Rating Rationale
September 22, 2020 | Mumbai
Mindspace Business Parks REIT (Mindspace REIT)
'Provisional CRISIL AAA/Provisional CRISIL PP-MLD AAAr/Stable/CRISIL A1+' assigned to debt instruments
 
Rating Action
Rs.500 Crore Non Convertible Debentures Provisional CRISIL AAA/Stable^ (Assigned)
Rs.500 Crore Long Term Principal Protected Market Linked Debentures Provisional CRISIL PP-MLD AAAr/Stable^ (Assigned)
Rs.250 Crore Commercial Paper Programme CRISIL A1+ (Assigned)
Corporate Credit Rating CCR AAA/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
^A prefix of 'Provisional' indicates that the rating centrally factors in the strength of specific structures, and will be supported by certain critical documentation by the issuer, without which the rating would either have been different or not assigned ab initio. This is in compliance with directive issued by the Securities and Exchange Board of India (SEBI) on May 6, 2015, on 'Standardising the term, rating symbol, and manner of disclosure with regard to conditional/provisional/in-principle ratings assigned by credit rating agencies (CRAs)'
Detailed Rationale

CRISIL has assigned its 'Provisional CRISIL AAA/Provisional CRISIL PP-MLD AAAr/Stable/CRISIL A1+' ratings to the proposed non-convertible debentures (NCDs), proposed long term principal protected market-linked debentures (MLDs) and commercial paper programme (CP) respectively, of Mindspace Business Parks REIT (Mindspace REIT). The corporate credit rating has reaffirmed at 'CCR AAA/Stable'. 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 proposes to house a facility management division beginning October 1, 2020.
 
Mindspace REIT proposes to raise NCDs, MLDs and CPs, proceeds from which are expected to be utilised for - a) refinancing of external debt at underlying SPVs, b) construction finance for ongoing projects and future development, and c) working capital, d) funding acquisitions and/or e) other general corporate purposes. The NCDs and MLDs are expected to be non-amortising with bullet repayment at the end of 18 months to 5 years; coupon, if any, will be accruing and paid at the time of redemption for MLDs, while it may be payable quarterly, half-yearly or annually, for NCDs. Additionally, the new instruments are expected to have financial covenants capping overall debt at loan-to-value (LTV) and debt-to-NOI (net operating income) or debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratios of 49% and 5.0 times, respectively.
 
The ratings continue to reflect Mindspace REIT's comfortable LTV ratio, characterised by low debt, strong debt protection metrics supported by a likely cap on incremental borrowings, and stable revenue profile of the assets, amidst benefits of high 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.
 
CRISIL has also considered measures taken by the central and state governments to contain the spread of the Covid-19 pandemic. Subdued economic activity or extended periods of work-from-home adopted by certain corporates may lead to build up of vacancy in the near term. Furthermore, the halt in planned construction activity during the lockdown phase, may lead to delay in project completion. CRISIL will continue to monitor events around the pandemic.  

Analytical Approach

For arriving at the rating, CRISIL 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 SEBI's 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 ability to refinance: Consolidated debt was low at Rs 3,324 crore as on August 10, 2020. Consequently, Mindspace REIT has a comfortable LTV ratio of around 14% (as per external valuation dated March 31, 2020). The low LTV ratio shields investors from the risk of any decline in property prices and its consequent impact on refinancing.

Proposed debt is expected to be coupon-bearing (payable at redemption for MLDs, and quarterly, half-yearly or annually for NCDs), with a bullet repayment at the end of the tenure.

* Strong debt protection metrics: Residual debt at the asset SPVs are amortising and will run down over the next 10-12 years. However, incremental debt may be drawn down for repayments, construction, working capital requirement, acquisitions and other corporate purposes. Average consolidated interest service coverage ratio (ISCR) should be comfortable at over 2.0 times, including for all incremental financing in the underlying asset SPVs. This is because incremental debt of around Rs 3000 crore likely to be raised over the next 3-5 years, over and above the proposed instruments and residual debt. Consequently, LTV and debt-to-NOI/debt-to-EBITDA ratios should remain comfortable at below 40% and 4.5 times, respectively, vis-a-vis 49% and 5.0 times, respectively, as proposed for the new debt.

* Stable revenue of asset SPVs proposed to be part of REIT: Mindspace REIT's entire revenue comes from 10 commercial offices, IT parks and SEZs. Consolidated revenue was Rs 1,757 crore for fiscal 2020. The portfolio assets had committed occupancy of 89.2% as on July 31, 2020. Committed occupancy has come down from 92.0% in March 2020, mainly because new area added in June 2020, of 8.0 lakh square feet (sq. ft), is to be leased out gradually; committed occupancy for completed space was robust at over 90%. The rentals have high mark-to-market potential, given the superior asset and service quality, favourable location in prime areas of Hyderabad, Mumbai, Pune and Chennai, good demand and competitive rental rates.

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. Tenant and sectoral concentration at 41.6% and 44.4% of gross contracted rentals, respectively as on March 31, 2020, exposes the REIT to moderate concentration risk. Furthermore, 24.6% of the gross contracted rentals will be due for renewal between fiscals 2021 and 2023. While majority of 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 frame. This could adversely impact cash flow, and hence, will be a key rating sensitivity factor.
Liquidity Superior

Liquidity remains strong, supported by healthy average consolidated ISCR of over 2.0 times, including for permitted additional financing. Furthermore, 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 believes Mindspace REIT will continue to benefit from the quality of its underlying assets over the medium term.

Rating Sensitivity Factors
Downward Factors

  • Reduction in value of underlying assets, leading to LTV ratio of over 40%
  • Higher-than-expected incremental borrowing
  • Increase in overall vacancy by over 5% for completed assets of 230 lakh sq. ft, of which 212 lakh sq. ft has been leased (occupied and committed) as on March 31, 2020
  • Significant delay in completion and leasing of under construction assets

The 'provisional' rating, on the proposed NCDs and MLDs, will be converted into a 'final' rating on:

  • Receipt of executed debenture trust deed
  • Prepayment/refinancing of debt at SPV level

Additional documents, if any, executed for the transaction will also have to be provided. A rating rationale/report indicating conversion of the 'provisional' rating into a 'final' rating will be published on the CRISIL website on receipt of these documents.

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 (Sundew) 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.) 99 lakh sq. ft, of which 98.0% was occupied as on July 31, 2020, while an additional area of approx. 5 lakh sq. ft is expected to be developed over the medium term.
 
Avacado Properties and Trading (India) Pvt. Ltd (Avacado) owns and operates:

  1. An IT park, Mindspace, in Malad, Mumbai. The property has been operational since 2004, and has a total leasable area of approx. 7 lakh sq. ft, of which 93.6% was occupied as on July 31, 2020.
  2. A commercial office, The Square, in Bandra Kurla Complex, Mumbai, with a total leasable area of approx. 1 lakh sq. ft. The property was acquired by the group in August 2019, and currently not leased.  

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

  1. A SEZ, Mindspace, in Airoli (East), Mumbai. The property has been operational since 2007, and has a total completed leasable area of approx. 47 lakh sq. ft, of which 97.0% was occupied as of July 31, 2020, while an additional area of approx. 21 lakh sq. ft is expected to be gradually developed over the medium to long term.
  2. 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, of which 99.9% was occupied as on July 31, 2020.
  3. 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. 7 lakh sq. ft, which was fully occupied as on July 31, 2020.
  4. A SEZ, Mindspace, in Pocharam, Hyderabad. The property has been operational since 2012 and has a total completed leasable area of approx. 4 lakh sq. ft, of which 92.5% was occupied as on July 31, 2020. 

Gigaplex Estate Pvt. Ltd (Gigaplex) owns and operates a SEZ/IT park, Mindspace, in Airoli (West) (Mumbai). The property has been operational since 2013, and has a total completed leasable area of approx. 35 lakh sq. ft, of which 72.3% was occupied as on July 31, 2020, while an additional area of approx. 10 lakh sq. ft is under construction and expected to be completed in the next 12 months. 
 
KRC Infrastructure and Projects Pvt. Ltd (KRC Infra):

  1. Owns and operates a SEZ/IT park, Commerzone, in Kharadi, Pune. The property was completed in fiscal 2020, and has completed leasable area of approx. 13 lakh sq. ft, of which 80.0% was occupied as on July 31, 2020. Another approx. 13 lakh sq. ft of area is under development or proposed to be developed over the medium term.
  2. The facility management arm, housed under this entity, shall provide services for each asset under the REIT. Services will 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, having completed leasable area of approx. 8 lakh sq. ft, to be leased gradually over the medium term.

Key Financial Indicators*
Particulars Unit 2020 2019
Revenue from operations Rs.Crore 1,757 1,422
Profit after tax (PAT) Rs.Crore 514 515
PAT margin % 29.3 36.2
Adjusted gearing Times 3.22 3.29
Interest coverage Times 2.67 2.83
*CRISIL-adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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
NA Non Convertible Debentures* NA NA NA 500.0 NA Provisional CRISIL AAA/Stable
NA Long Term Principal Protected Market Linked Debentures* NA NA NA 500.0 NA Provisional CRISIL PP-MLD AAAr/Stable
NA Commercial Paper NA NA 7-365 days 250.0 Simple CRISIL A1+
*Not yet placed
 
Annexure - List of Entities Consolidated with Mindspace REIT 
Entity consolidated Extent of consolidation Rationale for consolidation
KRIT Full 89% subsidiary
Sundew Full 89% subsidiary
Intime Full 89% subsidiary
Avacado Full 100% subsidiary
MBPPL Full 100% subsidiary
Gigaplex Full 100% subsidiary
KRC Infra Full 100% subsidiary
Horizonview Full 100% subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
--  CCR  0.00  CCR AAA/Stable  18-08-20  CCR AAA/Stable    --    --    --  -- 
        26-06-20  Provisional CCR AAA/Stable               
Commercial Paper  ST  250.00  CRISIL A1+    --    --    --    --  -- 
Long Term Principal Protected Market Linked Debentures  LT  0.00
21-09-20  		Provisional CRISIL PP-MLD AAAr/Stable    --    --    --    --  -- 
Non Convertible Debentures  LT  0.00
21-09-20  		Provisional CRISIL AAA/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs criteria for rating debt backed by lease rentals of commercial real estate properties
CRISILs rating criteria for REITs and InVITs
Criteria for rating entities belonging to homogenous groups

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