Nexus Select Trust: For long-term gain
The offer, which includes a fresh issue of Rs1,400cr and an offer for sale of Rs1,800cr, will be open during May 9-11
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Nexus Select Trust is tapping the capital markets with its offering, which includes a fresh issue of Rs1,400 crore and an offer for sale (OFS) of Rs1,800 crore. Units are in multiples of Rs10 and the lot size is 150 units and multiples thereafter. 25 per cent of the issue is reserved for the non-institutional portion and the balance for QIBs. This effectively means that the portion reserved for retail and HNI investors would be Rs800 crore. The issue opens on Tuesday (May 9) and closes on Thursday (May 11). The NAV of the unit is Rs127.73 and with the offering at a discount it has the potential upside on listing. The anchor book would be subscribed on Monday (May 8).
The company Nexus Select Trust has 17 malls in A class towns and metro’s totaling 9.8 million square feet with 96 per cent committed occupancy. The company has an average of 5.7 years of forward leased contracts. The company has a mix of rentals which are fixed and also variable with a percentage linked to tenant sales. The company has an annual 5 per cent rental hike with its contracts which are typically renewed every three years.
Roughly 10 per cent of the space comes up for renewal every year. This ensures a five per cent hike. Besides this the company gets an incremental spread on renewals that it does. This translates into a two per cent spread or increment for the full leased property. As a current mix 87 per cent of the leased revenue comes from fixed rental and 13 per cent comes from share of revenue from tenant sales. This renewal adds 2per cent to the company’s growth. Taking the three components it translates to 5% +2% +2% = 9-11% growth every year. The trust has to make projections of income and distribution over the next three years in the offer document. The trust has stated that they expect net operating income (NOI) to grow by 17 per cent CAGR in the period 2024-2026.
Nexus Select Trust is mandated to distribute 90 per cent of the surplus to its unit holders. However, it has committed to distribute 100 per cent to the unit holders and has assured of a pay-out of eight per cent in the first year growing at 17 per cent thereafter. The pay-out would consist of 3 parts namely: - dividend which is tax free, interest and return of capital. This distribution would grow by 17 per cent.
Growth would come from inorganic growth as the trust is mandated to invest only in completed projects or at least 80 per cent completed. They have bought out all the 17 assets that they currently have. Once the trust is listed it would become a platform which would offer single or two mall owners a tax efficient opportunity to sell out and join the platform.
The offering would be a first of its kind in the country as it has malls as its assets. The other listed REITs have commercial space as assets, and they do not come with the rider of revenue share linked to tenants’ sales. This becomes a big driver for malls. Further the consumption story is now taking shape with the advent of big global brands coming to the country over the last few years. With increased consumer awareness and higher disposable incomes, quality malls will always attract footfalls and brands.
It may be mentioned here that REITs trade at a discount to the NAV historically and one should not expect the discount being offered to be wiped out. There could always be some upside looking at interest rates and expectations of growth. Even the listed REITs trade in a broad range of 15-18 per cent discount to NAV.
Nexus Select Trust is a great investment for a person looking for a fixed income with growth potential. Countries like Singapore, US and Europe have listed REITS in their countries, but this is the first time that the same is being made available here. The sponsor of this REIT, Blackstone is a large player in this activity and has invested in real estate in the country and also the two listed REITs in the country. The instrument is attractively priced and offers an investment in the consumption story of the middle class.
(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)
