Mindspace Business Parks REIT (MINDSPACE.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Mindspace Business Parks REIT Acquisition Conference Call. [Operator Instructions] Please note that this conference is being recorded. With that, I hand over the call to Ms. Shweta Shah from Mindspace Business Parks REIT. Thank you, and over to you.

Good evening, everyone, and thanks for joining us for this call to discuss acquisition of the assets in prime CBD markets of Worli and BKC markets, Mumbai and Pune. You may wish to refer to the presentation and press release that has been uploaded in the Investor Relations section of our website. We would like to highlight that the company may make certain statements that may be forward-looking in nature. Please be advised that our actual results may differ materially from these statements. We do not guarantee these statements or results and are not obliged to update them at any point of time. Joining the call today are Ramesh Nair, our CEO and MD; Preeti Chheda, our CFO; and Govardhan Gedela, our Head Corporate of Finance. Ramesh will run you through the details of the acquisition. After which, we will open the floor to the questions. Over to you, Ramesh.

Thank you, Shweta. Good evening, everyone, and thank you for joining us on this call. Mindspace REIT is pleased to announce the addition of 3 CBD assets to its portfolio. This is in line with our strategy to grow our portfolio, both organically and inorganically. The proposed acquisition includes Ascent Worli, The Square Avenue 98 in BKC Annex and an office building in Kalyani Nagar, Pune CBD, all from K Raheja Corp for a value of INR 29.2 billion. The purchase price reflects a 6.1% discount to the average of both the independent valuers estimate. The Board of the Manager to Mindspace REIT has approved the acquisition and preferential issue of units. This aggregates to INR 18.2 billion, subject to unitholders and other regulatory approvals. The acquisitions are accretive, increasing NOI by 9% and DPU by 1.7% on a pro forma basis. Now an overview of the assets. The first one is Ascent Worli, a 4.5 lakh square feet, prime CBD trophy asset in Worli. It is a newly completed premium office tower located in the heart of Mumbai central office district, Worli. The in-place rent in this property is INR 302 per square foot per month with latest leases signed between INR 300 to INR 350 per square foot per month. This reflects its premium positioning and upside potential. It also shares layout with the iconic luxury residence, [ RTCR ], enhancing its exclusivity and appeal. The property elevates the workplace experience with grand hotel like lobbies, upscale dining options and thoughtfully designed common areas. Presently, Ascent's committed occupancy tax at 86%. It is owned to marquee global and Indian tenants such as Goldman Sachs, Dream 11, Executive Center and [ Sterlite ] among others. Ascent is one of the key contributors to the rerating of rentals in Worli, which is now seeing 400-plus square feet rentals. Let's talk a little more about the location of this asset. As you all know, Worli has seen remarkable resurgence due to major infra upgrades. It is very well connected to the coastal road, the Sea Link, Metro [indiscernible] via [indiscernible] to the upcoming airport. The Worli Sewri Connector, connecting Worli [indiscernible] is expected to be completed by second half of 2026. It is also centrally located between Nariman Point and BKC, the other 2 front office clusters of Mumbai. Further, the Ascent will have direct metro access through a 150-meter park being opened from the building. Worli is one of the most desirable pin codes for ultra-luxury residences, where a lot of senior leadership and decision-makers live in proximity. It is also a premium hospitality district with hotels such as Ritz Carlton, Four Seasons, St Regis and [indiscernible] Hotel, all located close by. Over the years, Worli has developed into a dynamic commercial and lifestyle hub. The second asset is the 2.2 lakh square feet of premium office space, The Square Avenue 98 and BKC Annex. This is strategically located in BKC Annex and very close proximity to BKC. The asset is currently 100% occupied and leased to JPMorgan. The tenant has been occupying this building for over 15 years now. This asset represents a core opportunity with a good value-add potential. This has the potential to add 62,000 square feet through vertical and horizontal expansion and also efficiency adjustment in line with prevailing market standards. This is a near-term opportunity as the lease expires in 2027. As market rents have grown faster than contracted rent, that asset also offers 40% mark-to-market opportunity on re-leasing. Market trend today is around INR 250 crores to INR 275 per square foot per month in this BKC submarket. The combined impact of area additions and [ rent vision ] will result in a substantial uplift in NOI. Again, talking about the location. BKC and BKC Annex areas continues to command premium rentals driven by limited supply and robust demand. It's a strong adjacency to BKC as the opening up of the Kalina BKC Connector and [ SCLR, ] has effectively integrated it with core BKC. It is easily accessible from both Western and Central suburbs through SCLR, proximity to airport, ease of entry and exit, all have elevated this micro markets positioning with rentals in the range of INR 250 to INR 275 as mentioned earlier. Further, the bullet train terminals should come up right next to this asset. This will make the location even more attractive to occupiers. As per the [ Bushman ] study, BKC and BKC Annex recorded the lowest vacancy of 4.8%. This is the lowest in any micro market in the city. This is down from 20% of 2021. As you are aware, there is no new supply in BKC in the last 8 years, except for [ strata ] sold asset. Now let's come to the Pune office building. This is located in Kalyani Nagar micro market. This is one of the affluent locations of Pune. It is located just 10 minutes from the airport and also exactly in between 2 metro stations. This is located at Koregoan Park, very close to Viman Nagar and airport. The location, as I mentioned, is upscale residential, close proximity to the hospitality industry and very close to hotels like Conrad, Westin, Sheraton and Hyatt. It has 1 lakh square feet of fully leased space. The asset is 100% occupied with WeWork as the anchor tenant. With a WALE of 6.8 years, this asset provides stable long-term cash flows for an attractive yield profile. Why will these assets matter to the REIT? With these acquisitions, Mindspace REIT expands further into Mumbai's prime front office CBD markets. This takes our front-office portfolio to 8% by value. It strengthens our presence in markets where demand from global occupiers remains robust. They are built to high quality, supported by strong tenancy, and position for sustained performance. Historical research has shown that tenant quality is better at CBD, tenant renewal behavior is stronger in CBD. CBD also sees faster rental growth and is always easier to exit while selling a CBD asset. This is also irreplaceable locations [ and one needs a scarcity premium for these assets ]. For us, it's quite straightforward: invest in great locations, work with great tenants and create durable value for our unitholders. These assets embody exactly that philosophy. These are backed by some of the biggest names on Wall Street as anchor tenants. They also enhance the quality of our portfolio with potential for upside and rentals. Now let's look at the financial and portfolio impact. As mentioned, the acquisition is being completed at INR 2,916 crores. This is a 6.1% discount to the average of 2 independent valuations. On a pro forma basis for FY '26, the transaction delivers 9% NOI growth and 1.7% DPU accretion. These assets also bring significant mark-to-market potential and value-add opportunity. Post acquisition, the Mindspace REIT portfolio expands to 39 million square feet. Our LTV post these acquisitions remains conservative at 24.7%, maintaining substantial debt headroom for future opportunities. This is our second sponsor acquisition. Following the successful acquisition earlier this year of Commerzone Raidurg in Hyderabad, a 1.82 million square feet asset in Hyderabad, which is 100% leased to [indiscernible]. Over the years, we have strengthened our portfolio through disciplined value-accretive growth. Now we have full ownership of Commerzone Porur where we did an inorganic acquisition. We also have done incremental ownership at Mindspace Madhapur, where we have picked up assets from other [indiscernible] who had spaces nearby. Also, we have done strategic expansions at Commerzone Yerwada to increase our control of the park. And more recently, you have seen us acquire The Square, 110 Financial District in Hyderabad. We have completed acquisitions of 3.2 million square feet in the recent past apart from the acquisitions we are discussing today. This is another step in Mindspace REIT's disciplined growth journey. In conclusion, these acquisitions reinforce our conviction in India's prime commercial business districts, especially in Mumbai's evolving CBD landscape. They enhance our income quality, deepen our front office footprint and position us for the next phase of sustainable long-term growth. With rising global demand for high-quality office space, Mindspace REIT is uniquely placed for the future. We thank you for your continued trust and confidence in us. We look forward to delivering many more milestones together with our mantra of building [ loved workspaces ] while maximizing value.

[Operator Instructions] We have our first question coming in from the line of Karan Khanna from AMBIT Capital.

Just a couple of questions from my side. Ramesh, if you can talk about the time lines when you expect this transaction to conclude? And can you also share the kind of mark-to-market opportunities that you see for these 3 assets? And if there are any other benefits that will accrue to the REIT as a result of this acquisition?

Yes. Time lines, we expect to close this by the first or second week of Jan. In terms of mark-to-market opportunity, I was looking at the various projects which are coming up within BKC. Sumitomo is today -- is the next project, which is [ going to come here ]. There's hardly any space available in the current BKC micro market, if you look at the other projects. Maker Maxity, today, there's only 2,000 square feet left in Maker Maxity. One BKC has just 18,000 square feet vacant. Godrej BKC has only 45,000 square feet vacant .[ FIFC ] is like [ nil ] vacancy. [ Crescent ] [indiscernible] vacancy. [indiscernible] vacancy. Sumitomo, which is expected to come late next year or early part of '27 is also seeing some good amount of traction. But the interesting part which one needs to note is Sumitomo is quoting over INR 500 rental. [ Prestige ], which is expected to come around is '28 is cohorting INR 450 rental. [indiscernible], which is close to our Worli property is quoting INR 450 rental. Four seasons GIC is coming out of the project, which is again going to be towards late '27, early '28 .They are quoting INR 450 rental. So all these are good mark-to-market potential opportunities given that BKC rentals have gone through the roof because of no vacancy available. And even in Kalina, even nearby assets are beginning to do deals at [ $270 ] in BKC Annex. So we're very confident that whenever there's a mark-to-market opportunity, we'll be able to capture full benefit from that.

So my second question, Ramesh, is specifically to your Square Avenue 98 BKC Annex asset, where the WALE stands at 2 years. So what kind of discussions are you having with JPMorgan in terms of perhaps them renewing the lease here? And secondly, if I look at the income support, so that's been taken at considering INR 250 per square feet kind of market rent. But if I look at Slide #21, that talks about INR 275 per square feet market rent. So how do we reconcile this? And more importantly, what kind of discussions are you having with JPMorgan as far as renewals are concerned?

So JPMorgan has their lease expiring towards [ August ] 2027. JPMorgan, which has been widely reported in the market, is taking space in Sumitomo. This gives us a huge 40% plus market opportunity, MTM opportunity given that current rental of JPMorgan is only INR 197. So that's an opportunity we have. JPMorgan, before expiry, we are sure will serve notice. There's already decent inquiries over the last 1 week as people started hearing that we may be buying this asset, at least 2 inquiries of full building from large Indian occupiers who want to own independent building, which has started coming up. With regards to income support, I'll add a few points and then Preeti can add some more. So JPMorgan has been occupying this since 2009, '10, so that's like over 15 years. There's always been the escalation back then. This was done just after Lehman GFC. The escalation back then, which was signed as 11% every 3 years, which is obviously today not in line with the market. The market rents have grown much faster than that. And in-place rent, like I said, it's only INR 197 while the market today is between INR 250 to INR 275. And the cash flow is, again, based on the contracted rent. That's the reason why we decided to do income support.

Yes. And just to add to your question in terms of INR 250 and INR 275. So the income support has been determined basis the difference in the market value and the in-place rent. INR 250 is what the valuers have taken at the current trend, INR 275 is what we expect the rent to be on the renewals. So the income support is nothing but the difference between the INR 250 and INR 197 where JPMorgan stands today. And that's been taken until the expiry of the lease term.

Sure. This is helpful. And my last question, Ramesh, going forward, will you continue to prefer relatively mature assets and higher occupancies? Or are you also considering assets where scope for turnaround is potentially higher? And is there an LTV ratio cap that you would not want to exceed in terms of acquisitions?

See, Karan, in terms of CBD assets, prime CBD assets is not only typically come into the market. We have noticed it. And whenever there is a CBD assets in Bangalore, there was a CBD asset, which was offered a while back. They are like 20 bidders who are participating in that bid. So highly sought after, but we look at all the opportunities, which come in the market.

And the LTV cap?

LTV cap, right now, we are still below 25%. So it's quite comfortable. So we have opportunity to grow that.

Yes. And as we've always been saying, Karan, we are okay anywhere around between 30%, 35% should be okay. Obviously, these [indiscernible] beyond that, then we'll do [indiscernible] so we have enough headroom. And to add to what Ramesh said, we would be open to buying assets where there is some amount of leasing left because that also gives us some upside. So we are okay with all kinds of assets, fully completed, fully-leased. We have certain [ stuff to still lease ] because we believe that our leasing competency should be able to get us the right rentals in the right time frame. So we will be open to all kinds of assets.

I'll just add a couple of lines there, Karan. This is a good example of super premium core kind of an acquisition, [ core plus kind ] of an acquisition. The last one we did was more of a value-added one, which we did in Hyderabad, Q-City acquisition. So it's a mix, like Preeti said, of different types of acquisitions [indiscernible]

We have our next question coming in from Parvez Qazi of Nuvama Group.

Two questions from my side. I believe in the asset, which has been leased to JPM, we have a potential to add another floor. So how long will it take you to construct that floor? And during this construction period, I mean, can we continue to get rent by leasing the balance area to some tenant or for maybe that 1-year period will need to keep the entire building vacant?

So Parvez, great question. It's going to take us around 9 months to upgrade this building on also to add that extra area of 60,000 square feet. During that time, we would also have the tenant doing [ fit out ] so there will be an overlap. But like in any redevelopment potential, like if you look at our Hyderabad [ B1 ], for example, there's like 3.5 years in between us developing. This is going to be just over 9 months. So it depends on how we are able to overlap the tenants rent -- periods along with our upgrades of the building.

Sure. Second, in the Pune asset, I think 1 building is already fully leased to WeWork. But I guess there's another building, which is currently vacant. So how soon can we lease that? I believe that is for [ social infra ]. So how soon can we lease that building?

It's a very small 15,000-odd square feet building, which is basically more like an amenity building. We'll have to give this to some alternate uses that are getting in amenity conversion in terms of usage or given to existing usages like a school, health care center or a convention center. So that's the possibilities. We believe this can be done over the next couple of quarters. It's not an office building. It's just an amenity building on the site.

Our next question is coming in from Pritesh Sheth of Axis Capital.

So just a few questions. In terms of Ascent Worli, which is -- which we got [ OC ] recently and it's 86% committed occupancy, how long it will take for us to reach 100% in terms of the interactions which are already going on with the tenants? And -- sorry, how long will it take to the rent-generating occupancy to reach this 100% -- 86% number? And for the balanced vacant portfolio, what's the time line of leasing that out? That's the first question. And second, on the assumptions of NOI that we have made for these individual assets to calculate the cap rate, is it usual occupancy into rentals plus [ CAM ], which has gone? Or there are any other additions to that? And what's the CAM income that we have assumed for each of these assets individually, if you can highlight. So yes, 3 questions.

Yes, the first question with regards to vendor rentals will start. By March, there would have been 73% of the 86% the rentals would have started by March of '26. By June of '26, all 86% would have started. We are confident that by April, we should be able to lease the balance 14% space. With regards to cap rates, it's normal to assume your [ CAM margins ] by calculating cap rates. That's a standard market price.

So Pritesh, it's determined in the usual fashion since most of the leases are contracted, the revenue streams and the CAM income streams are determined in the -- as per the contracted rents and CAMs that are agreed. The expenses in the asset and again, property tax, CAM expenses, insurance, which are the usual deductible expenses that go into net operating income. So that's how the NOI has been determined. There are no unusual items in that are considered.

Sure. Sure. Got it. And just as a follow-up for this Ascent Worli. You assumed FY '27 NOI has roughly INR 170-odd crores. That assumes JPMorgan is still with us or that assumes that JPMorgan is out and we have leased to another tenant at a higher rental?

Ascent is, Pritesh, not [indiscernible]

Yes. Sorry, sorry, the JPMorgan asset, the NOI assumption that we have made is based on JPMorgan still staying with us in FY '27 or...

Yes, it's in JPMorgan in Square Kalina building, we assume the JPMorgan continues till the lease expiry of October 2027.

Just I'd like to add here is typically large organizations like JPMorgan take a long time to do the [ fit-out so. ] So it's not that we can just pack the bags and leave tomorrow. First, the building has to get ready because their interior fit-out time lines could easily be 12 to 15 months, which gives us enough headroom to think and close on our strategy.

[Operator Instructions] Since there are no more questions, we will take that as a last question for today. On behalf of Mindspace Business Parks REIT, that concludes today's conference call. Thank you for joining us, and you can now click on the leave icon to exit the meeting. Thank you all for your participation.