IGI Logo

Resilient in tough times

Mindspace Business Parks REIT (MREIT) delivered a resilient performance in Q1FY22 with office rental collections of over 99% and flattish QoQ revenue/NOI of Rs4.2/3.6bn at a healthy NOI margin of 85.7%. While same-store occupancy declined by 150bps QoQ to 80.3%, a key positive was re-leasing of 0.5msf of space vacated in FY21 and 0.4msf of re-leasing of FY22 expiries during the quarter. With another 1.6msf of expiries in the remainder of FY22, portfolio vacancy levels remain a key monitorable.

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 maintain our BUY rating on MREIT with a revised Mar’22 DCF based target price of Rs341/unit (earlier Rs325) factoring in balance sheet and SPV level occupancy/rental adjustments. Key risks to our call are further rise in vacancies across assets and fall in lease rentals.

* FY22 lease expiries the key monitorable: In FY21, MREIT saw 1.8msf of early exits of which 0.8msf had been re-leased while the scheduled expiries of 1.8msf had seen 1.3msf being re-leased which had led to overall portfolio vacancy increasing by 1.5msf in FY21. At the beginning of FY22E, MREIT had 2.3msf of expiries (1.8msf scheduled expiries and 0.5msf of early expiries) which increased marginally by 0.1msf QoQ to 2.4msf as of Jun’21. In Q1FY22, MREIT was able to re-lease 0.4msf of scheduled expiries and also re-leased 0.5msf of area vacated in FY21. The REIT manager expects another 0.4msf of re-leasing in Q2FY22 as well. For FY22 overall, the REIT manager expects to lease 75% of scheduled expiries of 1.8msf excluding early expiries of 0.6msf (2.4msf of total expiries in FY22E). We believe that leasing momentum should pick up from Q3FY22 onwards barring any resurgence in the form of a third Covid wave.

* 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 ~45% 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 ~39% of the gross overall rental income as of Jun’21.

* Over 90% of FY22-24E distributions to be in the form of tax-free dividends: MREIT announced a Q1FY22 NDCF of Rs2.7bn or Rs4.6/unit (annualised distribution yield of 6.2%) of which over 90% was in the form of tax-free dividends. At CMP of Rs296, we estimate NDCF yield of 6.0% in FY22E, 6.6% in FY23E and 7.1% in FY24E of which over 90% of distribution is expected to be in the form of tax-free dividend + capital return.

Company Profile

Mindspace Business Parks REIT owns five integrated business parks and five quality independent office assets across India with 23.8msf of completed leasable area and 7.4msf of under construction and future development pipeline. As of 30 June 2021, the Portfolio is stabilized with 84.4% Committed Occupancy and a Weighted Average Lease Expiry (WALE) of 6.6 years. It was listed on August 7, 2020.

Mindspace REIT is sponsored by the KRC Group (K Raheja Corp.), a prominent realestate development and retail business group, with experience of over four decades in developing and operating assets across commercial, hospitality, retail, malls and residential segments).

The KRC Group has acquired and/or developed properties across various businesses, entailing approximately 28.5msf of commercial real estate, six operational malls, 2,554 operational hotel keys and residential projects across five cities in India as of March 31, 2020. These entities include Chalet Hotels, Inorbit Malls, Shoppers Stop outlets and KRCPL. KRC Group holds 63.2% of Mindspace Business Parks REIT

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer