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Recovery on track

Mindspace Business Parks REIT (MREIT) delivered a resilient performance in Q2FY22 with office rental collections of over 99% and flattish QoQ revenue/NOI of Rs4.3/3.6bn at a healthy NOI margin of 84.4%. Further, portfolio occupancy rose 120bps QoQ to 81.5% on the back of 0.5msf of new/vacant area leasing during the quarter. We believe that the REIT’s low leverage (net debt/TEV of 0.2x), marquee tenant profile and pick up in leasing momentum will enable the REIT to deliver NOI CAGR of 12% over FY21-24E. We revise our Mar’22 DCF based target price to Rs352/unit (earlier Rs341) factoring in balance sheet and SPV level occupancy/rental adjustments. However, we cut our Rating to ADD from BUY post the recent run up in unit price over the last three months. Key risks to our call are further rise in vacancies across assets and fall in lease rentals.

* H2FY22 lease expiries the key monitorable: Out of the total portfolio expiries of 1.6msf in H1FY22, the REIT has been able to re-lease 0.8msf with the balance 0.8msf of area seeing tenant exits. Against these exits, the REIT has achieved new leasing of 0.5msf and also leased 0.4msf of area vacated in FY21 (total 0.9msf of new leasing), which has resulted in the REIT’s committed occupancy rising by 70bps in H1FY22 to 84.9%. A key positive was the REIT leasing the entire space of 0.15msf at The Square, BKC, Mumbai asset which can generate annual rentals in excess of Rs400mn expected to commence from Apr’22. For H2FY22, the REIT manager is confident of re-leasing 40-50% of the area expiries of 0.9msf while new leasing may make up for any tenant exits in the balance vacated area. We believe that leasing momentum should pick up further from Q3FY22 onwards barring any resurgence in the form of a third Covid wave.

* Mindspace REIT portfolio poised to benefit from pickup in office leasing: We expect office leasing in India to gradually pick up as international travel resumes and existing assets see tenants renewing or looking to expand operations. With the REIT’s current tenant portfolio having ~44% of tenants in the technology domain along with smaller verticals such as financial services and telecom/media consisting of Global in- house captives, we believe that the REIT is well poised to benefit from pickup in office leasing. Currently, the REIT’s top ten occupiers contribute ~37% of the gross overall rental income as of Sep’21.

* Over 90% of FY22-24E distributions to be in the form of tax-free dividends: MREIT announced a Q2FY22 NDCF of Rs2.7bn or Rs4.6/unit ((flat QoQ, annualised distribution yield of 5.6%) of which over 90% was in the form of tax-free dividends. At CMP of Rs330/unit, we estimate NDCF yield of 5.4% in FY22E, 6.1% in FY23E and 6.5% in FY24E of which over 90% of distribution is expected to be in the form of tax- free dividend + capital return.

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