Real Estate IPOs in Brazil Flounder With Supply Pushing Records

Brazilian companies are lining up to go public in record numbers, and signs are emerging that the equity market in some sectors, especially real estate, is near its saturation point.

Of the nation’s three worst-performing initial public offerings this year, two are from real estate companies. A homebuilder that went public this week had to price its shares 14% below the low end of the proposed range, and it fell an additional 5% in its trading debut. Two construction companies canceled their plans entirely in the past two months.

“The market has been punishing names in sectors where the IPO pipeline is more crowded and the competitive landscape looks fiercer,” Gabriel Trebilcock, a Sao Paulo-based money manager at Ace Capital, said in an interview.

Share offerings have soared 38% this year to 89.8 billion reais ($17 billion), including IPOs totaling 12.4 billion reais, according to data compiled by Bloomberg. With interest rates at all-time lows, investors are seeking better returns in equities and companies are rushing deals to market.

Real Estate IPOs in Brazil Flounder With Supply Pushing Records

The real estate industry, including construction, is flashing some of the strongest oversupply danger signals. Of the 46 companies that have filed plans for IPOs, 19 -- or about 41% -- are real estate firms. And among this year’s 11 IPOs, the worst performer is Moura Dubeux Engenharia SA, northeast Brazil’s largest property developer. Its shares have tumbled 50% since the firm went public on Feb. 11.

Chief Executive Officer Diego Villar said he’s confident the stock price will rebound.

“Our shares fell because, like all real estate companies, we stopped launching new projects when the coronavirus pandemic hit, in order to preserve cash,” Villar said in an interview. “But now we are back in business and sales in June, July and August are the highest in 18 months.”

Bank Loans

Of the 1.1 billion reais raised by Moura Dubeux’s IPO, 82% went to pay debt owed to banks, including the three underwriters on the deal: Banco Bradesco BBI SA, Banco do Brasil SA and Caixa Economica Federal SA.

Villar said that helped save 180 million reais in financial costs a year, and the assets that had been pledged as collateral on the loans can now be sold to generate immediate cash and profit.

The drugstore chain d1000 Varejo Farma Participacoes SA also used IPO proceeds to pay debt, and it’s the second-worst performer this year. The Rio de Janeiro-based company raised about 424.7 million reais and handed roughly half of it over to creditors. Since their Aug. 7 IPO, the shares have slumped 30%.

An official at d1000 declined to comment.

Coming in at No. 3 on the list is Mitre Realty Empreendimentos e Participacoes Ltda., which has slumped about 25% since it raised 905.7 million reais on Feb. 4.

“Mitre didn’t launch new projects during the first half of the year, focusing on inventory, which was at low levels,” Chief Financial Officer Rodrigo Cagali said in an interview. This quarter the firm is launching four projects totaling 450 million reais, he said.

“Our company has been posting solid operating and financial results, with healthy leverage and a robust cash position,” he said.

Earlier this year, low-income builder Direcional Engenharia SA scrapped plans to list shares of its Riva 9 unit, and real estate developer You Inc Incorporadora e Participacoes SA canceled its IPO. Homebuilder Lavvi Empreendimentos Imobiliarios SA priced its initial public offering at 9.50 reais per share on Sept. 1, below the proposed price range of 11 reais to 14.50 reais. The shares now are at 8.86 reais.

Villar and Cagali said the drop in their firms’ stock prices doesn’t reflect specific difficulties at their companies, but is rather the result of natural oscillations for the sector in a highly volatile market. Brazil’s BM&FBovespa Real Estate index is down 30% this year, versus a 13% drop for the Ibovespa.

IPOs offered before the Covid-19 outbreak had higher valuations because investors could never have imagined how damaging the pandemic would be, they said.

©2020 Bloomberg L.P.

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