Nexus Trust is a REIT (Real Estate Investment Trust) sponsored by Blackstone. It came out with an IPO in May 2023 at a price of Rs 100 which expanded its unit base to 151.5 cr units, Blackstone holds 43% of the total post IPO units, Select Group holds 25% and the balance 32% is held by the public.
Nexus owns retail and commercial real estate which it leases out to tenants. This rental income is adjusted to arrive at NDCF (net distributable cash flow) which is paid to unitholders as per SEBI guidelines.
At present, Nexus has 17 urban consumption centres having GLA (gross leasable area) of @ 1 cr sq feet with 97% occupancy across 14 cities in India. It also has 354 hotel keys and 3 office assets with a GLA of 13 lac sq ft. Its marquee properties include Select City Mall Delhi and Nexus Elante Chandigarh.
There are about 100 odd ‘A’ grade malls in India having around 6 cr sq feet covered area. More than half of these malls are owned by the unorganized sector i.e. people owning only one or two malls and the balance are owned by organized players like Nexus etc. With a GLA of 1 cr sq feet, Nexus operates around 15-17% of total A grade malls in the country which gives it substantial soft power in negotiating with mall sellers as well as prospective tenants.
The total valuation of Nexus as on Dec 2022 done by independent valuers is 23500 cr. Excluding debt of 3500 cr, its net valuation comes to 20000 cr translating to NAV of around Rs 132. In terms of segment break-up, retail centers’ contribution was 90%, commercial office’s contribution was 6% and hotel contribution was 6%. A high retail concentration of 90% makes its business safer than office rental space which is impacted by ‘work from home’ and ‘hybrid’ mode of working.
Rentals charged by Nexus are a mix of minimum guarantee (87%) and revenue based (13%). Approximately 10% of its properties are expected to come up for renewal each year and as per concall post Q1FY24 numbers, the MTM (Mark to Market) rental upside is 20%.
While lease rentals do grow by 5-10% every time the property lease is renewed but for higher growth expansion is required. Nexus does this by acquiring new assets, creating value by renovating it, and bringing good brands as tenants which increases footfalls, occupancy and rentals. Nexus focuses on acquiring malls from the unorganized owners for this purpose which are over 50% in India thereby providing long runway for growth.
Nexus’ debt carries AAA rating and LTV (loan to value) is low at only 15%. Majority approval is required to raise debt to over 25% LTV. Debt cannot exceed 49% of asset value. Low LTV of 15% gives it headroom to borrow over $ 1 bn which can be used to acquire new assets.
As per current estimates, the DPU (distribution per unit) for FY24 should be around Rs 7.5 out of which 65-70% is expected to be tax free. At 30% tax, post-tax DPU will work out to 5.5% at a CMP of Rs 125. Research reports peg growth in retail consumption to be 8-10% for quite a long time. Nexus expects its revenues to grow at higher rates than the market growth but at the conservative assumption of 8% growth, DCF valuation at a discount rate of 12% comes to Rs 137.50. This 12% return will come half and half from running yield and capital appreciation.
With retail contribution of around 90%, expected 8-10% growth in consumer spending in the foreseeable future, low debt profile which leaves room to borrow for capex and Blackstone as sponsors, Nexus seems to be a good quasi debt opportunity to earn above average returns of around 12%.
The main risks to watch out for which will weaken/negate the investment case are:-
1) Excess supply of retail space
Existing retail real estate in India is around 6 cr sq feet and 35-40 lac sq feet is added every year. As per Nexus, demand accretion per annum is around 1 cr sq feet which means there is low supply side worry. But if supply starts exceeding demand, it will put pressure on rental yields affecting Nexus’s income and valuation negatively.
2) Slowdown in consumer spending
While enough reports estimate consumer growth spending to grow at 8-10%, any decline in consumer sentiment will be negative for rentals.