Rationale

The assigned rating factors in Sundew Properties Limited's (SPL) promoter strength, with the entity being a part of Mindspace Business Parks REIT {Mindspace REIT, rated at [ICRA]AAA(Stable)) and its strategic importance for the REIT. SPL contributed to 27% of Mindspace REIT's consolidated net operating income (NOI) for FY2022 and around 20% of the REIT's consolidated asset valuation in March 2022. ICRA notes that certain assets of SPL have been encumbered towards the secured borrowings at Mindspace REIT, leading to higher linkages between the entities. The rating also factors in the comfortable leverage and debt coverage metrics of SPL. The five-year average DSCR is estimated to be above 2.3 times and leverage (Debt1 /NOI) is estimated to be less than 4.5 times in the medium term. The rating also considers the established business profile of SPL, with favourably located commercial property viz. Mindspace Madhapur, Hyderabad, with a total completed area of 5.7 million square feet (msf) as on March 31, 2022. The rating also draws comfort from a strong tenant profile of the properties, with the presence of reputed tenants and long-term lease tenures of 5-15 years, ensuring rental income visibility in the near to medium term. ICRA also notes that the top-five tenants contributed 37% of the gross rentals in March 2022, which exposes the company to moderate lessee concentration risks. ICRA, however, has also taken note of the cyclicality associated with the commercial real estate sector and its vulnerability to external factors such as the Covid-19 pandemic. The pandemic has resulted in higher adoption of flexible working arrangements and broad-based increase in vacancies across most office leasing portfolios. However, ICRA notes that the occupancy in SPL's portfolio had increased to 95% in March 2022 from 83% in March 2020, despite the pandemic's impact and with the resumption in back-to-office plans, the high occupancy levels are likely to sustain in FY2023. Further, SPL is exposed to refinancing risks, as 64% of the total debt of Rs. 905.3 crore as on March 31, 2022, have bullet repayments. However, the high financial flexibility by being a part of Mindspace Business Parks REIT and low leverage as reflected in LTV of 15-16%, Debt/NOI of 3.0 times in March 2022 provide comfort. ICRA believes the credit profile of the company will remain stable on the back of stable operational and strong tenant profiles, along with robust coverage and leverage metrics