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Brookfield REIT IPO Review and Analysis in Detail

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Basis Structure of Brookfield REIT IPO

 

Another IPO which is coming up in this IPO fest is Brookfield REIT IPO. This IPO is expected to hit the primary markets in the first week of February 2021.

Brookfield REIT filed its draft papers in September 2020 and it intends to raise about Rs. 3,800 crores.

The Brookfield REIT IPO is of the book-building nature. This means the shares that are being offered are quoted with a price band. The other kind of offering is called fixed price offering, and this is characterized by a fixed price for the shares that are on offer.

The fresh issue segment will contain shares which are being newly issued by Brookfield REIT IPO. This amount will be used to service a portion of the company’s long-term debt.

As for the offer for sale segment, that includes those shares which are being sold by existing shareholders. These shares are not being diluted by the company. In this case, the transaction is between the existing shareholders and the new shareholders.

For the Brookfield REIT IPO, there isn’t an offer for sale segment.

The table below summarizes the details about the Brookfield REIT IPO. Details about the Brookfield REIT IPO share price, Brookfield REIT date 2021, Brookfield REIT IPO listing date and more have been included.

IPO Details

After the IPO, the Brookfield REIT shares will be listed on both NSE and BSE.

 

About the Company

 

Real Estate Investment Trusts are still a novel concept in India. Brookfield is India’s only institutionally managed public commercial real estate vehicle.

The company is sponsored by Brookfield Asset Management, which is a subsidiary of the Brookfield Group.

Brookfield REIT owns and manages office parts in Mumbai, Gurugram, Noida and Kolkata. The company’s portfolio consists of 14 million square feet (MSF), out of which 9.8 MSF is completed, 0.6 MSF is under construction and 3.6 MSF is earmarked for future development.

 

Products & Services

 

As a real estate investment trust, Brookfield’s primary product is the production of commercial office space to companies. As mentioned above, it owns and manages four office parks in India, and it provides space on a lease or rental basis.

 

Customers

 

Brookfield’s customers range across a variety of MNCs and other companies – Accenture, Bank of America, Barclays, TCS, Cognizant and Amazon are a few examples of their clients.

Three of the four office parks in Mumbai, Gurugram and Kolkata fall under special economic zones (SEZ) and the fourth, in Noida, is entirely an IT hub.

 

Promoter Shareholding Pattern

 

The table below lists out the promoter shareholding pattern before the Brookfield REIT IPO.

Promoter shareholding

After the IPO, it is expected that the promoter shareholding will fall to 54%.

 

Financial Overview of Brookfield REIT IPO

 

The table below provides the main financial figures for Brookfield REIT for the past three years. All the figures listed below are in Rs. Crores.

Financial Overview

Over the past three years, the total revenue of the company has been increasing steadily. The recorded CAGR, in this case, is 7.91%. As for the total assets, it has been increasing at a CAGR of 4.84%.

Total Revenue

As for the net income of the company, that has not shown a lot of consistently.

Net Profit

Although a profit was recorded in 2018, the company incurred losses in 2019. In 2020 again, a small profit was recorded. Going forward, especially once the company goes public, it will be very important to maintain a positive profit balance.

The long-term debt of the company is also an issue. Between 2018 and 2020, the long-term debt has grown at a CAGR of 32.99%.

Long term debt

Of course, it is important to remember at this point that the majority of the proceeds from the IPO will be utilized in servicing long-term debt. If this happens, it will have a positive impact on the company’s balance sheet.

 

Industry Analysis

 

The market for commercial landscape in India has grown significantly over the last decade. The trend in this field has gradually shifted from lone office buildings to full-fledged business parks.

The commercial real estate market in the top seven cities in India – Bengaluru, Chennai, Hyderabad, Kolkata, NCR Delhi, Mumbai and Pune have grown at a CAGR of 10.8% between 2008 and 2020. In that same period, the CAGR for each individual city ranged between 9% and 15%.

If you compare the valuations of commercial real estate globally, valuations are the highest in London. In comparison, the valuations in the Indian markets are much lower, with values in the range of only 15% of that in London.

In the Indian commercial real estate markets, the majority of the demand comes from seven specific sectors as shown in the graph below.

Sectorial Market Share

With regard to the top seven markets, a total of 180 million square feet (MSF) of commercial real estate has been delivered between 2015 and 2020. The net absorption in this same period was about 168.6 millions square feet (MSF).

This means, out of the 180 MSF of commercial real estate that was created, 168.6 MSF was utilized and the remaining was left vacant. This means the average absorption rate is about 93%.

The graphs below show the supply and net absorption over the years.

Supply

Absorption

Now, if we talk about the demand in the different cities, in terms of the occupancy, the highest demand is generated in Gurugram. The graph below shows the occupancy rates in different cities.

Occupation

There is another important point that we need to mention here.

The fact that Brookfield, being a real estate based company, is bringing its IPO amidst the COVID-19 crisis is quite interesting indeed. It is no secret that, with the ongoing work-from-home situation, the demand for commercial real estate has dropped.

Brookfield’s move indicates innate confidence in the regeneration of demand in this space.

According to real estate experts, “It lends great credibility to the inherent demand and strong fundamentals of the Indian commercial office market, as well as REIT as an investment vehicle itself.”

If this confidence is misplaced, however, and the demand is not regenerated successfully, then it can have a negative impact on the continued business of Brookfield REIT.

 

Peer Comparison of Brookfield REIT IPO

 

The table below shows the comparison of the two listed REIT stocks with the Brookfield REIT IPO.

Peer Review

In terms of the total yearly income, Mindspace and Embassy are much larger than Brookfield. Even in terms of the growth rate, Brookfield’s listed counterparts have far exceeded it in terms of performance.

If Brookfield is able to expand the scope of its operations, then it will be able to provide competition to Mindspace and Embassy.

The graph below shows the average total areas in million square feet (MSF) of Brookfield and the other REITs.

Peer Comparison

As shown in the graph above, Brookfield REIT's portfolio in terms of MSF is quite large in comparison with the other Asian REITs. It is fourth-largest.

 

Strengths of Brookfield REIT IPO

 

Brookfield is promoted by Brookfield Asset Management, which is one of the world’s largest asset management firms. The company, therefore, stands to benefit from the expertise of its promoter.

Apart from that, Brookfield REIT’s clients are diversified across different sectors, which reduce the associated risk. Over 75% of the rental agreements are with large multi-national companies like Barclays, Bank of America, Accenture and others.

Another strength for Brookfield REIT is the high occupancy rate that it maintains across the different locations. Over the past four years, the average occupancy has been about 94%.

 

Weaknesses of Brookfield REIT IPO

 

Brookfield REIT’s large debt burden imposes a strain on its balance sheet. If the proceeds from the IPO are successfully utilized for debt servicing, then it will reduce this burden.

The second weakness is the current situation of the market. With more and more companies shifting to a permanent work-from-home situation, the continued demand for commercial real estate is doubtful, to say the least.

There is also the fact that Brookfield REIT’s main revenue source is rental income. If the demand drops, then this will have a considerable impact on the company’s revenue and its continued business operations.

The ten largest clients of Brookfield REIT accounted for 74% of the leased area and 75% of the rental income in FY 2020. If any of these clients decided to take their business elsewhere, Brookfield’s revenue statements would look very different indeed.

 

Valuation of Brookfield REIT IPO

 

The table below compares the main valuation parameters of Brookfield REIT with that of its listed peers.

Valuation

A common valuation metric is the price to earnings ratio. If the P/E ratio of the company is lower than the average P/E value for the entire industry, then that company is considered to be undervalued.

As the earnings per share for Brookfield REIT is negative, it does not make sense to calculate the price to earnings ratio for the company.

We will, therefore, try another method of valuing the Brookfield REIT IPO.

According to the formula given by Benjamin Graham in his famous book Intelligent Investor, the intrinsic valuation is derived as follows.

FY20 Profit = ₹15.12crore

Growth Rate = 5%

Value = 15.12 * (8.5 + (2*5)) = ₹279.72 crore

According to the Intelligent Investor formula, the value derived above is the intrinsic value of the company on the basis of the earnings growth. If we consider a 10% margin of safety, the value comes out as follows.

By deduction of the margin of safety = ₹279.72 – 10% = ₹251.74 crore

As per the basis structure of the IPO, the market capitalization of the company is ₹3,800 crores. It is safe to conclude that the Brookfield REIT IPO is highly over valued.

 

Frequently Asked Questions

 

1. How to apply in Brookfield REIT IPO through Zerodha?

Simply log onto the Zerodha website or the Zerodha mobile app. Select the Brookfield REIT IPO from the IPO menu. Select the number of lots and submit your bid.

2. When Brookfield REIT IPO will open?

The subscription window for the Brookfield REIT IPO will open on February 3 and will close on February 5.

3. What is the lot size of Brookfield REIT IPO?

The Brookfield REIT shares will be available in lots of 200. This means you have to bid on a minimum of 200 shares. If you want to bid on more than 200 shares, you will have to do so in multiples of 200 – that is, 2 lots for 400 shares, 3 lots for 600 shares and so on.

4. How to apply for Brookfield REIT IPO?

There are two ways to apply for an IPO. You can apply either through UPI or through ASBA (net-banking).

In order to apply, simply log on to your brokerage house’s website, select the IPO for which you want to apply, select the number of lots that you want to bid for, and submit your bid.

5. When is Brookfield REIT IPO listing date?

The listing date for Brookfield REIT shares is set for February 17.

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