REIT Analysis: Mindspace Business Parks REIT

IPO Rating: Invest with limited exposure

About the issue

Backed by K Raheja Corp (KRC) and Blackstone Group, Mindspace Business Parks REIT (MBP REIT), is planning to raise up to Rs 4,500 crore through a REIT IPO. This will be the second REIT in India after Embassy Office Parks (EOP) REIT.  The price band is fixed at Rs 274-275. The issue is a combination of fresh issue and offer for sale (OFS). The fresh issue will comprise of Rs 1,000 crore and OFS will be to the tune of Rs 3,500 crore. The trust will not receive any proceeds from the OFS portion. Of the net proceeds from the fresh issue, Rs 900 crore will be utilised for the payment of certain debt availed by the asset SPVs. The remaining amount i.e. Rs 33.4 crore will be used to purchase non-cumulative redeemable preference shares held by certain KRC group persons. The market lot is of 200 shares, which means the minimum investment required will be Rs 55,000 at the upper price band and not Rs 15,000, which is the case with a normal IPO. Moreover, there is no retail category as such and one has to apply in NII or non-institutional investor category.

About the company

MBP REIT owns an office portfolio located in the four key office markets (Mumbai, Hyderabad, Pune, and Chennai region) of India. Its portfolio has a total leasable area of 29.5 million sq. ft (msf) and is one of the largest Grade-A office portfolios in India. As of March 31, 2020, the portfolio comprised of 23 msf of completed area, 2.8 msf of the under-construction area and 3.6 msf of the future development area. Of the under-construction area, around 2.6 msf is likely to be delivered by FY22.

MBP REIT’s portfolio has five integrated business parks with amenities such as restaurants, crèches, and outdoor sports arenas. MBP REIT’s portfolio markets represent approximately 58 per cent of total Grade-A net absorption in the top six Indian markets in FY20. These markets have demonstrated favourable long-term demand-supply dynamics, resulting in low vacancy and rental growth.

Between 2014 and the first quarter of 2020, net absorption was 100.3msf, while supply was 96.4 msf in these markets. During the same period, vacancy levels declined steadily from 17.2 per cent in 2014 to 10.4 per cent in the first quarter of 2020. Rentals in these markets have increased by 8.1 per cent CAGR in Hyderabad, 7.5 per cent in Chennai, 7.1 per cent in Pune, and 1.7 per cent in the Mumbai region. However, during the same period, the combined rentals in the portfolio markets have grown from Rs 79.3 per sq. ft (psf) per month to Rs 96.8 psf per month. As of March 31, 2020, MBP’s portfolio is well-diversified with 172 tenants and not a single tenant contributed more than 7.7 per cent of its gross contracted rentals. The tenant base comprises a mix of multinational and Indian corporates, including affiliates of Accenture, Qualcomm, BA Continuum, JP Morgan, Amazon, Schlumberger, UBS, Capgemini, Facebook, Barclays and BNY Mellon.

MBP REIT did not face any significant disruptions in its operations from COVID-19 led lockdown. It collected 99.4 per cent of the gross rentals in the month of March 2020, while the same was at 97.8 per cent and 95.2 per cent, respectively in April and May 2020. It has also not availed deferments or moratoriums on any financial obligations. On a positive side, it leased 0.7 msf of the area since the start of the current fiscal, where the weighted average rent was higher than the market rents estimated in those areas.

Financials

Over FY18-20, the rental income increased by 11.6 per cent CAGR, while income from maintenance services increased by 8.5 per cent CAGR. These income streams contributed an average of 73.8 per cent and 17.8 per cent, respectively, to the top-line during the period. This resulted in top-line increase by 18.2 per cent CAGR over FY18-20 to Rs 1,766 crore in FY20. Net operating income (NOI) and EBITDA increased by 11.1 per cent and 18.9 per cent CAGR, respectively, with an average margin of 75.3 per cent and 65.3 per cent, during the period. Reported PAT improved by 78.9 per cent CAGR to Rs 474.7 crore in FY20. Cash flow from operating activities (CFO) increased by 10.5 per cent CAGR over FY18-20 with an average CFO of Rs 873.13 crore. As per the valuer, the pre-issue fair value of the assets is around Rs 17,784.6 crore.

Valuation and recommendation

At the higher price band of Rs 275 per share, MBP REIT’s unit is valued at 87.1 per cent of its net asset value (NAV), as compared to Embassy Office Parks (EOP) REIT, which is trading at 98.1 per cent of its NAV. Thus, the issue seems to be attractive. The dividends received from REIT are tax-free. The major component (~93 per cent) of MBP REIT returns are expected to be from the dividends, which is expected to yield a return of more than seven per cent as compared to five per cent that you now receive in bank FDs and around six per cent in debt mutual funds on a post-tax basis.

Considering the already the subdued interest rate in the economy and anticipating a further decline in the rates, the projected yield from this REIT seems to be attractive. However, there are certain risks associated like uncertainty on the aftereffects of the COVID-19 pandemic on the economy, falling real estate prices, etc. All these issues might impact the future rental income of MBP REIT.

Therefore, the issue is suitable to only those investors, who want to diversify their investment and can invest that part of their portfolio that they would be parking in debt component.