Mindspace Business Parks REIT ‘buy or sell’? Strong rental portfolio, dividend yield

After a little less than two months into its stock market debut, India’s second Real Estate Investment Trust, the Mindspace Business Parks REIT has attracted major global and domestic brokerage houses to initiate its coverage with an overweight or Buy rating. Mindspace, with its large rental portfolio, which guarantees stable income and a high dividend yield, poses an attractive bet on the real estate market of four key cities — Mumbai, Hyderabad, Pune, and Chennai. REITs have to pay out at least 90% of their net distributable cash flows to stockholders as dividend.

Strong dividend payout

“Mindspace Business Park REIT enjoys stable cash flows from rental income coupled with growth in income and capital appreciation of underlying property values. Income payout of 90%-plus implies a high distribution yield,” said global brokerage and research firm Morgan Stanley in a recent note. Analysts at Morgan Stanley have an Overweight rating on the stock with a target price of Rs 333 per share. In the previous fiscal year, the firm reported a net profit of Rs 456 crore, which is expected to grow in a healthy manner over the years. Mindspace has a total leasable area of 29.5 msf with 172 tenants which and 92% committed occupancy. 

Morgan Stanley, expects the share price to jump 10% in the next 12-months, however, the returns don’t stop there. With a dividend distribution yield of 6.7%, it implies a total return potential of ~17%. “We believe that Mindspace REIT has strong and resilient cash flows, even in the current pandemic-stricken macro environment. This is because 86% of its total portfolio (by value) is completed, and it has 10-15 years of lease tenure with contracted lease escalations (12-15% every three years) and mark-to-market potential,” Morgan Stanley said. 

Property in key cities

Mindspace Business Parks REIT owns five integrated business parks and five quality independent office assets across India. Of the total asset portfolio, 41% of the office space is located in the Mumbai Metropolitan Region, 39% in Hyderabad, 17% in Pune and 3% in Chennai. Domestic brokerage firm ICICI Securities pegs Mindspace REITs net operating income growth at 16% CAGR till financial year 2023 based on the expected ramp up in occupancies in existing 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,” said ICICI Securities. The brokerage and research firm has a target price of Rs 358 per share on Mindspace REIT. 

Financial outlook healthy

Apart from strong NOI growth outlook and healthy dividend yield the company’s low in-place rents and strong execution position it well to skirt near-term challenges, said Bank of America Securities. Although work from home models does impact the business but BofA highlights that the pain is limited and not long-term. “Initial data points around the employee productivity trend remain mixed with surveys by real estate consultants suggesting a slightly higher percentage of workforce highlighting drop in productivity as opposed to an increase,” it said. The lack of infrastructure at home for the majority of the employees also hits business, making a case for returning to offices. BofA has a price objective of Rs 342 per share for Mindspace REIT.

Mindspace has also found itself added to Kotak Securities coverage radar recently with an Add rating with a fair value of Rs 330 per share. Analysts at Kotak Securities too see the strong NOI outlook and healthy rental portfolio.