Mindspace Business Parks REITs review (May apply)

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Review By Dilip Davda on July 21, 2020

•    This is the second REITs issue after the gap of 15+ months.
•    Mindspace Business Park belongs to KRC group (Raheja).
•    Its top line grew, but bottom line witnessed a decline for FY20.
•    Amidst ongoing COVID-19 pandemic, this sector is facing challenges due to WFH model.

PREFACE:
REITs were approved by regulator SEBI in the year 2014, but it could see the light of the day only in 2019 after meeting with criteria and rule frames tedious process. In fact, REITs are the most popular investment tool globally and India was missing it till then.

After almost more than 15 months we are witnessing second REITs issue. First such issue of Embassy Office Park in the month of March 2019 to mobilize Rs. 4750 cr. It was offered at Rs. 300 per unit (price band was Rs. 299 - Rs.300). It had a minimum application unit of 800 units with multiples of 400 units, thereon, thereafter. Ever since it's listing it has not quoted below the issue price. For the last 52 weeks, it has marked high/low of Rs. 518/301 and last traded price is Rs. 344.21 at a discount to its book value (NAV as on 31.03.20 - Rs. 374.64).

Now we have a second REITs offer from Mindspace Business Parks. According to market sources, there is few more realty sector big corporate's REITs are likely to be in the queue for fundraising.

India is the second-most populous country in the world and the fifth-largest economy in the world for 2019, according to the International Monetary Fund ('IMF'). India's Gross Domestic Product ('GDP') grew by 6.1% in 2018, making it the fastest-growing major economy in the world, and 4.2% in 2019. In the first half of 2020, the infection traced to a novel strain of coronavirus (known as COVID-19) spread to a majority of countries across the world, including India. The COVID-19 pandemic has had and may continue to have, repercussions across local, national and global economies and financial markets. In particular, a number of governments and organizations have revised GDP growth forecasts for 2020 downward in response to the economic slowdown caused by the spread of COVID-19. While India's GDP growth is forecasted to decline to 1.9% in 2020 due to various factors including COVID-19, it is expected to rise up to 7.4% in 2021. The Government of India in its 2020 Union Budget has outlined the vision to make India a 'US$ 5 trillion economy'.

ABOUT COMPANY:
The Sponsors of Mindspace REIT are ACL and CTL. Both the Sponsors are LLPs incorporated under the LLP Act, at Mumbai, Maharashtra, India. Both ACL and CTL form part of the KRC group (Raheja), which is one of India's leading real estate development and retail business groups, with experience of over four decades in developing and operating assets across commercial, hospitality, retail, malls and residential segments. KRC group has acquired and/or developed properties across various businesses of approximately 28.5 million square feet (msf) of commercial real estate, as of March 31, 2020.

The company owns a quality office portfolio located in four key office markets of India. Its portfolio has Total Leasable Area of 29.5 msf and is one of the largest Grade-A office portfolios in India, which comprises 23.0 msf of Completed Area, 2.8 msf of Under Construction Area and 3.6 msf of Future Development Area, as of March 31, 2020. Its Portfolio has five integrated business parks with superior infrastructure and amenities (such as restaurants, crèches and outdoor sports arenas) and five quality independent offices. Company's assets provide a community-based ecosystem and we believe that they have been developed to meet the evolving standards of tenants and the demands of 'new age businesses', which makes them among the preferred options for both multinational and domestic corporations.

Mindspace REITs Portfolio is located in Mumbai Region, Hyderabad, Pune and Chennai ('Portfolio Markets'), which are amongst the top six key office markets of India and accounted for approximately 58.0% of total Grade-A net absorption in the top six markets in India, namely, Chennai, Mumbai Region, Pune, Hyderabad, Bengaluru and the National Capital Region during the fiscal year 2020.

As of March 31, 2020, its Portfolio is well diversified with 172 tenants and no single tenant contributed more than 7.7% of Gross Contracted Rentals. Furthermore, as of March 31, 2020, approximately 84.9% of Gross Contracted Rentals were derived from leading multinational corporations and approximately 39.4% from Fortune 500 companies. Company's tenant base comprises a mix of multinational and Indian corporates, including affiliates of Accenture, Qualcomm, BA Continuum, JP Morgan, Amazon, Schlumberger, UBS, Capgemini, Facebook, Barclays and BNY Mellon, as of March 31, 2020. The total market value of Mindspace REITs portfolio as on 31.03.2020 stood at Rs. 23675 cr.

It's Committed Occupancy is 240 bps higher than average occupancy in Portfolio Markets, as of March 31, 2020, while rental growth has been approximately 320 bps higher for the last three fiscal years (Source: C&W Report).

ISSUE DETAILS:
Mindspace REITs is coming out with its maiden book building process IPO having a combo of a fresh issue worth Rs. 1000 cr. and offer for sale worth Rs. 3500 crore making a total issue size of Rs. 4500 cr. It has fixed the price band of Rs. 274 - Rs. 275. It opens for subscription on 27.07.20 and will close on 29.07.20. Minimum application is to be made for 200 units and in multiples of 200 units thereon, thereafter. Post allotment units will be listed on BSE and NSE. The net proceeds from the fresh issue will be used for - Partial or full pre-payment or scheduled repayment of certain debt facilities of the Asset SPVs availed from banks/financial institutions (including any accrued interest and any applicable penalties/ premium) (Rs. 900 cr.), Purchase of NCRPS of MBPPL (Rs. 33.40 cr.) and the balance for General Purpose needs. Mindspace REITs has been assigned a corporate credit rating of 'Provisional CCR AAA/Stable' by CRISIL.

The company has already received Rs. 1125 cr. (40909000 units each at Rs. 275) worth application from strategic investors ahead of IPO in the month of June 2020 from the overall issue size. Thus the current issue will be for Rs. 3375 cr. (approx 122727273 units). The company has reserved 75% for institutional investors and 25% for non-institutional investors (i.e. retail investors). The issue constitutes 20.66% of the post issue units' base of the company.

There are 13 BRLMs to manage this issue process. They are Morgan Stanley India Co. Pvt. Ltd., Axis Capital Ltd., DSP Merrill Lynch (BofA Securities), Citigroup Global Markets India Pvt. Ltd., JM Financial Ltd., Kotak Mahindra Capital Co. Ltd., CLSA India Pvt. Ltd., Nomura Financial Advisory and Securities (India) Pvt. Ltd., UBS Securities India Pvt. Ltd., Ambit Capital Pvt. Ltd., HDFC Bank Ltd., IDFC Securities Ltd. and ICICI Securities Ltd. KFin Technologies Pvt. Ltd. is the registrar to the issue. Post allotment, units will be listed on BSE and NSE.

Post issue, Mindspace REITs will have 5938018182 units that indicate market cap of Rs. 16308 cr. based on the upper price band of the units.

FINANCIAL PERFORMANCE:
For the last three fiscals, Mindspace REITs has posted total income/net profits of Rs. 1502.20 cr. / Rs. 161.00 cr. (FY18), Rs. 1697.70 cr. / Rs. 514.40 cr. (FY19) and Rs. 2026.20 cr. / Rs. 513.90 cr. (FY20). Thus while it has shown growth in its rental income, its bottom line has seen downtrends for FY20 and is perhaps the precursor of things likely going forward.

Mindspace REITs unit's NAV as on 31.03.20 stood at Rs. 319.50. On this basis, the issue is priced at a P/BV of 0.86. Considering the current quote of the listed peer Embassy Parks, this issue appears fully priced.

RISK FACTORS:

According to risk factors elaborated by Mindspace REIT in the offer documents, it may not be able to make distribution to the Unitholders in the manner described in the offer documents or at all, and the quantum of distribution may decrease.

It has no operating history and may not be able to operate the business successfully, achieve business objectives or generate sufficient cash flows to make or sustain distribution. Further the condensed combined financial statements prepared for the offer may not accurately reflect the future financial position, results of operation and cash flows.

The COVID-19 pandemic adversely affects Mindspace REIT's business, financial condition, results of operations, cash flows, liquidity and performance, and it may reduce the demand for commercial real estate in future.

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