Q4FY23 Review: Mindspace REIT: Muted outlook for FY24

8 May 2023 , 11:48 AM

Mindspace REIT (M-REIT) reported flat QoQ distribution for Q4; though FY23 distribution was up 3.5% YoY against 15% NOI growth. Leasing demand for SEZ remains weak, and while clarity on DESH Bill/SEZ amendment seems delayed, M-REIT will keep on de-notifying existing SEZ spaces. FY24 should see healthy NOI growth, however higher interest rates should largely offset the same.

Q4 performance in-line; occupancy level dips marginally QoQ: 

MREIT reported distribution of Rs4.81/unit (flat QoQ), of which 91% is in the form of dividend (tax-free). For FY23, distribution was Rs19.1/unit, up 3.5% YoY; although NOI was up 15% YoY. M-REIT reported gross leasing of 0.6msf in Q4FY23, against an area expiry of 0.1msf; however, due to new area addition across Airoli and Kharadi, blended-occupancy levels dipped marginally QoQ to 83.4%. For FY23, blended occupancy levels improved 120bps YoY. Physical occupancy across its parks has improved QoQ to 56%.

SEZ demand key challenge to improving occupancy: 

Of the total completed area, M-REIT has ~45% notified as SEZ, of which ~1.6msf is vacant (of which 0.4msf is under de-notification. Management said that while clarity on DESH bill or SEZ amendment (allowing partial denotification) is still some time away, there are 3-4 buildings of approx. 350,000sq.ft each that can be de-notified over next few quarters. This will ensure steady supply of non- SEZ buildings. Overall demand from smaller IT third-party players remains robust, even as larger RFPs are expected to be weak for next 2-4 quarters. 

Near-term outlook uncertain; ADD: 

Mgmt did not give any NOI/NDCF guidance for FY24. It expects healthy NOI growth, though partly offset by higher interest rates (~20bps increase assuming no change in policy rates hereon). Analysts of IIFL Capital Services cut their NDCF estimates by 8.5%/9.5% for FY24/25 to factor in lower occupancy and higher interest rates. Their revised nos imply FY24/25 yield of 6/6.8% respectively.

Analysts of IIFL Capital Services maintain add with target price of Rs 355.