Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to the proposed non-convertible debentures (NCDs) of Rs 150 crore of Mindspace Business Parks REIT (Mindspace REIT). These NCDs are expected to be utilised towards refinancing of existing debt or cash equivalent investments, fixed deposits, and mutual funds in accordance with applicable laws. CRISIL Ratings has also reaffirmed the rating on, NCDs of Rs 3890 crore, corporate credit rating and commercial paper at 'CRISIL AAA/Stable/CRISIL A1+'.

 

CRISIL Ratings has withdrawn its rating on Rs 75 crore of Series II NCDs and on Rs 375 crore of  long-term principal protected market-linked debentures (MLDs) at the request of the trust and upon receipt of third party confirmation of its redemption. The withdrawal is in line with CRISIL Ratings’ policy.

 

Mindspace REIT is sponsored by the K Raheja Corp group. The 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 borrowings, 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 (REIT) 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 6,991 crore as on March 31, 2024. Consequently, Mindspace REIT has a comfortable LTV ratio of 24.6% (on gross debt basis). The low LTV ratio shields investors from the risk of any decline in property prices and its consequent impact on refinancing.

 

The proceeds from NCDs of Rs 400 crores raised under Sundew Properties Ltd (Sundew; rated 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.

.

The 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 3 years, while the coupon will be payable quarterly. 

 

The NCDs of 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 5 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 of 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. 

 

The 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 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 38-39 months from deemed date of allotment, while coupon is payable quarterly. 

 

The NCDs of 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 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 months from deemed date of allotment, while coupon is payable quarterly. 

 

The NCDs of Rs 500 crore raised in May 2024 were general corporate purposes, direct or indirect acquisition of commercial properties and for providing loans to the SPVs of the REIT (directly or indirectly) for repayment of their existing financial indebtedness (MLD’s and Series II NCD’s)

 

The trust is now raising NCDs of Rs 650 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 to be 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 in the instrument raised in March 2023, June-2023 and September-2023 to 6.0 times. Though the financial covenant has been revised upwards, CRISIL Ratings expects the ratio to 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 2,351 crore and Rs 2,069 crore for fiscal 2024 and fiscal 2023 respectively.  Leasing activity has picked up with the REIT entering into agreements for new and vacant area to the tune of 11.0 lakh square feet (sq. ft) while renewing agreements for 25.0 lakh sq. ft in fiscal 2024 at a re-leasing spread of 14.3% (on 34.0 lakh sq. ft). 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 28.1% and 43.0% of gross contracted rentals, respectively, as on March 31, 2024, exposes the REIT to moderate concentration risk. Further, as on March 31, 2024, 8% 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

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

Rating Sensitivity factors

Downward Factors:

• Decline in the value of the underlying assets or higher-than-expected incremental borrowings, resulting in CRISIL Ratings sensitised LTV ratio of 40% or above
• Weakening of operating performance leading to lower-than-expected occupancy levels
• Significant delay in completion and leasing of under-construction assets or acquisition of assets of lower quality affecting portfolio health
• Any impact on independence of REIT operations due to but not limited to change in sponsorship of the trust or ownership of the REIT manager

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 96.4% as on March 31, 2024, while an additional area of approx. 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 99.6% as on March 31, 2024

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 March 31, 2024. 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. 48 lakh sq. ft with committed occupancy of 82.2% as on March 31, 2024, 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 97.6% as on March 31, 2024.

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 March 31, 2024.

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. Borad 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. 50 lakh sq. ft with committed occupancy of 80% as on March 31, 2024, while an additional area of approx. 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 approx. 19 lakh sq. ft with committed occupancy of 100.0% as on March 31, 2024. 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, etc.

 

Horizonview Properties Pvt. Ltd (Horizonview) owns an IT park, Commerzone, in Porur, Chennai. The property was completed in June 2020. Trust has acquired 2.4 lakh sq. ft. of leasable area from Landowner in Sep-2023 which was funded through debt. The property has completed leasable area of approx. 11 lakh sq. ft. with committed occupancy of 84% as on March 31, 2024.

Any other information:

Key financial covenants for MLDs tranche II of Rs 375 crore, and NCDs tranche I, II and III of Rs 200 crore, Rs 75 crore and Rs 500 crore, respectively

At the REIT level:

• Gross total debt / EBITDA or NOI < = 5.00x
• LTV (on net debt basis) <= 49%

 

Key financial covenants for NCDs tranche V, VI, VII of Rs 550 crore, Rs 500 crore and Rs 500 crore respectively

At the REIT level:

• Net total debt / NOI < = 6.00x
• LTV (on net debt basis) <= 49%