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Review By Dilip Davda on May 4, 2023

•    NST is engaged in the development of retail consumption space on a Pan India basis. 
•    It marked a setback in its top and bottom lines for FY21 and FY22 due to the pandemic.
•    It is now on a fast track and poised for bright prospects with rising trends.
•    The issue price and lot size are investor-friendly moves by this issuer. 
•    Post listing, it may generate first mover fancy in the segment.
•    Investors may consider investing for the medium to long-term rewards. 

PREFACE:
We have already marked a hat trick of REITs since March 2019. The three REITs that have entered the market and got listed are Embassy Office Parks, Mindspace Business Parks, and Brookfield India Real Estate Trust. While all of them received overwhelming responses for their maiden issue, they marked mixed trends post-listings. Now we have yet another REIT from Nexus Select Trust, which has the USP of retail consumption space i.e. Mall development and thus differs from others. Recently Apple opened its 2nd India store on April 20, 2023, at Select Saket (New Delhi) which indicates the preference enjoyed by this group.

ABOUT COMPANY:
Nexus Select Trust (NST) 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 (Source: CBRE Report, by Completed Area). NST expects to be the first publicly listed consumption centre REIT in India upon the listing of its Units on the Stock Exchanges. Consumption growth has served as a key driver of the Indian economy over the last decade (Source: Technopak Report), and the trust believes its Portfolio is well-positioned to benefit from the consumption tailwinds of India's growing middle class and rapid urbanization. 

NST'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. Its 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. 

NST's 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 (Source: Technopak Report). It believes that it has invested in among the highest quality assets in prime in-fill locations of India's major cities such as Delhi, Navi Mumbai, Bengaluru, Pune, Hyderabad and Chennai. These cities have limited organized retail stock and continue to witness strong demand fundamentals as domestic and international retailers expand their businesses even as the future supply of retail space is expected to remain constrained (Source: CBRE Report). 

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.

While its Portfolio is highly stabilized with Committed Occupancy of 96.2% and 5.7-year WALE as of December 31, 2022, its Portfolio enjoys strong embedded growth prospects. NST 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 (NST estimates that Market Rents for its properties are on average 16.1% higher than In-place Rents as of December 31, 2022) and lease-up of vacant area. As a result, its Portfolio's total NOI is projected to grow organically by 17.1% between FY24E and FY26E. Further, it has a strong track record of delivering inorganic growth through accretive acquisitions and it believes that it is well-positioned to scale inorganically through a lowly levered balance sheet with total indebtedness expected to be less than 20.0% of its initial market value post the utilization of the Net Proceeds from this offering.

NST is sponsored by Blackstone (Wynford Investments Ltd.), it is managed by Nexus Select Mall Management Pvt. Ltd. and Axis Trustee Services Ltd. is the Trustee for the said REITs. The manager directly employs 64 personnel as of March 31, 2023. The Manager is currently held by certain entities of the Sponsor Group. Simultaneous with the completion of the Initial Portfolio Acquisition Transactions, the Manager is proposed to be held jointly by certain entities forming part of the Sponsor Group and the Select Shareholders in the ratio 79:21. 

ISSUE DETAILS/CAPITAL HISTORY:
NST is coming out with its maiden REITs issue worth Rs. 3200 cr. comprising a fresh issue of Rs. 1400 cr. and an Offer for Sale (OFS) of Rs. 1800 cr. NST has announced a price band of Rs. 95 - Rs. 100 for this issue. The issue opens for subscription on May 09, 2023, and will close on May 11, 2023. The minimum application is to be made for 150 Units and in multiples thereon, thereafter. Post allotment, REITs will be listed on BSE and NSE. NST has allocated not more than 75% for Institutional Investors and net less than 25% for Non-Institutional Investors. Post allotment, units will be listed on BSE and NSE. While allotment will be proportionate, trading will take place in a lot of one unit. 

Out of the net proceeds of the fresh issue, NST will use Rs. 250 cr. cr. for partial or full repayment/prepayment of debt securities, Rs. 1050 cr. for the acquisition of stake and redemption of debt securities in certain Asset SPVs, and the rest for general corporate purposes. 

The Units being issued and transferred shall rank pari passu in all respects, including rights in respect of the distribution. The Unitholders will be entitled to participate in the distribution, if any, declared by Nexus Select Trust after the date of Allotment. In case of any alteration of the terms of the Units, including the terms of the Offer, which may adversely affect the interest of the Unitholders, approval from the Unitholders shall be required where the votes cast in favour of the resolution shall be more than the votes cast against the resolution.

The joint Book Running Lead Managers (BRLMs) to this issue are BofA Securities India Ltd., Axis Capital Ltd., Citigroup Global Markets India Pvt. Ltd., HSBC Securities and Capital Markets (India) Pvt. Ltd., IIFL Securities Ltd., JM Financial Ltd., J.P. Morgan India Pvt. Ltd., Kotak Mahindra Capital Co. Ltd., Morgan Stanley India Co. Pvt. Ltd., and SBI Capital Markets Ltd. while KFin Technologies Ltd. is the registrar of the issue. 

CORPORATE CREDIT RATING:
NST has been assigned a provisional corporate credit rating of AAA/Stable by CRISIL and ICRA.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, NST has (on a combined basis) posted a turnover/net profit - (loss) of Rs. 1780.19 cr. / Rs. 206.74 cr. (FY20), Rs. 1047.97 cr. / Rs. - (199.11) cr. (FY21), and Rs. 1398.52 cr. / Rs. - (10.95) cr. (FY22). Thus it suffered a setback in line with the general trends globally on account of the Pandemic. 

For 3Qs of FY23 ended on December 31, 2022, it earned a net profit of Rs. 257.02 cr. on a turnover of Rs. 1498.35 cr. and has thus overshot FY20's full year's net. This also indicates likely trends going forward with the changed lifestyle post-pandemic and growth in retail consumption in the world's largest consumer destination i.e. India. 

Post-IPO, the equity value of the trust will be Rs. 15150.00 cr. and NAV per unit in relation to the offer price shall be 0.78 at the cap price. Its NAV as of December 31, 2022, is Rs. 127.73 per unit.

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 six 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. The net distributable cash flows shall be calculated in accordance with the REIT Regulations and any circular, notification or guidelines issued thereunder and the SEBI Guidelines. These units will thus have a regular steady income as well as appreciation on residual portion in its realty assets on decreasing value of units till final redemption. 

In terms of the REIT Regulations, if the distribution is not made within 15 days of the declaration, the Manager shall be liable to pay interest to the Unitholders at the rate of 15% per annum until the distribution is made. Such interest shall not be recovered in the form of fees or any other form payable to the Manager by the Nexus Select Trust. However, Unitholders should note that there is no assurance or guarantee that distributions will be made in any amount or at all.

TAX BENEFITS:
The possible tax benefits available to Nexus Select Trust (the "Trust") and its unitholders under the Income-tax Act, 1961 ('the Act') as amended by the Finance Act, 2023 read with the Income Tax Rules, 1962, i.e. applicable for the Financial Year 2023-24 relevant to the assessment year 2024-25 (referred to as 'the Direct Tax Law'), presently in force in India. Several of these benefits depend on the Trust or its unitholders fulfilling the conditions prescribed under the relevant provisions of the Direct Tax Law. Hence, the ability of the Trust or its unitholders to derive the tax benefits is dependent upon fulfilling such conditions, which are based on business imperatives the Trust may face in the future, which, the Trust or its unitholders may or may not choose to fulfil.

As per the auditor's report, this statement is only intended to provide general information to the investors and is neither designed nor intended to be a substitute for professional tax advice. In view of the individual nature of the tax consequences and the changing Direct Tax Laws, each investor is advised to consult his or her own tax consultant with respect to the specific tax implications arising out of their participation in the proposed initial public offering of Units of the Trust (the "Offer") in accordance with the provisions of Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014, as amended and the guidelines and circulars issued thereunder (the "REIT Regulations"). 

COMPARISON WITH LISTED PEERS:
As per the offer document, NST has no listed peers to compare with. As all existing listed REITs in India operate primarily in the commercial office sector.

NB: For REITs, the issue price is considered the Face Value of the Unit

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