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Akshay Rajawat    


Surat, India

I am CA student and along side perusing the CFA (U.S.). I have a 6 month experience in Equity Research where i have done my internship programme in the same. I am keen to write an articles on Equity.

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Nexus Select Trust REIT

A Business Analysis


About Nexus Select REIT

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.

Nexus Select Trust serves across 14 cities in India including Delhi, Navi Mumbai, Bengaluru, Pune, Hyderabad, and Chennai, which constituted 30% of India's total discretionary retail spending in FY20.

Business Overview

Nexus Select Trust REIT (“Nexus REIT”) is the owner of India’s leading consumption center platform of high-quality assets that serve as essential consumption infrastructure for India’s growing middle class. They expect to be the 1st publicly listed consumption center REIT in India upon the listing of their Units on the Stock Exchanges.

The Portfolio comprises 17 best-in-class Grade A urban consumption centers with a total Leasable Area of 9.2 msf, 2 complementary hotel assets (354 keys) and 3 office assets (1.3 msf) as of December 31, 2022. Their 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. 

 Their 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 the total Gross Rentals for the month of December 31, 2022, respectively. 

However, demand remains strong as brick-and-mortar and online retail are expected to grow by capturing market share from unorganized retail (Source: Technopak Report). The quality, scale and reach of NST's Pan-India Portfolio, its superior shopping experience and its holistic retail offering have enabled it to achieve a market-leading position, which makes most of Portfolio assets destinations of choice for leading brands that are looking to expand in India (Source: CBRE Report). 

A majority of our Portfolio assets are market leaders in their respective submarkets and serve as shopping, entertainment and social destinations for their respective catchments (Source: CBRE Report, by Completed Area). As a result, NST enjoyed a 96.2% average Committed Occupancy across the Portfolio as of December 31, 2022, and 11.0% CAGR in tenant sales from FY18 to FY20, and a 7.5% CAGR in Marginal Rents across Portfolio from CY16 to CY19 (122 bps higher than the average Marginal Rents for Portfolio Markets (Source: CBRE Report)).

NST owns India's largest portfolio of consumption centres and replicating a platform of similar scale, quality and geographical diversity would be difficult due to the limited availability of prime city centre land parcels, long development timelines, and specialized capabilities required for developing, stabilizing and operating comparable assets (Source: CBRE Report, by Completed Area). 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. 

It's diversified exposure and industry-leading asset management capabilities have conferred significant resilience to the company's Portfolio, with tenant sales in the three months ended December 31, 2022, recovering to 128.1% of pre-COVID-19 levels as measured in the three months ended December 31, 2019. Further, it believes its business is well-hedged against the effects of inflation. As of December 31, 2022, 95.5% of NST's tenant leases provide for Minimum Guaranteed Rentals with typical contractual rent escalations of 12% to 15% over a period of three to five years, and 88.3% of its leases contained Turnover Rental arrangements which allow it to capitalize upon growth in tenant sales driven by increased consumption. 

Over the last three financial years and nine months, it has been able to recover more than 80% of its operating and maintenance expenses from tenants, while incurring significantly lower amounts of tenant improvement capital expenditure (as a proportion of its total NOI) as compared to consumption centres in the United States.

Company's Portfolio (as of December31,2022, unless other wise indicated)

Market Value of their Portfolio as of December31,2022 as per the Valuer is Rs. 235billion, as shown in further detail below.

Nexus Trust Portfolio

Key Portfolio Information

Tenant Profile

-------

Background Of The Nexus REIT

The Nexus Select Trust was settled on August 10, 2022 at Mumbai, Maharashtra, India as contributory, determinate and irrevocable trust under the provisions of the Indian Trusts Act, 1882, pursuant to a trust deed dated August 10, 2022. The Nexus Select Trust has been settled by the Manager (on behalf of the Sponsor) for an aggregate initial sum of ₹ 0.10 million. Currently, Wynford Investments Ltd is the sponsor of the Nexus Select Trust.  

Nexus Select Mall Management Pvt Ltd has been appointed as the manager to the Nexus Select Trust. The Manager has been constituted in accordance with the REIT Regulations and is proposed to be held by certain entities of the Sponsor Group and the Select Shareholders in the ratio 79:21. Axis Trustee Services Ltd has been appointed as the Trustee to the Nexus Select Trust.  Pursuant to the Initial Portfolio Acquisition Transactions, the Portfolio is proposed to be held through the Asset SPVs and the Investment Entity, in accordance with the REIT Regulations.  

The relationship between the Nexus Select Trust, the Trustee, the Manager and the Unitholders (which includes the Sponsor and the Sponsor Group) on the Listing Date. 

Company's Competitive Strength

Located in India, one of the world’s fastest growing consumption-led major economies 

Nexus Select Trust’s Portfolio is located in India, the fifth largest economy in terms of nominal gross domestic product (“GDP”), third-largest economy in terms of purchasing power parity (“PPP”), and the second-most populous country in the world as of June 30, 2022 (Source: Technopak Report). Income levels in India are increasing at a rapid pace, which is demonstrated by robust growth in its middle class and high-income households. As a result, the middle class household segment (i.e. households earning a total annual income of USD 5,000 to USD 50,000) grew at a 14.8% CAGR between FY10 and FY20. Domestic consumption is a key driver of India’s economy. In FY22, consumption expenditure accounted for approximately 59.6% of India’s GDP, which was approximately 390 bps higher than the world average and approximately 2,070 bps higher than that of China for the same period (Source: Technopak Report).With a market-leading presence in prime in-fill locations of 14 prominent cities across India, the Trust’s Portfolio is well-positioned to capitalize upon the consumption growth driven by these megatrends.

India’s largest platform of best-in-class assets with a presence in 14 of India’s key consumption cities

Nexus Select Trust is India’s largest consumption center platform (Source: CBRE Report, by Completed Area), comprising a Portfolio of 17 best-in-class urban consumption centres with a welldiversified 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 (Source: CBRE Report). 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 (Source: CBRE Report). Nexus Select Trust 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.

Highly occupied by a diversified tenant base of renowned national and international brands

Nexus Select Trust 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. Nexus Select Trust’s 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 also focusing on adding omni-channel retailers such as Nykaa, Mamaearth and Lenskart amongst many others, to provide an integrated omni-channel shopping experience to its consumers.  

Strong embedded growth with inflation hedged cash flows

Nexus Select Trust’s Portfolio is highly stabilized with 96.2% Committed Occupancy and a 5.7-year Weighted Average Lease Expiry (WALE) as of December 31, 2022. It is well-positioned for strong organic growth through a combination of contractual rent escalations, increased tenant sales leading to higher Turnover Rentals and re-leasing at higher market rents (it estimates that market rents for its properties are on average 16.1% higher than in-place rents as of December 31, 2022) and leaseup of vacant area. Nexus Select Trust has demonstrated strong growth over the last three fiscal years and nine months by leasing 4.2 msf and achieving average Re-leasing Spreads of 19.2% on approximately 2.9 msf of re-leased space. Furthermore, it has a strong track record of delivering inorganic growth through accretive acquisitions of stabilized assets and turnaround of underperforming assets.

Strategically located assets in prime in-fill locations with high barriers to entry

Nexus Select Trust’s urban consumption centres are strategically located in prime in-fill locations in close proximity to dense residential catchments and are well-connected to key transport and social infrastructure. Developing large retail assets in India is challenging due to limited availability of large land parcels in in-fill locations, land aggregation complexities, long gestation periods and specialized capabilities required for stabilizing large urban consumption centre projects (Source: CBRE Report). Higher land use considerations in city-centre locations such as residential development means it is typically sub-optimal to develop urban consumption centres from a floor area ratio (“FAR”) utilization standpoint, which acts as a natural limitation on the supply of large urban consumption centre projects (Source: CBRE Report). Even in the post-development stage, these assets require significant expertise in leasing, operations, retailer management, marketing and promotion, which only a few operators in India possess (Source: CBRE Report). As a result, it would be challenging to replicate a geographically diversified consumption center platform of its scale and quality. 

Key NOI Growth Drivers For FY24E to FY26E

Proactive asset management driving growth in value

Nexus Select Trust 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. It continuously engages with its tenants’ management teams to understand their growth plans and modify its leasing strategy accordingly. It relies on its strong data analytics capabilities to track tenant performance and determine the optimal tenant mix with the objective of maximizing rents and tenant sales at its urban consumption centres. Nexus Select Trust anticipates tenant vacancies, proactively engages with existing and prospective tenants and use “right tenant right location” tools to lease up vacant space. 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. In order to accommodate consumer preferences, it has focused on adding tenants from more experiential categories such as F&B and entertainment centres. The Trust also plans to continue to enhance the aesthetics of its urban consumption centers and improve the shopping experience by upgrading facilities in its assets including atriums, food courts, lobbies, facades, storefronts and washrooms. 

Distribution Policy

The Manager shall declare and distribute at least 90% of the net distributable cash flows of the Nexus Select Trust as distributions (“REIT Distributions”) to the Unitholders. Such REIT Distributions shall be declared and made not less than once every 6 months in every FY. Further, in accordance with the REIT Regulations, REIT Distributions shall be made no later than 15 days from the date of such declarations. The REIT Distributions, when made, shall be made in Indian Rupees. 

Tax Implications

1. Tax benefits in the hands of Nexus Select Trust in respect of interest and dividend income received from special purpose vehicles:

Interest income
Interest income received or receivable by Nexus Select Trust from an Indian company in which Nexus Select Trust holds a  controlling interest and any specific percentage ofshareholding or interest, as required under the REIT Regulations (‘SPV’) should be exempt from tax in the hands of Nexus Select Trust under section 10(23FC)(a) of the ITA.

Dividend income
Dividend income received or receivable by Nexus Select Trust from a SPV should be exempt in the hands of Nexus Select Trust under section 10(23FC)(b) of the ITA

2. Tax benefit in the hands of Nexus Select Trust in respect of rental income arising from directly owned assets

Any income received through renting or leasing or letting out of real estate assets (as defined under the REIT Regulations) owned directly by Nexus Select Trust shall be exempt from tax in the hands of Nexus Select Trust under section 10(23FCA) of the ITA.

3. Taxation of income, other than income referred to in paragraphs 1 and 2 above, in the hands of Nexus Select Trust – Section 115UA(2) read with section 111A, section 112 and section 112A of the ITA

 Income from capital gains

Objects of the issue

  • 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; and
  • General purposes

Financial Performance

Profit and Loss

IPO details

Risk

Uncertainties related to Covid-19
Decline in footfalls across the UCC space is a key risk
Tenant concentration risk

Disclosure:

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure:

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure:

Source - Company's RHP, Axis Capital Report, Website. Disc - Not an recommendation

Disclosure legality:

I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.

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