Exame – Tenda’s New Old Partner 


The American investor, Gary Garrabrant, is far from being a neophyte to Brazil’s real estate market. From 2006 to 2011, he presided over the board of directors of the homebuilder Gafisa. He represented Equity International, founded by billionaire Sam Zell, one of the world’s best-known investors and considered by many as the Warren Buffet of real estate.

In 2013, Garrabrant opened his own office in Sao Paulo to map out opportunities in Brazil. It took a while, but he seems ready to gain back some lost time. In August of this year, he bought 11.3% of the mall company, Aliansce – a slice that today is worth around 300 million reais. His most daring move came on December 14th, when an agreement was reached with Gafisa to buy 30% of its low-income homebuilder subsidiary, Tenda, for 231.7 million reais.

The agreement was reached after Gafisa canceled Tenda’s IPO when the company was unable to find enough buyers for the company’s shares at the minimum price of 12.50 reais per share. Garrabrant then closed the deal for 8.13 reais per share.

The announcement of the purchase symbolizes Garrabrant’s return to a market he knows very well but under new circumstances – outside Zell’s operation. “We have a long history with the country. This is our second chapter in Brazil and we are very optimistic about the country’s potential”, says Garrabrant.

His new asset manager, Jaguar Real Estate Partners, founded along with Thomas McDonald, also an ex-executive of Equity International – has the same focus as their old firm, emerging market real estate. To finance the firm’s new investments, Jaguar has closed its first fund with approximately U$350 million. “The country’s economy has bottomed and may remain there for some time. But we believe that over the long-run Brazil will be one of the world’s most attractive economies” says Garrabrant.

Zell and Garrabrant were pioneers in the creation of funds specialized in investing in real estate. Zell, today 75 years old, started early. At the beginning of the 60’s, while he studied law at the University of Michigan, he began managing rental properties for students. Two years after graduating, he opened the investment company Equity Group Investments. The group gave birth to three of the United States’ largest real estate companies: Equity Residential (apartments), Equity Office Properties Trust (offices) and Equity Lifestyle (prefab homes and resorts).

The connection with Garrabrant, today 59, began in 1996. At the time, the executive traded Chemical Bank for the vice-presidency of Equity Group. Three years later, he and Zell founded Equity International.

The company launched in Brazil in 2005. At the time, Equity International bought one third of Gafisa for U$55 million. One year later the partners joined the private equity firm GP Investments and bought the mall operator Ecisa, creating BR Malls. After a series of acquisitions, the company became a leader in an industry dominates by familial groups and, at its top, was worth R$13.7 billion.

In the first five years, the company invested nearly U$500 million in Brazilian companies. While Sam Zell ran the larger decisions of the company, Garrabrant and McDonald participated in the day-to-day of the companies in which they invested. Garrabrant participated in the IPO of Gafisa, in 2006, and was on the board of directors during a period when the Brazilian real estate market was going through a period of euphoria in an IPO boom for homebuilders.

In 2010, Equity International began selling its stake in Gafisa. At the time, Garrabrant and other executives repeated that there was nothing wrong with the company and that the exit was simply part of the natural investment cycle.

It is hard to know the real reason that led to their exit, but the truth is that they left at the right time. In 2010 the company had a market value of R$5.1 billion (at its IPO in 2006 it was valued at R$ 1.54 billion). Shortly after, the company began to suffer problems mainly linked to its low-income housing company, Tenda that it had bought in 2009.

At Tenda, Gafisa found far more operational problems than it expected, lost a lot of money and considered selling the business, which became known as “Tenda of horrors”. With all of Tenda’s problems and Brazil’s crisis, Gafisa itself is now worth slightly more than R$700 million.

While they sold their stakes in their first investments, in Gafisa and BR Malls, Zell and Garrabrant thought of investing in infrastructure projects in the country, eyeing mainly the 2014 World Cup and the Rio de Janeiro Olympics.

The investments never happened. In 2012, Garrabrant surprised the market by leaving Equity International. Thomas McDonald, then head of strategy for the firm and board member of Gafisa and BR Malls, also left the firm. According to the Wall Street Journal, the departure was the result of differences of opinion about compensation and strategy.

Garrabrant and McDonald then founded Jaguar. From there Garrabrant and Zell began a battle to convince investors who was “most responsible” for Equity International’s success, which has an average annual return on 20%. Zell invested R$400 million in the parking lot company Estapar and is a controller of a warehouse company Guarde Aqui.

While not competing directly with his former partner, Garrabrant should encounter competition from Gafisa shareholders to buy Tenda because in the agreement, Gafisa shareholders will receive 50% of Tenda’s shares and will have first rights on the other 50% – the date is not set yet, but news could still come up as Gafisa’s investor day on December 21st.

Only after that will Jaguar be able to buy the rest of the company. If there is between 20%-30% of the company available, Jaguar has to join the deal. However, if less than 20% of the company are left available Jaguar can choose to stay out.

The problem is that Gafisa’s shareholder base is very pulverized, making it harder to determine if Jaguar will enter the deal. According to an executive close to the deal, Gafisa’s main shareholders – Polo Capital and Patria Investimentos – who own 23.8% of the company – are interested in Tenda’s shares. “At slightly over R$8 per share Tenda is a great deal”.

Focusing on the low-income segment, Tenda is one of the few companies that is able to achieve positive results, in large part due to Minha Casa, Minha Vida. “We understand that the Brazilian real estate market is going through a difficult period. However, the low-income segment is not affected by this crisis. There is demand and there is credit.” says Garrabrant.

During the first 9 months of the year, Gafisa had R$1.4 billion in revenue and lost R$164.2 million. Tenda had revenues of R$766 million and made R$36 million. Until recently the laggard, Tenda, as it is seen, became Gafisa’s best hope. Garrabrant, of course, knows this. The problem, for him, is that many others have now figured that out as well. Finding good deals is getting harder every day.