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Gafisa S.A. Message Board

  • abcs.learning abcs.learning Feb 28, 2013 3:08 AM Flag

    Notes on the December 5, 2012 GFA investor day

    December 5, 2012 Gafisa Group (GFA) Investor Day
    Summary & strategy

    1. Gafisa has two near-term goals: deleveraging the balance sheet and generating free cash flow from ongoing operations.

    2. Gafisa Group (GFA) has 3 divisions - Alphaville, Gafisa, Tenda . All are now contributing to the generation of operating cash flow.

    Alphaville is the leader, the star division, and a strong indication of the future prospects for the company in both quality and profitability.

    The Gafisa division will be winding down old legacy projects with low margins in new markets. It will now focus on its traditional (and highly-profitable) high-rise markets in Rio and Sao Paulo.

    No new Tenda projects will be launched until its current inventory is sold or disposed of.


    Gafisa Group (GFA) has raised cash flow guidance for 2 sequential quarters

    Operational consolidated cash flow reached approximately R$ 980 million in 2012
    1H12 Full year Guidance + R$ 500 – R$ 700 ML
    3Q12 Full year Guidance + R$ 600 – R$ 800 ML
    4Q12 Actual results + + + R$ 980 ML

    Cash Generation
    1Q12 - - R$ 76 ML
    2Q12 + + R$ 231 ML
    3Q12 + + R$ 149 ML
    4Q12 + + R$ 310 ML (estimate)

    Income segment: Middle and Upper Middle income
    Unit Prices: R$ 100K - R$ 500K
    Characteristics: Horizontal lot development, suburban setting, custom Projects
    80% of $R launches are pre-paid by time of completion

    Launches - Alphaville
    2007 + R$ 237 ML
    2008 + R$ 313 ML
    2009 + R$ 420 ML
    2010 + R$ 741 ML
    2011 + R$ 972 ML
    2012 + R$ 1,343 ML

    Contracted Pre-Sales - Alphaville
    2007 + R$ 238 ML
    2008 + R$ 300 ML
    2009 + R$ 377 ML
    2010 + R$ 599 ML
    2011 + R$ 842 ML
    2012 + R$ 1108 ML

    Income segment: Middle and Upper Middle income
    Unit Prices: up to R$ 250K
    Characteristics: Vertical (high rise), Metro setting, custom projects

    2010 - 2012: Over 90% of $R launches are pre-paid by time of completion. The Gafisa division has narrowed its geographic focus back to a 98% concentration in Sao Paulo and Rio - their traditional urban markets - because they experienced poor results and cost overuns in new markets outside their core competency.

    Launches - Gafisa
    2007 + R$ 1698 ML
    2008 + R$ 1913 ML
    2009 + R$ 1264 ML
    2010 + R$ 2155 ML
    2011 + R$ 2157 ML
    2012 + R$ 1609 ML

    Contracted Pre-sales - Gafisa
    2007 + R$ 1329 ML
    2008 + R$ 1345 ML
    2009 + R$ 1510 ML
    2010 + R$ 1974 ML
    2011 + R$ 2180 ML
    2012 + R$ 1600 ML

    Income segment: Affordable Entry-Level
    Unit Prices: R$ 80K - R$ 250K
    Characteristics: Vertical (high rise), Metro setting & surroundings, Standardized products.

    Launches - Tenda
    2011 + R$ 398 ML
    2012 + R$ 0 ML

    Contracted Pre-sales - Tenda
    2011 + R$ 330 ML
    2012 - R$ 74 ML (loss)

    Other Tenda information:
    Brazil has a large latent demand in its low-income segment. Tenda's potential is dependent more on public policy than real estate conditions; it must keep scale to a minumum and maintain adaquate controls over the overall financial performance of its projects. Their experience with building and financing for the sub-prime market has been disastrous, but the division believes it has learned the necessary lessons to be profitable in this sector. Tenda has yet to prove its new business model for the low-income product.

    Future communities at Tenda will only be launched in the presence of basic acceptable conditions: resolution of legacy issues, a suitable urban landbank, and adaquate control over the financing of projects - especially timelines for planning and construction. Cost overuns have been a real problem. The Tenda division will not be undertaking new launches until all current ones are wound down in 2013. (Although some regional Tenda offices could resume business sooner.)

    The difficulty Tenda faces is in developing a product that is low-cost to build - affordable to buy - and yet of high enough quality to foster customer satisfaction and keep community-wide construction defects to a minimum.

    Tenda has had a positive experience with aluminum-mold construction techniques. This process requires a smaller workforce. Molders do not compete with conventional or structural masonry. The final product quality is less dependent on the work force (smaller quality deviations). Mold-construction yields a shorter job cycle (10 months vs. 15 months) and increases productivity per employee. Tenda notes that the Mexican low-income market has migrated from conventional masonry to molds in the last 10 years.

    Here is a video on this construction method: It's on youtube, Search for Kamkung + aluminum mold + construction. It's 5:59 minutes long.

    THe potential market for the low-income sector in Brazil is estimated at R$ 70BL for 2013-14. Many low-income households will be displaced in Rio and Sao Paulo over the next 3 years by preparations for the 2014 World Cup, the 400th anniversary of Rio, and the 2016 Olympics. The government desperately needs to develop low-cost housing alternatives for thousands of low-income families.

    Most of these units will befunded through a Federal government program called MCMV (My House, My Life) and disbursed through the bank Caixa Economica Federal (CEF). Caixa is a Brazilian analog to Fannie Mae or Freddie Mac in the U.S. CEF lent R$ 80BL in 2011 and R$ 100 BL in 2012. Half of all lending was aimed a low-income housing. It is Tenda's opinion that this bank likes to loan to large construction companies like itself. CEF has experienced a 16-fold increase in lending since 2003:

    Here is a May 17, 2011 article on MCMV from the Rio times "Minha Casa Minha Vida Development": Search on Rio Times + Minha Casa Minha Vida

    And this recent article from the Economist (Feb. 16, 2013), "If you Build it"
    Search on: Search on Economist + "If you build it" + Minha Casa Minha Vida.


    After reading through all this stuff, It's clear that Tenda is the dog of Gafisa group. The company's acquisition was enamored of all the cash (R$ 70 BL) the government was throwing at Low-Income housing, but Tenda found execution on their part to be disastrous. When you work with the economically unviable maybe it is easy to become quickly unviable too?

    The Gafisa division guy looks like he only knows high-rise and couldn't handle the wide-open-spaces of new markets. So that division is back to Sao Paulo and Rio now where he can practically mint money with his high rises. With the World Cup and Olympics, those markets should be like shooting fish in a barrel.

    Alphaville is the star. Tremendous execution, margins, customer satisfaction and diverse geographic footprint. Real winner.

    If they can make Tenda "work" - and that won't really start til all Tenda's legacy stuff is finished in 2013 - these guys could become the NY Yankees of Brazilian real estate. If they can't make Tenda work - and they can't figure out how to make low-income urban high-rise dwellings, they will just remain a medium okay company with an achilles heel (Tenda). It must be quite difficult to have someone on a tight schedule (the government - planning for the World Cup and Olympics) wave R$70 BL in your face and every time you reach for it the money runs away in over-runs and bureaucratic snafus. "You can look but you can't touch."

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