Q1FY24 Review: Mindspace REIT: Occupancy improvement encouraging

27 Jul 2023 , 01:49 PM

Mindspace REIT (M-REIT) reported flat distribution QoQ for Q1; NOI was up 5% YoY. Occupancy levels improved meaningfully, closing in the gap between committed and actual occupancy. Overall leasing demand outlook remains mixed, with robust nonSEZ demand, while SEZ demand is healthy only in some markets like Hyderabad. FY24 should witness healthy NOI growth, although higher interest rates would largely offset the same. Hence, analysts of IIFL Capital Services continue to build a flattish YoY distribution. 

Q1 distribution in-line; occupancy level improves meaningfully: 

M-REIT reported distribution of Rs4.8/unit, flat now for last 4 quarters. Of this, ~91% is in the form of dividend (tax-free). NOI was up 5% QoQ, driven by contribution of rentals coming in from B9, B10 in Airoli (W) and B5 in Gera Commerzone Kharadi. M-REIT reported gross leasing of 0.38msf in Q1FY24, of which ~50% was re-leasing. While there was a marginal dip in committed occupancy to 88.8% vs 89% QoQ, actual occupancy improved sequentially to 86.9% vs 83.4% QoQ, closing in the gap between committed and actual occupancy. Mgmt shared that physical occupancy (employee attendance) across its parks remains at 57% and is likely to improve, driven by GCCs. 

SEZ Act amendment key to demand pickup: 

Of the total completed area, M-REIT has ~55% area notified as SEZ; of this, ~2.2msf is vacant (0.4msf is under de-notification). The non SEZ portfolio is now >95% occupied. Management said that once clarity on SEZ amendment comes in, that will allow floor-by-floor de-notification and should drive leasing volumes much faster. Leasing demand is expected to pick up after 2-3 quarters, with large RFPs returning and the recent pickup in GCC hiring translating into space take up. 

Building flat YoY distribution; ADD: 

M-REIT does not share any NOI/NDCF guidance. It expects healthy NOI growth for FY24, although it will largely be offset by higher interest rates. At 19%, the net debt-to-GAV is healthy and it is considering acquiring partner interest in its Commerzone Porur asset. Retain DPU estimates and ADD rating.