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Leasing uptick; acquisitions ahead

Mindspace REIT reported a steady quarter with leasing momentum improving and expiries remaining minimal (c.2-5% of annual gross rentals over the next 3 years). Committed Occupancy increased to 86.9% (85.6% in Jun’22) led by Commerzone Porur (+23% ppt), Airoli West (+1.5%) and Madhapur (+1.6%) on broad-based traction, and the REIT aims to increase that to c.90% by FY23-end. Actual occupancies stood at 82.8% and are likely to converge with committed occupancies in the coming quarters. On the demand front, while large RFPs are put on hold on account of global pressures, smaller companies continue to show interest. Physical occupancies across the portfolio inched upwards to 41% in Oct’22 (31% in Jun’22) and will head towards 50% by Mar’23. While financial services and smaller companies are operating at 80-90% occupancy GCCs are at 25% and technology companies have minimal occupancy. We maintain ‘BUY’ with a Sep’23 TP of INR 375 (total return potential of 16%; 6% dividend and 10% capital appreciation). Key risks: prolonged slowdown across markets / rising interest rates impacting distributions.

* Performing well across assets: In 2QFY23, Mindspace Reported Revenue of INR 6.8bn (+61% YoY; +39% QoQ) and NOI of INR 4.2bn (+16% YoY; +4% QoQ). Revenue came in higher as it includes revenue from works contract services amounting to INR 1.8bn. Asset Revenue came in at INR 4,974 (+17% YoY; +1% QoQ) while Reported Net Operating Income was INR 4,172mn (+16.0% YoY; +3.9% QoQ). Gross leasing stood at 1.27msf (0.54msf of re-leasing + 0.49msf of new area leased + 0.24msf of vacant area being leased up), with an average rent of INR 62 psf/month. Out of 1.27msf, c.43.2% of area was leased to existing tenants, achieving re-leasing spread of 22.3% on 0.8msf of area (26 tenants); 0.49msf of new area was leased. Committed occupancy increased to 86.9% (85.6% in Jun’22) led by Commerzone Porur (+23% ppt), Airoli West (+1.5%) and Madhapur (+1.6%). Actual occupancies also improved to 82.8% (82.1% in 1QFY23) with Gera Commerzone Kharadi at 99.9% (84.5% in 1QFY23; 100% committed) while Madhapur improved slightly to 89.4% (89.0% in 1QFY23) and Commerzone Porur declined to 33.8% (36.5% in 1QFY23; despite increase in committed).

* Visibility on pre-leasing / NOI growth: Mindspace is likely to show improvement in metrics for 2HFY23 as i) rental escalations / MTM are expected to come through in the portfolio (Hyderabad recent leasing happening ~INR 68-70psf; in-place at INR 60psf), ii) Gera Commerzone (0.3msf; 100% pre-leased) and Airoli West (0.9msf pre-leased; new tower + 0.3msf data centres) and iii) possible acquisitions.

* Acquisitions – Commerzone Hyderabad and Square Avenue 98, BKC: Commerzone Madhapur, Hyderabad (ROFO asset) a fully pre-let c.1.8 msf asset was offered on 3rd Feb’22 by the sponsor group and the REIT is looking to acquire this asset on a share swap basis. Moreover, the sponsor group has offered The Square Avenue 98, BKC (0.16msf; 100% leased) and both the assets are likely to be acquired together.

* We Maintain ‘BUY’ with a Sep’23 TP of INR 375: We maintain ‘BUY’ with a Sep’23 TP of INR 375 (total return potential of 16%; 6% dividend and 10% capital appreciation). At CMP, stock trades at c.5.6% / 6.4% FY23E / FY24E yield.

* Comfort over expiries: In 2HFY23 / FY24 / FY25 area of 0.4msf / 0.7msf / 1.1msf is expiring (re-leasing visibility on 0.2msf), contributing 1.6% / 3.8% / 5.0% of annual portfolio rentals, which is likely to be offset by rental escalations and re-leasing.

* Distribution: Mindspace declared distributions of INR 2,817mn / INR 4.75 per unit, with over 92% while interest constitutes 7.6% and other income 0.4%.

* Other details: i) Balance capex at the portfolio level currently stands at INR 20.94bn excluding approval costs, ii) The management remains hopeful of leasing in Airoli parks to pick up once DESH policy comes through, and presently 1.8msf of vacant SEZ area is there that could possibly see traction, iii) On the liability side, the weighted average cost of borrowing has increased to 7.3% (from 6.9% in 1QFY23) on a net debt of INR 46.47bn. Net debt to market value stood at 16.8%, iv) Commerzone Porur occupancy increased to 59.5% (36.5% in 1QFY23) and the management remains confident of significant leasing in 1.2msf of vacant non-SEZ area.

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