Discover the five indicators that you cannot disregard in real estate paper funds – 03/26/2023 – From Grain to Grain

A common mistake when valuing an asset class is to assume uniformity between these assets. In real estate investment funds (FIIs) this is very common. Many consider everyone to be similar. However, the indicators for evaluating each type of FII are different. Today I’m going to address the five main indicators that Brunno Bagnariolli, Partner at Jive Investments and CIO of Mauá Capital Funds, points out as the most relevant for paper FIIs.

In the last chapters (links in the footer), I explained what a paper FII is and why it is a mistake to classify FIIs using only the dividend rate, or Dividend Yield (DY), as a metric.

Although paper FIIs invest in fixed-income securities, they are risky investments. For every risky investment, remember the following general expression:

Return is what you take, but risk is what you buy.

So, you need to evaluate well what you are paying for, that is, the risk.

Be careful when evaluating only the past return. Risk factors may not have manifested themselves in the past, but may arise in the future, compromising the return receivable.

As Guilherme De Luca, partner at Mauá Capital and Jive Investments points out, the first step in choosing an FII is to select the managers you trust.

Bagnariolli defines and explains five key indicators for classifying paper FIIs.

The first four factors are related to the risk of receiving the credits owed for the assets invested by the FII.

When investing in private credit securities, before assessing how much you earn, it is more important to assess whether you will receive from the creditor, what guarantees are involved and what risk you run if he is not able to pay and you have to foreclose on the guarantees .

Only after evaluating these four factors should you assess whether you are really being rewarded for the known risks. This would be the fifth factor.

So, let’s go to the explanation of the CIO of Mauá Capital about these indicators:

• “LTV” (Loan-to-Value) or “Guarantee Ratio”: That is, here for how much debt there are real estate guarantees as collateral. An operation with a debit balance of R$100 million, for example, which has properties under guarantee worth R$200 million, has an LTV of 50%. The lower the LTV, the more solid the operation.
• Coverage Ratio: together with the LTV, it is also important to assess the interest coverage, that is, whether the flow generated by the property is sufficient to honor the debt payment without the need for the debtor to contribute his own resources monthly to pay the debts. installments.
• Segments and Location of Pledged Properties: How is the exposure by segment of properties of that CRI FII? More defensive sectors, such as logistics, for example, tend to bring greater stability to the FII. Sectors such as subdivisions and timeshare assets are generally at greater risk. Along with the segment, it is always important to analyze the location of these properties together. A logistics warehouse 10 km from São Paulo as a guarantee poses less risk to a CRI than a warehouse in the interior of a less developed region in Brazil.
• Structure protection mechanisms: Understand how robust the CRI structure is, for example, if there are protections for prepayment, fines, which indexes, if there is a floor or ceiling of remuneration, if there is protection of minimum coverage ratio, maximum LTV, among others.
• Transaction Fee: What is the average premium that the CRIs portfolio of that FII has in relation to the risks it runs. In other words, is the risk consistent with the expected return on assets? Here it is important to consider the indexes of each operation to perform the correct comparison. For example, the best comparison for a CRI indexed to the IPCA would be with the NTN-B rate (inflation-indexed government bonds).

These are certainly not simple factors, and some are not readily available to most ordinary investors.

Some of these data need a closer contact with the manager for detailing. This contact can be made either through the investor service channels or in interviews and forums in which managers participate.

Its focus is on assessing whether the return received is really adequate for the analyzed risks.

For example, does it make sense to earn between 1% and 2% more in DY per year and risk defaulting, getting a property that in the end may not be able to pay the debt? Some FIIs that have allotments or timeshare assets as collateral have this risk.

Reinforcement, more important than just evaluating the return or past DY, is to first select managers that you really trust that will properly select the credits and will not bring you negative surprises in the future.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan
Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence
Chapter 8 Before making any investment, define these two factors
Fixed Income
Chapter 9 You should not build an income portfolio if you want to reach equity to live on income
Chapter 10 Avoid these two common fixed income investor mistakes
Chapter 11 In fixed income, does it pay to invest in private credit in relation to public credit?
Chapter 12 Discover how to win the private fixed income premium, but with low risk
Chapter 13 This is the simplest way to plan your financial independence with fixed income
Chapter 14 With our interest rates, find out if it pays to invest in dollars
Variable income
Chapter 15 Taking a risk can accelerate your journey to financial independence
Chapter 16 What is multimarket funds and how did they come about?
Chapter 17 Understand how to select hedge funds
Chapter 18 Is Real Estate an Appropriate Investment for Achieving Financial Independence?
Chapter 19 Real estate funds are better investments than real estate, but most prefer the worst; understand
Chapter 20 These real estate funds are more like fixed income funds
Chapter 21 When selecting Real Estate Funds, be careful with this indicator
Chapter 22 Discover the three indicators that you cannot disregard in a paper real estate fund
…
Chapter 24 Shares
Chapter 25 Alternative Investments
Chapter 26 When should I trade a risky investment that is not performing?
Investment funds and Private Pension

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