|Shares Out. (in M):||313||P/E||17.6x||12.8x|
|Market Cap (in $M):||5,941||P/FCF||17.6x||12.8x|
|Net Debt (in $M):||4,968||EBIT||796||913|
|Cost of goods and/or services sold||0||0||0||0||0||0||0||0||0|
|Other operating income/expenses||1||2||(4)||1||(9)||(5)||(6)||(6)||(6)|
|Operating income (EBIT)||88||170||290||538||796||913||993||1,042||1,095|
|Other non-operating income/expenses||205||1,049||443||1,740||0||0||0||0||0|
|Income before taxes||251||1,144||509||1,914||356||486||581||649||720|
|Taxes and provisions||(84)||(323)||(174)||(686)||(18)||(24)||(29)||(32)||(36)|
|Income/(loss) before minority interest||167||821||335||1,227||338||462||552||616||684|
|Minority interest and other||0||0||0||0||7||0||0||0||0|
|(-) Non-recurring gains (losses)||122||718||228||1,082||1||0||0||0||0|
|Recurring net income||45||103||107||146||337||462||552||616||684|
|Recurring EPS, local currency, fully diluted||0.71||0.75||0.67||0.60||1.08||1.48||1.77||1.97||2.19|
|Profitability/ income statement ratios||2009||2010||2011||2012||2013E||2014E||2015E||2016E||2017E|
|G&A % of sales||22%||18%||14%||15%||14%||13%||12%||12%||12%|
|Accumulated GLA ('000 m2)||631.9||1,133.3||1,136.6||1,866.6||1,952.0||2,012.7||2,012.7||2,012.7||2,012.7|
|Occupancy rate (%)||98%||92%||97%||97%||97%||96%||96%||96%||96%|
|Change in implied rent||15.7%||23.6%||38.6%||15.0%||10.0%||7.5%||5.0%||5.0%|
The stock is down ~24% YTD (~double the decline in the broader index) as macro concerns about Brazil, as well as slightly increasing vacancies in Rio/SP have spooked the market. I believe these concerns are overblown and the stock presents and attractive opportunity here.
Over the past several years, BR AAA offices in Rio have tended to be in low single digits (<5%) while rents have been stable. A pipeline of new developments in the process of coming on-line has put pressure on vacancy and rent levels for the overall market. These new projects will contribute the equivalent of ~20% of exisitng Class A stock over the next 18 months. This is bad for BR's class A exposure, but should have a more moderate impact on their AAA exposure which is a much larger segment for BR (33% of overall revenue v 8%). It is worth pointing out that existing stock of office space in Rio is not particularly suited for an increasingly global city with only ~3% of the market considered AAA and only 14% A. Almost half the overall office space market lacks central A/C so BR is playing in a small niche here. It is worth pointing out that all office leases in Brazil are adjusted for inflation on an annual basis. Additionally, all leases contain a mark to market provision enabling either the landlord or tenant to open the lease basis to market repricing every three years. Given the strength of the market, this has worked in BR's favor and so-called lease spreads have yielded increases of 20-30% above inflation. Also, note tenants generally have the ability to cancel a lease with 3 months notice and 3 months of rent payments so a landlord effectively has 6 months to find a replacement tenant (a situation BR recently experienced in Rio).
SP AAA has a similar dynamic, with BR's historical AAA vacancies <5% and stable to slightly growing rents. Like Rio there is new capacity being added here, but it also tends to skew away from AAA class (and represents ~15% of exisitng A stock over next 18-24 months). BR's AAA spaces in SP are in a niche with only 6% of total stock considered AAA. One potential area of concern is a new project they have opened and have seen slower than expected lease-up rates. This is a function of their unwillingness to offer discounts on leases and there appears to potentially be a disconnect on pricing, but the demand ought to be there.
While perhaps the least glamorous part of their portfolio, the industrial leasing business (which accounts for ~29% of revenue) is arguably the most attractive. Most industrial properties are built to suit with long term leases. Vacancy rates here have remainder <2.5% over the past few years which reflects the customized nature of these properties and the long term duration of the contracts. Importantly, rents here have also been strong with average rent increasing ~9%/year. It is important to note that unlike the office market, built to suit leases don't have the same cancellation provision and while a tenant can get out of a lease, there will be large penalties (essentially the remainder of the lease payments due). This is a very stick market and should provide ballast to the higher risk Rio/SP AAA markets.
The market here seems to be implying either a meaningful decrease in rent rates or an increase in vacancies. Given the fact that lease spreads have been pacing +mid teens in office and + high single digits in industrial, seeing rent rates actually decline seems far fetched. BR is trading at 0.8x book which is below their 3 year average of 1.0x and below peers that trade ~1.4-2.3x book. This doesn't make much sense considering the relative attractiveness of BR's portfolio (esp industrial and AAA skewing). Even a modest re-rating towards BR's LT average of 1x yields a $26 stock price.
|P/E||Iguatemi||BR Malls||Sao Carlos||CCP||Brazil Avg||BR Prop||Implied BR Prop at avg|
-It will be necessary to keep an eye on emerging supply and lease-up rates. The introduction of new supply is real and while this capacity tends to target BR's non-core single A market, there could be a ripple effect into AAA demand and pricing. Also, it is possible a disconnect is emerging in pricing as tenants appear reluctant to pay the rates demanded by property owners (ie in BR's new JK Towers). This could be a temporary blip while the market clears or it could be indicative of potential pricing pressure to come.
-Macro risks are obviously a factor here. Brazil's economy isn't exactly a picture of strength with general China exposure as well as a potentially dicey consumer credit environment. This risk ought to be at least partially hedgable.
-The company is fairly levered with ~6x of leverage. This debt is adjusted for inflation but so is their rent base so while there could be a timing mismatch in a period of major changes in inflation rate, the difference should balance out over time. But financial leverage could eventually be an operational constraint.
|Entry||02/05/2014 02:30 PM|
I read that the industrial properties have been sold.
What are your current thoughts?