Sheth Developers & Realtors (India) Limited: Ratings Reaffirmed
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March 26, 2021 Sheth Developers & Realtors (India) Limited: Ratings reaffirmed; removed from watch with Negative implication and ‘Negative’ outlook assigned Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) [ICRA]A (Negative); removed from Fund based-Term Loan 600.00 600.00 watch with Negative implications and ‘Negative’ outlook assigned Total 600.00 600.00 *Instrument details are provided in Annexure-1 Rationale The negative outlook takes into consideration the continuing impact of the Covid-19 pandemic on the operations of Sheth Developers & Realtors (India) Limited’s (SDRIL). The company owns and operates Viviana Mall in Thane, Maharastra. Mandatory closure of mall operations from March 22, 2020 to September 01, 2020 already impacted the company’s cash flows for the current year, as it extended waivers on rentals to the tenants. Furthermore, the company’s business risk profile remained under pressure, even after the commencement of operations, with footfalls and trading densities remains below pre-Covid levels. Now, with the recent surge in Covid cases in the Thane region, and the regulation mandating Covid test for mall entry, footfalls may be further impacted. Any second round of rental waiver or deferment of rent payments will continue to constrain the cash flows of the company into FY2022 and will remain a key monitorable. ICRA will continue to monitor the rapidly changing situation and possible impact on the risk profile of the company. The rating continues to draw strength from the attractive location of SDRIL’s sole retail property ‘Viviana Mall’ in Thane, Maharashtra and healthy operational profile marked by high occupancy rates, with presence of diversified & reputed tenants. The mall has an established operating track record of more than seven years with a diverse lessee profile, consisting of high- end retail stores, multiplex, food court and restaurants with reputed tenants such as H&M, Shoppers Stop, Cinepolis and Lifestyle. The project site is located in the Laxmi Nagar area of Thane (Maharashtra), adjoining the Eastern Express Highway, and attracts footfall from the catchment areas as well as remote areas of Thane city. While there are three to four malls in the surrounding area, the competition for Viviana’s mall is limited, given its significantly larger size and presence of established brands as its tenants. A combination of attractive location and catchment area as well as robust mall management capabilities have enabled the mall to keep the occupancy levels at pre-Covid levels i.e. at 99.8% as on February 28, 2021, with vacancies post the onset of the pandemic being entirely replaced by new tenants. Further, the average footfalls for the period Sep 01, 2020 – February 28, 2020 reverted to 46% of pre-Covid levels and trading densities to 67% of pre-Covid levels. The rating also factors in moderate leverage (Gross debt/Net operating income remains moderate at around 4.6 times as on December 31, 2020 despite incremental debt availed in FY2020 to fund the pay-out to existing shareholders in FY2020), the presence of a debt servicing reserve account (DSRA) in the form of fixed deposit (Rs.10.62 crore as on December 31, 2020) equivalent to two months of debt repayment, and an escrow structure, which prioritizes debt servicing, thus enhancing the credit profile. ICRA continues to draw comfort from the strong investor profile (GIC) and experienced management with three decades of expertise and experience in the realty and leasing industries. The rating, however, remains constrained by the moderate lessee concentration risk, with the top-five tenants occupying 43% of the total leasable area as of Dec 31, 2020 and estimated to contribute to 30% of the total rental income in FY2021. The rating also remains exposed to lease vacancy risk and rental escalation risk as 30% of leases are expiring and 5% of the leases are falling due for escalation in FY2022. Of the total leased area of 9.43 lakh sqft, 1.31 lakh sqft are expiring in FY2022. Weighted average balance lease tenure for the property is pegged at 2 years as on Dec 31, 2020; which further accentuates the risk. The vacancy and escalation risk are also exacerbated by the possible adverse impact of the Covid-19 pandemic on the business prospects of tenants, thereby exerting pressure on their cash flows. However, ICRA notes that while 0.19 lakh sqft of area was www.icra .in Page | 1 vacated by the tenants during 9M FY2021, the same was occupied by new tenants within the same period itself, demonstrating the healthy operating profile of the mall, and mitigating vacancy risks to an extent. The rating is further constrained by asset and geographical concentration, as the entire leasable area is at a single location. The cash cover will also remain susceptible to volatility in interest rates, given that the interest rate is floating in nature. Key rating drivers and their description Credit strengths Healthy operational profile marked by high occupancy rates, diversified lessee profile and favorable location - Operational since June 2013, ‘Viviana mall’ has an established operating track record of more than seven years. The mall has a diverse lessee profile, consisting of high-end retail stores, multiplex, food court and restaurants with reputed tenants such as H&M, Shoppers Stop, Cinepolis and Lifestyle. The project site is located in the Laxmi Nagar area of Thane (Maharashtra), adjoining the Eastern Express Highway, and it attracts footfall from the catchment areas as well as remote areas of Thane city. While there are three to four malls in the surrounding area, the competition for Viviana’s mall is limited, given its significantly larger size and presence of established brands as its tenants. A combination of attractive location and catchment area as well as robust mall management capabilities have enabled the mall to keep the occupancy levels to pre-Covid levels i.e. at 99.8% as on February 28, 2021, with vacancies post the onset of of the pandemic being entirely replaced by new tenants. Further, the average footfalls for the period Sep 01, 2020 – February 28, 2020 have reverted to 46% of pre-Covid levels and trading densities to 67% of pre-Covid levels. However, the impact of the recent surge in Covid cases in the Thane region, and the regulation mandating Covid test for mall entry on the same remains to be seen. Moderate leverage; Presence of structural features such as escrow mechanism and DSRA – The company’s Gross debt/Net operating income remains moderate at around 4.6 times as on December 31, 2020 despite incremental debt availed in FY2020 to fund the pay-out to existing shareholders in FY2020. Further, the company has created a debt servicing reserve account (DSRA) in the form of fixed deposit (Rs.10.62 crore as on December 31, 2020) equivalent to two months of debt repayment. The receivables are routed through an escrow mechanism to ensure prioritization of debt servicing. Presence of DSRA coupled with adequate liquidity profile of the company underpins the rating. ICRA estimates the cumulative DSCR to remain healthy at around 1.7x times over the tenure of the loan. Experienced management with three decades of expertise and experience in realty and leasing industries and strong investor profile – SDRIL is promoted by the Ashwin Sheth Group, holding 33.98% stake, 17.02% stake being held by Precious Trading and Investments Ltd (subsidiary of Sheth Developers Private Limited holding 74.99% and balance 25.01% being with Public) and GIC (Singaporean Sovereign wealth fund holding through Reco Fern Pte. Ltd., Singapore) holding 49.0% stake. The Ashwin Sheth Group has more than two decades of experience in residential real estate development and commercial leasing. With major operations/project located in Mumbai and Dubai, the Group has developed more than 13 million sq. ft. across more than 54 residential, commercial and mixed-use projects. GIC has been an active investor in India in the recent years with an investment portfolio of around US$ 2 billion. The mall is expected to benefit from GIC’s presence and experienced management in terms of operational and financial synergies. Credit challenges Adverse impact of Covid on FY2021 cashflows, with rental waivers granted to tenants; risks from increasing Covid cases in the region - The negative outlook takes into consideration the continuing impact of the Covid-19 pandemic on the operations of Sheth Developers & Realtors (India) Limited’s (SDRIL). The company owns and operates Viviana Mall in Thane, Maharastra. Mandatory closure of mall operations from March 22, 2020 to September 01, 2020 already impacted the company’s cash flows for the current year, as it extended waivers on rentals to the tenants. Furthermore, the company’s business risk profile remained under pressure, even after the commencement of operations, with footfalls and trading densities remains below pre-Covid levels. Now, with the recent surge in Covid cases in the Thane region, and the regulation mandating Covid test for mall entry, footfalls may be further impacted. Any second round of rental waiver or deferment of rent payments will continue www.icra .in Page | 2 to constrain the cash flows of the company into FY2022 and will remain a key monitorable. ICRA will continue to monitor the rapidly changing situation and possible impact on the risk profile of the company. Comfort is drawn from the company’s adequate liquidity position, with unencumbered cash and bank balance of Rs.14.2 crore, presence of DSRA equivalent to two months of interest and principal repayment and unutilized overdraft balance of Rs.30 crore as on Dec 31, 2020. Moderate lessee concentration at the property - Lease concentration risk remains moderate with the top-five tenants occupying 43% of the total leasable area as of Dec 31, 2020 and estimated to contribute to 30% of the total rental income in FY2021.