No wonder that the investments of billionaire Sam Zell are closely monitored. In 2006, he sold his commercial real estate company, Equity Properties, for US$39 billion. It was the biggest deal in the history of the U.S. housing market – which collapsed just a few months later.
Tenda has yielded the expected returns – in fact, it actually not only lagged financially but its operation has been showing problem after problem. According to Duilio, Tenda’s profitability per project is close to zero when it should have been in between 10% and 15%, as projected before the acquisition.
“Tenda’s focus on volume was not working. They launch projects, but are unable to deliver,” says a construction analyst at Bradesco. The new owners only realized this after the acquisition, and now try to calculate the size of the inherited problems.
There are cases of some projects costing 50% more than initially anticipated and others that were built without following on the original design. Moreover, it was found that Tenda had a rudimentary credit approval system. Of the 32,908 customers who bought their homes with Tenda, only 5380 (just over 16%) can actually afford it. About 5,000 of them do not have the credit profile required to get financing, therefore, Gafisa will refund them with what they already paid for the properties.
The company is also reviewing the situation of 81 of Tenda’s construction sites. The goal is to determine how many buildings will have to be canceled due to environmental issues or design errors. “If these projects are canceled, Gafisa will have pretty much written off its existing investment at Tenda,” says another analyst at Bradesco.
“It’s as if Tenda is a tumor within Gafisa,” says an executive who left the company in 2011. “The problems posed by Tenda contaminated Gafisa.” Internally, employees assigned to work with Tenda’s projects often see it as punishment, since they know that the chance of meeting targets and receiving bonuses is minimal.
Alphaville: Gafisa’s Jewel
A broad company restructuring was announced by Gafisa a month ago. As part of the new model, housing projects made to low-income clients will only take place if previously approved by Caixa Economica Federal, with a specific clause that these buyers will be fully financed by the bank. Most analysts approved the company’s decision to be more conservative.
Gafisa lost more than half of its market value in 2011. It is valued at just over US$ 2 billion, almost the same as smaller companies such as Eztec and JHSF. Its assets are worth about 75% more than its current market value, a sign that their stock is cheap. This might explain why the company had been recently approached by private equity groups and other developers.
“Every market participant had about three meetings in recent months to talk about Gafisa,” says the partner of an interested fund. Their eyes are in the operation of Alphaville, by far the best business within Gafisa, with a profit margin of about 30%.
Its competitor PDG and at least two funds sent official offers to acquire Alphaville. “It’s our crown jewel. We will not sell it,” says Duilio.