Phoenix Mills gets ‘Buy'”rating; lease renewals are key

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Published: August 23, 2016 6:01:17 AM

Its development business can generate net cash flow of R25-30 bn over the next 4-5 years, being used for growth/deleveraging

Rental business: Collective rental income from malls grew mere 5% y-o-y on 7% y-o-y growth in consumption. Rental growth can revive driven by rental renewals (1.9 msf across malls over FY17-18, which is 40% of its leasable area) at significantly higher Minimum Guarantees (MG) and better revenue share terms (except Kurla mall where rentals are not to be revised). We revise our assumptions to factor in higher rental escalations (for e.g. renewals at Pune and Bangalore malls are being negotiated at 50% higher rentals) and also revise our cap rates lower (to 8% from 9% earlier) to factor in low risk to rentals.

Development business: No new launches in Q1; new sales in ongoing projects were muted (vs. R0.5 bn in Q4). However, collections remained steady at R1.1 bn (vs R1.2 bn in Q4). Development business can generate net cash flow of R25-30 bn over next 4-5 years, which could be used to fund growth/ deleveraging.

Q1 highlights

High Street Phoenix: While avg rentals increased 9% y-o-y to R302 psf p.m, rental income grew mere 7% y-o-y mainly due to lower occupancy (91% vs. 94% in Q1’16), resulting in moderate growth in consumption (up 5% y-o-y).

Development portfolio: Revenue recognition from development portfolio stood at R0.95 bn (up 15% y-o-y). Net debt declined by R1 bn; however, management indicated overdraft facilities of R1-1.5 bn which it could draw if need be. PML has made all the payments related to stake purchases. Having acquired majority stakes in key assets, it has no near-term plans to acquire additional stakes. Project Kessaku is expected to cross revenue recognition threshold in Q2FY17.

Growth strategy: PML plans to acquire ready/under construction malls across India, if they can generate IRRs in mid-20s. PML is also looking at acquiring land for mixed-use developments.

Other highlights

Towers 1,2 and 3 of One Bangalore West project have received Occupation Certificate (OC), with OC for towers 4 and 5 expected in the coming months. While Bangalore real estate market has been tepid, the company does not plan to lower its selling prices in its projects. In fact, the company plans to increase price in its One Bangalore West project after receiving the OC.

St. Regis: While room revenue increased 34% y-o-y, Ebitda increased 18% y-o-y mainly on account of certain refurbishment expenses and management fees paid to St. Regis (in Q1FY16, the hotel did not have an operator).

Rebranding of hotel to St. Regis is yielding results with rack rates increasing 19% y-o-y to R9,957/ night in Q1FY17.

Operating margin remained flat at 46% in Q1. Ebitda increased 12% y-o-y. The company has unsold area of 0.45 msf in its commercial portfolio, which it plans to lease out (and not sell) at R65-85 psf per month. PML is consciously delaying launch of new projects in Bangalore and Chennai in wake of slowdown in demand. The company is focusing on monetising its unsold inventory in its launched projects. Average cost of debt has declined to 11% from 11.8% as on Mar ’15.

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