FGTS: changing rules affects low-income households, says Tenda – 09/23/2023 – Market

One of the sectors most sensitive to interest rates, due to long-term financing, construction was strongly affected by the cycle of increasing the basic rate and expects to breathe again with the falling Selic.

But, for businesses focused on low-income housing, a risk remains, says Rodrigo Osmo, CEO of the construction company Tenda: that of changing the rules of the FGTS (Service Time Guarantee Fund).

“If we are not careful about how we change the FGTS remuneration dynamics, we can deconstruct something that works extremely well”, says the Tenda executive, whose focus is the low-income public.

In an interview with Sheethe says that “this change under discussion has to be thought out very carefully so that we don’t commit something extremely painful to the needy population.”

The change in FGTS remuneration is under discussion in the STF (Supreme Federal Court) and could affect the financing of Minha Casa, Minha Vida. If the court decides on the change, says Osmo, there are risks for Brazilian public housing.

The construction company Tenda is going through a period of recovery this year, after suffering an “unimaginable” loss of R$547 million in 2022, as the company itself described in its balance sheet for the fourth quarter of last year.

Now, much of the improvement in the company’s numbers is related to changes in the format of the Minha Casa, Minha Vida program implemented by the new government of Luiz Inácio Lula da Silva (PT).

Focused on the public who earn up to two minimum wages, the construction company takes advantage of changes in the social program, which strengthened precisely bracket 1, which encompasses families who earn up to R$2,640.

Osmo says that, in the first half of the year, Minha Casa, Minha Vida corresponded to 60% of the company’s total revenue. After the sanction, in July, of changes to the social program, property sales through MCMV now account for 100% of the company’s revenue.

Tenda’s shares have appreciated by more than 200% in the year. It is the developer with the biggest increase on the Stock Exchange. What is the reason for this investor confidence in the company’s role?
There are two big reasons. First, it is a perception that we managed to turn the game around. In 2021, we suffered a lot from Covid. The pandemic hit our company harder than any other company in the sector, and this put both the company’s profitability and balance sheet at risk.

So, it was a company in which investors were unsure whether it would become profitable again and whether the balance sheet would be sufficient to run the company from now on.

Throughout 2023, this perception was left behind. The market today believes that Tenda has changed the game, both in profitability and leverage [relação entre a dívida e o lucro operacional da companhia].

The second big reason for investor confidence is what I’m calling the perfect gale. What does it mean?

This new government has placed great emphasis on Minha Casa, Minha Vida, perhaps the government’s main social program, and it has clearly focused on what they are calling range 1, which are families that earn up to two minimum wages of income, or R $2,640.

And Tenda is the biggest player in this segment. Within the government’s social focus, we are the best positioned company today. So, I think this all changed the market’s mood towards the company.

Taking advantage of the fact that Mr. spoke at Minha Casa, Minha Vida, Tenda’s second quarter balance sheet shows that, only in July, the first month after the reformulation of the social program, the company reached the highest monthly sales volume since May 2022. What are the expectations of increase in sales from now on?
For us, at this moment, more important than the increase in sales is the increase in margin [relação do lucro pela receita]. Because we are already operating today, even before July, at a very high sales speed.

The main challenge we had in 2023 was to recover the margin. And what happened in July? We managed to gain an additional 3.5% in price compared to the second quarter.

In July, the good news was the entry into force of the new Minha Casa, Minha Vida parameters. Furthermore, since August, Caixa Econômica Federal began to significantly increase the concession of the Price Table [sistema de amortização de empréstimos] for 420 months.

In this income stratum, of up to two minimum wages, the Price Table concentrated up to 360 months and increased to 420 months. For us, this news is extremely positive.

And what is the percentage of Tenda’s current revenue from the Minha Casa, Minha Vida program?
This number is very easy: it is 100%. But I think that more important than sales within Minha Casa, Minha Vida is what we sell within track 1 of the program. Because that is the government’s focus, and that is our strength.

This number, until the first semester, was 60%. But the first semester still didn’t have all the impulses that the government gave to prioritize band 1. It was already very significant and will become even more so.

And in relation to interest rates in Brazil, the country entered a cycle of falling basic rates. Should the construction sector feel the benefits of this interest rate cut in the short term?
Yes, I think it is perhaps the most interest-sensitive sector. But it is important to make a distinction between the low-income segment and the middle and high-income segment. The middle and high income segment is extremely sensitive to interest rates, because the short-term interest rate defines what the long-term interest rate is, and there is no loan longer than a real estate loan.

So, when the long-term interest rate rises, families’ financing capacity drops substantially.

But for low income the dynamics are different. Because the low income resource comes from the FGTS, and the FGTS is not subject to these interest fluctuations. It has a pre-fixed rate, paid to its shareholder, TR [Taxa Referencial] + 3%, in addition to profit distribution. And the TR + 3% is what guides the cost of the loans it grants to low-income people.

A change in relation to the form of correction of the FGTS is now under discussion in the Federal Supreme Court, which will increase profitability for beneficiaries. But this should affect the financing of Minha Casa, Minha Vida for public coffers. What is your view on this subject?
I think this is a very complicated discussion, because of the following: when we look at who has resources in the FGTS, 90% of the FGTS resources are in shareholders with more than four minimum wages of income.

However, 90% of the FGTS benefit goes to families with less than four wages of income. So, the FGTS is today the main social development fund in Brazil. And it plays a fundamental role in promoting affordable housing.

There is an argument that public housing should not be financed with private resources. But this is not true in most countries in the world. And the FGTS is one of the models used by the World Bank, including as a reference for promoting popular housing throughout the world.

So, if we are not careful about how we change the dynamics of FGTS remuneration, we can deconstruct something that works extremely well and is an example to the world of how to promote popular housing.

I think this change under discussion has to be thought out very carefully so that we don’t commit something extremely painful to the needy population.

Mr. and has the sector mobilized in terms of opening dialogue with the Judiciary to address this issue?
Yes. We have had success in conversations with some ministers. I think that all the ministers we have managed to talk to so far understand the merit of the arguments. We would like to be able to talk to everyone, so that everyone is guided and well-founded in the decision they will make.

Returning to Tenda, in the second quarter the company managed to reduce its losses by 90% in the annual comparison. Do you expect that, in the short term, there will be a reversal of losses to profits?
I’m not going to talk about specific quarters because they are very subject to episodic variations. But we articulated internally that 2023 would be a year of crossing. It would be a year in which we would once again have a robust balance sheet and we would once again become a profitable company, so that in 2024 we would grow again, and grow again by generating cash, in a profitable way, generating profit.

This plan is underway and we will deliver.

One point that the market has been looking at closely is debt. And Tenda’s debt fell considerably in the second quarter, in a quarterly comparison. What has the company done to reduce its debt?
The big measure was a focus on cash generation and we generated very substantial operating cash in the second quarter: R$180 million. In the first half of the year, it amounted to R$270 million. This has allowed the company to deleverage quarter by quarter.

Now, with the follow-on [oferta de novas ações que a empresa fez recentemente], we will certainly see a very substantial drop in the company’s leverage. So, this deleveraging process will certainly continue in the third quarter.

The follow-on crowned the end of the company’s balance sheet risk. Leverage returned to very healthy levels.

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Rodrigo Osmo, 47
Graduated in chemical engineering from the Polytechnic School of USP (University of São Paulo), with an MBA from Harvard Business School, he has been CEO of the construction company Tenda since 2012, in addition to being a coordinating member of the company’s executive investment and ethics committees. He served as business development director and financial director at Gafisa, and was managing director at Alphaville Urbanismo