Nexus REIT

IPO Size: Rs. 3,200 cr 

• Fresh Issue of Rs. 1,400 cr, for debt repayment and stake acquisition
• Offer for sale (OFS) of Rs. 1,800 cr, by 7 selling unit-holders, including sponsor Blackstone (~60% stake to fall to 43% post listing)

Price band: Rs. 95-100 per unit (not share)

• 75% allocation for institutional investors and 25% for retail and HNI

M cap: Rs. 15,150 cr, implying 21% dilution

IPO Date: Tue 9^th May to Thu 11^th May 2023, Listing Fri 19^th May 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

 

Nexus Select Trust

A retail real estate investment trust (REIT), operating 17 malls in India, aggregating 9.8 million sq ft retail space, including Delhi’s Select Citywalk, which grosses India’s highest sales per sq ft and also houses Apple’s store (at nearly twice the rental of its Mumbai store), and 3 commercial and 2 hotel properties. At Rs. 100 per unit, post-listing, equity value stands at Rs. 15,150 cr with enterprise value of Rs. 18,830 cr. Net asset value (NAV) of Rs. 23,500 cr is irrelevant, as the assets are not being actually sold.

 

8.25% Effective Yield for FY24E

Nexus plans to distribute 100% of its projected net distributable cash flow (NDCF) among unit-holders, at quarterly intervals, as against regulatory requirement of minimum 90% distribution at semi-annual intervals, making the return of 8% pa or effective yield at 8.25% for FY24E, based on NDCF of Rs. 1,212 cr.

For FY25E, expected return is higher at 8.6% pa, based on projected NDCF of Rs. 1,313 cr, as tenant revenue share accounts for 13-15% of Nexus’ revenue.

This return, although not guaranteed, is 80-85 bps higher than all leading bank fixed deposit (SBI, HDFC, ICICI, Axis, Kotak) rates, which lie between 7.10-7.20% pa for 15-24 month deposit, translating into an effective yield of 7.30-7.40%. Even Bajaj Finance’s fixed deposits offers ~7.5% pa interest.

Other listed REITS, Embassy, Mindspace, Brookfield, are trading at yields of 6.0-7.4%, making Nexus attractive on peer comparison.

 

No Fear of Capital Loss, in Medium Term

REIT prices decline when interest rates rise and vice versa. Since interest rates in India seem peaked out, there is no risk of capital decline over the medium term for Nexus.

In the short term, there remains scope for 3-4% listing gains, given the attractive yield.

 

REIT is More Debt-like

REIT is a preferred option over buying physical property. As a financial instrument, it falls in between debt and equity, as returns are not guaranteed (like debt), not as high (as equity), but more regular. Thus, REITs can be allocated only from one’s debt portfolio and not from equity allocation.

 

Tax Efficient for Unitholders   

For income tax purpose, distribution from Nexus can be split into three components:

1. 35% is interest income – taxable for unit-holder at regular income tax rates
2. 55% is qualified dividend income – Exempt from tax for unit-holder
3. 10% is return of capital – not taxable till Rs. 100 (cumulative), subsequently at unit-holder’s regular income tax rate. This tax liability is not likely to materialize, as return of capital is projected at less than Re 1 per year for the next 3 years.

Based on the structuring of Nexus REIT (and not all REITs), 1/3^rd of the distribution is taxable, while 2/3^rd will be tax free, in the hands of unit holders, based on current tax provisions.

Thus, effective post-tax yield stands at 7.35% (for income up to Rs. 50 lakh) and at 7.26% (for income between Rs. 50-100 lakh), much higher than post-tax fixed deposit yield of about 4.8-5.1%.

Thus, Nexus’ REIT is structured tax-efficiently, adapting to the amendments of FY24 Union Budget (applicable from 1.4.23).  

Capital Gains (on sale of units) continue to be taxed at 15%/10% for STCG/LTCG respectively with minimum holding period of 36 months (unlike 12 months for listed equity) for long term capital gains.