Ladies and gentlemen, good day and welcome to Brookfield India Real Estate Trust earnings call for Q4 FY 2023. As a reminder, all participant lines will be in the listen-only mode until the floor is open for questions. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.
On the call, we have the following persons: Mr. Ankur Gupta, Managing Partner, Brookfield Asset Management and Director, BrookProp Management Services Private Limited. Mr. Alok Aggarwal, Chief Executive Officer, BrookProp Management Services Private Limited. Mr. Sanjeev Kumar Sharma, Chief Financial Officer, BrookProp Management Services Private Limited. Mr. Pawan Kakumanu, Senior Vice President, Strategic Finance, and Mr. Shailendra Sabhnani from Brookfield. I now hand the conference over to Mr. Rachit Kothari. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, Welcome to the call. We are pleased to report to you the Q4 and full year results for financial year 2023. I'd start by saying that this has been a transformative quarter for our REIT. On one hand, we have made significant operating leaps on our existing portfolio On the other, secured a large INR 11,200 crore acquisition, which will completely change the scale, diversity, and the operating outlook of our business.
In that breath, a couple of things to cover at the beginning. Great operating progress at two of our assets. Our early renewal of 900,000 sq ft of space in Kensington with TCS secures over INR 100 crore or 10% of portfolio's operating income every year for the next 15 years with a five-year lock-in.
Our asset N1 in Noida has also touched 96% occupancy with very limited lease-up left. Trends in both these properties are great testament to the confidence that our occupiers continue to show in us. We expect the other three assets to follow similar trends as return to work progresses and clarity on SEZ reforms comes through.
We're also very pleased to announce with the approval of our independent board members, a transaction that is transformational to the inorganic growth story of our REIT and a big validation of Brookfield's commitment towards growing this vehicle. We have signed binding agreements to acquire Candor TechSpace G1 and Downtown Powai. These assets were on our pipeline for the last 12 months or so. A very high quality, irreplaceable portfolio of 6.5 million sq ft.
The deal is in an equal partnership with GIC, the Sovereign Wealth Fund of Singapore, one of the largest investors in Indian real estate, and is on the exact same terms, but majority board seats and management will continue to stay with the Brookfield India REIT. GIC has committed approximately INR 3,300 crore towards these transactions, and the REIT will look to raise a similar amount post the unit holder votes to conclude the transaction. The deal is priced to an INR 11,225 crore enterprise value, which implies a 6% discount to GAV and a 12% discount to our estimate of NAV based on the independent valuations.
These properties have an income potential of over INR 900 crores, which implies an 8.1% cap rate and a 4%-5% DPU accretion. This deal will also take our consolidated assets to over INR 28,000 crores, making us the second-largest REIT in the country, putting us on the path to be the largest as we add more assets and new cities. I will now request Alok to walk through the business updates.
Thank you, Rachit. A very good afternoon to everyone. I'm pleased to announce that we have ended a strong financial year and have delivered on our stated objectives for the year. With the announcement of a distribution of INR 5 per unit this quarter, we have met our NDCF guidance and have announced distribution of INR 20.20 per unit for FY 2023.
We have displayed strong organic growth during the year with our contracted NOI run rate crossing INR 1,000 crore, growing almost 15% from the run rate in Q4 last year. We're also delivering on our inorganic growth strategy and are excited to announce the proposed acquisition of 6.5 million sq ft of Grade A commercial office real estate in Mumbai and in Gurugram.
We'll acquire Downtown Powai and Candor TechSpace G1 for a total consideration of INR 11,225 crore. The acquisition will be carried out through our unique 50/50 partnership with GIC, a renowned global institutional investor. GIC is one of the largest foreign investors in India real estate and has a 25+ years investment track record in India.
The equal partnership between Brookfield India REIT and GIC for the acquisition of Downtown Powai and G1 will be extremely beneficial for both parties, with strong alignment of interest towards value creation. Under the management of our sponsor, Brookfield Group, both Downtown Powai and G1 have been established as dominant assets in their respective micro markets.
These assets are highly complementary to our REIT and are being acquired at a discount of 5.8% to the average fair value assessed by two independent valuers. Axis Capital has provided a fairness opinion on the acquisition price of INR 11,225 crore. These acquisitions will significantly increase the scale of the REIT, with the operating area increasing by 44% and the consolidated gross asset value by 73%.
The top five tenant concentration will reduce from 52% to 32%. The prominent BFSI tenants such as Deloitte, JP Morgan, and Nomura being added to our top 10 roster. This transaction will significantly improve our geographical diversification, with Mumbai's share of our GAV increasing to 33%. The acquisition will enhance the proforma effective economic occupancy by approximately 200 basis points to 91%.
We anticipate a 4.5% increase in NDCF per unit as a result of these acquisitions. We propose to fund this transaction through our institutional placement of up to INR 3,500 crore, and have taken board approval for the same. This institutional placement will significantly enhance the free float of the REIT unit and diversify our investor base.
With the COVID-led disruption largely behind us, we are seeing an upsurge in the return to office trend, with strong month-to-month growth in footfall at our assets. This trend, coupled with the quality of asset, has resulted in us achieving a gross leasing of 2.1 million sq ft in FY 2023, which is approximately 1.8x of our historical leasing average. We have additionally signed 0.4 million sq ft of expansion options during the financial year.
We are delighted to announce the renewal of 0.9 million sq ft with TCS at Kensington at a renewal spread of approximately 35% signed during the quarter. The renewal would take place in two phases and will significantly de-risk our income profile. The weighted average lease expiry of the overall portfolio has improved from 6.8 to 7.9 years, and the expiries due till FY 2026 have reduced from 32% to 22%.
During the financial year, we signed deals with market tenants at all our assets, such as Aristocrat at N2, Accenture at G2, Baker Hughes at Kensington, LTIMindtree at N1, and Capgemini at K1. We renewed space with TCS at Kensington, British Telecom at G2, Mercer at N2, and Genpact at K1.
The leasing success that we have seen during the year, coupled with our robust leasing pipeline of 1.1 million sq ft, gives us confidence that FY 2024 will be a strong year. Our effective economic occupancy has improved to 89%. There were total leased area at 12 million sq ft. Our existing leases have delivered a robust embedded growth with an 11% average escalation on 4.1 million sq ft during the year.
ESG continues to be a key component of our overall strategy, and we continue to fervently work towards a sustainable future with our target to achieve a net zero by 2040. We have signed a power purchase agreement through the IEX platform to procure renewable energy up to 60% of the energy requirement at our assets in Noida.
This will potentially reduce our greenhouse gas emissions by 7.5% for the Noida assets. We're also working on a long-term solution for the procurement of renewable energy for the REIT entities under third-party open access agreement, which will potentially reduce our greenhouse gases emissions by 48%. We continue to take incremental measures to ensure that our assets are efficient, resilient, and future ready. I would like to invite Sanjeev to provide a financial update. Thank you.
Thanks, Alok. Good afternoon, everyone. I am pleased to announce that we have achieved an NDCF of INR 167 crores, means INR 4.99 per unit in quarter four of financial year 2023. We are able to deliver on our guidance. For 12 months of financial year 2023, we have achieved an NDCF of INR 679 crores, means INR 20.25 per unit.
The board has approved the distribution of INR 168 crores, means INR 5 per unit this quarter. We have achieved a near 100% distribution of INR 677 crores, means INR 20.20 per unit for the full financial year 2023. Final version of budget clarified the issues on the taxation of a component of distribution, which is in line with our expectation.
Further, as commercial office business parks picks up, REITs are well positioned to provide capital appreciation from the underlying business in addition to distribution yields. We have witnessed a growth of 14% in our operating lease rentals to INR 211 crores compared to the same period last year.
The adjusted NOI for this quarter, including income support from the Sponsor Group, also witnessed a stellar growth of 15% to INR 244 crores compared to quarter four of financial year 2022. The addition of Candor TechSpace N2 into the portfolio and a significant improvement in our CAM margins over financial year 2022 lifted our operating lease rentals by 28% to INR 827 crores and adjusted NOI by 38% to INR 961 crores over the same period last year.
We have witnessed an expansion in our NOI or the NOI to OLR ratio by 4% to 107% in Q4 of financial year 2023, as compared to the same period last year. The improvement in our CAM margins was driven primarily by some of the occupiers moving to higher hours of operation. Because of higher physical attendance we have seen at our assets.
Our robust balance sheet with a 32% Loan-to-Value ratio has enabled us to see a limited increase in the average interest rates to 8.2% as on March 31st 2023. This is a 144 basis point increase in the interest rates during financial year 2023, compared to a 250 basis point increase in the repo rate during the same period. Additionally, our debt structure has ensured that we have limited amortization of only 5% over the next three years. With this, I would request the moderator to open the floor for Q&A. Thanks to everyone.
Thank you very much, sir. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. You may press star and one to ask a question at this time. The first question is from the line of Pradyumna Choudhary from JM Financial. Please go ahead.
Yeah. Hi. Couple of questions. The first one being, the assets that have been acquired. Somewhere I read that the NDCF yield from those would be around 4.5%, and the discount to GAV is 5%. In that sense, has it been a slightly expensive acquisition? Would it be right to say that? Like, how do you see it?
Second, on the same thing, would be that from my understanding, we are raising around INR 35 billion and the asset would be 50/50 priced at INR 112 billion. I think the debt-to-equity comes out to be, for the asset at least, comes out to be 37.5% debt and 62.5% equity. Is the debt a bit on a higher side for the acquisition? Second would be related to the current demand scenario. Are you seeing any sort of weakness because of what's happening more globally? Yeah, these two.
This is Ankur. I'll just start off about the transaction and my colleagues will take it forward. I just want to make sure that the understanding is correct. The NDCF accretion over the baseline is by 4%-5%, which means we are enhancing the NDCF accretion. The implied yield on an asset value basis is in excess of 8%. All in all, this is an accretive transaction, and it's also at a discount to average of fair value of two assets. I think. Lastly, in the context of the quality of the assets of this scale are very, very hard to acquire, to amass. These are irreplaceable assets, if I may use that word.
All counts, this is a fantastic transaction underlined by the fact that a strong institutional investor with decades of experience in this space is coming in at the same basis as the REIT is coming in at. That's point number one. On point number two, we have stated as a large owner of real estate assets across the world, that high quality assets continue to be in top demand, both from an occupier perspective as well as from a capital perspective, which is also reflected in the strong performance that our REIT has had with the overhang of the COVID-led situations, almost behind us. I would say that. On all accounts, this is a fantastic opportunity for the REIT to significantly increase its breadth and enterprise value.
Understood.
Lastly, on the question of LTV. Sorry, I forgot to answer that. On a look-through basis, if you look at the value and not look at the cost, in the zone, about one third or thereabouts, that we think is prudent capital structure for high quality income generating 90% plus lease assets with long-term lease tenure. As capital markets evolve, we've always stated that our LTV will toggle in the region of 25%-35%. Because the value uplift that happens through income increases cannot always be captured on a static basis as far as debt stack is concerned.
Understood. Secondly, on the demand side, like, can you just give us an idea, are you seeing any sort of weakness or, are we still seeing larger deals happening or for now dispersed? Some idea there.
Well, as I mentioned, we have completed some markedly large transactions in our portfolio in the REIT across our portfolio in the country. As I mentioned, high quality real estate needs to be separated from some of the commentary that's happening around media. That has always been the case. It is just pronounced right now. But our assets and the quality of our portfolio in India and worldwide continues to do very, very well.
All right. Thank you so much.
Thank you. The next question is from the line of Sri Karthik Velamakanni from Investec. Please go ahead.
Hi. Thanks for the opportunity. My question again is to the transaction, and I'm referring to the slide number 18 in the presentation on the acquisition. There's a INR 2.6 billion working capital and debt financing drawdown, against which the CapEx number is a INR 1.1 billion. The gap of INR 1.5 billion, in fact, for the year in reference, is being used to support the NDCF. If we were to adjust for that, the clean NDCF looks much lower. How should we think about this bit? That is question one. Second, again, I'm gonna take this valuation question in a slightly different way.
You announced, let's say, a discount of approximately 5.86% on the VAV. However, our REIT assets today approximately trade at a 12% discount, at the current market price. In fact, the acquisition discount seems to be much lower than where the REIT is currently trading. How do we triangulate these two things? Thank you.
Sure. Sri Karthik, Pawan here. I will take the first question. I think, here there is a representation which has been made on a pro forma basis. I think a better way to look at NDCF or to that extent, NDCF yield is that we are doing this acquisition at a 8.2% rental yield, adjusted for one third of that being through debt, which is coming at a cost of 8.5%. We get a NDCF yield of 8% on the remaining two thirds, which will be funded through equity. This is on the overall transaction level.
Now, typically, with the lease-up which is expected over the next two years, taking into account G1 as well as for the lease-up remaining in Downtown Powai, we anticipate that there is INR 100 crore of lease-up rentals, which will come up in G1 and approximately INR 50 odd crores which comes up in Downtown Powai. INR 75 crore of security deposit inflows will come up in the next two years. Adding that into the fray as well, I think there is north of 8% of NDCF yield which is coming from these assets, and I think that's the right way of looking at what value these assets are bringing in. On the second question.
On your second question, Srikarthik, look, again, I mean, the valuation of assets that you're purchasing from private sellers, again, I mean, the stock trading at a certain level, you know, should not really impact valuation of assets when you look to purchase them. Our endeavor has been to, of course, get the best deal for the REIT. And the discount to NAV that I mentioned in my opening remarks is still 12%, which is double digit. You know, which is, I would say, in line or maybe slightly short of where the discount to NAV of a current stock is.
What I would say is that is one way to look at it, but the other way to look at it is the fact that you're getting an asset at an early 8% cap rate with a 5%-6% growth profile. You're looking at 14%, asset level IRR. And on top of it, if you add the 35% LTV, you look at about a 17% equity IRR on this transaction. This is going to be immensely beneficial for the existing unit holders as well as new unit holders who choose to participate in the fundraise.
Okay. Thank you for that.
I would also add that, you know, stock valuations are set by the last share that's sold or bought. Always using that as a representative of how private capital markets or transaction capital markets behave. Our endeavor in the REIT has always been to grow with high quality assets, not take development risk. You can always purchase, you know, discounted assets which will not qualify for the quality or take undue development and operating risks.
These assets check the box on every parameter. Dominant assets, almost no operating risk, certainly no development risk and fantastic income profile from credit tenants, and coming at a discount towards an independent view of valuation. On all counts, we are very excited that it that it allows us to motor ahead on our business plan for the REIT.
Sure. Could I ask a couple of questions on the results also if okay?
If that's okay with you. Maybe you can come back in the queue, if that's okay.
Yeah, yeah. Okay, no problem. Yeah. Yeah, yeah. Okay. Thank you.
Thank you. The next question is from the line of Atul Tiwari from Citigroup. Please go ahead.
Yes. Thanks a lot. Congratulations on acquisition. Atul, just one question. You mentioned that NDCF per unit, it is accretive by about 5%. In that calculation, you have assumed issuance of new units in the QIP?
That's correct.
Okay. Obviously the price whatever has been built in is similar to the today's market price. Is that right, Ankur Gupta, or no?
That's right.
Okay. Okay. Thank you. Thank you.
Thank you. A reminder to all the participants, anyone who wishes to ask a question may press star and one now. The next question is from the line of Pritesh Sheth from Motilal Oswal. Please go ahead.
Hi. Thanks for the opportunity. Just two questions, one on the acquisition. For the assets that we have acquired, is there any mark-to-market opportunity that we see, on the existing, you know, occupancy?
Hi. Pawan here. There is some amount of mark-to-market in both these assets available in about 4%-5% mark-to-market on a consolidated level on the entire 6.5 million sq ft portfolio.
Any thoughts like, when it can be, you know, realized? I mean, are the expiries of those under-rented tenants very soon or it's longer?
Yeah. This is Ankur, I'll just answer that question slightly differently, with what my colleague Rachit stated, that these assets are coming at an equity IRR of about 17%. unlevered IRR of about 14%. starting with about 8%-ish yield with all the cash flow accretion that's happening, I think the best way to look at it from a total return scenario that you are getting 8% yield, which is growing at about 6% annually, assuming that, you know, cap rates remain the same. That's probably the easiest way to look at. You know, we can go tenant by tenant on 6.5 million sq ft. but there are profiles that are different.
I would also like to state that these markets have tremendous supply gap of high quality spaces with almost no operating risk. The ability to increase rents as expiries come through is very high. You're kind of trading stability with consistent growth in some of these portfolios rather than a spike, which is also good. Overall, on the portfolio basis, it adds tremendous value to our business. I think the best way to look at it is an unlevered 14% return from these assets that shows the real compounding impact of growth.
Thanks, Ankur. That's very clear. Secondly, since we have, you know, good chunk of exposure to the IT services guys like Cognizant, TCS, Accenture, you know, anything, you know, we are hearing on their outlook about, you know, hiring slowdown or, you know, office space take up? I mean, I saw we had a good renewal this quarter from TCS, but in terms of new space absorption, how do they think about, you know, next six months, 12 months?
That would be Alok.
This is Alok. Let me answer this question. We have seen, you know, a 0.9 million renewal for 15 years. That's, SEZ, that itself validates the kind of, you know, attractiveness of our assets, SEZ. Even in Capgemini, they have taken new space in Calcutta, you know, we have seen. We're talking about markets, we're talking about different tenants. Calcutta market has done pretty well. You know, it has kind of revived. We are expecting a 2 million sq ft, you know, kind of leases this year, we hope we can capture some of them. Lot many of them are IT services company.
While they are not taking space in growth, but they're taking, you know, small leases, 50,000, 1 lakh sq ft, they're taking, renewals they're taking. We also have, you know, Accenture has signed, Mercer has signed. There's a demand. Of course, they have not grown their numbers in last quarter, but that's okay because, you know, they have grown by almost 20% per annum in last two to three years. I mean, one quarter, two quarter, three quarter, of course, consolidation, which is okay. I think the icing on cake is they're back to office. More and more the staff will keep coming back to office.
They will take more and more space for existing employees, forget about the new additions. That's what has happened with one of the tenants in Calcutta. As soon as they crossed 50% people coming back to office, they needed more space. Even if their numbers are not increasing, that's okay. I mean, we have seen the back to office numbers going almost up to 65 on average in our campuses. As soon this. Every month these numbers are going up. You know, leasing will continue. There's absolutely no issues on that.
Sure. No exit or no discussions with Cognizant as well, right? No concerns on that versus what we have seen on media.
I would not go, you know, you know, Cognizant probably will leave. They have some space in Calcutta, some in Bombay. They could leave some space in Bombay. That's okay because that happens. You know, we have seen many of these companies leaving some space, got backfilled. Most of the spaces have good mark to market. Some churn will happen in better times and worse of times. One tenant here and there is something that will keep happening. Yeah.
Sure, sir. That's very helpful. Thank you. Thank you for answering the questions. All the best.
Thank you.
Thank you. The next question is from the line of Adhidev Chattopadhyay from ICICI Securities. Please go ahead.
Good afternoon, everyone. Am I audible?
Yeah. Please go ahead.
Yeah. Just a couple of questions. This is on the NDCF specifically. Sir, considering whatever the leasing scenario for the existing portfolio, any NDCF guidance you'd like to share for the coming year in terms of what growth we can see organically in the NDCF? That is the first question. Secondly, sir, in this transaction, you have mentioned the NDCF walk down we have given for the proposed assets in future. There is a large working capital adjustment of INR 263 crores. Could you just explain what is the nature of this adjustment? Going forward, how should we look at this? Is it one time or it is more of a recurring nature when we arrive at the NDCF accretion number? Thank you.
Adhidev, Sanjeev here. Let me take first question, and then I will hand over to Pawan for the second one. As far as NDCF guidance is concerned, I will take you back to the previous year. Even after increasing the interest cost in financial year 2023, we maintained a run rate of INR 5 NDCF or DPU. Though we are not giving any guidance for our NDCF, but don't see a significant volatility in our distributions.
Okay, sir. You do not expect any major expires or anything coming up, right? Is the right way to look at it? Means it's more of a stable thing for the current portfolio in the coming years as of today.
See, we have about 1.2 million sq ft of space projected.
Uh-huh.
Out of this, probably, you know, you know, maybe 50% can get expired. That, that can happen. I think we should be mindful of that. We have been seeing this from last three years. Expires have happened. We have been able to backfill them. We have been. Most of the expires if you talk about in Calcutta, and in Noida.
We're seeing lot of, by the way, we're seeing good kind of expansion in, in Noida markets. N1 we have achieved 97%. In N2 there's a strong leasing pipeline. Where the expire would happen, we would get mark-to-market. There could be three to six months lag in backfilling them, but we are confident that wherever expires happen, we should be able to backfill them.
Okay. Okay, thanks.
Adhidev, hi. Pawan here.
Yeah, hi.
On your query with regard to NDCF accretion, I think what we have presented is a FY 2023 performer number. The right way we would think to look at an NDCF accretion here is that the overall deal we are doing at a 8.1%, 8.2% center yield. Add to that one third of this is being financed at debt at 8.5%, which means on the remaining equity portion, we generate a yield of 8% odd.
There is lease up, which is expected in both these assets of about INR 150 crore of annual run rate. We expect a INR 75 crore of security deposit inflows happening over the next two years. Add that in, and, we think we are looking at upwards of 8.1%, 8.2% kind of NDCF yield, and that's how we are looking at this overall metric.
Okay. Sir, just to understand correctly, the NDCF which you've represented, should again, on a longer term basis, it should go up every year, right, on the base of what we have currently said for FY 2023?
That would be the right way of looking at it.
Adhidev, the contractual-
Okay, fine.
The levers for growth both in the existing portfolio and the proposed acquisitions continue to be fairly robust. We will see that, we'll see that continue to, you know, go and grow on a projected basis, in a similar fashion.
Okay. Okay. Thank you very much.
Yes.
Thank you. The next question is from the line of Murtuza Arsiwalla from Kotak Securities. Please go ahead.
Yeah. Afternoon, Alok, Ankur, and other members of the team. Just two questions on the SEZ piece, which has been sort of holding back the industry at large. Any updates that you have to share with us? If you could give us a breakup of vacancies between SEZ and non-SEZ. Just touching on the Cognizant piece again, any communication that you've had from them in terms of early terminations, et cetera, or some assets that you could see expiring prematurely? Because, you know, they've been very vocal in their earnings call. Do you see a risk that some of the other sort of IT companies may want to follow suit or go in that direction?
Murtuza , can I just come in here for a minute, and, you know, I'll let Alok describe it in detail.
Sure.
You know, IT companies have been vocal about many things. You know, we have to distill the noise from the reality. You know, what is said for Main Street versus Wall Street sometimes is different. Everybody univocally has said now that this whole work from home and all that stuff, it doesn't work. Most markets in the world are back to full working from home.
Alok mentioned the strong hiring trend that they've had. We'll just distill that trend, the factual matter versus commentary on a generic basis. There will be some churn, but there'll also be very strong lease up and consolidation that we will see. Our assets are primed for it. It's up to the teams to now make opportunity of that situation that's going to emerge, which is consolidation.
Because you've had growth. Now it's time for consolidation, then there'll be growth again. India is very well-placed to capture that growth. Some companies will do well, some companies will not do well. You know, our assets hopefully will do well, and they will be attractive for companies that are on the strong growth trajectory.
We firmly believe that their growth starts when people work together in offices and create, and create better businesses. I'll let Alok answer the second question. But also primarily our vacancy is in the SEZ portfolio. N-One is the only asset before the acquisition of the future, you know, the Powai and G-One. That's not SEZ right now, and that's almost 100% leased now. Primarily our vacancy is in the SEZ portfolio, and we've seen good communication with regulators on reforms. When those reforms happen, our expectation is sooner than later. The degree of reforms is really up to the regulators to decide.
Sure. Thank you. Thank you, Ankur.
Let me take this SEZ question. Sandeep Deshpande is getting delayed. We have been in constant touch with regulators, and we're expecting a partial floor-by-floor denotification approvals to come up soon. How soon, I think it's difficult to comment. Having said that, now we also have lived with this SEZ reforms, not reforms for the last three years.
We have also kind of, you know, we are saying, and we have seen there's a lot of traction in SEZ. Fine. I mean, while non-SEZs have done fantastically well, you know, touching almost about 97%, 98%. Even SE properties, you know, TCS, Capgemini has taken new space in Calcutta. Capgemini, Mercer, Accenture, these all companies are taking space in SEZ. All are renewing SEZ.
We are sitting in front of every company which is not in SEZ, but is eligible for SEZ. You know, we are telling them the value addition which SEZ is bringing. We also have changed our strategy. It's getting us results. Aristocrat, which was never in SEZ actually, they took one full building in Noida. Many tenants who are willing to consider SEZ because 25 acre campuses, you know, fantastic safety, security, ESG, options to expand. We are working on that. We feel if these reforms come, fantastic. If they get delayed, we are confident we should be able to convert a lot of tenants who are, or if not lot, many of the tenants who are presently out of SEZs to SEZs. That's what we feel.
Sure. Thank you so much, Alok.
Thank you. The next question is from the line of Sri Karthik V. from Investec. Please go ahead.
Thanks again. My question is pertaining to the quarterly results. When I look at the total security deposits movement from Q4 2022 to Q4 2023, on a period-to-period basis, there has been a net accretion. However, our NDCF movement suggests that it's almost a reduction or a cash outflow of INR 61 crores. I'm trying to reconcile both these data points. That's one.
Sri Karthik, Sanjeev here. In the balance sheet, when you see the number, it's along with the IND AS adjustments, because you need to do the discounting of the security deposit, and every quarter you need to rewind also.
Mm-hmm.
When you come to the NDCF, that's coming from the cash flow. That might be the difference which you are talking of.
Oh, I see. Okay. Understood. Also the increase in borrowings for the year, roughly INR 2.9 billion, against which our CapEx for the year is about INR 1.3 billion. The difference of about INR 1.5 billion, how would that reconcile? That's the second question.
Sri Karthik, I think you are referring to the balance sheet number.
Yes.
If you refer to the NDCF statement number, which is a cash flow, yes, there is a gap is lesser than what you mentioned in your question. Just to answer that, why financing over and above CapEx is, it's mainly to fund temporary working capital requirements or differences, like withholding tax, like refund of some of the tenant deposits which have not been refilled as of today. I would refer to last quarter's calls also. One of you have asked a similar question. I explained then also that all these temporary differences gets netted off over a period of time.
Maybe in one quarter we will enter into a situation where this working capital requirement funded through debt. In next quarter or subsequent quarters, it gets reversed. In one year, it is funded through debt. In coming year, it gets reversed. On a per-over a period of midterm, it gets nullified.
Understood. Lastly, on our interest cost, it's today at about 8.2, and you're tentatively indicating 8.5% as the current incremental cost of borrowing. Would that be the new, I would say, average for FY 2024 that we'll have to work with for the REIT too?
This is Ankur. Yeah, this is Ankur. Look, I don't know whether the average is because, you know, we have floating rate debt. I would, though, urge you to look at the tenure of our debt along with the cost of the debt. The, you know, in markets or in global capital markets that are slightly uncertain, both go together.
I think benchmark or at least, central banks, both in India and most places in the world, have stated, a policy shift over the last few months. Certainly India has been quite, sort of, you know, prominent shift. We don't expect. In fact, we expect a reversal. You guys are probably experts at that. Many people are expecting a reversal, to, lower, lowering of rates.
Again, you know, we won't speculate on that right now. We certainly feel interest costs for us should be coming down over a short to medium period. You know, as the enterprise grows larger and our lease tenure is longer, we can also look to almost, you know, have a combination of fixed versus floating. Given the appreciation that we have in our portfolio, sometimes long focusing of debt, because, you know, we don't need, we have a tenure, but we're paying too much for that.
Thanks. Then any indicative mix of distribution for the acquired assets?
Karthik, just before we get to this question, just rounding up the previous one, just a couple of points. If you look at the existing REIT debt, which is at 8.2%, this is already factored in, as we mentioned, all the interest rate hikes till date. As Ankur highlighted, we do not, with the policy shift, see any further increases potentially.
There is now a downward bias that we see on the existing portfolio. For the proposed assets that we are looking to acquire, the cost of 8.5% that we've indicated is a repo-linked benchmark. Again, that as we see a policy shift over a period of time, should start seeing a downward trend. That's the way you probably want to think about it.
Yeah. On a second question, Sri Karthik, around the distribution mix. Look, I think it shouldn't materially change. However, you know, management is actively thinking about certain initiatives to improve the dividend contribution to this mix, you know, which we can update you in subsequent quarters. At this point in time, you know, all things remaining the same, there will be no material change to the distribution mix.
Okay. Clear. Thanks. Thank you.
Thank you. The next question is from the line of Vikrant from Apricus Wealth. Please go ahead.
Hi. Can you hear me?
Yeah.
Yes.
Yes. Just a couple of questions. one is probably more general, is, if you can give some insights into competition for tenants in the key markets that you operate in. Specific to this Powai acquisition is the other question. Underpinning, I guess, this 14%-17% equity IRR that you spoke about is the growth rates. When I look at the independent valuation report, it suggests, historical is around 2% for the market, and there's a lot of supply increasing in the market. Could you perhaps explain the reason for the optimism?
So, uh-
Ankur. I will just say that, you know, sometimes supply is stated. It takes a long time to build assets, certainly a very long time to stabilize assets, and in these markets, a very, very, very long time to procure financial closures. I would say that. Finally, to create the ecosystem. Assets that we have have been built over few decades now, and an ecosystem exists around it.
My suggestion on some of these averages. May not work in specific situations, and for us, we've demonstrated these numbers in our portfolio. A lot of the escalations are contractual in nature. The TCS lease that we've talked about, 15-year lease with annual escalation. I would just say that, you know, some of these are contractual in nature, some of these are demonstrated in nature, and expectation of future is somebody's guess. Many times in India, it just takes longer to build and costs more. In fact, I would like to see how at these values, new construction, with buying of land, will actually point towards an even higher growth rate for our portfolio.
I'll just add that look at the track record of both these assets, and we have given it in our acquisition presentation. You know, G1 used to lease at INR 50 in 2015, and today it's leasing at north of INR 80, you know, which is about 6%-7% CAGR. Right? Powai used to lease at INR 110 in 2017, and today it's at INR 163. Right? That itself, I would say the numbers are in front of you. These assets of course, command a premium. They grow at above inflationary rates and have done so in the past, and not just near-term past, but you know, over a period of five to seven years.
Just I would like to add here the performance of the numbers could have been very, very different if it was not for three years of once in a lifetime kind of a event, COVID, which we all went through. Just look at, you know, how Brookfield, these assets have performed even after three years kind of a COVID impact.
Sure. Just a quick follow-up on that. I think Ankur mentioned this, I'm assuming you guys looked at replacement costs. Can you perhaps indicate if you're buying below or above replacement cost?
Below replacement cost. In case of Powai, if you compare it to land prices today and where, let's say residential apartments sell at, which is I think the best comp that you can get for land plus construction, properties in Powai are selling anywhere between, you know, I would say INR 28,000-INR 32,000 a foot. I think our acquisition basis on these assets is about INR 24,000 a foot. A very similar dynamic in Gurgaon, you know, where again, you know, if you look at the resi or, you know, in these markets or the land comps in these markets, the number would come out to be very similar in terms of discount.
Yeah. At these valuations, either land has to be free or construction has to be free to make financial returns at these rentals. Our expectation is that rentals is going to go up significantly.
Sure. Sorry, just, another question on the competition for tenants in your key markets, please. Thanks.
Yeah. This is Alok. You know, when we talk about let's take and we have to take market by market. When we talk about Powai, I don't think, you know, of course, those who can't afford to live Powai, they go out, they go out and take space on different locations. But those who want to be in Powai, you know, they take, they continue in Powai and pay the market price. Similarly, you know, in Gurugram, yes, we have two or three top players. Competition is among those top players. Noida, I think, our assets are dominant. We are, you know, significantly ahead in terms of rentals, in terms of ability to acquire new tenants.
Noida at least first tenants want to see our assets, and for some reason, if that doesn't work out, then they go out. That's something I've seen from last seven years happening. Calcutta again, you know, Calcutta again, most prominent assets. People like to be there, and for some reason, if they can't be there, then they go out at a, you know, cheaper options. That's how we look at competition.
Thanks.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you.
We would like to thank everyone once again for joining us on the call. We'll see you next quarter. Thank you, everyone.
Thank you very much, sir. On behalf of Brookfield India Real Estate Trust, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.