Mindspace REIT offers investors an opportunity to invest in 29.5 million sq. ft (23 million sq. ft completed area) of office space spread over four markets of Hyderabad, Mumbai region, Pune and Chennai. NOI of the portfolio will likely grow at 15% CAGR between FY2020 and FY2023E to Rs 17 billion. We initiate coverage with an ‘add’ rating and fair value of Rs 330/share, noting the 6.7% yield at CMP as well as sustainable growth trajectory over the next decade.
We initiate coverage on Mindspace REIT with an ‘add’ rating and a fair value estimate of Rs 330/share. Our fair value estimate comprises an asset value of Rs 233 billion for operational as well as under-construction assets, yielding an equity value of Rs 201 billion, based on September 2022E. Mindspace REIT currently trades at a dividend yield of 6.7% and capitalisation rate of 7.7% on FY2022E, with estimated growth in NOI of 15% CAGR between FY2020 and FY2023E. Mindspace Madhapur (Rs 88 billion) and Mindspace Airoli East (Rs 43 billion) comprise the bulk of the enterprise value of Rs 233 billion.
Mindspace REIT offers a portfolio of 29.5 million sq. ft of Grade A office space that has been developed by the K Raheja group. The portfolio comprises 23 million sq. ft of completed area, 2.8 million sq. ft of under construction and 3.6 million sqft of future development office space spread across four markets — Hyderabad (11.6 million sq. ft), Mumbai region (12.1 million sq. ft), Pune (5 million sq. ft) and Chennai (0.8 million sq. ft). In-place rentals of Rs52/ sq. ft offer 16% upside at current market rentals with a portfolio WALE of 5.8 years.
Mindspace REIT had revenues of Rs 15.5 billion in FY2020 that is estimated to accelerate to Rs 24 billion (15% CAGR) by FY2023E, consequently leading to improvement in NOI to Rs 17 billion by FY2023 from Rs 12 billion in FY2020. Contractual rent escalations coupled with re-pricing of expiring leases and addition of another 3.5 million sq. ft of leasable area on an extant asset base of 23 million sq. ft drives improvement in earnings. Mindspace REIT has a net worth of Rs 163 billion based on issue price of Rs 275/share with net debt (gross debt-cash) of Rs 26 billion. Capex plans of Rs 11 billion, to be incurred over the next three years, will drive incremental revenue beyond FY2023E.
A structural weakness in service sector growth in India or over-investment in commercial real estate leading to a drop in occupancy levels, and slower-than-expected growth in rental incomes may pose a risk for the growing annuities such as those of Mindspace REIT. Regulatory changes that may increase the tax incidence or hinder further property development pose an additional risk to the commercial real estate portfolio of Mindspace REIT.
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