Nexus Select Trust: Consumption play with attractive yield and growth levers

26 Jul 2023 , 11:06 AM

Recommendation: Buy; Target price: Rs 130

Analysts of IIFL Capital Services initiate BUY coverage on Nexus Select Trust (Nexus REIT), India’s largest retail mall platform spread across 14 cities that account for 30% of India’s discretionary retail spending. At 96.2% occupancy, the portfolio is highly stabilised. Projected NOI Cagr of 9% over FY23-26 is largely consumption-led. Despite the recent price run-up, analysts of IIFL Capital Services estimate distribution yield of 6.8%/7.3% over FY24/25 and 11% discount to NAV, implying a healthy total return of 17-18% over the next 12 months. Further, REIT will benefit from a favourable interest rate cycle over the medium term, and from operational turnaround of recent and future acquisitions.

Play on urban retail consumption: 

Nexus REIT owns 17 malls (9.8msf, 89% of EV), 3 office properties (1.3msf) and 2 hotels (354 keys) – spread across most Tier 1 and the prominent Tier 2 cities of India. The portfolio is well–placed to achieve a steady state rental growth through: 1) Contractual escalations (12-15% over 3-5 years) 2) Incremental revenue share from tenant sales (~5-25% of net sales) 3) M2M/re-leasing spreads 4) Lease up of vacant area. Rental growth over CY16-19 has been 7.5% Cagr;  analysts of IIFL Capital Services  build the same over their forecast period as well.

‘Operational turnaround’ to be an ongoing theme for acquisitions: 

Sponsored by the Blackstone group, Nexus REIT is mostly into acquiring operational malls and turning them around. Analysts of IIFL Capital Services recent visits re-affirm that renovations (of the food court/atrium/façade), adding/re-zoning/re-sizing of brands reflect in meaningful improvement in consumption growth, and eventually rentals, over a period of 3-5 years, which  analysts of IIFL Capital Services  believe is yet to play out fully for new acquisitions.

Growth levers in place with attractive yield; initiate with BUY:

Nexus REIT is aiming to double its portfolio in next 4-5 years through brownfield acquisitions (largely from pool of ~100 Grade–A retail malls India), aided by healthy balance sheet (15% net debt-to-EV). While Office REITs trade at compelling valuations (17-28% discount to NAV), Nexus REIT benefits from a highly constructive outlook on urban retail discretionary consumption over near-to-medium term. Initiate with BUY.