Dear Investor,
The 3R RE FIA fund (our equity fund focused on Brazilian listed homebuilders) ended 2017 with a performance of + 32.3%, approx. 5.5% above the Ibovespa and slightly above the 31.9% of the IMOB Index. The year was marked by an slightly improvement, hence lower than expected on the operational side of the companies and the sector, however the positive direction continues to be in line with our investment thesis. The JBS owners’ scandal in May affected the sector more than the rest of the stock market, in our opinion, since it is a very long duration asset and the consumer buying decision is more sensitive to its long-term outlook that became slightly uncertain. Another practical consequence was a more cautious positioning from the companies, which delayed or slowed down the process of new product launches. In this context, the financial statements of listed homebuilders continued to show a very ugly picture in general, inhibiting the expected improvement of the listed assets.
In our mid-term investment thesis, nothing has changed. On the one hand, we did have some additional destruction of value in the short run given the slower recovery. But our valuations already considered sufficiently conservative assumptions. On the other hand, although hardly visible now, we believe that the potential for value creation of the companies may be even greater than we expected given the better macro scenario. The GAP between the market value and the NAV value we calculate is still significant, and we can glimpse a scenario in which companies return to generate positive NAV in the short / medium term.
In the first half of 2015 we tried to launch a PIPE that aimed to buy 10% stake in Gafisa, and take an active participation in the board of directors. Our investment thesis was very much based on Tenda’s value within Gafisa, at a time when investors still thought Tenda was the problem, and should be sold. We have been with the managers of the two operations (Gafisa and Tenda), visited construction sites, talked to several people on the board and somehow took advantage of our knowledge of the history of the case, both on the side of Gafisa and Tenda. Due to market conditions at the time we did our roadshow between April and May 2015, we were unable to raise the minimum amount established, and we gave up the fund.
From April 1, 2015 to 02/20/2018, despite the evolution much worse than the one anticipated at that moment for the Brazilian economy, and even more for the sector (given the characteristics of long cycle and capital intensive of the medium / high income products), with very negative impacts on the operations of Gafisa and Alphaville, Gafisa’s “shares” rose 74%. For this calculation we consider the current market value of Gafisa, we add up the market value of Tenda and subtract the value of the sale of Tenda shares to Gafisa shareholders in the process of separating companies (new resources that had to be contributed by shareholders), and the market value of Gafisa on 04/1/2015. In the same period the Ibovespa increased 70%, MRVE3 + 138%, IMOBB + 40%, EZTC3 + 72% and CYRE3 48%. It was a very out of the box thesis from the standpoint of traditional fundamentalist analysis and the radar of the majority. And even in a context that proved to be much more difficult than we had planned, it had a very positive result. The current moment of the real estate developers / builders in good measure reminds us of this, we see a strong potential, much more hidden value than liabilities, and limited downside. In a normal macroeconomic context, we believe that in 2 to 3 years, what happened with the Gafisa’s case should be repeated for the sector as a whole, with regard to the change of perception (in the case of Gafisa it was a change of perception about the value of Tenda) and of creation of value not anticipated by investors in general.
