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Mindspace Business Parks REIT 

Steady leasing traction 

Mindspace Business Parks REIT (MREIT) delivered a resilient performance in Q2FY23 with office rental collections of over 99% and 4% QoQ increase in NOI to Rs4.2bn at a NOI margin of 83.9%. Overall portfolio occupancy as of Sep’22 was at 82.8% (up 70bps QoQ) with committed occupancy at 86.9% (up 130bps QoQ). In H1FY23, of the 0.8msf of expiries, the REIT manager has re-leased 0.6msf of space (0.2msf space vacated) and also leased additional area of 0.4msf which was vacated in FY22, leading to a net positive leasing of 0.2msf. With leasing momentum improving and office physical occupancy rising (up 10% QoQ to 41%), the REIT manager expects portfolio occupancy levels to rise going ahead. We upgrade our rating to ADD from HOLD with an unchanged DCF based target price of Rs367/unit based on Mar’23E NAV. At CMP of Rs339/unit, we estimate NDCF yield of 5.9% in FY23E, 6.4% in FY24E and 6.7% in FY25E, of which over 90% is estimated to consist of tax-free dividend + capital return. Key risks are further rise in vacancies across assets and fall in lease rentals.

Leasing traction to flow into NOI from Q4FY23 onwards: In Q2FY23, the REIT delivered revenue of Rs4.9bn which was up 1% QoQ while Q2FY23 NOI of Rs4.2bn was up 4% QoQ owing to a marginal ramp up in occupancy in Airoli (W), Mumbai asset. Overall H1FY23 gross leasing stood at 2.1msf with 1.3msf of new and vacant area leasing along with 0.9msf of re-leasing. Overall portfolio occupancy as of Sep’22 was at 82.8% (up 70bps QoQ) with committed occupancy at 86.9% (up 130bps QoQ). In H1FY23, of the 0.8msf of expiries, the REIT manager has re-leased 0.6msf of space (0.2msf space vacated) and also leased additional area of 0.4msf which was vacated in FY22, leading to a net positive leasing of 0.2msf. For H2FY23, the area scheduled for expiry stands at 0.3msf, of which the REIT manager expects to re-lease at least 70% area. Possible de-notification of SEZ area in a few buildings at Airoli (W) asset sometime in FY23E on passage of the DESH (Development of Enterprises and Services Hub) Bill and rent from new leasing starting to flow in sometime in Q4FY23 (factoring in four to six month rent free period) augurs well for NOI and NDCF growth in FY24E. Of the 3.2msf of vacant area as of Sep’22 across the completed portfolio of 24.9msf, 1.8msf is SEZ space while non-SEZ space of 1.4msf is where the near-term leasing focus remains until clarity emerges on the DESH Bill.

Over 90% of FY23-25E 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. In H1FY23, the REIT’s NDCF distribution stood at Rs5.6bn or Rs9.5/unit. At CMP of Rs339/unit, we estimate NDCF yield of 5.9% in FY23E, 6.4% in FY24E and 6.7% in FY25E, of which over 90% of distribution is expected to be in the form of tax-free dividend + capital return.

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