Aesapar (AEFI11) – Real estate investment fund, or corporate bond secured by real estate?

Rather than a college REIT, Aesapar (AEFI11) looks more like a fixed-rate collateralized bond whose issuer is its tenant Anhanguera Educacional. 

ECB announces its asset-purchase program.

US quarterly GDP growth back to “normal” 

Brazil’s unanimous interest-rate increase of half a percentage point 

Subscribe for free to our biweekly newsletter

Subscribe and receive for free our biweekly newsletter in your inbox. We won’t sell your email address to third parties. It’s our privacy policy!



Release: 01 February 2015


Fundamentals/Indicators

ECB announces its asset-purchase program

On January 22 the European Central Bank announced its asset-purchasing program. Initiating at a rate of 60 billion euros per month, the program is intended to continue until at least September 2016. By purchasing sovereign bonds, the ECB encourages investors to free up funds and place them in riskier funds. Analysts are expecting that the Euro-zone’s commercial real estate market will strengthen, since this is a natural asset class for investment after bonds and stocks. The ECB signaled its determination to respond more forcefully to the decline in inflation and threat of long-term deflation, and this move has the potential to boost inflation over time.

Chart01

 Source: European Central Bank, Marc to Market

Brazil’s REIT activity slows down in 2014

In 2014, Brazil-based publicly traded REITs issued a total of R$4.7 billion (approximately US$2.0 billion) through secondary equity offerings, down from R$14.0 billion in 2012 and R$10.7 billion in 2013. Due to the slowdown of the economy and the prospects of a tightening credit environment, this decline was expected.

Chart02

Source: BM&FBovespa, Oanda

U.S. GDP growth back to “normal”

After posting an exceptional 5.0 percent GDP growth in the third quarter of 2013, the United States posted a more modest growth of 2.6 percent in the final quarter of 2014.

Source: Bureau of Economic Analysis

Central Bank of Brazil announces interest-rate increase

As for Brazil, its Central Bank announced a unanimous interest-rate increase of half a percentage point, to 12.25 percent. The minutes of the Meeting of the Monetary Policy Committee (Copom) state that the organization expects inflation to be elevated in 2015, but that it should begin to decline in 2016. High interest rates are never good news for home borrowers, but the minutes do suggest a better environment in the long run. In addition, Brazil posted the lowest unemployment rate of its historical series: last December the unemployment rate was 4.3 percent, closing 2014 at 4.8 percent.

Source: Central Bank of Brazil


REITs

Brazil’s Aesapar (AEFI11) – Real estate investment fund, or corporate bond secured by real estate?

Delays associated with its greenfield project don’t seem to be a primary concern for buyers of Aesapar shares. Conceived in a built-to-suit model, Aesapar has not yet been able to fulfill its goal of constructing two campuses for the low and middle-income student college chain Anhanguera Educacional, its sole tenant. Nonetheless, dividends were fixed at inception to be 0.95 percent per month over the total investment – regardless of the actual status of construction. Presently, investing in Aesapar looks more like a fixed-rate collateralized bond whose issuer is Anhanguera.

As risky as a greenfield project can be, since it raised capital in 2011 Aesapar through its tenant has been trying to break past the licensing process in order to start construction. Sixty percent of the raised capital has been used to purchase land, with the rest placed in an escrow account. The campuses will be built in Campinas, near São Paulo (with a capacity of approximately 8,000 students) and in Cuiabá, in the central west part of Brazil (with 5,500 students). Aesapar has prioritized the offering to its employees. The fund administrator is Citibank, and fund manager is XP Gestão de Recursos.

Anhanguera Educacional is a for-profit higher education institution with 67 campuses spread across all Brazilian states. It has almost half-a-million students, and has established a history of building colleges and acquiring property since its foundation in 1994. Following the merger with its Brazilian rival Kroton Educacional in 2014, the combined entity became the world’s largest higher education company with more than one million students.

Anhanguera unit in the district of Vila Mariana, São Paulo, Brazil


The primary source of revenues is (premium) lease proceeds from Anhanguera as tenant of the two complexes. According to the fund prospectus, Anhanguera must honor the following disbursements:

  • Until the final release from the escrow amount – The lease premium is a minimum of 0.95 percent per month over the amount in the escrow account (total investment minus the amount withdrawn). As the funds will be yielding in the escrow, Anhanguera will actually cover only the amount necessary to reach the 0.95 percent yield.
  • From the beginning of the lease – The lease is 0.95 percent per month over the amount that was effectively deployed.

As such, no matter the situation the proceeds will always be 0.95 percent per month over the investment (costs to purchase land and build). This is essentially a loan yielding 0.95 percent over the principal. The only difference is that the principal is corrected by inflation annually. As expected, the dividend payment has been stable since inception. Over the past two years, there has been an annual inflation correction every January and this January has not been different. Presently the dividend is R$1.00 per share per month.

According to the September 2011 appraisal report, Colliers International valued the Campinas project at R$59,020,000 and estimated the monthly lease payments at R$573,000, whereas they valued the Cuiabá project at R$43,410,000 with estimated monthly lease payments at R$435,000. Under their scenario, total market value would then be R$102,430,000 and total monthly lease payments R$1,008,000.

However, in mid-2013 the construction of a shopping mall nearby led to the book value jumping 50 percent, spiking from a net raised amount of R$72.3 million to a market value of R$109.0 million. I assume that for this new market value, the estimated monthly lease payment would have gone up to R$1,073,000.

Nonetheless, the current proceeds from both projects total R$758,326 a month (as of December of 2014).

Here’s the trade-off:

  • On one hand, Anhanguera “guarantees” a stable cash dividend of 1.00 a month per share, corrected by inflation annually. This is a forward dividend yield of 11.1 percent (based on the January 30, 2015 share price and projected dividend distributions of R$12 per share in 2015). Even if Anhanguera has not been able to monetize the property since inception in 2011 (apparently due to licensing issues), this situation will remain for some time since construction has not yet begun.
  • On the other hand, neither the share price nor dividend captures the upside of asset appreciation.

As construction delays persist, it is possible that due to inflation the construction costs will exceed the funds allocated back in 2011 – especially when the yield over those funds is distributable to shareholders. Anhanguera stated that they will cover any cost overruns, protecting shareholders from a construction cost risk. That arrangement makes sense given that Anhanguera is responsible for hiring the builder and coordinating the construction.

Chart03

Source: BM&FBovespa, Infomoney, Wikipedia, Kroton Educational 


Written by Heli Brecailo

Disclaimer
This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision.
Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure
The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​