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Stable performance; Pocharam asset drags occupancy

Mindspace REIT (Mindspace) reported an in line quarter (3QFY24) as gross leasing came in at 0.45msf. Committed occupancy declined to 86.1% (down 40bps QoQ) on account of c. 0.22msf expiries at Pocharam. Excluding these expiries, committed occupancy would have been c. 87%. The company declared distributions of INR 4.8 per unit in 3QFY24 (INR 14.4 per unit in 9MFY24) which at an annualised run rate would be INR 19.2 per unit. Mindspace has a development pipeline of 4.4msf of which 1.5msf is likely to become operational in FY25E. The management expects occupancy to remain at c. 86% by FY24E despite the 1msf expiry coming up in 4QFY24E. Mindspace continues to have a strong balance sheet as net debt stands at INR 60.1bn with an LTV of 21% providing considerable headroom for future growth. Mindspace has received board approval to divest its Pocharam asset. This marks a positive development as the performance of the asset has been below par in the post Covid period. We maintain ‘BUY’ and roll forward to a Mar’25 TP of INR 370 (total return potential of 22.4%; 6.8% dividend and 15.6% capital appreciation).

NOI growth driven by rental escalations: In 3QFY24, Mindspace reported revenue of INR 6.0bn (+8% YoY; down 5% QoQ; includes regulatory income). Asset revenue came in at INR 5.96bn (+10% YoY; down 1% QoQ). NOI grew to INR 4.7bn (+4% YoY; down 4% QoQ) due to i) healthy leasing across assets, ii) lease rent escalations of 11.4% on 2.4msf since 3QFY23 and iii) growth in rentals due to 13.4% MTM achieved over 1.7msf released since 3QFY23. In-place rentals grew to INR 68psf pm (+5% YoY; +1% QoQ).

Leasing momentum softens; occupancy to close at c. 86% by FY24E: Gross leasing stood at 0.45msf (0.41msf of re-leasing + 0.04msf of vacant area), with an average rent of INR 78psf / month. Out of 0.45msf, 84.6% of area was leased to existing tenants. Mindspace achieved re-leasing spread of 17.1% on 0.4msf of area. Committed occupancy declined to 86.1% (86.5% in Dec’23) majorly due to c. 0.22msf of expiries at Pocharam. The scheduled & early expiries for FY24E have increased by 0.6msf to 3.0msf (1.8msf in SEZ) of which 2.0msf has expired in 9MFY24. However, Mindspace has already re-leased 1.2msf (majorly in non-SEZ areas). Going forward, expiries in 4QFY24E / FY25E are at comfortable levels with 1.0msf / 0.8msf expiring, contributing 3.1% / 3.2% of annual rentals.

Robust development pipeline: Mindspace has a development pipeline of 4.4msf and c. 1.5msf of leasable area is set to become operational in FY25E. Major additions will happen at Commerzone Kharadi (1.0msf of leasable area by 3QFY25E), data centre at Airoli West (0.3msf by 4QFY25E) and an experience centre at Madhapur (0.13msf by 3QFY25E). Mindspace has also received requisite approvals to acquire 42k sqft of leasable area at Commerzone Yerwada for INR 410mn (INR 9,761psf; 13% discount to fair value).

We maintain ‘BUY’ with a Mar’25 TP of INR 370: We maintain ‘BUY’ and roll forward to a Mar’25 TP of INR 370 (total return potential of 22.4%; 6.8% dividend and 15.6% capital appreciation). At CMP, the stock trades at 6.3% / 6.8% FY24E / FY25E yield.

Distributions: In 3QFY24, Mindspace declared distribution of INR 2,846mn / INR 4.80 p.u., comprising i) INR 4.29 p.u. as dividend (89.4%; tax free), ii) INR 0.5 p.u. as interest (c. 10.4%) and iii) INR 0.01 p.u. as other income (0.2%). As of 9MFY24, Mindspace has declared distributions of INR 8,591mn / INR 14.4 p.u.

Key conference call highlights:

Distribution has not grown YoY despite NOI growing 4% during the same period, as it was lost to increased interest cost. Also, Mindspace has not taken any debt support for its distribution.

The recent SEZ reform is a big boost for Mindspace given 85% of their total vacancy lies in SEZ areas. The company has already started applying for floor-wise denotification with c. 0.4msf at one of its Airoli assets.

Presently, Mindspace has 3.6msf of vacant area out of which c. 3.0msf is attributable to SEZ area. The company is likely to lease out this vacant SEZ area in the next 2-2.5 years.

Pocharam asset has been a drag on Mindspace’s portfolio and it is hopeful to get the asset monetised in the next 1-2 quarters now that the company has received the board’s approval

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