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Add Mindspace Business Parks REIT Ltd For Target Rs.318

Mindspace Business Parks REIT (MREIT) delivered an inline Q4FY21 performance with office rental collections of over 99% and revenue/NOI of Rs4.3/3.6bn at a healthy NOI margin of 83.9%. MREIT announced its second quarterly NDCF of Rs2.85bn or Rs4.81/unit. However, a dampener was overall portfolio occupancy falling by 350bps QoQ to 81.8% from 85.3% with exits in Hyderabad and Airoli West assets. With another 2.3msf of expiries in FY22E, portfolio vacancy levels are at risk of increasing further heading into FY22E.

Taking into account that incremental office leasing may not improve until international travel opens up earliest by Sep’21, we have assumed lower asset level occupancies and have cut our FY22/23E NOI estimates by 3% and NDCF estimates by 2%, respectively. We retain our ADD rating on MREIT with a revised Mar’22 DCF based target price of Rs318/unit (earlier Rs342). At CMP of Rs289, we estimate NDCF yield of 6.3% in FY22E and 6.9% in FY23E of which over 90% is estimated to consist of tax-free dividends. Key risks to our call are further rise in vacancies across assets and fall in lease rentals.

* Steady operating performance:

MREIT reported Q4FY21 revenue and Net Operating Income (NOI) of Rs4.3bn and 3.6bn at a healthy NOI margin of 83.9%. The REIT has reported resilient rental collections of over 99% in FY21 (in line with other listed peers).

* Vacancy levels rise QoQ on early exits:

A dampener in Q4FY21 was overall portfolio occupancy falling by 350bps QoQ to 81.8% from 85.3% with further early exits of 0.2msf in Q4FY21. For FY21 overall, MREIT has seen 1.8msf of early exits of which 0.8msf has been re-leased while the scheduled expiries of 1.8msf have seen 1.3msf being released which has led to overall portfolio vacancy increasing by 1.5msf in FY21. With another 2.3msf of expiries in FY22E including 0.5msf of early expiries, portfolio vacancy levels are at risk of increasing further in FY22E until leasing momentum returns. As per MREIT management, with occupiers looking to temporarily give up space and waiting for offices to open up again, near-term weakness in incremental leasing may persist for another two-three quarters.

* FY22E NDCF guidance at risk:

MREIT announced a Q4FY21 NDCF of Rs2.85bn or Rs4.81/unit and the REIT has met H2FY21 NDCF guidance of Rs5.7bn given at the time of IPO. However, considering the recent portfolio exits, the MREIT management highlighted a risk to meeting the earlier FY22E NDCF guidance of Rs12.2bn or Rs20.6/unit. We have assumed lower asset level occupancies and have cut our FY22/23E NOI estimates by 3% each to Rs14.7/17.3bn and NDCF estimates by 2% each to Rs10.8/11.8bn, respectively. However, we are of the view that this pain is transient and expect a pick-up in incremental leasing from H2FY22 which may result in vacancy levels reducing as we head into FY23E.

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