Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to the proposed non-convertible debentures (NCDs) of Rs 540 crore of Mindspace Business Parks REIT (Mindspace REIT). These NCDs are expected to be utilised towards refinancing of existing debt or investing in cash equivalent investments, fixed deposits and mutual funds in the interim in accordance with applicable laws. CRISIL Ratings has also reaffirmed its 'CRISIL PPMLD AAA/CRISIL AAA/Stable/CRISIL A1+' ratings on the long-term principal protected MLDs, NCDs of Rs 3,425 crore, corporate credit rating and commercial paper.

 

CRISIL Ratings has withdrawn its rating on Rs 200 crore of Series I NCDs at the request of the trust and upon receipt of third-party confirmation of its redemption. This rating action is in line with the withdrawal policy of CRISIL Ratings.

 

Mindspace REIT is sponsored by the K Raheja Corp group. The real estate investment trust (REIT) owns eight special purpose vehicles (asset SPVs) comprising 10 commercial offices, information technology (IT) parks and special economic zone (SEZ) assets and houses the facility management division.

 

The ratings continue to reflect Mindspace REIT's comfortable loan-to-value (LTV) ratio, characterised by low debt, strong debt protection metrics supported by a cap on incremental borrowing and stable revenue profile of the assets amidst benefits of healthy occupancy and geographic diversification. The strengths are partially offset by susceptibility to volatility in the real estate sector, causing fluctuations in rental rates and occupancy levels.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Mindspace REIT with those of its asset SPVs, in line with its criteria for rating entities in homogeneous groups. This is because Mindspace REIT has direct control over the asset SPVs and will support them in the event of any exigency. Additionally, as per Securities and Exchange Board of India’s (SEBI’s), Real Estate Investment Trust Regulations, 2014, Mindspace REIT and its asset SPVs are mandated to distribute 90% of their net distributable cash flow. Also, the cap on borrowing by the REIT has been defined at a consolidated level (equivalent to 49% of the aggregate value of Mindspace REIT’s assets).

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Comfortable LTV ratio, supporting the ability to refinance

Consolidated gross debt was low at Rs 6,717 crore as on December 31, 2023. Consequently, Mindspace REIT had a comfortable LTV ratio of 22.4% (on gross debt basis and as per external valuation dated September 30, 2023). The low LTV ratio shields investors from the risk of any decline in property prices and its consequent impact on refinancing.

 

Proceeds from NCDs worth Rs 75 crore were utilised primarily for refinancing external debt at underlying asset SPVs. These instruments are non-amortising with bullet repayment at the end of 36-38 months from deemed date of allotment, while the coupon is payable quarterly.

 

MLDs of Rs 375 crore were also utilised primarily for refinancing external debt at underlying asset SPVs. These instruments are similar to the NCDs in terms of amortisation and have a tenure of 1,156 days from the date of allotment. The coupon is accruing and to be paid at the time of redemption of MLDs, subject to terms and conditions mentioned in the transaction documents.

 

Proceeds from NCDs worth Rs 400 crore raised under Sundew Properties Ltd (Sundew; ‘CRISIL AAA/Stable’) were also utilised primarily for refinancing external debt at underlying asset SPVs. These instruments are non-amortising with bullet repayment at the end of 33 months from deemed date of allotment, while the coupon is payable quarterly.

 

NCDs of Rs 500 crore raised in February 2022 have been primarily utilised for refinancing of external debt at underlying SPVs. These are non-amortising with bullet repayment at the end of three years, while the coupon will be payable quarterly. 

 

NCDs worth Rs 500 crore raised in July 2022 were utilised primarily for refinancing of existing debt at underlying SPVs. These are non-amortising with bullet repayment at the end of five years, while the coupon will be payable quarterly. 

 

The NCDs of Rs 550 crore raised in March 2023 were utilised towards refinancing existing loans undertaken towards eligible green projects and for providing loans to the SPVs of the REIT (directly or indirectly) for repayment of their existing loans for eligible green projects in accordance with applicable laws. These are non-amortising with bullet repayment at the end of 36-38 months from deemed date of allotment, while coupon is payable quarterly. 

 

The NCDs worth Rs 500 crore raised in June 2023 were utilised for providing loans to the SPVs of the REIT (directly or indirectly) for repayment of their existing financial indebtedness. These are non-amortising with bullet repayment at the end of 36-37 months from deemed date of allotment, while coupon is payable quarterly. 

 

NCDs of Rs 500 crore raised in September 2023 were utilised for general corporate purposes, direct or indirect acquisition of commercial properties and for providing loans to SPVs of the REIT (directly or indirectly) for repayment of their existing financial indebtedness. These are non-amortising with bullet repayment at the end of 38-39 months from deemed date of allotment, while coupon is payable quarterly. 

 

NCDs worth Rs 340 crore raised in March 2024 is expected to be utilised for general corporate purposes, direct or indirect acquisition of commercial properties and for providing loans to SPVs of the REIT (directly or indirectly) for repayment of their existing financial indebtedness. These are non-amortising with bullet repayment at the end of 36 months from deemed date of allotment, while coupon is payable quarterly. 

 

The trust proposes to raise NCDs of Rs 1,000 crore, which are expected to be utilised towards refinancing of existing debt or cash equivalent investments, fixed deposits and mutual funds in accordance with applicable laws.

 

Strong debt protection metrics

Mindspace REIT is expected to have healthy debt protection metrics, including for all incremental financing in the underlying asset SPVs. This is because incremental debt, over and above the existing debt, to be raised over the next 3-5 years is expected at around Rs 4,500 crore (includes expected refinancing). The existing debt instruments stipulate debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) or debt-to-NOI (net operating income) thresholds of 5.0 times, which has been changed to 6.0 times in instruments raised in March 2023, June 2023 and September 2023. Though the financial covenant has been revised upwards, the ratio should remain well below the erstwhile covenants in line with the management articulation of maintaining conservative capital structure. Consequently, the LTV is expected to remain below 30% on a sustained basis.

 

Stable revenue of asset SPVs

Mindspace REIT’s entire revenue comes from 10 commercial offices, IT parks and SEZs. Consolidated revenue was Rs 2,069 crore and Rs 1,758 crore for fiscals 2023 and 2022, respectively. Consolidated revenue for the first nine months of fiscal 2024 stood at Rs 1,756 crore vis-à-vis Rs 1,533 crore for the corresponding period of the previous fiscal. Leasing activity has picked up with the REIT entering into agreements for new and vacant areas to the tune of 3 lakh square feet (sq ft) while renewing agreements for 13 lakh sq ft during the first nine months of fiscal 2024 at a re-leasing spread of 12% (on 15 lakh sq ft spread over extensions and leasing of vacant area as on March 31, 2023). Superior asset and service quality, favourable location in prime areas of Hyderabad, Mumbai Region, Pune and Chennai, good demand and competitive rental rates should support occupancy going forward.

 

Weakness:

Susceptibility to volatility in the real estate sector

Rental collection remains susceptible to economic downturns, which may constrain the tenant’s business risk profile, and therefore, limit occupancy and rental rates. Top 10 tenants and technology sector concentration at 29.7% and 43.9% of gross contracted rentals, respectively, as on December 31, 2023, exposes the REIT to moderate concentration risk. Further, as on December 31, 2023, 6.3% of the total portfolio is coming up for expiry by fiscal 2025. While majority of the tenants are established corporates and may continue to occupy the property, any industry shock leading to vacancies may make it difficult to find alternate lessees within the stipulated time. This could adversely impact cash flow, and hence, will be a key rating sensitivity factor.

Liquidity: Superior

Liquidity remains strong, supported by healthy debt protection metrics, including for permitted additional financing. Further, a low LTV ratio enhances the REIT’s financial flexibility. Consolidated debt is unlikely to cause LTV ratio to exceed 40%, thus protecting investors from any decline in property prices and the consequent impact on refinancing.

Outlook: Stable

Mindspace REIT will continue to benefit from the quality of its underlying assets over the medium term.

Rating Sensitivity Factors

Downward Factors

• Higher-than-expected incremental borrowing or decline in the value of underlying assets, leading to CRISIL Ratings-adjusted LTV ratio of 40% or above
• Reduction in overall committed occupancy to below 82-85% on a sustained basis
• Significant delay in the completion and leasing of under construction assets
• Any other non-adherence to the structural features of the transaction
• Acquisition of weak assets impacting the portfolio quality or higher-than-expected debt funding for new acquisitions impacting financial metrics of the REIT
• Any change in sponsorship of the trust or unitholding of sponsors, resulting in change in ownership or board structure of the REIT manager, affecting independence of REIT operations

About the trust

Mindspace REIT is registered as an irrevocable trust under the Indian Trust Act, 1882, and as a REIT with SEBI’s REIT Regulations, 2014, as amended. Mindspace REIT’s portfolio assets are held through the following asset SPVs:

 

K Raheja IT Park (Hyderabad) Ltd (KRIT), Sundew Properties Ltd and Intime Properties Ltd (Intime) own and operate a SEZ/IT park, Mindspace, in Madhapur, Hyderabad. The property has been operational since 2005 and has a total completed area of approximately (approx.) 96 lakh sq. ft with committed occupancy of 94.8% as on December 31, 2023, while an additional area of about 36 lakh sq ft is expected to be developed over the medium term.

 

Avacado Properties and Trading (India) Pvt Ltd (Avacado) owns and operates:

a)                   An IT park, Mindspace, in Malad, Mumbai region. The property has been operational since 2004, and has a total leasable area of approx. 8 lakh sq. ft with committed occupancy of 98.0% as on December 31, 2023

b)                   A commercial office, The Square, in Bandra Kurla Complex, Mumbai region, with a total leasable area of approx. 1 lakh sq. ft and committed occupancy of 100.0% as on December 31, 2023. The property was acquired by the group in August 2019, and is completely leased. 

 

Mindspace Business Parks Pvt. Ltd (MBPPL) owns and operates:

a)                   An SEZ, Mindspace, in Airoli (East), Mumbai region. The property has been operational since 2007, and has a total completed leasable area of approx. 47 lakh sq. ft with committed occupancy of 80.4% as on December 31, 2023, while an additional area of approx. 16 lakh sq. ft is expected to be gradually developed over the medium-to-long term.

b)                   An IT park, Commerzone, in Yerwada, Pune. The property has been operational since 2010, and has a total leasable area of approx. 17 lakh sq. ft with committed occupancy of 96.1% as on December 31, 2023

c)                   An IT park/commercial office, The Square, in Nagar Road, Pune. The property has been operational since 2015, and has a total leasable area of approx. 8 lakh sq. ft with committed occupancy of 100.0% as on December 31, 2023.

d)                   An SEZ, Mindspace, in Pocharam, Hyderabad. The property has been operational since 2012 and has a total completed leasable area of approx. 6 lakh sq. ft which is currently not occupied, while an additional area of approx. 4 lakh sq. ft. Board has approved the initiation and associated matters in relation to the divestment of Mindspace Pocharam, Telangana.

 

Gigaplex Estate Pvt Ltd (Gigaplex) owns and operates an SEZ/IT park, Mindspace, in Airoli (West) (Mumbai region). The property has been operational since 2013, and has a total completed leasable area of approx. 49 lakh sq. ft with committed occupancy of 72.6% as on December 31, 2023, while an additional area of about 3 lakh sq ft is under construction and expected to be completed in phases over the next fiscal. 

KRC Infrastructure and Projects Pvt Ltd (KRC Infra):

a)                   Owns and operates an SEZ/IT park, Commerzone, in Kharadi, Pune. The property has completed leasable area of around 19 lakh sq ft with committed occupancy of 100% as on December 31, 2023. Another approx 10 lakh sq ft of area is under development or proposed to be developed over the medium term.

b)                   The facility management arm, housed under this entity beginning October 1, 2020, provides services for each asset under the REIT. Services include housekeeping, management of equipment, facade cleaning, security expenses, repair and maintenance and maintenance of common areas.

 

Horizonview Properties Pvt Ltd (Horizonview) owns an IT park, Commerzone, in Porur, Chennai. The property was completed in June 2020. The trust has acquired 2.4 lakh sq ft of leasable area from the landowner in September 2023, which was funded through debt. The property has completed leasable area of approx 11 lakh sq ft, with committed occupancy of 80.1% as on December 31, 2023.

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
INE0CCU07058	NCDs	01-Feb-2022	6.35%	31-Dec-24	500.0	Simple	CRISIL AAA/Stable
INE0CCU07033	NCDs	18-Mar-2021	6.69%	17-May-24	75.0	Simple	CRISIL AAA/Stable
INE0CCU07041	Long-term principal protected MLDs	18-Mar-2021	10-year G-Sec linked	17-May-2024	375.0	Highly complex	CRISIL PPMLD AAA/Stable
NA	Commercial paper	NA	NA	7-365 days	700.0	Simple	CRISIL A1+
INE0CCU07066	NCDs	28-July-2022	7.95%	27-Jul-2027	500.0	Simple	CRISIL AAA/Stable
INE0CCU07074	NCDs	15-Mar-2023	8.02%	13-Apr-2026	550.0	Simple	CRISIL AAA/Stable
INE0CCU07082	NCDs	02-June-2023	7.75%	30-June-2026	500.0	Simple	CRISIL AAA/Stable
INE0CCU07090	NCDs	11-Sep-2023	8.03%	10-Dec-2026	500.0	Simple	CRISIL AAA/Stable
INE0CCU07108	NCDs	21-Mar-2024	7.93%	20-03-2027	340.0	Simple	CRISIL AAA/Stable
NA	NCDs**	NA	NA	NA	460.0	Simple	CRISIL AAA/Stable
NA	NCDs**	NA	NA	NA	540.0	Simple	CRISIL AAA/Stable

**Yet to be placed

 

Annexure - Details of Rating Withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
INE0CCU07025	NCDs	17-Dec-2020	6.45%	16-Dec-2023	200.0	Simple	Withdrawn