Oct 2, 2012 Financial Times Article: Brazilian Homebuilders
Property: Housebuilders start to recover
By Amy Stillman
Housebuilders, once the most valued of real estate stocks in Brazil, have had a testing year on the São Paulo stock exchange, leaving them humbler and – some real estate investors suggest – wiser.
“A lot of homebuilders are shedding assets and turning their back on national expansion strategies,” says Antonio Bonchristanio of fund manager GP Investimentos. “The age of big and beautiful is over, [but that means] more cash generation and less financial risk for investors.”
Born of a series of IPOs less than a decade ago, housebuilders have faced the growing pains of a sector that has developed too quickly. Newly listed and cash-rich, in the late 2000s property developers went on a shopping spree, buying rivals, launching products and expanding into growth regions. In 2010, Brazilian housebuilding companies raised R$1.82bn in structured debt and capital markets operations.
But such exuberance was shortlived. Developers have struggled to meet labour and construction costs, while misadventures in the complicated low-income housing segment left middle to high-income players badly burnt last year.
Housebuilders have had to rein in growth and refocus on cash generation. Many have withdrawn from remote regions, while some builders such as Brookfield Incorporações are selling off non-core assets to lower leverage. According to Cristiano Machado, Brookfield’s chief financial officer, the company will sell projects expected to take more than five years to develop, accounting for a portion of its land bank valued at R$400m. It has sold R$46m of assets this year.
The trend has been good for real estate investors such as GTIS Partners. The New York-based firm is snapping up land from the listed companies and has found developers more willing to partner on new projects to cut costs. “In the past, [housebuilders] would have just proceeded on their own,” says GTIS’s Josh Pristaw.
So-called “white knights” have arrived in the form of private equity investors and parent companies. In May, Vinci Partners, a buyout firm, said it would raise up to R$800m for PDG Realty, giving it 21 per cent of PDG’s equity in four years.
Brookfield has received backing from its parent Brookfield Asset Management, which will inject about R$400m into the company through a rights offering. Gafisa rejected a buyout offer from former stakeholders Equity International and GP Investimentos in February.
But it has since had a management shake-up to improve accountability, and some fund managers have increased their minority stake. This has started to make housebuilding stocks look more attractive.
Samuel Lieber, Alpine Woods Capital portfolio manager, expects housebuilding companies’ price-to-book ratio to rise next year to 7-8 times their book value per share. Brookfield, Gafisa and PDG are trading below their book value.
He says: “I don’t think they will be traded like growth stocks as they were in 2010. But it’s only a matter of time before [they] are on solid footing, and able to pay strong dividends.”
Lots of TV programming featuring "Flip this house", "vacation homes", "real estate whatever"...flippers capitulated a year or two after the burst. The same should happen in brazil. Housing is not an investment ( it's just a place to live) Brazilian flippers should capitulate to a consolidated industry working on economies of scale and compressed margins. Fewer players with pristine balance sheets will trade at wiser 20x.
The lag between good news and upward moment in GFA is astonishing. Almost always GFA moves AFTER the news. Market never factor in anything in this stock.
Bloomberg GFA latest news has the story on the latest housing stimulus Minha Casa Minha Vida. "“This increases the price ceiling and the number of people that can participate in the program,” Erick Scott Hood, an analyst at brokerage SLW Corretora, said in a telephone interview from Sao Paulo. “It’s very positive for companies that have business in this segment as it could increase demand.”
MRV Engenharia & Participacoes SA (MRVE3), Cyrela and Gafisa SA (GFSA3) are poised to benefit the most from the change because of their business serving low-income clients, he said."
btw. before these news, Barclays saw 80% up and the stock falls to $3 ?!? (next support )..ha.
I try not to let highly believable statistical noise keep from making a good investment at a good price. The only thing I am worried about at this point is a collapse in the Brazilian commodity economy. But at the same time, I think smarter minds than me have priced worries about that in to the stock already - Gafisa has lost 80% of its capitalization in the last two years. This has been the first big pullback since the stock doubled off its lows in the summer time.
It is my experience that home builders are one of the few industries where the fundamentals cannot be "faked". The stocks are highly volatile (just witness the U.S. homebuilders) but the nature of the beast is long long cycles of steady up, followed by a dramatic crash and then sideways, and finally, recovery again.
Maybe Gafisa won't recover this year, but if the bargain-basement buyout price offered it earlier this year was $5.00 - $7.00/share, then there is at least that probability in the price. And in a surprising recovery of Sao Paola real estate? Probably more. At $3.70, I'm willing to stick around to find out.
I have been looking for a chance to buy Gafisa for almost two months. Last week I got it.
I think my last take on GFA is that from October, 2010 til last summer, the company lost 90% of its capitalization. This is what happened to many of the builders in the US: KBH, PHM, HOV, BZH etc. In the process of destruction of capital, the worst possible outcome is inflicted/predicted on the shares. When that doesn't happen, a rapid snapback ensues, then a reconsideration of the snapback (like now), then a long drawn out process begins in which the bears continually point out everything that's wrong with the company and why a person should not own the shares. Meanwhile, the shares rise. At least, that's the hope.