Mindspace REIT: Built-in resilience

Since its listing in July this year, Mindspace REIT has remained range-bound, mainly due to occupancy-related concerns on the back of Covid-19. While the demand and supply of office spaces in the market declined between January and June this year, leasing activities have started improving in regions, including Bengaluru, Pune and Hyderabad. According to JLL, a real estate consultant, Pune’s office market for instance, is gradually picking up with approximately 1 million sq. ft. of gross office space being absorbed during July-October .

Mindspace reported strong rental collections and a healthy occupancy during the first half of FY21, thanks to its diversified client base.. The REIT has a rent-yielding portfolio spread across four key office markets -- Mumbai Metropolitan Region (41 per cent), Pune (17 per cent), Hyderabad (39 per cent) and Chennai (3 per cent).

Location of the REIT’s properties too works out in its favour. Mindspace’s office spaces are mainly present in micro markets which offer an advantage of low rental costs.

Considering its resilience, Mindspace REIT could be a good alternative investment avenue for investors with an appetite for risk. At the current market price of ₹328.35, the REIT is trading at a discount to its NAV of ₹338 as on September 30, 2020.

The yield for investors is expected to be around 7 per cent for FY21, which the REIT will start distributing from 3QFY21.

While there are some concerns about leasing activities for office space in general due to the pandemic, quality client base, comfortable debt position and healthy occupancy and collections bode well for Mindspace. In the recent September quarter of FY21, the REIT reported revenue of ₹278 crore and profit of ₹68.4 crore.

Healthy collections

Mindspace REIT has 23.9 million sq ft of income-generating commercial properties spread across four cities. During the first half of financial year 2020-21 (FY21), the REIT was not only able to collect 99 per cent of its rent but was also able to achieve rental escalations.

This is an indication of stable client base which has helped the REIT withstand challenging market conditions.

In terms of occupancy, the REIT has been able to consistently maintain occupancy at 90-92 per cent.

Good pedigree (backed by K Raheja Corp), location advantage, and lower rentals (₹70 per sq ft average rental for REIT vs ₹ 85-90 per sq ft market rent) help Mindspace REIT not only retain its client but attract new ones as well. These factors, coupled with long-term lease contracts, help the REIT to maintain steady cash flows.

Strong tenant portfolio

Mindspace REIT’s mainstay revenue is from rental income (80 per cent).The REIT’s top 10 clients, including Facebook, Qualcomm, UBS, Barclays and Schlumberger, contribute about 42 per cent to its gross rental revenue. It has average lease tenure of 5-10 years, with an initial commitment period of 3-5 years.

Further, Mindspace has contractual escalations of 12-15 per cent every three years. With some clients, the REIT has annual lease escalation of 4-5 per cent. During the first half of FY21, of the 1.04 million sq ft leases signed, the REIT was able to lease 0.48 million sq ft (about 44 per cent) to new clients.The remaining 56 per cent (of the area leased) was re-leased to existing tenants.

Also, of the 2.5 million sq ft of office space expiring in FY21, 0.6 million sq ft is already re-leased. The REIT is in advance discussions for leasing another 0.8 million sq ft.

Few challenges

The REIT has about 1.8 million sq ft on-going projects to be completed by FY22. It has resumed construction in about 1.7 million sq ft of such projects. However, the construction activities are yet to come back to full swing (as of September, it is at 75 per cent capacity). The lockdown measures have resulted in delay in delivery of few projects by 1-2 quarters. In terms of pre-leasing, though the REIT was able to pre-lease about 0.2 million sq ft, many corporates have initiated work-from-home until mid of next year. This could results in deferments of leasing decisions.

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