Shorting PDG Rises as Backlog Climbs: Corporate Brazil

Traders are increasing bets PDG Realty SA Empreendimentos & Participacoes, Brazil’s worst-performing homebuilder in 2012, will plunge further after short positions returned more than 60 percent in the past year.

The ratio of borrowed shares -- an indication of short selling -- in Brazil’s third-biggest homebuilder exceeds 16 percent, the third highest among companies on the benchmark Bovespa index and up from 9.5 percent at the start of the year, according to data compiled by Bloomberg. Five of the 10 most-shorted stocks in Brazil are homebuilders.

Developers have been working to clear backlogs of unsold apartments since 2011 after overestimating demand in cities such as Rio de Janeiro and Sao Paulo. Housing prices that rose 58 percent from August 2010 through last month, coupled with slowing growth and rising consumer debt, have shut many buyers out of the market.

“Looking ahead, there is the question of oversupply and the weight of the cost of the structure of these companies, which will be supported by fewer projects given the eroded capital base and a market that has limited new projects,” said Claudio Andrade, a partner at Rio de Janeiro-based Polo Gestao de Recursos, which owns shares in the builders.

Short Positions

MRV Engenharia & Participacoes has the highest short positions among developers and the second-highest on the Bovespa at 20 percent of total float, data compiled by Bloomberg show. The ratio of borrowed shares also exceeds 10 percent for builders Rossi Residencial SA, Cyrela Brazil Realty SA Empreendimentos & Participacoes and Gafisa SA.

MRV fell 16 percent in the 12 months ended Feb. 8, while PDG plunged 59 percent and Rossi tumbled 58 percent. Gafisa slid

2.4 percent, while Cyrela, Brazil’s biggest homebuilder, gained

2.4 percent.

MRV rose 1.2 percent to 11.54 reais at 1:27 p.m. today in Sao Paulo trading. Cyrela fell 1 percent to 17.32 reais, while Rossi slid 0.2 percent to 4.08 reais and Gafisa dropped 0.8 percent to 4.79 reais. PDG was up 0.3 percent to 3.06 reais.

PDG declined to comment on short interest in its shares, citing the approach of its fourth-quarter earnings release on March 27. Bruna Campoy, a Gafisa spokeswoman, and Jeane Morais, a spokeswoman for Rossi, didn’t return requests for comment.

New home sales in Sao Paulo, Brazil’s biggest city, peaked in 2010 and plunged 21 percent the following year, when new houses and apartments outpaced demand by a third. In response, builders scaled back new projects, with Belo Horizonte, Brazil-based MRV cutting housing starts by the fourth quarter of 2011.

Supply, Demand

“You have a process of supply and demand that will take some time to rebalance,” MRV Chief Financial Officer Leonardo Correa said in a telephone interview. Shorting homebuilders isn’t new, he said. “The liquidity of the stock ends up attracting that kind of player.”

Among Brazil’s top six builders, PDG posted the steepest year-over-year decline in operating margins in the third quarter as costs surged and pre-sales plunged 63 percent.

“All of these companies have faced high cost increases and difficulties in execution,” Eduardo Silveira, an analyst at BES Securities, said by telephone from Sao Paulo. For the year, “we did a scenario of PDG going over budget by 1 billion reais -- a number that size wouldn’t surprise us.”

Loss Estimate

PDG is projected to report an adjusted net loss of 348 million reais ($176 million) in 2012, the median of 13 analyst estimates compiled by Bloomberg. The company’s results for at least the next two years will remain negative, said Silveira, who recommends selling PDG.

Standard & Poor’s said in a Dec. 21 statement that it has a negative outlook for PDG’s BB- credit rating, three grades below investment quality.

MRV is trading at 7.8 times estimated 2013 earnings, and Rossi’s multiple is 5.1, based on data compiled by Bloomberg. That compares with an average of 11.3 for all companies on the Bovespa index. Estimates weren’t available for PDG and Cyrela.

Further price increases should help builders recover, Cyrela CFO Jose Florencio Rodrigues Neto said.

Real-estate prices in Brazil rose 14 percent in 2012 to 7,049 reais per square meter ($330 per square foot) in December, according to an index compiled by economics research institute FIPE and real-estate website Zap Imoveis.

“The market continues to do well, prices continue to increase, although less so than in the past,” Rodrigues said in a telephone interview. Sao Paulo-based Cyrela had fewer new offerings in 2012 because project approvals were stalled, he said. That damped sales, which he expects Cyrela to recover this year. “The demand is there, people are buying homes,” he said.

Growth Opportunities?

“It important for investors to understand what is going on with the company and not depend only on indicators,” Rodrigues said. “The question that should guide investors is: Is there space to grow in future, is the company doing its homework?”

While real-estate prices are rising on an annual basis, purchases are still down from their 2010 high. New-home sales in Sao Paulo fell 1.9 percent to 24,028 units in the first 11 months of 2012 from a year earlier.

“Investors are worried about demand for homes,” Silveira said. “Demand for homes is sort of cooling.”