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On the cusp of a recovery

Mindspace Business Parks REIT (MREIT) delivered a resilient performance in Q4FY22 with office rental collections of over 99% and 6% QoQ revenue/NOI increase at Rs4.7/4.0bn at a healthy NOI margin of 84.8%. Overall portfolio occupancy remained flat QoQ at 82.2% (committed occupancy at 84.3%). In FY23E, the area scheduled for expiry stands at 1.1msf of which the REIT manager expects to release at least 60% area and expects portfolio occupancy levels to cross 90% by end of FY23 or H1FY24 on the back of renewed occupier interest for larger sized deals. We upgrade our rating to ADD from HOLD with a revised target price of Rs365/unit (earlier Rs359) as we roll forward to Mar’23 NAV. At CMP of Rs345/unit, we estimate NDCF yield of 5.8% in FY23E and 6.3% in FY24E (over 90% tax-free returns). Key risks to our call are further rise in vacancies across assets and fall in lease rentals.

* Steady quarter, expect leasing traction from FY23E: In Q4FY22, the REIT delivered revenue of Rs4.7bn and NOI of Rs4.0bn which was up 6% QoQ owing to escalations and rent commencement for certain new areas across assets (Madhapur, Hyderabad and The Square, BKC, Mumbai). Overall portfolio occupancy remained flat QoQ at 82.2% with committed occupancy at 84.3%. In FY23E, the area scheduled for expiry stands at 1.1msf of which the REIT manager expects to re-lease at least 60% area and expects portfolio occupancy levels to cross 90% by end of FY23E or H1FY24 as enquiries from tenants have increased with larger spaces expected to see leasing traction over the next 12-18 months. In FY22, the REIT manager achieved gross leasing of 4.5msf including 2.2msf of re-leasing and 2.3msf of new and vacant area lease-up

* Mindspace REIT portfolio poised to benefit from pickup in office leasing: We expect office leasing in India to see a strong pick up in FY23E as physical occupancy across offices ramps up in excess of 50% (25% currently). With the REIT having ~43% 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 ~36.5 of the gross overall rental income as of Mar’22.

* Over 90% of FY23-24E distributions to be in the form of tax-free dividends: MREIT has declared a total NDCF distribution of Rs10.9bn or Rs18.45/unit in FY22 of which over 90% was in the form of tax-free dividends. At CMP of Rs345/unit, we estimate NDCF yield of 5.8% in FY23E and 6.3% in FY24E of which over 90% of distribution is expected to be in the form of tax-free dividend + capital return. While 46% of MREIT’s debt is fixed, we have already factored in higher interest cost of 150bps above the current overall debt cost of 6.6% p.a.

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