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Recovery on track

Mindspace Business Parks REIT (MREIT) delivered a resilient performance in Q3FY22 with office rental collections of over 99% and 3% QoQ revenue/NOI increase at Rs4.4/3.7bn at a healthy NOI margin of 84.4%. Further, portfolio occupancy rose marginally by 50ps QoQ to 82.0%. The REIT manager has also been able to achieve an early re-leasing of 0.23msf for FY23E and 0.25msf for FY24E during the quarter. 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 Mar’23 on the back of renewed occupier interest for larger sized deals. We cut our rating to HOLD from ADD with a revised Mar’22 target price of Rs359/unit (earlier Rs352) factoring in asset level and balance sheet adjustments. Key risks to our call are further rise in vacancies across assets and fall in lease rentals.

Early-releasing of FY23-24E expiries the key positive:

Out of total portfolio expiries of 2.5msf in FY22, the REIT manager expects to re-lease 50% of the area (1.3msf) and has been able to re-lease 1.1msf in 9MFY22 and may re-lease 50% of the Q4FY22 expiries of 0.4msf with the balance 0.2msf of area seeing tenant exits. While near-term occupancy may remain at ~82% levels, the REIT has a committed occupancy of 84.6% as of Dec’21. A key positive was the REIT pre-leasing the entire upcoming space of 0.7msf at Commerzone, Kharadi, Pune which is estimated to start earning rentals from Q4FY23. Further, the REIT manager has also been able to achieve an early re-leasing of 0.23msf for FY23E and 0.25msf for FY24E during the quarter. 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 Mar’23.

Mindspace REIT portfolio poised to benefit from pickup in office leasing:

We expect office leasing in India to gradually pick up as international travel resumes and existing assets see tenants renewing or looking to expand operations. With the REIT’s current tenant portfolio having ~43% of tenants in the technology domain along with smaller verticals such as financial services and telecom/media consisting of Global inhouse captives, we believe that the REIT is well poised to benefit from pickup in office leasing. Currently, the REIT’s top ten occupiers contribute ~37% of the gross overall rental income as of Dec’21.

Over 90% of FY22-24E distributions to be in the form of tax-free dividends:

MREIT announced a Q3FY22 NDCF of Rs2.75bn or Rs4.6/unit ((flat QoQ, annualised distribution yield of 4.9%) of which over 90% was in the form of tax-free dividends. At CMP of Rs361/unit, we estimate NDCF yield of 4.9% in FY22E, 5.6% in FY23E and 6.0% in FY24E of which over 90% of distribution is expected to be in the form of taxfree dividend + capital return.

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