Mindspace REIT: Stable dividend yields make it a good long-term bet

The near-term outlook is uncertain and may weigh on its rental portfolio

Mindspace Business Parks Real Estate Investment Trust (REIT) is a play on higher yields from a steady rentgenerating portfolio. The REIT, promoted by K Raheja Corp Group (KRC Group), has a completed commercial portfolio of 23 million square feet across key office markets of Hyderabad, Mumbai, Pune, and Chennai. The company generated net operating income (NOI) of ~1,225 crore for FY20. It has grown its NOI at 1114 per cent over the past two financial years. For FY21, it has indicated a net distributable cash flow (NDCF) of ~574 crore for the second half of FY21. NDCF is the amount available to the REIT for distribution in the form of dividends to unitholders; the REIT has to distribute at least 90 per cent of NDCF on a semi-annual basis. For FY21, on an annualised basis, the yield in the ~274-275 price band works out to 7 per cent. The REIT estimates yields to be at 7.5 per cent in FY22 and 8 per cent in FY23. Returns from rental assets are a function of increasing NOI. Over the FY20-23 period, the company expects this metric to increase 17 per cent annually to just under ~2,000 crore, from the FY20 level of ~1,225 crore.

Increase in rentals of existing lease contracts by 12-15 per cent over a three-five-year period, forms the largest chunk of revenue growth at 40 per cent. Leasing of existing vacant premises, assets under development and contract renewals are the other sources of revenue growth over the next three years.

New leases are expected to come at higher rents given a 22.5 per cent difference between existing rents and market values. While a quarter of the rental contracts expiring over FY21-23 period could offer a mark-to-market re-leasing opportunity, given the weak market conditions, getting tenants to opt for escalations could be a tough ask. While MNC clients tend to be sticky, are particular about security issues and the outsourcing trends continue to be steady, the work-from-home trend for some staff could put downward pressure on new leases. Mohit Agrawal of IIFL Securities believes that a persistent pandemic will be a key risk to rental growth and vacancies, especially for contracts that are nearing expiry.

The company, however, says that it has signed 0.7 million square feet of new contracts since April at prevailing rates. On rent, it indicated that collections were over 99 per cent for March, while that for April and May varied between 95 per cent and 98 per cent. This is in line with the Q1 performance of Embassy Office Parks REIT (Embassy), which indicated a rental collection of 97 per cent for the quarter.

The key reason for the high collections could be the strength of the REIT’S client base, with 85 per cent of the tenants being multinationals and 45 per cent from the information technology (IT) space, which has been less affected by the Covid-19 pandemic. For sectors such as IT, rentals form a small part of the cost base, which coupled with the spending to the tune of ~2,000-~6,000 per square foot on interiors, can make relocation a costly affair.

The IPO, which has so far seen investments of Rs 2,643 crore from strategic and anchor institutional investors (59 per cent of the issue size) is expected to bring down the debt. The REIT, which has debt of ~7,382 crore at the end of FY20, is looking at bringing it down to ~3,700 crore levels on the back of IPO proceeds, as well as repayment of debt on certain assets by KRC Group. Debt levels falling to 15 per cent of the enterprise value after the issue and lower interest costs give the company flexibility to look at inorganic expansion.

While steady dividends are a source of income, capital appreciation could add to the gains. The country’s first listed REIT, Embassy, has generated returns of 22 per cent since listing in April last year outperforming both the Sensex (-1.4 per cent) and BSE Realty index (-25 per cent).

Lower interest rates (10-year treasuries at 5.8 per cent currently), which are unlikely to see a sharp rebound in the near term, are expected to support valuations of commercial realty players. While the short term may see weakness in lease rentals, investors with a medium-to-long-term view can look at the issue for steady returns.