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On the cusp of a recovery

We attended Mindspace Business Parks REIT’s (MREIT) analyst meet in Mumbai/Pune where the company reiterated its strategy and business outlook for its office assets including: 1) overall portfolio physical occupancy which was 23% in Apr’22 has improved to 30-35% in May’22 and is expected to cross 60% by Sep’22 barring any fresh Covid related disruptions, 2) the REIT manager expects portfolio occupancy levels to cross 90% by end of FY23 or H1FY24 on the back of renewed occupier interest for larger sized deals (committed occupancy stood at 84.3% as of Mar’22), 3) construction is on in full swing on the 1.7msf of expected space addition in FY23E of which 70% space is already pre-committed and 4) de-densification trends for new office spaces is already visible with a large tenant planning for 150sft /employee vs. 80-100sft earlier. We maintain our ADD rating with a revised target price of Rs367/unit and at CMP of Rs349/unit, we estimate NDCF yield of 5.8% in FY23E and 6.2% in FY24E (over 90% tax-free returns). Key risks to our call are further rise in vacancies across assets and fall in lease rentals

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.

Expect leasing traction from FY23E: Overall portfolio occupancy as of Mar’22 was 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. Possible de-notification of SEZ area in a few buildings at Airoli (W) asset sometime in FY23E and recent pre-commitments (a BFSI tenant leased 0.23msf in Q4FY22) will drive growth in FY23E revenue and NOI.

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 Rs349/unit, we estimate NDCF yield of 5.8% in FY23E and 6.2% 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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