Fitch Ratings has assigned CapitaLand India Trust CY6U (CLINT) a first-time long-term issuer default rating (IDR) of “BBB-“. CLINT’s outlook is also deemed to be “stable”.
“The rating is underpinned by the trust's high-quality portfolio of Grade A offices in India, which we expect will sustain high occupancy rates and positive rental reversions amid strong demand for information technology (IT) outsourcing services,” says the ratings agency in a note dated July 7 (US Eastern time).
“This counterbalances its rising exposure to asset developments and acquisitions,” it adds.
CLINT’s portfolio mainly consists of business parks with Grade A offices in five top-tier cities in India, Bangalore, Chennai, Hyderabad, Mumbai and Pune.
The properties, which are located in established demand centres for IT outsourcing services and global capability centres (GCC), have higher occupancy rates compared to the India office market average. They have seen strong rental growth in the last few years.
“We believe CLINT is well-positioned to benefit from India's status as a global leader in IT outsourcing services,” says Fitch.
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It adds that CLINT’s portfolio is forecast to maintain blended occupancy rates of around 90% - 92%. This will be driven by mature existing assets in the mid- to high-90s range, even as partly leased new properties are commissioned.
“We estimate base rental income from existing assets to increase to $213 million in FY2024 and $226 million in FY2025, from $179 million in FY2023, supported by strong demand by IT companies and major financial institutions that is driving a rising number of GCCs,” Fitch writes.
In the next three years, Fitch expects CLINT to have a capital expenditure (capex) of $515 million to develop its data centres in Navi Mumbai and Hyderabad, as well as its MTB6 building in International Tech Park Bangalore. The REIT, which has a large pipeline of asset development and acquisitions via forward purchases, is expected to grow its floor area to 30.2 million sq ft by 2030 from 21 million sq ft as of end-March this year.
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CLINT also has a $718 million commitment remaining under its committed forward purchases as of March 31. This will be acquired in stages and largely during 2024 to 2030, Fitch adds.
Well-managed development risks
The ratings agency likes that CLINT’s development risks have been well-managed. Though CLINT’s developments face leasing risks as they are not pre-committed, the REIT manages this by acquiring assets only after they have achieved a minimum occupancy rate. The asset may be acquired at a discount if the occupancy is lower than agreed upon.
So far, all of CLINT’s acquisitions were previously completed with a minimum occupancy rate of 50%, which was ramped up over the next 12 to 24 months, Fitch points out.
“We expect execution risk to be manageable, with the support of the experienced asset management team backed by its sponsor, CapitaLand Investment Limited,” it notes.
CLINT to benefit from positive trends in data centres
CLINT is also set to benefit from the positive trends in the data centre sector.
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“We expect CLINT's foray into data centre development to improve the portfolio's growth potential and diversification. We expect strong growth in demand for data centre space in India, boosted by growth in internet traffic, increased mobile data usage, IT outsourcing, cloud computing and government support,” says Fitch.
The trust expects data centres to contribute about 15% towards its total revenue in the medium term.
“We believe this will mitigate risks of technology obsolescence and the limited, albeit improving, lender and investor appetites for this niche asset class relative to mainstream commercial property,” Fitch adds.
Temporary increase in leverage
Meanwhile, the trust is expected to see a temporary increase in leverage, with Fitch expecting its ebitda leverage to peak at 8.5 times in FY2025 before tapering off to 7.0 times. This is due to the high capex from its data centre developments and forward purchase commitments in FY2024 and FY2025.
“Leverage will improve to below our estimates if the trust raises equity to partially fund capex as planned, but that is subject to market risk. We have factored in potential proceeds in FY2024 from the disposal of two of CLINT's mature but smaller non-core assets for capex funding,” says Fitch.
“Our expected peak ebitda net leverage is above the level for CLINT's current rating, but we acknowledge that it has a number of levers and leverage could be lower than our forecast,” it adds.
So far, CLINT has kept its gearing ratio below 40% and has shown an ability to raise equity to fund its capex. This includes the issuance of $150 million of equity from a preferential offering and raising $25 million from a sponsor subscription in 2023 to fund the construction of its International Tech Park Hyderabad, aVance A1 and Gardencity projects.
CLINT is also expected to manage its interest-rate risk thanks to its high fixed-rate debt ratio of 71% at end-March 2024 and a well-spread debt maturity profile in the near term.
“We forecast ebitda interest cover to stay above 2.0 times in the next two years and slowly improve, in line with our assumption that US policy rates will fall to 500 basis points (bps) by end-2024 and 375 bps by end-2025, from 550 bps at end-2023,” Fitch writes.
CLINT aims to maintain a fixed-debt ratio of at least 65% in the medium term, it points out.
Property portfolio concentration and forex risk
Though Fitch sees mostly positives in CLINT, it notes that the REIT has a concentrated property portfolio where its top 10 assets comprise over 93% of asset value as of end-December 2023.
However, the ratings agency adds that tenant risk is mitigated by the profile and credit quality of CLINT’s multinational clientele. Furthermore, it expects CLINT’s asset concentration to gradually improve as the REIT grows its portfolio through asset developments and acquisitions.
Foreign currency (forex) risk is another. As CLINT’s revenue is generated solely in Indian rupees, the REIT has some exposure to unhedged forex risk.
“The trust's financial policies state that 30% - 50% of its debt will be denominated in Singapore dollars, with the balance hedged to rupees. The trust is also increasing its onshore rupee-denominated construction loans to fund its capex,” says Fitch. As of end-March 2024, 57.6% of total debt was hedged to rupees.
Estimates
Fitch forecasts CLINT’s revenue to come in at $283 million and $336 million in FY2024 and FY2025 respectively. The REIT is expected to see revenue growth from better occupancy rates and positive rental reversions from existing properties. Income contributions from new acquisitions and developments are also expected to add to CLINT’s revenue growth.
In FY2024 and FY2025, CLINT’s ebitda is expected to reach $199 million and $237 million respectively, with 50% of management fees, which are paid in units, to be added back to ebitda due to their non-cash nature.
CLINT’s development capex and forward purchase commitments are expected to be around $450 million in FY2024 and $510 million in FY2025.
As at 9.55am, units in CLINT are trading 1 cent higher or 1% up at $1.01.
