UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
| ☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 |
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . |
OR
| ☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report |
Date of event requiring this shell company report :
For the transition period from to
Commission file number: 001-33356
GAFISA S.A.
(Exact name of Registrant as specified in its charter)
GAFISA S.A.
(Translation of Registrant’s name into English)
The Federative
Republic of Brazil
(Jurisdiction of incorporation or organization)
Av. Pres. Juscelino Kubitschek, No. 1830, Block
2, 3rd Floor
04543-900 – São Paulo, SP – Brazil
phone: + 55 (11) 3025-9000
fax: + 55 (11) 3025-9348
e mail: ri@gafisa.com
Attn: Guilherme Benevides – Principal Executive Officer and Investor Relations Officer
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
|
Title of each class |
Name of each exchange on which registered |
| Common Shares, without par value* | N/A |
* Traded only in the form of American Depositary Shares (as evidenced by American Depositary Receipts), each representing two common shares which are registered under the Securities Act of 1933.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
The number of outstanding shares as of December 31, 2021 was:
|
Title of Class |
Number of Shares Outstanding |
| Common Stock | 337,445,727 |
*Includes 296,211 common shares that are held in treasury.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer ☒ | Non-accelerated Filer ☐ | Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this annual report:
| ☐ | U.S. GAAP |
| ☐ | International Financial Reporting Standards as issued by the International Accounting Standards Board |
| ☒ | Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☒ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
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In this annual report, references to “Gafisa,” “we,” “our,” “us,” “our company” and “the Company” are to Gafisa S.A. and its consolidated subsidiaries (unless the context otherwise requires). In addition, the term “Brazil” refers to the Federative Republic of Brazil, and the phrase “Brazilian government” refers to the federal government of Brazil. All references to “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil, and all references to “U.S. dollar,” “U.S. dollars” or “US$” are to U.S. dollars, the official currency of the United States. References to “Brazilian GAAP” or “BR GAAP” are to accounting practices adopted in Brazil and references to “U.S. GAAP” are to generally accepted accounting principles in the United States. Any reference to “financial statement” is related to our consolidated financial statements.
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Financial Information
We maintain our books and records in reais. Our audited financial statements were prepared in accordance with Brazilian GAAP and are presented in thousands of reais, which are based on:
| · | Brazilian Law No. 6,404/76, as amended by Brazilian Law No. 9,457/97, Brazilian Law No. 10,303/01, Brazilian Law No. 11,638/07, Brazilian Law No. 12,431/11 and Brazilian Law No. 12,973/14, which we refer to hereinafter as “Brazilian corporate law;” |
| · | the rules and regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários), or the “CVM;” and |
| · | the accounting standards issued by the Brazilian Federal Accounting Council (Conselho Federal de Contabilidade), or the “CFC,” and the Accounting Standards Committee (Comitê de Pronunciamentos Contábeis), or the “CPC.” |
Brazilian corporate law was amended by Law No. 11,638, dated December 28, 2007, in order to facilitate the convergence of Brazilian GAAP with International Financial Reporting Standards, or “IFRS,” and thereafter, the CPC issued new accounting standards that generally converged Brazilian GAAP with IFRS, except for revenue recognition related to real estate transactions.
In preparing our financial statements, we have applied: (1) Circular Letter/CVM/SNC/SEP 02/2018 regarding the application of Technical Pronouncement CPC 47 – Revenue from contracts with customers (IFRS 15), and (2) CPC 37 (R1), which requires that an entity develops accounting policies based on the standards and interpretations of the CPC. We have adopted all pronouncements, guidelines and interpretations of the CPC issued through December 31, 2021. As a result, our financial statements are prepared in accordance with Brazilian GAAP, which allows revenue recognition on a percentage of completion basis for construction companies (i.e., revenue is recorded in accordance with the percentage of financial evolution of the construction project), and are therefore not compliant with IFRS as issued by the International Accounting Standards Board (“IASB”), which require revenue recognition on transferring control.
Brazilian GAAP differs in significant respects from U.S. GAAP. The notes to our financial statements included elsewhere in this annual report contain a reconciliation of equity and net income (loss) from Brazilian GAAP to U.S. GAAP. Unless otherwise indicated, all financial information of our company included in this annual report is derived from our Brazilian GAAP financial statements.
Our consolidated financial statements reflect statement of operations and balance sheet information for all of our subsidiaries, and also separately disclose the interest of non-controlling shareholders.
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Market Information
Certain industry, demographic, market and competitive data, including market forecasts, used in this annual report were obtained from internal surveys, market research, publicly available information and industry publications. We have made these statements on the basis of information from third-party sources that we believe are reliable, such as the Brazilian Property Studies Company (Empresa Brasileira de Estudos de Patrimônio), or “EMBRAESP,” the Association of Managers of Real Estate Companies (Associação de Dirigentes de Empresas do Mercado Imobiliário), or “ADEMI,” the Getulio Vargas Foundation (Fundaçao Getulio Vargas), or “FGV,” the National Bank of Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social), or “BNDES,” the Real Estate Companies’ Union (Sindicato das Empresas de Compra, Venda, Locação e Administração de Imóveis Residenciais e Comerciais), or “SECOVI,” the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or “IBGE,” and the Brazilian Central Bank (Banco Central do Brasil), or the “Central Bank,” among others. Industry and government publications, including those referenced here, generally state that the information presented therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Although we have no reason to believe that any of this information or these reports are inaccurate in any material respect, such information has not been independently verified by us. Accordingly, we do not make any representation as to the accuracy of such information.
Rounding and Other Information
Some percentages and certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables in this annual report may not be an arithmetic aggregation of the figures that precede them.
In this annual report, all references to “contracted sales” are to the aggregate amount of sales resulting from all agreements for the sale of units (including residential communities and land subdivisions) entered into during a certain period, including new units and units in inventory. Further, in this annual report we use the term “value of launches” as a measure of our performance. Value of launches is not a GAAP measurement. Value of launches, as used in this annual report, is calculated by multiplying the total numbers of units in a real estate development by the average unit sales price.
All references to “potential sales value” are to our estimates of the total amount obtained or that can be obtained from the sale of all launched units of a certain real estate development, calculated by multiplying the number of units in a development by the sale price of the unit. Investors should be aware that our potential sales value may not be realized or may significantly differ from the amount of contracted sales, since the total number of units actually sold may be lower than the number of units launched and/or the contracted sales price of each unit may be lower than the launching price.
In addition, we present information in square meters in this annual report. One square meter is equal to approximately 10.76 square feet.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this annual report in relation to our plans, forecasts, expectations regarding future events, strategies, and projections, are forward-looking statements which involve risks and uncertainties and which are therefore not guarantees of future results, including as a result of any impact from the COVID-19 pandemic. Our estimates and forward-looking statements are mainly based on our current expectations and estimates on projections of future events and trends, which affect or may affect our businesses and results of operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several uncertainties and are made in light of information currently available to us. Our estimates and forward-looking statements may be influenced by the following factors, among others:
| · | changes in overall economic conditions, including employment levels, population growth and consumer confidence; |
| · | changes in real estate market prices and demand, estimated budgeted costs and the preferences and financial condition of our customers; |
| · | demographic factors and available income; |
| · | any impacts from the COVID-19 pandemic; |
| · | our ability to repay our indebtedness and comply with our financial obligations; |
| · | our ability to arrange financing and implement our expansion plan; |
| · | our ability to compete and conduct our businesses in the future; |
| · | changes in our business; |
| · | inflation and interest rate fluctuations; |
| · | changes in the laws and regulations applicable to the real estate market; |
| · | government interventions, resulting in changes in the economy, taxes, rates or regulatory environment; |
| · | other factors that may affect our business, market share, financial condition, liquidity and results of our operations; and |
| · | other risk factors discussed under “Item 3. Key Information—D. Risk Factors.” |
The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our future results may differ materially from those expressed in these estimates and forward-looking statements. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, inclusive of, but not limited to, the factors mentioned above.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
| A. | [Removed and Reserved] |
| B. | Capitalization and Indebtedness |
Not applicable.
| C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
| D. | Risk Factors |
Summary of Risk Factors
An investment in our common shares or the ADSs is subject to a number of risks, including risks relating to our business and the Brazilian real estate industry, risks relating to Brazil and risks relating to our common shares and the ADSs. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.
Certain Risks Relating to Our Business and Industry
| · | Our business, results of operations, financial condition and the market price of our common shares or the ADSs may be adversely affected by weaknesses in general economic, real estate and other conditions. The residential homebuilding and land development industry is cyclical and is significantly affected by changes in general and local economic conditions. Worldwide financial market volatility may also adversely impact government plans for the Brazilian real estate industry, which may have a material adverse effect on our business, our financial condition and results of operations. |
| · | Our business may be adversely affected by the COVID-19 pandemic. The outbreak and the preventative and protective actions that governments took in respect of COVID-19 during 2020 and 2021, has resulted in a period of business disruption and reduced operations, including in the real estate sector. In addition, the pandemic has caused levels of equity and other financial markets to decline sharply and to become volatile, including the price of our common shares. The COVID-19 pandemic may continue to affect our industry and cause temporary suspension of projects and shortage of labor and raw materials, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. |
| · | We operate in a highly competitive industry and our failure to compete effectively could adversely affect our business. The Brazilian real estate industry is highly competitive and fragmented. We compete with several developers on the basis of land availability and location, price, funding, design, quality, and reputation as well as for partnerships with other developers. Furthermore, a significant portion of our real estate development and construction activity is conducted in the state of São Paulo, an area where the real estate market is highly competitive due to a scarcity of properties in desirable locations and the relatively large number of local competitors. |
| · | Problems with the construction and timely completion of our real estate projects, as well as third party projects for which we have been hired as a contractor, may damage our reputation, expose us to civil |
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liability and decrease our profitability. The quality of work in the construction of our real estate projects and the timely completion of these projects are major factors that affect our reputation, and therefore our sales and growth. We may incur construction and other development costs for a project that exceeds our original estimates due to increases over time in interest rates, real estate taxes or costs associated with materials and labor, among others.
| · | Our inability to acquire adequate capital to finance our projects could delay the launch of new projects and adversely affect our business. We expect that the continued expansion and development of our business will require significant capital, including working capital, which we may be unable to obtain on acceptable terms, or at all, to fund our capital expenditures and operating expenses, including working capital needs. We may fail to generate sufficient cash flow from our operations to meet our cash requirements. Future borrowing instruments such as credit facilities are likely to contain restrictive covenants, particularly in light of the recent economic downturn and unavailability of credit, and/or may require us to pledge assets as security for borrowings under those facilities. Our inability to obtain additional capital on satisfactory terms may delay or prevent the expansion of our business, which would have an adverse effect on our business. |
Certain Factors Relating to Brazil
| · | Brazilian economic, political and other conditions, and Brazilian government policies or actions in response to these conditions, may negatively affect our business and results of operations and the market price of our common shares or the ADSs. The Brazilian economy has been characterized by unstable economic cycles and frequent and occasionally extensive intervention by the Brazilian government. Uncertainty over whether the Brazilian federal government will implement reforms or changes in policy or regulation affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil, which may have an adverse effect on our activities and consequently our operating results, and may also adversely affect the trading price of our common shares and the ADSs. |
| · | Inflation, and government measures to curb inflation, may adversely affect the Brazilian economy, the Brazilian securities market, our business and operations and the market prices of our common shares or the ADSs. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which could lead to reduced demand for our products in Brazil and decreased net sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income. Any decline in our net operating revenue or net income and any deterioration in our financial condition would also likely lead to a decline in the market price of our common shares and the ADSs. |
| · | Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the Brazilian economy and the price of our common shares and the ADSs. The market for securities offered by companies with significant operations in Brazil is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets, as well as the United States, Europe and other countries. Developments or economic conditions in other countries may significantly affect the availability of credit to companies with significant operations in Brazil and result in considerable outflows of funds from Brazil, decreasing the amount of foreign investments in Brazil. |
| · | Political instability and economic uncertainty in Brazil, including in relation to country-wide corruption probes, may adversely affect the price of our ADSs and our business, operations and financial condition. Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities offered by companies with significant operations in Brazil. Any factor that creates additional political uncertainty may harm the Brazilian economy and, consequently, our business and the price of our common shares and the ADSs. |
| · | Fluctuations in interest rates may have an adverse effect on our business and the market prices of our common shares and the ADSs. The Central Bank, through the Monetary Policy Committee (Comitê de |
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Política Monetária) establishes the Special Clearance and Escrow System rate (Sistema Especial de Liquidação e Custodia), which is the basic interest rate for the Brazilian financial system by reference to the level of economic growth of the Brazilian economy, the level of inflation and other economic indicators. Any increase in the TR rate or the CDI rate may have an adverse impact on our financial expenses, our results of operations and on the market price of our common shares or the ADSs. We are not a party to any hedging instruments with respect to our indebtedness.
Certain Risks Relating to Our Common Shares and the ADSs
| · | International economic and market conditions, especially in the United States, may adversely affect the market price of the ADSs. The market for securities issued by Brazilian companies is influenced, to a varying degree, by international economic and market conditions generally. The uncertainties generated by crisis may affect the market prices of our ADSs in future and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all. |
| · | Developments and the perception of risks in other countries, especially emerging market countries, may adversely affect the market prices of our common shares and the ADSs. The market for securities issued by Brazilian companies is influenced, to varying degrees, by economic and market conditions in other emerging market countries, especially other Latin American countries. Developments in other countries and securities markets could adversely affect the market prices of our common shares and the ADSs and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all. |
| · | The relative volatility and the lack of liquidity of the Brazilian securities market may adversely affect you. The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States. This may limit your ability to sell our common shares and the common shares underlying your ADSs at the price and time at which you wish to do so. |
| · | Shares eligible for future sale may adversely affect the market value of our common shares and the ADSs. Certain of our shareholders have the ability, subject to applicable Brazilian laws and regulations and applicable securities laws in the relevant jurisdictions, to sell our shares and the ADSs. We cannot predict what effect future sales of our shares or ADSs may have on the market price of our shares or the ADSs. |
| · | The economic value of your investment in our company may be diluted. We may need additional funds in the future, in order to expand more rapidly, develop new markets, respond to competitive pressures or make acquisitions. Any necessary additional financing may not be available on terms favorable to us. If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively.If additional funds are raised by our issuing new equity securities existing shareholders may be diluted. |
Risks Relating to Our Business and to the Brazilian Real Estate Industry
Our business, results of operations, financial condition and the market price of our common shares or the ADSs may be adversely affected by weaknesses in general economic, real estate and other conditions.
The residential homebuilding and land development industry is cyclical and is significantly affected by changes in general and local economic conditions, such as:
| · | employment levels; |
| · | population growth; |
| · | consumer demand, confidence, stability of income levels and interest rates; |
| · | availability of financing for land home site acquisitions and the availability of construction and permanent mortgages; |
| · | inventory levels of both new and existing homes; |
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| · | supply of rental properties; and |
| · | conditions in the housing resale market. |
Furthermore, the market value of undeveloped land, buildable lots and housing inventories held by us can fluctuate significantly as a result of changing economic and real estate market conditions. If there are significant adverse changes in economic or real estate market conditions, we will have to sell homes at a loss or hold land in inventory longer than planned.
Since 2014, weakening economic conditions and political instability in Brazil, leading to fluctuations in interest rates and inflation and an increase in levels of unemployment, among other factors, have had an adverse impact on the real estate market, including a decrease in the volume of Gafisa launches and a sharp decrease in the overall volume of real estate launches in Brazil. Worldwide financial market volatility may also adversely impact government plans for the Brazilian real estate industry, which may have a material adverse effect on our business, our financial condition and results of operations.
Our business may be adversely affected by the COVID-19 pandemic
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. In January 2020, COVID-19 spread to other countries, including Brazil, and on March 11, 2020, the World Health Organization declared that the spread of COVID-19 had become a global pandemic. The spread of COVID-19 has resulted in a global and regional economic slowdown, and efforts to contain the spread of COVID-19 have intensified, including shutdowns mandated by governmental authorities. The outbreak and the preventative and protective actions that governments took in respect of COVID-19 during 2020 and 2021 has resulted in a period of business disruption and reduced operations, including in the real estate sector. In addition, the pandemic has caused levels of equity and other financial markets to decline sharply and to become volatile, including the price of our common shares.
In response to the pandemic, we created a crisis management committee which meets daily to discuss developments and disease prevention measures. In addition, we have preventatively determined that back-office personnel work remotely, providing all employees with the required tools and infrastructure to enable them to work from home. We have also implemented a series of educative and preventative measures targeted at our construction site employees, and have reduced staff considered to be in the risk group. Moreover, our sales teams have focused on online interactions with prospective customers.
The COVID-19 pandemic may continue to affect our industry and cause temporary suspension of projects and shortage of labor and raw materials, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations.
Our operations could also be disrupted if any of our employees or the employees of our subcontractors contracted or are thought to have contracted COVID-19 or another disease that could cause an epidemic, since this could require us and our subcontractors to quarantine some or all of these employees and temporarily close our work sites and other facilities used for our operations. In addition, our revenue and profitability could also be reduced to the extent COVID-19 or any other epidemic harms the overall economy in Brazil. These adverse impacts, particularly if they materialize and persist for a substantial period, may significantly and adversely affect our business operation and financial performance. Additionally, the city of São Paulo where we develop our main projects is highly affected by COVID-19. A recurrence of this epidemic or any epidemic in the city of São Paulo could result in material disruptions to our property developments, which in turn could materially and adversely affect our financial condition and results of operations.
The impact from the outbreak of COVID-19 on our operations might result in the postponement of our launches, a reduction in sales volume and an increase in customer payment defaults. Additional impacts will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, such as vaccination programs, among others. While there have been no significant impacts on our business or our financial targets as a result of the COVID-19 pandemic, we could be materially adversely affected by a protracted downturn in local, regional or global economic conditions.
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During 2021, we were better equipped to manage the challenges of COVID-19 compared to 2020. A combination of our strategy and the relaxation of restrictions in some regions of Brazil resulted in a gradual increase in lauches and sales volumes. However, there is some uncertainty regarding the duration and likelihood of further government interventions or increases in restrictions, as well as the economic effects on financial markets, which may materially adversely affect our business, liquidity, financial condition, and the outcome of operations.
Our management has evaluated the impacts of the COVID-19 pandemic on our financial statements, including projections of profit or loss and cash generation, based on its best estimates, and management has concluded that there is no need to recognize any additional loss allowances. We will continue to monitor and analyze the impacts of the COVID-19 pandemic on our results of operations and financial condition.
We operate in a highly competitive industry and our failure to compete effectively could adversely affect our business.
The Brazilian real estate industry is highly competitive and fragmented. We compete with several developers on the basis of land availability and location, price, funding, design, quality, and reputation as well as for partnerships with other developers. Because our industry does not have high barriers to entry, new competitors, including international companies working in partnership with Brazilian developers, may enter into the industry, further intensifying this competition. Some of our current potential competitors may have greater financial and other resources than we do. Furthermore, a significant portion of our real estate development and construction activity is conducted in the state of São Paulo, an area where the real estate market is highly competitive due to a scarcity of properties in desirable locations and the relatively large number of local competitors. If we are not able to compete effectively, our business, our financial condition and the results of our operations could be adversely affected.
Problems with the construction and timely completion of our real estate projects, as well as third party projects for which we have been hired as a contractor, may damage our reputation, expose us to civil liability and decrease our profitability.
The quality of work in the construction of our real estate projects and the timely completion of these projects are major factors that affect our reputation, and therefore our sales and growth. We may experience delays in the construction of our projects or there may be defects in materials and/or workmanship. Any defects could delay the completion of our real estate projects, or, if such defects are discovered after completion, expose us to civil lawsuits by purchasers or tenants. These factors may also adversely affect our reputation as a contractor for third party projects, since we are responsible for our construction services and the building itself for five years. Construction projects often involve delays in obtaining, or the inability to obtain, permits or approvals from the relevant authorities. In addition, construction projects may also encounter delays due to adverse weather conditions, natural disasters, fires, delays in the provision of materials or labor, accidents, labor disputes, unforeseen engineering, environmental or geological problems, disputes with contractors and subcontractors, unforeseen conditions at construction sites, disputes with surrounding landowners, or other events. In addition, we may encounter previously unknown conditions at or near our construction sites that may delay or prevent construction of a particular project. If we encounter a previously unknown condition at or near a site, we may be required to correct the condition prior to continuing construction and there may be a delay in the construction of a particular project. The occurrence of any one or more of these problems in our real estate projects could adversely affect our reputation and our future sales.
We may incur construction and other development costs for a project that exceeds our original estimates due to increases over time in interest rates, real estate taxes or costs associated with materials and labor, among others. We may not be able to pass these increased costs on to purchasers. Construction delays, scarcity of skilled workers, default and or bankruptcy of third party contractors, cost overruns and adverse conditions may also increase project development costs. In addition, delays in the completion of a project may result in a delay in the commencement of cash flow, which would increase our capital needs.
Our inability to acquire adequate capital to finance our projects could delay the launch of new projects and adversely affect our business.
We expect that the continued expansion and development of our business will require significant capital, including working capital, which we may be unable to obtain on acceptable terms, or at all, to fund our capital expenditures and operating expenses, including working capital needs. We may fail to generate sufficient cash flow from our operations to meet our cash requirements. Furthermore, our capital requirements may vary materially from
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those currently planned if, for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may require additional financing sooner than anticipated, or we may have to delay some of our new development and expansion plans or otherwise forgo market opportunities. Future borrowing instruments such as credit facilities are likely to contain restrictive covenants, particularly in light of the recent economic downturn and unavailability of credit, and/or may require us to pledge assets as security for borrowings under those facilities. Our inability to obtain additional capital on satisfactory terms may delay or prevent the expansion of our business, which would have an adverse effect on our business. As of December 31, 2021, our net debt (indebtedness from debentures, loans and financing, and project financing balance, net of our cash and short term investments position) was R$709.3 million, our cash and cash equivalents and short-term investments were R$612.8 million and our total debt was R$1,322.1 million.
Changing market conditions may adversely affect our ability to sell our property inventories at expected prices, which could reduce our margins and adversely affect the market price of our common shares or the ADSs.
We must constantly locate and acquire new tracts of land for development and development home sites to support our homebuilding operations. There is a lag between the time we acquire land for development or development home sites and the time that we can bring the properties to market and sell homes. As a result, we face the risk that demand for housing may decline, costs of labor or materials may increase, interest rates may increase, currencies may fluctuate and political uncertainties may occur during this period and that we will not be able to dispose of developed properties at expected prices or profit margins or within anticipated time frames or at all. Significant expenditures associated with investments in real estate, such as maintenance costs, construction costs and debt payments, cannot generally be reduced if changes in the economy cause a decrease in revenues from our properties. The market value of property inventories, undeveloped tracts of land and desirable locations can fluctuate significantly because of changing market conditions. In addition, inventory carrying costs (including interest on funds unused to acquire land or build homes) can be significant and can adversely affect our performance. Because of these factors, we may be forced to sell homes and other real properties at a loss or for prices that generate lower profit margins than we anticipate. We may also be required to make material write-downs of the book value of our real estate assets in accordance with Brazilian and U.S. GAAP if values decline. The occurrence of any of these factors may adversely affect our business and results of operations.
We are subject to risks normally associated with permitting our purchasers to make payments in installments; if there are higher than anticipated defaults or if our costs of providing such financing increase, then our profitability could be adversely affected.
As is common in our industry, we and the special purpose entities (sociedade de propósito específico), or “SPEs,” in which we participate permit some purchasers of the units in our projects to make payments in installments. As a result, we are subject to the risks associated with this financing, including the risk of default in the payment of principal or interest on the loans we make as well as the risk of increased costs for the funds raised by us. In addition, our term sales agreements usually bear interest and provide for an inflation adjustment. If the rate of inflation increases, the loan payments under these term sales agreements may increase, which may lead to a higher rate of payment default. If the default rate among our purchasers increases, our cash generation and, therefore, our profitability could be adversely affected.
In the case of a payment default after the delivery of financed units, Brazilian law provides for the filing of a collection claim to recover the amount owed or to repossess the unit following specified procedures. The collection of overdue amounts or the repossession of the property is a lengthy process and involves additional costs. It is uncertain that we can recover the full amount owed to us or that if we repossess a unit, we can re-sell the unit at favorable terms or at all.
If we or the SPEs in which we participate fail to comply with or become subject to more onerous government regulations, our business could be adversely affected.
We and the SPEs in which we participate are subject to various federal, state and municipal laws and regulations, including those relating to construction, zoning, soil use, urban regulations, environmental protection, historical sites, consumer protection and antitrust. We are required to obtain, maintain and renew on a regular basis permits, licenses and authorizations from various governmental authorities in order to carry out our projects. We
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strive to maintain compliance with these laws and regulations, as well as with conditions of permits, licenses and authorizations. If we are unable to achieve or maintain compliance with these laws, regulations and conditions, we could be subject to fines, project shutdowns, cancellation of licenses and revocation of authorizations or other restrictions on our ability to develop our projects, which could have an adverse impact on our business, financial condition and results of operations. In addition, our contractors and subcontractors are required to comply with various labor and environmental regulations and tax and other regulatory obligations. Because we are secondary obligors to these contractors and subcontractors, if they fail to comply with these regulations or obligations, we may be subject to penalties by the relevant regulatory bodies, and to indemnification claims from affected third parties.
Regulations governing the Brazilian real estate industry as well as environmental laws have tended to become more restrictive over time. We cannot assure that new and stricter standards will not be passed or become applicable to us, or that stricter interpretations of existing laws and regulations will not be adopted. Furthermore, we cannot assure that any such more onerous regulations would not cause delays in our projects or that we would be able to secure the relevant permits and licenses. Any such event may require us to spend additional funds to achieve compliance with such new rules and therefore make the development of our projects more costly, which could adversely affect our business and the market price of our common shares or the ADSs.
Scarcity of financing and/or increased interest rates could cause a decrease in the demand for real estate properties, which could negatively affect our results of operations, financial condition and the market price of our common shares or the ADSs.
The scarcity of financing and/or an increase in interest rates or in other indirect financing costs may adversely affect the ability or willingness of prospective buyers to purchase our products and services, especially prospective low income buyers. A majority of the bank financing obtained by prospective buyers comes from the Housing Financial System (Sistema Financeiro de Habitação), or the “SFH,” which is financed by funds raised from savings account deposits. The Brazilian Monetary Council (Conselho Monetário Nacional), or the “CMN,” often changes the amount of such funds that banks are required to make available for real estate financing. If the CMN restricts the amount of available funds that can be used to finance the purchase of real estate properties, or if there is an increase in interest rates, there may be a decrease in the demand for our residential and commercial properties and for the development of lots of land, which may adversely affect our business, financial condition and results of operations.
We and other companies in the real estate industry frequently extend credit to our clients. As a result, we are subject to risks associated with providing financing, including the risk of default on amounts owed to us, as well as the risk of increased costs of funding our operations. An increase in inflation would raise the nominal amounts due from our clients, pursuant to their sales agreements, which may increase their rates of default. If this were to occur, our cash generation and, therefore, our operating results may be adversely affected. In addition, we obtain financings from financial institutions at different rates and subject to different indexes and may be unable to match our debt service requirements with the terms of the financings we grant to our clients. The mismatch of rates and terms between the funds we obtain and the financings we grant may adversely affect us.
We may sell portions of our landbank located in nonstrategic regions, which is in line with our future strategies. As a result, we will prepare an annual analysis for impairment of our landbank.
As part of our strategy to focus our future operations on regions where our developments have historically been successful, and where we believe there is homebuilding potential based on market opportunities, we may sell portions of our landbank located outside of these regions. As a result, we prepare an annual impairment analysis of our landbank based on the acquisition cost of the land in our portfolio. In 2011, we made a decision to sell a portion of our landbank given our narrowed geographic focus and, since then, we have been recording provisions for impairment on landbank and properties for sale. As of December 31, 2015, we had R$50.3 million recorded as a provision for impairment on landbank and properties for sale. Since 2016, our impairment analysis has been negatively impacted by the challenging macroeconomics conditions in the real estate sector and in Brazil as a whole, which has led to a decrease in sales prices for our commercial and residential units. As of December 31, 2018, 2019 and 2020, we had R$235.9 million, R$198.5 million and R$129.2 million recorded as a provision for impairment on landbank and properties for sale, respectively. As of December 31, 2021, we had R$78.9 million recorded as a provision for impairment on landbank and properties for sale.
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The real estate industry is dependent on the availability of credit, especially in the entry-level segment.
One of our main strategies is to expand our operations to the entry-level segment in which clients are strongly dependent on bank financing to purchase homes. This financing may not be available on favorable terms to our clients, or at all. Changes in the Real Estate Financing System (Sistema de Financiamento Imobiliário), or the “SFI,” and in the SFH rules, the scarcity of available resources or an increase in interest rates may affect the ability or desire of such clients to purchase homes, consequently affecting the demand for homes. These factors would have a material adverse effect on our business, financial condition and results of operations.
Because we recognize sales revenue from our real estate properties under the percentage of completion method of accounting under Brazilian GAAP as generally adopted by construction companies and under U.S. GAAP, by transferring control, an adjustment in the cost of a development project may reduce or eliminate previously reported revenue and income.
We recognize revenue from the sale of units in our properties based on the percentage of completion method of accounting, which requires us to recognize revenue as we incur the cost of construction. Total cost estimates are revised on a regular basis as the work progresses, and adjustments based upon such revisions are reflected in our results of operations in accordance with the method of accounting used. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported income, we will recognize a credit to or a charge against income, which could have an adverse effect on our previously reported revenue and income.
Our participation in SPEs creates additional risks, including potential problems in our financial and business relationships with our partners.
We invest in SPEs with or without other real estate developers and construction companies in Brazil. The risks involved with SPEs include the potential bankruptcy of our SPE partners and the possibility of diverging or inconsistent economic or business interests between us and our partners. If an SPE partner fails to perform or is financially unable to bear its portion of the required capital contributions, we could be required to make additional investments and provide additional services in order to make up for our partner’s shortfall. In addition, under Brazilian law, the partners of an SPE may be liable for certain obligations of an SPE, including with respect to tax, labor, environmental and consumer protection laws and regulations. These risks could adversely affect us.
We may experience difficulties in finding desirable land tracts, and increases in the price of land may increase our cost of sales and decrease our earnings.
Our continued growth depends in large part on our ability to continue to acquire land and to do so at a reasonable cost. As more developers enter or expand their operations in the Brazilian home building industry, land prices could rise significantly and suitable land could become scarce due to increased demand, decreased supply or both. A resulting rise in land prices may increase our cost of sales and decrease our earnings on future developments. We may not be able to continue to acquire suitable land at reasonable prices in the future, which could adversely affect our business.
The market value of our inventory of undeveloped land may decrease, thus adversely affecting our results of operations.
We own tracts of undeveloped land that are part of our inventory for future developments. We also intend to increase our inventory and acquire larger tracts of land. The market value of these properties may significantly decrease from the acquisition date to the development of the project as a result of economic downturns or market conditions, which would have an adverse effect on our results of operations.
Increases in the price of raw materials and fixtures may increase our cost of sales and reduce our earnings.
The basic raw materials and fixtures used in the construction of our homes include concrete, concrete block, steel, aluminum, bricks, windows, doors, roof tiles and plumbing fixtures. Increases in the price of these and other raw materials, including increases that may occur as a result of shortages, duties, restrictions, or fluctuations in exchange rates, could increase our cost of sales. Any such cost increases could reduce our earnings and adversely affect our business.
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If we are not able to implement our growth strategy as planned, or at all, our business, financial condition and results of operations could be adversely affected.
We plan to grow our business by selectively expanding to meet the growth potential of the Brazilian residential market. We believe that there is increasing competition for suitable real estate development sites. We may not find suitable additional sites for development of new projects or other suitable expansion opportunities. We anticipate that we will need additional financing to implement our expansion strategy and we may not have access to the funding required for the expansion of our business or such funding may not be available to us on acceptable terms. We may finance the expansion of our business with additional indebtedness or by issuing additional debt or equity securities.
We could face financial risks, covenant restrictions and restrictions on our ability to employ assets associated with incurring additional indebtedness, such as reducing our liquidity and access to financial markets and increasing the amount of cash flow required to service such indebtedness, or associated with issuing additional stock, such as dilution of ownership and earnings.
Additionally, as part of our growth strategy, we may develop new business in areas different than those in which we currently operate. For example, we are currently working on new projects through Gafisa Propriedades Incorporação, Administração, Consultoria E Gestão De Ativos Imobiliários S.A., or Gafisa Propriedades, for the management of our own and third party real estate properties. We cannot guarantee that our growth strategy to develop new business will be successful. Furthermore, we may need to incur in additional financing and we may not be able to generate enough returns from any new business to pay off such additional financing.
There are risks for which we do not have insurance coverage or the insurance coverage we have in place may not be sufficient to cover damages that we may suffer.
We maintain insurance policies with coverage for certain risks, including damages arising from engineering defects, fire, landslides, storms, gas explosions and civil liabilities stemming from construction errors. We believe that the level of insurance we have contracted for accidents is consistent with market practice. However, there can be no assurance that such policies will always be available or provide sufficient coverage for certain damages. In addition, there are certain risks that may not be covered by such policies, such as damages resulting from war, force majeure or the interruption of certain activities and, therefore any requirement to pay amounts not covered by our insurance may have a negative impact on our business and our results of operations. Furthermore, we are required to pay penalties and other fines whenever there is delay in the delivery of our units, and such penalties and fines are not covered by our insurance policies.
Moreover, we cannot guarantee that we will be able to renew our current insurance policies under favorable terms, or at all. As a result, insufficient insurance coverage or our inability to renew existing insurance policies could have an adverse effect on our financial condition and results of operations.
Our level of indebtedness could have an adverse effect on our financial health, diminish our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or the real estate industry.
As of December 31, 2021, our total debt (loans, financing and debentures) was approximately R$1,322.1 million and our short-term debt was R$404.7 million. In addition, as of December 31, 2021 our cash and cash equivalents and short-term investments available was R$612.8 million and our net debt represented 39.1% of our shareholders’ equity including the non-controlling interest. Our indebtedness has variable interest rates. Our level of indebtedness could have important negative consequences for us. For example, it could:
| · | require us to dedicate a large portion of our cash flow from operations to fund payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; |
| · | increase our vulnerability to adverse general economic or industry conditions; |
| · | limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate; |
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| · | limit our ability to raise additional debt or equity capital in the future or increase the cost of such funding; |
| · | restrict us from making strategic acquisitions or exploring business opportunities; and |
| · | place us at a competitive disadvantage compared to our competitors that have less debt. |
Certain of our debt agreements contain financial and other covenants and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.
Certain of our existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios, ratings and tests, cash generation, capitalization, debt coverage, maintenance of shareholding position, and others. Our ability to meet these financial ratios, ratings and tests can be affected by events beyond our control and we cannot assure that we will meet those tests, especially given the lower yield environment in which the industry currently operates. Failure to meet or satisfy any of these covenants, financial ratios or financial tests could result in an event of default under these and other agreements, as a result of cross-default provisions. If we are unable to comply with our debt covenants, we could be forced to seek waivers.
If we are unable to obtain waivers, a large portion of our debt could be subject to acceleration. We do not believe such occurrence to be likely; however, if it were to happen, we could be required to renegotiate, restructure or refinance our indebtedness, seek additional equity capital or sell assets, which could materially and adversely affect us.
We cannot guarantee that we will be successful in obtaining any waivers. As of December 31, 2021, the Company and its subsidiaries were in compliance with the contractual covenants provided for in our debentures and our credit instruments
Failures or delays by our third party contractors may adversely affect our reputation and business and exposes us to civil liability.
We engage third party contractors to provide services for our projects. Therefore, the quality of work in the construction of our real estate projects and the timely completion of these projects may depend on factors that are beyond our control, including the quality and timely delivery of building materials and the technical skills of the outsourced professionals. Such outsourcing may delay the identification of construction problems and, as a result, the correction of such problems. Any failures, delays or defects in the services provided by our third party contractors may adversely affect our reputation and relationship with our clients, which would adversely affect our business and results of operations.
Unfavorable judicial, administrative or arbitration decisions may adversely affect us.
We currently are, and may be in the future, defendants in several judicial, administrative proceedings related to civil, labor and tax matters. We cannot assure you that we will obtain favorable decisions in such proceedings, that such proceedings will be dismissed, or that our provisions for such proceedings are sufficient in the event of an unfavorable decision. Unfavorable decisions that impede our operations, as initially planned, or that result in a claim amount that is not adequately covered by provisions in our balance sheet, may adversely affect our business and financial condition.
We may be held responsible for labor liabilities of our third party contractors.
We may be held responsible for the labor liabilities of our third party contractors and obligated to pay for fines imposed by the relevant authorities in the event that our third party contractors do not comply with applicable legislation. As of December 31, 2021, R$5.6 million of our R$6.9 million of total labor liabilities and provisions were for such liabilities. Approximately 80% of the labor claims were commenced by employees of our third party contractors. An adverse result in such claims would cause an adverse effect on our business.
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Failure to keep members of our senior management and/or our ability to recruit and retain qualified professionals may have a material adverse effect on our business, financial condition and results of operations.
Our future success depends on the continued service and performance of our senior management and our ability to recruit and retain qualified professionals. None of the members of our senior management are bound to long-term labor contracts or non-compete agreements and there can be no assurance that we will successfully recruit and retain qualified professionals to our management as our business grows. The loss of any key professionals or our inability to recruit or retain qualified professionals may have an adverse effect on our business, financial condition and results of operations.
We are subject to risks associated with noncompliance with any data protection laws and can be adversely affected by any penalties or other sanctions imposed.
In the year 2018, Law No. 13.709/2018, the Lei Geral de Proteção de Dados Pessoais (Brazilian General Data Protection Law) or LGPD, was enacted and came into effect as of September 18, 2020. Inspired by the General Data Protection Regulation of the European Union, the LGPD sets forth a comprehensive set of rules that promise to reshape how companies, organizations and public authorities collect, use, process and store personal data when carrying out their activities.
The LGPD sets out a legal framework for the processing of personal data and provides, among others, for the rights of data subjects, the legal bases that legitimize processing operations, requirements for obtaining consent, obligations and requirements related to data breaches, requirements for international data transfers, among others. The LGPD also created the Autoridade Nacional de Proteção de Dados (National Data Protection Authority), or ANPD, with powers to enforce the law. Most provisions of the LGPD entered into effect on September 18, 2020, while the provisions relating to administrative sanctions came into effect on August 1, 2021. On October 29, 2021, the Regulation on Supervision and Sanctioning Procedures approved by the ANPD was published, which governs, among other things, how the administrative sanctions provided for in the LGPD should be applied.
In addition to the administrative sanctions provided for in the LGPD, failure to comply with any provisions set forth in the LGPD regarding the personal data collected by us has the following risks: (i) the filing of lawsuits, individual or collective, claiming damages resulting from violations, based not only on the LGPD, but also on the sparse legislation that address data protection matters; (ii) the application of specific penalties foreseen in the sparse legislation, such as Marco Civil da Internet (Brazilian Internet Act), in case of violation of its provisions, by some consumer protection bodies and public prosecution offices.
The LGPD, as well as any other changes to existing personal data protection laws and the introduction of such laws in other jurisdictions in which we operate, may subject us to, among other things, additional costs and expenses and may require costly changes to our business practices and security systems, policies, procedures and practices.
In relation to the LGPD’s administrative sanctions, if we are not in compliance with the LGPD, we may be subject to the sanctions, individually or cumulatively, of: (a) a warning; (b) a one-time fine of up to two percent of the private legal entity or group’s pre-tax revenue in its preceding fiscal year in Brazil, limited to a total of R$50 million per infraction; (c) a daily fine, which is also subject to the abovementioned limit; (d) mandatory public disclosure of the infraction after its occurrence is confirmed; (e) the suspension of the processing of the corresponding personal data until the infraction is remedied and the obligation to delete personal data corresponding to the infraction; (f) partial suspension of the database to which the infraction relates for six months, extendable by an additional six months; (g) suspension of the data processing activity to which the infraction relates for six months, extendable by an additional six months; and (h) partial or complete prohibition of any data processing activities, each of which could harm our reputation and negatively affect our business and operating results. Moreover, we may be liable for property, moral, individual or collective damages caused by us, including by third party providers that process personal data for us, and jointly liable for property, moral, individual or collective damages caused by our subsidiaries, due to non-compliance with the obligations established by the LGPD.
As a result of our business activities, we hold large volumes of personal data, including that of employees, suppliers and customers. Therefore, we have designed and implemented a privacy governance framework in order to comply with the LGPD and improve some of the existing guidelines. We have also implemented security measures to protect our databases and prevent cyberattacks, thereby reducing risks of exposure to data breaches and information security incidents.
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Additionally, as a result of the remote work measures adopted in response to the COVID-19 pandemic, there is a risk of an increase in cyberattacks through our employees’ personal computers, since the cyber security of the networks used by them in their homes may not maintain the same level of security as that of our corporate work environment, which may impair our ability to manage our business.
Despite the security measures that we have in place, our facilities and systems may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events, and individuals may attempt to gain unauthorized access to our database in order to misappropriate such information for potentially fraudulent purposes. Our security measures may fail to prevent such incidents and breaches of our systems could result in adverse impact to our reputation, financial condition, and market value. In addition, if we are unable to prove that our systems are properly designed to detect and to try and detain a cyberattack, or even if we fail to respond to a cyberattack properly, we could be subject to severe penalties, aside from damages awarded to our customers, suppliers and employees whose personal data might have been mishandled or breached. Finally, if we fail to ensure the security of personal data, we may be subject to the obligation to notify the ANPD and the data subjects involved in the security incident or data breach.
Information technology failures, including those that affect the privacy and security of sensitive customer and business information, could disrupt our operations.
We rely on information technology systems to process, transmit and store large amounts of electronic data, including personal information. A significant portion of the communication between our personnel, customers and suppliers depends on information technology. As with all large systems, our information systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers’ attacks or other security issues.
We take various actions with the aim of minimizing potential technology disruptions – such as investing in intrusion detection solutions, proceeding with internal and external security assessments, building and implementing business continuity plans and reviewing risk management processes – but all of these protections may be compromised as a result of third-party security breaches, burglaries, cyberattack, errors by employees or employees of third-party vendors, of contractors, misappropriation of data by employees, or unaffiliated third parties, or other irregularities that may result in persons obtaining unauthorized access to company data or otherwise disrupting our business. Unauthorized or accidental access to, or destruction, loss, alteration, disclosure, misuse, falsification or unavailability of information could result in violations of data privacy laws and regulations, damage to our reputation or our competitive advantage, loss of opportunities to acquire or divest of businesses or brands and loss of ability to commercialize products developed through research and development efforts and, therefore, could have a negative impact on net operating revenues. More generally, these or other similar technology disruptions can have a material adverse effect on our business, results of operations, cash flows or financial condition.
We, as with all business organizations, are routinely subject to cyber-threats, however, while we continue to invest in new technology-monitoring and cyberattack prevention systems, no commercial or government entity can be entirely free of vulnerability to attack or compromise given how rapidly and unpredictably techniques evolve to obtain unauthorized access or disable or degrade service.
On February 16, 2022, we informed the market that we had identified a criminal ransomware attack in our information technology environment, and immediately activated our internal information security protocols in order to identify the causes of the incident and mitigate its impacts. Our operations were not interrupted, since we were able to rebuild a separate information technology environment and our IT team proceeded to investigate the nature of the cyberattack and its effects and we did not identify any unauthorized access to our ERP data server. Concurrently, a forensic investigation was conducted by an independent firm and no evidence of personal data breach which may cause a risk or relevant damage to its owners was identified, as per article 48 of Law 13,709/2018. Moreover, as ratified by the forensic report, despite the increase of data transfer volume in the related period, there is no evidence on which we can infer the types of eventual data breach.
As corroborated by the forensic investigation and our IT team analysis, there was no evidence of any damage and data breach in our ERP software, therefore there was no effect on the results of operations and financial statements. Furthermore, as a result of the investigation, we identified that this ransomware attack was aimed to a specific subsystem with no direct relation to our ERP server, diminishing its impacts to our operations. However, additional security measures were suggested, which will be remediated by implementing a Security Operation Center (SOC) with a Security Information and Event Management (SIEM) monitoring. This forensic investigation was concluded in May 2022. Additionally, we maintain frequent updates of our network, and continually invests in our technology processes to preserve the security of our systems and prevent any attempts of intrusion, and make use of technologies with strict security standards, compatible with our activities.
Risks Relating to Brazil
Brazilian economic, political and other conditions, and Brazilian government policies or actions in response to these conditions, may negatively affect our business and results of operations and the market price of our common shares or the ADSs.
The Brazilian federal government frequently exercises significant influence over the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control
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inflation and other policies and regulations have often involved, among other measures, increases or decreases in interest rates, changes in fiscal policies, wage and price controls, foreign exchange rate controls, blocking access to bank accounts, currency devaluations, capital controls and import and export restrictions. We have no control over and cannot predict what measures or policies the Brazilian government may take in the future, and how these can impact us and our business. We and the market price of our common shares or the ADSs may be harmed by changes in Brazilian government policies, as well as general economic factors, including, without limitation:
| · | growth or downturn of the Brazilian economy; |
| · | interest rates and monetary policies; |
| · | exchange rates and currency fluctuations; |
| · | inflation; |
| · | liquidity of the domestic capital and lending markets; |
| · | import and export controls; |
| · | exchange controls and restrictions on remittances abroad and payments of dividends; |
| · | modifications to laws and regulations according to political, social and economic interests; |
| · | fiscal policy and changes in tax laws and related interpretations by tax authorities; |
| · | economic, political and social instability, including general strikes and mass demonstrations; |
| · | the regulatory framework governing the educational industry; |
| · | labor and social security regulations; |
| · | energy and water shortages and rationing; |
| · | commodity prices, including prices of paper and ink; |
| · | public health, including as a result of epidemics and pandemics, such as the COVID-19 pandemic; |
| · | changes in demographics, in particular declining birth rates, which will result in a decrease in the number of enrolled students in primary and secondary education in the future; and |
| · | other political, diplomatic, social and economic developments in or affecting Brazil. |
Uncertainty over whether the Brazilian federal government will implement reforms or changes in policy or regulation affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil, which may have an adverse effect on our activities and consequently our operating results, and may also adversely affect the trading price of our common shares and the ADSs.
Further, Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. See “—The ongoing economic uncertainty and political instability in Brazil may adversely affect the price of our ADSs and our business, operations and financial condition.”
As has been true in the past, the current political and economic environment in Brazil has and is continuing to affect the confidence of investors and the general public, which has historically resulted in economic deceleration and heightened volatility in the securities offered by companies with significant operations in Brazil, which may adversely affect us and the price of our common shares and the ADSs.
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See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Brazilian Economic Environment” for further information.
Inflation, and government measures to curb inflation, may adversely affect the Brazilian economy, the Brazilian securities market, our business and operations and the market prices of our common shares or the ADSs.
At times in the past, Brazil has experienced high rates of inflation. According to the General Market Price Index (Índice Geral de Preços—Mercado), or “IGP-M,” inflation rates in Brazil were 7.5% in 2018, 7.3% in 2019, 23.1% in 2020 and 17,7% in 2021. In addition, according to the Expanded Consumer Price Index (Índice de Preços ao Consumidor Ampliado), or “IPCA,” Brazilian consumer price inflation rates were 3.7% in 2018, 4.3% in 2019, 4.5% in 2020 and 10,0% in 2021. Our term sales agreements usually provide for an inflation adjustment linked to the National Construction Cost Index (Índice Nacional de Custo de Construção), or “INCC.” The INCC rates were 3.8% in 2018, 4.1% in 2019, 8.8% in 2020 and 13,8% in 2021. The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting availability of credit and reducing economic growth. Inflation, actions to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.
Brazil may experience high levels of inflation in future periods. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which could lead to reduced demand for our products in Brazil and decreased net sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing our reais-denominated debt may increase, resulting in lower net income. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could affect our ability to refinance our indebtedness in those markets. In addition, increases in inflation rates would increase the outstanding debt of our customers, which could increase default levels and affect our cash flows. Any decline in our net operating revenue or net income and any deterioration in our financial condition would also likely lead to a decline in the market price of our common shares and the ADSs.
Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the Brazilian economy and the price of our common shares and the ADSs.
The market for securities offered by companies with significant operations in Brazil is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets, as well as the United States, Europe and other countries. To the extent the conditions of the global markets or economy deteriorate, the business of companies with significant operations in Brazil may be harmed. The weakness in the global economy has been marked by, among other adverse factors, lower levels of consumer and corporate confidence, decreased business investment and consumer spending, increased unemployment, reduced income and asset values in many areas, reduction of China’s growth rate, currency volatility and limited availability of credit and access to capital. Developments or economic conditions in other countries may significantly affect the availability of credit to companies with significant operations in Brazil and result in considerable outflows of funds from Brazil, decreasing the amount of foreign investments in Brazil.
Crises and political instability in other emerging market countries, the United States, Europe or other countries could decrease investor demand for securities offered by companies with significant operations in Brazil, such as our common shares or the ADSs. Investors sentiment in one country may cause capital markets in other countries to fluctuate, affecting the value of our common shares and ADSs, even if indirectly. The economic, political and social instability in the United States, the trade war between the United States and China, crises in Europe and other countries, the consequences of United Kingdom’s exit from the European Union, and global tensions, as well as economic or political crises in Latin America or other emerging markets, including as a result of the COVID-19 pandemic, may significantly affect the perception of the risks inherent in investment in Brazil.
The United Kingdom withdrew from the European Union on January 31, 2020, commonly referred to as Brexit. The United Kingdom and the European Union agreed a Trade and Cooperation Agreement on December 24, 2020, or the TCA. The TCA was ratified by the UK parliament on December 30, 2020 and came in force on May
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2021. Additionally, on November 7, 2020, Joseph Biden won the presidential election in the United States and assumed office as the 46th President of the United States on January 20, 2021. The U.S. president has considerable influence, which may materially and adversely global economy and political stability. We cannot ensure that the Biden administration will adopt policies designed to promote macroeconomic stability, fiscal discipline, as well as domestic and foreign investment, which may materially and adversely impact the trading price of securities of Brazilian issuers, including our common shares and ADSs.
In 2022, the military conflict between the Russian Federation and Ukraine is contributing to further increases in the prices of energy, oil and other commodities (including grains and fertilizers) and to volatility in financial markets globally, as well as a new landscape in relation to international sanctions. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term. Growing economic uncertainty and new of a potentially recessive economy globally may also create uncertainty in the Brazilian economy. These developments, as well as potential crises and forms of political instability arising therefrom or any other yet unforeseen development, may adversely affect our business and the price of our common shares and ADSs.
The ongoing economic uncertainty and political instability in Brazil may adversely affect the price of our ADSs and our business, operations and financial condition.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities offered by companies with significant operations in Brazil.
The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy. Various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest of such investigations, known as “Operação Lava Jato,” have negatively impacted the Brazilian economy and political environment. The potential outcome of these investigations is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy. In March 2021, a Brazilian Federal Supreme Court ruling issued by Justice Edson Fachin annulled the decisions that had convicted former President Luiz Inacio Lula da Silva. As a result of this ruling, former President Luiz Inacio Lula da Silva recovered his political rights and is able to run for office in the upcoming 2022 presidential elections in Brazil, which may result in political instability and may have an adverse effect on Brazilian capital markets.
On April 14, 2021, a Parliamentary Committee of Inquiry (Comissão Parlamentar de Inquérito), or “CPI,” was established to investigate actions and omissions by the Brazilian federal government in facing the pandemic and collapse of health in the State of Amazonas at the beginning of the year and the misuse of funds to combat the effects of COVID-19 in Brazil. With the support and expedition of a precautionary measure by the Brazilian Supreme Court justice, Luís Roberto Barroso, the necessary measures were taken for the creation and installation of the CPI.
The potential outcome of these and other investigations is uncertain, but they have already had a negative impact on the general perception of the market on the Brazilian economy and have affected and may continue to adversely affect our business, our financial condition and our operating results, as well as the trading price of our shares. We cannot predict whether the ongoing investigations will result in further political and economic instability, or if new allegations against government officials and/or executives of private companies will arise in the future or will result in additional investigations.
A failure by the Brazilian government to implement necessary reforms may result in diminished confidence in the Brazilian government’s budgetary condition and fiscal stance, which could result in downgrades of Brazil’s sovereign foreign credit rating by credit rating agencies, negatively impact Brazil’s economy, and lead to further depreciation of the real and an increase in inflation and interest rates, which could adversely affect our business, financial condition and results of operations.
Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business and the price of our common shares and the ADSs.
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Fluctuations in interest rates may have an adverse effect on our business and the market prices of our common shares and the ADSs.
The Central Bank, through the Monetary Policy Committee (Comitê de Política Monetária), or the “COPOM,” establishes the Special Clearance and Escrow System rate (Sistema Especial de Liquidação e Custodia), or the “SELIC rate,” which is the basic interest rate for the Brazilian financial system by reference to the level of economic growth of the Brazilian economy, the level of inflation and other economic indicators. The SELIC rate is also an important policy instrument used by the Brazilian government to achieve inflation targets it established on June 21, 1999 (Decree No. 3,088).
As of December 31, 2016, the SELIC rate was 13.75%. As of December 31, 2017, the Central Bank had significantly reduced the SELIC to 7.0% and, as of December 31, 2018, the SELIC rate was 6.5%. As of December 31, 2019, the Central Bank had further decreased the SELIC rate to 4.50% and as of December 31, 2020, the SELIC rate was 2.00%. As of December 31, 2021, the SELIC rate was 9.25%. As of the date of this annual report, the SELIC rate is 12.75%. Debts of companies in the real estate industry, including ours, are subject to the fluctuation of the SELIC rate. Should the SELIC rate increase, the costs relating to the service of our debt obligations may also increase.
As of December 31, 2021, our indebtedness was denominated in reais and subject to Brazilian floating interest rates, such as the Reference Interest Rate (Taxa Referencial), or “TR,” and the Interbank Deposit Certificate Rate (Certificado de Depósito Interbancário), or “CDI rate.” Any increase in the TR rate or the CDI rate may have an adverse impact on our financial expenses, our results of operations and on the market price of our common shares or the ADSs. We are not a party to any hedging instruments with respect to our indebtedness.
Restrictions on the movement of capital out of Brazil may adversely affect your ability to receive dividends and distributions on the ADSs and on our common shares, or the proceeds of any sale of our common shares.
Brazilian law permits the Brazilian government to impose temporary restrictions on conversions of Brazilian currency into foreign currencies and on remittances to foreign investors of proceeds from their investments in Brazil whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to expect a pending serious imbalance. The Brazilian government last imposed remittance restrictions for approximately six months in 1989 and early 1990. The Brazilian government may take similar measures in the future. Any imposition of restrictions on conversions and remittances could hinder or prevent holders of our common shares or the ADSs from converting into U.S. dollars or other foreign currencies and remitting abroad dividends, distributions or the proceeds from any sale in Brazil of our common shares. Exchange controls could also prevent us from making payments on our U.S. dollar-denominated debt obligations and hinder our ability to access the international capital markets. As a result, exchange controls restrictions could reduce the market prices of our common shares and the ADSs.
Changes in tax laws may increase our tax burden and, as a result, adversely affect our profitability.
The Brazilian government regularly implements changes to tax regimes that may increase our and our customers’ tax burdens. These changes include modifications in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. Since April 2003, the Brazilian government has presented several tax reform proposals, which were mainly designed to simplify tax assessments, to avoid internal disputes within and between the Brazilian states and municipalities, and to redistribute tax revenues. The tax reform proposals provided for changes in the rules governing the federal Social Integration Program (Programa de Integração Social), or “PIS,” the federal Contribution for Social Security Financing (Contribuição para Financiamento da Seguridade Social), or “COFINS,” the state Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços), or “ICMS,” and other taxes. The effects of these proposed tax reform measures and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified. However, some of these measures, if enacted, may result in increases in our overall tax burden, which could negatively affect our overall financial performance.
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Risks Relating to Our Common Shares and the ADSs
International economic and market conditions, especially in the United States, may adversely affect the market price of the ADSs.
The market for securities issued by Brazilian companies is influenced, to a varying degree, by international economic and market conditions generally. As our ADSs are traded Over the Counter, or the “OTC,” adverse market conditions and economic and/or political crises, especially in the United States, such as the subprime mortgage lending crisis in 2007 and 2008 and the financial and credit crises in 2008, have at times resulted in significant negative impacts on the market price of our ADSs. Despite the fact that our clients, whether financed by us or by Brazilian banks through resources obtained in the local market, were not directly exposed to the mortgage lending crisis in the United States, there were still uncertainties as to whether such crisis may indirectly affect homebuilders worldwide. The uncertainties generated by such a crisis may affect the market prices of our ADSs in future and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.
Developments and the perception of risks in other countries, especially emerging market countries, may adversely affect the market prices of our common shares and the ADSs.
The market for securities issued by Brazilian companies is influenced, to varying degrees, by economic and market conditions in other emerging market countries, especially other Latin American countries. Although economic conditions are different in each country, the reaction of investors to developments in one country may cause the capital markets in other countries to fluctuate. Developments or adverse economic conditions in other emerging market countries have at times resulted in significant outflows of funds from, and declines in the amount of foreign currency invested in, Brazil. For example, in 2001, after a prolonged recession, followed by political instability, Argentina announced that it would no longer continue to service its public debt. The economic crisis in Argentina negatively affected investors’ perceptions of Brazilian securities for several years. Economic or political crises in Latin America or other emerging markets may significantly affect perceptions of the risk inherent in investing in the region, including Brazil.
The Brazilian economy is also affected by international economic and general market conditions, especially economic and market conditions in the United States. Share prices on the B3, for example, have historically been sensitive to fluctuations in U.S. interest rates as well as movements of the major U.S. stock indexes, particularly in the current worldwide economic downturn. Developments in other countries and securities markets could adversely affect the market prices of our common shares and the ADSs and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.
The relative volatility and the lack of liquidity of the Brazilian securities market may adversely affect you.
The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States. This may limit your ability to sell our common shares and the common shares underlying your ADSs at the price and time at which you wish to do so. As of December 31, 2021, the average daily trading for all companies listed on the B3, the only Brazilian stock exchange, was approximately R$ 33.4 billion, according to B3 data.
Shares eligible for future sale may adversely affect the market value of our common shares and the ADSs.
Certain of our shareholders have the ability, subject to applicable Brazilian laws and regulations and applicable securities laws in the relevant jurisdictions, to sell our shares and the ADSs. We cannot predict what effect future sales of our shares or ADSs may have on the market price of our shares or the ADSs. Future sales of substantial amounts of such shares or the ADSs, or the perception that such sales could occur, could adversely affect the market prices of our shares or the ADSs.
The economic value of your investment in our company may be diluted.
We may need additional funds in the future, in order to expand more rapidly, develop new markets, respond to competitive pressures or make acquisitions. Any necessary additional financing may not be available on terms favorable to us. If adequate funds are not available on acceptable terms, we may be unable to meet our business or
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strategic objectives or compete effectively. If additional funds are raised by our issuing new equity securities existing shareholders may be diluted. See “Item 4. Information on the Company—A. History and Development of the Company.”
We may be subject to takeover by other companies or investors.
Since we do not have a controlling shareholder, we may be subject to takeover by other companies or investors. Pursuant to article 46 of the Company’s bylaws, any shareholder that holds a participation equal to or greater than 50% of the Company’s share capital is required to make a tender offer for the remaining shares, for consideration equal to at least the fair value as determined by an appraisal report and subject to the regulation provided for in Law No. 6,404/76 of the Brazilian corporate law and applicable CVM regulations on takeovers. In addition, in accordance with Brazilian corporate law, a shareholder that holds a participation equal to or greater than 10% of the Company’s share capital may convene a shareholder meeting to dismiss the management of the Company, and to the extent the other shareholders at such meeting do not vote against a proposal to dismiss or approve such proposal, our management would be dismissed, which would disrupt the day to day operations of the Company and would have an adverse impact on our business and result of operations.
Holders of our common shares or the ADSs may not receive any dividends or interest on shareholders’ equity.
According to our bylaws, we must generally pay our shareholders at least 25% of our annual net profit as dividends or interest on shareholders’ equity, as calculated and adjusted under Brazilian corporate law method. This adjusted net profit may be used to absorb losses or for the payment of statutory participation on profits to debenture holders, employees or members of our management, which would ultimately reduce the amount available to be paid as dividends or interest on shareholders’ equity. Additionally, Brazilian corporate law allows a publicly traded company like us to suspend the mandatory distribution of dividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability. Despite our positive results in 2021, and based on our financial condition and cash availability, we allocated amounts related to the distribution of dividends to an unrealizable profit reserve.
For further information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.”
Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.
Holders of ADSs may exercise voting rights with respect to our common shares represented by ADSs only in accordance with the terms of the deposit agreement governing the ADSs. Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in specified newspapers in Brazil. Holders of our common shares will be able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders’ meeting from the ADR depositary following our notice to the depositary requesting the depositary to do so. To exercise their voting rights, holders of ADSs must instruct the ADR depositary on a timely basis. This voting process necessarily will take longer for holders of ADSs than for holders of our common shares. Common shares represented by ADSs for which no timely voting instructions are received by the ADR depositary from the holders of ADSs shall not be voted.
Holders of ADSs also may not receive the voting materials in time to instruct the depositary to vote the common shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the common shares underlying their ADSs are not voted as requested.
No single shareholder or group of shareholders holds more than 50% of our capital stock, which may increase the opportunity for alliances between shareholders as well as conflicts between them.
No single shareholder or group of shareholders holds more than 50% of our capital stock. There is no guidance in Brazilian corporate law for publicly-held companies without an identified controlling shareholder. Due to the absence of a controlling shareholder, we may be subject to future alliances or agreements between our shareholders,
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which may result in the exercise of a controlling power over our company by them. In the event a controlling group is formed and decides to exercise its controlling power over our company, we may be subject to unexpected changes in our corporate governance and strategies, including the replacement of key executive officers. Additionally, we may be more vulnerable to a hostile takeover bid. The absence of a controlling group may also jeopardize our decision-making process as the minimum quorum required by law for certain decisions by shareholders may not be reached and, as a result, we cannot guarantee that our business plan will be affected. Any unexpected change in our management team, business policy or strategy, any dispute between our shareholders, or any attempt to acquire control of our company may have an adverse impact on our business and result of operations.
Holders of ADSs will not be able to enforce the rights of shareholders under our bylaws and Brazilian corporate law and may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company.
Holders of ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our bylaws and Brazilian corporate law.
Our corporate affairs are governed by our bylaws and Brazilian corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of the ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries.
Holders of ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
We are a corporation organized under the laws of Brazil, and all of our directors and executive officers and our independent public accountants reside or are based in Brazil. Most of the assets of our company and of these other persons are located in Brazil. As a result, it may not be possible for holders of ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may be enforced in Brazil only if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our directors or executive officers than would shareholders of a U.S. corporation.
Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of the ADSs.
According to Law No. 10,833 of December 29, 2003, the disposition of assets located in Brazil by a non-resident to either a Brazilian resident or a non-resident is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. Thus, gains arising from a disposition of our common shares by a non-resident of Brazil to another non-resident of Brazil are subject to income tax.
Although the matter is not entirely clear, we believe it is reasonable to take the position that ADSs do not constitute assets located in Brazil for the purposes of Law No. 10,833/03. Accordingly, the disposition of our ADSs by a non-resident to either a Brazilian resident or a non-resident should not be subject to taxation in Brazil. We cannot assure you, however, that the Brazilian tax authorities or the Brazilian courts will agree with this interpretation. In the event that a disposition of our ADSs is considered a disposition of assets located in Brazil, gains on a disposition of ADSs by a non-resident of Brazil may be subject to income tax in Brazil. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations—Gains.”
Any gain or loss recognized by a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—U.S. Federal Income Tax Considerations”) would generally be treated as U.S. source gain or loss for all foreign tax credit purposes. Consequently, U.S. Holders will not be able to credit any Brazilian income tax imposed on such gains against their U.S. federal income tax liability unless they have other creditable taxable income from foreign sources in the appropriate foreign tax credit basket. In addition, recently issued Treasury regulations impose additional requirements for foreign taxes to be eligible for credit. For further information, see "Item 10. Additional
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Information—E. Taxation—U.S. Federal Income Tax Considerations—Foreign Tax Credits." U.S. Holders should consult their tax advisers as to whether the Brazilian tax on gain would be creditable or deductible against such holder’s U.S. federal income tax on foreign-source income from other sources.
There can be no assurance that we will not be a passive foreign investment company, or “PFIC,” for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of our common shares or ADSs.
In general, a non-U.S. corporation is a PFIC for any taxable year if: (1) 75% or more of its gross income consists of passive income (the “income test”) or (2) 50% or more of the average value of its assets (generally determined on a quarterly basis) consists of assets that produce, or are held for the production of, passive income (including cash and cash equivalents). Generally, “passive income” includes interest, dividends, rents, royalties and certain gains. For purposes of the above calculations, a non-U.S. corporation that directly or indirectly owns at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. The Company believes that it was not a “passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes for its 2021 taxable year. However, because the Company’s PFIC status is an annual determination that can be made only after the end of each taxable year and will depend on the composition of its income and assets and the value of its assets for each such year, there can be no assurance that the Company will not be a PFIC for the current or any other taxable year.
If the Company were a PFIC for any taxable year during which a U.S. holder owned its common shares or ADSs, certain adverse U.S. federal income tax consequences could apply to such U.S. holder. See “Item 10. Additional Information—E. Taxation——Certain U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”
Judgments of Brazilian courts with respect to our common shares will be payable only in reais.
If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the common shares, we will not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may be satisfied in Brazilian currency only at the exchange rate, as determined by the Central Bank, in effect on the date of payment. The exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under our common shares or the ADSs.
Holders of ADSs may be unable to exercise preemptive rights with respect to our common shares underlying the ADSs.
Holders of ADSs will be unable to exercise the preemptive rights relating to our common shares underlying ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended, or the “Securities Act,” is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of ADSs. We may decide, in our discretion, not to file any such registration statement. If we do not file a registration statement or if we, after consultation with the ADR depositary, decide not to make preemptive rights available to holders of ADSs, those holders may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if they are not sold, their preemptive rights will be allowed to lapse.
An exchange of ADSs for common shares risks loss of certain foreign currency remittance and Brazilian tax advantages.
The ADSs benefit from the certificate of foreign capital registration, which permits Citibank N.A., as depositary, to convert dividends and other distributions with respect to our common shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for common shares will then be entitled to rely on the depositary’s certificate of foreign capital registration for five business days from the date of exchange. Thereafter, they will not be able to remit the proceeds abroad unless they obtain their own certificate of foreign capital registration under the terms of Law No. 4,131/62, or unless they qualify under Resolution CMN 4,373, which superseded Resolution CMN No. 2,689, which entitles certain investors to buy and sell shares on
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Brazilian stock exchanges or organized over-the-counter market and benefit from the certificate of foreign capital registration managed by their authorized representatives in Brazil. See “Item 9. The Offering and Listing—C. Markets—Investment in Our Common Shares by Non-Residents of Brazil.”
If holders of ADSs do not qualify under Resolution CMN 4,373, they will generally be subject to less favorable tax treatment on distributions with respect to our common shares. There can be no assurance that the depositary’s certificate of registration or any certificate of foreign capital registration obtained by holders of ADSs will not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to their investment in the ADSs may not be imposed in the future.
A portion of the compensation of our officers and members of the senior management is paid in the form of stock options, which could tie their interest to the market price of our shares and ADSs.
We have established stock option plans for our officers and members of our senior management. Potential benefits under the stock option plans are tied to the appreciation of the market price of our shares and ADSs.
As a result, our compensation policy may influence our officers and members of the senior management and their interest to the market price of our shares and ADSs, which may conflict with the interests of our shareholders. Our officers and members of the senior management may be influenced to focus on short-term rather than long-term results because a significant portion of their compensation is tied to our results and the market price of our shares and ADSs. See “Item 6. Directors, Senior Management and Employees—E. Share Ownership—Stock Option Plans” in this annual report.
ITEM 4. INFORMATION ON THE COMPANY
| A. | History and Development of the Company |
General
Gafisa S.A. is a corporation organized under the laws of Brazil. We were incorporated on November 12, 1996 for an indefinite term. Our registered and principal executive offices are located at Av. Pres. Juscelino Kubitschek, No. 1830, Block 2, 3rd Floor, 04543-900, São Paulo, SP, Brazil, and our general telephone and fax numbers are + 55 (11) 3025-9000 and + 55 (11) 3025-9242, respectively.
We are a leading diversified national homebuilder serving all demographic segments of the Brazilian market. Established over 60 years ago, we have completed and sold more than 1,100 developments and constructed over 16 million square meters of housing under the Gafisa brand, which we believe is more than any other homebuilder in Brazil. Recognized as one of the foremost professionally-managed homebuilders, we are also one of the best-known brands in the real estate development market, enjoying a reputation among potential homebuyers, brokers, lenders, landowners, and competitors for quality, consistency and professionalism, offering a variety of residential options to the mid to higher income segments.
Our core business is the development of high-quality residential units in attractive locations. The year ended December 31, 2019 was a milestone year for Gafisa, as we underwent a comprehensive restructuring process. As a result and to focus on our restructuring, we decided not to launch new projects. We resumed launches in 2020, totaling a PSV of R$898.3 million. In 2021 we had a PSV of R$1,684.6 million. We currently operate mainly in São Paulo and Rio de Janeiro, but we still have a small portion of our inventory in other cities.
In 2006, Gafisa acquired Alphaville Urbanismo S.A., or “Alphaville,” a leading residential community development company in Brazil. In 2008, Gafisa acquired Tenda, focusing on the low income segment. In 2013, Gafisa sold a 70% interest in Alphaville, and sold our remaining stake in 2019.
On August 16, 2016, we announced to the market that the spin-off studies were ongoing and that we were evaluating other potential capital structure options and separation alternatives for the Gafisa and Tenda business units, including a potential offer of securities and/or a sale of equity interests, in addition to the spin-off itself.
In December 2016, following the conclusion of our analysis of certain strategic options, our management at the time decided to sell 50% of Tenda’s total capital stock, and transfer the remaining 50% of Tenda’s total capital stock
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to our shareholders in connection with a reduction in our total capital stock. Accordingly, on December 14, 2016, we entered into the SPA with Jaguar pursuant to which we would sell Tenda shares representing up to 30% of the total capital stock of Tenda, at a price equal to R$8.13 per share.
During 2017, we did not issue a launch guidance for Gafisa as a result of the continuing weakening economic conditions and political instability in Brazil. Accordingly, we adopted a conservative approach to launches, focusing on the sale of inventory.
The spin-off of the Tenda business unit was consummated on May 4, 2017, following: (i) a reduction of the capital stock of Tenda (without the cancellation of shares), pursuant to which Gafisa, as sole shareholder at that time, received R$100 million (adjusted by the SELIC); (ii) a reduction of the capital stock of Gafisa, resulting in the distribution to Gafisa shareholders of shares corresponding to 50% of the capital stock of Tenda; (iii) the conclusion of the preemptive rights exercise pursuant to which Gafisa shareholders acquired up to 50% of the total share capital of Tenda, at the price per share set forth in the SPA with Jaguar and for a total amount of R$219.5 million, with no shares being acquired by Jaguar; and (iv) the satisfaction of other conditions precedent for the consummation of the spin-off. In addition, on May 4, 2017, the Tenda shares were listed on the B3 and began to publicly trade.
During 2018, we did not issue a launch guidance for Gafisa as a result of the economic conditions and political instability in Brazil.
On September 25, 2018, at an extraordinary shareholders’ meeting held at the request of GWI Asset Management S.A., the shareholders resolved to (i) remove by majority vote all of the members of the Board of Directors and (ii) elect new Board members by means of a multiple-vote process. Accordingly, at a Board of Directors’ meeting on September 28, 2018, the following resolutions were passed as part of the turnaround process and the optimization of the Company’s structure: (i) the withdrawals of chief executive officer, chief financial and investor relations officer and chief operating officer and the election of new statutory officers; (ii) the adoption of measures to approve the Company’s headquarters relocation; (iii) the closure of our branch located in the city of Rio de Janeiro and (iv) the approval of the Company’s share buyback program.
An auction of 14,600,000 shares held by the Company’s shareholder, GWI Asset Management S.A. took place on February 14, 2019, corresponding to an interest of 33.67% in the Company’s ownership structure. As a result of this auction, Planner Corretora de Valores S.A., through investment funds managed by it, acquired 8,000,000 common shares corresponding to 18.45% of the total common shares issued by the Company. Mr. Mu Hak You and Mr. Thiago Hi Joon You resigned from the board of directors on February 17, 2019.
In 2019 and 2020, we did not issue a launch guidance for Gafisa as a result of the economic conditions and political instability in Brazil. In 2021, with the aim of increasing visibility and providing further information in connection with our business strategy, we resumed the issuance of launch guidances, with launch projections for 2021 ranging from R$1.5 billion to R$1.7 billion.
Our common shares are listed on the B3 under the symbol “GFSA3” and the ADSs are traded OTC in the United States under the symbol “GFASY.”
Our agent for service of process in the United States is National Corporate Research, Ltd. located at 10 East 40th Street, 10th floor, New York, NY 10016.
Historical Background and Recent Developments
Gomes de Almeida Fernandes Ltda., or “GAF,” was established in 1954 in the city of Rio de Janeiro with operations in the real estate markets in the cities of Rio de Janeiro and São Paulo. In December 1997, GP Investimentos S.A. and its affiliates, or “GP,” entered into a partnership with the shareholders of GAF to create Gafisa S.A. In 2004, as a result of a corporate restructuring, GP assumed a controlling position in our company. In 2005, an affiliate of Equity International Management, LLC, or “Equity International,” acquired approximately 32% of our company through a capital contribution. In February 2006, we concluded our initial public offering in Brazil, resulting in a public float of approximately 47% of our total share capital at the conclusion of the offering.
In September 2006, we created Gafisa Vendas Intermediação Imobiliária Ltda., or “Gafisa Vendas,” to function as our internal sales division in the state of São Paulo and in February 2007, we created a branch of Gafisa Vendas
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in Rio de Janeiro, or “Gafisa Vendas Rio,” to function as our internal sales division in the metropolitan region of Rio de Janeiro.
In October 2006, we entered into an agreement with Alphaville Participações S.A. to acquire 100% of Alphaville, one of the largest residential community development companies in Brazil in terms of units and square meters, focused on the identification, development and sale of high quality residential communities in the metropolitan regions throughout Brazil targeted at upper and upper-middle income families.
On March 17, 2007, we concluded our initial public offering of common shares in the United States, resulting in a public float of 78.6% of our total share capital at the conclusion of the offering. Upon completion of the offering, entities related to Equity International and GP controlled 14.2% and 7.3% of our total capital stock, respectively. In June 2007, Brazil Development Equity Investments, LLC, a company affiliated with GP, sold its remaining interest in our company (7.1% of our capital stock at the time).
On March 15, 2007, we created a new wholly-owned subsidiary, Fit Residencial Empreendimentos Imobiliários Ltda., or “FIT,” for the development, construction and management of lower and lower-middle income residential projects. On October 21, 2008, Gafisa and Tenda concluded a business combination in which FIT was merged into Tenda. The purpose of the merger was to consolidate the activities of FIT and Tenda in the lower-income segment in Brazil focused on developing real estate units with an average price of less than R$200.0 thousand. As a result of the business combination, Gafisa became the owner of 60.0% of the total and voting capital stock of Tenda. On December 30, 2009, the shareholders of Gafisa and Tenda approved a corporate restructuring to consolidate Gafisa’s non-controlling share ownership in Tenda. The restructuring was accomplished by exchanging all of the remaining Tenda shares not held by Gafisa into Gafisa shares. As a result of the restructuring, Tenda became a wholly-owned subsidiary of Gafisa. On October 26, 2007, Gafisa acquired 70% of Cipesa Empreendimentos Imobiliários S.A., a leading homebuilder in the State of Alagoas at the time.
On October 1, 2010, Equity International sold its remaining interest in our company.
On December 9, 2013, Gafisa announced the completion of the agreement to sell a 70% interest in Alphaville to private equity firms Blackstone and Pátria. Gafisa retained a 30% interest. The sale valued Alphaville at R$2.0 billion. The proceeds from the transaction totaled R$1.54 billion, of which R$1.25 billion was received through the sale of shares, and R$290 million was received as a dividend distributed by Alphaville.
On February 2, 2014, Gafisa’s board of directors authorized management to initiate studies for a potential spin-off of Gafisa and Tenda business units into two independent publicly traded companies. Our management initiated the studies in the first quarter of 2014.
During 2015 and 2016, we implemented several initiatives in connection with the potential spin-off. During 2016, our management decided to sell 50% of Tenda’s total capital stock, and transfer the remaining 50% of Tenda’s total capital stock to our shareholders in connection with a reduction in our total capital stock, and implement the spin-off. The spin-off of the Tenda business unit was consummated on May 4, 2017. See “—A. History and Development of the Company—General” for further information.
On March 23, 2017, the Company conducted a reverse split of common shares issued by the Company, at the ratio of 13.483023074 to 1, and proportional adjustment to the limit of authorized capital.
On December 20, 2017, the Company’s shareholders approved at an extraordinary shareholders’ meeting a capital increase of up to R$300.0 million, with the option to approve a partial capital increase of up to R$200.0 million to be subscribed for through the issuance of a minimum of 13,333,333 new common shares and a maximum of 20,000,000 new common shares in the Company, all in registered, book-entry form, and with no par value, at a price per share equal to R$15.00, of which R$0.01 per share would be allocated to capital, and R$14.99 per share would be allocated to capital reserves. This capital increase is part of the Company’s strategy to reinforce its liquidity, strengthen its capital structure and solidify the Company’s strategic and operational positioning for a new cycle of the real estate market. Following the preemptive rights exercise period, which expired on January 19, 2018, and the subsequent subscription periods that expired on February 2, 2018 and February 21, 2018, respectively, we issued and sold 16,717,752 new common shares of the Company for a total amount of R$250.8 million, all in registered, book-entry form, and with no par value, at a price per share equal to R$15.00, of which R$0.01 per share
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was allocated to capital, and R$14.99 per share was allocated to capital reserves. Accordingly, on February 28, 2018, our board of directors approved a capital and capital reserve increase in the amount of R$250.8 million.
At the end of 2017 and in the beginning of 2018, GWI Group, a private property investment company and asset management fund founded by South Korean national Mu Hak You, began to acquire a large number of shares in the Company. On January 31, 2018, following several purchases of Company shares, the GWI Group had a 30.45% interest in the Company’s share capital.
On September 21, 2018, GWI Group acquired an additional number of shares, increasing its interest to 37.32% in the Company’s share capital. GWI informed us that this share acquisition was made for investment purposes and in order to restructure part of the Company’s Board. On September 25, 2018, GWI convened an Extraordinary Shareholders’ Meeting for the purpose of dismissing members of the Board of Directors and electing new members through a multiple-vote process. GWI approved the dismissal of the entire Board of Directors and elected directors for five of the seven vacant seats. See “Item 6. Directors, Senior Management and Employees—C. Board Practices,” for further information about our Board of Directors. Within three days of the dismissal and election of the new Board of Directors, the Company’s executive board was removed from office.
On November 26, 2018, our Board of Directors approved the voluntary delisting of our ADSs from the New York Stock Exchange (the “NYSE”) and a proposal to maintain our ADR facility as a Level 1 ADR program to enable investors to retain their ADSs. On December 7, 2018, we filed a Form 25 with the SEC to effect the delisting of the ADSs, and sent a copy to the NYSE on the same day. The last day of trading on NYSE for our ADSs was December 14, 2018, and our ADSs were delisted from the NYSE on December 17, 2018. Our ADSs remain eligible for trading in the over-the-counter markets in the United States, and our common shares will continue to be listed and admitted to trading in the Novo Mercado segment of the B3. In addition to the information we are required to report under applicable Brazilian regulations, we intend to continue publishing English translations of our annual report, interim results and communications on our investor relations website at (www.ri.gafisa.com.br), in accordance with Rule 12g3-2(b) under the Exchange Act. In the Extraordinary shareholders meeting held in April 2019, the measures taken for the voluntary delisting of Gafisa’s shares from the New York Stock Exchange (NYSE) and the change of the American Depositary Shares program from a Level 3 to a Level 1 program were not ratified.
On December 19, 2018, the Board of Directors approved the cancellation of 1,030,325 of the Company’s common shares, without reduction in our capital stock.
On January 22, 2019, the Board of Directors approved the cancellation of 370,000 of the Company’s common shares, without reduction in our capital stock. The Company also disclosed to the market a Material Fact stating that the GWI Group had acquired Company shares representing more than 50% in the Company’s share capital. Pursuant to article 46 of the Company’s Bylaws, any shareholder that holds a participation equal to or greater than 50% of the Company’s share capital is required to make a Tender Offer for the remaining shares. Accordingly, shortly thereafter, GWI Group, without making a Tender Offer, sold a small portion of its shares in order to maintain a participation of less than 50% in the Company’s share capital. Following queries for clarification by the Company, CVM and B3 about these transactions involving the Company’s share capital, GWI Group confirmed that the GWI acquisition of more than 50% of the Company’s share capital was not intentional and, therefore, did not trigger the Tender Offer requirement provided for in the Company Bylaws.
By February 14, 2019, GWI Group had sold, through auction in the capital markets, a 33.67% interest it held in the Company’s share capital. As a result, GWI Group ceased to control the Company and reduced its interest in the Company’s share capital to 7.70%. Furthermore, Planner Corretora de Valores S.A. in the same date, through investment funds managed by it, purchased shares corresponding to 18.45% of the total share capital of the Company.
The GWI Group traded in our shares in early 2019, giving rise to several requests for information by CVM and B3 with respect to compliance with the Tender Offer requirement provided for in the Company’s Bylaws. The Company responded to such requests on March 21, 2019 and, as of the date of this annual report, has no knowledge of any further action to be taken by CVM regarding this issue. The Company understands that, as the GWI Group is no longer a relevant shareholder and their representatives are no longer part of the Company’s management, the Company should not be subject to any further sanctions and will keep its shareholders and the market informed of any developments in that regard.
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During February, March and April 2019, the members of the Company’s Board of Directors elected in late 2018 resigned, with the exception of Pedro Carvalho de Mello, and new members were elected to replace them. As of the date of this annual report, following the Annual General Meetings held on April 30, 2021, Gafisa’s Board of Directors is composed of the following members: (i) Leo Julian Simpson (nominated as chairman of the Board of Directors on April 15, 2019), (ii) Antonio Carlos Romanoski, (iii) Eduardo Larangeira Jácome, (iv) Nelson Sequeiros Rodriguez Tanure, (v) João Antônio Lopes Filho, (vi) Thomas Cornelius Azevedo Reichenheim, (vii) Gilberto Benevides and (viii) Nelson Queiroz Sequeiros Tanure.
On April 15, 2019, at the Annual General Meeting, the shareholders resolved to suspend the shareholder rights of GWI Asset Management S.A. and the other members of the GWI Group due to GWI Group’s non-compliance with the Company’s Bylaws as they relate to the Tender Offer request. In addition, it was resolved to increase the limit of authorized capital of the Company from 71,031,876 ordinary shares to 120,000,000 ordinary shares. This increase in the Company’s authorized capital enables us to issue new shares in a sufficient amount to accommodate the financial restructuring of the Company.
On April 15, 2019, following the General Meeting, in order to raise funds for investments, the newly appointed Board of Directors approved a capital increase of 26,273,962 new common shares. These newly issued common shares were offered privately to the Company’s shareholders at the B3, and were issued at the reference price of R$6.02 per common share (which was determined following an audit conducted by a specialized firm). The Board of Directors also appointed Roberto Luz Portella as Chief Executive Officer, Chief Financial Officer and Investor Relations Officer and Eduardo Larangeira Jácome as Operational Executive Officer. Following the preemptive rights exercise period, and the subsequent subscription periods, we issued and sold 12,170,035 and 14,103,927 new common shares of the Company for a total amount of R$62.3 million and R$70.0 million, respectively, all in registered, book-entry form, and with no par value, at a price per share equal to R$5.12 and R$4.96, respectively. Accordingly, on June 24, 2019, our board of directors approved a capital increase in the amount of R$132.3 million.
In June 2019, we concluded a capital increase of 26,273,962 shares, raising approximately R$132 million.
On August 15, 2019, the Board of Directors approved a capital increase of 48,968,124 new common shares. These newly issued common shares were offered privately to the Company’s shareholders at the B3, and were issued at the reference price of R$6.57 per common share (which was determined following an audit conducted by a specialized firm). Following the preemptive rights exercise period and subsequent subscriptions periods, we issued and sold 45.554.148 and 3,413,976 new common shares of the Company for a total amount of R$254.2 million and R$18.5 million, respectively, all in registered, book-entry form, and with no par value, at a price per share equal to R$5.58 and R$5.42, respectively. Accordingly, on October 23, 2019, our board of directors approved a capital increase in the amount of R$272.7 million.
On August 29, 2019 the Board of Directors appointed André Luis Ackermann as Chief Financial Officer, and Eduardo Larangeira Jácome tendered his resignation as Management Officer, effective as of September 30, 2019. Eduardo Larangeira Jácome remained as a member of the Restructuring Committee until December 31, 2019 and a member of the Company’s Board of Directors.
In addition, on September 20, 2019, Roberto Luz Portella resigned from his position as Chief Executive Officer and Investor Relations Officer. Following his resignation, on September 23, 2019, the Board of Directors appointed André Luis Ackermann as Investor Relations Officer.
In October 2019, we concluded a capital increase of 48,986,124 shares and raised approximately R$272 million.
On October 21, 2019, we informed our shareholders and the market that we entered into a Purchase and Sale, Stock Redemption, Corporate Restructuring Agreement with Alphaville Urbanismo S.A., Private Equity AE Investimentos e Participações S.A. and affiliates of PEAE, setting forth the terms and conditions for the divestment of our shares in Alphaville. On December 27, 2019, we concluded the divestment sale of our remaining 21.20% stake in Alphaville for R$100 million, which was settled by offsetting certain credits and the receipt of the investee shares against assets, measured at fair value. This transaction is in line with the Company’s strategy to optimize and improve the Company’s portfolio and capital allocation, aiming at creating value for our shareholders.
On December 16, 2019, we announced that we had entered into a non-binding letter of intent with UPCON Incorporadora S.A. (“UPCON”), pursuant to which we indicated our intent to acquire the entire share capital of
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UPCON. On March 2, 2020, the Administrative Council for Economic Defense (CADE) approved, without restriction, the merger of UPCON into the Company. Once all required approvals are obtained, UPCON will become a wholly-owned subsidiary of Gafisa.
On December 16, 2019, we entered into an Additional Investment Agreement with UPCON, which was discussed at an Extraordinary Shareholders’ Meeting on April 30, 2020. Accordingly and with the aim to strengthen our executive team, our Board of Directors approved a new organizational structure and elected the following three new Executive Officers: (i) Guilherme Augusto Soares Benevides as Chief Operations Officer and Vice-president of Operations; (ii) Fábio Freitas Romano as Assistant Vice-president of Operations; and (iii) Ian Monteiro de Andrade as Chief Financial Officer and Investor Relations Officer and Vice-president of Management and Finance.
On April 30, 2020, at our Annual and Extraordinary Shareholders’ Meeting, the following matters were approved in relation to the purchase and sale of UPCON Incorporadora S.A.’s shares: (i) the acquisition by Gafisa of the entire share capital of UPCON; (ii) an increase in the Company’s share capital of R$310.0 million; (iii) the issuance of two series of debentures convertible into common shares to cover the transaction with UPCON, in the total amount of R$150.0 million; (iv) changes in the composition of the Board of Directors, which will have seven to nine members; (v) the election of members to the Board of Directors; and (vi) approval of a plan to repurchase the Company’s shares, up to a limit of 10,327,558 shares to be acquired by the Company.
On January 28, 2020, the Board of Directors elected new statutory officers: (i) Cauê Castello Cardoso, (ii) Guilherme Luis Pesenti, and (iii) Luiz Fernando Ortiz.
At a Board of Directors meeting held on February 7, 2020, Mr. Roberto Luz Portella tendered his resignation as a member of the Company’s Board of Directors. At the same meeting, Mr. João Antônio Lopes Filho was elected as the new member of the Company’s Board of Directors.
On March 27, 2020, our Board of Directors approved the establishment of the Company’s share buyback program with the objective of generating value for the Company’s shareholders, that was confirmed by the General Shareholders Meeting held on April 30, 2020. Shares purchased by the Company as part of the buyback program will be held in treasury, and may subsequently be canceled, sold and/or used in connection with the exercise of stock options granted by the Company. The maximum number of shares the Company may acquire under this program is 10,327,558 common shares, pursuant to Article 8 of CVM Instruction No. 567/15. This buyback program ends on May 4, 2021. Under our current shares repurchase program, any acquisition by us of our own shares must be made on a stock exchange and cannot be made by means of a private transaction. See “Item 10. Additional Information—B. Memorandum and Bylaws—Purchases by us of our own Shares,” for further information.
On March 2, 2020, the Administrative Council for Economic Defense (CADE) approved, without restriction, the merger of UPCON into the Company. On April 30, 2020 all required approvals were obtained, and UPCON became a wholly-owned subsidiary of Gafisa.
On November 16, 2020, the Board of Directors approved (1) the issuance of 9,944,150 common shares, and (2) an increase in our share capital from 290,731,951 common shares to 300,676,101 common shares and R$1,041,248 thousand to R$1,083,248 thousand.
On November 3, 2020, CADE approved our acquisition from Calçada S.A. of four real estate ventures located in the city of Rio de Janeiro.
On November 10, 2020, we entered into a purchase agreement for the acquisition of certain real estate assets located in the city of São Paulo, namely the “Hotel Fasano Itaim” project, as part of the execution plan of the newly-formed Gafisa Propriedades, a business unit directed at developing, owning and managing proprietary and third-party real estate assets. We completed this acquisition in January 2021. Additionally, Gafisa Propriedades has also acquired stakes in two shopping malls located in the city of Rio de Janeiro and other real estate assets in São Paulo-SP, as described below.
On January 13, 2021, Gafisa Propriedades exercised an option to purchase 32 studio apartments and a controlling stake in the “Hotel Fasano Itaim” development, which also includes restaurants and a convention center, from Even Construtora e Incorporadora S.A. The purchase price was R$310 million, and the stake of Gafisa Propriedades in the hotel was 80.37%.
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On January 20, 2021, Gafisa Propriedades completed the acquisition of a stake in Jardim Guadalupe Shopping Mall, located in the city Rio de Janeiro. The purchase price for 100% of the asset totalled R$39.8 million, and the asset also carried R$25.0 million in debt. On the same date, Gafisa Propriedades entered into a purchase agreement for the acquisition of a stake in São Conrado Fashion Mall, also located in Rio de Janeiro. Completion of the acquisition is subject to the approval of the current creditors of Fashion Mall. The purchase price for 100% of the asset totalled R$59.5 million, and additionally the asset carried R$75.0 million in debt.
On March 8, 2021, Gafisa Propriedades entered into a purchase agreement for the acquisition of private suites in connection with the “Cidade Matarazzo Rosewood São Paulo” project. The purchase price for the part of the project already completed totaled R$83.4 million.
On May 24, 2021, the Board of Directors approved (1) the issuance of 8,876,083 common shares, and (2) an increase in our share capital from 300,676,101 common shares to 309,552,184 common shares and R$1,083,249 thousand to R$1,120,547 thousand.
On August 3, 2021, we approved the sale of certain real estate assets in the aggregate amount of R$200 million to a real estate investment fund.
On September 28, 2021, the Board of Directors (i) ratified the issue of 27,892,638 shares, (ii) approved the ratification of the Company’s Capital Stock increase, within the limit of authorized capital to R$1,248,574,113.49, divided into 337,445,727 common shares issued by the Company, pursuant to Article 6 of the Company’s Bylaws and (iii) announced a refund of the amounts subscribed by referred shareholders, in the amount of R$51,320.79, corresponding to 11,181 shares to be transferred on September 29, 2021.
During 2021 and looking towards the future, we started integrating environmental, social and governance (ESG) principles into our business model. Accordingly, we established an ESG policy to develop good practices and report on progress related to corporate governance, and to prioritize investments in people, innovation, technology and sustainability. We believe that implementing the best practices recommended by the Brazilian Institute of Corporate Governance (IBGC) will ensure transparency and the fair and equitable disclosure of our corporate governance practices, and support the sustainable development of the business for our investors and customers. On April 26, 2022, we published our first sustainability report on our investor relations website, which was prepared in accordance with the core option of the Global Reporting Initiative (GRI) Standards – the global sustainability reporting framework. The contents of our website, and the contents of any other website referred to herein, are not incorporated into, and do not form part of, this annual report.
In addition, in March 2022, André Luis Ackermann resigned from his position as statutory officer and, in May 2022, Ian Monteiro de Andrade resigned from his position as Chief Financial Officer and Investor Relations Officer.
Capital Expenditures
In 2021, under the Gafisa brand, we invested R$41.7 million in machinery and equipment, information technology equipment, software, project planning and information technology projects. Our main investments during the period were related to sales standsand software acquisitions, which amounted to R$32.7 million and R$4.6 million, respectively.
In 2020, under the Gafisa brand, we invested R$16.7 in machinery and equipment, information technology equipment, software, project planning and information technology projects. Our main investments during the period were related to sales stands, which amounted to approximately R$8.7 million.
In 2019, under the Gafisa brand, we invested R$3.6 million in machinery and equipment, information technology equipment, software, project planning and information technology projects. Our main investments during the period were related to sales stands, which amounted to approximately R$1.0 million.
Our capital expenditures are all made in Brazil and are usually funded by financings through local debt capital markets. We currently do not have any significant capital expenditures in progress.
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| B. | Business Overview |
General Overview
We believe we are one of Brazil’s leading homebuilders. For over/more than 60 years, Gafisa has been recognized as one of the foremost professionally-managed homebuilders, having completed and sold more than 1,100 developments and constructed over 16 million square meters of housing, which we believe is more than any other residential development company in Brazil. We believe our brand “Gafisa” is a well-known brand in the Brazilian real estate development market, enjoying a reputation among potential homebuyers, brokers, lenders, landowners and competitors for quality, consistency and professionalism.
Our core business is the development of high-quality residential units in attractive locations. For the year ended December 31, 2021, we reaped the benefits of our restructuring process initiated in 2019 and resumed launches after a two year period. In addition, we also provide construction services to third parties on certain developments where we retain an equity interest. We are currently operating mainly in São Paulo and its metropolitan area. The city of São Paulo represented approximately 6% of the national population and over 10% of the gross domestic product as of December 31, 2017 (latest available information).
Our Markets
We have developed real estate projects in 40 municipalities throughout Brazil, including Barueri, Belém, Campinas, Cuiabá, Curitiba, Goiânia, Gramado, Guarujá, Guarulhos, Itu, Jundiaí, Macaé, Maceió, Manaus, Niterói, Nova Iguaçu, Osasco, Porto Alegre, Porto Velho, Rio de Janeiro, Salvador, Santo André, Santos, São Bernardo do Campo, São Caetano do Sul, São Gonçalo, São Jose dos Campos, São Luís, São Paulo and Volta Redonda.
In 2020, we created a new business unit, Gafisa Propriedades, which acquires and develops real estate assets and is expected to provide management services to proprietary and third-party owned real estate assets. In the first quarter of 2021, Gafisa Propriedades acquired (i) a stake in the Hotel Fasano Itaim project in São Paulo, currently under construction, (ii) stakes in Jardim Guadalupe Shopping and São Conrado Fashion Mall (closing pending), both in the city of Rio de Janeiro, and (iii) a private suites in the Cidade Matarazzo Rosewood São Paulo project in São Paulo-SP.
On November 16, 2020, we completed the acquisition of four projects located in Rio de Janeiro from Calçada S.A., marking the return of Gafisa’s presence in the Rio de Janeiro real estate development market. “Gafisa Rio” is our local base for acquiring land and launching new projects in Rio de Janeiro, and will enable us to better understand and manage business opportunities in the Rio de Janeiro real estate market.
Our Real Estate Activities
Our real estate business includes the following activities:
| · | developments for sale of: |
| · | residential units; |
| · | commercial buildings; |
| · | construction services to third parties on certain developments in the Gafisa segment where we retain an equity interest; and |
| · | sale of units through our brokerage subsidiaries, Gafisa Vendas and Gafisa Vendas Rio, jointly referred to as “Gafisa Vendas.” |
The table below sets forth our potential sales value, generated from new developments for each of our real estate activities and as a percentage of total real estate amount generated during the periods presented:
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| For the year ended December 31, | ||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| (in thousands of reais) | (% of total) | (in thousands of reais) | (% of total) | (in thousands of reais) | (% of total) | |||||||||||||||||||
| Residential buildings | 1,441,741 | 100.0 | 634,522 | 100.0 | — | — | ||||||||||||||||||
| Commercial | — | — | — | — | — | — | ||||||||||||||||||
| Potential sales | 1,441,741 | 100.0 | 634,522 | 100.0 | — | — | ||||||||||||||||||
The table below sets forth our sales value from new developments generated for each of our real estate activities and as a percentage of total real estate amount generated during the periods presented:
| For the year ended December 31, | ||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| (in thousands of reais) | (% of total) | (in thousands of reais) | (% of total) | (in thousands of reais) | (% of total) | |||||||||||||||||||
| Residential buildings | 266,319 | 100.0 | 172,800 | 100.0 | — | — | ||||||||||||||||||
| Commercial | — | — | — | — | — | — | ||||||||||||||||||
| Sales | 266,319 | 100.0 | 172,800 | 100.0 | — | — | ||||||||||||||||||
Developments for Sale
The table below provides information on our developments for sale activities during the periods presented:
| As of and for the year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (in thousands of reais, unless otherwise stated) | ||||||||||||
| São Paulo | ||||||||||||
| Potential sales value of units launched(1) | 1,062,649 | 262,547 | — | |||||||||
| Developments launched(2) | 5 | 3 | — | |||||||||
| Usable area (m2)(3) | 71,516 | 16,776 | — | |||||||||
| Units launched(4) | 1,447 | 148 | — | |||||||||
| Average sales price (R$/m2)(3)(5) | 14,859 | 15,650 | — | |||||||||
| Rio de Janeiro | ||||||||||||
| Potential sales value of units launched(1) | 379,092 | 326,251 | — | |||||||||
| Developments launched(2) | 2 | 1 | — | |||||||||
| Usable area (m2)(3) | 20,300 | 11,285 | — | |||||||||
| Units launched(4) | 344 | 25 | — | |||||||||
| Average sales price (R$/m2)(3)(5) | 18,674 | 28,910 | — | |||||||||
| Other Markets | ||||||||||||
| Potential sales value of units launched(1) | — | 45,724 | — | |||||||||
| Developments launched(2) | — | 1 | — | |||||||||
| Usable area (m2)(3) | — | 6,586 | — | |||||||||
| Units launched(4) | — | 58 | — | |||||||||
| Average sales price (R$/m2)(3)(5) | — | 6,943 | — | |||||||||
| Total Gafisa | ||||||||||||
| Potential sales value of units launched(1) | 1,441,741 | 634,522 | — | |||||||||
| Developments launched(2) | 7 | 5 | — | |||||||||
| Usable area (m2)(3) | 91,816 | 34,648 | — | |||||||||
| Units launched(4) | 1,621 | 231 | — | |||||||||
| Average sales price (R$/m2)(3)(5) | 15,702 | 18,313 | — | |||||||||
| (1) | Potential sales value is calculated by multiplying the number of units in a development by the expected sales price of the unit. |
| (2) | Does not consider acquisitions of additional ownership interests in projects or cancelled projects. |
| (3) | One square meter is equal to approximately 10.76 square feet. The unit’s usable area in exchange for land pursuant to barter transactions is not included. |
| (4) | The units delivered in exchange for land pursuant to barter transactions are not included. |
| (5) | Average sales price per square meter was R$9,184, R$7,605 and R$6,400 in 2021, 2020 and 2019, respectively, for Gafisa’s ventures only. |
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Our developments for sale are divided into two broad categories: (1) residential buildings and (2) commercial buildings.
Overview of Residential Buildings
In the residential buildings category, we develop two main types of products: (1) luxury buildings targeted at higher-income customers and buildings targeted at middle-income customers; and (2) entry level buildings targeted at middle-low income customers. Quality residential buildings for middle- and upper-income customers are our core products and we have developed them since our inception. A significant portion of our residential developments is located in São Paulo and Rio de Janeiro. In 2006, we began our national expansion to pursue opportunities in residential buildings outside these cities. However in 2012, as a result of the difficulties to manage these projects and to achieve reasonable profits, we shifted our focus back to São Paulo and Rio de Janeiro.
Luxury and Middle-Income Buildings
Luxury buildings are a high margin niche. Units usually have over 150 square meters of private area, at least four bedrooms and more than three parking spaces. Typically, this product is fitted with modern, top-quality materials designed by brand-name manufacturers. The development usually includes swimming pools, gyms, visitor parking, and other amenities. Average price per square meter generally is higher than approximately R$18,000. Luxury building developments are targeted to families with monthly household incomes in excess of approximately R$40,000.
Buildings targeted at middle-income customers have accounted for the majority of our sales since our inception. Units usually have between 60 and 150 square meters of private area, between one and three bedrooms and up to three parking spaces. Buildings are usually developed in large tracts of land as part of multi-building developments and, to a lesser extent, in smaller lots in attractive neighborhoods. Average price per square meter ranges from approximately R$10,000 to R$18,000. Middle-income building developments are tailored to customers with monthly household incomes between approximately R$15,000 and R$40,000.
The table below sets forth our luxury and middle-income building developments launched between January 1, 2019 and December 31, 2021:
| Project Description | Year Launched | Gafisa Participation (%) | Usable Area (m2) (1) (2) | Completion Year | Number of Units (2) | Units Sold (%) (As of December 31, 2021) | ||||||||||||||||
| Invert Campo Belo | 2021 | 100 | % | 22,488 | 2024 | 361 | 23.5 | % | ||||||||||||||
| Tom Delfim Moreira | 2021 | 100 | % | 1,953 | 2024 | 6 | 31.5 | % | ||||||||||||||
| Tonino Lamborghini San Paolo | 2021 | 100 | % | 6,882 | 2025 | 107 | 8.0 | % | ||||||||||||||
| Flow By Gafisa | 2021 | 100 | % | 11,691 | 2024 | 420 | 20.6 | % | ||||||||||||||
| Vinci Moema | 2021 | 100 | % | 9,701 | 2025 | 164 | 17.7 | % | ||||||||||||||
| Invert Barra | 2021 | 100 | % | 18,347 | 2024 | 168 | 25.7 | % | ||||||||||||||
| Cyano | 2020 | 100 | % | 11,285 | 2023 | 25 | 41.1 | % | ||||||||||||||
| Normandie Moema | 2020 | 100 | % | 8,895 | 2023 | 64 | 71.7 | % | ||||||||||||||
| High Line Jardins | 2020 | 100 | % | 4,624 | 2023 | 68 | 46.8 | % | ||||||||||||||
| Chez Perdizes | 2020 | 100 | % | 3,257 | 2023 | 16 | 17.7 | % | ||||||||||||||
| (1) | One square meter is equal to approximately 10.76 square feet. |
| (2) | Values for 100% of the building development, except on projects with partial interest. |
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Entry Level Developments
Entry level housing consists of building and house units. Units usually have between 40 to 60 square meters of private area, one to three bedrooms, and are typically located outside the vehicle restriction area of São Paulo and near public transportation points. The average price per square meter ranges from R$6,000 to R$9,000. Entry level housing developments are tailored to customers with monthly household incomes between approximately R$7,000 and R$10,000.
The table below sets forth our entry level developments launched between January 1, 2019 and December 31, 2021:
| Project Description | Year Launched | Gafisa Participation (%) | Usable Area (m2) (1) (2) | Completion Year | Number of Units (2) | Units Sold (%) (As of December 31, 2021) | ||||||||||||||||
| Marajoara Club House | 2021 | 100 | % | 20,754 | 2024 | 395 | 21.5 | % | ||||||||||||||
| Parque Ecoville F3 – Barigui | 2020 | 100 | % | 6,586 | 2023 | 58 | 27.1 | % | ||||||||||||||
| (1) | One square meter is equal to approximately 10.76 square feet. |
| (2) | Values for 100% of the building development, except on projects with partial interest. |
Completed developments with percentage of units sold less than 90%
The table below sets forth our completed developments as of December 31, 2021, with percentage of units sold less than 90%:
| As of December 31, 2021 | ||||
| Project Description | Units Sold (%) | |||
| Up Office Berrini (1) | 13.7 | % | ||
| Alta Vistta – Fase 1 (2) | 22.4 | % | ||
| Alta Vistta – Fases 3 E 4 (3) | 37.6 | % | ||
| MN15 Ibirapuera (4) | 41.6 | % | ||
| Gafisa Desenvolvimento Urbano (5) | 55.1 | % | ||
| Moov Estacao Bras (6) | 55.8 | % | ||
| Alphamall (7) | 80.3 | % | ||
| Life 360 (8) | 82.8 | % | ||
| Botanique (9) | 84.1 | % | ||
| J330 Jardins (10) | 85.4 | % | ||
| Smart Santa Cecilia (11) | 88.4 | % | ||
| Target Offices e Mall (12) | 63.9 | % | ||
| (1) | Up Office Berrini. This development was 100% completed at December 31, 2021 at which time 13.65% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12-24 months. |
| (2) | Alta Vistta F1. This development was 100% completed at December 31, 2021 at which time 22.40% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12-24 months. |
| (3) | Alta Vistta F3 e F4. This development was 100% completed at December 31, 2021 at which time 37.62% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12-24 months. |
| (4) | MN | 15. This development was 100% completed at December 31, 2021 at which time 41.60% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12 months. |
| (5) | Gafisa Desenvolvimento Urbano. This development was 100% completed at December 31, 2021 at which time 55.07% of the units had been sold. These units are mostly related to land lots and were acquired in 2019 from |
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Alphaville’s operation. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12-24 months.
| (6) | Moov Estação Brás. This development was 100% completed at December 31, 2021 at which time 55.79% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12-24 months. |
| (7) | Alphamall. This development was 100% completed at December 31, 2021 at which time 80.34% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12 months. |
| (8) | Life 360. This development was 100% completed at December 31, 2021 at which time 82.82% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12 months. |
| (9) | Botanique. This development was 100% completed at December 31, 2021 at which time 84.08% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12-24 months. |
| (10) | J330. This development was 100% completed at December 31, 2021 at which time 85.39% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12 months. |
| (11) | Smart Santa Cecília. This development was 100% completed at December 31, 2021 at which time 88.40% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 12 months. |
| (12) | Target Offices e Mall. This development was 100% completed at December 31, 2021 at which time 63.87% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold over a long time period. The relatively low speed at which the units of this development have been sold is mainly due to the challenging macroeconomic conditions in the city of Rio de Janeiro and its negative impact on the real estate market. |
We have evaluated all of our developments and we have recorded reduction to net realizable value and write-offs to net realizable value for the following projects: Alpha Green, Alpha Land, Alphamall, Americas Avenue, Espaço Alpha, Golden Office, Sao Gate, Sao – Way, Target Offices & Mall, Smart Vila Madalena, Smart Santa Cecília, Moov Parque Maia, Moov Belém, Upcon Cinquo,Icon Business e Mall, Gafisa Desenvolvimento Urbano, Parque Ecoville, single units of Olavo Bilac and single units of Reserva das Ruínas.
Some of these projects, such as Target Offices & Mall and Americas Avenue, were transferred to our properties management team at Gafisa Propriedades, for a more focused engagement of the issues related to them.
Land subdivisions
Land subdivisions consist of the land acquired from Alphaville Urbanismo S.A., in the divestment operation of our shares and is in line with our strategy of optimization and improvement of our portfolio. These lots are equipped with infrastructure for specific land parceling, such as electricity, water and sewage, paved streets and common leisure areas. Our subdivisions are usually located in wealthy suburban areas close to highways leading to major cities. A typical lot is between 250 and 5,000 square meters, most of it for residential use and a small part for commercial use. The average price per square meter ranges from approximately R$ 200 to R$ 800. We target clients with a monthly family income of more than approximately R$ 10,000 for these subdivisions.
We are structuring partnerships with the main real estate companies in the locations of the developments for the commercialization of the lots.
The table below sets forth our entry level developments acquired between January 1, 2019 and December 31, 2021:
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| Project Description | Year Acquired | Gafisa Participation (%) | Usable Area (m2) (1) (2) | Number of Units (2) | ||||||||||
| Alphaville Castello Itu | 2019 | 100 | % | 6,151 | 3 | |||||||||
| Terras Alphaville Dourados | 2019 | 100 | % | 26,189 | 69 | |||||||||
| Terras Alphaville Gravataí | 2019 | 100 | % | 969 | 3 | |||||||||
| Terras Alphaville Linhares | 2019 | 100 | % | 3,333 | 5 | |||||||||
| Alphaville Litoral Norte 3 Salvador | 2019 | 100 | % | 7,270 | 8 | |||||||||
| Alphaville Pernambuco | 2019 | 100 | % | 6,578 | 13 | |||||||||
| Terras Alphaville Ponta Grossa | 2019 | 100 | % | 2,842 | 6 | |||||||||
| Alphaville Aracaju Sergipe | 2019 | 100 | % | 22,694 | 35 | |||||||||
| (1) | One square meter is equal to approximately 10.76 square feet. |
| (2) | Values for 100% of the building development, except on projects with partial interest. |
Commercial Buildings
In 2019, 2020 and 2021, we did not launch any commercial buildings, although some of our residencial buildings had a commercial element attached to them.
Construction Services
We provide construction services to third parties on certain developments where we retain an equity interest. This practice allows us to benchmark our construction costs, facilitates our access to new constructions materials, techniques and service providers such as architects and sub-contractors, and provides larger economies of scale.
As of December 31, 2021, there is no real estate developments for third parties currently under construction, in which we also have an equity interest.
Sale of Units Through Our Brokerage Subsidiaries
In September 2006, we created a new subsidiary, Gafisa Vendas, to function as our internal sales division in the state of São Paulo. This subsidiary company is responsible for efforts in connection with: (1) launches — our internal sales force focuses on promoting launches of our developments; however, we also use outside brokers (mainly in Rio de Janeiro), thus creating what we believe to be a healthy competition between our sales force and outside brokers; (2) inventory — we have a team focused on selling units launched in prior years; and (3) web sales — we have a sales team dedicated to internet sales as an alternative source of revenues with lower costs.
Gafisa Propriedades
In 2020, we created a new business unit, Gafisa Propriedades (formerly Upcon S.A), which comprises real estate assets aimed to generate income, focused on management services for proprietary and third-party real estate. Gafisa Propriedades identifies and capitalizes on promising market opportunities, including real estate purchases, commercial property management (e.g. shopping centers), open-plan corporate offices (and accompanying infrastructure), and hotels. The business has more than 105,000 square meters of gross leasable area (GLA) and is focused on real estate assets aimed at generating income and opportunities for operational turnarounds.
Our Clients
Our clients mainly consist of development clients. Development clients are clients who purchase units in our developments. As of December 31, 2021, our development-client database was comprised of more than 87.000 individuals. We currently have approximately 12.000 active clients.
We also provide construction services to certain construction-services clients in connection with developments in which we retain an equity interest. As of December 31, 2021, there are no construction services clients currently under construction.
No individual client represents more than 5% of our revenues from residential developments or construction services.
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Our Operations
The stages of our development process are summarized in the diagrams below:
Land Acquisition
We use results from our extensive market research to guide our land reserves strategy and process. Our marketing and development teams monitor market fundamentals and trends. We have developed a sophisticated database to support our search for and analysis of new investment opportunities. Key decision factors used by our management for land acquisition and new developments include location, type of product to be developed, expected demand for the new developments, current inventory of units in the region and acquisition cost of the land.
Whenever we identify an attractive tract of land, we first conduct a study of the project to define the most appropriate use of the space. Afterwards, the basic design of the project enters the economic feasibility study stage, where we consider preliminary revenues and expenses associated with the project. This study will determine project profitability. We collect and analyze information on demand, competition, construction budget, sales policy and funding structure to ensure economic viability of the new development. We then initiate a legal due diligence of the property to identify liens, encumbrances and restrictions, potential solutions to such issues and the relevant costs. Before acquiring the land, we conduct a thorough due diligence process including an environmental review. Each decision to acquire land is analyzed and approved by our investment committee. See “Item 6. Directors, Senior Management and Employees—C. Board Practices” elsewhere in this annual report for further information on the activities of our committees and boards.
We seek to finance land acquisition through barter transactions, in which we grant the seller a certain number of units to be built on the land or a percentage of the proceeds from the sale of units in such development. As a result, we reduce our cash requirements and increase our returns. In the event we cannot do so or in order to obtain better terms or prices, we acquire land for cash, alone or in partnership with other developers. We purchase land both for immediate development and for inventory.
As a strategy defined by the end of 2011, the Company is selling landbank located in cities and places where there is no intention to run operations with new developments.
As of December 31, 2021, we had an inventory of 38 land parcels under Gafisa, in which we estimate we could develop a total of 12,434 units (residential and commercial) with a sales value of R$12.3 billion, of which 6% represents land acquired through barter transactions. The table below sets forth the breakdown of our land holdings by location and by segment:
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| Gafisa | ||||||||
| Future Sales (% Gafisa) (1) | % Bartered | |||||||
| (in millions of reais) | ||||||||
| São Paulo | 2,960 | 11 | % | |||||
| Rio de Janeiro | 8,152 | 5 | % | |||||
| Other states | 1,171 | 0 | % | |||||
| Total | 12,283 | 6 | % | |||||
| (1) | Information reflects our interest. |
Project Design
In order to meet evolving preferences of our customers, we invest considerable resources in creating an appropriate design and marketing strategy for each new development, which includes determining the size, style and price range of units. Our staff, including engineers and marketing and sales professionals, works with recognized independent architects on the planning and design of our developments. Their activities include designing the interior and exterior, drafting plans for the execution of the project, and choosing the finishing construction materials. A team responsible for preparing the business plan and budget and assessing the financial viability for each of our projects is also involved. Simultaneously with the planning and design of our developments, we seek to obtain all the necessary licenses and regulatory approvals from local authorities, which usually take three to twelve months in the case of our residential buildings and three years in the case of our residential communities.
Marketing and Sales
Our marketing efforts are coordinated by our internal staff. Our specialized team generally coordinates with several outsourced brokerage companies, monitoring such sales representatives in order to promote loyalty and ensure performance. Our marketing intelligence team is also responsible for gathering information on the needs and preferences of potential customers to provide guidance on our land acquisition and project design activities.
Gafisa Vendas was created as our internal sales division and it currently consists of approximately 651 independent Gafisa Vendas brokers, 22 sales coordinators, 28 sales managers and 4 sales directors.
The creation of Gafisa Vendas was intended to establish a strategic channel for us to access our clients and to reduce our dependence on outside brokers for marketing. Because the sales force at Gafisa Vendas is trained to sell our products exclusively, we believe that it is able to focus on the sale of our developments, articulate the unique features of our development, manage our current customers and capture new customers more effectively. Gafisa Vendas was initially established in São Paulo in 2006 and opened a branch in Rio de Janeiro in 2007.
In 2021, 2020, 2019, 2018 and 2017, Gafisa Vendas was responsible for approximately (i) 83%, 77%, 74%, 73.7% and 68.0%, respectively, of our sales in the state of São Paulo, and (ii) 60%, 4%, 60%, 64.9% and 63%, respectively, of our sales in the state of Rio de Janeiro.
We will continue to utilize independent real estate brokerage firms as we believe this provides a healthy competition between our internal sales force and outside brokers. Independent brokers provide us with a broad reach, access to a specialized and rich database of prospective customers, and flexibility to accommodate the needs of our diverse offering and clientele. In line with our results-oriented culture, we compensate brokers based on their profit contribution rather than on sales. Brokers are required to attend periodic specialized training sessions where they are updated on customer service and marketing techniques, competing developments, construction schedules, and marketing and advertising plans. We emphasize a highly transparent sales approach, as opposed to the traditional high-pressure techniques, in order to build customer loyalty and to develop a sense of trust between customers and us. At our showrooms, brokers explain the project and financing plans, answer questions and encourage customers to purchase or sign on to receive a visit or additional information.
Under our Gafisa brand, we typically initiate our marketing efforts 60 days before the launch of a development. We typically have a showroom on or near the construction site, which includes a model unit furnished with appliances and furniture. We leverage our reputation for quality, consistency, on-time delivery and professionalism
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to increase sales velocity. We have been successful with this strategy, usually selling approximately 30% of the units before construction starts.
We market our developments through online platforms, newspapers, radio, television, direct mail advertising and by distributing leaflets in neighboring areas, as well as through telemarketing and websites.
Under Brazilian law, we may establish a term within and the conditions under which we are entitled to cancel the development. According to our regular purchase contracts, if we are not able to sell at least 60% of the units within 180 days of launching, we can cancel the development. Under those circumstances, we usually consider changing the project or selling the land, but, in any of those cases, we have to return the cash payment made by our customers adjusted for inflation but with no interest. Customers, however, are not entitled to other remedies. Over the last five years, we have only cancelled two developments.
Construction
Gafisa has been engaged in the construction business for over 50 years. Our experience spans across the entire construction chain. Before engaging in each new project, we develop sketches and research and develop projects and plans to create the most appropriate product possible. Our standardized construction techniques and unique control system are designed to optimize productivity and minimize raw material losses. Our monitoring tools are available on our intranet where all employees regularly review costs and key performance indicators of each development such as actual versus budget comparisons, volume consumption for each raw material, and construction schedule.
We use strict quality control methods. We have developed proprietary procedure manuals that describe in significant detail each task of each stage of the construction project. These manuals are also used for the training sessions that we require all of our workers to attend. In addition, we keep quarterly records of projects delivered.
The reviews focus on identifying problems in order to take corrective and preventive actions in projects underway and thus avoid costly repetition. We have adopted a quality management system that was certified for ISO 9001 by Fundação Bureau Veritas, from Universidade de São Paulo. In 2007, we received a certification from Programa Brasileiro de Qualidade e Produtividade do Habitat (PBQP-H), which is part of the Ministry of Cities. In addition, the Eldorado Business Tower building was certified as a Green Building, category Platinum, by the U.S. Green Building Council, which attests that it is environmentally sustainable, through the rational use of energy, natural lighting and pollution control and recycling. Eldorado Business Tower was the first building in Latin America to achieve this category.
We invest in technology. We believe that we have pioneered the adoption of advanced construction techniques in Brazil such as dry wall and plane pre-stressed slabs, which present numerous advantages over traditional techniques. We also optimize costs by synchronizing our projects’ progress so as to coordinate the purchase of raw material and benefit from economies of scale. We have long-term arrangements with a number of suppliers which allow us to build our developments with quality, using brand name construction materials and equipment, and advanced technology. Moreover, our centralized procurement center enables us to achieve significant economies of scale in the purchase of materials and retention of services.
We do not own heavy construction equipment and we employ directly only a small fraction of the labor working on our sites. We generally act as a contractor, supervising construction while subcontracting more labor-intensive activities. Substantially all on-site construction is performed for a fixed price by independent subcontractors. We have policies in place in order to hire reputable, cost-oriented and reliable service providers that are in compliance with labor laws and have performed their work diligently and on time in the past. Hiring subcontractors instead of employing workers directly has some financial and logistical advantages. For instance, we do not need to incur fixed costs to maintain a specialized labor force even when they are not actively working at a construction site and we do not need to pay for frequent transfers of labor to different construction locations.
Our construction engineering group coordinates the activities of service providers and suppliers, monitors compliance with safety and zoning codes, and monitors completion of the project on a timely basis. We provide a five-year limited warranty covering structural defects in all our developments.
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Risk Management
Our risk management procedures require that all of our projects be approved by our investment committee, which meets on a monthly basis, or more frequently on an as-needed basis, and consists of our chief executive officer and two members of our board of directors. Our investment committee carefully reviews the various studies conducted by us and described above. In addition, we have a board of officers, which meets monthly, and is in charge of overseeing and approving major decisions. See “Item 6. Directors, Senior Management and Employees—E. Share Ownership” in this annual report.
Customer Financing
The table below sets forth the percentage of each type of customer financing we typically provide for each type of development as of December 31, 2021:
| Sales Term | Luxury and Middle Income (average) | Entry-Level (average) | ||||||
| Mortgage lending (delivery) | 85 | % | 100 | % | ||||
| Gafisa 36 months | 15 | % | 0 | % | ||||
| Gafisa 60 months | 0 | % | 0 | % | ||||
| Gafisa 120 months | 0 | % | 0 | % | ||||
Mortgages. In 2021, approximately 70% of our sales value was financed by bank mortgages, where the customer paid us approximately 25% to 60% of the sales price of the property during the period of construction, and upon delivery of the property paid the balance of the sales price through a bank mortgage. We analyze the credit history of each customer at the time of sale to see if the customer would qualify for a bank mortgage based on banks’ standard credit rating policies. Although there is no assurance that the customer will qualify for a mortgage at the time of delivery, our analyses have been fairly successful in predicting whether the customer would qualify for a mortgage. The following table sets forth the credit limits established by mortgage sources available in Brazil in 2021:
|
Credit Lines |
Typical Interest rate |
Maximum Home Value |
Maximum Loan Value |
| Mortgage portfolio (Carteira Hipotecária) or CH | up to 9.99% annually + TR(1) | No limit | No limit |
| Housing Finance System (Sistema Financeiro da Habitação) or SFH | up to 7.99% annually + TR | R$1,500,000.00 | R$1,500,000.00 |
| Government Severance Indemnity Fund for Employees (Fundo de Garantia do Tempo de Serviços) or FGTS for Programa Casa Verde e Amarela | up to 7.16% annually + TR | R$264,000.00 | R$264,000.00 |
| (1) | TR refers to the daily reference rate. |
Financing by Gafisa during construction. We finance some of our own sales during the construction period, with a down payment of 20-30% and financing of the balance through monthly installments up to the delivery of the unit.
Financing by Gafisa after delivery. In addition, we offer financing plans to prospective customers using our own capital, where we finance purchases for up to 120 months after the completion of the construction. For completed units we require a down payment of 30% and financing of the remaining balance with up to 120 monthly installments. For units under construction we require a down payment of 10% and provide financing for the remaining balance of 25-35% with up to 30 monthly installments until the delivery of the unit and financing of the remaining 75-65%, respectively, with up to 120 additional monthly installments. All of our financing plans are guaranteed by a conditional sale of the unit, with the transfer of the full property rights of the unit to the customer upon the full payment of the outstanding installments.
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We have developed a strict credit policy in order to minimize risks. We take the following steps whenever we conduct a credit review process:
| · | trained independent brokers interview each potential customer to collect personal and financial information and fill out a registration form; |
| · | registration forms are delivered, along with a copy of the property deed, to us and, if the bank providing the financing requests, to an independent company specialized in real estate credit scoring; |
| · | credit is automatically extended by us to the customer if his or her credit analysis is favorable. However, if the credit analysis report raises concerns, we will carefully review the issues and accept or reject the customer’s application depending on the degree of risk. To the extent financing is provided by a bank, such financial institution will follow their own credit review procedures; and |
| · | after approving the application, our staff accepts the down payment which is given as a deposit on the purchase of the unit. |
Sales contracts. Our sales contracts generally provide for adjustment of the sales price according to the INCC during construction and at an annual interest rate of 12% plus IGP-M over the receivables balance after a stated date in our sales contracts. We have historically experienced a low rate of customer default on our sales. On December 31, 2021, our clients’ default level, related to amounts overdue for over 30 days, was 14.2% of our accounts receivable for Gafisa.
In order to maintain low rates of customer default, we have adopted a conservative and robust credit and receivables management policy, pursuant to which: (1) we conduct database research on the socio-economic background of our prospective customers; (2) our agreements discourage default and cancellation of the purchase by imposing immediate penalty fees, interest and liquidated damages which are adjusted for inflation, and we retain approximately 25-50% (Gafisa) of the total amount paid to us plus expenses incurred by us, which in general represents all or a substantial portion of the amount that the defaulted clients have already paid us; and (3) we offer several options to our customers if they experience financial difficulties, such as offering them a greater number of installment payments or exchanging the unit bought for a less expensive one. When a default occurs, we endeavor to renegotiate the outstanding loan with our customers before taking any legal action.
We will only transfer title of the unit to a buyer after the release of the certificate of acceptance of occupancy by local authority and the full payment of all outstanding installments. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Launches and Contracted Sales—Contracted Sales” for a discussion of the sales value of contracts cancelled by our customers and penalties paid in connection with such cancellations.
The table below sets forth client default levels:
| As of and for the year ended December 31, | ||||||||||||
| Customer default level | 2021 | 2020 | 2019 | |||||||||
| Gafisa | 14.2 | % | 14.9 | % | 15.1 | % | ||||||
Cancelation of sales contracts.
Until December 2018, sales contracts involving real estate development activities were irrevocable under Brazilian law. The buyer did not have the unilateral ability to terminate a contract once it was executed, nor did the buyer have the ability to require a refund of amounts previously paid unless Gafisa agreed. To the extent the customer was not in compliance with its obligations under a contract, Gafisa could, at its sole discretion, either force compliance through Brazilian courts, or agree to a “default” by the customer. In this case, if Gafisa agreed at its sole discretion to refund part of the amounts paid to the defaulting party, the penalty set forth in the contract would be normally applied.
In recent years, however, the Brazilian real estate market has seen an unprecedented level of noncompliance by customers, many of which went to court to ask for the unilateral judicial termination of sales contracts. This was
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triggered by a number of factors, including a national economic crisis, high levels of unemployment and a crisis in the real estate market, leading to a distorted fluctuation in real estate prices.
In view of the excessive number of judicial proceedings filed to redeem consumer rights, Law No. 4,591 of December 16, 1964 was amended by Law No. 13,786 on December 12, 2018, to regulate the unilateral termination of real estate contracts and clarified the parameters of the commercial relationship between customer and contractor.
Pursuant to Law No. 13,786, upon termination of a real estate sale contract due to the default of a buyer’s obligation, the buyer is entitled to a partial restitution of the amounts already paid to the developer. The penalty due by the buyer in these cases must not exceed:
(i) 25% of the amounts paid, if the development is not being constructed legally segregated from the developer’s assets, as per Law No. 10,931 of August 2, 2004 (“Detached Assets”); or
(ii) 50% of the amounts paid, if the development is subject to Detached Assets.
In case the buyer finds a new buyer for the returned unit, the penalty fees can be avoided, provided the requirements defined by law are satisfied.
The real estate developer must refund the referred amounts in a single installment no later than (i) 30 days from the issuance of the occupancy permit by the relevant Municipality, if subject to Detached Assets; (ii) 180 days from the termination of the relevant agreement, if not subject to Detached Assets; or (iii) 30 days from the resale of the returned unit, if prior to the other terms.
In addition, Brazilian law also grants the developer the right to force the unit to be auctioned in case the buyer’s proceeds from the auction are used to reimburse the buyer for the amounts already paid to the developer, deducting the amounts stipulated by the relevant legislation. When no third party is willing to acquire the unit in the auction, the ownership of the unit returns to the developer, which shall reimburse the buyer portion of the amounts already paid, also in accordance with the law.
The table below provides the number and sales value of contracts canceled by customers for the periods presented:
| As of December 31, 2021 | As of December 31, 2020 | As of December 31, 2019 | ||||||||||||||||||||||
| Year Segment | Number of contracts | Sales value (in thousands of reais) | Number of contracts | Sales value (in thousands of reais) | Number of contracts | Sales value (in thousands of reais) | ||||||||||||||||||
| Gafisa | ||||||||||||||||||||||||
| Contracted sales | 1,320 | 754,771 | 905 | 516,903 | 832 | 292,087 | ||||||||||||||||||
| Volume/Sales value of cancelations | (340 | ) | (173,240 | ) | (172 | ) | (78,928 | ) | (193 | ) | (97,531 | ) | ||||||||||||
| Percentage | 25.8 | % | 23.0 | % | 19.0 | % | 15.3 | % | 23.2 | % | 33.0 | % | ||||||||||||
| Volume/Sales value, net of cancelations | 980 | 581,531 | 733 | 437,975 | 639 | 194,556 | ||||||||||||||||||
| Total sales value net of cancelation | 980 | 581,531 | 733 | 437,975 | 639 | 194,556 | ||||||||||||||||||
Receivables securitization
We release capital for new projects by seeking not to maintain receivables after our projects are completed. The securitization (mortgage-backed securities) market in Brazil is expanding. This expansion is helped significantly by recent development in Brazilian foreclosure laws.
With the growing availability of mortgages from commercial banks and the increasing liquidity of CRIs, we expect to further reduce our role as a financing provider to our customers. Our goal is to optimize our working capital by transferring the financing activities to securitization companies and banks.
Main Raw Materials and Suppliers
We purchase a wide variety of raw materials for our operations. Even though these raw materials have represented on average, over the last three years, approximately 45% of our total costs of development, aside from
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land, the only raw material that represents more than approximately 5% of our total costs is steel. Prices of some raw materials have increased over the last three years at a rate higher than inflation. The index that measures the fluctuation of construction costs, the INCC, increased 29.1% during the three year period ended December 31, 2021, resulting in an increase in the construction costs of Gafisa over that period. During the three year period ended December 31, 2021 the IGP-M increased 55.7%. We have been working on the development of new construction techniques and the utilization of alternative materials in order to reduce costs and improve our construction process with advanced technology.
We contract with major suppliers for the materials used in the construction of the buildings. We receive general pricing proposals from various suppliers of raw materials and select the proposal with the best terms and conditions for each development. In addition to pricing, we select our suppliers by the quality of their materials. We set forth specific minimum quality requirements for each construction project, and the chosen supplier must meet this quality requirement. The materials for our developments are readily available from multiple sources and, accordingly, we do not rely on any one supplier for our raw materials.
Our five largest suppliers in terms of volume are Gerdau Aços Longos S.A., Polimix Concretos Ltda., Pormade Portas de Madeiras Decor Ltda., Valebeton Concreto Eireli and Thyssenkrupp Elevadores S.A. In general terms, we purchase products for our construction based on the scheduled requirements, and we are given approximately 30 days to pay. The products we purchase generally come with a five-year warranty. We do not have any exclusive arrangements with our suppliers. We work closely with suppliers, enabling them to schedule their production in order to meet our demand or notify us in advance in the event they anticipate delays. We have good relationships with our suppliers and have experienced no significant construction delays due to shortages of materials in recent years. We do not maintain inventories of construction materials.
We achieve significant economies of scale in our purchases because we:
| · | use standard construction techniques, |
| · | engage in a large number of projects simultaneously, and |
| · | have long-term relationships with our suppliers. We periodically evaluate our suppliers. In the event of problems, we generally replace the supplier or work closely with them to solve the problems. |
Customer Service
In our industry, customer satisfaction is based in large part on our ability to respond promptly and courteously to buyers before, during and after the sale of our properties, including providing an owner’s guide. These services are provided with the objective of educating customers on the progress of the construction and improving customers’ experience with the purchase of our units. Other customer service efforts include:
| · | a dedicated outsourced call center with consultants and specialists trained to answer our customers’ inquiries; and |
| · | the development of the “Gafisa Viver Bem” web portal, through which our customers can, for example, follow the project’s progress, alter their registration information and check their outstanding balances. |
Viver Bem has always been an inspiration for Gafisa, and this has led the company to develop better spaces, idealize concepts and innovative projects. With that in mind, we developed the Gafisa Viver Bem Program, a complete platform of products and services, which is present throughout the entire customer journey, from the acquisition of the property to the post-delivery stage of the transaction. Gafisa Viver Bem comprises the following stages: Unit Customization, Renovation and Decoration services, Purchasing Club, Rental Management and Condominium Administration.
In the Viver Bem Personalização stage, the client can personalize his/her unit plan and finishing services of his/her unit, even before picking up the keys. Modifications are carried out during construction and with Gafisa’s warranty. In the Viver Bem Reforma e Decoração Program, Gafisa develops personalized interior projects, executes, and manages the construction work in an integrated manner, with excellent finishing options, within the parameters of budgets, time and final result. Renovation and Decoration is offered to customers who are in the delivery stage of
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the project or in the post-keys stage. In the exclusive shopping club, customers have access to the products of the best home appliance and decoration manufacturers, direct from the factory and without intermediaries.
Additionally, as part of our customer service program in our residential developments, we conduct pre-delivery inspections to promptly address any outstanding construction issues. We also conduct monitored inspections of our developments to allow buyers to gather more information from our technical personnel. In addition, we send a monthly status report on the construction of the unit. We also provide a five-year limited warranty covering structural defects, which is required by Brazilian law.
Competition
The real estate market in Brazil is highly fragmented and competitive with low barriers to entry. The main competitive factors include price, financing, design, quality, reputation, reliability, meeting delivery expectations, partnerships with developers and the availability and location of land. Certain of our competitors have greater financial resources than we do, which could provide them an advantage over us in the acquisition of land using cash. In addition, some of our competitors have better brand recognition in certain regions, which could give them a competitive advantage in increasing the velocity of their sales. Because of our geographic diversification, we believe that we have access to different markets within Brazil that have different demand drivers.
Because of the high fragmentation of the markets in which we operate, no single developer or construction company is likely to obtain a significant market share. With the exception of São Paulo and Rio de Janeiro, where we face competition from major publicly-traded competitors, in other regions we generally face competition from small and medium-sized local competitors that are not as well-capitalized. We expect additional entrants, including foreign companies in partnership with Brazilian entities, into the real estate industry in Brazil, particularly the São Paulo and Rio de Janeiro markets.
The table below sets forth the most recent data available on our market share in the São Paulo and Rio de Janeiro markets:
São Paulo (1) — Gafisa’s Market Share
| Year ended December 31, | ||||||||||||
| Year | 2021 | 2020 | 2019 | |||||||||
| (Launches in R$ million) | ||||||||||||
| Local market | 44,945 | 28,763 | 31,442 | |||||||||
| Gafisa(2) | 1,063 | 262 | — | |||||||||
| Gafisa’s market share | 2.4 | % | 0.9 | % | — | |||||||
Source: EMBRAESP and SECOVI.
| (1) | Metropolitan region. |
| (2) | Gafisa interest. |
Rio de Janeiro (1) — Gafisa’s Market Share
| Year ended December 31, | ||||||||||||
| Year | 2021 | 2020 | 2019 | |||||||||
| (Launches in R$ million) | ||||||||||||
| Local market | 6,220 | 3,786 | 3,676 | |||||||||
| Gafisa(2) | 379 | 326 | — | |||||||||
| Gafisa’s market share | 6.1 | % | 8.6 | % | — | |||||||
Source: ADEMI.
| (1) | Metropolitan region. |
| (2) | Gafisa interest. |
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In 2019, we did not launch any development in Rio de Janeiro.
Seasonality
Although the Brazilian real estate market is not generally seasonal, there are a few months of the year when the market slows down (January, February and July) each year. These months coincide with school vacations and result in the postponement of investment decisions. We are impacted similarly as the rest of the market during such periods.
Subsidiaries
We carry out our real estate developments directly or through our subsidiaries or our jointly-controlled entities in partnership with third parties. Many of Gafisa’s subsidiaries and joint-ventures are SPEs, many of which have been incorporated by us as joint ventures together with other real estate and construction companies in Brazil.
As of December 31, 2021, Gafisa had 162 direct and indirect subsidiaries, 26 jointly-controlled entities under operations and 4 entities in which it had minority stakes. The majority of such subsidiaries, jointly-controlled entities and entities in which Gafisa has a minority stake are incorporated as special purpose entities, are headquartered in Brazil and operate exclusively in the real estate sector.
Of our 162 SPEs or invested companies, 132 are wholly-owned by us, and we hold an interest of 50% or less in30.
Intellectual Property
Trademarks
Our trademarks are filed or registered in Brazil with the Brazilian Institute of Industrial Property (Instituto Nacional de Propriedade Industrial), or the “INPI,” which is the competent body for, among others, trademarks’ and patents’ registries in Brazil. Additionally, the trademark “Gafisa” is also registered before the competent agency for registering trademarks in the United States.
Currently, the registration process of a trademark takes approximately 24 months from the date of filing of the application until the definitive registration. From the date of filing of the application to the date of the definitive registration, the applicant has an expectation of right for the use of the trademark in connection with the products and services for which the trademark was applied.
Each trademark registration is effective for a 10-year period and is renewable for equal and successive periods. The renewal of a trademark registration is granted upon request accompanied by payment of renewal fees during the final year of the trademark’s registration period or within the 6-month waiting period after its expiration. In case of non-payment, the registration is definitively archived by INPI, requiring the filing of a new application.
A trademark registration may be cancelled in the case of (1) the expiration of its renewable 10-year validity term; (2) the trademark owner’s or holder’s waiver, in whole or in part, of the rights granted by registration; (3) the forfeiture, or the applicant’s or the holder’s failure to use a registered trademark in connection with related goods or services for a period longer than five years; or (4) the failure to appoint a Brazilian resident with the power to represent the applicant or holder in administrative or judicial proceedings, in cases where the applicant or the holder resides abroad.
As of the date of this annual report, we had approximately 20 pending trademark applications and 130 trademarks registered in Brazil with the INPI.
Our most significant trademark is “Gafisa,” which is duly registered with the INPI in the relevant market segment.
Domain Name
As of the date of this annual report, we, together with our subsidiaries, were the owners of approximately 221 domain names including our and our subsidiaries’ principal websites. The term of each domain name registration is
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usually one year and is renewable for equal and successive periods. An annual fee payment is necessary for the maintenance of the domain name registrations. Other than non-payment of the annual fee, domain name registration may be cancelled by: (1) express waiver of the owner; (2) irregularities in the data form as requested by the respective agency; (3) non-compliance with applicable regulations; (4) judicial order; or (5) in the case of foreign companies, non-compliance with the obligation to initiate the company’s activities in Brazil. Our domain names will, unless renewed, expire between March 2022 and September 2023. We will seek to renew our domain names expiring in April 2022, after evaluating their continuing applicability.
Patents
We have no patents registered in our name.
Software Licenses
Most of the software we use in our daily business refers to common computer programs, such as Windows, SAP and AutoCAD. Additionally, we own all required licenses of use in connection with such software. The use of computer software without the acquisition of proper licenses is considered a felony subject to both criminal and civil liabilities, including the payment of fines and restrictions of future use of the applicable software.
Licenses
Under Brazilian laws, we are required to obtain a variety of licenses for each of our new developments. As of the date of this annual report, we have obtained all necessary licenses and permits to operate our business.
Insurance
We maintain insurance policies with leading Brazilian insurance companies, such as Allianz Seguros S.A., Chubb do Brasil Companhia de Seguro, AXA Seguros S.A., Swiss RE, Ezze Seguros, Newe Seguros, Liberty Seguros, Fator Seguradora, Ace Seguradora, Berkley Seguros, Tokio Marine Seguradora S.A., J Malucelli Seguradora S.A., Zurich Brasil Seguros, FairFax Brasil Seguros Corporativos and Pottencial Seguradora with coverage for, among others, (1) potential risks arising from the commencement of construction, including property damages, business interruption, engineering risks, fire, falls, collapse, lightning, and gas explosion; (2) construction errors; (3) performance bonds; and (4) losses arising from damages or defense costs associated with litigation resulting from misconduct of directors and officer. Such insurance policies contain customary specifications, limits and deductibles. Additionally, we do not maintain any insurance policy for our properties after construction is completed.
According to Brazilian Federal Law, it is mandatory that homebuilders have insurance policies in force with coverage for, among others, damages and losses related to civil liabilities and performance bonds. Failure or default in contracting any compulsory insurance required by applicable legislation is subject to a penalty amounting to the higher amount between (1) twice the premium price of the insurance that should have been contracted; and (2) ten percent of the insured property value. Additionally, no operating authorization or license (or the renewal of any existing license) shall be granted to companies subject to compulsory insurance in default of the aforementioned obligations.
Our management believes that the insurance coverage for our properties is adequate and that our insurance policies are customary for our industry in Brazil and adequate for applicable regulations.
Regulatory Framework
Brazilian Government and Real Estate Sector Regulations.
The real estate sector is directly regulated by the Brazilian government and is indirectly impacted by the government’s regulations on the availability of credit. Regulations include development policies, zoning restrictions and environmental laws which can determine the availability of different products offered in the market. For example, city master plans and zoning laws restrict the types of real estate developments that can be constructed in a given area.
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As a general rule, the NBCC requires that the transfer of title of real estate properties, as well as the assignment, transfer, change or waiver of rights on real estate properties, be carried out by means of a public deed, except in certain cases, such as when the Real Estate Finance System (Sistema Financeiro Imobiliario), or SFI, or the SFH, are involved. The intent of this rule is to increase the security of real estate property transfers.
According to applicable law, transfer of real estate title is only deemed effective upon the registration of the transfer with the relevant Real Estate Registry Office. The procedure for the execution of public deeds and also the respective registration with the Real Estate Registry Office (Registro Imobiliário) is regulated by the Brazilian Law of Public Registers (Lei de Registros Públicos), in particular Law No. 6,015 of December 13, 1973.
In addition, any assets assigned to directly generate income in Real Estate Investment Funds are subject to regulation by the Brazilian Securities Comission (Comissão de Valores Mobiliários) “CVM,” specifically in the terms of Instruction No. 472 of October 31, 2008.
Real estate development
Real estate development activities are regulated by Federal Law No. 4,591 of December 16, 1964, as amended, or Law No. 4,591. The main duties of a developer are to: (1) obtain all required construction approvals and authorizations from the proper authorities; (2) register the development with the Real Estate Registry Office (without registration, the developed units cannot be sold); (3) indicate in the preliminary documents the deadline for the developer to withdraw from the development; (4) indicate in all advertisements and sales contracts the registration number of the development with the Real Estate Registry Office; (5) oversee the construction of the project established by the contract which must be in accordance with the approval granted by the authorities; (6) deliver to the final owner the completed units, in accordance with the contractual specifications, and transfer to the final owner the title of the unit by signing the final sale deed; (7) assume sole responsibility for the delivery of the developed units to the respective purchasers; (8) assume sole responsibility in the event the construction of the unit is not in accordance with the advertisements and sale contracts; and (9) provide construction blueprints and specifications along with the joint ownership agreement to the proper Real Estate Registry Office. The final owner is obligated, in turn, to pay the price related to the cost of the land and the construction.
The construction of the real estate units may be contracted and paid for by the developer or by the final owners of the units. Brazilian law provides for two pricing methods in real estate development: (1) construction under contract and (2) construction under a system of management. In construction under contract, the contracting parties will either set a fixed price, stipulated before the construction begins, or agree on an adjustable price pegged to an index determined by the contracting parties. In construction under a system of management, an estimated price is agreed upon by the contracting parties, but no fixed final price is provided at the beginning of the construction process. The actual amount that purchasers of the units pay depends on the monthly costs of the developer or contractor.
In addition, in order to increase the legal and economic confidence in the real estate development sector, Law No. 4,591 was recently amended by Law No. 13,786, enacted on December 12, 2018, providing for and regulating the possibility of unilateral dissolution or termination of purchase and sale agreements involving real estate development activities.
Urban land subdivisions
Urban land subdivisions consist of subdivisions of urban land parcels into building lots and the construction of new roads and other infrastructure, and are regulated by Law No. 6,766 of December 19, 1979 – the Brazilian Law of Urban Land Subdivision (Lei de Parcelamento do Solo), as amended, or Law No. 6,766. Law No. 6,766 governs urban land subdivisions and establishes, among other things, the planning and technical requirements for this form of land parceling and the obligations of the developers, and also provides for fines and sanctions in the event of violation of its provisions.
Under Law No. 6,766, land subdivisions are intended for the creation of lots in urban areas or urban expansion zones, as defined by the planning director or approved by municipal law, and must comply with Law No. 6,766.
For the construction of land subdivisions, the developer must proceed through the following steps: (1) prior to developing the land subdivision plan, it must request the municipality in which the development will be located to
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issue directives on use policies specifically to the land, such as the delineation of lots, road and street systems and areas reserved for municipal or community properties; (2) pursuant to the directives issued by the municipality, it must develop a plan for the proposed land subdivision and present it to the municipality for approval, including the plans, designs, descriptions, and schedule for performance of the work, among other documents; and (3) after approval for the land subdivision project is obtained, it must be submitted for recording in the property registry of the appropriate Real Estate Registry Office within 180 days. The approval may be revoked and treated as expired if it is not submitted for recording within the 180-day period.
In addition to the approval of the project by the municipality in which the development will be located, the approval of other governmental bodies may be necessary in cases where the land subdivision: (1) is located in an area of special interest, such as a protected cultural, historical, landscape and archeological heritages site as defined by state or federal legislation; (2) is located in the boundary area of a city, belongs to more than one municipality, or is in a metropolitan region or urban agglomeration as defined in state or federal law; or (3) has an area greater than 1 million square meters. In the case of land subdivisions located in a municipality area that is within a metropolitan area, the examination and prior consent to the approval of such project will be subject to the metropolitan authority.
The legal requirements for the approval of the land subdivision by a municipality include: (1) the developer must preserve a percentage of the land used for residential communities as open spaces for public use and for municipal or community properties with the percentage determined by each municipal zoning code; (2) each lot must have a minimum area of 125 square meters and the distance between the building and the street must be at least five meters; (3) the developer must reserve 15 meters of land on either side of running or still water and of strips of public domain land for roads and highways; and (4) the allotment procedures must be coordinated with the official adjacent tracks, existing or projected, and harmonized with the local topography.
Law No. 6,766 also sets forth locations where subdivisions are not permitted, such as: (1) on wetlands and lands subject to flooding, until measures have been taken to assure water drainage; (2) on land that has been filled with material that is a public health hazard, unless previously cleaned up; (3) on land that has a slope equal to or greater than 30 degrees, unless the requirements of the appropriate authorities have been met; (4) on lands where geological conditions make buildings inadvisable; and (5) in ecological preserves or areas where pollution creates unacceptable sanitary conditions, until corrected.
In order to offer greater security to the property market, Law No. 6,766 prohibits the sale or promise of sale of any lot that is the result of a subdivision where the developer has not previously obtained approval by the appropriate municipality and the development has not been recorded with the respective Real Estate Registry Office. If any such lot is sold or contracted to be sold, the developer and any person or legal entity benefiting from such sale or promise of sale shall be jointly liable for the resulting damages to the purchaser and the public authorities.
Law No. 6,766 was recently amended by Law No. 13,786, enacted on December 12, 2018, which granted the buyer the right to restitution of the amounts already paid to a developer when the agreement is terminated due to the breach of the buyer’s obligations as provided therein, increasing and/or deducting, whichever is applicable, the amounts originally stipulated thereby. The penalty due by the buyer must not exceed 10% of the value of the agreement adjusted for inflation, and the amounts must be reimbursed by the developer, who can make the payments in up to 12 installments, the first one being due no later than (i) 180 days from the date expected for the conclusion of the construction, or (ii) 12 months from the termination of the relevant agreement, if the construction has been concluded.
Assets for Appropriation
Law No. 10,931 of August 2, 2004, as amended, provides for certain protection of real estate assets. Accordingly, such protected assets are segregated from other properties, rights and obligations of the developer, including other assets previously appropriated, and such appropriated assets can only be used to guarantee debts and obligations related to the respective development. The appropriated assets are considered bankruptcy free and will not be affected in the event of bankruptcy or insolvency of the developer. In the event of a bankruptcy or insolvency of the developer, joint ownership of the construction may be instituted by a resolution of the purchasers of the units or by judicial decision. The joint owners of the construction will decide whether the project will proceed or the assets appropriated will be liquidated. Developers may also opt to submit a project to appropriation in order to benefit from a special tax system. Under this system, land and objects built on the land, financial investments in the
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land, and any other assets and rights with respect to the land are considered to be protected for the benefit of the construction of that development and the delivery of the units to the final owners, and are thus separate from the remaining assets of the developer.
In addition, in order to encourage the use of the appropriation system, Laws No. 11,977 of July 7, 2009 (amended by Law No. 12,249 enacted on June 11, 2010, Law No. 12,424 enacted on June 16, 2011, Law No. 12,693 enacted on July 24, 2012, Law No. 12,722 enacted on October 3, 2012, Law No. 13,043 enacted on November 13, 2014, Law No. 13,097 enacted on January 19, 2015, Law No. 13,274 enacted on April 26, 2016, Law No. 13,465 enacted on July 11, 2017 and Law No. 13,590 enacted on January 4, 2018) and No. 12,844 of July 13, 2013, which granted tax benefits for the adoption of the system by reducing tax rates on appropriated assets from 7% to 4% and, in the case of the appropriated assets under the public housing program “Minha Casa, Minha Vida,” the rates were reduced from 7% to 1%, until December 31, 2018, by Law No. 13,097, enacted January 19, 2015. We have not yet utilized the appropriation system for any of our real estate developments. We prefer to use our subsidiaries and our jointly-controlled entities for each specific real estate development. Our subsidiaries and jointly-controlled entities allow us to borrow funds by segregating the credit risk taken on by the financial institutions.
Credit Policy Regulations
The real estate sector is highly dependent on the availability of credit in the market, and the Brazilian government’s credit policy significantly affects the availability of funds for real estate financing, thus influencing the supply of and demand for properties.
Housing Finance System, or “SFH”
Law No. 4,380 of August 21, 1964, as amended, created the SFH to promote the construction and ownership of private homes, especially for low income earners. Financing resources under the SFH’s control are provided by the Government Severance Indemnity Fund for Employees (Fundo de Garantia do Tempo de Serviço), or “FGTS,” and from savings account deposits. The FGTS, created by Law No. 5,107 of September 13, 1966 and regulated by Law No. 8,036 of May 11, 1990, imposes a mandatory 8% employee payroll deduction on all employees in Brazil. Employees maintain FGTS accounts, which are similar to pension funds, and are allowed, among other things, to use the funds deposited in the accounts for the acquisition of real estate property under certain circumstances, as set forth by applicable law. The CEF is the agency responsible for managing the funds deposited in the FGTS. In order to be eligible for the financing, the beneficiary must purchase a completed unit or unit under construction priced at up to R$950,000 (price applicable to the States of Rio de Janeiro, São Paulo, Minas Gerais and Distrito Federal) or R$800,000 (price applicable to other Brazilian States). In addition, the beneficiary shall (1) not own or be the committed purchaser of any residential real estate financed by the SFH within Brazil; (2) not own or be the committed purchaser of, any real estate property built or under construction in both his or her current city of residence and the city where the beneficiary conducts his or her main activities; (3) reside for at least one year in the city where the property is located; (4) pay the FGTS; and (5) be registered for at least three years with the FGTS regime. The unemployed also have access to the FGTS to purchase real estate property provided that he still has funds on the FGTS account (where the 8% payroll deduction was deposited while employed).
Financings that originate from savings account deposits in the entities comprising the Brazilian Saving and Loan System (Sistema Brasileiro de Poupança e Empréstimo), or “SBPE,” are regulated by the Central Bank. Such financings can be obtained through the SFH, which is strictly regulated by the Brazilian government, or through the mortgage portfolio system, where banks are free to set the financing conditions. SFH financing offers fixed interest rates lower than the market rates, capped at around 12% per year, and SFH financing contract terms vary, in general, between 15 and 30 years. The mortgage portfolio system financing offers market interest rates as determined by the financial institutions, generally varying between 18.5% and 12% per year.
CMN Resolution No. 3,932/2010 provides for the allocation of the funds deposited in savings accounts in the entities comprising SBPE and states that the following conditions must be met for SFH financing: (1) the maximum amount of the financing is 80% of the appraisal price of the property, as a general rule; (2) the maximum appraisal price for the financed unit is R$950,000 (applicable to the States of Rio de Janeiro, São Paulo, Minas Gerais and Distrito Federal) or R$800,000 (applicable to other Brazilian States); (3) the maximum actual cost to the borrower, which includes charges such as interest, fees and other financial costs, except insurance and other costs, may not
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exceed 12% per year; and (4) the borrower is responsible for the potential outstanding balance verified at the end of the financing term, (such term might be extended by half of the initial term).
SFH financings need to be secured by at least one of the following: (1) a first mortgage over the unit that is being financed; or (2) a conditional sale over the unit that is being financed, as prescribed by Law No. 9,514 of November 20, 1997, as amended by Law No. 10,931 of August 2, 2004, Law No. 11,076 of December 30, 2004, Law No. 11,481 of May 31, 2007, Law No. 12,703 of August 07, 2012, Law No. 12,810 of May 15, 2013, Law No. 13,043 enacted on November 13, 2014, Law No. 13,097 enacted on January 19,2015 and Law No. 13,465 enacted on July 11, 2017 (“Law no. 9,514”), (3) a first mortgage or conditional sale, as determined by Law No. 9,514, of other property owned by the borrower or by a third party or (4) other guarantees, as established by the financing agent. SFH funds are only released upon the formalization of one of these methods of guaranteeing the loan.
As of 2014, the federal government implemented changes to the regulations on financing and construction in order to promote growth in the real estate market. The implemented measures are, among others: (1) all the acts involving real estate will be entered on the property’s record in the land registry office, i.e., unregistered acts and actions enforceable against third parties in good faith, even if the unregistered act or action challenges ownership to the property; (2) the buyer of a real estate property will be able to give property as guarantee to finance another, or to purchase other assets with funds raised in savings accounts; (3) banks can issue Real Estate Covered Bonds (Letras Imobiliárias Garantidas, or “LIGs”), pursuant to CMN Resolution No. 4,598, enacted on August 29, 2017, which is exempt from income tax to raise more funds and borrow to finance the purchase of real estate; and (4) banks may grant payroll loans, in which the parcels will be charged to the worker’s salary in the private sector with more facilities, resulting in lower interests.
Mortgage portfolio
While a large portion of the funds in the deposits in saving accounts are allocated to the SFH, some of the funds are allocated to loans granted at market rates. CMN Resolution No. 3,932/10, as amended, established that at least 65% of these deposits should be used for real estate financing, with a minimum of 80% of the financing going to housing loans under the SFH and the remaining balance for loans granted at market rates which are usually higher than in SFH loans, including mortgage portfolio used by banks for the concession of housing loans.
In early 2005 the Brazilian government took a number of measures to better regulate the use of the funds raised in savings account deposits in order to promote growth of the real estate sector, these measures included: (1) the cancellation of payments to the Central Bank of funds not invested in real estate financing in January, February and March; (2) the creation of a real estate interbank deposit market to allow financial institutions with excessive investments in real estate to trade with financial institutions that have capacity for more real estate credits; (3) a review of the factors used in the calculation guidelines of the SFH in order to stimulate financing for the acquisition of new real estate properties at a low cost, applicable as of January 1, 2005; and (4) authorization for the SFH to provide financing to legal entities for the construction of development projects for their employees, provided that such entities follow all SFH guidelines.
In 2014, the Brazilian government adopted measures to facilitate the purchase of financed properties, as discussed in SFH above, and in 2016, the increase in the operating limits of the SFH to units with a maximum sales prices of R$800,000 and R$950,000 (applicable only to the States of Rio de Janeiro, São Paulo, Minas Gerais and the Distrito Federal). These changes have significantly increased the funds available for investments in the Brazilian real estate sector.
Real Estate Finance System, or “SFI”
The SFI was created by Law No. 9,514 to establish assignment, acquisition and securitization criteria for real estate credits. The system seeks to develop primary (loans) and secondary (trading of securities backed by receivables) markets for the financing of real estate properties by creating advantageous payment conditions and special protection of creditors’ rights. The SFI supervises real estate financing transactions carried out by savings banks, commercial banks, investment banks, real estate credit portfolio banks, housing loan associations, savings and loan associations, mortgage companies and other entities authorized by the CMN to provide such financing. The parties, under the following conditions, may freely negotiate SFI real estate credits: (1) the amount loaned and the related adjustments must be fully reimbursed; (2) interest must be paid at the rates established by the contract; (3) interest must be capitalized; and (4) borrowers must purchase life and permanent disability insurance.
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Real estate sales, rental, or other real estate property financing in general, may be negotiated with non-financial institutions under the same conditions permitted by authorized entities under the SFI. In these cases, non-financial entities are authorized to charge capitalized interest rates greater than 12% per year.
The following types of guarantees are applicable to loans approved by the SFI: (1) mortgages; (2) fiduciary assignment of credit rights resulting from sales contracts; (3) guarantee of credit rights resulting from contracts of sale or promise of sale of property; and (4) conditional sale of real estate property.
Law No. 9,514 also reformed securitizations of real estate assets provisions, making them less expensive and more attractive. The securitization of credits in the context of the SFI is carried out through real estate securitization companies, non-financial institutions formed as joint stock companies whose objective is to acquire and securitize real estate credits. Funds by the securitizing companies may be raised through the issuance of debentures or notes, or the creation of a new type of CRI. According to applicable law, CRIs are nominative credit securities issued exclusively by securitizing companies, backed by real estate credits, freely negotiated, and payable in cash. CRIs tend to have, among others, the following characteristics: are issued in book-entry form, may have fixed or floating interest rates and can be paid in installments, may contain adjustment provisions, are registered and traded through centralized systems of custody and financial settlement of private securities and may be secured by the assets of the issuing company.
Casa Verde e Amarela program
On January 12, 2021, Federal Law No. 14,118 was published to create the “Casa Verde e Amarela” program, regulated by Decree No. 10,600 of January 14, 2021, as a result of the project to convert Provisional Measure 996, of August 25, 2020, with the purpose of promoting housing rights for families residing in urban areas with a monthly income of up to R$7,000 and for families living in rural areas with an annual income of up to R$84,000, in each case to increase economic development, jobs generation and income and quality of life for the urban and rural population.
Municipal Legislation
Municipal planning is regulated by articles 182 and 183 of the Federal Constitution and by Law 10,257 of July 10, 2001 (Estatuto da Cidade), as amended, or Law 10,257. Law 10,257 provides, among other things, for the establishment of (1) rules for the parceling, use and occupation of urban tracts of land in each municipality for the collective welfare and environmental balance of the community; and (2) a master plan, which shall be reviewed every 10 years. The master plan is the guiding tool used to plan developments in the urban areas of each municipality and is used as a reference by all public and private agents acting within the municipality. It establishes the strategic goals and general guidelines for urban construction, the objectives and guidelines for differentiated areas of planning and the instruments for their deployment.
We set out below certain details of the laws governing the municipal planning of the two major cities in which we operate, São Paulo and Rio de Janeiro:
São Paulo municipality
City laws govern the zoning, construction, parceling, use and occupation of land in the municipality of São Paulo. They set forth technical and urban planning requirements for parceling, and provide that the division, subdivision or segregation of urban tracts of land be subject to the prior approval of the São Paulo municipal government. Moreover, the zoning laws describe the types of permissible uses for the land and their respective characteristics, by dividing São Paulo into areas of use with fixed locations, limits and boundaries. They also provide for fines and sanctions for noncompliance.
On May 9, 2017, Municipal Law 16402 was published, replacing Municipal Law 11,228 of June 25, 1992, approving the Code of Works and Construction, regulated by Decree 57,776 of July 07, 2017, which governs administrative and executive producers and sets forth rules for the planning, licensing, execution, maintenance and use of public works and construction within properties in the municipality of São Paulo, and provides for sanctions and fines applicable in cases of non-compliance with these rules.
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On July 31, 2014, Municipal Law 16,050 was published, replacing Municipal Law 13,430 of September 13, 2002, approving the master plan and creating the Planning System of the municipality of São Paulo and regulating the new master plan of the municipality. The new master plan provides a series of guidelines for the development and growth of the city of São Paulo for the next 10 years, in order to (i) encourage the use of public and non-motorized forms of transport; (ii) reduce the housing deficit; (iii) improve the access of residential areas to commercial areas of the city; and (iv) encourage the development of urban areas already equipped with public transportation infrastructure, among other guidelines.
On March 22, 2016, Municipal Law 16,402 was published, replacing Municipal Law 13,885 of August 25, 2004, regulating the new rules regarding the parceling, use and occupation of land in the municipality of São Paulo.
Rio de Janeiro municipality
Decree 322 of March 3, 1976, as amended, of the Municipality of Rio de Janeiro, and Decree “E” 3,800 of April 20, 1970, as amended, of the then State of Guanabara, jointly created the municipality’s Zoning Regulation, Land Parceling Regulation and Construction Regulation. These regulations control the use of the municipality land, including urban zoning, use of properties, development of construction sites and conditions for the use of each zone in the municipality. The Ten-year master plan of the municipality, approved pursuant to Supplementary Law No. 111 of January 1, 2011, establishes rules and procedures related to urban policy of the municipality, determines guidelines, provides instruments for its execution and defines area policies and their related programs, aiming at meeting the social needs of the city.
On January 14, 2019, Municipal Law No. 198 was published, replacing the former Code of Works and Construction of the Municipality of Rio de Janeiro. The new Code has only 40 articles, replacing the over 500 provided for in the former code, and its principal goal is to modernize and simplify the rules for developers. The simplification of the licensing process allows for more flexible urbanization parameters. Among the important changes brought about by Law No. 198, we highlight the following:
(i) Minimum Size: The new rule allows for properties with a minimum size of 25 square meters (or 82 square feet), except in the boroughs of Barra da Tijuca, Recreio dos Bandeirantes, Vargem Grande, Vargem Pequena and Ilha do Governador. According to the old rules, the minimum useable area of the apartments varied from 28 square meters (91 square feet) in the Central and Northern regions and 60 square meters (196 square feet) in the Southern Region;
(ii) Parking: It is no longer required for a building built within a radius of 800 meters (2,624 feet) from an underground, train, BRT and/or VLT station to have at least one parking space for each one of its individual units. The requirement now is one parking space for every four apartments;
(iii) Playground: It is no longer required for a building to have a playground;
(iv) Marquees: Marquees, which have been forbidden since 2007, are once again allowed in the city’s building designs;
(v) Elevators: Elevators are now required only in buildings with more than five stories;
(vi) Cultural Heritage Buildings: Cultural Heritage Buildings may have their use changed, pursuant to the compliance with the rules enforced by the preservation regulatory bodies;
(vii) Balconies: No limits on the construction of a balcony were established in the new code. Sealing off balconies is still allowed, provided that the legal requirements are met;
(viii) Mezzanines: Non-residential units may have a mezzanine that occupies 100% of its useable area pursuant to payment of a fee to City Hall;
(ix) Condo Villages: It is once again permitted to build condo villages in town, which may have up to 36 units. According to the old rules, these used to be allowed only in the boroughs of Campo Grande and Tijuca. The code also determines that the upkeep of the village street, its entrance and common services are the obligation of its occupants;
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(x) Bike Racks: It is now required of residential buildings to have a designated place for storing bicycles; and
(xi) Retrofit: The rules for the calculation of the Total Built Area, parking spaces and adaptation of the building in the retrofitting of existing buildings have been made more flexible.
Environmental Issues
We are subject to a variety of Brazilian federal, state and local laws and regulations concerning the protection of the environment, as well as urban regulations and zoning restrictions, as described below. Applicable environmental laws may vary according to the development’s location, the site’s environmental conditions and the present and former uses of the site. Compliance with these environmental laws may result in delays, cause us to incur in substantial costs, and prohibit or severely restrict project development. Before we purchase any real estate, we conduct investigations of all necessary and applicable environmental issues, including the possible existence of hazardous or toxic materials, as well as any inadequately disposed waste substances. During the investigations we also identify the existence of water wells and protected vegetation, observing the proximity of the real estate property to permanent preservation areas. We generally condition the real estate property acquisitions on obtaining the required regulatory approvals prior to closing.
We have adopted certain practices to further our commitment to environmental protection and landscape development. Through our Selective Collection Project, we have partnered in environmental education initiatives with private and governmental entities, including non-governmental organizations. We provide training to all of our outsourced workers (before we begin work on any particular project), that focuses on the importance of preserving the environment and how to effectively collect, store and control materials for recycling. Alphaville was given the “ECO Award” in 2006 and 2007 (by the American Chamber of Commerce), the “Top Ambiental Award” (Top Environmental Award) in 2007 and 2008 (by the Brazilian Association of Marketing and Sales Agents, in recognition for its environmentally responsible practices) and the “Top Social Award” in 2008 and 2009 (by the Brazilian Association of Marketing and Sales Agents, in recognition for its socially responsible practices). Our Eldorado Business Tower building is the first building in Latin American, to be pre-certified by the U.S. Green Building Council as a Leed CS 2.0 Platinum building for leadership in energy and environmental design.
Environmental licenses and authorizations
Brazilian environmental policy requires environmental licenses and permits for the construction and operation of real estate projects. Environmental licensing is required for both initial construction and alteration in existing developments, and the licenses must be periodically renewed. The Brazilian Institute of Environment and Renewable Natural Resources (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis), or the IBAMA, is responsible for granting such licenses for projects developed in two states or in federal conservation units. In other cases, state or municipal environmental agencies are responsible for granting such environmental licenses, depending on the extent of environmental impacts caused by certain projects.
The environmental licensing process is comprised of three stages: preliminary license, installation license and operational license. The preliminary license, issued during the preliminary planning phase of the project, authorizes the location and basic development, and establishes the conditions and technical requirements to be observed in further stages of development. The installation license authorizes the facility’s construction. The operating license authorizes the commencement and continuation of operational activities. Operating licenses are subject to compulsory renewal depending on their validity. The licensing of activities that may significantly impact the environment, as determined by the competent environmental agency and according to the Environmental Impact Assessment and its related Report (“EIA/RIMA”), requires environmental offset payments, to be invested in conservation units (e.g. national parks, biological reserves etc.), pursuant to Article 36 of Law No. 9,985/00. The value of the environmental offset is established by the environmental agency conducting the licensing proceeding, according to the “ecosystem impact level” of the proposed activity, pursuant to Article 31-A of Federal Decree No. 6,848/09.
The installation, operation or alteration of projects without proper and valid environmental licensing or the non-compliance with the conditions or technical requirements of the respective environmental licenses, may subject the violator to administrative sanctions that may range from fines (R$500 to R$10 million), as well as the suspension of activities and, depending on the specific circumstances, criminal liability (of individuals and/or companies), pursuant to Federal Law No. 9,605/98 and civil liability (in case environmental damage occurs).
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The construction, maintenance and sale of our projects may be hampered or halted by delays in the issuance of applicable licenses or even by failure to obtaining such licenses.
The construction of real estate developments often requires land moving activities, and in many cases, the cutting down of trees. In addition to environmental licenses and permits, Brazilian legislation requires specific environmental authorizations for the development of projects, based on the characteristics of the project, its location and the natural features inherent to the area. The development of projects that require the cutting of trees or removing vegetation must receive specific authorizations from environmental agencies. Companies that apply for an authorization for vegetation removal are required to perform the reforestation of other areas as a compensatory measure, such as reforestation or to repair the affected areas, which may imply additional expenses. Brazilian legislation also requires special protections for certain specific types of flora and areas with special ecological purpose, imposing additional legal requirements to removal of such vegetation.
The removal of vegetation without proper and valid authorization, or non-compliance with the authorization requirements, may subject the transgressor to civil liability (in case environmental damage occurs), administrative sanctions (such as fines) and, according to specific circumstances, criminal liability (of individuals and/or companies), pursuant to Federal Law No. 9,605/98.
The licensing of projects with relevant environmental impacts located in a conservation unit or within its buffer zone will depend on prior authorization from the conservation unit’s managing office.
In addition, the development of projects that require water abstraction from bodies of water or groundwater, as well as the discharge of effluents into water bodies, are subject to specific water use grants, to be issued by the relevant authorities. Water use grants are subject to certain conditions and technical requirements, including maximum capacity requirements and effluent treatment standards, and are subject to automatic renewal.
Moreover, some of our projects require the transfer of wildlife to other areas, which is subject to specific authorizations issued by the state environmental agencies. To catch, handle and transfer wildlife without the proper authorization may result in administrative sanctions of up to R$5,000.00 per animal, pursuant to Federal Decree 6,514/08.
Waste disposal
Brazilian legislation relies on several standards and procedures for waste management. All waste must be properly stored, treated, transported and disposed of, in order to avoid the occurrence of environmental damages – and as a result, environmental liability.
The Brazilian “National Waste Management Policy” (Federal Law No. 12,305/10) and CONAMA Resolution 307/2002 specifically regulate the handling of solid waste generated by the construction sector. As part of their licensing procedure, companies are required to present and have a solid waste management plan approved by competent environmental agency and must comply with the conditions and obligations set forth in such plan. Failure to comply with such obligations may lead to civil (obligation to repair/indemnify in case of pollution), administrative (e.g. fines, suspension of activities etc.) and, according to specific circumstances, criminal liability.
Regarding civil liability, because Brazilian legislation imposes strict, joint and several liability for environmental damages, companies may be held liable for any environmental damages that may arise as a result of its activities, including waste generated thereof, which must be properly stored, treated, transported and disposed of. Likewise, the hiring of third parties for management of waste generated from our activities does not exempt us from civil environmental liability.
Contaminated areas
We develop and construct projects in several states within Brazil. Each state has its Environmental Secretary and/or Environmental Agency. The São Paulo State Secretary of Environment (Secretaria de Estado do Meio Ambiente de São Paulo), or the “SMA,” and the State Environmental Agency of São Paulo (Companhia Ambiental do Estado de São Paulo), or “CETESB,” are the principal environmental regulatory entities of the State of São Paulo, and they have adopted procedures with regard to the management of contaminated areas, including the creation of environmental standards to preserve the quality of land and underground water, as well as procedures to
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be complied with if contamination is confirmed. The standards established by CETESB are used as reference by most Brazilian states that have no specific regulation on contaminated land management.
In addition, the Rio de Janeiro State Secretary of Environment (Secretaria de Estado do Meio Ambiente e Desenvolvimento Urbano do Rio de Janeiro) and the Rio de Janeiro State Environmental Agency, or “INEA,” also maintain their own quality standards, in combination with those established by the National Environmental Council (Conselho Nacional do Meio Ambiente), or “CONAMA.” Other states have similar requirements.
If contaminated areas are identified in the development of our projects, we must provide proper disclosure to environmental authorities and registration before real estate property records. Given the strict liability regime, we may be required to proceed with the remedial actions deemed necessary by environmental agencies in order to comply with technical standards set forth for each kind of project, even if we have not caused the contamination, and may result in delays for the project development’s completion. Prior approval from environmental agencies before engaging in remedial actions may be necessary. All emergency actions to prevent and mitigate risks to the environment and public health, if required, must be adopted promptly and at our expense.
Non-compliance with the guidelines established by the environmental and health entities may result in criminal, as well as administrative penalties. Moreover, the owners and holders of properties may be required to pay for costs relating to the clean-up of any contaminated soil or groundwater located in their properties, even if they did not cause the contamination.
If there are contaminated areas in the properties where our projects will be developed, this must be disclosed to our clients.
Environmental liability
Article 225 of the Brazilian Federal Constitution, provides that “activities that are harmful to the environment shall subject violators, whether individuals or companies, to criminal and administrative sanctions, regardless of the obligation to repair the damage caused.” Therefore, the Brazilian Federal Constitution provided for environmental liability in three distinct fields: civil, administrative and criminal. As an example, payment of an administrative fine does not offer exemption from the duty to make reparations or indemnify for damages that might be caused by harmful conduct, nor does it offer exemption from possible criminal charges prompted by the event.
Civil environmental liability in Brazil is considered by case law as propter rem, that is, liability attaches to the real estate property. Therefore, whoever buys or holds environmentally damaged land will succeed in the liability for the clean-up or recovery and for reparation of potential damage to third parties. Although this liability can be contractually allocated between the parties, it cannot be opposed either administratively or before third parties, meaning the concept of a bona fide prospective purchaser does not exist in civil environmental liability in Brazil.
In addition, Federal Law No. 6.938/81 establishes strict liability for the recovery of environmental damages or, if not possible, compensation or indemnity for such damages, with joint and several liability established among all those directly or indirectly contributing to environmental degradation, regardless of the degree of participation in the damage. Each of those involved may be held liable for the full amount of the damages. Moreover, pursuant to Article 4 of Federal Law 9.605/1998, Brazilian environmental legislation determines that the corporate veil may be pierced whenever the veil is considered to be an obstacle to recovery for environmental damages. As a result, the controlling legal entity can be found liable despite a limited liability legal status.
At the administrative level, environmental liability may be assigned through administrative sanctions imposed by the competent environmental entities, pursuant to Law No. 9.605/98 which “rules on the criminal and administrative sanctions deriving from conduct and activities that are harmful to the environment” and pursuant to Federal Decree No. 6.514/08. These sanctions may include, among others: (1) fines of up to R$50 million, tailored to the economic capacity and track record of the offender, in addition to the severity of the facts and past performance, with the possibility of these fines being imposed at double or triple rates for repeated offenses; (2) suspension or interdiction of the activities of the respective enterprise; and (3) withdrawal of tax incentives and benefits. Administrative liability falls on the person engaged in the conduct described as an administrative offense.
Criminal liability is personal, arising directly from the unlawful conduct of the agent, with the crimes necessarily being specifically addressed in the law. Brazilian law allows criminal liability to be assigned to
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individual persons as well as corporate entities. When liability is assigned to the latter, the individual persons taking the decision that resulted in the criminal conduct (such as directors, officers, administrators, board members, members of technical entities, auditors, managers, agents or representatives) may also be penalized to the extent of their culpability.
| C. | Organizational Structure |
The following chart shows our organizational structure for our principal subsidiaries, all of them incorporated in Brazil:
For more information on our remaining subsidiaries and jointly-controlled entities, see “—B. Business Overview—Subsidiaries.”
| D. | Property and Equipment |
We lease our headquarters located at Av. Pres. Juscelino Kubitschek, No. 1830, Block 2, 3rd and 13 rd Floor, 04543-900 – São Paulo, SP – Brazil. We also lease our branch office for customer services located at Av. República do Líbano, No. 1214, 04501-001– São Paulo, SP – Brazil. In Rio de Janeiro, we lease our branch office located at st. Praia do Botafogo, No. 370, 2nd Floor, 22250-904– Rio de Janeiro, RJ – Brazil.
Currently, we lease approximately 3,616 square meters. We believe our current facilities are adequate for the full development of our operations.
As of December 31, 2021, our property and equipment recorded on our balance sheet mainly consisted of sales stands, facilities, model apartments, computer equipment, vehicles and leasehold improvements, among others, the balance of which was R$44.0 million.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the notes thereto. The following discussion contains forward-looking
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statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements because of various factors, including those set forth in “Item 3. Key Information—D. Risk factors.”
| A. | Operating Results |
The financial statements for the years ended December 31, 2021, 2020, 2019, 2018 and 2017 were prepared in accordance with the accounting practices adopted in Brazil, which comprise the rules of the Brazilian Securities Commission (CVM), and the standards, interpretations and guidelines of the Accounting Standards Pronouncements Committee (CPC), and are in compliance with the International Financial Reporting Standards (IFRS) adopted in Brazil, including the guidance contained in Circular Letter CVM/SNC/SEP 02/2018, of December 12, 2018, which establishes the accounting procedures for recognition, measurement and disclosure of certain types of transactions arising from contracts for purchase and sale of real estate unit not yet completed in real estate development entities. The Brazilian GAAP applied by us is not in compliance with IFRS as issued by IASB.
In December 2016, following the conclusion of our analysis of certain strategic options, our management decided to sell 50% of Tenda’s total capital stock, and transfer the remaining 50% of Tenda’s total capital stock to our shareholders in connection with a reduction in our total capital stock. Accordingly, on December 14, 2016, we entered into an SPA with Jaguar pursuant to which we agreed to sell Tenda shares representing up to 30% of the total capital stock of Tenda, at a price equal to R$8.13 per share.
The spin-off of the Tenda business unit was consummated on May 4, 2017, following: (i) a reduction of the capital stock of Tenda (without the cancellation of shares), pursuant to which Gafisa, as sole shareholder at that time, received R$100 million (adjusted by the SELIC); (ii) a reduction of the capital stock of Gafisa, resulting in the distribution to Gafisa shareholders of shares corresponding to 50% of the capital stock of Tenda; (iii) the conclusion of the preemptive rights exercise pursuant to which Gafisa shareholders acquired up to 50% of the total share capital of Tenda, at the price per share set forth in the SPA with Jaguar and for a total amount of R$219.5 million, with no shares being acquired by Jaguar; and (iv) the satisfaction of other conditions precedent for the consummation of the spin-off. In addition, on May 4, 2017, the Tenda shares were listed on the B3 and began to publicly trade.
As a result of this transaction, the results of operations of Tenda have been presented as discontinued operations under Brazilian GAAP in the Company’s 2017, 2016, and 2015 consolidated statements of operations, and the Company recorded an impairment loss in the amount of R$610.1 million for the year ended December 31, 2016, related to the measurement of disposal group held for sale at the lower of its carrying value and the fair value less cost to sell, taking into account the price of R$8.13 per share described above. Additionally, for the period ended May 4, 2017, under Brazilian GAAP, the fair value of discontinued operations was adjusted in the amount of R$215.4 million, considering the weighted average price per share at R$12.12 and the amount of R$107.7 million related to the obligation to sell Tenda shares at a price equal to R$8.13 per share, which was reflected in the profit or loss of discontinued operations, in order to reflect the difference between the fair value of the group of assets held for sale and the effective selling price.
See “Item 4. Information on the Company—A. History and Development of the Company—Historical Background and Recent Developments.” Our chief executive officer, who is responsible for allocating resources among these businesses and monitoring their progress, uses economic present value data, which is derived from a combination of historical operating results and forecasted operating results, to assess segment information primarily on the basis of different business segments.
Overview
We generate our revenues mainly from the development and sale of real estate developments. We recognize revenues from the sale of real estate developments over the course of their construction periods, based on a financial measure of completion and not at the time that the sales agreements are executed. To a lesser extent, we also generate revenues from real estate services such as construction, technical and real estate management we render to third parties. We structure some of our projects through either our subsidiaries or jointly-controlled entities organized as special purpose vehicles.
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Brazilian Economic Environment
We believe that our results of operations and financial performance are and will continue to be affected by the following macroeconomic trends and factors:
All of our operations are located in Brazil. As a result, our revenues and profitability are affected by political and economic developments in Brazil and the effect that these factors have on the availability of credit, disposable income, employment rates and average wages in Brazil. Our operations, and the industry in general, are particularly sensitive to changes in economic conditions.
Brazil is the largest economy in Latin America, as measured by gross domestic product, or GDP. The following table shows data for real GDP, inflation and interest rates in Brazil and the U.S. dollar/real exchange rate at the dates and for the periods indicated.
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (%, unless otherwise stated) | ||||||||||||
| Real growth in GDP | 4.6 | (3.9 | ) | 1.1 | ||||||||
| Inflation rate (INPC)(1) | 10.2 | 5.5 | 4.5 | |||||||||
| Inflation rate (IGP—M)(2) | 17.8 | 23.1 | 7.3 | |||||||||
| National Construction Cost Index (INCC)(3) | 14.0 | 8.7 | 4.2 | |||||||||
| TJLP rate(4) | 5.2 | 4.6 | 5.6 | |||||||||
| CDI rate(5) | 7.6 | 2.8 | 4.7 | |||||||||
| Appreciation (devaluation) of the real vs. US$ | (7.2 | ) | (28.9 | ) | (4.0 | ) | ||||||
| Exchange rate (closing) — US$1.00 | R$ 5.571 | R$ 5.197 | R$ 4.031 | |||||||||
| Exchange rate (average)(6) — US$1.00 | R$ 5.397 | R$ 5.158 | R$ 3.944 | |||||||||
| (1) | INPC: consumer price index measured by the IBGE. |
| (2) | General Market Price Index (Índice Geral de Preços-Mercado) measured by the FGV. |
| (3) | National Index of Construction Cost (Índice Nacional de Custo da Construção) measured by the FGV. |
| (4) | Represents the interest rate used by BNDES for long-term financing (end of period). |
| (5) | Represents an average of interbank overnight rates in Brazil (accumulated for period-end month, annualized). |
| (6) | Average exchange rate for the last day of each month in the period indicated. |
Brazilian Real Estate Sector
The Brazilian real estate sector is characterized by cyclical performance influenced by various macroeconomic factors. For example, demand for housing, the availability of financing and growth in population and incomes are, among others, factors that influence the performance of the real estate market.
In addition, since 2006, the Brazilian government has enacted incentives in the real estate sector, including the following:
| · | Provisional Measure No. 321 enacted on September 12, 2006, later converted into Law No. 11,434 enacted on December 28, 2006 and amended by Law No. 12,599 enacted on March 23, 2012, gave banks the option to charge fixed interest rates on mortgages; |
| · | Law No. 10,820 enacted on December 17, 2003, amended by Law No. 10,953 enacted on September 27, 2004, regulated by Decree No. 5,892 enacted on September 12, 2006, as amended by Decree No. 4,840 enacted on September 17, 2003, as amended by Law No. 13,097 enacted on January 19, 2015, allowed payroll deductible mortgage loans to employees of both public and private entities; |
| · | Decree No. 6,006 enacted on December 28, 2006, replaced by Decree No. 7,660 enacted on December 23, 2011, implemented a 50% tax cut on Tax on Manufactured Products (Imposto sobre Produtos Industrializados), or IPI, levied on the acquisition of important construction products, including certain |
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types of tubes, ceilings, walls, doors, toilets and other materials. In 2009, other decrees eliminated the IPI levied on the acquisition of similar products, but were implemented for a limited term only and were set to expire in March 2010, but were extended until December 31, 2012;
| · | Provisional Measure No. 656 enacted on October 7, 2014, converted into Law No. 13,097 enacted on January 19, 2015 (“Law No. 13,097”), which establishes mechanisms for protecting purchasers and recipients of in rem rights which enter into legal transactions based on the information contained in the real estate records. In addition, deals with payroll loans, establishing the concentration of acts in the real estate property registration and creates the LIG. |
| · | Normative Instructions No. 30 and No. 31 enacted on December 30, 2015, which establish new interests rates and loan limit subsidies for the 2nd and 3rd brackets of the “National Individual Loan Program” segment of the FGTS. |
| · | CMN Resolution No. 4,598/2017, which regulates the issuance of LIGs by financial institutions, establishing its general characteristics, procedures and applicable requirements, including with regards to underlying assets backing such securities, as well as other guidelines applicable to the LIG trustee and to LIG holders’ meetings. |
| · | Law No. 13,777 enacted on November 20, 2018, established a new form of condominium–- a “multi-property” condominium. Multi-property allows the co-owners of a property to each use it for a pre-determined period of time as its single owner. Each “time fraction” is indivisible and bound to the right of use of the property for periods of no less than 7 days, which can be fixed and determined or change from year to year. |
| · | Law No. 13,786 enacted on December 12, 2018, which regulates the dissolution or termination of purchase and sale agreements involving real estate development activities, in order to foster legal and economic confidence in the real estate development sector. |
| · | Municipal Law No. 198 enacted on January 14, 2019, which replaced the former Code of Works and Construction of the municipality of Rio de Janeiro. The new Code has only 40 articles, replacing the over 500 provided for in the former code, and its principal goal is to modernize and simplify the rules for developers. The simplification of the licensing process allows for more flexible urbanization parameters. |
Impairment of non-financial assets
We annually review the carrying amount of assets, with the objective of evaluating events or changes in the economic, operational or technological circumstances that may indicate a decrease or loss in the recoverable amount of such assets. Should such evidence exist, and the carrying amount exceeds the recoverable amount, a provision for impairment loss is recognized in the statement of operations by adjusting the carrying amount to the recoverable amount. A test for impairment of intangible assets with indefinite useful lives and goodwill is performed at least annually or when circumstances indicate a decrease in the carrying amount. As of December 31, 2017 and 2018, the Company recorded an impairment loss related to the goodwill on the remeasurement of the investment in AUSA in the amounts of R$127.4 million and R$112.8 million, respectively. On December 27, 2019, we sold our remaining stake in Alphaville and the remaining goodwill balance was written down in the amount of R$161.1 million. The recoverable amount of an asset or of a certain cash-generating unit is defined as the greater of its value in use and its fair value less costs to sell. When estimating the value in use of an asset, the estimated future cash flows are discounted to present value using a pre-tax discount rate that reflects the weighted average cost of capital for the industry in which the cash-generating unit operates. Cash flows are derived from the budget for the following five years, and do not include restructuring activities for which the Company has not yet committed or future significant investments that will improve the asset basis of the cash-generating unit being tested. The recoverable amount is sensitive to the discount rate used under the discounted cash flow method, as well as the estimated future cash inflows and the growth rate used. The fair value less costs to sell is determined, whenever possible, based on a binding sale agreement in an arm’s length transaction between knowledgeable and willing parties, adjusted for expenses attributable to the sale of the asset, or, in the absence of a binding sale agreement, based on the market price in an active market, or on a recent transaction with similar assets.
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Properties for sale
Our properties for sale are stated at construction cost, which cannot exceed its net realizable value. In the case of real estate developments in progress, the portion in inventory corresponds to the cost incurred for units that have not yet been sold.
The cost of properties for sale includes expenditures incurred in the acquisition of the land and in construction (including foundation, structure, finishing and the respective costs of construction materials), costs of own and outsourced labor, and financial costs directly related to the ventures.
Land is recorded at acquisition cost. See “Item 4. Information on the Company—B. Business Overview—Our Real Estate Activities—Land Acquisition.” Land can be acquired for cash, in installments, through barter for units that are completed or in construction of other ventures, or through barter for receivables from future sales of ventures. The cost of land related to bartered units comprises the estimated sale price in cash, this fair value being recorded as contra-entry to the advances from customers-barter.
The interest on loans and financing directly related to ventures financed by the National Housing System (SFH) and other credit facilities which funds are used to finance the construction and acquisition of land are capitalized over the development and construction stage, and recognized in the statement of operations in the proportion to the units sold.
We have the policy of annually conducting tests on our landbank, comparing its carrying amount and its recoverable amount, and on the units in construction and completed units, comparing the unit construction cost with the sale value of units in inventory. The assumptions that usually underlie the calculation of the recoverable value of assets are based on expected cash flows, and economic viability studies of real estate ventures that show the recoverability of assets or its market value, all discounted to present value.
The classification of land into current or non-current assets is carried out by the Management based on the schedule of the real estate venture launches. Management periodically reviews the estimates of real estate venture launches.
In accordance with our internal policy, each individual project launched has been internally evaluated taking into consideration the following: (1) assumptions for market, sales forecast, economics and operating conditions; (2) cash flow analysis using the discounted cash flow method; (3) approval by an investment committee; and (4) inclusion in the business plan regarding the timetable and backlog for development releases. This process is part of our corporate governance practices. We update the assumptions on an annual basis and consider the continuing viability for each project for impairment test purposes.
Transactions with share-based payment
We measure the cost of transactions with employees to be settled with shares based on the fair value of equity instruments on the grant date. The estimate of the fair value of share-based payments requires the determination of the most adequate pricing model to granted equity instruments, which depends on the grant terms and conditions. It also requires the determination of the most adequate data for the pricing model, including the expected option life, volatility and dividend income, and the corresponding assumptions.
Provisions for legal claims
We recognize a provision for tax, labor and civil claims. The assessment of the probability of a loss includes the evaluation of the available evidence, the hierarchy of Laws, existing case law, the latest court decisions and their significance in the judicial system, as well as the opinion of external legal counsel. The provisions are reviewed and adjusted to take into account the changes in circumstances, such as the applicable expiration term, findings of tax inspections, or additional exposures found based on new court issues or decisions. The settlement of transactions involving these estimates may result in amounts different from those estimated in view of the inaccuracies inherent in the process of estimating them. The Company reviews its estimates and assumptions on a monthly basis.
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Taxes on income
Current income tax and social contribution
Current income tax is the expected tax payable or receivable to be offset in relation to taxable profit or loss for the year. To calculate the current income tax and social contribution on net profits, we adopt the regime set forth by Law No. 12,973 enacted on May 13, 2014 and in force as of January 1, 2015. The new regime is based on the Brazilian accounting standards introduced by Laws No. 16,638/2007 and No. 11,941/2009, from the tax basis of such taxes, thus revoking the Brazilian Transitory Tax Regime, or “RTT.”
Taxes on income in Brazil comprise income tax (25%) and social contribution on net profits (9%), for entities on the standard profit regime, for which the composite statutory rate is 34%. Deferred taxes for these entities are recognized as at the balance sheet date for all temporary tax differences between the tax bases of assets and liabilities, and their carrying amounts.
As permitted by tax legislation, certain subsidiaries opted for the presumed profit regime, a method under which taxable profit is calculated as a percentage of gross sales. For these companies, income tax is calculated on presumed profits of 8% of gross revenues and social contribution on presumed profits of 12% on gross revenues, to which income tax and social contribution rates of 25% and 9%, respectively, are applied.
As permitted by tax legislation, the development of certain ventures are subject to the “afetação” regime, whereby the land and its features where a real estate will be developed, as well as other binding assets and rights, are separated from the assets of the developer and comprise the “patrimônio de afetação” (Detached Assets) of the corresponding development and which real estate units will be delivered to the buyers. In addition, certain subsidiaries elected the irrevocable option for the Special Taxation Regime (RET), adopting the “patrimônio de afetação,” according to which the income tax, social contribution on net profits, PIS and COFINS are calculated at 4% on monthly gross revenues.
On May 13, 2014, Provisional Measure No. 627 was converted into Law No. 12,973/14, revoking the RTT and bringing significant changes to Brazilian tax legislation. The new rules came into effect on January 1, 2015, with an option to adhere to the new rules from January 1, 2014. During 2014, we analyzed the potential impact of the new rules on our consolidated financial statements and internal control structure. Based on our analysis, we concluded that the new rules would not have a material impact on how we account for taxes in 2014 and we therefore opted not to adopt them from January 1, 2014. We have adhered to the new rules since January 1, 2015.
Deferred income tax and social contribution
Deferred tax is recognized in relation to tax losses and temporary differences between the carrying amount of assets and liabilities for accounting purposes and the corresponding amounts used for tax purposes. It is recognized to the extent that it is probable that future taxable income will be available to be used to offset deferred tax assets, based on profit projections made using internal assumptions and considering future economic scenarios that estimate their full or partial use. The recognized amounts are periodically reviewed and the impacts of realization or settlement are reflected in compliance with tax legislation provisions. Tax credits on accumulated tax losses do not have an expiration date, however, they can only be offset against up to 30% of the taxable profit for each year. Companies that opt for the presumed profit tax regime do not record tax losses and do not have temporary differences, and for this reason, deferred taxes are not recognized.
To the extent that the realization of deferred tax assets is not considered to be probable, this amount is not recorded. We record deferred tax on a net basis, determined by legal entity and same jurisdiction. For entities with cumulative tax losses for the last three years, the Company and its subsidiaries recognized deferred tax assets and liabilities based on the following assumptions:
| · | 100% of deferred tax liabilities on temporary differences; |
| · | Deferred tax assets on temporary differences that have realization terms similar to deferred tax liabilities, and relate to the same legal entity, are recorded up to the limit of the deferred tax liabilities; and |
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| · | In situations where recent losses indicate that future taxable income is uncertain, deferred tax assets are not recognized on deductible temporary differences in excess of deferred tax liabilities recorded on taxable temporary difference liabilities nor is an asset recognized for the carry forward of unused tax losses. |
Measurement of deferred tax asset
Our projections assume that a significant portion of our business will be conducted in our principal holding companies, and this enables the recovery of a substantial portion of our accumulated tax losses.
However, several external factors, beyond our control, may affect such tax calculations, in addition to possible requirements to segregate ventures in their own development entities (SPEs, for example) to a greater extent than we intend. There is also the possibility that taxation rulings relating to new ventures or even ventures that have already been developed within the principal holding companies, may require the exclusion of such businesses and for such businesses to file their own tax returns separate from that of the Company.
A reduction in the concentration of projects in holding companies with tax losses carried forward may, therefore, compromise the expected recovery of losses carried forward, which is the reason we partially recognized a deferred income tax asset.
Fair value of financial instruments
When the fair value of the financial assets and liabilities presented in the balance sheet cannot be obtained in the active market, it is determined using valuation techniques, including the discounted cash flow method. The data for such methods is based on those available in the market, when possible; however, when such data is not available in the market, a certain level of judgment is required to establish the fair value. This judgment includes considerations on the data used, such as liquidity risk, credit risk, and volatility. Changes in the assumptions about these factors may affect the presented fair value of financial instruments.
Estimated cost of construction
Total estimated costs, mainly comprising the incurred and future costs for completing the construction works, were reviewed in the preparation of these financial statements, and changes to estimates are possible. The percentage of completion, which is the method for revenue recognition, is measured in view of the incurred cost in relation to the total estimated cost of the respective project.
Real estate development and sales
The Company applied CPC 47 – Revenue from Contracts with Customers from January 1, 2018, including the guidance contained in Circular Letter CVM/SNC/SEP 02/2018, of December 12, 2018, which establishes the accounting procedures for recognition, measurement and disclosure of certain types of transactions arising from contracts for purchase and sale of real estate unit not yet completed in real estate development entities.
According to CPC 47, the recognition of revenue from contracts with customers became subject to a new regulation, based on transfer of control over promised goods or service, which can be at a point in time or over time, according to the satisfaction or not of the “contractual performance obligations.” Revenue is measured in an amount that reflects the consideration the entity expects to be entitled to and is based on a five-step model as follows: (1) identification of contract; (2) identification of performance obligations; (3) determination of transaction price; (4) allocation of transaction price to performance obligations; and (5) revenue recognition.
The Company records the accounting effects of contracts only when: (i) the parties to the contract have approved the contract; (ii) the Company can identify each party’s rights and the established payment terms; (iii) the contract has commercial substance; and (iv) the Company has determined that the collection of consideration to which the Company is entitled is probable.
Revenues, as well as costs and expenses directly relating to real estate development units sold and not yet finished, are allocated to the statement of operations over the construction period and the following procedures are adopted:
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(a) For the sales of completed units, revenues are recorded when the sale is completed and the transfer of control, regardless of the receipt from the customer of the contracted amount;
(b) For the sales of units under construction, the following applies:
| · | The incurred cost, including the cost of land, and other directly related expenditure, that correspond to the units sold is fully recognized in the consolidated statement of operations; |
| · | Sales revenues are recognized in profit or loss, using the percentage-of-completion method for each venture, this percentage being measured in view of the incurred cost in relation to the total estimated cost of the respective ventures; |
| · | Revenue recognized in excess of actual payments received from customers is recorded as either a current or non-current asset in “Trade accounts receivable.” Any payment received in connection with the sales of units that exceeds the amount of revenue recognized is recorded as “Payables for purchase of land and advances from customers”; |
| · | Interest and inflation-indexation charges on accounts receivable as from the time the units are delivered, as well as the adjustment to present value of accounts receivable, are recognized in profit or loss on a pro rata basis using the effective interest method; |
| · | The financial charges on accounts payable for acquisition of land and those directly associated with the financing of construction are recorded in properties for sale and recorded in the incurred cost of finished units until their completion, and follow the same recognition criteria as for the recognition of the cost of real estate units sold while under construction; |
| · | Taxes levied and deferred on the difference between real estate development revenues and the cumulative revenue subject to tax are calculated and recognized when this difference in revenue is recognized; and |
| · | Advertising and publicity expenses are recorded in the consolidated statement of profit or loss as incurred. |
Construction services
Revenues from real estate services are recognized as services are rendered and consist primarily of amounts received in connection with construction management activities for third parties, and technical advisory services, mainly related to developments where we retain an equity interest.
Barter transactions
Barter transactions have the objective of receiving land from third parties and are settled with the delivery of real estate units or transfer of portions of the revenue from the sale of real estate units of ventures. The value of the land acquired is determined based on the fair value, as a component of inventory of properties for sale, with a corresponding entry to advances from customers’ liabilities. Revenues and costs incurred from barter transactions are included in profit or loss over the course of construction period of ventures, as described in item (b) above.
Allowance for expected credit losses
We annually review the assumptions used in establishing an allowance for expected credit losses, in view of the revision of historical data of its current operation and improvement of measurement estimates.
We record an allowance for expected credit losses for all sales contracts of real estate units, and the amounts are accrued as a contra-entry to the recognition of the respective development revenue, based on data history of its current operations and estimates. Such analysis is individually made for each sales contract, in line with CPC 48 – Financial Instruments, item 5.5.17I).
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Disposal group held for sale and profit or loss from discontinued operations
The Company classifies a disposal group as held for sale if its carrying value is recovered by the sale transaction. The asset or group of assets held for sale are available for immediate sale at current market conditions, subject only to applicable customary terms for the sale of such assets held for sale, resulting in a high sale probability.
For a sale to be highly probable, management must be committed to the sale of the asset, and must initiate an active search to identify a buyer and complete the sale. In addition, the asset held for sale shall also be effectively marketed for sale at a price that is reasonable in relation to its current fair value and, the sale must be completed within one year of the classification date, unless events beyond the control of the Company result in an extension of such period.
The asset held for sale is measured at the lower of its carrying value and the fair value less cost to sell. In case the carrying value is higher than the fair value, an impairment loss is recognized in statement of profit or loss for the year. Any reversal or gain will only be recorded within the limit of the recognized loss. As of December 31, 2016, the Company recorded an impairment loss related to Tenda’s discontinued operations in the amount of R$610.1 million. For the period ended May 4, 2017, the Company carried out the remeasurement of the fair value of the disposal group held for sale, related to Tenda, considering the weighted average value per share for exercising preemptive rights traded over the period between March 17, 2017 and March 31, 2017, as measurement basis, leading to the price of R$12.12 per share, and, accordingly, valuing Tenda at R$754.5 million (R$539.0 million in 2016).
The assets and liabilities of the group of discontinued assets are shown in single line items in our assets and liabilities. The profit or loss of discontinued operations is presented as a single amount in the statement of profit or loss, contemplating the total post-tax profit or loss of such operations less any impairment-related loss.
Launches and Contracted Sales
Launches
The table below presents detailed information on our launches for the periods presented, including developments launched by our jointly-controlled entities in partnership with third parties:
| As of and for the year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Launches (in millions of reais) | 1,442 | 634 | — | |||||||||
| Number of projects launched | 7 | 5 | — | |||||||||
| Number of units launched(1) | 1,621 | 231 | — | |||||||||
| Launched usable area (m2)(2) | 91,816 | 34,648 | — | |||||||||
| Percentage of Gafisa investment | 100 | % | 100 | % | — | |||||||
| (1) | The units delivered in exchange for land pursuant to barter arrangements are not included. |
| (2) | One square meter is equal to approximately 10.76 square feet. |
In 2021, we launched under the Gafisa brand 7 residential developments with a total potential sales value of R$1,442 million, 5 of which were in the state of São Paulo and 2 of which was in the state of Rio de Janeiro. During the year, approximately 71% of our launches in terms of potential sales value was generated from launches in the state of São Paulo and 28% in the state of Rio de Janeiro.
In 2020, we launched under the Gafisa brand 5 residential developments with a total potential sales value of R$634 million, 3 of which were in the state of São Paulo and one of which was in the state of Rio de Janeiro. During the year, approximately 25% of our launches in terms of potential sales value was generated from launches in the state of São Paulo and 48% in the state of Rio de Janeiro.
In 2019, we did not launch any residential developments.
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Gafisa segment
In 2021, Gafisa launches totaled R$1,442 million, a 127% increase compared with 2020. Contracted sales for 2021 totaled R$755 million, up 36% from 2020. Sales of units launched over the year accounted for 18,5%, while sales of inventories accounted for the remaining 81,5%.
In 2020, Gafisa launches totaled R$634 million, compared to no launches in 2019. Contracted sales for 2020 totaled R$555 million, an increase of 185% from 2019. Sales of units launched over the year accounted for 31.1%, while sales of inventories accounted for the remaining 68.9%.
In 2019, we did not launch any residential developments.
Contracted sales for 2019 totaled R$ 195.7 million, a decrease of 75.9% from 2018. This amount is 100% related to sales of inventories. The lack of new project launches for the year directly affected sales performance.
In 2021, Gafisa delivered 7 ventures/stages and 1,439 units, accounting for R$612 million in Potential Sales Volume.
The market value of Gafisa segment inventories reached R$2.3 billion at the end of 2021, compared to R$ 1.12 billion at the end of 2020 and R$881.7 million at the end of 2019.
Contracted sales
The following table shows the composition of our contracted sales by the type of development, according to units sold during the same year that they were launched and the units sold in the years after they were launched, as well as their respective percentages in relation to total sales for the periods presented:
| As of and for the year ended December 31, | ||||||||||||
| Type of development | 2021 | 2020 | 2019 | |||||||||
| (in millions of reais, unless otherwise stated) | ||||||||||||
| Luxury middle-income buildings | 479.9 | 337.8 | 109.3 | |||||||||
| Entry-level developments | 90.6 | 85.4 | 94.5 | |||||||||
| Commercial | 11.1 | 131.9 | (8.1 | ) | ||||||||
| Total contracted sales(1) | 581.5 | 555.1 | 195.7 | |||||||||
| Sale of units launched in the year | 266.3 | 172.6 | — | |||||||||
| Percentage of total contracted sales | 35.3 | % | 31.1 | % | — | |||||||
| Sale of units launched during prior years | 488.5 | 382.5 | — | |||||||||
| (1) | Amount net of sales cancellation. |
The following table shows our and our main subsidiaries’ contracted sales for the periods presented:
| As of and for the year ended December 31, | ||||||||||||
| 2021 (2) | 2020 (2) | 2019 | ||||||||||
| (in millions of reais, unless otherwise stated) | ||||||||||||
| Contracted sales(1) | ||||||||||||
| Gafisa | 581.5 | 555.1 | 195.7 | |||||||||
| Total contracted sales | 581.5 | 555.1 | 195.7 | |||||||||
| (1) | Amount net of sales cancellation. |
| (2) | Includes sales of commercial units to Gafisa Propriedades. |
In 2021, we sold 18.5% of the launched units, which combined with the sales of units launched during prior periods, resulted in total contracted sales of R$266.3 million, an increase of approximately 54.3% compared to 2020.
In 2020, we sold 31.1% of the launched units, which combined with the sales of units launched during prior periods, resulted in total contracted sales of R$172.6 million.
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In 2019, we did not launch any developments.
We provide a limited amount of post-construction client financing. Our default rate was 14.2%, 14.9% and 15.1% as of December 31, 2021, 2020 and 2019, respectively.
The table below shows the penalties charged to customers that have defaulted and had their contracts cancelled for the periods presented:
| As of and for the year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (in millions of reais) | ||||||||||||
| Gafisa | 6.5 | 1.3 | 3.2 | |||||||||
The following table sets forth our contracted sales expected to be recognized, as well as the amount corresponding to the expected cost of units sold, and the expected margin, all of them to be recognized in future periods, for the periods presented:
| As of and for the year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (in millions of reais, unless otherwise stated) | ||||||||||||
| Sales to be recognized | 347.8 | 346.3 | 437.7 | |||||||||
| Net sales to be recognized(1) | 335.3 | 333.7 | 421.7 | |||||||||
| Cost of units sold to be recognized(2) | (208.3 | ) | (228.3 | ) | (271.1 | ) | ||||||
| Expected gross margin—yet to be recognized(3) | 126.414 | 109.4 | 150.6 | |||||||||
| Expected margin percentage | 37.7 | % | 32.8 | % | 35.7 | % | ||||||
| (1) | Excludes indirect PIS and COFINS taxes of 3.65%. This information includes ventures that are subject to restriction due to a contractual clause, which defines the legal period of 180 days in which the Company can cancel a development. |
| (2) | The estimated gross profit shown does not consider the tax effects or the present value adjustment, and the costs of lands, financial charges and guarantees, which will be carried out to the extent they are realized. |
| (3) | Based on management’s estimates. |
Gross Operating Revenues
Our revenues are derived mainly from the development and sale of real estate and, to a much lesser extent, the rendering of construction services to third parties on certain developments in the Gafisa segment where we retain an equity interest.
Real estate development and sales
Real estate development revenues, including inflation adjustments and interest from credit sales, comprise revenues from the sales of units in the residential buildings we develop, and to a lesser extent, the sales of lots and commercial buildings.
Construction services rendered
Our revenues generated by real estate services consist substantially of amounts received in connection with construction management activities for third parties, technical management and real estate management, related to developments in the Gafisa segment where we retain an equity interest. As of December 31, 2021, 1.7% of our net operating revenues were derived from constructions services rendered.
Operating Costs
Our operating costs consist of real estate development costs and, to a lesser extent, costs of services rendered.
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Real estate development costs
Real estate development costs consist of costs of land, construction (which includes costs for a broad variety of raw materials and labor), capitalized interest (financial costs) from project specific financing, projects, foundations, structuring and furnishing, as well as costs for outsourced labor. The items making up our costs, as a percentage of our total cost were as set forth for the periods presented.
| For the year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Land | 32.70 | % | 2.49 | % | 14.15 | % | ||||||
| Construction costs | 57.71 | % | 83.60 | % | 70.11 | % | ||||||
| Financial costs | 6.87 | % | 11.34 | % | 13.54 | % | ||||||
| Development costs | 2.72 | % | 2.57 | % | 2.20 | % | ||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
One of our principal real estate development costs is the cost of land. Over the last five years, land represented, on average, 22.8% of our total cost of development. However, this is an extremely volatile component, varying according to characteristics of the land, the region where the land is located, the type of development to be launched and market conditions. Land can be acquired for cash, through the exchange of units once the building is constructed, through financial swaps (whereby a portion of sales is given to the owner of land as a form of financing for the land), or through a combination of the three options.
No single raw material alone represents a significant portion of our total costs of development, but over the last five fiscal years, raw materials represented, on average, 35% of our total cost of development. The index that measures construction cost variation, the INCC, increased by 10.1%, 8.8% and 4.2% in 2021, 2020 and 2019, respectively. Although some of the principal raw materials, such as steel, have experienced significant price increases well above the level of inflation over the last four years, we have reduced our raw materials costs by developing and using new construction techniques and materials.
Over the last five years, we have incurred most of our construction costs from the 1st to the 18th month of construction of a development, as shown in the table below:
| Period of construction | Percentage of costs incurred | |||
| 1st to 6th month | 12 | % | ||
| 7th to 12th month | 22 | % | ||
| 13th to 18th month | 31 | % | ||
| 19th to 24th month | 17 | % | ||
| 25th to 30th month | 18 | % | ||
Real estate services
Our costs of real estate services consist of direct and indirect labor fees and outsourced services.
Operating Expenses
Our operating expenses include selling, general and administrative expenses, depreciation and amortization expenses and revenues and revaluation of investment in affiliates.
Selling expenses
Selling expenses include advertising, promotion, brokerage fees and similar expenses.
General and administrative expenses
General and administrative expenses principally include the following:
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| · | employee compensation and related expenses; |
| · | fees for outsourced services, such as legal, auditing, consulting and others; |
| · | management fees and expenses; |
| · | stock option plan expenses; |
| · | overhead corporate expenses; |
| · | expenses related to legal claims and commitments; and |
| · | legal expenses related to public notaries and commercial registers, among others. |
Depreciation and amortization
Depreciation expenses consist of depreciation of our property and equipment.
Financial Income and Expenses
Financial income includes income from financial investments. Interest revenues are recognized on effective interest method. Financial expenses generally consist of interest payable on loans, financings and debentures and are also recognized on effective interest method.
Taxes on Income
In general, taxes on income in Brazil consist of federal income tax (25%) and social contribution on net profits (9%), for a composite statutory tax rate of 34%. We calculate income tax and social contribution in accordance with the “taxable profit” regime. Our subsidiaries and jointly-controlled entities, however, with annual billings lower than a specified threshold, may calculate their respective income and social contribution taxes through either this “taxable profit” regime or through the “presumed profit” regime, depending on our strategic tax planning. For the companies that opt for the “presumed profit” regime, the income tax basis is calculated as 8% of gross revenues and the social contribution basis is calculated as 12% of gross revenues, to which income tax and social contribution rates of 25% and 9%, respectively, are applied.
As permitted by tax legislation, the development of certain ventures are subject to the “afetação” regime, whereby the land and its features where real estate will be developed, as well as other binding assets and rights, are separated from the assets of the developer and comprise the “patrimônio de afetação” (Detached Assets) of the corresponding development and whose real estate units will be delivered to the buyers. In addition, certain subsidiaries made the irrevocable option for the Special Taxation Regime (RET), adopting the “patrimônio de afetação,” according to which the income tax, social contribution on net profits, PIS and COFINS are calculated at 4% monthly on gross revenues.
Net income (loss) from discontinued operations
The net income (loss) from discontinued operations represents the results of operations of Tenda for the period ended May 4, 2017, as well as the results of operations for this entity for the comparative periods. This line item also contains the impairment (loss) reversal related to the measurement of disposal group held for sale at the lower of its carrying value and the fair value less cost to sell.
The income (loss) of discontinued operations is presented as a single amount in statement of operations, which includes the total after-tax-income of these operations, less any impairment-related loss.
Results of Operations
The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance with Brazilian GAAP. References to increases or decreases in any given period relate to the corresponding preceding period, unless otherwise indicated.
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As explained in Note 8.2 to our consolidated financial statements for the year ended December 31, 2019, the results of operations of Tenda have been presented as discontinued operations under Brazilian GAAP in the Company’s 2017 consolidated statements of operations.
Results of Operations for the Years Ended December 31, 2021 and 2020
Net operating revenue
Net operating revenue for the year ended December 31, 2021, recognized by the percentage of completion revenue recognition method, was R$818.3 million, a decrease of 7.4% from R$884.0 million for the year ended December 31, 2020, mainly due to the decrease in revenue recognition from barter transactions from R$183.7 million in 2020, to R$90.0 million in 2021, representing a decrease of 51%. In 2020, the amount of R$156.2 million was related to barter transactions from our Cyano development in Rio de Janeiro – excluding this amount, there was an increase in net operating revenue of 12.4% in 2021, mainly due to (i) higher volume of new launches during the year, (ii) the increase in revenue recognition from construction projects and their improved performance and (iii) higher volume of sales.
The gross revenue generated from the sale of property and barter transactions, net of the cancellation provision (reversal) totaled R$854.1 million for the year ended December 31, 2021, a decrease of R$81 million or 8.7% compared with the same period in 2020 of R$935.0 million. This decrease was mainly due to revenue recognition from barter transactions from our Cyano development. The tax deductions from gross revenue reached R$35.8 million in 2021 from R$51.0 million in 2020, representing a decrease of 29.9%, which was mainly impacted by the higher volume of revenue recognition in the previous year.
During 2021, inflation as measured by the INCC, the main Brazilian indicator for civil construction costs, was 10.1%. This resulted in an increase in our construction costs and consequently, the prices of our units for some projects, notably those launched and delivered in 2020 and 2021. This increase was offset by (i) monthly increases in the sale prices of our inventory units, and (ii) monthly upward adjustments of outstanding balances on our units sold, in order to reflect inflationary increases.
Operating costs
Operating costs in 2021 totaled R$609.7 million, a 14.8% decrease compared to R$715.3 million in 2020, as a result of a decrease in operating costs related to barter transactions from our Cyano development. This decrease was partially offset by a higher volume of new launches and sales and our improved project construction performance.
Gross profit
Gross profit in 2021 totaled R$208.6 million, representing an increase of approximately 23.6% from gross profit of R$168.8 million in 2020. This increase was mainly due to higher volume of launches and an increase in project sales with better operating performance.
In 2021, the gross margin generated from our activities increased to 25.5% compared to 19.1% in 2020. This increase was due to the higher volume of new launches and sales and their more efficient performance.
Selling expenses
Selling expenses in 2021 totaled R$44.2 million, representing an increase of 52.4% compared to R$29.0 million in 2020. This increase was mainly due to the higher volume of launches and sales in 2021. Selling expenses in 2021 represented 5.4% of our net operating revenue compared to 3.3% in 2020.
General and administrative expenses, not including depreciation and amortization expenses
General and administrative expenses were R$114.5 million in 2021, a 26.5% increase compared to R$90.5 million in 2020. This increase was mainly due to an increase in salaries and payroll charges as a result of an increase in our number of employees.
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Depreciation and amortization
Depreciation and amortization in 2021 was R$20.9 million, an increase of 152.3% when compared to the R$8.3 million recorded in 2020. This increase was mainly due to the higher volume of new launches in 2021 as well as investments in sales stands.
Other income and expenses, net
Net other income totaled R$154.3 million in 2021, compared to a net expense of R$44.2 million in 2020. This increase was mainly due to a gain from our Costa do Pero acquisition in the amount of R$175.4 million. This increase was partially offset by an increase in lawsuit related expenses, which totaled R$ 60.5 million in 2021, compared to R$43.8 million in 2020.
Financial income and expenses, net
Net financial expenses totaled R$44.6 million in 2021, compared to net financial expenses of R$73.0 million in 2020. The decrease was mainly due to (i) an increase in income related to the fair value valuation of investment fund quotas in the amount of R$42.9 million and (ii) a decrease in interest expenses as a result of the repayment of historical indebtedeness and the renegotiation of payment terms for current indebtedness during the period.
Taxes on income
Income tax and social contribution totaled an expense of R$85.0 million in 2021 compared to R$7.6 million in 2020. This increase was mainly due to the deferred tax liability of R$59.6 million related to the gain from our Costa do Pero acquisition. Additionally, the provision for income tax and social contribution had a negative impact of R$13.6 million in 2021, compared to R$7.6 million in 2020 due to a higher volume of launches and sales.
Net income attributable to non-controlling interest
Net income attributable to non-controlling interests decreased from a net loss of R$0.5 million in 2020 to a net loss of R$0.2 million in 2021.
Net income (loss) attributable to owners of Gafisa
Net income attributable to owners of Gafisa was of R$90.2 million in 2021, compared to a net loss of R$73.2 million in 2020. This variation was mainly due to (i) higher volume of new launches and sales and their improved operating performance and (ii) the Costa do Pero acquisition, which resulted in a gain of R$175.4 million.
Results of Operations for the Years Ended December 31, 2020 and 2019
Net operating revenue
Net operating revenue for the year ended December 31, 2020, recognized by the percentage of completion revenue recognition method, was R$884.0 million, an increase of 120.8% from R$400.4 million for the year ended December 31, 2019, mainly due to (i) higher volume of new launches during the year, (ii) the increase in revenue recognition from construction projects and their improved performance and (iii) higher volume of sales.
The gross revenue generated from the sale of property and barter transactions, net of the cancellation provision (reversal) totaled R$935.0 million for the year ended December 31, 2020, an increase of R$497.7 million or 113.8% compared with the same period in 2019 of R$437.3 million. The tax deductions from gross revenue reached R$51.0 million in 2020 from R$36.8 million in 2019, representing an increase of 38.4%, which was mainly impacted by the higher volume of new launches and sales during the year.
During 2020, inflation as measured by the INCC, the main Brazilian indicator for civil construction costs, was 8.8%. This resulted in an increase in our construction costs and consequently, the prices of our units for some projects, notably those launched and delivered in 2019 and 2020. This increase was offset by (i) monthly increases in the sale prices of our inventory units, and (ii) monthly upward adjustments of outstanding balances on our units sold, in order to reflect inflationary increases.
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Operating costs
Operating costs in 2020 totaled R$715.3 million, a 153.0% increase compared to R$282.6 million in 2019, as a result of the higher volume of new launches and sales and a reversal of impairment adjustments in our landbank and inventory in the amount of R$11.3 million, compared to R$27.1 million in 2019.
Gross profit
Gross profit in 2020 totaled R$168.8 million, representing an increase of approximately 43.3% from gross profit of R$117.7 million in 2019. This increase was mainly due to (i) higher volume of launches and sales and (ii) a decrease in dissolutions (cancelation of sales).
In 2020, the gross margin generated from our activities decreased to 19.1% compared to 29.4% in 2019. This decrease was due to the challenging macroeconomic conditions in Brazil and their adverse impact on the price of our units.
Selling expenses
Selling expenses in 2020 totaled R$29.0 million, representing a increase of 94.7% compared to R$14.8 million in 2019. This increase was mainly due to the higher volume of launches and sales in 2020. Selling expenses in 2020 represented 3.3% of our net operating revenue compared to 3.7% in 2019.
General and administrative expenses, not including depreciation and amortization expenses
General and administrative expenses were R$90.5 million in 2020, a 67.2% increase from the R$54.1 million recorded in 2019. However, recurring general and administrative expenses increased from R$50.8 million in 2019 to R$56.3 million in 2020. This increase is mainly due to salaries and payroll charges and increase of our staff.
Depreciation and amortization
Depreciation and amortization in 2020 was R$8.3 million, a decrease of 41.6% when compared to the R$14.1 million recorded in 2019. This decrease was mainly due to the lack of new launches in 2019 and concentration of our new launches in the fourth quarter of 2020 as well as investments in sales stands.
Other income and expenses, net
Net other expenses totaled R$44.2 million in 2020, compared to R$31.6 million in 2019. This increase is mainly due to lawsuits related expenses of R$43.8 million. In 2019, the amount of R$31.6 million was related due (i) the result of the divestment in Alphaville Urbanismo in the amount of an expense of R$78.0 million, (ii) an income of R$66.4 million related to the outcome of the arbitration decision related to venture construction contracts with partners and (iii) a lawsuits related expense of R$20.6 million.
Financial income and expenses, net
Net financial expenses totaled R$73.0 million in 2020, compared to net financial expenses of R$59.6 million in 2019. The increase is mainly due to a increase in interest expenses as a result of a increase in our levels of indebtedness during the period.
Taxes on income
Income tax and social contribution totaled an expense of R$7.6 million in 2020 compared to a positive impact of R$35.3 million in 2019. This decrease was mainly due to a net tax credit of R$49.2 million from the write down of goodwill related to the divestment in AUSA and the gain from the acquisition of GDU Loteamentos in the business combination operation recorded in 2019. Accordingly, the provision for current income tax and social contribution had a negative impact of R$7.6 million in 2020, compared to R$2.0 million in 2019 due to higher volume of sales and new launches in 2020.
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Net income attributable to non-controlling interest
Net income attributable to non-controlling interests increased from a net loss of R$0.4 million in 2019 to a net loss of R$0.5 million in 2020.
Net income (loss) attributable to owners of Gafisa
Net loss attributable to owners of Gafisa was of R$73.2 million in 2020, compared to a net loss of R$26.0 million in 2019. This variation was mainly due to (i) the challenging macroeconomic conditions in Brazil and their adverse impact on the price of our units and (ii) non recurring items that totaled an expense of R$58.4 million as a result of the Company´s comprehensive restructuring process.
Business Segments
Following the consummation of the Tenda spin-off on May 4, 2017 and the completion of the discontinuation of Tenda’s operations (see Note 8.2 to our consolidated financial statements for the year ended December 31, 2019), the Company operates one business segment. Accordingly, our management, who is responsible for monitoring our business progress, used data derived from our consolidated financial statements to make decisions. Therefore, in line with CPC 22 – Operating Segments, the Company understands that there were no reportable business segments to be disclosed in the years ended December 31, 2019 and 2018. See “Item 4. Information on the Company—A. History and Development of the Company—Historical Background and Recent Developments.”
Beginning as from the year ended December 31, 2020 and including the year ended December 31, 2021, our management began analyzing data to make decisions based on three reportable business segments in which we operate: Gafisa, for luxury and middle-income projects in Brazil, except Rio de Janeiro, Gafisa Rio, for luxury and middle-income ventures in the state of Rio de Janeiro, and Gafisa Propriedades, focused on the management of our own and third-party real estate properties.
For comparative purposes, we provide below a measure of historical results and other related information for each reporting segment as of December 31, 2021 and December 31, 2020. The information below is derived from our statutory accounting records which are maintained in accordance with Brazilian GAAP. No individual customer represented more than 10% of our net operating revenue in the year ended December 31, 2021.
| As of December 31, | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| Gafisa | Gafisa Rio | Gafisa Propriedades | Total | Gafisa | Gafisa Rio | Gafisa Propriedades | Total | |||||||||||||||||||||||||
| (in millions of reais, unless otherwise indicated) | ||||||||||||||||||||||||||||||||
| Net operating revenue | 701.0 | 75.6 | 41.7 | 818.3 | 625.6 | 258.5 | — | 884.0 | ||||||||||||||||||||||||
| Operating costs | (512.0 | ) | (55.8 | ) | (41.8 | ) | (609.7 | ) | (519.0 | ) | (196.3 | ) | — | (715.3 | ) | |||||||||||||||||
| Gross profit (loss) | 189.0 | 19.8 | (0.1 | ) | 208.6 | 105.6 | 62.2 | — | 168.8 | |||||||||||||||||||||||
| Gross margin | 27.0 | % | 26.2 | % | (0.2 | )% | 25.5 | % | 16.9 | % | 24.1 | % | — | 19.1 | % | |||||||||||||||||
| Net income (loss) | (26.3 | ) | 3.1 | 113.4 | 90.2 | (123.5 | ) | 50.3 | — | (73.2 | ) | |||||||||||||||||||||
Gafisa
Net operating revenue
Net operating revenue for the year ended December 31, 2021, recognized by the percentage of completion revenue recognition method, was R$701.0 million, an increase of 12.1% from R$625.6 million for the year ended December 31, 2020, mainly due to (i) higher volume of new launches during the year, (ii) the increase in revenue recognition from construction projects and their improved performance and (iii) higher volume of sales.
Operating costs
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Operating costs in 2021 totaled R$512.0 million, a 1.3% decrease compared to R$519.0 million in 2020. This decrease was partially offset by a higher volume of new launches and sales and our improved project construction performance.
Gross profit
Gross profit in 2021 totaled R$189.0 million, representing an increase of approximately 79.0% from gross profit of R$105.6 million in 2020. This increase was mainly due to higher volume of launches and an increase in project sales with better operating performance.
In 2021, the gross margin generated from our activities increased to 27.0% compared to 16.9% in 2020. This increase was due to the higher volume of new launches and sales and their more efficient performance.
Gafisa Rio
Net operating revenue
Net operating revenue for the year ended December 31, 2021 was R$75.6 million, a decrease of 70.8% from R$258.5 million for the year ended December 31, 2020, mainly due to the decrease in revenue recognition related to barter transactions from R$156.2 million in 2020, to R$8.4 million in 2021, representing a decrease of 94.6%. In 2020, the amount of revenue from barter transactions was from our Cyano development in Rio de Janeiro, which was launched in the fourth quarter of 2020.
Operating costs
Operating costs in 2021 totaled R$(55.8) million, a 71.6% decrease compared to R$(196.3) million for the year ended December 31, 2020, due to the decrease in operating costs related to barter transactions from our Cyano development. This decrease was partially offset by a higher volume of new launches and sales and our improved project construction performance.
Gross profit
Gross profit in 2021 totaled R$19.8 million, representing a decrease of 68.2% from gross profit of R$62.2 million for the year ended December 31, 2020. This decrease was mainly due to the relevance of sales figures and revenue recognition from our Cyano development, which was launched in the last quarter of 2020.
In 2021, the gross margin generated from our activities increased to 26.2% compared to 24.1% in 2020. This increase was due to the higher volume of new launches and sales and their more efficient performance.
Gafisa Propriedades
Net operating revenue
Net operating revenue for the year ended December 31, 2021 was R$41.7 million, compared to no amount of revenue recognized for the year ended December 31, 2020, mainly due to sales of units which were reclassified from investment property to properties for sale.
Operating costs
Operating costs in 2021 totaled R$(41.8) million, compared to no amount of operating costs for the year ended December 31, 2020, due to sales of units that were reclassified from investment property to properties for sale.
Gross profit (loss)
Gross loss in 2021 totaled R$0.1 million, compared to no amount of gross profit for the year ended December 31, 2020.
In 2021, the negative gross margin generated from our activities was 0.2% due to increased costs allocated to the units sold.
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| B. | Liquidity and Capital Resources |
Our transactions are financed mainly through the contracting of real estate financing and securitization of receivables. When necessary and in accordance with market demands, we carry out long-term financing for the sale of our developments. In order to turn over our capital and accelerate its return, we try to transfer to banks and sell to the market the receivables portfolio of our units.
In 2021, 2020 and 2019, we did not carry out any receivables sales with recourse.
Construction financing lines of credit are available and we have fulfilled substantially all of our construction financing needs for 2021, 2020 and 2019 at consolidated rates similar to the CDI rate. In order to mitigate the effects of the 2008 global credit crisis, the Brazilian government has announced additional lines of credit to assist the construction industry and its customers, including R$6 billion from the FGTS (a Government Severance Indemnity Fund for Employees). In 2009, we approved the issue of two series of debentures for Gafisa and Tenda in the total amount of R$1.2 billion. In addition, local financial institutions are financing up to 80% of construction costs, through the Brazilian Saving and Loan System (Sistema Brasileiro de Poupança e Empréstimo — SBPE) indexed to TR (Taxa Referencial) and a fixed rate spread.
During 2021, our customers’ ability to obtain bank mortgage loans continued to improve, with interest rates in the range of 7.99% to 10.75%+TR, depending on family income and credit score.
The following table shows the balance of our receivables from clients for the development and sale of properties for the periods presented:
| As of December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (in millions of reais) | ||||||||||||
| Real estate development receivables: | ||||||||||||
| Current | 425.5 | 487.1 | 442.5 | |||||||||
| Long-term | 116.2 | 217.2 | 103.0 | |||||||||
| Total | 541.7 | 704.3 | 545.5 | |||||||||
| Receivables to be recognized on our balance sheet according to percentage of completion method: | ||||||||||||
| Current | — | — | — | |||||||||
| Long-term | 342.6 | 346.3 | 437.6 | |||||||||
| Total | 342.6 | 346.3 | 437.6 | |||||||||
| Total receivables from clients – portion recognized plus portion not recognized | 884.3 | 1,050.6 | 995.0 | |||||||||
The total balance of receivables on the balance sheet has the following maturity profile:
| As of December 31, 2021 | ||||
| (in millions reais) | ||||
| Maturity | ||||
| Overdue | 182.0 | |||
| 2022 | 488.5 | |||
| 2023 | 99.5 | |||
| 2024 | 65.7 | |||
| 2025 | 19.8 | |||
| 2026 onwards | 28.8 | |||
| Total | 884.3 | |||
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Loans made to our clients are generally adjusted on a monthly basis as follows: (1) during construction, by the INCC in São Paulo, Rio de Janeiro and other Brazilian cities; and (2) after delivery set forth in the contract, by the IGP-M plus 12% per annum in all markets.
We limit our exposure to credit risk by selling to a broad customer base and by continuously analyzing the credit of our clients. As of March 31, 2022, our clients’ default level was 15.0 of our accounts receivable for Gafisa. We annually review the assumptions used in establishing an allowance for expected credit losses and cancelled contracts, in view of the revision of historical data of its current operation and improvement of measurement estimates. The Company records an allowance for expected credit losses with a factor applied over the accounts receivables not impaired based on credit loss experiences for each real estate development and cancelled contracts for customers when a cash inflow risk is identified. Contracts are monitored to identify the moment when these conditions are mitigated. This allowance is calculated based on the percentage of the construction work completion, a methodology adopted for recognizing income for the year. The allowance for expected credit losses and cancelled contracts totaled R$$77.1 million as of December 31, 2021 and is considered sufficient by our management to cover incurred losses on the realization of accounts receivable.
Cash Flows
Operating activities
In 2021, net cash used from operating activities totaled R$279.9 million, compared to R$452.9 million in 2020. In 2020, net cash generated from operating activities totaled R$452.9 million, compared to R$44.0 million in 2019. This decrease is mainly composed of (i) a R$314 million increase in goodwill related to new acquisitions during 2021 and a R$94.1 million increase in suppliers; (ii) a R$47,1 million increase in payables for purchase of properties and advances from customers and a R$48.6 million decrease in related party transactions; (iii) expenses in the net amount of R$33.8 million which did not affect our cash and cash equivalents, of which R$27.7 million relates to a reversal of impairment adjustments in our landbank and inventory.
Investing activities
Net cash used in investing activities, including the acquisition of assets, equipment and new investments was R$284 million in 2021, compared to R$237.9 million in 2020. This variation is mainly due to the increase in short term investments in the amount of R$228 million, related to the capital increases in 2021.
Net cash used in investing activities, including the acquisition of assets, equipment and new investments was R$237.9 million in 2020, compared to cash generated from investing activities of R$300.6 million in 2019.
Financing activities
Net cash generated from financing activities in 2021 totaled R$570.4 million, compared to the net cash generated from financing activities in 2020 of R$693.8 million. The lower cash generated in 2021 compared to 2020 was mainly attributable to (i) increase in loans and financing in the amount of R$763 million and a decrease in amortization of loans and financing in the amount of R$194.4 million.
Net cash generated from financing activities in 2020 totaled R$693.8 million, compared to the net cash generated from financing activities in 2019 of R$236.7 million. The higher cash generated in 2020 compared to 2019 was mainly attributable to (i) the R$477.9 million capital increases in 2020 (ii) a reduction on increase and amortization of loans and financing. Pledged mortgage receivables and short-term investments.
As of December 31, 2021, substantially all of our mortgage receivables totaling R$926.3 million are pledged. In addition, R$159 million of our short-term investments and collaterals are restricted as they have been pledged.
Off-balance sheet arrangements
As of December 31, 2021, we did not have any off-balance sheet arrangements.
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Capital Expenditures
In 2021, we invested R$41.7 million in machinery and equipment, information technology equipment, software, sales stands, project planning and information technology projects. Our main investments during the period were related to sales stands, which amounted to R$32.7 million.
In 2020, we invested R$16.7 million in machinery and equipment, information technology equipment, software, sales stands, project planning and information technology projects. Our main investments during the period were related to sales stands, which amounted to R$8.7 million.
In 2019, we invested R$3.6 million in machinery and equipment, information technology equipment, software, project planning and information technology projects.
Our capital expenditures are all made in Brazil and are usually funded by local debt capital markets. We currently do not have any significant capital expenditures in progress.
Indebtedness
When we consider appropriate, we have incurred indebtedness within SFH, which offers lower interest rates than the private market. When our customers obtain a mortgage, we use the proceeds to redeem our SFH indebtedness. We intend to continue our strategy of maintaining low levels of debt comprised mainly of transactions within SFH or long-term transactions.
As of December 31, 2021, we had outstanding debt in the total amount of R$1,322.1 million, an increase of 40.5% as compared to December 31, 2020. As of December 31, 2021, our indebtedness principally consisted of: (1) debentures totaling R$447.0 million, (2) working capital loans totaling R$541.1 million, and (3) other loans (mainly SFH) totaling R$334.1 million. As of December 31, 2021, we had an equity debt in the total amount of R$242.8 million related to the acquisitions of Costa Peró and Campo Grande.
As of December 31, 2020, we had outstanding debt in the total amount of R$940.9 million, an increase of 28.8% as compared to December 31, 2019. As of December 31, 2020, our indebtedness principally consisted of: (1) debentures totaling R$270.4 million, (2) working capital loans totaling R$281.2 million, and (3) other loans (mainly SFH) totaling R$389.3 million.
| Maturity as of December 31, 2021 | ||||||||||||||||||||
| Total | 2022 | 2023 | 2024 | 2025 and thereafter | ||||||||||||||||
| (in millions of reais) | ||||||||||||||||||||
| Debentures (Projects) | 360.7 | 9.5 | — | 186.9 | 164.3 | |||||||||||||||
| Housing Finance System (SFH) | 283.3 | 225.3 | 14.0 | — | 44.0 | |||||||||||||||
| Real State Finance System (SFI) | 50.8 | 8.1 | 7.8 | 7.8 | 27.1 | |||||||||||||||
| Bank credit notes (Projects) | 516.1 | 141.8 | 39.8 | 63.8 | 270.7 | |||||||||||||||
| Project debt total | 1,210.9 | 384.7 | 61.6 | 258.5 | 506.1 | |||||||||||||||
| Debentures (Working Capital) | 86.4 | 12.8 | 9.3 | — | 64.3 | |||||||||||||||
| Other Working Capital | 24.9 | 24.9 | — | — | — | |||||||||||||||
| Working Capital debt total | 111.3 | 37.7 | 9.3 | — | 64.3 | |||||||||||||||
| Equity debentures | 242.8 | — | — | 242.8 | - | |||||||||||||||
| Total | 1,565.0 | 422.4 | 70.9 | 501.3 | 570.4 | |||||||||||||||
On March 28, 2017, we issued a CCB in a total amount of R$47 million due in 2021. The CCB is guaranteed by real estate receivables.
On November 30, 2017, we issued a CCB in the amount of R$40 million due in 2021. The CCB is guaranteed by real estate receivables.
In September 2018, we issued a CCB in the amount of R$40 million due in 2021. The CCB is guaranteed by real estate receivables.
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In April 2019, we issued a CCB in the amount of R$10 million due in 2022. The CCB is guaranteed by real estate receivables.
In December 2020, we issued a CCB in the amount of R$195 million due in 2025. The CCB is guaranteed by real estate receivables.
During 2021, we entered into CCB transactions in the total amount of R$553.0 million, maturing between January 2022 and June 2025. The CCBs are guaranteed by real estate receivables.
The actual ratios and minimum and maximum amounts stipulated by restrictive covenants related to these CCBs at December 31, 2021 are as follows:
|
At December 31, 2021 | |
| Loans and Financing | |
| Total accounts receivable (2) plus inventory required to be below zero or 2.0 times over venture debt (3) |
9.69 times |
| Total account receivable plus inventory of completed units required to be below zero or 2.0 times over net debt (1) less venture debt (3) |
(4.42) times |
| Total debt, less venture debt, less cash and cash equivalents and short-term investments, cannot exceed 75% of equity plus non-controlling interests |
13.12% |
| Total receivable (2) plus unappropriated income plus total inventory of completed units required to be 1.5 time over the net debt plus payable for purchase of properties plus unappropriated cost |
1.92 times |
| (1) | Net debt refers to total debt less cash and cash equivalents. |
| (2) | Total accounts receivables, whenever mentioned, refers to the amount reflected in the Balance Sheet plus the amount to be recognized according to the PoC and not yet shown in the Balance Sheet. |
| (3) | Venture debt and general guarantee debt refer to SFH debts, defined as the sum of all disbursed borrowing contracts which funds were provided by SFH, as well as the debt related to the seventh placement. |
Debenture program
In November 2017, we issued two series of non-convertible debentures totaling R$120 million on a private placement basis. The first series of debentures totaling R$90 million is secured by (i) first-priority mortgages over select real estate ventures of the Company and (ii) fiduciary assignments of real estate receivables generated by such select real estate ventures. In November 2017, the debenture holders assigned their fiduciary rights in the real estate receivables to a real estate securitization special purpose entity, which issued CRIs backed by such real estate receivables. The second series of debentures totaling R$30 million, and guaranteed by a fiduciary guarantee, has not been placed with investors as of the date of this annual report. The proceeds of the debentures will be used to fund the development of the aforementioned real estate ventures only.
In May 2018, we issued non-convertible debentures, with a general guarantee, as a single series in the total amount of R$76 million, with final maturity in July 2020. The proceeds from the placement will be used in the development of select real estate ventures and their guarantees are represented by the conditional sale of real estate receivables and the purchase of completion bond related to a specific venture. The face value of the private placement will accrue interest equal to the cumulative variation of the Interbank Deposit (DI) plus 3.75% per annum.
In July 2018, we issued non-convertible debentures, with a general guarantee, as a single series in the total amount of R$90 million, with a final maturity in June 2022. The proceeds from the placement will be used in the development of select real estate ventures and their guarantees are represented by the conditional sale of real estate receivables. The face value of the private placement will accrue interest equal to the cumulative variation of the Interbank Deposit (DI) plus 3% per annum.
In April 2019, we issued non-convertible debentures, with a general guarantee, as a single series in the total amount of R$40 million, with a final maturity in October 2020. The proceeds from the placement will be used in the development of the “Gafisa Square Ipiranga” and “Moov Espaço Cerâmica” real estate ventures, and their
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guarantees are represented by the fiduciary assignment of real estate receivables and conditional sale of units. The face value of the private placement will accrue interest equal to the cumulative variation of the Interbank Deposit (DI) plus 5% per annum.
In July 2020, in the context of the acquisition of the totality of UPCON’s shares, we issued debentures convertible into ordinary actions, with a general guarantee, in two series in the total amount of R$33.8 million, with a final maturity in July 2021. These debentures were converted into common shares in September 2021. The face value of the private placement will accrue interest equal to the cumulative variation of Interbank Deposit (IGPM) plus 0.50% per annum.In Setember 2020, we issued non-convertible debentures, with a general guarantee, as a single series in the total amount of R$190 million, with a final maturity in Setember 2024. The proceeds from the placement will be used in the development of the “Belvedere Lorian Boulevard,” “Moov Estação Brás,” “Upside Paraiso,” “Scena Tatuapé,” “Parque Ecoville,” “Moov Belém” and “Moov Parque Maia” real estate ventures, and their guarantees are represented by the fiduciary assignment of real estate receivables and conditional sale of units. The face value of the private placement will accrue interest equal to the cumulative variation of the Interbank Deposit (DI) plus 6% per annum.
In October 2020, we issued two series of convertible debentures in the aggregate amount of R$117.6 million. The first series of debentures totaling R$42 million, with a general guarantee, was converted in November 2020, in the context of the acquisition of interest in four ventures of Calçada S.A. The second series of debentures totaling R$25.6 million, with a general guarantee, was placed in December 2020, and was converted in May 2021. The face value of the private placement will accrue interest equal to the cumulative variation of the Interbank Deposit (100% of DI) per annum.
In March 2021, we issued two series of non- convertible debentures in the aggregate amount of R$165 million, maturing in August 2028. The proceeds from the issuance will be used to develop the “Hotel Fasano” real estate project, and are guaranteed by the fiduciary assignment of real estate receivables and conditional sale of units. The face value of the private placement will accrue interest equal to the cumulative variaton of inflation (IPCA) plus 6.25% per annum.
In December 2021, we issued non-convertible debentures, with a general guarantee, as a single series in the total amount of R$85 million, maturing in November 2027. The proceeds from the issuance will be used in the development of selected real estate projects, and are guaranteed by the fiduciary assignment of real estate receivables and conditional sale of units. The face value of the private placement will accrue interest equal to the cumulative variation of the Interbank Deposit (DI) plus 4.5% per annum.
In December 2021, we issued two series of convertible debentures, with a general guarantee, in the total amount of R$247.5 million, maturing in December 2024, in connection with the acquisitions of the Costa do Peró and Campo Grande real estate projects. The face value of the private placement will accrue interest per annum equal to the cumulative variation of the Interbank Deposit (100% of DI).
We have various covenants relating to our debentures issuances described above. These mainly consist of (i) cross default provisions, whereby outstanding indebtedness will become immediately due and payable in the event that the Company or its subsidiaries do not comply with their obligations under any other credit facility for a value in excess of the amounts set forth therein; (ii) restrictions on transfer of control and merger and acquisition transactions; (iii) limitations on our ability to incur debt; (iv) limitations or creating liens on assets; (v) limitations on the distribution of dividends if we are under default; and (vi) the following ratios and limits to be calculated on a quarterly basis. The table below sets forth these ratios and limits as amended.
The actual ratios and minimum and maximum amounts stipulated by these restrictive covenants at December 31, 2021 are as follows:
|
At December 31, 2021 | |
| Total accounts receivable (2) plus inventory required to be below zero or 2.0 times over net debt (4) less venture debt (3) | 13.02 times |
| Total debt less venture debt (3), less cash and cash equivalents and short-term investments (1), cannot exceed 75% of equity plus non-controlling interests | 13.12% |
| (1) | Cash and cash equivalents and short-term investments refer to cash and cash equivalents and marketable securities. |
| (2) | Total accounts receivables, whenever mentioned, refers to the amount reflected in the Balance Sheet plus the amount to be recognized according to the PoC and not yet shown in the Balance Sheet. |
| (3) | Venture debt and general guarantee debt refer to SFH debts, defined as the sum of all disbursed borrowing contracts which funds were provided by SFH, as well as the debt related to the seventh placement. |
| (4) | Net debt refers to total debt less cash and cash equivalents |
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We expect to comply with the covenants in the agreements governing our outstanding indebtedness which may limit our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions. See “Item 3. Key Information—D. Risk Factors—Our level of indebtedness could have an adverse effect on our financial health, diminish our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or the real estate industry.”
As of December 31, 2021, the Company and its subsidiaries were in compliance with the contractual covenants provided for in our debentures and our credit instruments.
Financing through the Housing Finance System (SFH)
Most of our financing is incurred directly or through our subsidiaries or jointly-controlled entities from the principal banks that operate within SFH. As of December 31, 2021, the interest rates on these loans generally varied between 7.0% and 14.2% per annum, plus TR, and the loans generally mature through March 2022 and July 2026. This financing is secured by mortgages on property and by security interests on the receivables from clients. As of December 31, 2021, we had 9 loan agreements in effect, with a balance of R$334.1 million. At the same date we had no amount in aggregate principal amount of financing agreements with SFH, to be released through the date of completion as construction of the corresponding development’s progress.
On March 26, 2020, we completed the renegotiation of our financial liabilities with Banco do Brasil S.A. in the total amount of R$138.4 million. As part of the renegotiation, the final maturity of such financial liabilities was extended to June 2025 and we reduced the cost of servicing them, giving us the time we need to sell the units in inventory tied to this debt. The completion of this renegotiation strengthens our capital structure and our credit relationship with Banco do Brasil and the financial markets in general.
Securitization deals and Fund — FIDC
On June 27, 2011, the Company and its subsidiaries entered into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$203.9 million (R$185.2 million – Gafisa’s interest) in exchange for cash, at the transfer date, discounted to present value, for R$171.7 million (R$155.9 million – Gafisa’s interest), recorded under “Obligations assumed on assignment of receivables.”
On December 22, 2011, Gafisa and its subsidiaries entered into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$72.4 million in exchange for cash at the transfer date, discounted to present value, by R$60.1 million, classified as “Obligations with assignment of receivables.”
On July 6, 2012, Gafisa and its subsidiaries entered into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$18.2 million in exchange for cash at the transfer date, discounted to present value, for R$11.5 million.
On December 27, 2012, Gafisa and its subsidiaries enter into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$72.0 million in exchange for cash at the transfer date, discounted to present value, by R$61.6 million.
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On November 29, 2013, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$24.2 million in exchange of cash at the transfer date, discounted to present value, by R$19.6 million.
On November 25, 2014, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$15.2 million in exchange of cash at the transfer date, discounted to present value, by R$12.4 million.
On December 3, 2015, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$32.2 million in exchange of cash at the transfer date, discounted to present value, by R$24.5 million.
On March 4, 2016, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$36.4 million in exchange for cash at the transfer date, discounted to present value, for R$27.3 million.
On May 09, 2016, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$23.0 million in exchange for cash at the transfer date, discounted to present value, for R$17.5 million.
On August 16, 2016, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$21.4 million in exchange for cash at the transfer date, discounted to present value, for R$14.9 million.
On December 21, 2016, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$27.0 million in exchange for cash at the transfer date, discounted to present value, for R$19.5 million.
On March 28, 2017, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$30.2 million in exchange for cash at the transfer date, discounted to present value, for R$23.0 million.
In 2021, 2020 and 2019, we did not perform any transfer of sales receivables from Gafisa and its subsidiaries to investors.
Pursuant to Article 125 of the Brazilian Civil Code, the CCI-Investor carries general guarantees represented by statutory liens on real estate units, effective as soon as the conditional restrictions included in the registration are lifted, as reflected in the real estate deed on (i) the assignment of receivables from the assignors to SPEs, as provided for in Article 167, item II, (21) of Law No. 6,015, of December 31, 1973; and (ii) the issue of CCI-Investor by SPEs, as provided for in Article 18, paragraph 5 of Law No. 10,931/04.
We will be compensated for, among other things, the reconciliation of the receipt of receivables, guarantee the CCIs, and the collection of past due receivables. The transaction structure provides for the substitution of us as collection agent in the event of non-fulfillment of the responsibilities described in the collection service contract.
Working Capital
We believe that our current working capital is sufficient for our present requirements and that our sources of funds from financing activities are sufficient to meet the financing of our activities and cover our need for funds for at least the next twelve months.
In 2019, our Board of Directors ratified the following capital increases:
| · | On June 24, 2019: subscription and payment of 26,273,962 new common shares, of which 12,170,035 shares were subscribed at the price of R$5.12 and 14,103,927 shares were subscribed at the price of R$4.96, totaling R$62.3 million and R$69.9 million, respectively. |
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| · | On October 23, 2019: subscription and payment of 48,968,124 new common shares, of which 45,554,148 shares were subscribed at the price of R$5.58 and 3,413,976 shares were subscribed at the price of R$5.42, totaling R$254.2 million and R$18.5 million, respectively. |
On April 30, 2020, the shareholders approved at the extraordinary shareholders’ meeting the capital absorption of the Company’s retained losses in the amount of R$2,585,033 thousand.
In 2020, the Company’s Board of Directors ratified the following capital increases:
| · | On August 7, 2020: subscription and payment of 75,610,000 new common shares at the price of R$4.10, totaling R$310 million. |
| · | On September 25, 2020: subscription and payment of 95,121,951 new common shares at the price of R$4.10, totaling R$390 million. |
| · | On November 16, 2020: subscription and payment of 9,944,150 new common shares at the price of R$4.22, totaling R$42 million. |
In 2021, the Company’s Board of Directors ratified the following capital increases:
| · | On May 24, 2021: subscription and payment of 8,876,083 new common shares at the price of R$3.49, totaling R$37.299 million. |
| · | On September 28, 2021: subscription and payment of 27,892,638 new common shares at the price of R$4.59, totaling R$128 million. |
Accordingly, as of December 31, 2021, the Company’s authorized and paid capital amounted to R$1,248.5 million (R$1,083.2 million in 2020), represented by 337,445,727 (300,676,101 in 2020) registered common shares, with no par value, of which 296.221 (341,570 in 2020) were held in treasury.
U.S. GAAP Reconciliation
We prepare our consolidated financial statements in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. Our net income attributable to owners of Gafisa, in accordance with Brazilian GAAP, was a net income of R$90.2 in 2021, and a net loss R$73.2 million and R$26.0 million in 2020 and 2019, respectively. Under U.S. GAAP, our net profit was R$50.4 million in 2021, and net loss of R$26.1 million and R$60.7 million in 2020 and 2019, respectively.
Our equity, in accordance with Brazilian GAAP, was R$1,815.2, R$1,549.5 million and R$882.8 million as of December 31, 2021, 2020 and 2019, respectively. Under U.S. GAAP, we recorded total equity of R$1,536.3, R$1,309.6 million and R$595.4 million as of December 31, 2021, 2020 and 2019, respectively.
The following items generated the most significant differences between Brazilian GAAP and U.S. GAAP in determining net income and shareholders’ equity:
| · | revenue recognition; and |
| · | effects of deferred taxes on the difference above. |
For a discussion of the principal differences between Brazilian GAAP and U.S. GAAP as they relate to our financial statements and a reconciliation of net income and equity see Note 32 to our consolidated financial statements included elsewhere in this annual report and “Item 3.A. Key Information—Selected Financial Data.”
New Accounting Pronouncements, Interpretations and Guidance
Pronouncements (new or revised) and interpretation applicable to years beginning January 1, 2021
The Company adopted all of the pronouncements (new or revised) and interpretations issued by the CPC applicable to its operations which were effective as of December 31, 2021.
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The following standards are in effect beginning on January 1, 2021:
| · | Amendments to CPC 38, CPC 40 (R1) and CPC 48: Interest Rate Benchmark Reform – provide exemptions that apply to all hedging relationships directly affected by the interest rate benchmark reform. A hedging relationship is directly affected if such reform gives rise to uncertainties about the timing or the amount of interest rate benchmark-based cash flows of the hedged item or of the hedging instrument. These amendments do not have impact on the financial statements of the Company, once the latter does not have interest rate hedging relationships. |
| · | Amendments to CPC 26 (R1) and CPC 23: Definition of material – provide a new definition of material that states that the “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of financial statements. A misstated information is material if it could be reasonably expected to influence decisions taken by primary users. These amendments did not have any impact on the financial statements, nor are expected to have any future impact on the Company. |
| · | Revision of CPC 00 (R2): Conceptual Framework for Financial Reporting – provide updated definitions and criteria for recognition of assets and liabilities, and clarifies some important concepts. These amendments did not have impact on the Company’s financial statements. |
| · | Amendments to CPC 06 (R2): COVID-19-related Rent Concessions – provides lessees with concessions in the application of the CPC 06 (R2) provisions about the modification of lease contract, by recognizing the concessions occurring as direct consequence of the COVID-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-related rent concession granted by the lessor is a lease modification. This amendment did not have any impact on the Company’s financial statements. There is no other standard, amendment or issued interpretation that is not yet adopted that could, in the opinion of our management, have a significant impact on our financial statements upon adoption. |
Recently Adopted and Issued U.S. GAAP Accounting Standards
Please refer to Note 32(c) to our consolidated financial information for a description of recently adopted U.S. GAAP accounting standards and recently issued U.S. GAAP accounting standards.
| C. | Research and Development, Patents and Licenses, etc. |
We have a research and development department for new products, processes and methodologies focused on reducing the construction cycle. Our research and development expenditures in 2021, 2020 and 2019 were immaterial. See also “Item 4. Information on the Company—B. Business Overview—Construction.”
In 2021 we invested in innovation through startups — from operations to product development, and started to take steps to develop into a full-service real estate platform. In total, we have identified 500 startups, maintained connections with 200 startups, and implemented more than 20 related projects.
| D. | Trend Information |
Elsewhere in this annual report, including under “Item 3. Key Information—D. Risk Factors” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Brazilian Real Estate Sector,” we discuss trends, uncertainties, demands, commitments or events which could have a material effect upon our net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that could cause reported financial information to not necessarily be indicative of future operating results or financial condition.
In addition, while we believe the long-term prospects for the Brazilian housing market have not changed over the past five years, we recognized that we needed to adjust how we have approached the demand for high growth and diversification in the market in order to achieve sustainable, profitable growth. In the Brazilian housing market,
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demand has outstripped supply on all fronts, from units and availability of skilled labor, to reliable and experienced suppliers and building partners, to financing, and to the ability to rapidly issue permits and obtain the necessary approvals to deliver units.
In December 2016, following the conclusion of our analysis of certain strategic options, our management decided to sell 50% of Tenda’s total capital stock, and transfer the remaining 50% of Tenda’s total capital stock to our shareholders in connection with a reduction in our total capital stock. Accordingly, on December 14, 2016, we entered into an SPA with Jaguar Real Estate Partners LP (“Jaguar”) pursuant to which we offered to sell Tenda shares representing up to 30% of the total capital stock of Tenda, at a price equal to R$8.13 per share.
The spin-off of the Tenda business unit was consummated on May 4, 2017, following: (i) a reduction of the capital stock of Tenda (without the cancellation of shares), pursuant to which Gafisa, as sole shareholder at that time, received R$100 million (adjusted by the SELIC); (ii) a reduction of the capital stock of Gafisa, resulting in the distribution to Gafisa shareholders of shares corresponding to 50% of the capital stock of Tenda; (iii) the conclusion of the preemptive rights exercise pursuant to which Gafisa shareholders acquired up to 50% of the total share capital of Tenda, at the price per share set forth in the SPA with Jaguar and for a total amount of R$219.5 million, with no shares being acquired by Jaguar; and (iv) the satisfaction of other conditions precedent for the consummation of the spin-off. In addition, on May 4, 2017, the Tenda shares were listed on the B3 and began to publicly trade.
On September 25, 2018, GWI convened an Extraordinary Shareholders’ Meeting for the purpose of dismissing members of the Board of Directors and electing new members through a multiple-vote process. GWI approved the dismissal of the entire Board of Directors and elected directors for five of the seven vacant seats. See “Item 6. Directors, Senior Management and Employees—C. Board Practices,” for further information about our Board of Directors. Within three days of the dismissal and election of the new Board of Directors, the Company’s executive board was removed from office.
On November 26, 2018, our Board of Directors approved the voluntary delisting of our ADSs from the NYSE and a proposal to maintain our ADR facility as a Level 1 ADR program to enable investors to retain their ADSs. On December 7, 2018, we filed a Form 25 with the SEC to effect the delisting of the ADSs, and sent a copy to the NYSE on the same day. The last day of trading on NYSE for our ADSs was December 14, 2018, and our ADSs were delisted from the NYSE on December 17, 2018. Our ADSs remain eligible for trading in the over-the-counter markets in the United States, and our common shares will continue to be listed and admitted to trading in the Novo Mercado segment of the B3. In addition to the information we are required to report under applicable Brazilian regulations, we intend to continue publishing English translations of our annual report, interim results and communications on our investor relations website at (www.ri.gafisa.com.br), in accordance with Rule 12g3-2(b) under the Exchange Act.
During February, March and April 2019, the members of the Company’s Board of Directors elected in late 2018 resigned, with the exception of Pedro Carvalho de Mello, and new members were elected to replace them. As of the date of this annual report, following the Annual General Meeting held on April 15, 2019, Gafisa’s Board of Directors is composed of the following members: (i) Leo Julian Simpson (nominated as chairman of the Board of Directors on April 15, 2019), (ii) Antonio Carlos Romanoski, (iii) Demian Fiocca, (iv) Eduardo Larangeira Jácome, (v) Nelson Sequeiros Rodriguez Tanure, (vi) Roberto Luz Portella and (vii) Thomas Cornelius Azevedo Reichenheim, all nominated on April 15, 2019.
On April 15, 2019, at the Annual General Meeting, the shareholders resolved to suspend the shareholder rights of GWI Asset Management S.A. and the other members of the GWI Group due to GWI Group’s non-compliance with the Company’s Bylaws as they relate to the Tender Offer request. In addition, it was resolved to increase the limit of authorized capital of the Company from 71,031,876 ordinary shares to 120,000,000 ordinary shares. This increase in the Company’s authorized capital enables us to issue new shares in a sufficient amount to accommodate the financial restructuring of the Company.
On April 15, 2019, following the General Meeting, in order to raise funds for investments, the newly appointed Board of Directors approved a capital increase of 26,273,962 new common shares. These newly issued common shares were offered privately to the Company’s shareholders, and were issued at the reference price of R$ 6.02 per common share (which was determined following an audit conducted by a specialized firm). The Board of Directors
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also appointed Roberto Luz Portella as Chief Executive Officer, Chief Financial Officer and Investor Relations Officer and Eduardo Larangeira Jácome as Operational Executive Officer.
On August 15, 2019, the Board of Directors approved another capital increase of 48,968,124 new common shares. These newly issued common shares were offered privately to the Company’s shareholders at B3 S.A. – Brasil, Bolsa, Balcão (former BM&FBovespa), and were issued at the reference price of R$ 6.57 per common share (which was determined following an audit conducted by a specialized firm). Following the preemptive rights exercise period and subsequent subscriptions periods, we issued and sold 45,554,148 and 3,413,976, respectively, new common shares of the Company for a total amount of R$254.2 million and R$18.5 million, respectively, all in registered, book-entry form, and with no par value, at a price per share equal to R$5.58 and R$5.42, respectively. Accordingly, on October 23, 2019, our board of director approved a capital increase in the amount of R$272.7 million. As of the date of this annual report, the share capital of the Company totaled R$2,926.3 million, represented by 120,000,000 common shares, all in registered, book-entry form, and with no par value.
On August 30, 2019 the Board of Directors appointed André Luis Ackermann as Chief Financial Officer, and Eduardo Larangeira Jácome tendered his resignation to the position of Management Officer, effective as of September 30, 2019. Eduardo Larangeira Jácome remains as a member of the Restructuring Committee until December 31, 2019 and a member of the Company’s Board of Directors.
Also, on September 20, 2019, Roberto Luz Portella resigned from his position as Chief Executive Officer and Investor Relations Officer. Following his resignation, on September 23, 2019, the Board of Directors appointed André Luis Ackermann as Investor Relations Officer cumulating with his former responsibilities as Chief Financial Officer.
On December 27, 2019, we concluded the sale of our remaining 21.20% stake in Alphaville for R$100 million, which was paid through the offsetting of certain credits and the delivery of assets. This transaction is in line with the Company’s strategy to optimize and improve the Company’s portfolio and capital allocation, aiming at creating value for our shareholders.
At a Board of Directors meeting held on February 2, 2020, Mr. Roberto Luz Portella tendered his resignation as a member of the Company’s Board of Directors. At the same meeting, Mr. João Antônio Lopes Filho was elected as the new member of the Company’s Board of Directors.
On March 2, 2020, with the aim to strengthen our executive team, our Board of Directors approved a new organizational structure and elected the following three new Executive Officers: (i) Guilherme Augusto Soares Benevides as Chief Operations Officer and Vice-president of Operations; (ii) Fábio Freitas Romano as Assistant Vice-president of Operations; and (iii) Ian Monteiro de Andrade as Chief Financial Officer and Investor Relations Officer and Vice-president of Management and Finance.
On March 27, 2020, our Board of Directors approved the establishment of the Company’s share buyback program with the objective of generating value for the Company’s shareholders, that was confirmed by the General Shareholders Meeting held on April 30, 2020. Shares purchased by the Company as part of the buyback program will be held in treasury, and may subsequently be canceled, sold and/or used in connection with the exercise of stock options granted by the Company. The maximum number of shares the Company may acquire under this program is 10,327,558 common shares, pursuant to Article 8 of CVM Instruction No. 567/15. This buyback program ends on May 4, 2021. Under our current shares repurchase program, any acquisition by us of our own shares must be made on a stock exchange and cannot be made by means of a private transaction. See “Item 10. Additional Information—B. Memorandum and Bylaws—Purchases by us of our own Shares,” for further information.
On March 2, 2020, the Administrative Council for Economic Defense (CADE) approved, without restriction, the merger of UPCON into the Company. On April 30, 2020 all required approvals were obtained, and UPCON became a wholly-owned subsidiary of Gafisa.
On April 30, 2020, the shareholders approved at the extraordinary shareholders’ meeting the capital absorption of the Company’s retained losses in the amount of R$2,585,033 thousand. Additionally, the Company’s Board of Directors ratified a capital increase: (1) on August 7, 2020 through the subscription and payment of 75,610,000 new common shares at the price of R$4.10, totaling R$310 million, and (2) on September 25, 2020 through the subscription and payment of 95,121,951 new common shares at the price of R$4.10, totaling R$390 million.
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Since March 2020, the COVID-19 pandemic has spread across Brazil and other countries, and governments have implemented a series of measures including travel restrictions and quarantines to contain COVID-19, which has adversely affected the real estate industry in the regions where we operate.
During 2021, we were better equipped to manage the challenges of COVID-19 compared to 2020. A combination of our strategy and the relaxation of restrictions in some regions of Brazil resulted in a gradual increase in lauches and sales volumes. However, there is some uncertainty regarding the duration and likelihood of further government interventions or increases in restrictions, as well as the economic effects on financial markets, which may further delay the recovery of the real estate industry and negatively impact it. As of the date of this annual report, we have not suffered a significant increase in customer default or a reduction in sales volume and the construction of our projects continue to be on schedule Accordingly, considering the scenario of uncertainty as to when the COVID-19 pandemic will end and normal economic activity will resume, as well as the negative impacts the COVID-19 pandemic will have on Brazil’s economy, including on the cost of construction inputs, management has, as of the date of this annual report, evaluated the effects of COVID-19 on our business, including on our projections of profit or loss and cash generation based on our best estimates, and has concluded that there is no need to recognize additional loss allowance, and that there is no material adverse effect on our operations. Given the uncertainty surrounding COVID-19, we continue to monitor ongoing developments to continually update our projections and analysis on any effect on our financial information.
For the year ended December 31, 2020, we opted to defer the payment of federal taxes related to March, April and May 2020 to a later date pursuant to Ordinances No. 139, 150 and 245. Pursuant to Provisional Measure 927, dated March 22, 2020, we also opted to defer employer FGTS deposits for March, April and May 2020, to be deposited in six monthly installments starting in July 2020. In addition, pursuant to Provisional Measure 936, dated March 31, 2020, converted into Law 14,020/2020, we reduced salaries by 25% with a proportional reduction in working hours for a certain group of employees over a 90-day period. Furthermore, there was a voluntary 50% reduction in the fees of the members of our Board of Director over a 180-day period.
Moreover, we experienced volatility in the price of our publicly traded stock as a result of the global concern for the COVID-19 pandemic and its developments.
In addition, in March 2022, André Luis Ackermann resigned from his position as statutory officer.
| E. | Critical Accounting Estimates |
The preparation of financial statements in accordance with Brazilian GAAP requires management to make judgments, estimates and adopts assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, as well as the disclosure of contingent liabilities, at the balance sheet date. Assets and liabilities subject to estimates and assumptions include the useful life of property plant and equipment, impairment of assets, deferred tax assets, provision for uncertainty tax positions, labor and civil risks, and the measurement of the estimated cost of ventures and financial instruments. Estimates are used for, among other things, impairment of non-financial assets, transactions with share-based payment, provisions for tax, labor and civil risks, fair value of financial instruments, estimated costs of ventures, realization of deferred income tax and other similar provisions. Although we believe that our judgments and estimates are based on reasonable assumptions, as they are subject to several risks and uncertainties and are made in light of information available to us, our actual results may differ from these judgments and estimates.
See Note 2.2 to our consolidated financial statements, included elsewhere in this annual report for further information on these and other accounting policies we adopt.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
| A. | Directors and Senior Management Board of Directors |
The table below shows the names, positions, and terms of office of the members of our board of directors, as of December 31, 2021:
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|
Name |
Age |
Position |
Election Date |
Term of Office(1) |
| Leo Julian Simpson (2) | 66 | Chairman | April 15, 2019 | Annual Shareholders’ General Meeting in 2021 |
| Antonio Carlos Romanoski (2) | 76 | Director | April 15, 2019 | Annual Shareholders’ General Meeting in 2021 |
| Thomas Cornelius Azevedo Reichenheim (2) | 75 | Director | April 15, 2019 | Annual Shareholders’ General Meeting in 2021 |
| Nelson Sequeiros Rodriguez Tanure (2) | 70 | Director | April 15, 2019 | Annual Shareholders’ General Meeting in 2021 |
| João Antonio Lopes Filho | 58 | Director | April 30, 2020 | Annual Shareholders’ General Meeting in 2021 |
| Eduardo Larangeira Jácome | 66 | Director | April 15, 2019 | Annual Shareholders’ General Meeting in 2021 |
| Gilberto Benevides | 70 | Director | April 30, 2020 | Annual Shareholders’ General Meeting in 2021 |
| Nelson de Queiroz Sequeiros Tanure | 36 | Director | August 10, 2020 | Annual Shareholders’ General Meeting in 2021 |
| (1) | Under Brazilian corporate law, an annual general shareholders’ meeting must take place within the first four months of the calendar year. |
| (2) | Independent member pursuant to Brazilian Law. According to Brazilian Law, a director is considered independent when: (1) he/she has no relationship with the company, except for holding shares; (2) he/she is not a controlling shareholder, spouse or relative of the controlling shareholder, has not been in the past three years linked to any company or entity related to the controlling shareholder; (3) he/she has not been in the past three years an employee nor an executive of the company, of the controlling shareholder or of any subsidiary of the company; (4) he/she is not a supplier or buyer, direct or indirect, of the company where the arrangement exceeds a certain amount; (5) he/she is not an employee or manager of any company which renders services to the company or which uses services or products from the company; (6) he/she is not a spouse or relative of any member of the company’s management; and (7) he/she does not receive any compensation from the company, except for the compensation related to its position as a board member. |
Our directors are not subject to mandatory retirement due to age.
The following is a summary of the business experience and principal outside business interests of the current members of our board of directors.
Antonio Carlos Romanoski. Mr. Antonio Carlos Romanoski held several positions at the Electric Power Company of Paraná - COPEL for 17 years, including Manager of Finance and Human Resources, Administrative Officer, Chief Financial Officer and member of the Board of Directors. He also served as Superintendent (resident) overseeing the construction of the Salto Osório and Foz do Areia Power Plants. He was also responsible for attracting foreign financing from international agencies. Mr. Romanoski also worked for 15 years at Refrigeração Paraná S.A., the second largest manufacturer of Domestic Appliances in Brazil, where he held the positions of Chief Financial Officer, General Director and Market Relations Officer. He oversaw the merger and acquisition process of Industries Pereira Lopez and led the restructuring process of the Prosdócimo Organizations, overseeing the merger and incorporation of 14 companies. He coordinated the logistics of the sale of the company to Electrolux do Brasil S.A., where he then served as Chief Executive Officer for three years and as Member of the Board of Directors. He supported the merger of Refripar with Electrolux S.A., creating Electrolux do Brasil, as well as the merger of the Electrolux / Prosdócimo brands. In addition, Mr. Romanoski served as president of the Atlas of Home Appliances industry, where he has remained a member of the Board of Directors since 1988. Mr. Romanoski served as Member of the Board of Directors of TEKA - Tecelagem Kuenrich S.A. in 2003 and 2004, and in the same period, he was a member of the Board of Directors of Ferropar - Ferrovia Paraná S.A. He has been a shareholder of CEFI - Center of Excellence in Finance since 1994, which provides business advice with specialization in mergers, acquisitions, family businesses and financial structuring. He coordinated the following projects, among others: City Hall of Curitiba - Financial restructuring and capitalization - Inepar S / A Indústria e Construção - Restructuring of the Group and creation of the Holding Company - De Lara Transportes - Evaluation of the company and advisor in the sale to ALL - Sonae Emplanta - Advisory on fundraising for Shopping Center - Copel - Member of the Consortium
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for the privatization of the company - HSBC - Training of 2,000 managers and directors in the EVA concept - Souza Cruz - Advice on investment project in the State of Paraná - Unimed Rio - Restructuring and market adequacy. He is also a shareholder of Romanoski & Associados.
Nelson Sequeiros Rodriguez Tanure. Mr. Nelson Sequeiros Rodriguez Tanure is Chief Executive Officer of Docas Investimentos S.A. He has been an investor of PETRO RIO S.A. since 2013, and he acquired Editora Pesos S.A. in 2006. He entered into a usufruct agreement for the Jornal do Brasil, Gazeta Mercantil and Forbes magazine brands in 2001. Mr. Tanure acquired control of Docas S.A. and of its subsidiaries Boavista S.A. and Boavista Trading in 1999, and he incorporated ISHIBRAS, forming the company Indústrias Verolme-Ishibras S.A. in 1994. He served as Chairman of the Board of Directors of SADE VIGESA S.A. (a union of South American Engineering and Villares equipment) in 1991, and he acquired EMAQ VEROLME ESTALEIROS S.A. (a merger of EMAQ Engenharia e Máquinas S.A. and Verolme Shipyard) in 1989. In 1983, he founded Representação e Comércio Internacional Ltda., a Brazilian trading and holding company which is the controlling shareholder of Serviços de Engenharia e Equipamentos S.A. and Engenharia e Máquinas S.A. He holds a degree in Business Administration from the Federal University of Bahia in 1975, and he graduated from the Institut des Hautes Etudes de Development Economique et Social - Université Paris I in 1976. He holds a specialization from the Owner / President Management Program at Harvard Business School.
Leo Julian Simpson. Mr. Leo Julian Simpson began his career as a financial lawyer at Rickerbys & Pardoes, working in property development of industrial and recreational facilities in England. In 1986, he expanded these skills at Shimizu Corporation, Japan’s largest finance and leisure entrepreneur in Europe and Asia. In 1987, he began working at McKenna & Co. documenting and financing international infrastructure projects in the telecommunications, energy and transportation sectors, including in the construction of airports and power plants in the United Kingdom. In addition, Mr. Simpson provided legal advice supporting the creation of companies such as National Grid, France Telecom, Sprint Corporation and Intelig Telecomunicações in Brazil. He became commercial director and then president of Intelig Telecomunicações, a position he held until the company was sold by Brazilian investors to TIM. Mr. Simpson graduated with a degree in law from Bristol University in England in 1977.
Eduardo Langeira Jácome. Mr. Jácome has served as Officer and Director of Gafisa S.A. since March 15, 2019 and April 15, 2019, respectively. He graduated in Business Administration from the School of Political and Economic Sciences of Rio de Janeiro. He has 45 years of experience in Business Management and Human Resources, 35 of which have been in executive positions. He worked for 23 years at IBM, three years at Coca Cola Andina, five years at Telemar / Oi, four years at Cia. Brasileira de Multimídia and one year at HRT / PetroRio. He has held planning, implementation and management positions at People & Business Solutions (2006), Global Sports Network (2010) and PBS Technology (2015). He is a member (2018-2020) of the Executive Board of MercoSerra, the Development Agency of Serra Carioca, which is a private entity created to support the economic development of the region formed by Nova Friburgo, Petrópolis and Teresópolis. Mr. Jácome serves as Member of the Fiscal Council (2018-2020) of ACIANF - Commercial, Industrial and Agricultural Association of Nova Friburgo, and in 2016, he was approved as an Associate Member of the Brazilian Institute of Corporate Governance (IBGC).
João Antonio Lopes Filho. Mr. João Antonio Lopes Filho was the founding partner of Portcapital and manager of the Aespoespacial Fund. He was a partner at Banco Fator S.A. from 1994 to 2008, responsible for the Corporate Finance, Mergers and Acquisitions, Capital Markets and Private Equity division. He was responsible for the Venture Capital Fund between 1999-2006 (Santa Catarina Emerging Companies Fund). He was a member of the Board of Directors of Trafo Equipamentos Elétricos SA from 2003 to 2007. He was Managing Partner of Trevisan Auditores Independentes, having developed the Mergers, Acquisitions and Privatizations Advisory Area and coordinated the Human Resources, Productivity, Quality Advisory Areas and Training. He was an auditor at Price Watherhouse, having participated in audits at large banks and multinational companies. He holds a degree in Economic Sciences from Universidade Mackenzie and Fund Manager at CVM.
Thomas Cornelius Azevedo Reichenheim. Mr. Thomas Cornelius Azevedo Reichenheim is the former Director of several companies, notably Auxiliary Bank, Auxiliary Investment Bank, Auxiliar Seguradora, La Fonte Fechaduras and LFTel S.A. He is also the owner of Carisma Comercial Ltda. of T.R Portfolios Ltda. where he advises on the creation of capital and financial institutions. Mr. Reichenheim graduated with a degree in Business Administration from the Fundação Getúlio Vargas, in 1972, and in Law from Faculdades Metropolitanas Unidas, in 1972.
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Gilberto Benevides Mr. Gilberto Benevides has more than 40 years’ experience in the construction and real estate sector. He worked at Company S.A. from 1984 to 2008, including between 2006 and 2008 when Company S.A. was a publicly traded company, and was part of the management team of Company S.A. from 2008 to 2010. Since 2010, he has served as an officer for UPCON Incorporadora S.A. He graduated with a degree in Civil Engineering from Mackenzie University, and a post-graduate degree in Business Management from Mackenzie University.
Nelson Queiroz Sequeiros Tanure. Mr. Nelson Queiroz Tanure worked at PETRO RIO S.A. as non-statutory officer since 2014. Mr. Nelson has extensive experience in industries such as oil and gas and infrastructure. He graduated in economics from IBMEC, and completed Bachelor’s Degree in economics in Boston College.
The table below shows the names, positions, and terms of office of our executive officers, as of the date of this annual report:
|
Name |
Age |
Position |
Election Date |
Term of Office |
| Guilherme Augusto Soares Benevides | 40 | Chief Operational Officer (Principal Executive Officer) | March 2, 2020 | May 16, 2022 |
| Guilherme Luis Pesenti e Silva | 38 | Statutory Director | January 28, 2020 | January 28, 2023 |
| Luiz Fernando Ortiz | 44 | Statutory Director | January 28, 2020 | January 28, 2023 |
| Fabio Freitas Romano | 47 | Statutory Director | March 2, 2020 | March 2, 2023 |
| Sheyla Castro Resende | 36 | Statutory Director | May 24, 2021 | March 2, 2023 |
The business address of each of our executive officers is Av. Pres. Juscelino Kubitschek, No. 1830, Block 2, 3rd Floor, 04543-900 – São Paulo, SP – Brazil.
The following is a summary of the business experience and principal outside business interests of the current executive officers.
Guilherme Augusto Soares Benevides. Mr. Benevides started his career in the real estate sector at the age of 17. Before becoming an entrepreneur, he worked in the marketing and sales areas at Archote and Fernandez Mera and participated in the development of Imovelweb, the first digital platform on the market. As a businessman, he was the founder and CEO of Upcon Incorporadora S/A for 15 years. He also founded and chaired Upcar Parking, SetUp and Upcon Brokers. Recently, he was an investor and board member of the startup HomeGuru. Mr. Benevides graduated in Advertising and Marketing from Universidade Paulista.
Guilherme Luis Pesenti e Silva. With over 10 years’ experience in M&A and business development, Mr. Presenti has led projects and transactions in different industries in Brazil and abroad. Mr. Pesenti was Head of M&A and Business Development at Petro Rio S.A. (from 2016 to 2019), M&A Senior Manager at Burger King Europe GmbH (Zug, Switzerland) (from 2014 to 2016) and M&A Coordinator at Votorantim Cimentos S.A. (from 2009 to 2012). Mr. Presenti holds a bachelor’s degree in economics and management from Università Cattolica del Sacro Cuore (Milan, Italy – 2008) and an MBA from INSEAD (Fontainebleau, France – 2013).
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Luiz Fernando Ortiz. Mr. Ortiz has 21 years’ experience in the real estate sector and joined Gafisa in 2011 for the acquisition of more than BRL 2 billion in PSV in business. Since 2014, he has been in charge of business development, responsible for launching approximately BRL 3 billion of PSV in residential projects. Currently, Mr.Ortiz is the Real Estate Development Director in charge of managing Gafisa’s portfolio in the State of São Paulo. Mr. Ortiz has a degree in civil engineering from Instituto Mauá de Tecnologia and holds an MBA certificate in Real Estate from University of São Paulo and an MBA in business from Fundação Getulio Vargas.
Fabio Freitas Romano. Mr. Romano’s professional career began in 1997, as an intern at Company S.A., where he reached the position of Director of Incorporations. Before becoming Upcon’s Managing Partner in 2011, he also participated on the Executive Board of large companies, including Gafisa and Yuny. Mr. Romano has participated in more than 140 projects throughout Brazil. Mr. Romano holds a bachelor’s degree in civil engineering from Universidade Mackenzie and holds an MBA in Real Estate Market from the University of São Paulo.
Sheyla Castro Resende. Ms. Resende started her career at Gafisa as a trainee in 2010, and has held several positions in different areas since then. Since 2019, she has been a non-statutory Director of Management & HR, with direct involvement in the restructuring of the Company, and became Vice President of Management & HR in 2021. She graduated in Civil Engineering in 2009 from the Federal University of Juiz de Fora/MG, and has completed post-graduate and extension courses from Fundação Getúlio Vargas, Instituto Falconi, Business School São Paulo and EAP.
Our Relationship with our Executive Officers and Directors
As of December 31, 2021, our board of officers in the aggregate held 4.64% of our share capital and our board of directors in the aggregate held a 0.81% direct or indirect interest in our share capital. As of December 31, 2021, there were no material agreements entered into by us with any members of our board of directors or with any member of our board of officers, other than those pertaining to their roles within the Company. As of December 31, 2021, none of our executive officers held interests in our subsidiaries as directors and/or executive officers. In none of these cases, as of the referenced date, were the interests held material.
As of December 31, 2020, our board of officers in the aggregate held 0.91% of our share capital and our board of directors in the aggregate held a 2.39% direct or indirect interest in our share capital. As of December 31, 2020, there were no material agreements entered into by us with any members of our board of directors or with any member of our board of officers, other than those pertaining to their roles within the Company. As of December 31, 2020, none of our executive officers held interests in our subsidiaries as directors and/or executive officers. In none of these cases, as of the referenced date, were the interests held material.
As of December 31, 2019, our board of officers in the aggregate held 0.0137% of our share capital and our board of directors in the aggregate held a 0.0107% direct or indirect interest in our share capital. As of December 31, 2019, there were no material agreements entered into by us with any members of our board of directors or with any member of our board of officers, other than those pertaining to their roles within the Company. As of December 31, 2019, some of our executive officers held interests in our subsidiaries as directors and/or executive officers. In none of these cases, as of the referenced date, were the interests held material.
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| B. | Compensation |
For each of 2021, 2020 and 2019
Under Brazilian corporate law, the company’s shareholders are responsible for establishing the aggregate amount paid to members of the board of directors, the executive officers and the members of the fiscal council. Once the shareholders establish an aggregate amount of compensation, the members of the board of directors are then responsible for setting individual compensation levels.
For each of 2021, 2020 and 2019, the aggregate compensation we paid to the members of the board of directors was R$0.9 million, R$1.0 million and R$0.9 million, respectively.
For each of 2021 and 2019, the aggregate compensation we paid to the members of the fiscal council was R$240 thousand and R$112 thousand, respectively. In 2020, the fiscal council was not installed.
For each of 2021, 2020 and 2019, the aggregate compensation we paid to the executive officers was R$4.4 milion, R$5.0 million (net of bonuses for Gafisa executive officers) and R$7.0 million (net of bonuses for Gafisa executive officers), respectively, which includes, unless otherwise indicated, fixed compensation, annual bonus amounts and the costs related to Stock Options Programs.
Approximately 58% (40% 2020) of the total compensation paid to Gafisa officers is variable. For the year ended December 31, 2021, the total amount paid related to short-term bonuses was equivalent to 20%.
For each of 2021, 2020 and 2019, the individual compensation we paid to members of our board of directors (fixed compensation), fiscal council (fixed compensation) and officers (fixed compensation, short-term bonus and costs related to Stock Options Programs) is set forth in the tables below.
Gafisa
| 2021 | Board of Directors | Fiscal Council | Executive Officers | |||||||||
| Number of members(1) | 8 | 3 | 8 | |||||||||
| Annual highest individual compensation (in R$) | 120.000 | 80.000 | 600.000 | |||||||||
| Annual lowest individual compensation (in R$)(2) | 120.000 | 80.000 | 308.000 | |||||||||
| Annual average individual compensation (in R$) | 120.000 | 80.000 | 531.291 | |||||||||
| (1) | Based on the average number of members during the period. |
| (2) | Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer). |
| 2020 | Board of Directors | Fiscal Council | Executive Officers | |||||||||
| Number of members(1) | 8 | — | 7 | |||||||||
| Annual highest individual compensation (in R$) | 95,000 | — | 562,834 | |||||||||
| Annual lowest individual compensation (in R$)(2) | 13,333 | — | 287,532 | |||||||||
| Annual average individual compensation (in R$) | 63,375 | 330,404 | ||||||||||
| (1) | Based on the average number of members during the period. |
| (2) | Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer). |
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| 2019 | Board of Directors | Fiscal Council | Executive Officers | |||||||||
| Number of members(1) | 10 | 3 | 6 | |||||||||
| Annual highest individual compensation (in R$) | 105,067 | 39,200 | 700,000 | |||||||||
| Annual lowest individual compensation (in R$)(2) | 36,667 | 24,000 | 225,000 | |||||||||
| Annual average individual compensation (in R$) | 85,333 | 30,200 | 333,000 | |||||||||
| (1) | Based on the average number of members during the period. |
| (2) | Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer). |
| C. | Board Practices |
General Information
We are managed by a board of directors consisting of at least five and up to nine directors and at least two and up to eight executive officers. Our directors are elected for a two-year term and our executive officers are elected for a three-year term. Reelection of officers and directors is permitted. We also have (i) a fiscal council, which under Brazilian Law is not a permanent body, although currently installed, (ii) permanent advisory committees created in accordance with our bylaws, namely: an audit committee and a corporate governance and compensation committee and (iii) executive committees established by the Board of Directors, namely: an investment executive committee, a finance executive committee, and an ethics executive committee. See “—A. Directors and Senior Management Board of Directors.”
Board of Directors
Our board of directors is our decision-making body responsible for formulating general guidelines and policies for our business, including our long term strategies. Among other things, our board of directors is responsible for appointing and supervising our executive officers.
Our board of directors meets at least once every two months and at any other time when a meeting is called by its chairman or by at least two other effective members. The decisions of our board of directors are taken by the majority vote of those members present at the respective meeting and constituting a quorum of at least four members. In the event of a tie vote, the chairman of our board of directors has, in addition to his personal vote, the right to cast a tie-breaking vote. In addition, pursuant to Brazilian corporate law, a member of our board of directors is prevented from voting in any shareholders’ or board of directors’ meeting, or from acting in any business or transaction, in which he may have a conflict of interest with our company.
Under Brazilian corporate law, a company’s board of directors must have at least three members. Our bylaws provide for a board of directors of up to nine members, from which at least 20% or two members, whichever is greater, shall be independent members, as determined by the Listing Rules of the Novo Mercado. Our directors are elected at our annual general shareholders’ meeting for a two-year term of office, with reelection permitted, and are subject to removal at any time by our shareholders at a shareholders’ general meeting. Although the Listing Rules of the Novo Mercado require at least 20% or two independent members, our board of directors currently has seven independent members, out of a total of eight members.
Article 141 of Brazilian corporate law provides that shareholders with at least 10% of a company’s total capital stock may request the adoption of the multiple voting procedure for the election of the board of directors, even where there is no provision for this in the company’s bylaws. The multiple voting procedure grants each share as many votes as the number of board members, and allows shareholders to allocate either all of their votes to a single candidate or to distribute their votes among several candidates.
All the voting proceedings discussed in the previous paragraphs currently apply to our company.
As prescribed by CVM Instruction No. 282, of June 26, 1998, the minimum voting capital percentage required for the adoption of the multiple voting procedure in publicly-held companies may be reduced as a result of the amount of its capital stock. The referred minimum percentage may vary from 5% to 10% depending on the amount
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of our capital stock, as prescribed in the aforementioned CVM Instruction No. 282, of June 26, 1998. Based on the current amount of our capital stock, shareholders representing 5% of our total capital stock may request the adoption of the multiple voting procedure in order to elect the members to our board of directors. If the adoption of the multiple voting procedure is not requested, directors are elected by a majority vote of our shareholders, and such shareholders who, individually or collectively, represent at least 10% of our shares, are entitled to appoint, in a separate vote, a director and its alternate.
The Listing Rules of the Novo Mercado also provide that all members of our board of directors and our board of officers must comply with the arbitration clause in the bylaws before taking office.
Executive Officers
Under Brazilian corporate law, a company’s board of executive officers must have at least two members, and each of such members must be a resident in Brazil. Furthermore, no more than one-third of our directors may serve as members of our board of officers at any given time. In addition, under the Listing Rules of the Novo Mercado, the chief executive officer of our company shall not serve as the chairman of the board of directors.
Our executive officers are our legal representatives and are primarily responsible for managing our day-to-day operations and implementing the general policies and guidelines set forth in our shareholders’ general meetings and by our board of directors. Our bylaws require that our board of officers be composed of at least two members and a maximum of eight members. The members of our board of officers are appointed by our board of directors for a term of three-years, and may be reelected or removed by our board of directors at any time. Our bylaws and our board of directors determine the role of our executive officers. Currently, we have a board of officers comprised of five members: Guilherme Augusto Soares Benevides, Guilherme Luis Pesenti e Silva, Luiz Fernando Ortiz Fabio Freitas Romano and Sheyla Castro Resende.
The CFO/IRO and the COO submit the business plan, annual budget, investment plans and new expansion plans for Gafisa and our subsidiaries to the approval of the board of directors. They enact these plans and develop our strategy and operational plan, including the manner in which we will execute the resolutions approved at the shareholders’ meeting and by the board of directors. Together with the other officers, they also supervise and coordinate our activities. The officer in charge of investor relations supplies our financial information to investors, the CVM and the B3, and is also responsible for keeping an updated register based on the applicable regulations.
Fiscal Council
Under Brazilian corporate law, the fiscal council is a corporate body independent from the management of the company and its external auditors. The company fiscal council is not a permanent body, and whenever installed, must consist of no less than three and no more than five members. The primary responsibility of the fiscal council is to review management’s activities and the company’s financial statements and to report its findings to the shareholders of the company. The fiscal council is not equivalent to an audit committee as contemplated by the Securities Exchange Act, as amended. Under Brazilian corporate law, a fiscal council must be established at a shareholders’ general meeting upon request of shareholders representing at least 10% of the shares with voting rights, or 5% of the shares with no voting rights, and its members shall remain in office until the annual general shareholders’ meeting of the year following their election. Each member of the fiscal council is entitled to receive compensation in an amount equal to at least 10% of the average amount paid to each executive officer (excluding benefits and profit sharing).
As prescribed by CVM Instruction No. 324, of January 19, 2000, the minimum voting capital percentage required to request the fiscal council to be installed may be reduced as a result of the amount of the company’s capital stock. Based on the current amount of our capital stock, shareholders representing 2% of our voting capital stock may request the fiscal council to be installed. The referred minimum percentage may vary from 2% to 8% depending on the amount of our capital stock, as prescribed in the aforementioned CVM instruction.
Individuals who are also employees or members of the administrative bodies of our company, of companies controlled by us, or of companies forming a group of companies with us (pursuant to Chapter XXI of Brazilian corporate law), as well as spouses or parents of our management, cannot serve on the fiscal council.
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Our by-laws provide for a non-permanent fiscal council composed of at least three and up to five members, which can be formed and have its members elected at the shareholders’ general meeting, as requested by the shareholders, in the events set forth by Brazilian corporate law. When in operation, the compensation of our fiscal council is set at the shareholders’ general meeting that elects it.
On April 30, 2021, our shareholders decided to install the Fiscal Council, and to appoint Elias de Matos Brito, Ronaldo dos Santos Machado, Luiz West as members, with the respective alternates being Viviane Leite Ventura, João Batista Irenede Menezes e Anderson dos Santos Amorim.
We have also established a permanent statutory audit committee. See “—Audit Committee.”
Audit Committee
Our bylaws provide for an Audit Committee that convenes regularly, as often as it determines is appropriate to carry out its responsibilities. The Audit Committee must be comprised of at least three members, all of which must be independent members. The Audit Committee is currently composed of Gilberto Braga, Pedro Carvalho de Mello and Thomas Cornelius Azevedo Reichenheim. Our board of directors has determined Gilberto Braga and Pedro Carvalho de Mello are each independent for the purpose of Rule 10A-3 of the Exchange Act. Our board of directors has determined that Gilberto Braga is an audit committee financial expert within the meaning of the regulations promulgated by the United States Securities and Exchange Commission.
This committee has responsibility for, among others, planning and reviewing our annual and quarterly reports and accounts with the involvement of our auditors, focusing particularly on compliance with legal requirements and accounting standards, and ensuring that an effective system of internal financial controls is maintained, as set forth in the Company’s by-laws. The ultimate responsibility for reviewing and approving our annual and quarterly reports and accounts remains with our directors.
Corporate Governance and Compensation Committee
Our bylaws provide for a Corporate Governance and Compensation Committee that convenes regularly, as often as it determines is appropriate to carry out its responsibilities. The Corporate Governance and Compensation Committee must be comprised of at least three members, all of which must be independent. The Corporate Governance and Compensation Committee is currently comprised of Antonio Carlos Romanoski, Nelson Sequeiros Rodriguez Tanure, and Thomas Cornelius Azevedo Reichenheim. This committee, among other things, considers and periodically reports on matters relating to the size, identification, selection and qualification of the board of directors, executive officers and candidates nominated for the board of directors and its committees, is responsible for overseeing compliance with the corporate governance principles applicable to us under our bylaws and other policies, as well as for proposing improvements and changes to such applicable principles; reviews and makes recommendations to our directors regarding its compensation policies and all forms of compensation to be provided to our executive officers and other employees.
| D. | Employees |
As of December 31, 2021, we had 400 employees at Gafisa across the following states:
| States | Gafisa Number of Employees | |||
| Curitiba | 2 | |||
| Rio de Janeiro | 45 | |||
| São Paulo | 353 | |||
| Total | 400 | |||
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The table below shows the number of employees for the periods presented, within the macro areas of the company:
| Period | Operations | Administration & Finance | Business Development | Sales | Total | |||||||||||||||
| 2021 | 159 | 171 | 29 | 41 | 400 | |||||||||||||||
| 2020 | 136 | 109 | 11 | 21 | 277 | |||||||||||||||
| 2019 | 98 | 90 | 8 | 19 | 215 | |||||||||||||||
| 2018 | 234 | 127 | 26 | 35 | 422 | |||||||||||||||
| 2017 | 242 | 213 | 60 | 131 | 646 | |||||||||||||||
Our administrative employees carry out management, finance, information technology, legal and human resources activities among others. Our construction site employees focus on management and oversight of our construction workers, the majority being outsourced. The outsourced professionals are hired by the contractors to carry out various tasks on the construction sites. As of the date of this annual report, we estimate that approximately 971 outsourced professionals are providing services to Gafisa across Brazil, all in the Southeast region of Brazil.
We offer training programs to our employees, subcontractors and outsourced employees. All of our professionals involved in the construction of our developments are trained prior to the beginning of their work and are supervised directly by our engineers.
The majority of our employees and outsourced professionals of the State of São Paulo are enrolled with the Civil Construction Industries Workers’ Union (SINTRACON). As a rule, the Civil Construction of Large Building Industry in the State of São Paulo (SINDUSCON-SP) annually negotiates with SINTRACON collective bargaining agreements applicable to our employees. The most recent collective bargaining agreement for our employees and outsourced professionals in the State of São Paulo was executed in May 2021, establishing a salary adjustment of 7.59% as of May 2021. This collective bargaining agreement became effective in May 2021 and will expire in April 2022. The majority of our employees and outsourced professionals of the State of Rio de Janeiro are members of the Civil Construction, Tiles, Cement, Marble and Granite Products, Road Construction, Paving, and Land Moving and Industrial Maintenance and Assembly Industries’ Workers Union of the Rio de Janeiro Municipality (SINTRACONST-RIO). As a rule, the Civil Construction of Large Building Industry in the State of Rio de Janeiro (SINDUSCON-RIO) annually negotiates with SINTRACONST-RIO the collective bargaining agreements applicable to our employees. The most recent collective bargaining agreement for our employees and outsourced professionals in the State of Rio de Janeiro was executed in March 2020, establishing a salary adjustment of 3.5% as of March 2021. This collective bargaining agreement became effective in March 2021 and expired in March 2022. As of the date of this annual report, we are negotiating the collective bargaining agreements for our employees in the states of São Paulo and Rio de Janeiro related to 2022.
We believe that our relationship with our employees and workers’ unions is good. In all the regions where we operate, we maintain a stable relationship with the workers unions, which generally decreases the risk of strikes.
The benefits we offer to our permanent employees include life insurance, dental plan, health insurance, meal tickets and profit sharing.
Health and Safety
We are committed to preventing work-related accidents and diseases. Accordingly, we maintain a risk prevention program which seeks to maintain and enhance the health and physical conditions of our employees, by anticipating, recognizing, evaluating and controlling any existing or potential environmental risks in the workplace.
In addition, we have an internal committee for the avoidance of accidents, which seeks to prevent diseases and accidents from occurring in the workplace. We make significant investments in this area, providing frequent training programs for our construction employees as well as for our subcontractors’ employees, and we require our subcontractors to follow strict guidelines.
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| E. | Share Ownership |
As of the date of this annual report, our directors and executive officers do not hold, on an aggregate basis, any direct or indirect interest of greater than 5% of our total share capital or of the share capital of any of our subsidiaries or jointly-controlled entities. As of December 31, 2020, some of our executive officers held interests in our subsidiaries and jointly-controlled entities as directors and executive officers. In none of these cases, as of the date of this annual report, were the interests held material.
The table below sets forth the number of our total shares beneficially owned by each of our directors and executive officers as of the date of this annual report:
|
Name |
Position |
Number of Shares Owned |
| Antonio Carlos Romanoski | Member of the Board of Directors | 51,935 |
| Eduardo Larangeira Jácome | Member of the Board of Directors | 195,437 |
| Nelson Sequeiros Rodriguez Tanure | Member of the Board of Directors | 752,150 |
| João Antonio Lopes Filho | Member of the Board of Directors | 353,666 |
| Gilberto Benevides | Member of the Board of Directors | 14,233,444 |
| Thomas Cornelius Azevedo Reichenheim | Member of the Board of Directors | 64,120 |
| Luiz Fernando Ortiz | Statutory Officer | 104,534 |
| Guilherme Luis Pesenti e Silva | Statutory Officer | 87,249 |
| Guilherme Benevides | Statutory Officer | 1,885,716 |
| Fabio Romano | Statutory Officer | 351,853 |
Stock Option Plans
Gafisa’s stock option plans seek to: (1) encourage our expansion and success by allowing our executives and key employees to acquire shares of our capital stock in order to encourage their integration with the company; (2) allow us to obtain and retain the services of executives and key employees by offering them the benefit of becoming one of our shareholders; and (3) align the interests of our executives and key employees with the interests of our shareholders.
We have individual agreements with our key employees and executives for Gafisa, under which they are entitled to purchase shares of our capital stock pursuant to the terms and conditions of the stock option plans and the specific conditions set forth in their agreements.
In 2002, our shareholders ratified the terms and conditions of our stock option plan. A standard stock option program to grant subscription rights related to our preferred shares was approved by our board of directors at a meeting held on April 3, 2000. As a result of our entry in the Novo Mercado segment of B3, our preferred shares were converted into common shares, and therefore all options relating to this plan grant subscription rights related to our common shares. Currently, we do not have any stock option grants related to this plan.
On February 3, 2006, our shareholders approved a new stock option plan. Under the 2006 stock option plan, our board of directors may release further programs on a regular basis of options to purchase up to 5% of the total outstanding shares of our company, as set forth in the 2006 stock option plan. Such new programs would grant our executives and key employees the right to subscribe and/or acquire our shares for a set price, under terms and conditions according to the agreements set for each participant. Currently, we do not have any stock option grants related to this plan.
Our most recent stock option plan was approved on May 18, 2008 during a special shareholders’ general meeting. Under this new stock option plan, our board of directors may create additional programs on a regular basis for options to purchase up to 5% of the total outstanding shares of our company, as set forth in the 2008 stock option plan.
Under this stock option plan, the board of directors may also grant different types of options to certain beneficiaries, namely “A options,” which are regular options, and “B options,” for the exercise price of R$0.09. The exercise of B options, if granted, is subject to the proportional purchase of common shares or exercise of a regular
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option under this 2008 stock option plan, according to the terms and conditions set forth in each program, and to lapse two years from the common share purchase date.
On April 30, 2021, our shareholders approved a new stock option program. However, as of the date of this annual report, all active stock option programs follow the 2008 stock option plan.
2012 Programs
Two stock option programs were approved in 2012 for executive officers and key employees.
The first is a standard stock option program granting subscription rights related to our common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire our shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.
Under the second program, the board of directors may grant different types of B options for the exercise price of R$0.09 per share. The exercise of B options, if granted, is subject to the proportional exercise of regular options at market price, granted under this second program, according to the terms and conditions set forth in such second program, and to lapse one year from the grant date.
As of the date of this annual report, options to purchase 302.532 shares of our common shares have been granted to key employees and executive officers pursuant to this second program. The options granted included 222.912 “B” options, and all of them have been acquired or expired pursuant to such program.
2013 Programs
Two stock option programs were approved in 2013 for executive officers and key employees.
The first is a standard stock option program granting subscription rights related to our common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire our shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.
As of the date of this annual report, 101,612 options to purchase shares of our common shares have been granted to executive officers pursuant to this agreement and none has been acquired. Out of the amount granted, 51,331 have been expired pursuant to such agreements.
Under the second program, the board of directors may grant different types of B options for the exercise price of R$0.09 per share. The exercise of B options, if granted, is subject to the proportional exercise of regular options at market price, granted under this program, according to the terms and conditions set forth in this second program, and to lapse one year from the grant date.
As of the date of this annual report, options to purchase 297.677 shares of our common shares have been granted to key employees and executive officers pursuant to this second program. The options granted included 217.222 “B” options, and all of them have been acquired or expired pursuant to such program.
2014 Programs
One stock option program was approved in 2014 for executives and key employees.
Under this program, the board of directors may grant different types of B options for the exercise price of R$0.09 per share. The exercise of B options, if granted, is subject to the proportional exercise of regular options at market price, granted under this program, according to the terms and conditions set forth in each program, and to lapse one year from the grant date.
As of the date of this annual report, options to purchase 323.500 shares of our common shares have been granted to employees and executives pursuant to this agreement. The options granted included 124.651 “B” options. Out of the total options granted, all of them have been acquired, expired or cancelled pursuant to such program.
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2015 Programs
One stock option program was approved in 2015 for executives and key employees.
This program is a standard stock option program granting subscription rights related to our common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire our shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.
As of the date of this annual report, options to purchase 264.750 shares of our common shares have been granted to key employees and executive officers pursuant to this agreement. Out of the total options granted, all of them have been acquired, expired or cancelled pursuant to such program.
In addition to the above stock option program, the board of directors approved a “Phantom Shares” program, payable in cash in accordance with the amount of options exercisable by the executives and key employees during the exercise period under the 2015 stock option program.
2016 Programs
One stock option program was approved in 2016 for executives and key employees.
This program is a standard stock option program granting subscription rights related to our common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire our shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.
As of the date of this annual report, options to purchase 163.900 shares of our common shares have been granted to key employees and executive officers pursuant to this agreement. Out of the total options granted, none have been acquired or expired pursuant to such agreement.
In addition to the above stock option program, the board of directors approved a “Phantom Shares” program, payable in cash in accordance with the amount of options exercisable by the executives and key employees during the exercise period under the 2016 stock option program.
2017 Programs
No stock option program was approved in 2017 for executives and key employees.
2018 Programs
One stock option program was approved in 2018 for executives and key employees.
This program is a standard stock option program granting subscription rights related to our common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire our shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.
As of the date of this annual report, options to purchase 2.685.474 shares of our common shares have been granted to key employees and executive officers pursuant to this agreement. Out of the total options granted, 2.252.076 have been canceled or expired pursuant to such agreement.
After the vesting period of 4 years, the options may be exercised in whole or in part as follows: 60% as of March 30, 2022; 20% as of March 30, 2023 and 20% remaining as of March 30, 2024. The price set for the 2018 Program was R$15.00.
2019 Programs
No stock option program was approved in 2019 for executives and key employees.
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2020 Programs
No stock option program was approved in 2020 for executives and key employees.
2021 Stock Option Plan and Programs
On April 30, 2021, our shareholders approved a new stock option plan. However, as of the date of this annual report, all active stock option programs follow the 2008 stock option plan. The exercise price for all programs to be approved under the 2021 stock option plan is the average price of Gafisa stock during the immediately preceding 4th quarter, with a 20% discount.
| Gafisa Active Programs | Number of Stock Options granted (2) | Number of Stock Options Outstanding (Not Expired or exercised) as of the date of this annual report (2) | Exercise Price per Stock Option (2) | Expiration | ||||||||||
| August 2012 (Standard SOP) (1) | 264,036 | 77,852 | 17.01 | August 2025 | ||||||||||
| May 2013 (Standard SOP) (1) | 101,612 | 21,210 | 28.29 | May 2027 | ||||||||||
| April 2016 (Standard SOP) (Gafisa) | 163,900 | 176,221 | 19.40 | April 2022 | ||||||||||
| March 2018 (Standard SOP) (Gafisa) | 2,685,474 | 433,398 | 15.00 | March 2025 | ||||||||||
| March 2021 (Standard SOP) (Gafisa) | 3,243,126 | 2,270,188 | 3.49 | March 2023 | ||||||||||
| Total | 2,978,869 | |||||||||||||
| (1) | Options unvested or vested and not yet exercised. |
| (2) | Considering the reverse stock split of all Gafisa’s shares at a ratio of 13.483023074 to 1 consummated on March 23, 2017 and other adjustments. |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| A. | Major Shareholders |
As of the date of this annual report, the following shareholders held more than 5.0% of our common shares:
| Shareholders | Shares | (%) | ||||||
| MAM Asset Management Gestora de Recursos | 50,650,604 | 15.01 | % | |||||
| Planner Corretora de Valores | 16,231,139 | 4.81 | % | |||||
| JPMorgan Chase & Co | 13,227,872 | 3.92 | % | |||||
| Others | 257,336,111 | 76.17 | % | |||||
| Total | 337,445,727 | 100.00 | % | |||||
The following table sets forth information of our directors and officers as a group, as well as common shares held in treasury and other shares in the public float. Each holder of common shares has the same rights.
| Shareholders | Shares | (%) | ||||||
| Board of Directors and Officers | 18,398,189 | 5.45 | % | |||||
| Treasury shares | 296,211 | 0.09 | % | |||||
| Public Float | 318,751,327 | 94.46 | % | |||||
| Total | 337,445,727 | 100.00 | % | |||||
We had a total of 36 record shareholders located in the United States. We are not aware of any shareholders’ agreement currently in force with our main shareholders.
| B. | Related Party Transactions |
Other than arrangements which are described in “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management Board of Directors—Our Relationship with our Executive Officers and
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Directors” and the transaction described below, since January 1, 2007, there has not been, and there is not currently proposed, any material transaction or series of similar transactions to which we were or will be a party in which any director, executive officer, holder of 5% of our capital stock or any member of their immediate family had or will have a direct or indirect interest.
Under Brazilian corporate law, our directors and executive officers cannot vote on any matter in which they have a conflict of interest and such transactions can only be approved on reasonable and fair terms and under conditions that are no more favorable than the terms and conditions prevailing in the market or offered by third parties.
We participate in the development of real estate ventures with other partners, directly or through related parties, based on the constitutive documents of condominiums and/or consortia. The management structure of these enterprises and the cash management are centralized in the lead partner of the enterprise, which manages the construction schedule and budgets. Thus, the lead partner ensures that the investments of the necessary funds are made and allocated as planned. The sources and uses of resources of the venture are reflected in the balance sheet of the ventures, reflecting the respective participation percentages of the partners, which are not subject to inflation adjustments or financial charges and do not have a predetermined maturity date. The average term for the development and completion of the projects in which the resources are invested is between 24 and 30 months. Please refer to Note 21 to our consolidated financial statements for further information on balances with related parties.
As of and for the years ended December 31, 2021, 2020 and 2019, we have not entered into any loan or other type of financing agreement with our directors or executive officers. In the year ended December 31, 2021, the amount of transactions related to units sold to management members was R$2.8 million. In the years ended December 31, 2020 and 2019, there were no units sold to management members. There was no amount receivable as of December 31, 2021, 2020 and 2019.
| C. | Interests of Experts and Counsel |
Not applicable.
| A. | Consolidated Statements and Other Financial Information |
For our consolidated financial statements and notes thereto see “Item 18. Financial Statements.”
Legal Proceedings
We are currently party to several legal and administrative proceedings arising from the normal course of our business, principally relating to civil, environmental, tax and labor claims. We establish provisions in our balance sheets relating to potential losses from litigation based on estimates of probable losses. Brazilian GAAP requires us to establish provisions in connection with probable losses and we record a provision when, in the opinion of our management, we feel that an adverse outcome in a litigation is probable and a loss can be estimated. The determination of the amounts provisioned is based on the amounts involved in the claims and the opinion of external legal counsel.
Civil Claims
As of December 31, 2021, we were a party to 3.636 civil claims, totaling R$223.2 million. Most of these civil claims involve ordinary course of business matters relating to the development of our properties, including annulment of contractual clauses and termination of agreements with the reimbursement of the amounts paid. We have also minority civil claims where we discuss the resolution of the construction partnership.
As of December 31, 2021, the provisions related to civil claims include R$17.7 million related to lawsuits in which the Company is included as successor in enforcement actions for judicial and extrajudicial debts, in which the original debtor is a former shareholder of Gafisa, Cimob Companhia Imobiliária (“Cimob”) or companies that are part of the economic group of Cimob. The plaintiff alleges that the Company should be liable for the debts of Cimob. We have made judicial deposits amounting to R$20.2 million in connection with these claims. The
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Company is filing appeals against all decisions, as it considers that the inclusion of Gafisa in the claims to be legally unreasonable; these appeals aim at releasing amounts and obtaining the recognition that it cannot be held liable for the debt of a company that does not have any relationship with Gafisa. The Company has obtained both favorable and unfavorable decisions on appeal, and the final decision of each pending appeal cannot be predicted at present.
The Company is a plaintiff in proceedings against Cimob and its former and current controlling shareholders. The Company is seeking (i) restitution of amounts already paid by the Company in connection with the lawsuits in which the Company is included as successor in enforcement actions for judicial and extrajudicial debts proceedings in which the original debtor is Cimob and (ii) the recognition of the court that it does not have any relationship with Cimob and cannot therefore be held liable for the debt of Cimob. The final decision is pending, and cannot be predicted at present.
As of December 31, 2021, the provision for our civil claims amounted to R$237.7 million.
Environmental Claims
As of December 31, 2021, we were the defendants in certain environmental claims alleging damage to a permanent conservation area and we are currently not able to estimate the aggregate amount of such claims.
In addition, we are occasionally party to other administrative environmental inquiries or claims by the Public Prosecution Offices or by other governmental agencies or third parties. These inquiries may result in public environmental claims against us and the findings in these inquires may give rise to other administrative and criminal claims. However, based on currently available information, we do not believe these matters are, or are likely to be in the future, material to our business or financial condition.
In Case No. 0020654-60.2011.4.01.3200, federal prosecutors (Ministério Público Federal) argue that the company has built one of the towers of “Riviera da Ponta Building” on Federal Government property, next to a riverbank. The federal prosecutors claimed R$88.3 million in damages, comprising both environmental liability for construction in an allegedly “protected area” and payoff for the property. We estimate the probability of the Company to be sentenced to pay R$88.3 million as remote because we believe that the federal prosecutors’ computations to get this number are unreasonable, since neither the value nor the extension of the area supposedly invaded are accurate.
As of December 31, 2021, we have made no provisions for environmental claims.
Tax Claims
As of December 31, 2021, we were party to several tax proceedings involving tax liabilities in the aggregate amount of R$180 million. As of December 31, 2021, the provision for tax liabilities amounted to R$1.0 million. In addition, we have deposited R$37,3 million with the court in connection with some of these proceedings. These amounts take into consideration the tax liabilities of our subsidiaries, in proportion to our interest in their share capital. The main tax proceedings to which we are a part are described below.
Several municipalities charge a municipal tax on construction services on an arbitrated basis, which varies depending on the characteristic of the construction. We have filed lawsuits against the municipalities of São Paulo and Rio de Janeiro to challenge the calculation of the arbitrated basis on several of our developments under construction. In these proceedings, we deposited R$14.1 million with the courts and we are awaiting the final decisions.
In addition, the municipality of São Paulo has issued tax assessments against us. We have filed administrative defenses and are awaiting the final administrative decisions. The total amount involved in these proceedings in 2021 is R$5.6 million.
We filed a lawsuit against the Brazilian Internal Revenue (Receita Federal) to challenge the increase in the PIS and Cofins rates from 0% to 0.65% and 4%, respectively, on financial income earned by legal entities subject to the non-cumulative regime, on the basis that in our view, this increase is illegal and unconstitutional. Accordingly, we requested from the Brazilian courts a preliminary injunction prohibiting the Brazilian Ministry of Finance from collecting the PIS and Cofins contributions on financial revenues. The Brazilian courts denied our request. We
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appealed the decision and as of December 31, 2021, we had deposited R$20 million with the court in connection with the lawsuit, which is pending a final decision.
We are also party to three proceedings with the Brazilian Internal Revenue (Receita Federal) related to taxes in connection with our stock options plans, which the Brazilian Internal Revenue (Receita Federal) alleges that we owe. The total amount of the proceedings is R$38 million, and we have filed our defenses to dismiss these proceedings as we believe we do not owe these taxes. In 2020 a judicial decision dismissed a R$6 million assessment. In 2021, through another lawsuit we filed our defenses to dismiss a R$7 million assessment. As of the date of this annual report, these proceedings are pending and no provisions have been made.
Labor Claims
As of December 31, 2021, we were a defendant in 916 labor claims resulting from our ordinary course of business, of which approximately 80% were filed by outsourced workers and approximately 20% were filed by our former employees. The alleged legal bases for these claims mainly relate to termination benefits, overtime hours, employee relationship and dismissal rights. As of December 31, 2021, the total value involved in the labor claims filed against us was approximately R$79.5 million. As of December 31, 2021, the provision for labor claims amounted to R$6.9 million.
In addition, we are periodically party to other administrative labor inquiries or claims by the Public Prosecution Offices or by other governmental agencies or third parties. These inquiries may result in public labor claims against us and the findings in these inquires may give rise to other claims. However, based on currently available information, we do not believe these matters are, or are likely to be in the future, material to our business or financial condition.
We have adopted certain measures to audit third party contractors. The objective of these measures is to evaluate compliance by third party contractors with labor obligations to their employees. We believe this will help us minimize the risks of potential labor liabilities.
Arbitration
We are also involved in arbitrations proceedings, commenced by us against a partner seeking to discuss damages suffered in connection with the development of certain real estate projects, stemming from breach of contract obligations.
In summary the arbitrations proceedings are:
Arbitration POLO:
The Company requested the filing of an Arbitration Procedure before the Mediation and Arbitration Center of the Brazil-Canada Chamber of Commerce, on July 31, 2018, against Yogo Participações and Empreendimentos Imobiliários S.A. (“Yogo”); Polo Real Estate Fund of Investments and Holdings and Polo Capital Real Estate Gestão de Recursos Ltda. as Yogo shareholders; and Comasa - Construtora Almeida de Martins Ltda., in connection with alleged breaches of certain contractual obligations. As of the date of this annual report, both respondents were summoned, and the arbitration is ongoing.
Arbitration BKO:
In October 2013, Gafisa, SPE 111 and SPE 81 filed an arbitration proceeding against BKO alleging: (i) a default by BKO under the London Ville, Avant Garde and Vittá construction contracts, due to (i.a.) non-compliance with the physical schedule of the works, and (i.b.) overflow of the maximum guaranteed price / target cost and / or constructive defects; (ii) unilateral and unjustified termination by BKO of the Avant Garde and Vittá construction contracts; and (iii) the unenforceability of invoices issued by BKO under the construction contracts of Avant Garde and Vittá. BKO claims (i) in relation to the London Ville venture, that Gafisa failed to comply with the MOU signed between the parties to complete the work; (ii) in relation to the Avant Garde project, that Gafisa never paid the contractual bonus that BKO would be entitled since it has achieved the Target Cost stipulated in the first phase of the construction contract, which affected the second phase of the contract; (iii) in relation to the Vittá venture, that Gafisa ceased to pay for the work, which led to the termination of the contract. During the evidence stage of the
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proceedings, an accounting and engineering examination was commissioned. The expert examination was completed and, following the hearing of witnesses that took place on May 9, 2019 and May 10, 2019, the parties presented their final arguments. On November 12, 2019, the arbitration court ruled partially in favor of Gafisa in order to recognize most of the pleadings. The court also granted part of BKO’s pleadings. However, the decision needed to be clarified, so Gafisa filed a motion for clarification on November 18, 2019. BKO also filed a motion for clarification on November 20, 2019. Both motions were partially granted and accordingly, Gafisa’s credit represents R$69 million, which is fully recorded in our financial statements, and BKO’s credit represents R$0.9 million.
In parallel, taking into account possible deviations of capital and assets by BKO, Gafisa requested the seizure of R$59.9 million, and the Arbitral Tribunal granted the seizure of 5% (five percent) of BKO’s net sales and credits arising from a lawsuit filed by BKO (Case file No. 1068081-53.2015.8.26.0100). The seizure of net sales was later replaced by an attachment over more than 20 real estate properties belonging to BKO and some affiliated companies. The affiliated companies filed a motion to dismiss the attachment over their assets. The lower court granted the plaintiffs’ request in limine. In response, Gafisa filed an appeal to the Court of Appeals in order to reestablish the attachment. On February 14, the court of appeals upheld Gafisa’s appeal, and the attachment was shortly re-established, to be again suspended on September, while pending an appeal to the Superior Court. As of the date of this annual report, the orders are still pending a final decision.
As of December 31, 2021, we had not recorded any provisions for our arbitration claims.
Other Developments
On June 14, 2012, we received a subpoena from the SEC Division of Enforcement related to the Matter of Certain 20-F Filer Home Builders (HO-11760). The subpoena requests that we produce all documents from January 1, 2010 to the present related to the preparation of our financial statements, including, among other things, copies of our financial policies and procedures, board and audit committee and operations committee minutes, monthly closing reports and financial packages, any documents relating to possible financial or accounting irregularities or improprieties and internal audit reports. The SEC’s investigation is a non-public, fact-finding inquiry and it is not clear what action, if any, the SEC intends to take with respect to the information it gathers. The SEC subpoena does not specify any charges. The Company has already submitted all the information requested by the SEC, which as of the publication of these financial statements has not issued any opinion. We have not received any further notice from the SEC after delivering the requested information in the first half of 2012.
On July 31, 2012, we received a letter from the CVM: CVM/SEP/GEA-5/ Letter No. 208/2012, requesting information related to criteria for measurement and recognition of revenue and enhancement in the disclosure of some notes to our financial information. We have already provided all the information requested by the CVM. In addition, on February 19, 2013, we received a letter from the CVM: CVM/SEP/GEA-5/ Letter No. 040/2013 recommending enhancements to the notes to our financial statements regarding the percentage of assets by venture that is included in the structures of equity segregation of the purchase.
On July 11, 2013, the Company received CVM/SEP/GEA-5 Letter No. 240/2013, which requested information on the criteria for measuring and recognizing revenues. The Company has already provided all the information requested by CVM. On November 2013, we received a letter from the CVM: SEP/GEA-5/no 362/2013, requesting information related to some control deficiencies. We have already provided all the information requested by the CVM.
The CVM letters listed above led to administrative proceeding “Processo Administrativo Sancionador Nº RJ2014-9034” involving Wilson Amaral de Oliveira and Alceu Duilio Calciolari, former executive officers of the Company, and André Bergstein, former chief financial officer of the Company.
Wilson Amaral de Oliveira, Alceu Duilio Calciolari and André Bergstein presented their defenses on December 8, 2014, and submitted first proposals to enter into leniency agreements (termos de compromisso) on January 1, 2015, followed by second proposals in August 2017, which were approved by the CVM and entered into in September 2017.
Pursuant to the leniency agreements, Wilson Amaral de Oliveira, Alceu Duilio Calciolari and André Bergstein were required to pay certain administrative fines, which they duly paid and following which administrative proceeding Nº RJ2014-9034 with the CVM was closed.
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Dividend Policy
The amount of any of our distributions of dividends and/or interest on shareholders’ equity will depend on a series of factors, such as our financial conditions, prospects, macroeconomic conditions, tariff adjustments, regulatory changes, growth strategies and other issues our board of directors and our shareholders may consider relevant, as discussed below.
Amounts Available for Distribution
At each annual general shareholders’ meeting, our board of directors is required to propose to our shareholders how our earnings of the preceding fiscal year are to be allocated. For purposes of Brazilian corporate law, a company’s income after federal income tax for such fiscal year, net of any accumulated losses from prior fiscal years and amounts allocated to debentures, employees’ and management’s participation in earnings and founders’ shares, represents its “net income” for such fiscal year. In accordance with Brazilian corporate law, an amount equal to the company’s “net income” may be affected by the following:
| · | reduced by amounts allocated to the legal reserve; |
| · | reduced by amounts allocated to any statutory reserve; |
| · | reduced by amounts allocated to the contingency reserve, if any; |
| · | reduced by amounts allocated to the tax incentives reserve; |
| · | reduced by amounts allocated to the investment reserve; |
| · | increased by reversals of contingency reserves recorded in prior years; and |
| · | increased by amounts allocated to the investment reserve, when realized and if not absorbed by losses. |
Our calculation of net income and allocation of funds to our reserves for any fiscal year are determined on the basis of our audited unconsolidated financial statements for the immediately preceding fiscal year.
Allocation of Net Income
According to Brazilian corporate law, we have two types of reserve accounts: (1) profit reserves and (2) capital reserve.
Profit Reserves
Our profit reserves consist of the following:
| · | Legal Reserve. Under Brazilian corporate law and our by-laws, we are required to maintain a legal reserve to which we must allocate 5% of our net income for each fiscal year until the aggregate amount of such reserve equals 20% of our share capital. However, we are not required to make any allocations to our legal reserve in a fiscal year in which the legal reserve, when added to our other established capital reserves, exceeds 30% of our total share capital. The portion of our net income allocated to our legal reserve must be approved by our annual general shareholders’ meeting and the balance of such reserve may only be used to increase our share capital or to absorb losses, but is unavailable for the payment of dividends. As of December 31, 2021, there was a total amount of R$4.5 million allocated to our legal reserve. |
| · | Statutory Reserve. Under Brazilian corporate law, we are permitted to provide for the allocation of part of our net income to discretionary reserve accounts that may be established in accordance with our bylaws. The allocation of our net income to discretionary reserve accounts may not be made if it serves to prevent distribution of the mandatory distributable amount. According to our bylaws, up to 71.25% of our net income may be allocated to an investment reserve to finance the expansion of our activities and the activities of our controlled companies by subscribing for capital increases, creating new |
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projects or participating in consortia or any other type of association to achieve our corporate purpose. The allocation of this reserve cannot jeopardize the payment of the mandatory dividends. This statutory reserve is established in accordance with our bylaws as an investment reserve, and such reserve may not exceed 80% of our share capital. As of December 31, 2021, there was a total amount of R$64.3 million allocated to our statutory reserve.
| · | Contingency Reserve. Under Brazilian corporate law, a percentage of our net income may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Management must indicate the cause of the anticipated loss and justify the establishment of the reserve for allocation of a percentage of our net income. Any amount so allocated in a prior year either must be reversed in the year in which the justification for the loss ceases to exist or charged off in the event that the anticipated loss occurs, whose value can be estimated. The allocations to the contingency reserve are subject to the approval of our shareholders in a general shareholders’ meeting. As of December 31, 2021, there was no amount allocated to our contingency reserve. |
| · | Non-realized Profit Reserve. Under Brazilian corporate law, the amount by which the mandatory distributable amount exceeds the “realized” net income in a given fiscal year, as proposed by the board of directors, the excess may be allocated to the investment reserve. Brazilian corporate law defines “realized” net profits as the amount by which net profits exceed the sum of (1) the net positive results, if any, from the equity method of accounting and (2) the net profits, net gains or net returns resulting from transactions or the accounting of assets and liabilities based on their market value, to be received after the end of the following fiscal year. All amounts allocated to the non-realized profit reserve must be paid as mandatory dividends when those “non-realized” profits are realized if they have not been designated to absorb losses in subsequent periods. As of December 31, 2021, there was no amount allocated to our non-realized profit reserve. |
| · | Retained Earnings Reserve. Under Brazilian corporate law, a portion of our net income may be reserved for investment projects in an amount based on a capital expenditure budget approved by our shareholders. If such budget covers more than one fiscal year, it might be reviewed annually at the general shareholders’ meeting. The allocation of this reserve cannot jeopardize the payment of the mandatory dividends. As of December 31, 2021, the amount of R$174.7 million was allocated to our retained earnings reserve. |
Capital Reserves
The capital reserve is formed by (a) amounts received by shareholders in excess of the par value of shares issued (premium on capital stock), as well as the part of the issue price of the shares with no par value that exceeds the amount intended to form the capital stock; and (b) proceeds from the sale of founders’ shares and warrants. Under Brazilian corporate law, capital reserve may only be applied to: (1) absorb losses that exceed accumulated earnings and revenue reserves; (2) redeem, reimburse or buy our own shares; and (3) increase our share capital.
Mandatory Distribution of Dividends
Brazilian corporate law generally requires that the bylaws of each Brazilian company specify a minimum percentage of the amounts available for distribution by such company for each fiscal year that must be distributed to shareholders as dividends or as interest on shareholders’ equity, also known as the mandatory dividend.
The mandatory dividend is based on a percentage of adjusted net income, rather than a fixed monetary amount per share. Under our bylaws, at least 25% of our net income, as calculated under Brazilian GAAP and adjusted under Brazilian corporate law (which differs significantly from net income as calculated under U.S. GAAP), for the preceding fiscal year must be distributed as a mandatory dividend. Adjusted net income means the distributable amount before any deductions for profit retention and statutory reserves.
Under Brazilian corporate law, however, we are allowed to suspend the distribution of the mandatory dividends in any year in which our board of directors report to our general shareholders’ meeting that the distribution would be inadvisable in view of our financial condition. Such suspension is subject to the approval at the shareholders’ meeting and review by members of the fiscal council. Our board of directors must file a justification for such suspension with the CVM within five days of the relevant general shareholders’ meeting. If the mandatory dividend
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is not paid, the unpaid amount shall be attributed to a special reserve account. If not absorbed by subsequent losses, those funds shall be paid out as dividends as soon as the financial condition of the company permits.
The mandatory dividend may also be paid in the form of interest attributable to shareholders’ equity, which is considered to be a deductible financial expense for the purpose of calculating our income and social contribution tax obligations, provided that certain requirements are met. See “Item 10. Additional Information—E. Taxation” for further information.
Payment of Dividends
We are required by Brazilian corporate law and our bylaws to hold an annual general shareholders’ meeting within the first four months following the end of each fiscal year, at which time, among other things, the shareholders have to decide on the allocation of the results from the preceding year and on the payment of dividends based on our financial results from the previous fiscal year.
Under Brazilian corporate law, dividends are generally required to be paid to the holder of record on the date of the dividend declaration date within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date of payment, which, in either case, must occur within the fiscal year in which such dividend was declared. A shareholder has a three-year period from the date of the dividend payment to claim dividends, which do not bear interest and are not monetarily restated, after which the aggregate amount of any unclaimed dividends shall legally revert to us.
Our board of directors may declare interim dividends to be deducted from the retained earnings or profit reserves in our semi-annual or annual financial statements. In addition, our board of directors may pay dividends from our net income based on our net income registered on semi-annual or quarterly balance sheet. The dividends paid in each semester may not exceed the amounts accounted for in our capital reserve accounts. Any payment of interim dividends may be set off against the amount of mandatory dividend relating to the net profit earned in the year in which the interim dividends were paid.
In general, shareholders who are not residents of Brazil must register their equity investment with the Central Bank to have dividends, sales proceeds or other amounts with respect to their shares eligible to be remitted outside of Brazil. The common shares underlying the ADSs are held in Brazil by Banco Itaú S.A., also known as the custodian, as agent for the depositary, who is the registered owner on the records of the registrar for our shares. The depositary registers the common shares underlying the ADSs with the Central Bank and, therefore, it is possible to have dividends, sales proceeds or other amounts with respect to the common shares remitted outside Brazil.
Payments of cash dividends and distributions, if any, are made in reais to the custodian on behalf of the depositary, which then converts such proceeds into U.S. dollars and causes such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. In the event that the custodian is unable to convert immediately the reais received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by any depreciation of the real that occurs before the dividends are converted. Under current Brazilian tax law, dividends paid to persons who are not Brazilian residents, including holders of ADSs, will not be subject to Brazilian withholding tax, except for dividends declared based on profits generated prior to December 31, 1995, which will be subject to Brazilian withholding income tax at varying tax rates. See “Item 10. Additional Information—E. Taxation.”
Holders of ADSs have the benefit of the electronic registration obtained from the Central Bank, which permits the depositary and the custodian to convert dividends and other distributions or sales proceeds with respect to the common shares represented by ADSs into foreign currency and remit the proceeds outside of Brazil. In the event the holder exchanges the ADSs for common shares, the holder will be entitled to continue to rely on the depositary’s certificate of registration for five business days after the exchange. Thereafter, in order to convert foreign currency and remit outside of Brazil the sales proceeds or distributions with respect to the common shares, the holder must obtain a new certificate of registration in its own name that will permit the conversion and remittance of such payments through the commercial exchange rate market.
Under current Brazilian legislation, the Brazilian government may impose temporary restrictions of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Common Shares and the ADSs.”
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Interest on Equity
Under the Brazilian tax legislation effective January 1, 1996, Brazilian companies are permitted to pay “interest” to holders of equity securities and treat such payments as a deductible financial expense for Brazilian income tax purposes and, from 1997, for social contribution on net profit purposes. The purpose of the tax law change is to encourage the use of equity investment, as opposed to debt, to finance corporate activities. Payment of such interest may be made at the discretion of our board of directors. The amount of any such notional “interest” payment to holders of equity securities is generally limited in respect of any particular year to the greater of:
| · | 50% of net income (after the deduction of the provisions for social contribution on net profits but before taking into account the provision for corporate income tax and the interest attributable to shareholders’ equity) for the period in respect of which the payment is made; or |
| · | 50% of the sum of retained earnings and profit reserves as of the beginning of the year in respect to which such payment is made. |
For tax deduction purposes, the rate applied in calculating interest attributable to shareholders’ equity cannot exceed the pro rata die variation of the Long Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, as determined by the Central Bank from time to time.
For accounting purposes, although the interest should be reflected in the statement of operations for tax deduction, the charge is reversed before the calculation of the net income in the statutory financial statements and deducted from the shareholders’ equity in the same way as the dividend. Please refer to “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations—Income—Interest on Shareholders’ Equity” below for a discussion of tax consequences related to the receipt of payments of interest attributable to shareholders’ equity by a non-resident holder of our common shares or ADSs.
The amount distributed to shareholders as interest attributable to equity, net of any withholding tax, may be included as part of the minimum mandatory dividend. In accordance with applicable law, we are required to pay to shareholders an amount sufficient to ensure that the net amount they receive in respect of interest attributable to shareholders’ equity, after payment of the applicable withholding tax, plus the amount of declared dividends, is at least equivalent to the amount of the minimum mandatory dividend. A shareholder has a three-year period from the date of the interest payment to claim interest attributable to equity, after which the aggregate amount of any unclaimed interest shall legally revert to us.
If a payment of interest on equity is recorded at net value as part of a mandatory dividend, we will pay the income tax on behalf of our shareholders at the time the payment is distributed. Otherwise, the income tax will be paid by the shareholders, subject to our obligation to retain and collect taxes on the payment.
History of Payment of Dividends and Interest on Equity
In 2015, we did not distribute any dividends related to fiscal year 2014.
On April 25, 2016, we approved the payment of dividends in the total amount of R$17.7 million, or R$0.048 per share (excluding treasury shares) for fiscal year 2015. The dividends were distributed on December 22, 2016, as approved by a meeting of the board of directors held on December 16, 2016.
In 2016, we did not distribute any dividends related to fiscal year 2015. In 2017, we did not distribute any dividends related to fiscal year 2016. In 2018, we did not distribute any dividends related to fiscal year 2017. In 2019, we did not distribute any dividends related to fiscal year 2018. In 2020, we did not distribute any dividends related to fiscal year 2019. In 2021, we did not distribute any dividends related to fiscal year 2020.
| B. | Significant Changes |
None.
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| A. | Offer and Listing Details |
Our common shares started trading on the B3 on February 17, 2006 and the ADSs started trading on the NYSE on March 16, 2007. The last day for trading of our ADSs on the NYSE was December 14, 2018.
On November 26, 2018, our Board of Directors approved the voluntary delisting of our ADSs from the NYSE and a proposal to maintain our ADR facility as a Level 1 ADR program to enable investors to retain their ADSs. On December 7, 2018, we filed a Form 25 with the SEC to effect the delisting of the ADSs, and sent a copy to the NYSE on the same day. The last day of trading on NYSE for our ADSs was December 14, 2018, and our ADSs were delisted from the NYSE on December 17, 2018. Our ADSs remain eligible for trading in the over-the-counter markets in the United States, and our common shares will continue to be listed and admitted to trading in the Novo Mercado segment of the B3. In addition to the information we are required to report under applicable Brazilian regulations, we intend to continue publishing English translations of our annual report, interim results and communications on our investor relations website at (www.ri.gafisa.com.br), in accordance with Rule 12g3-2(b) under the Exchange Act.
We are part of the following indices of the Brazilian stock market:
| · | IBRA: This index comprises all stocks actively traded on the cash market operated by B3 that have a certain minimum liquidity and active trading criteria; |
| · | IMOB: This index is a real estate sector index covering B3’s most actively traded securities; |
| · | IGCX: This index comprises all stocks trading on the Novo Mercado and Levels 1 and 2 of the B3; |
| · | IGCT: The stocks that comprise this index are selected as constituents of the Special Corporate Governance Equity Index (IGC) to the extent they meet certain additional membership criteria; |
| · | IGC-NM: This index comprises stocks listed for trading on the Novo Mercado segment of the B3; |
| · | ITAG: This index comprises stocks which give minority shareholders enhanced tag-along rights protection in addition to the protection required by law in the event of a change of control; |
| · | SMLL: This index comprises small capitalization stocks; and |
| · | INDX: This index was developed to measure the performance of the most representative companies of the industrial sector, an important segment of the Brazilian economy. Its theoretical portfolio is composed by the industry’s most representative stocks, which are selected among B3’s most actively traded securities. |
| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
Our common shares are listed on the B3 under the symbol “GFSA3,” and they trade OTC under the symbol “GFSAY.”
Trading on the B3
Trading on the São Paulo Stock Exchange is conducted every business day, from 10:00 a.m. to 5:00 p.m. or 6:00 p.m. (depending on the time of the year), on an electronic trading system called the PUMA Trading System (“PUMA”). Trading is also conducted between 5:30 p.m. (or 6:30 p.m.) and 6:00 p.m. (or 7:00 p.m.), on an online system connected to PUMA and Internet brokers called the “after market” The “after-market” trading is scheduled after the close of principal trading sessions, when investors may send purchase and sell orders and trade through the
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home broker system. This after-market trading is subject to regulatory limits on price volatility of securities traded by investors operating on the Internet.
The CVM and the B3 have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances. Trading in securities listed on the B3, including the Novo Mercado, Bovespa Mais, Bovespa Mais Nível 2 and Levels 1 and 2 segments, may be effected off the exchanges in the unorganized over-the-counter market in certain circumstances.
The shares of all companies listed on the B3, including the Novo Mercado, Bovespa Mais, Bovespa Mais Nível 2 and Level 1 and Level 2 companies, are traded together.
Settlement of transactions occurs three business days after the trade date, without adjustments to the purchase price. Delivery of and payment for shares are made through the facilities of separate clearing houses for each exchange, which maintain accounts for brokerage firms, the Central Securities Depository of the B3 (Central Depositária de Ativos da B3). The seller is ordinarily required to deliver the shares to the B3 clearing house on the second business day following the trade date.
In order to maintain control over the fluctuation of the B3 index, the B3 has adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever specified indices of the B3 fall below the limits of approximately 10% and 15%, respectively, in relation to the closing index levels for the previous trading session.
Although the Brazilian equity market is the largest in Latin America in terms of capitalization, it is smaller and less liquid than the major U.S. and European securities markets. The B3 is significantly less liquid than other major exchanges in the world. As of December 31, 2021, the average daily trading for all companies listed on B3, the only Brazilian stock exchange, represented approximately R$36.9 billion, according to B3 data. Although any of the outstanding shares of a listed company may trade on the B3, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by government entities or by one main shareholder. The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the common shares at the time and price you desire and, as a result, could negatively impact the market price of these securities.
Trading on Brazilian stock exchanges by non-residents of Brazil is subject to registration procedures. See “—Investment in Our Common Shares by Non-Residents of Brazil.”
Regulation of Brazilian Securities Markets
The Brazilian securities markets are mainly governed by Law No. 6,385, of December 7, 1976, Law No. 4,728, of July 14, 1965 and Brazilian corporate law, each as amended and supplemented, and by regulations issued by the CVM, which has authority over stock exchanges and the securities markets generally; the CMN; and the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.
These laws and regulations, among others, provide for licensing and oversight of brokerage firms, governance of the Brazilian stock exchanges, disclosure requirements applicable to issuers of traded securities, restrictions on price manipulation and protection of minority shareholders. They also provide for restrictions on insider trading. However, the Brazilian securities markets may not be considered to be as highly regulated and supervised as the U.S. securities markets or securities markets in some other jurisdictions. Accordingly, any trades or transfers of our equity securities by our officers and directors, our controlling shareholders or any of the officers and directors of our controlling shareholders must comply with the regulations issued by the CVM. See “Item 10. Additional Information—B. Memorandum and Bylaws—Disclosure Requirements.”
We have the option to ask that trading in our securities on the B3 be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of the B3 or the CVM, based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the B3.
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Under Brazilian corporate law, a corporation is either publicly held, as we are, or closely held. All public companies are registered with the CVM and are subject to reporting requirements. A company registered with the CVM may trade its securities either on the B3, if it has registered to have its securities traded at the B3, or on the Brazilian over-the-counter market. The shares of a listed company may also be traded privately, subject to several limitations. Our common shares are listed on Novo Mercado segment of the B3.
The Brazilian over-the-counter market consists of direct trades between individuals in which a financial institution registered with the CVM (and in the relevant over the counter market) serves as intermediary. The Brazilian over-the-counter market is divided into two categories: (i) an organized over the counter market, in which the transactions are supervised by self-regulating entities authorized by the CVM; and (ii) a non-organized over the counter market, in which the transactions are not supervised by self-regulating entities authorized by the CVM. In either case, transactions are directly traded outside of the stock exchange market, through a financial institution authorized by the CVM. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.
Investment in Our Common Shares by Non-Residents of Brazil
Portfolio Investment
Investors residing outside Brazil are authorized to purchase equity instruments, including our common shares, in the form of foreign portfolio investments on the B3, provided that they comply with the registration requirements set forth in (i) CVM Instruction No. 560, published on March 25, 2015, which revoked CVM Instruction No. 325 and (ii) Resolution No. 4,373 of September 29, 2014, issued by CMN (“Resolution No. 4,373”).
With certain exceptions, Resolution No. 4,373/14 investors are permitted to carry out any type of transaction in the Brazilian financial capital market involving a security traded on a stock, futures or organized over-the-counter market authorized by the CVM. Investments and remittances outside Brazil of gains, dividends, profits or other payments under our common shares are made through the foreign exchange market. See “Item 10. Additional Information—D. Exchange Controls.”
In order to become a Resolution No. 4,373/14 investor, an investor residing outside Brazil must:
| · | appoint a representative in Brazil with powers to take actions relating to the investment (before CVM, Central Bank and other regulatory entities) and to receive judicial notifications; |
| · | appoint an authorized custodian in Brazil for the investments, which must be a financial institution duly authorized by the Central Bank and CVM; |
| · | appoint a tax representative in Brazil; |
| · | through its representative in Brazil, register itself as a foreign investor with the CVM and the Central Bank; and |
| · | through its representative in Brazil, register itself with the Brazilian Internal Revenue (Receita Federal) pursuant to Regulatory Instruction No. 1,470 of May 30, 2014, and Regulatory Instruction No. 1,548 of February 13, 2015, as the case may be. |
Securities and other financial assets held by foreign investors pursuant to Resolution No. 4,373/14 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading by foreign investors is generally restricted to transactions carried out in the Brazilian stock exchanges or in organized over-the-counter markets licensed by the CVM. Therefore, as a general rule, no private sale of securities and other financial assets held by foreign investors pursuant to Resolution No. 4,373/14 are permitted.
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