usually all REITs have two layered structure.
As per SEBI guidelines,
The consistency of NDCF is an important metric to keep an eye on.
The occupancy rate is the percentage of the square foot available in the portfolio of REIT. This is an important metric of its performance. This ensures consistency in payouts, increasing rental & dividend income. The higher the occupancy, the stable are the cash flows. Having said that, it is unlikely to have 100% occupancy always.
A well managed property in prime location will have the highest occupancy rate. On the other side, oversupply of properties can reduce occupancy rates & rental income. REITs having diversified portfolio across geographies & tenants are less prone to oversupply & concentration risk.
NAV is one of the best way to assess REITs. Think of it like a Book value per share. It is calculated as the estimated market value of the properties minus all liabilities. This divided by number of shares outstanding. NAV is more accurate way to determine share price of REIT.
Many a times, REITs tend to trade below or above NAV. This happens because of supply & demand of the traded units. In such cases, we have to keep an eye on share price distance from NAV.
A strong sponsor will have many advantages like brand recognition, trust factor, on time delivery etc. REITs will also have Right of first offer (ROFO) on properties owned by the sponsors.
The cash distributed to the unit holders is a combination of three parameters – Interest income, Dividend income & Repayment of debt. Taxation works the same for all REITs except for Dividend income. It depends on the tax regime the SPVs had opted for.
Unit holders are taxed at the same rate at which REITs are taxed. REITs having the highest non taxable portion of NDCF are likely to gain higher interest among investors.
You can buy units of REITs just like shares through regular trading accounts on BSE and NSE, the major exchanges.
Image below shows BSE and NSE codes for the three REITs on zerodha.
BIRET stands for Brookfield REIT.
Before arriving at our overall recommendation, a brief note for each REIT to understand similarities and differences.
Sponsored by Embassy & Blackstone, Embassy REIT is the first listed REIT & the largest in Asia (by area). The company owns & operates 42.4 MSF (million square feet). It has a portfolio of eight office parks, two hotels & a 100 MW solar power plant. It comprises 32.3 MSF completed operating area with an occupancy of 88.9% as of March 31, 2021.
Bangalore is their biggest market with 72% of the asset value, followed by Mumbai (11%) & Pune (10%). Top 10 tenants contribute 39% of rentals. The company has a WALE (Weighted Average Lease Expiry) of 7 years.
In the last 3Y the company had grew its revenues at a CAGR of 12.1% to 2360.3 Cr. EBITDA grew by 14.1% CAGR during the same period to 1492.9 Cr as of FY21.
NOI grew by 12% YoY, with operating margins of 86%. In Q3FY21 the company had raised 5200 Cr via NCDs to refinance its debt. This had brought down the average cost of borrowing from 10.3% to 6.9%.
Unlike other REITs, Embassy has exposure to hotels in its portfolio (5% of their GAV). If work related travel remains muted, this segment will continue to be a dragger on their operations. The company took a rent escalation of 13% on 8.4 msf across 94 leases in FY21. This will aid 10-15% to the NOI growth.
Mindspace REIT is sponsored by K Raheja Corp Group. It has a strong portfolio of office spaces across Mumbai, Pune, Hyderabad & Chennai with a total leasable area of 30.2 msf.
Top 10 tenants contributes 40.3% of rentals. They are at 84.2% occupancy. WALE stands at 6 years.
In the last 4Y, the company had grown its revenue by 8.9% CAGR to 1629.3 Cr. It was up by 5.1% in FY21. The NAV has moved up from 326.1 at the time of IPO (July 2020) to 345.2 as of Mar 2021.
Snippet from Mindspace REIT Investors Presentation
Mindspace offers a higher post tax yield (90% of NDCF). All SPVs are 100% owned by REIT except for Mindspace Hyderabad (11% is owned by Government of AP).
Net Operating Income (NOI) is up by 12.1% to 1374.1 Cr. The distribution yield currently is at 7%. Loan to Value is at 14%. Net debt to NOI at 2.5 times. All SPVs are 100% owned by REIT except for Mindspace Hyderabad (11% is owned by Government of AP).
Brookfield India REIT is the new kid on the block. It is sponsored by Brookfield AMC & is India’s only institutionally managed commercial real estate vehicle. They have commercial properties in Mumbai, Gurugram, Noida & Kolkata. Their initial portfolio comprises 14.0 Million SqFt, with rights to acquire further 8.2 Million SqFt.
NCR region contributes 56% of the total asset value. The company has an occupancy of 91% & WALE of 7 years. The company is heavily dependent on few clients. Accenture, TCS & Cognizant contributes 49% of the leased area.
The revenue is down by -9.8% to 863 Cr in FY21. Loan to value stands at 18%. The company has a total debt of 2120 Cr. The cost of borrowing is relatively high at 7.15% when compared to its peers. The management had guided to bring it down to 6.45%.
In Apr 2021, Brookfield had converted Rs. 1010 Cr of Compulsory Convertible Debentures held by REIT into equity share. This is a repayment of shareholders loan. It has increased the tax free portion of the NDCF from 15% to 30%.
The portfolio has a well-staggered lease expiry profile. This will increase the Mark to Market from 31% to 34% by FY23. NAV is at 317/- per unit as of FY21.
The company has Right of First Offer (ROFO) on certain properties owned by Brookfield Group. These new assets have the potential to:
All three of them are well-managed trusts with strong balance sheets. They have similar growth opportunities for the long term.
However, some exhibit better performance than the other two in few parameters.
In the chart below, click REIT name to see their exposure by geography
In chart below, click REIT name to see exposure by sector
The answer varies depending on your context as an investor.
Mindspace REIT if you are conservative and taking a debt investors’ point of view. With well-diversified portfolio & highest tax free distribution, this suits HNIs as a good long-term bet. Low occupancy (84%) & consistency of cash flows will be a risk though.
Brookfield REIT if you are a growth investor looking for capital appreciation. Considering all important metrics like WALE, Yield, LTV, Occupancy etc, Brookfield either leads the pack or is at par with others. The company is looking to double the total leasable area in the next 3 to 5 years. The incremental cost of debt will come down from 7.15% to 6.65%.
Taking a holistic view, Brookfield REIT is better placed to capture the growth & provide decent stability in the cash flows.
In the order of preference, we like
Brookfield India REIT > Mindspace REIT > Embassy REIT
But what of the impact of Covid on the REIT industry & its outlook?
Globally things are slowly getting back to normal. Offices in USA & rest of Asia have started recording increase in attendances where a large part of population has been vaccinated.
India however is in a pause mode. Occupiers continue to delay the new deals unless driven by immediate business need.
REITs have been largely resilient in the last 1.5 years. Most of them have restructured their debt, raised capital & strengthened their balance sheet.
Short term outlook
Medium term outlook
The emerging Hybrid model (WFH + Office) can be a new norm in the near future. This will have a direct impact on the rental yields. Tenants may renegotiate the deals at a lower rates. Price may remain stagnant for next few years.
Indian REITs have successfully navigated Covid till now. We can’t rule out the short term weakness in this sector. At the same time writing obituaries for India REITs is unwarranted. The long term story for Office spaces / Commercial real estate continue to remain strong – in its new form.
Other relevant reading:
NOTE: This article is for informational purposes only and should not be considered as investment advice.
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