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Resilient in tough times

Mindspace Business Parks REIT (MREIT) delivered a resilient performance in FY21 in a Covid impacted year with a NOI growth of 12% and H2FY21 NDCF distribution of Rs9.6/unit. In spite of COVID-19 headwinds which led to FY21 occupancies declining by 300-500bps in key assets, the REIT achieved 99% collection efficiency in office rentals and achieved gross leasing of 3.5msf with an average re-leasing spread of 19.1%.

Owing to the second Covid wave in India, the MREIT manager expects muted leasing activity for another 2-3 quarters with a possible revival in H2FY22E, which is in line with our sector view. We believe that the REIT’s low leverage (net debt/TEV of 0.2x), marquee tenant profile and de-densification of offices will enable the REIT to deliver NOI CAGR of 12% over FY21-24E.

We upgrade our rating on MREIT to BUY from ADD with a revised Mar’22 DCF based target price of Rs325/unit (earlier Rs318). At CMP of Rs282, we estimate NDCF yield of 6.3% in FY22E, 7.0% in FY23E and 7.4% in FY24E of which over 90% is estimated to consist of tax-free dividends/capital return. Key risks are rise in vacancies of office assets and fall in lease rentals.

* FY22 lease expiries the key monitorable: 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 re-leased 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.

* Mindspace REIT portfolio cushions the COVID-19 impact: While incremental leasing is yet to pick up until international travel resumes and existing assets seeing tenant exits, the REIT’s current tenant portfolio which has ~44% of tenants in the technology domain with even smaller verticals such as financial services and telecom/media consisting of Global in-house captives is resilient to near-term weakness, in our view. Currently, the REIT’s top ten occupiers contribute ~40% of the gross overall rental income as of Mar’21.

* Over 90% of FY22-24E distributions to be in the form of tax-free dividends: MREIT announced a H2FY21 NDCF of Rs5.7bn or Rs9.6/unit (annualised distribution yield of 6.8%) of which over 90% was in the form of tax-free dividends. At CMP of Rs282, we estimate NDCF yield of 6.3% in FY22E, 7.0% in FY23E and 7.4% 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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