Brazil's Fifth Biggest Homebuilder Loses $598 Million as 4,000 Buyers Become Ineligible for Mortgages

It wasn't supposed to happen in Brazil's red-hot real estate market but it did to Gafisa, the country's fifth biggest homebuilder by revenue. The company posted a loss of 1.1 billion Brazilian reais ($598 million US) in 2011, reversing a profit of BRL440 million in 2010.

Earlier this year, Gafisa rejected a buyout offer from Chicago real-estate entrepreneur Sam Zell and Brazilian investment fund GP Investimentos.
wasn't supposed to happen in Brazil's red-hot real estate market but it did to Gafisa, the country's fifth biggest homebuilder by revenue. The company posted a loss of 1.1 billion Brazilian reais ($598 million US) in 2011, reversing a profit of BRL440 million in 2010.

Earlier this year, Gafisa rejected a buyout offer from Chicago real-estate entrepreneur Sam Zell and Brazilian investment fund GP Investimentos.

In its prepared statement, the company attributed the loss directly to the cancellation of 4,000 mortgage contracts previously signed by its Tenda unit  with homebuyers who suddenly became ineligible for the loans. Tenda deals in the lower-income market.

The loss  included total adjustments of 889.5 million reais related to cost overruns.

The net loss could have placed the company on a more shaky footing with its lenders.  However, Gafisa, foreseeing the loss, had earlier modified its cash drawdown arrangements with lenders to avoid violating any aspects of its contracts, the company stated.

At Dec. 31, the company had about BRL983 million in cash and cash equivalents compared to BRL1.2 billion in the same period of 2010, Gafisa said.

Credit Suisse Group AG analysts immediately cautioned their clients to be cautious in buying Gafisa stock.

Gafisa forecasts new projects in 2012 ranging from 2.7 billion reais to 3.3 billion reais, deliveries of 22,000 to 26,000 units and operating cash flow of 500 million reais and 700 million reais, according to its statement.

Gafisa has been restructuring its subsidiaries for the past 12 months. Its main focus has been on repositioning Tenda which it acquired at the end of 2008. The company had gambled on increasing its share of the low-income housing market but the gamble failed.  Gafisa's operating costs soared.

The company's operational costs totaled BRL2.68 billion in 2011, up from BRL2.63 billion in 2010.

The company said, "Net revenue for the full year 2011, recognized by the Percentage of Completion (PoC) method, was BRL2.8 billion, 25.1% below the previous year's net revenues as a result of BRL1.2 billion in revenue reversals related to the adjustments, BRL1 billion coming from Tenda and the remaining attributed to the Gafisa segment."

The company stated, "A thorough review of the Tenda portfolio of receivables identified 4,000 customers who are no longer eligible for bank mortgages and whose contracts were terminated, resulting in an impact of BRL91.2 million.

"The dissolution of contracts with potential property owners involves units that are, on average, more than 70% complete; where we collected an average down payment of 6% of the total value of the unit."

Gafisa said the units were returned to inventory and became eligible for resale to qualified mortgage borrowers.

Additionally, provisions were made for future dissolutions equivalent to 8,000 units, resulting in a net impact of BRL80 million in the period. Also, provisions for bad debt amounted to BRL79.3 million.

"The net debt to equity ratio increased to 118.0% from 75.3% in the third quarter of 2011 primarily driven by a 27% reduction in equity with the reported loss and an increase of net debt and investor obligations of 10% equivalent to cash burn of BRL200.2 million and a dividend payment of BRL98.8 million," Gafisa stated.

Tenda will be less aggressive this year, the company said.

"Launches [of properties]  for 2012 are expected to be between BRL2.7 and BRL3.3 billion, reflecting the new more targeted regional focus and the deliberate slowdown of the Tenda business," according to the company statement.

"Gafisa should represent 50%, Tenda 10% and AlphaVille 40% of launches. For the first quarter of 2012, the Gafisa Group already launched BRL400 million," the company said.

The company expects to generate between BRL500 million and BRL700 million in operating cash flow for the full year of 2012.  One Brazil real equals 0.548546 U.S. dollars.