Mindspace Business Parks REIT IPO kicks off: Here's what analysts say

NEW DELHI: The Rs 4,500 crore Blackstone-backed Mindspace Business Parks REIT IPO kicked off on Monday. Analysts said the IPO is a play on a stabilising rent-yielding office portfolio and they have a neutral-to-positive view on the issue.

REITs or real estate investment trusts are companies that own or finance income-producing real estate. The stockholders of a REIT earn a share of the income produced through real estate investment.

Mindspace Business Parks REIT is looking to raise up to Rs 1,000 crore through issuance of fresh units and up to Rs 3,500 crore through an offer for sale.

On Friday, the REIT raised Rs 2,644 crore from anchor and strategic investors, with HSBC Global, Fidelity and Nomura Trust, Capital Income Builder and Cohen & Steers as among major investors.

Mindspace's completed portfolio of 23 million square feet is 88 per cent occupied, with 6.4 million square feet of brownfield development likely to accrue over the next 5-7 years.

The price band of the issue is fixed at Rs 274-275 per unit. Investors can bid for a minimum of 200 units and in multiples of 200 units. At the upper price band, the issue requires Rs 55,000 in minimum investment by investors.

If succeeded, Mindspace would be the second REIT to list on stock exchanges after Embassy Office Parks REIT's in March 2019.

Analysts noted that the company, which originally filed a draft offer document with SEBI on December 31 and again filed a new offer document with SEBI on July 17, has reduced its market-to-market (MTM) expectations on upcoming lease renewals. In the original draft offer document filed by the company, the MTM spread for FY21 and FY22 was 40 per cent and 44 per cent, respectively. This spread expectation has been reduced to 34 per cent and 40 per cent for FY21 and FY22, respectively.

IIFL said Mindspace REIT is a play on the stabilised rent-yielding office portfolio, spread across the Hyderabad, Mumbai Metropolitan Region (MMR), Pune and Chennai markets.

"The REIT is projecting a distribution yield of 7.5 per cent for FY22, largely through the tax- efficient mode of dividends. Even as the ongoing Covid-19 poses risks to the near-term projections, we believe that over time, Mindspace REIT would offer a steady double-digit total return structure, on a steady & growing dividend-income stream. We recommend subscribing to the issue," the brokerage said.

The brokerage noted that the Midspace REIT portfolio has delivered an in-place rental of 6.7 per cent compounded annually over FY17-20, outpacing markets, and added 6.6 million square feet capacity. For FY20-23, the REIT has projected 17 per cent growth in net operating income (NOI), on the back of 4-5 per cent contracted lease escalations, increasing occupancy from vacant lease up and 2.8 million square feet sqft of new construction, and MTM potential.

"The portfolio and tenant base are diversified & well-positioned; 85 per cent of the tenant base involves MNCs, and 44 per cent from technology and 22 per cent from financial services," IIFL said.

Nirmal Bang, which attended an analyst meet by the REIT, suggested the company did not face significant disruptions in the operations from coronavirus during the financial year ended March 31 and collected 99.4 per cent of gross rentals for March.

"The properties were not fully occupied by the tenants for the months of April and May. As of May 31, committed occupancy of the portfolio was 92.4 per cent and in-place rent across the portfolio was 52.5 per square feet. The company derived 99.4 per cent of the gross rentals from leasing of office premises and has not witnessed a significant decline in the rent receipts during April and May. It collected 97.8 per cent and 95.2 per cent of gross rentals for the months of April and May, respectively," the brokerage said.

Tenants from the technology sector have traditionally comprised the largest tenant base for the REIT, but the share of non-technology sector tenants has increased by 1,020 basis points over the last three fiscal years. As a result, the contribution of the technology sector to the gross rentals has decreased to 44.4 per cent as of March 31, 2020 compared to 54.6 per cent as of March 31, 2017.

"Despite near term uncertainties due to Covid-19, we believe that in the long run the REIT will offer similar or better post tax yields as compared to fixed income. Steady and growing dividend stream along with capital appreciation of underlying assets makes it an attractive investment opportunity in the long run.We recommend ‘Subscribe’ to the issue from a long term investment perspective," Angel Broking said.

The REIT's consolidated debt stood at Rs 7,382 crore as on March 31, which primarily includes lease rental discounting loans in various SPVs. A sizeable amount of debt is proposed to be pre-paid through IPO inflows. ICRA noted that the consolidated debt is expected to be Rs. 3,614 crore post listing. The incremental debt drawdown for the under-construction assets will increase the debt to some extent by FY2021 end.

"ICRA estimates the debt/net operating income to remain comfortable in the range of 2.75-3.15 times in FY2021 and LTV (loan-to-asset value) in the range of 15-17.5 per cent. Low initial leverage provides financial flexibility to fund the future construction and acquisitions," it said.