Blog

Please see a translation of an article we came across via one of Brazil’s most prominent financial and business magazines – Exame – the original of which can be read by clicking here (in Portuguese).

With a debt level reaching the billion mark and after the second frustrated attempt to capitalise its construction company, developer Walter Torre is seeking partners for his developments.

In recent years, developer Walter Torres built a portfolio envied by many of his competitors.  The high point of his company was the sale of the WTorre development in 2008 – the building which is now the headquarters of Santander Brasil in São Paulo and was the highest levelled transaction for a piece of real estate in Brazil.  In the following year, Torres established another record with the initiation of works in Latin America’s largest building (in terms of area) which will house a large part of Petrobras’ national operation, occupying 190,000 square metres in the centre of Rio de Janeiro.  Contrary to many competitors, who looked for finance on the stock exchanges, WTorre has achieved its meteoric expansion essentially by bank loans.  However, the price of this decision reared its ugly head and is now being considered as costly.   With R$ 340 million in debt maturing by the end of this year, WTorre has only a tenth of that in cash available.  The total debt stands at R$ 3.2 billion.  Furthermore, the company has also accumulated debts valued at R$ 1 billion since 2006.  At the start of September (2010), Walter Torre for the second time cancelled his company’s debut on Brazil’s main stock exchange (the first took place in 2007).  Instead, the company were hoping to raise the R$ 1 billion with the sale of approximately 25 percent of its shares – but the market was not able to pay more than R$ 600 million.  ‘We were expecting them to understand the value of our assets – but this did not happen,’ says Torre.

Such events are not exactly a surprise and with such weak financial results being presented, the debut could have been a disaster waiting to happen.  Given the situation, Torre and his partner, Paulo Remy, have articulated a plan to raise finance in the short term.  Part of it started to be executed in June with the sale of the company’s shipyard in Rio Grande do Sul for R$ 425 million.  Shortly after, the company managed to extend its payment of R$ 90 million to the Bank of Brazil – which was previously due in December of this year.  Now WTorre are in search of partners for its projects with the creation of property funds to aggregate 60 percent of its total assets – valued at a total of R$ 2.4 billion.  The first of them, set for launch at the end of October will be on the back of the Petrobras building.  The second will consist of 9 of its 20 developments, valuing at a total of R$ 600 million.  The company is also looking for partners for its new developments, such  as the Palmeiras sports stadium in São Paulo – budgeted at R$ 320 million.  In addition to helping clear its accounts, the funds are also serving as an exit strategy gateway for the Santander and Votorantim banks – associates of WTorre since 2008 when R$ 500 of debt was converted into 15 percent of the company.  They can now swap part of this involvement with shares of the fund.  According to industry executives, the associated partners are placing pressure to contract external consultants in order to improve the results.  Torre denies this and, when asked, the banks refused to comment. “The company has been slow to action and financial difficulties remain,” says Fernanda Rezende from the Fitch valuation ratings agency.

Searching for partners represents a fundamental change in the WTorre business model and was, for a considerable time, viewed as a flawed strategy.  The company was created in 1981 by Torre – a graduate of civil engineering – and was able to expand following the ‘build-to-suit’ strategy where the specifics of a project would be planned according to the needs of the buyer prior to commencement.    In practice, this would involve the construction of industrial warehouse units and office spaces for large companies in exchange for leases of up to 20 years.  To finance such works, Torre would negotiate packages with the banks on the basis of future corresponding rental receipts as a form of securitisation.  “For a long time we needed very little of our own finance to be able to construct,” says Torre.  The problem, according to him, commenced when competitors such as BR Properties and São Carlos sought increased market share – bring developments that were more sophisticated and, moreover, increasingly expensive.  This created a situation where the anticipated rental receipts were not sufficient enough to cover the costs of works.  “We were struggling to find 15 percent of the investment,” says Remy, partner of WTorre.  To invest in worthwhile projects, the debt would have to reach into the billions.

Lagging Rents

Torre may confront several obstacles in the task of attracting capital from new investors.  One of them is the issue of the terms of the lease contract used as part of the building construction.  In the ‘build to suit’ system, the rental agreement adjustments are linked to a determined index.  With the higher valuations of Brazilian commercial property, the rentals subsequently begin to fall behind.  The contract with Petrobras, for example, established a rental valuation of R$ 81.9 per square metre for 17 years and 8 months.  “The rental of the building next door is at R$ 120 per square metre.  Not having the same value is making things difficult,” says Torre.  Furthermore, WTorre have to compete for investors who are being offered packages from at least 9 other funds currently undergoing analysis by the Comissão de Valores Mobiliários (the Brazilian Property Valuation Commission) – these collectively have the intention of capturing R$ 6 billion for the investment in the Brazilian property market.  “Some are offering a minimum profitability level to stand out from other offers,” says Patrícia Figueiredo, real estate agent from Gradual which is not the case with the funds from WTorre.

Having a clear and defined plan is the only strategy for Torre to adopt.  The direct partners of the company, Santander and Votorantim, can demand for an offer to be made from August 2012.  The pressure to have a successful initial plan is becoming increasingly paramount and the changes in the way of structuring the business objectives will be fundamental to ensure that this happens.  The first attempt, in 2007, demonstrated a lack of confidence with regards to the efficiency of the developer.  It was during this time that Torre contracted Marco Antonio Bologna to increase the credibility of the company in the financial markets.  Bologna stayed in the position for 18 months before leaving (and is now current president of the TAM airline group).  Today, with losses and debts staining the company, investor doubt remains. “We still have to demonstrate that the company has more value that what the market is imagining,” says Torre.