Mindspace Business Parks REIT - Near-term weakness to persist - ICICI Securities

Mindspace Business Parks (MREIT) delivered an inline Q3FY21 performance with office rental collections of 99% and revenue/NOI of Rs4.2/3.6bn at a healthy NOI margin of 85.9%. MREIT announced its first quarterly NDCF of Rs2.84bn or Rs4.8/unit. However, a dampener was overall portfolio occupancy falling by 160bps QoQ to 85.3% from 87.1% with early exits of 1.6msf in 9MFY21. With another 1.1msf of expiries in Q4FY21, portfolio vacancy levels are at risk of increasing further heading into FY22E. Taking into account that incremental office leasing may not improve until international travel opens up earliest by Jul'21, we have assumed lower asset level occupancies and have cut our FY22/23E NOI estimates by 10%/6% and NDCF estimates by 9%/5%, respectively. Accordingly, we cut our rating on MREIT to ADD from BUY with a revised Mar'22 DCF based target price of Rs342/unit (earlier Rs358). At CMP of Rs323, we estimate NDCF yield of 5.8% in FY22E and 6.3% in FY23E of which over 90% is estimated to consist of tax-free dividends.

- Steady operating performance: MREIT reported Q3FY21 revenue and Net Operating Income (NOI) of Rs4.2bn and 3.6bn at a healthy NOI margin of 85.9%. The REIT has reported resilient rental collections of over 99% in 9MFY21 (in line with other listed peers).

- Vacancy levels rise QoQ on early exits: A dampener in Q3FY21 was overall portfolio occupancy falling by 160bps QoQ to 85.3% from 87.1% with early exits of 1.6msf in 9MFY21 (1.0msf as of Sep'20). With another 1.1msf of expiries in Q4FY21, portfolio vacancy levels are at risk of increasing further heading into FY22E. As per MREIT management, with occupiers looking to temporarily give up space and waiting for offices to open up again, near-term weakness in incremental leasing may persist for another two-three quarters. At the same time, the REIT manager remains optimistic of a pickup in leasing from H2FY22 once international travel opens up and people return to offices (currently 10% of tenant workforce is physically attending office across its business parks) and tenants look to sign new long-term contracts.

- FY22E NDCF guidance at risk: MREIT announced its first quarterly NDCF of Rs2.84bn or Rs4.8/unit and we expect the REIT to meet H2FY21 NDCF guidance of Rs5.7bn given at the time of IPO. However, considering the recent portfolio exits, the MREIT management highlighted a risk to meeting the FY22E NDCF guidance of Rs12.2bn or Rs20.6/unit. We have assumed lower asset level occupancies and have cut our FY22/23E NOI estimates by 10%/6% to Rs18.7/22.0bn and NDCF estimates by 9%/5% to Rs11.0/12.1bn, respectively. However, we are of the view that this pain is transient and expect a pick-up in incremental leasing from H2FY22 which may result in vacancy levels reducing as we head into FY23E.

Source : Equity Bulls

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