Nexus Select Trust: Capitalising on multiple growth levers

28 Mar 2024 , 01:02 PM

Analysts of IIFL Capital Services believe Nexus REIT will continue to meaningfully outperform the industry on same-store consumption growth, driven by active mall management and strong trends from Tier-2/3 malls. Further, third-party acquisitions at ~100-150bps cap rate spread could add significant value, as Nexus looks to double its portfolio over the next four to five years; and in the near term, could acquire three malls in South India. Retail macro remains favourable – strong leasing demand vs limited supply, favourable interest rate environment over FY25/26. Valuations are inexpensive at ~13.6x FY26 Ebitda; reiterate BUY with an upside of 18% and FY25 yield of 6.6%.

Outperformance in consumption growth to continue; Tier-2/3 malls posting solid performance:

While the overall retail consumption trends for the industry have been soft recently, Nexus has clocked in 14% YoY for M9FY24 — ~2x of the industry growth. The outperformance is likely to continue, partly driven by active mall management and strong growth trends being witnessed in Tier-2/3 city malls. Within the consumption basket, categories like Luxury fashion, Family Ent., Jewellery, Beauty products — all are faring well, while pockets of Value fashion and Hypermarkets are seeing moderation. Average basket size continues to expand; footfalls growth is healthy at 8% for 9MFY24.

Value-accretive acquisitions could be the next growth lever:

Nexus is considering the acquisition of three malls in South India with ~1msf (due-diligence completed); unconfirmed media reports identify them as L&T malls in Hyderabad. Analysts of IIFL Capital Services’ visit to these malls confirm that they would fit well in the Nexus’ under-invested/under-leased theme with meaningful scope for a turnaround. Nexus would acquire third-party assets directly on its balance sheet (14% LTV) at a potentially attractive valuation for REIT unit holders. Further, acquisitions by REIT can be particularly attractive for sellers preferring share swap making it taxneutral.

Valuations undemanding; reiterate BUY:

Macro environment for retail /REITs remains favourable, with ~10msf of leasing demand vs 3-4msf of supply for CY24; and any potential reduction on interest rates to favour distribution growth and REIT price performance. Implied cap rate of 8.5% (on FY26 NOI) on completed retail assets not expensive.