Structured Finance

www.indiaratings.co.in 4 August 2014

Commercial Mortgage

Intime Properties Limited Presale

Capital Structure

Class Issuance

Amount (INRm) Legal Maturity Long-Term Rating CE

a (%) Outlook

Complexity Indicator

b

Proposed Non-Convertible Debentures

3,400.0 Aug 2023 IND AAA(SO)(exp) 12.0 Stable High

Expected ratings assigned on 7 July 2014 do not reflect final ratings and are based on information provided by the issuer as of 6 July 2014. These expected ratings are contingent on final documents conforming to information already received. Ratings are not a recommendation to buy, sell or hold any security. The offering circular and other material should be reviewed prior to any purchase a Credit enhancement as a percentage of proposed issuance amount

b Ind-Ra‟s complexity indicators are an opinion on the relative complexity of a broad category of instruments expressed

on an ordinal scale of „Low Complexity‟, „Moderate Complexity‟ and „High Complexity‟. „High Complexity‟ refers to an instrument where the relationship between the numerous interdependent risk factors and intrinsic return characteristics is highly involved, requiring forward-looking analysis and projections

Transaction Summary

India Ratings & Research (Ind-Ra) assigned an expected rating to Intime Properties Limited‟s

proposed single class of fixed-rate non-convertible debentures (NCDs) in July 2014. The

proposed issuance of NCDs would be secured by a mortgage over the issuer‟s underlying

commercial office properties and an exclusive charge on commercial lease rental income from

licensees at the properties in Raheja Mindspace in Hyderabad. The funds will be used to

refinance the existing debt, fund reserve accounts and pay closing costs. Any balance would

be used for general corporate purposes of the issuer including loans and advances to any

group companies.

The expected rating of NCDs addresses the timely payment of interest and principal by the

legal maturity in accordance with the transaction documentation.

Key Rating Drivers

Strong Asset Quality: The quality of underlying assets is strong. The assets are part of a

large IT park spanning 110 acres of land in Hyderabad‟s HITEC city, an established IT/ITES

and residential hub. Owing to the superior quality of office spaces and the competitive nature of

rentals, the property owned by Intime is 99% occupied. The current average rental is 8%-12%

lower than that charged in the same micro-market for grade A office spaces.

Marquee Licensees: As of 30 June 2014, the property was 99% occupied by over 35

licensees with the top three tenants namely Novartis Healthcare Pvt Ltd, B A Continuum India

Pvt Ltd (a nonbank subsidiary of Bank of America) and HSBC Electronic Data Processing India

Pvt Ltd accounting for 48.4% of the leasable area and around 53% of the total license fees.

The concentration risk is mitigated by the competitive rentals charged, quality maintenance

offered, newly constructed buildings and strong financial strength of the licensees.

Key Tenant Exit Risk Covered: The lease for Novartis was up for renewal in January 2014 for

five years but has been renewed only for next three years. Novartis has plans of expansion and

is looking for leasing a larger space outside the Mindspace campus. Ind-Ra in its concentration

test found that the transaction is adequately covered to withstand the exit of such key tenants

(see Concentration Test section).

Inside This Report

Capital Structure 1 Transaction Summary 1 Key Rating Drivers 1 Additional Rating Factors 2 Transaction and Legal Structure 3 Disclaimer 6 Property Overview 6 Tenancy 7 Economic Environment and Asset Outlook 8 Market Overview 8 Ind-Ra‟s Cash Flow Analysis 10 Rating Sensitivity Analysis 11 Counterparty Risk 12 Performance Analytics 12 Appendix1: Sponsor Overview 13

Analyst

Jatin Nanaware

+91 22 4000 1761

jatin.nanaware@indiaratings.co.in

Structured Finance

Intime Properties Limited

August 2014 2

Adequate DSCR, LTV: In the agency‟s stabilised cash flow scenario, adjusted net cash flow

(Ind-Ra NCF) and the debt service reserve account (DSRA) balance are found to have an

adequate debt service coverage ratio (DSCR) cover in the range of 2.15x-2.35x over the

annual debt to be serviced. Also, Ind-Ra‟s estimated property value results in an initial loan-to-

value (LTV) of 47.7% of the debt amount, which is higher than the LTV computed using third

party valuation. Both DSCR and LTV ratios are in line with the benchmark levels expected for

the assigned rating.

Partial Amortisation Reduces Refinance Risk: Ind-Ra views NCDs‟ amortising structure as

being less risky than the one that pays interest only, as amortisation reduces the size of balloon

payment and potential refinancing risk. Balloon LTV is close to 35% based on Ind-Ra estimated

initial property value, with 25.7% of scheduled amortisation in six years.

Rating Sensitivity: A 10% decline in Ind-Ra NCF for the entire tenor of the transaction could

result in a one-notch rating downgrade. Similarly, over 30% decline in Ind-Ra NCF for the entire

tenor could result in the rating migrating below investment grade.

Additional Rating Factors

SPV Nature of Issuer: The issuer is similar to a structured finance SPV, with no other

business operations than to manage the property and no financial obligation other than NCDs.

The rating on the NCD issuance has thus been analysed like a typical CMBS issuance, given

predictable cash flows, long-term leases and absence of significant financial or business risks.

DSRA: Debt holders benefit from the presence of a pre-funded DSRA equivalent to 10 months

of average debt service or 12% of the initial principal outstanding at transaction closing.

Extreme Situation Analysis: In Ind-Ra‟s break-even analysis, investors would still receive

timely payments if net operating income (NOI) was to drop by 45% from the FY14 reported NOI

for the entire period of the transaction.

Sponsorship and Management: The property sponsor, K Raheja Group, has significant

expertise and a proven track record in the leasing and maintenance of such assets.

Cash Trap Trigger Mechanism: The presence of performance-based and security cover

triggers in transaction structure provides cushion in times of stress. If any of these triggers are

breached, any surplus lying in the credit of the escrow account would be trapped in the escrow

account or in permissible investments and not transferred to the current account of the issuer

till the time the trigger is cured.

The three-month average of weighted average (WA) base rent drops below INR30/sqft/month as evidenced by a quarterly chartered accountant report.

The three-month average occupancy level in the subject property falls below 85%, as evidenced by a quarterly chartered accountant report.

The ratio of the aggregate valuations of the mortgaged property as furnished by a reputed third party valuer, to the value of the amounts outstanding falls below 2x.

After four years from issuance, all residual cash flows will be trapped in the escrow account /permissible investments charged in favour of the debenture trustee, for payment to NCD holders.

Lock Box Mechanism: All receivables including rent and reimbursement expenses will be

deposited directly in an escrow account which is charged in the favour of the debenture trustee

on a monthly basis. Any payments made from the escrow account would be subject to the

terms of debenture trust deed.

Applicable Criteria

Structured Finance Rating Criteria (September 2012)

Key Information

Issuer: Intime Properties Ltd

Put Option Provider: Content

Properties Pvt Ltd

Debenture Trustee: IDBI

Trusteeship Co Ltd

Approved Bank: Axis Bank Ltd

(„IND AAA‟/Stable)

Issuer Call Options: 2 call

Options at the end of 4 and 6

years from issuance

Third Party Put Option: At the

end of 6th

year from issuance

Total Initial Principal: INR

3,400m

Scheduled Maturity

Transaction: 6 Years from

issuance

Legal Maturity of the

Transaction: 9 Years from

issuance

Structured Finance

Intime Properties Limited

August 2014 3

Transaction and Legal Structure

In the proposed transaction, future lease receivables from the commercial office property would

be charged to the debenture trustee for the benefit of NCD investors. The obligations would

also be secured by first ranking equitable mortgage over the property. The obligations of put

option seller would be secured by similar equitable mortgage rights over the same property.

The transaction has a scheduled tenor of six years with a legal tail period of three years. The

fixed-rate NCDs have an additional step-up coupon feature, if the first call option at the end of

fourth year since issuance is not exercised.

Investor payouts will be serviced by the lease rentals paid by the tenants and any other income

generated from the property.

Figure 1

Simplifies Transaction Structure

Repayment Structure

The transaction is of partially amortising nature. Of the initial Issuance amount of INR3,400m,

25.8% is scheduled to be repaid in the initial six years after the issuance. Additionally, all

excess cash flows trapped from the beginning of the fifth year would be used to repay the

balloon amount. If the balloon amount is not repaid by the issuer by the end of the sixth year,

the debenture trustee would have the right to put the outstanding NCDs to the put option

provider for a price equivalent to the outstanding obligations of NCD holders. A failure by the

put option provider to honour the put option would make it a defaulter, resulting in the

debenture trustee enforcing the security. These sale proceeds would be first used to repay the

outstanding NCD holders.

Call and Put Option

The transaction provides for two call options to the issuer, at the end of the fourth and sixth

years. If the call option at the end of the fourth year is not exercised, all excess cash flows

Structure Diagram

Property Owner/

IssuerInvestors

Corporate TenantsEscrow

Accounts

Debenture/

Trustee (DT)

DSRA

Account

Put Option

Provider

Purchase Consideration

Lease

Lease

Rentals

To fund any

shortfalls

NCD

Payments

Operational

Rights to DT

Put Option on

Debentures

NCD Issuance

Assignment of Security Package =

Lease Receivables + First & pari-

passu Mortgage to the Property +

Charge Over all Transaction

Accounts

Note: This diagram represents Ind-Ra‟s interpretation of the transaction structure as represented in the

transaction documents

Source: Transaction documentsFigure 2 Repayment Schedule

Months since issuance

Principal schedule

per month (INRm)

Principal schedule per year

(INRm)

1-12 11.90 142.80 13-24 11.90 142.80 25-36 11.90 142.80 37-48 11.90 142.80 49-60 11.90 142.80 61-72 13.60 163.20

Source: Ind-Ra

Structured Finance

Intime Properties Limited

August 2014 4

(starting of the fifth year) after servicing the scheduled debt amortisation would be trapped in an

escrow account or permissible investments till the transaction matures.

If the second call option is also not exercised, the debenture trustee would have the right to

redeem the balloon amount by exercising legal rights under the put option agreement. A failure

by the put option provider to purchase the outstanding NCDs entitles the trustee to initiate the

sale process of the property, which would be used to redeem the outstanding NCDs prior to

their legal maturity.

Priority of Payments

Moneys in the escrow account shall first be applied in the following order of priority:

Figure 3 Summary of Payments Waterfall

1 Statutory or regulatory dues payable by the assignee 2 Towards any fees and expenses 3 Towards payment of insurance premium 4 Overdue payments of the NCDs 5 Scheduled interest and principal payments of the NCD 6 Replenishment of the credit enhancement facility to the extent of utilisation 7 To the extent, the issuer has failed to deposit amounts in the security deposit reserve account

(SDRA) 8 Any surplus lying to the credit of the escrow account will be used under the following conditions:

o Up to 48th month from the date of issuance of debentures: If there is no event of default outstanding and no performance based or security triggers breached under the debentures, the entire surplus will be transferred to the current account of the issuer. However, if at the end of any month either a Default is outstanding or security or performance based triggers are breached, the entire surplus would flow into the permitted investments account till both the above conditions are cured.

o From the 49th month up to maturity: The surplus will be transferred only to the permitted investments account for the repayment of the principal amount outstanding according to the repayment schedule.

Source: Transaction documents

If the surplus funds are retained in the escrow account and not flown back to the issuer

corporate account, the issuer would be entitled to request the debenture trustee for a

withdrawal of amounts corresponding to the actual maintenance expenses, reimbursements

credited by the tenants corresponding to utility bills, etc.

Security Package

The obligations of the issuer under the debenture documents is secured by

The first and pari-passu charge on all three building aggregating to the leasable area of 1.71 million sq ft of IT space by way of a deposit of title deed. The put option seller‟s obligations to the debenture trustee are also secured by the first and pari-passu charge on the property.

A power of attorney to register the mortgage security in favour of the debenture trustee at the end of six years, if the second call option is not exercised

The first and exclusive charge on lease receivables arising from lease agreements

Charge by way of hypothecation over DSRA, escrow account, permitted investments account, tax reserve account (TRA) and security deposit account

Assignment of all insurance policies relating to the property in favour of the security trustee

Cash Management Provisions

All amounts to be received from lessee and licensees under the lease agreements (including

but not limited to premium, rent, fit-out rent, maintenance, business centre charges,

reimbursements of utility bills and other expenses, security deposits, etc.) and all proceeds

from each insurance policy would be deposited into the escrow account controlled by the

debenture trustee. Additionally, the issuer undertakes that any receivables received in its

corporate account from any of the tenants post the issuance would be swept into the escrow

account, in accordance with the transaction documents. The issuer is likely to intimate all

Structured Finance

Intime Properties Limited

August 2014 5

licensees of the debenture account into which all license fees and other dues are to be remitted

by licensees for the tenor of the transaction.

Any surplus lying in the escrow account could be invested into permissible investments

provided an exclusive charge is created on these accounts in favour of the debenture trustee.

Reserve Accounts

DSRA: It is proposed to be maintained as a fixed deposit in a bank rated at least „IND

AAA‟/Stable or with liquid mutual funds with rating of at least „IND AAA‟ or equivalent.

The DSRA account would be funded upfront to the extent of INR408m and would be available

till the life of the transaction. Funds in the account would act as a reserve for the issuer to meet

debt repayments in case of any shortfall on due date. DSRA can be replenished according to

the cash flow waterfall mechanism.

The transaction documents provide for an option to substitute DSRA with an unconditional

irrevocable guarantee from an „IND AAA‟ rated financial institute at a later date.

SDRA: If a termination notice is served or any lease is not renewed, the issuer is likely to fund

SDRA with an amount equivalent to the security deposit from its own sources and not from the

escrow account. Till the time the issuer arranges for such funds, any surplus lying to the credit

of the escrow account would be transferred to SDRA and not to the current account of the

issuer. On successful funding of the escrow account, the security deposit received from a new

lessee will not be required to be deposited in the escrow account.

TRA: The account would be funded to the extent of INR90m. Funds in the account would be

used by the issuer to cover service tax obligations pertaining to the show cause notice received

by the company under contest. Any service tax related liability over and above those covered

here would be on account of the issuer. The facility could be reduced or withdrawn after the

approval of the debenture trustee.

Future Indebtedness

The issuer besides any unsecured trade payables shall not incur any financial indebtedness. It

shall also not provide any guarantee on behalf of any person, except any subordinated debt

from its promoter and/or promoter‟s subsidiaries. Such promoter debt shall be payable only

after NCDs are paid in full. Any other indebtedness would need the prior approval of debenture

trustee.

Legal Analysis

Ind-Ra reviewed draft transaction documentation to understand whether the terms and

structure of the transaction conformed to information previously received.

The key documents related to the transaction include the following:

Debenture trust deed

Accounts agreement

Deep of Hypothecation

Put option agreement

Power of attorney

Term sheet

Information memorandum

The drafts of closing and supplemental legal opinions and an opinion on the title provided by

the transaction counsel covers the following key issues:

Clear Title of the Building and the Land: On the basis of the title report, the issuer has the

Structured Finance

Intime Properties Limited

August 2014 6

valid right, title, interest in and possession of the mortgaged property.

Enforceability of Transaction Documents: The transaction documents constitute the legal, valid and binding obligations of the issuer and the option provider, and are enforceable with their respective terms.

Validity and Enforceability of Security: The security documents constitute the legal, valid and binding obligations of the issuer and are enforceable in accordance with their respective terms.

Bankruptcy Remoteness of the Issuer with any of Promoters: In the event of the liquidation or insolvency of the promoters, the assets of the issuer shall not be deemed to be the assets of the promoters and shall not be available to the creditors of such promoters.

The power of attorney may be exercised by the debenture trustee without any further issuer intervention

Validity of Lease Agreements on Issuer‟s Liquidation: The lease agreements will remain operative upon liquidation of the issuer subject to the terms of the lease agreement.

Disclaimer

For the avoidance of doubt, Ind-Ra relies, in its credit analysis, on legal and/or tax opinions

provided by transaction counsel. As Ind-Ra has always made clear, Ind-Ra does not provide

legal and/or tax advice or confirm that the legal and/or tax opinions or any other transaction

documents or any transaction structures are sufficient for any purpose. The agency draws your

attention to the disclaimer at the foot of this report, which makes it clear that this report does

not constitute legal, tax and/or structuring advice from Ind-Ra, and should not be used or

interpreted as legal, tax and/or structuring advice from Ind-Ra. Should readers of this report

need legal, tax and/or structuring advice, they are urged to contact relevant advisers in the

relevant jurisdictions.

Property Overview

Intime Properties is a JV arrangement between K Raheja Corp group (89%) and Andhra

Pradesh Industrial Infrastructure Corporation Limited (APIIC, 11%). It has three commercial

buildings with a saleable area of 1.71 million sq ft, spanning across 8.52 acres. These buildings

were developed by the issuer, who also maintains them. They are part of a larger development

called Raheja Mindspace located in Madhapur, Hyderabad, an established IT/ITES and

residential hub. There are over 35 corporate tenants occupying these three buildings.

Raheja Mindspace Park is spanning across 110 acres. It has 9.3 million sq ft of office space

along with a hotel, a residential project and a state-of-the-art retail mall within its campus. The

park has vast open spaces, greenery and tree-lined avenues along the roads.

The park provides both multitenant and built-to-suit facilities to companies namely IBM,

Accenture, CSC, Bank of America, Facebook and Novartis. Other companies in multitenant

facilities include Qualcomm, Zensar Technologies Ltd, Oracle, Accenture, Amazon, GE,

Verizon, Thomson Reuters and Wells Fargo. As of 31 March 2014, over 50,000 professionals

worked in the park.

Figure 6

Source: Issuer

Figure 4 Building Area

Building Area (m Square

Feet)

Building 5B 0.25 Building 6 0.39 Building 9 1.07

Source: Ind-Ra

Figure 5 Building 5B

Building 6

Building 9

Source: Issuer

Structured Finance

Intime Properties Limited

August 2014 7

All three commercial properties were developed during 2008 and 2009. The property has

historically maintained a high level of occupancy. The current occupancy level of the property is

99%.

Building 5B was constructed in 2008; the property has six floors of office space, around 600

vehicle parking spaces and five elevators. Building 6, constructed in 2009, is a LEED Certified

Platinum Rated by Indian Green Building Council. It has nine floors of office space, around 350

vehicle parking spaces and six elevators. Building 9, which covers nearly 63% of the saleable

area for the SPV, was constructed in 2009. This building is occupied by multiple tenants. The

property has 11 floors of office space, around 900 vehicle parking spaces and 22 elevators.

Tenancy

As of 30 June 2014, the property was 99% occupied by over 35 tenants, most notably:

Novartis, BA Continuum, HSBC, Deloitte, Qualcomm India, Amazon, Verizon, Broadcom and

Kidde India.

The top three tenants at the property comprise 0.83 million sq ft, representing 48.3% of the net

rentable area (NRA) and 52.9% of gross rentals charged. Weighted average gross rent for the

top three tenants is INR 40.16/sf/month compared with overall average of INR36.95/sf/month.

Novartis is the largest tenant at the property (22.6% of NRA), occupying the entire building 6, a

Platinum Rated Green Building. Owing to its platinum rating and location within the campus, it

enjoys higher per sq ft rentals than other tenants. On visual inspection, the amenities and

infrastructure created by Novartis in the building is of superior quality and the fit out costs

incurred would also be on a higher side. However, the lease for Novartis, up for renewal in

January 2014, was renewed for only three years instead of five years according to the earlier

agreement. This was because the current space is inadequate to accommodate Novartis‟

expansion plans and it may relocate to an alternate premise in West Hyderabad. Ind-Ra in its

cash flow model scenario has tested the cash flow adequacy for such an event.

BA Continuum is the second-largest tenant at the property (14.3% of NRA). It is a non-bank

subsidiary of Bank of America. BA Continuum supports business process, information

technology and knowledge process for all major lines of business at Bank of America. Besides

Building 5B, it also occupies Building 5A and spaces in buildings 2A and 2B. It occupies close

to 0.54 million sq ft in the campus and employs close to 8,500 employees in the campus. Also,

BA Continuum‟s current rentals are at an attractive discount of 10%-15% as against the current

charges in the micromarket. In H113, it renewed the lease for another five years.

HSBC (EDP), Qualcomm and Deloitte occupies two office floors each in the multitenant

Building 9, contributing about one-thirds of the total NRA. The key advantage for Building 9 is

its diversification in tenancy. The building has over 30 distinct tenants and the flexibility to find

an alternate tenant if any of them vacates is much higher than for a singly occupied custom-

made office building.

Figure 7 Top Five Tenants

Tenant Current lease expiry date

a NRA m square foot % of total NRA

Novartis (Building 6) December 2016 0.39 22.7 BA Continuum (Building 5B) April 2018 0.25 14.4 Deloitte (Building 9) January 2016 0.19 11.3 HSBC EDP (Building 9) April 2022 0.19 11.2 Qualcomm (Building 9) March 2015 0.18 10.4 Total 1.20 70.0 a BA Continuum, Deloitte and Qualcomm have another five-year lease renewal option

Source: Ind-Ra

Structured Finance

Intime Properties Limited

August 2014 8

Tenant Rollover Schedule

There has been an agreement on commercial terms between the tenants and the lessor for the

period of lease term. While the lessee can decide to terminate the agreement by giving the

notice period, the lessor cannot terminate the agreement for any commercial reasons. Many of

the lease agreements have an option to renew the leases for an additional term at pre-agreed

commercial terms. The average residual lease period for the property is close to 69 months.

Figure 8 Tenant Rollover Schedule

Year % of NRA % of rent % of rent (cumulative) Key tenant lease expiry (including renewal option)

2014 0.00 0.00 0.00 2015 0.00 0.00 0.00 2016 0.02 0.02 0.02 2017 23.62 29.23 29.25 Novartis (January 2017) 2018 (first call option) 7.69 7.09 36.34 Amazon Development Centre 2019 9.92 9.40 45.73 Broadcom, UTC, Kidde 2020 (schedule maturity)

18.37 16.34 62.07 Qualcomm, Deloitte(December 2020)

2021 6.26 5.64 67.71 Deloitte (January 2021) 2022 (legal maturity) 12.98 10.82 78.53 HSBC (EDP)

Source: Ind-Ra Analysis

Economic Environment and Asset Outlook

The real estate sector in India struggled through much of 2012 and 2013. Ind-Ra has

maintained a negative to stable outlook on the Indian real estate sector for 2014 in view of the

emerging stability amid persistent weak demand drivers and weak credit metrics of the

dominant players.

Commercial real estate demand continued to be subdued in 2013, due to the on-going

economic slowdown and the consequent fall in headcount additions. In the IT-ITeS sector, this

contributes significantly to commercial real estate demand. Headcount addition in 2013 fell

about 30% yoy. Ind-Ra expects the subdued commercial property demand to continue in 2014,

due to the continued slow economic growth which has impacted fresh hiring in most sectors.

Both capital values and lease rentals for commercial properties in India have substantially

corrected post the 2008-2009 economic crisis due to a slowdown in both the domestic and

global economies, and also due to real estate becoming unaffordable. The capital values and

rentals of a commercial space have stabilised at the lower end and present limited downside.

The long-term view on the Indian real estate industry is positive as fundamental demand

drivers such as increasing urbanisation, favourable demographics, growth of services sector

and rising incomes remain intact.

Market Overview

The commercial market in Hyderabad is divided in to three broad areas as follows:

Central Business District

West Zone (IT/extended IT corridor)

Peripheral Business District

Central Business District is the existing commercial hub of the city, which broadly caters to non-

IT focused businesses. One of the constraints in this area is high density, limited space and

infrastructure provisions.

The West Zone has developed into an alternate commercial hub, which predominantly caters to

Structured Finance

Intime Properties Limited

August 2014 9

IT/ITES activities and are characterised by Grade A commercial spaces with superior

infrastructure provisions. It has proximity to the Nehru Outer Ring Road. Also, the connectivity

would improve once the Hyderabad Metro Rail Project is completed.

Peripheral Business District is the emerging hub for commercial activity in Hyderabad with the

development of organised SEZ and non-SEZ space options.

According to CBRE, Hyderabad had a total commercial stock of about 38.8 million sq ft as of

end-1Q14, of which West Zone constitutes around 75% of the total completed stock. Also, of

the total office stock in Hyderabad, IT/ITES component constitutes nearly 77%.

Since 2009, Hyderabad witnessed an average annual organised commercial office supply of

about 3.02 million sq ft, of which West Zone constitutes 89%. In the same period, the

Hyderabad witnessed an average annual absorption of about 3.4 million sq ft, of which 2.7

million sq ft comes from West Zone.

CBRE estimates West Zone to witness an influx of over 11–12 million sq ft of commercial

space over the next two to three years. CBRE expects the absorption level in the West Zone to

match the new supply and their assumption of sustainable vacancy rate for the subject property

is 2%-3%. Ind-Ra believes that the new supply will lead to higher-than-current vacancy levels in

the microeconomic market or lead to stabilisation in rental values.

Figure 9

Figure 10

5

10

15

20

25

30

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 1Q14

Supply (LHS) Net absorption (LHS) Vacancy (RHS)

West Hyderabad – Supply, Absorption, Vacancy

(Area m sft)

Source: CBRE Research

(%)

0

5

10

15

20

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2009 2010 2011 2012 2013 1Q14

Supply (LHS) Net absorption (LHS) Vacancy (RHS)

Hyderabad IT Corridor – Supply, Absorption, Vacancy

(Area m sft)

Source: CBRE Research

(%)

Structured Finance

Intime Properties Limited

August 2014 10

Figure 11

Ind-Ra’s Cash Flow Analysis

Ind-Ra arrives at Ind-Ra NCF by making adjustments to the reported property-level revenue,

expenses and capital expenditures in order to reflect its view of sustainable performance

through a commercial real estate cycle. Ind-Ra NCF is used to determine Ind-Ra DSCR and

LTV.

Property Rent Recognition: The weighted average warm shell rent of the property is

INR36.95/sq ft/month. This is comparable to rental rates in the same microeconomic market in

2011. The current average rentals in that location are INR39-45/sq ft/month. The rental rates in

the area where the property is located is nearly 20% lower than Hyderabad Central business

district and significantly lower than other major IT parks in India. Since the current rentals are

8%-12% below the existing market rates, the agency has not made any adjustment to the

rental rates in NCF calculation.

Property Rent Escalations: The executed lease agreements have an escalation clause for

base warm shell rent by 10%-15% after every three years. In a stable economic scenario, most

cities in India have in the past observed these levels of rent escalations. However, Ind-Ra has

not given any benefit to any rent escalations while arriving at NCF.

Vacancy Assumptions: The current vacancy rate of the property is 1.0%. The average

vacancy rate for the Hyderabad IT corridor for the last six years was around 7.0%, with a

declining trend. For the stabilised scenario, Ind-Ra has assumed that one of the 11 office floors

(9.1%) for the multitenant Building 9 would always be vacant for the next nine years. The

stabilised vacancy assumed by the agency is higher than the current and historic vacancies

observed in the Mindspace campus, but similar to the observed vacancies in the

microeconomic market.

Property Insurance: The issuer has arranged for property insurance. The actual insurance

premium cost is around INR2.0m. A higher amount at INR4.0m has been assumed by Ind-Ra

as stabilised insurance cost. The insurance cover of INR3,731.9m is higher than the target debt

amount of INR3,400m.

Common Area Maintenance: Every lease agreement has a contractual obligation for the

lessee to pay common area maintenance (CAM) and campus maintenance charges on a

monthly basis along with a monthly rent. On the basis of the history and future estimations of

the issuer, CAM income would be sufficient to cover all maintenance charges, property

expenses and insurance premiums, leaving a positive CAM margin. However, Ind-Ra has

provided for property taxes and insurance premium separately.

Additionally, Ind-Ra has relied on third-party engineers‟ report to estimate future repair and

maintenance charges towards plant and machinery/HVAC, electrical work, firefighting, lifts and

20

25

30

35

40

45

50

55

60

2007 2008 2009 2010 2011 2012 2013 1Q14

CBD West Zone(INR Per sqft - per month)

Hyderabad Micro Market Rental Trends

Source: CBRE Research

Structured Finance

Intime Properties Limited

August 2014 11

PHE Systems and civil structures for all the three buildings. Ind-Ra has conservatively

assumed a negative CAM margin against the issuer‟s reported positive CAM margin for the

past few years.

Also, the engineer‟s report opines that based on design norms for a sound R.C.C. frame

structure, the total life of all the three buildings is 60 years. Similarly, the total life for plant and

machinery and equipment is estimated to be in the range of 15-20 years, which is well beyond

the life of transaction leading to minimal capex requirements till the NCD maturity.

After all adjustments, Ind-Ra‟s final stabilised NCF represents a haircut of nearly 10% over the

issuer‟s last reported NCF.

Cash Flow Model - Stabilised Scenario

Using the stabilised Ind-Ra NCF, a cash flow model has been developed to arrive at cash flow

DSCRs. Ind-Ra NCF and DSRA balance have an adequate DSCR cover in the range of 2.15x-

2.35x over the annual debt to be serviced till the second early redemption date.

At the second early redemption date, 74.2% of the initial NCD principal remains outstanding

according to the scheduled amortisation. Using Ind-Ra‟s rating level, refinance rate and target

DSCR assumptions, the property‟s cash flows are sufficient to refinance the balloon amount.

Failure to refinance by the second early redemption date would permit the debenture trustee to

enforce the security. Using Ind-Ra NCF and cap rate assumptions, Ind-Ra arrives at a property

value which is lower than third party valuations. Ind-Ra estimates initial LTV and refinance LTV

at 47.7% and 35.4%, respectively. The LTV parameters are within Ind-Ra‟s benchmark levels

for the rating assigned.

Concentration Test Exit of Largest Tenant (Novartis)

Ind-Ra in this scenario has assumed that Novartis leaves in the third year post the NCD

issuance and the time coincides with a cyclical downturn for the asset class leasing market for

Hyderabad. In this scenario, Ind-Ra has conservatively tested for the Novartis tower to be

vacant for two years post its exit and a gradual re-let of the tower in the next four years. Even in

such an extreme scenario, DSCR coverage levels are found sufficient.

Simultaneous Exit of Top Three Tenants (Novartis, BA Continuum and Deloitte)

Ind-Ra in this scenario has assumed that all the top three tenants would vacate simultaneously

in the second year post the NCD issuance. The issuer would take another three years to bring

occupancy back to stable levels. Even in such an extreme scenario, DSCR coverage levels are

found sufficient. Ind-Ra believes that such a scenario is extremely remote.

Extreme Situation Analysis

In Ind-Ra‟s break-even analysis, if the actual NOI drops by 45% from the FY14 reported NOI

for the entire period of the transaction, investors would still receive timely payments.

Rating Sensitivity Analysis

The following rating sensitivities describe how the ratings would react to a further decline in

NCF below Ind-Ra‟s NCF. The implied rating sensitivities indicates only some of the potential

outcomes and do not consider other risk factors to which the transaction is exposed. Stressing

additional risk factors could result in different outcomes. Furthermore, the implied ratings, after

the further NCF stresses are applied, are more akin to what the ratings would be at deal

issuance had those further-stressed NCFs been in place at that time.

The section on rating sensitivities

provides information about the

sensitivity of the rating to model

assumptions. It should not be used

as an indicator of possible future

performance.

Structured Finance

Intime Properties Limited

August 2014 12

Figure 12 Defined Stresses Rating

Original rating IND AAA (SO)(exp) NCF decline by 10% IND AA+(SO)(exp) NCF decline by 20% IND A(SO)(exp) NCF decline by 30% IND BBB-(SO)(exp)

Source: Ind-Ra

Counterparty Risk

Account Bank

The account bank (Axis Bank Ltd, „IND AAA‟/Stable) would hold all key transaction accounts

such as escrow account, DSRA Account, SDRA and TRA. Given the vital role of the account

bank, the NCD ratings would be partially linked to the rating of the account bank, if on a rating

downgrade of the account bank, the issuer fails to replace it with another account bank whose

rating is equivalent to the ratings of the NCDs.

Performance Analytics

The transaction has received expected ratings. Expected ratings indicate that the transaction

can be assigned a final rating, subject to the receipt of executed documentation (transaction

documentation and legal opinions), conforming to information already received.

Ind-Ra will initiate surveillance only once final ratings have been assigned to the transaction.

The agency has a dedicated team of analysts who monitor and review Indian SF transactions

rated by Ind-Ra. Clear and timely reporting is essential to assess the performance of a

transaction and form an accurate credit view.

Structured Finance

Intime Properties Limited

August 2014 13

Appendix1: Sponsor Overview

K. Raheja Corp was formed in 1956 and has over the years transitioned into a well-diversified

corporate house that has made its mark in retailing, hospitality and real estate. The group has

made its presence felt in all the major cities in India mainly Mumbai, Pune, Bangalore,

Coimbatore, etc. with developments of over 20 million sq ft of commercial property and over

2,000 residential projects.

One of the major real estate development projects launched by the group is Mindspace. It

comprises the development of commercial and residential buildings and is located at Mumbai,

Hyderabad, Navi Mumbai and Gandhinagar.

Geographically, the group has focused its activities in the western and southern regions of the

India. Currently, the active projects are based in Mumbai and Pune in the west, Bangalore and

Hyderabad in the south. The group has also planned new projects at Goa and Navi Mumbai.

The group‟s completed residential and commercial real estate projects as well as IT parks are

as follows:

Retail Properties: Inorbit Malls (India) Pvt Ltd, Shopper‟s Stop Ltd, Crossword, Hypercity

Commercial Properties: Mindspace (Mumbai & Hyderabad), Commerzone (Pune), Business Park, Raheja Towers (Bangalore), Raheja Towers (Chennai)

IT Parks: K Raheja IT Park (Hyderabad), Navi Mumbai, Pune, Gandhinagar.

Residential Properties: Vivarea (Worli-Mumbai and Koramangla-Bengaluru), Raheja Vihar (Mumbai), Mindspace (Mumbai), Raheja Woods (Pune), Raheja Vistas at NIBM (Pune), Viva at Kadamba (Goa)

Hospitality: Renaissance Mumbai Hotel & Convention Centre, Lakeside Chalet Marriott Executive Apartment Hotel, The Resort, J W Marriot, Westin at Hyderabad Four Points at Vashi and Marriot at Whitefield Bangalore.

Structured Finance

Intime Properties Limited

August 2014 14

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