We initiate coverage on Mindspace Business Parks REIT with a BUY rating based on March 2022 DCF based target price of Rs358/unit. The REIT has a stabilised rent-yielding office portfolio spread across Hyderabad, Mumbai Metropolitan Region, Pune and Chennai. With 92% committed occupancy and in-place rent of just Rs52/psf/month, we like the company given 16% NOI CAGR over FY20-23E, a resilient leasing cycle for office assets in India's tier I cities and low leverage of 0.2x net debt/equity which leaves headroom for injection of new assets in the REIT portfolio. At CMP of Rs302, we estimate NDCF yield of ~7% over FY22-23E of which over 90% is estimated to consist of tax-free dividends. Key risk to our thesis is the large-scale adoption of Work-from-Home by occupiers over the long term.
- Quality asset portfolio in tier I office markets: Mindspace Business Parks REIT owns five integrated business parks and five quality independent office assets across India with 23.0msf of completed leasable area, 2.8msf of under construction area and 3.7msf of future development pipeline. The portfolio is stabilized with 92.0% Committed Occupancy and a Weighted Average Lease Expiry (WALE) of 5.8 years. Of the total asset portfolio, 41% of the office space is located in Mumbai Metropolitan Region, 39% in Hyderabad, 17% in Pune and 3% in Chennai. Mindspace REIT has 172 tenants with top 10 occupiers contributing 42% of gross contracted rentals. The technology (44%) and financial services sectors (22%) account for majority of tenants.
- Strong NOI growth CAGR of 16% over FY20-23E: We expect Mindspace REIT's Net Operating Income (NOI) to grow at a 16% CAGR over FY20-23E based on the expected ramp up in occupancies in existing assets, ~3msf of under construction assets coming on stream and annual rental escalations (4-5% annual escalation in existing contracts) and mark-up of leases which are expiring. This excludes any injection of RoFo assets. The REIT has reported resilient rental collections of 95-99% in the March-May 2020 period post onset of COVID-19 (in line with listed peers) and has leased 0.7msf of area (of which 40.5% was leased to its existing tenants and 59.5% was leased to new tenants).
- India's long term advantages remain as a high-quality office hub: While COVID-19 will likely impact FY21 leasing activity, our view is that the Indian office market retains many positives such as: 1) Limited number of 8-10 pan-India developers capable of building quality rental assets; 2) India remains one of the more affordable office markets in the world, with average rentals for Grade A office markets in peripheral/suburban markets hovering around 1 USD/psf/month or Rs70-75/psf/month; 3) India leads in STEM (Science, Technology, Engineering, Mathematics) talent for technology assignments with over 2 million students graduating every year.