Nexus Select Trust REIT
- Nexus Select Trust REIT is coming out with a 100% book building; initial public offering (IPO) of 33,68,41,950 shares of Rs 1 each in a price band Rs 95-100 per equity share.
- Not more than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs). Further, not less than 25% of the issue will be available for the non-institutional bidders.
- The issue will open for subscription on May 9, 2023 and will close on May 11, 2023.
- The shares will be listed on BSE as well as NSE.
- The face value of the share is Rs 1 and is priced 95 times of its face value on the lower side and 100 times on the higher side.
- Book running lead managers to the issue are BofA Securities India, Axis Capital, Citigroup Global Markets India, HSBC Securities and Capital Markets (India), IIFL Securities, JM Financial, J.P. Morgan India, Kotak Mahindra Capital Company, Morgan Stanley India Company and SBI Capital Markets.
- Compliance Officer for the issue is Charu Patki.
Profile of the company
The company is the owner of India’s leading consumption centre platform of high-quality assets that serve as essential consumption infrastructure for India’s growing middle class. The company’s Portfolio offers an attractive opportunity to capitalize on India’s consumption growth through a robust business model and diversified asset base that can serve as a natural hedge against inflation. The company’s Portfolio comprises 17 best-in-class Grade A urban consumption centres with a total Leasable Area of 9.2 msf, two complementary hotel assets (354 keys) and three office assets (1.3 msf) as of December 31, 2022. Its assets are strategically located across 14 leading cities in India, which constituted 30% of India’s total discretionary retail spending in FY20 and had an average population CAGR that was 226 bps higher than the national average from financial years 2011 to 2021.
The company owns India’s largest portfolio of consumption centres and replicating a platform of similar scale, quality and geographical diversity would be difficult due to limited availability of prime city centre land parcels, long development timelines, and specialized capabilities required for developing, stabilizing and operating comparable assets. Its Portfolio has a tenant base of 1,044 domestic and international brands with 2,893 stores as of December 31, 2022 and is well diversified across cities with no single asset and tenant contributing more than 18.3% and 2.8% of its total Gross Rentals for the month of December 31, 2022, respectively. It has curated a healthy mix of tenants across sectors such as apparel and accessories, hypermarket, entertainment, and food and beverages (F&B) in order to provide a holistic shopping and entertainment offering to consumers.
Proceed is being used for:
- Partial or full repayment or prepayment and redemption of certain financial indebtedness of the Asset SPVs and the Investment Entity.
- Acquisition of stake and redemption of debt securities in certain Asset SPVs.
- General purposes.
Industry overview
Indian retail has significantly evolved in the last three decades, starting from high-street to small shopping centres and eventually to large format UCCs. Large domestic brands across all the major retail categories have expanded their store footprint rapidly over the last six years resulting in a strong tenant demand. Brands like Titan, Shoppers Stop, Reliance Retail, PVR, Croma, Arvind Fashions, Trent and Jubilant Foodworks have indicated plans to expand their B&M presence by adding new stores. Multiple global brands have entered India and have expanded their reach and footprint aggressively across key consumption centres on the back of strong consumption growth, availability of Grade-A retail infrastructure, increased brand awareness and supportive regulatory changes. Global marquee brands such as Zara, H&M, Uniqlo, Marks & Spencer, Bath & Body Works, IKEA, Starbucks among others, are already operational and expanding in the country. Over the last 10 years, approximately 300 international brands have entered the country. Following the success of international brands in India, many new global brands are looking to launch their presence in the country. Some of these international brands include COS (Collection of Style), Chilli Beans, and Pret A Manger, among others.
Given the under-penetration of organized retail in India, both B&M and Online retail are expected to grow in tandem at the expense of unorganized retail. This is further supported by brands realizing the necessity of having an omni-channel strategy, resulting in better brand awareness and higher customer satisfaction. Multiple brands which started as digital-only have realized the potential of B&M retail and evolved their business model towards omni-channel. Omni-channel continues to grow in prominence as new-age e-commerce companies use this as a medium to improve customer experience and brand recall, reduce customer acquisition cost, shipping costs and costs associated with returns. There are multiple brands such as Nykaa, Lenskart, Bluestone, Mamaearth, The Man Company, Bombay Shaving Company, Giva, Zivame, CaratLane, among others, which have adopted an omni-channel strategy.
Pros and strengths
India’s largest platform of best-in-class assets with presence in 14 of India’s key consumption cities: The company is India’s largest consumption centre platform comprising a Portfolio of 17 best-in-class urban consumption centres with a well-diversified presence in prime in-fill locations of prominent cities across India. Its properties are amongst the highest quality retail assets in India due to their scale, best-in-class asset quality and industry-leading asset management. As a result, its Portfolio commands a 3.8% Marginal Rent premium compared to the Marginal Rents for properties across its Portfolio Markets as of June 30, 2022. It is India’s leading platform that can provide tenants with a diversified pan-India presence and it is often the first port-of-call for many tenants looking to establish or expand their presence in the country. The scale and quality of its Portfolio enables it to maintain high levels of Committed Occupancy and negotiate competitive lease terms with its tenants. As a result, over the last three fiscal years and nine months it has have leased 4.2 msf, achieved average Re-Leasing Spreads of 19.2% on approximately 2.9 msf of re-leased space and achieved Committed Occupancy of 96.2% as of December 31, 2022. Its scale enables it to command premium rentals, optimize cost structures and drive synergies across leasing, marketing and property management.
Highly occupied by a diversified tenant base of renowned national and international brands: The company has a high quality and diversified tenant base of 1,044 retail tenants across 2,893 stores as of December 31, 2022, comprising a mix of leading international brands including Zara, ALDO, Superdry, and Marks & Spencer, and Indian brands including Croma, Shoppers Stop, PVR Cinemas and Forest Essentials. Approximately 47.3% of its Gross Rentals in the month ended December 31, 2022 were from international brands and approximately 52.7% were from domestic Indian brands. Its assets provide a holistic shopping, dining and entertainment experience. Its high quality and diversified asset base makes it the partner of choice for domestic and international brands in India. It has proactively curated a diverse mix of tenants across different categories including hypermarket, apparel and accessories, entertainment and F&B to establish its centres as shopping and entertainment destinations in their respective sub-markets. It is continuously looking to upgrade its tenant mix in order to provide a market-leading offering that accommodates the ever-evolving consumption and spending patterns of consumers.
Proprietary insights and access through industry-leading technology initiatives: The company’s scale and deep industry relationships, coupled with the proprietary advantage of information that it obtain from across its Portfolio, results in powerful network effects that drive its performance. By evaluating the data it collect through its strong data analytics capabilities, it is able to gain valuable insights into its urban consumption centres and tenant performance. The proprietary data it collects across its Portfolio provides it with valuable information regarding performance trends across stores, brands, assets, cities and submarkets. It leverages this information to calibrate its leasing, marketing and acquisition strategies and enhance overall Portfolio performance. It continuously adopt new technologies and upgrade existing ones to enable efficient collection of data relating to leasing, tenant sales, footfalls, key financial metrics, parking, consumer satisfaction, compliance, marketing and employee performance.
Renowned Sponsor with global expertise and local knowledge: The company is sponsored by the Sponsor, which is a portfolio company of Blackstone real estate funds. Blackstone is one of the world’s leading investment firms with $975 billion of assets under management as of December 31, 2022, across multiple alternate asset classes including real estate, private equity, infrastructure, life sciences, growth equity, credit, real assets and secondary funds, all on a global basis. Blackstone’s real estate business was founded in 1991 and is a global leader in real estate investing with $326 billion of assets under management as of December 31, 2022. Blackstone’s real estate funds’ portfolio is spread across 1,475 msf of Leasable Area as of December 31, 2022. Blackstone’s real estate business operates as one globally integrated business with over 800 real estate professionals globally as of December 31, 2022 and has investments in the Americas, Europe and Asia. Blackstone’s real estate business has extensive experience in building or rebuilding leading companies and taking them public such as Hilton Worldwide Holdings Inc. and Invitation Homes Inc. It has over 15 years of operating experience in India and has participated in India’s first two REITs.
Risks and concerns
Significant portion of revenues are derived from a limited number of large tenants: The company’s revenues from operations are concentrated in a few large tenants and in a limited number of properties. Its Gross Rentals from its top ten tenants (by Gross Rental contribution) in aggregate amounted to 20.2% of its combined Gross Rentals for the month ended December 31, 2022. Its top ten tenants (by Occupied Area) occupied 33.7% of its Occupied Area as of December 31, 2022. Further, even if the company seek to diversify its tenant base, several of its tenants, while representing different brands and segments, may belong to one or more large conglomerates with wide ranging interests. Its reliance on a small number of tenants for a significant portion of its revenues, may give the tenant a certain degree of pricing leverage against it. Its reduced ability to negotiate better terms with such tenants may adversely affect its growth, including its revenues in the future. Further, it cannot assure that it will be able to maintain past levels of business from such tenants.
Does not provide any assurance or guarantee of any distributions to the Unitholders: There is no assurance or guarantee of any distributions to the Unitholders. Distributions to Unitholders will be based on the net distributable cash flows available for distribution. The assessment of the net distributable cash flows is based on pre-determined framework as per applicable regulations and as more specifically prescribed in the Distribution Policy, in consultation with financial and tax advisors, the results of which will be subject to limited review by its Auditors. Further, while the company proposes to acquire 100% of EDPL, its Sponsor Group’s holding in EDPL to the extent of 0.55% is subject to a regulatory lock-in until September 30, 2025. It is entitled to acquire this stake upon completion of the lock-in. Until such time that it is able to acquire 100% of EDPL, its ability to make distributions from EDPL will be constrained to its 99.45% stake in EDPL. Further, as non-cash expenditure, such as amortization and depreciation, are charged to the profit and loss account, the Asset SPVs or the Investment Entity may have surplus cash but no profit in the profit and loss account, and hence may not be able to declare dividends as per applicable regulations.
The REIT Regulations impose restrictions on the investments made by the company: The REIT Regulations require it to ensure compliance with certain requirements, including maintaining a specific threshold of investment in rent or income generating properties. There are also regulatory requirements which impose conditions on minimum unit holding of the Sponsor and Sponsor Group and debt financing limits, which may constrain its ability to raise funds and limit its ability to make investments. In particular, under the REIT Regulations, as not more than 20% of the value of its assets may be invested in certain permitted forms of investments over and above rent or income generating properties, it may be limited in terms of future investment on account of its proposed investment in the Investment Entity. Further, as a REIT that is not Indian owned and controlled, it is also subject to other restrictions.
Reliance on third party operators: The company relies on third party service providers for certain aspects of business, including for certain information systems, technology, administration and maintenance of corporate secretarial records. Any interruption or deterioration in the performance of these third parties, failures of their information systems and technology, or termination of these arrangements or other problems in its relationships with these third parties, could impair the quality of its operations, affect its reputation and adversely affect business. If the company does not select, manage and supervise appropriate third parties to provide these services, or if it has any disagreements with such third parties that are not adequately resolved, its reputation and financial results may suffer. Despite its efforts to implement and enforce strong policies and practices regarding service providers, it may not successfully detect and prevent fraud, misconduct, incompetence or theft by its third-party operators. In addition, any removal or termination of third party operators would require it to seek new operators, which would create delays and adversely affect its operations.
Outlook
Nexus Select Trust is India's leading real estate investment trust. Nexus Select Trust is India's leading consumption centre platform with 17 Grade-A best-in-class Urban Consumption Centres spread across 14 cities. The company owns 17 Grade A urban consumption centres with a total Leasable Area of 9.8 msf, two complementary hotel assets (354 keys), and three office assets of 1.3 msf as of December 31, 2022. The company has curated a healthy mix of tenants across sectors such as apparel and accessories, hypermarket, entertainment, and food and beverages (F&B). Nexus is also working across 50+ ESG initiatives to create a positive impact on people and the environment. On the concern side, the company has limited experience in conducting business outside the States of Maharashtra, Madhya Pradesh, Punjab, Gujarat, Orissa, Rajasthan, Karnataka, Tamil Nadu, Telangana and the Union Territory of New Delhi and the Union Territory of Chandigarh and may not be able to leverage its experience in these regions to expand into cities in other regions. Besides, the company may face active competition in acquiring suitable and attractive properties from other property investors, including other REITs, property development entities and private investment funds.
The company is coming out with an IPO of 33,68,41,950 equity shares of face value of Rs 1 each. The issue has been offered in a price band of Rs 95-100 per equity share. The aggregate size of the offer is around Rs 3200 crore to Rs 3368.42 crore based on lower and upper price band respectively. On the financial front, the company’s combined revenue from operations increased by 45.34% from Rs 906.97 crore in FY21 to Rs 1318.21 crore in FY22. The company’s loss decreased from Rs 199.11 crore in FY21 to Rs 10.95 crore in FY22. Meanwhile, the company intends to continue its proven leasing strategy and maintain high occupancy with premium rents across its Portfolio assets. Its pan-India presence and strong local teams have helped it drive platform-level leasing synergies and establish deep relationships with tenants and brokers. The company plans to continue to enhance the aesthetics of its urban consumption centres and improve the shopping experience by upgrading facilities in its assets including atriums, food courts, lobbies, facades, storefronts and washrooms.
