Company Quick10K Filing
Gafisa
20-F 2019-12-31 Filed 2020-06-23
20-F 2018-12-31 Filed 2019-11-12
20-F 2017-12-31 Filed 2018-04-30
20-F 2016-12-31 Filed 2017-04-28
20-F 2015-12-31 Filed 2016-04-28
20-F 2014-12-31 Filed 2015-04-28
20-F 2013-12-31 Filed 2014-04-29
20-F 2012-12-31 Filed 2013-04-12
20-F 2011-12-31 Filed 2012-07-06
20-F 2010-12-31 Filed 2012-07-06
20-F 2009-12-31 Filed 2010-03-10

GFA 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Business Conduct and Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-2.2 dp130702_ex202.htm
EX-8.1 dp130702_ex801.htm
EX-12.1 dp130702_ex1201.htm
EX-12.2 dp130702_ex1202.htm
EX-13.1 dp130702_ex1301.htm
EX-13.2 dp130702_ex1302.htm
EX-15.1 dp130702_ex1501.htm

Gafisa Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 dp130702_20f.htm FORM 20-F

 

 

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, 2019

 

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                             

 

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: Ian Andrade – Chief Financial 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, 2019 was:

 

Title of Class 

Number of Shares Outstanding 

Common Stock 120,000,000*

 

*Includes 2,981,052 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 an internal control over financial reporting auditor attestation is included in the filing:

 

Yes No ☐

 

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

 

 

 

TABLE OF CONTENTS

 

Page

 

INTRODUCTION 1
PRESENTATION OF FINANCIAL AND OTHER INFORMATION 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 3
PART I 4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4
ITEM 3. KEY INFORMATION 4
ITEM 4. INFORMATION ON THE COMPANY 22
ITEM 4A. UNRESOLVED STAFF COMMENTS 54
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 54
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 80
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 91
ITEM 8. FINANCIAL INFORMATION 92
ITEM 9. THE OFFER AND LISTING 99
ITEM 10. ADDITIONAL INFORMATION 103
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 126
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 127
PART II 129
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 129
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 129
ITEM 15. CONTROLS AND PROCEDURES 129
ITEM 16. RESERVED 131
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 131
ITEM 16B. CODE OF BUSINESS CONDUCT AND ETHICS 132
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 132
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 133
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 133
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 133
ITEM 16G. CORPORATE GOVERNANCE 133
ITEM 16H. MINE SAFETY DISCLOSURE 133
PART III 133
ITEM 17. FINANCIAL STATEMENTS 133
ITEM 18. FINANCIAL STATEMENTS 133
ITEM 19. EXHIBITS 133

i 

INTRODUCTION

 

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, 2018. 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.

 

As explained in Note 8.2 to our consolidated financial statements for the year ended December 31, 2019, the results of operations of Construtora Tenda S.A., or “Tenda,” have been presented as discontinued operations under Brazilian GAAP in the Company’s 2018, 2017, 2016 and 2015 consolidated statements of operations. Under Brazilian GAAP, previous period balance sheet information is not retrospectively adjusted. Additionally, earnings per share amounts have been adjusted retroactively to reflect the reverse split of our common shares at the ratio of 13.483023074 to 1, which was consummated on March 23, 2017.

 

 

Additionally, as of December 31, 2018, for comparability purposes, our statement of profit or loss for the year ended December 31, 2017 and 2016 has been adjusted to consider changes in accounting practice derived from the adoption of CPC 48 – Financial Instruments (IFRS 9) and CPC 47 – Revenue from Contracts with Customers (IFRS 15). As required by CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors, the retrospective effects of the adoption of CPCs 47 and 48 are demonstrated as follows:

 

 

For the Year ended December 31, 

For the Year ended December 31, 

 

2017 

2016 

 

Balances originally reported as of 12/31/2017 

Impact from applying CPCs 47 and 48 

Balances restated after reclassification 

Balances originally reported as of 12/31/2016 

Impact from applying CPCs 47 and 48 

Balances restated after reclassification 

Statement of profit or loss            
Net operating revenue 608,823 177,351 786,174 915,698 7,483 923,181
Operating costs (818,751) (87,735) (906,486) (1,029,213) 15,403 (1,013,810)
Operating (expenses) income (654,216) (654,216) (362,747) - (362,747)
Financial income (expenses) (107,268) (107,268) (25,679) - (25,679)
Income tax and social contribution 23,100 23,100 (100,080) - (100,080)
Non-controlling interests (281) (281) 1,871 - 1,871
Profit or loss of discontinued operations

98,175 

— 

98,175 

(559,704) 

(559,704) 

Net income (loss) for the year

(849,856) 

89,616 

(760,240) 

(1,163,596) 

22,886 

(1,140,710) 

 

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.

 

2 

In addition, we present information in square meters in this annual report. One square meter is equal to approximately 10.76 square feet.

 

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.

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

3 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

 

The following selected financial data for 2019, 2018, 2017, 2016 and 2015 has been derived from our audited consolidated financial statements presented herein. The consolidated financial statements presented herein for the years ended 2017 and 2016 have been retrospectively adjusted to reflect the adoption of the new accounting pronouncements CPCs 47 (IFRS 15), CPC 48 (IFRS 9) and ASC 606, as explained in Notes 3 and 33 to our consolidated financial statements for the year ended December 31, 2018. The aforementioned retrospective adjustments (2017 and 2016) were audited by BDO and, therefore, KPMG audit report makes reference to the consolidated financial statements before those adjustments. The following selected financial data for 2019, 2018, 2017, 2016 and 2015 are derived from these audited consolidated financial statements presented herein.

 

Our financial statements are prepared in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. For a discussion of the significant differences relating to these consolidated financial statements and a reconciliation of net income (loss) and equity from Brazilian GAAP to U.S. GAAP, see the notes to our consolidated financial statements included elsewhere in this annual report. See also “Presentation of Financial and Other Information.”

 

This financial information should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report.

 

As explained in Note 8.2 to our consolidated financial statements for the years ended December 31, 2019 and December 31, 2018, Notes 1 and 8.2 to our consolidated financial statements for the year ended December 31, 2017 and Notes 2.3 and 8.2 to our consolidated financial statements for the year ended December 31, 2016, 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. Additionally, earnings per share amounts have been adjusted retroactively to reflect the reverse split of our common shares at the ratio of 13.483023074 to 1, which was consummated on March 23, 2017.

 

The following table sets forth financial information as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015, which has been prepared in accordance with Brazilian GAAP in effect as of December 31, 2019. Certain information below is presented in accordance with U.S. GAAP.

 

   As of and for the year ended December 31,
   2019(4)(5)  2018(4)(5)  2017(4)(5)  2016(4)(5)  2015(4)
   (in thousands of reais, except per share, per American Depositary Shares (“ADS”) and operating data)
Consolidated Statement of Operations Data:               
Brazilian GAAP:               
Net operating revenue    400,465    960,891    786,174    923,181    1,443,357 
Operating costs    (282,684)   (846,169)   (906,486)   (1,013,810)   (1,061,921)
Gross profit (loss)    117,781    114,722    (120,312)   (90,629)   381,436 
Operating expenses, net    (119,833)   (477,228)   (654,216)   (362,747)   (295,595)
Financial expenses, net    (59,624)   (80,521)   (107,268)   (25,679)   (50,422)
Income (loss) before income tax and social contribution    (61,676)   (443,027)   (881,796)   (479,055)   35,419 
Income tax and social contribution    35,275    21,751    23,100    (100,080)   (658)
Net income (loss) from continuing operations    (26,401)   (421,276)   (858,696)   (579,135)   34,761 
Net income (loss) from discontinued operations .   —      —      98,175    (559,704)   36,218 
Net income (loss) for the year attributable to non-controlling interest    (361)   (1,750)   (281)   1,871    (3,470)
Net income (loss) for the year attributable to owners of Gafisa   R$

(26,040

)  R$

(419,526) 

   R$

(760,240) 

   R$

(1,140,710) 

   R$

74,449 

 
Share and ADS data(1):                         

4 

 

 

   As of and for the year ended December 31,
   2019(4)(5)  2018(4)(5)  2017(4)(5)  2016(4)(5)  2015(4)
   (in thousands of reais, except per share, per American Depositary Shares (“ADS”) and operating data)
Per common share data—R$ per share:               
Earnings (loss) per weighted average number of shares—Basic    (0.3800)   (10.1960)   (28.2710)   (42.3720)   2.7309 
From continuing operations    (0.3800)   (10.1960)   (31.9220)   (21.5124)   1.6187 
From discontinued operations .   —      —      3.6509    (20.7906)   1.1122 
Earnings (loss) per weighted average number of shares —Diluted    (0.3800)   (10.1960)   (28.2710)   (42.3720)   2.7123 
From continuing operations    (0.3800)   (10.1960)   (31.9220)   (21.5124)   1.6077 
From discontinued operations    —      —      3.6509    (20.7906)   1.1046 
Weighted average number of shares outstanding—in thousands    68,584    41,147    26,891    26,921    27,262 
Dividends and interest on shareholders’ equity declared—in thousands of reais    —      —      —      —      17,682 
Earnings (loss) per share—R$ per share    (0.3800)   (10.1960)   (28.2710)   (42.3720)   2.7316 
Number of common shares outstanding as at end of period—in thousands*    117,019    39,784    27,102    26,779    27,255 
Earnings (loss) per ADS—R$ per ADS(1)    (0.7590)   (20.3920)   (56.5420)   (84.7440)   5.4631 
U.S. GAAP:                         
Net operating revenue    386,209    818,064    1,103,212    1,880,564    1,464,591 
Operating costs    (302,772)   (736,614)   (1,109,322)   (1,544,794)   (1,072,817)
Gross profit (loss)    83,437    81,450    (6,110)   335,770    391,774 
Operating expenses, net    (114,827)   (461,746)   (449,353)   (309,443)   (335,369)
Financial expenses, net    (56,828)   (80,568)   (107,023)   (25,679)   (52,923)
Income from disposal on controlling interests    —      —      —      —      —   
Income (loss) before income tax and social contribution and income from equity method investments    (88,218)   (460,864)   (562,486)   648    3,482 
Income tax and social contribution    35,305    20,343    52,493    49,041    (27,242)
Equity pick-up    (8,137)   (13,847)   (176,917)   (55,407)   (14,430)
Net income (loss) from continuing operations    (61,050)   (454,368)   (686,910)   (5,718)   (38,190)
Net income (loss) from discontinued operations    —      —      64,796    (506,185)   25,014 
Net income (loss) for the year    (61,050)   (454,368)   (622,114)   (511,903)   (13,176)
Net income (loss) attributable to non-controlling interests    (361)   (1,750)   (281)   2,214    (3,092)
Net income (loss) attributable to owners of Gafisa    (60,689)   (452,618)   (621,833)   (514,117)   (10,084)
Per share and ADS data(1):                         
Per common share data—R$ per weighted average number of shares:                         
Earnings (loss) per weighted average number of shares—Basic    (0.8849)   (11.0000)   (23.1242)   (19.0972)   (0.3699)
Earnings (loss) per weighted average number of shares—Diluted    (0.8849)   (11.0000)   (23.1242)   (19.0972)   (0.3699)
Weighted average number of shares outstanding — in thousands    52,299    41,147    26,891    26,921    27,262 
Dividends declared and interest on equity    —      —      —      —      17,682 
Per ADS data—R$ per ADS(1):                         
Profit (loss) per ADS —Basic(1)    (1,7698)   (22.0000)   (46.2484)   (38.1945)   (0.7398)
Profit (loss) per ADS —Diluted(1)    (1,7698)   (22.0000)   (46.2484)   (38.1945)   (0.7398)
Weighted average number of ADSs outstanding—in thousands    26,149    20,574    13,446    13,461    13,631 
Dividends and interest on equity declared    —      —      —      —      17,682 
Consolidated Balance Sheet Data:
                         
Brazilian GAAP:                         

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   As of and for the year ended December 31,
   2019(4)(5)  2018(4)(5)  2017(4)(5)  2016(4)(5)  2015(4)
   (in thousands of reais, except per share, per American Depositary Shares (“ADS”) and operating data)
Cash, cash equivalents and short-term investments    414,330    137,160    147,462    253,180    712,311 
Current and non-current properties for sale    1,078,306    1,089,401    1,330,083    1,911,530    2,630,617 
Working capital(2)    556,984    656,796    474,904    990,699    2,267,795 
Total assets    2,540,049    2,526,280    2,876,360    5,095,118    6,760,332 
Total debt(3)    730,687    889,413    1,104,898    1,637,568    2,150,793 
Total Gafisa equity    881,410    491,317    711,222    1,794,374    3,095,491 
Equity of non-controlling interests    1,435    1,874    3,847    2,128    1,745 
Total equity    882,845    493,191    715,069    1,796,502    3,097,236 
U.S. GAAP:                         
Cash and cash equivalents, short-term investments and restricted short-term investments    414,330    137,160    147,462    253,180    478,037 
Current and non-current properties for sale    1,937,601    1,989,044    2,056,430    2,892,690    2,219,226 
Working capital(2)    371,297    538,971    438,467    989,868    2,389,212 
Total assets    2,921,727    2,907,168    3,193,196    5,469,243    6,688,848 
Total debt(3)    730,678    889,413    1,104,898    1,637,568    1,902,463 
Total Gafisa equity    593,988    238,544    491,538    1,436,283    2,702,234 
Equity of non-controlling interests    1,435    1,874    3,847    1,710    2,648 
Total equity    595,423    240,418    495,395    1,437,993    2,704,882 
Consolidated cash flow provided by (used in):                         
Brazilian GAAP                         
Operating activities    44,019    31,450    206,865    269,666    104,563 
Investing activities    (300,620)   (3,061)   445,448    162,455    384,664 
Financing activities    236,732    (24,612)   (528,609)   (456,813)   (516,842)

_________________

* Common shares held in Treasury are not included.

 

(1)Earnings (loss) per ADS is calculated based on each ADS representing two common shares. On March 23, 2017, we consummated a reverse split of our common shares at the ratio of 13.483023074 to 1, decreasing the number of our total common shares from 378,066,162 common shares to 28,040,162 common shares. All Brazilian GAAP and U.S. GAAP information relating to the number of shares and ADSs has been adjusted retroactively for the periods ended December 31, 2016 and 2015 to reflect the reverse split of our common shares.

 

(2)Working capital equals current assets less current liabilities.

 

(3)Total debt comprises current and non-current portion of loans and financings and debentures.

 

(4)As explained in Note 8.2 to our consolidated financial statements for the years ended December 31, 2019 and December 31, 2018, Notes 1 and 8.2 to our consolidated financial statements for the year ended December 31, 2017 and Notes 2.3 and 8.2 to our consolidated financial statements for the year ended December 31, 2016, the results of operations of Tenda have been presented as discontinued operations under Brazilian GAAP and U.S. GAAP in the consolidated statements of operations. Under Brazilian GAAP, previous period balance sheet information is not retrospectively reclassified.

 

(5)As explained in Note 3 to our consolidated financial statements for the year ended December 31, 2018, under Brazilian GAAP, we have adopted CPC 48 – Financial Instruments (IFRS 9) and CPC 47 – Revenue from Contracts with Customers (IFRS 15) retrospectively from January 1, 2016. Under U.S. GAAP, we have adopted ASUs Topic 606 – Revenue from Contracts with Customers retrospectively from January 1, 2016. The consolidated financial information as of and for the years ended December 31, 2015 has been derived from our historical financial statements but was not restated for the retrospective application of IFRS 9 and IFRS 15, for Brazilian GAAP purposes, and Topic 606 for U.S. GAAP purposes, due to unreasonable effort or expense.

 

Exchange Rates

 

All transactions involving foreign currency in the Brazilian market, whether carried out by investors resident or domiciled in Brazil or investors resident or domiciled abroad, must now be conducted on the consolidated exchange market through institutions authorized by the Central Bank and subject to the rules of the Central Bank.

 

The Central Bank has allowed the real to float freely against the U.S. dollar since January 15, 1999. Since the beginning of 2001, the Brazilian exchange market has been increasingly volatile, and, until early 2003, the value of the real declined relative to the U.S. dollar, primarily due to financial and political instability in Brazil and Argentina. According to the Central Bank, in 2005, 2006 and 2007, however, the period-end value of the real appreciated in relation to the U.S. dollar 13.4%, 9.5% and 20.7%, respectively. In 2008, the period-end value of the real depreciated in relation to the U.S. dollar by 24.2%. In 2009 and 2010, the period-end value of the real appreciated in relation to the U.S. dollar by 34.2% and 4.3%. In 2011, the real depreciated against the U.S. dollar by 11.2%. In 2014, the period-end value of the real depreciated in relation to the U.S. dollar by 13.4%. On December 31, 2014, the period-end

 

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real/U.S. dollar exchange rate was R$2.6562 per U.S.$1.00. In 2015, the period-end value of the real depreciated in relation to the U.S. dollar by 47.0%. On December 31, 2015, the period-end real/U.S. dollar exchange rate was R$3.9048 per U.S.$1.00. On December 31, 2016, the period-end real/U.S. dollar exchange rate was R$3.2591 per U.S.$1.00. On December 31, 2017, the period-end real/U.S. dollar exchange rate was R$3.308 per U.S.$1.00. On December 31, 2018, the period-end real/U.S. dollar exchange rate was R$3.875 per U.S.$1.00. On December 31, 2019, the period-end real/U.S. dollar exchange rate was R$4.031 per U.S.$1.00. Although the Central Bank has intervened occasionally to control unstable movements in the foreign exchange rates, the exchange market may continue to be volatile as a result of this instability or other factors, and, therefore, the real may substantially decline or appreciate in value in relation to the U.S. dollar in the future.

 

The following table shows the selling rate, expressed in reais per U.S. dollar (R$/US$), for the periods and dates indicated.

 

Year 

Period-end 

Average(1) 

Low 

High 

2015 3.905 3.339 2.575 4.195
2016 3.259 3.483 3.119 4.156
2017 3.308 3.193 3.051 3.381
2018 3.875 3.656 3.139 4.188
2019 4.031 3.946 3.652 4.260

 

Month 

Period-end 

Average(2) 

Low 

High 

December 2019 4.031 4.110 4.031 4.226
January 2020 4.270 4.149 4.021 4.270
February 2020 4.499 4.341 4.238 4.499
March 2020 5.199 4.884 4.488 5.199
April 2020 5.427 5.326 5.078 5.651
May 2020 5.426 5.643 5.299 5.937
June 2020 (through June 19, 2020) 5.347 5.127 4.889 5.364

_________________

Source: Central Bank.

 

(1)Represents the average of the exchange rates on the closing of each day during the year.

 

(2)Represents the average of the exchange rates on the closing of each day during the month.

 

On June 19, 2020, the selling rate was R$5.347 to US$1.00. The real/dollar exchange rate fluctuates and, therefore, the selling rate at June 19, 2020, may not be indicative of future exchange rates.

 

Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or serious reasons to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989, and early 1990, for example, the Federal Government froze all dividend and capital repatriations that were owed to foreign equity investors. These amounts were subsequently released in accordance with Federal Government directives. There can be no assurance that similar measures will not be taken by the Federal Government in the future.

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

This section is intended to be a summary of the more detailed discussion included elsewhere in this annual report. Our business, results of operations, financial condition or prospects could be adversely affected if any of these risks occurs, and as a result, the trading price of our common shares and ADSs could decline. The risks described below are those known to us and those that we currently believe may materially affect us.

 

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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;

 

·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.

 

For example, in 2008, the global financial crisis adversely impacted Brazil’s gross domestic product, or “GDP,” resulting in a decrease in both the number of developments launched and the rate of sales of our units. 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, 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 recent coronavirus outbreak.

 

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 have taken in respect of COVID-19 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 labour and raw materials, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. 

 

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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 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, among others. While it is too early for us to predict the impacts on our business or our financial targets that the expanding pandemic, and the governmental responses to it, may have, we would be materially adversely affected by a protracted downturn in local, regional or global economic conditions.

 

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.

 

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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 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, 2019, our net debt (indebtedness from debentures, loans and financing, and project financing balance, net of our cash and short term investments position) was R$316.4 million, our cash and cash equivalents and short-term investments were R$414.3 million and our total debt was R$730.7 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.

 

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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 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

 

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prices for our commercial and residential units. As of December 31, 2016, 2017 and 2018, we had R$174.4 million, R$310.6 million and R$235.9 million recorded as a provision for impairment on landbank and properties for sale, respectively. As of December 31, 2019, we had R$198.5 million recorded as a provision for impairment on landbank and properties for sale.

 

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

 

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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.

 

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.

 

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, 2019, our total debt (loans, financing and debentures) was approximately R$730.7 million and our short-term debt was R$584.3 million. In addition, as of December 31, 2019 our cash and cash equivalents and short-term investments available was R$414.3 million and our net debt represented 35.3% 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;

 

·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.

 

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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, 2019, 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, 2019, R$16.9 million of our R$34.7 million of total labor liabilities and provisions were for such liabilities. Approximately 90% 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.

 

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.

 

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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 economy has been characterized by unstable economic cycles and frequent and occasionally extensive intervention by the Brazilian government. The Brazilian government has often changed monetary, fiscal, credit, tariff and other policies to influence the course of the Brazilian economy. For example, the government’s actions to control inflation have at times involved setting wage and price controls, blocking access to bank accounts, imposing exchange controls and limiting imports into Brazil. We have no control over, and cannot predict, what policies or actions the Brazilian government may take in the future.

 

Our business, results of operations, financial condition and prospects, as well as the market prices of our common shares or the ADSs, may be adversely affected by, among others, the following factors:

 

·exchange rate movements;

 

·exchange control policies;

 

·expansion or contraction of the Brazilian economy, as measured by rates of GDP;

 

·inflation;

 

·tax policies;

 

·other economic, political, diplomatic and social developments in or affecting Brazil;

 

·interest rates;

 

·energy shortages;

 

·liquidity of domestic capital and lending markets; and

 

·social and political instability.

 

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.

 

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 2017, 7.5% in 2018 and 7.3% in 2019. In addition, according to the Expanded Consumer Price Index (Índice de Preços ao Consumidor Ampliado), or “IPCA,” Brazilian consumer price inflation rates were 2017, 3.7% in 2018 and 4.3% in 2019. 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 2017, 3.8% in 2018 and 4.1% in 2019. 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

 

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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 emerging market countries have at times significantly affected the availability of credit to companies with significant operations in Brazil and resulted 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. In June 2016, the United Kingdom had a referendum in which the majority voted to leave the European Union (so-called “Brexit”). The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations. The United Kingdom formally ceased to be a member state of the European Union on January 31, 2020, at which point a transition period began. The United Kingdom is expected to continue to follow certain European Union rules during the transition period which will end on December 31, 2020; however, the ongoing process of negotiations between the United Kingdom and the European Union will determine the future terms of the United Kingdom’s relationship with the European Union, including access to European Union markets, either during the transitional period or more permanently. We have no control over and cannot predict the effect of the United Kingdom’s exit from the European Union nor over whether and to which effect any other member state will decide to exit the European Union in the future. These developments, as well as potential crises and forms of political instability arising therefrom or any other as of yet unforeseen development, may harm our business and the price of our common shares and the ADSs.

 

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.

 

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. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, 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. 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.

 

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

 

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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, operations and financial condition.

 

Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, and could adversely affect our business, operations, financial condition 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 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, 2015, the SELIC rate was 14.25%. As of December 31, 2016, the Central Bank reduced the SELIC rate to 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%. As of the date of this annual report, the SELIC rate is 3.75%. 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, 2019, 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

 

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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.

 

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, 2019, the average daily trading for all companies listed on the B3, the only Brazilian stock exchange, was approximately R$4.3 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.

 

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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. 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. Based on the negative results of the fiscal year 2014, on April 16, 2015, our shareholders did not approve any distribution of dividends. On April 25, 2016, our shareholders approved a distribution of dividends in the amount of R$17.7 million, representing R$0.0481 per share. Based on the negative results of the fiscal year 2016, at our annual shareholders’ meeting held on April 28, 2017, our shareholders did not approve any distribution of dividends. Based on the negative results of the fiscal year 2017, our shareholders did not approve any distribution of dividends at our annual shareholders’ meeting held on April 27, 2018. Based on the negative results of the fiscal year 2018, our shareholders did not approve any distribution of dividends at our annual shareholders’ meeting held on April 24, 2019. Based on the negative results of the fiscal year 2019, at our annual shareholders’ meeting held on April 30, 2020, our shareholders did not approve any distribution of dividends.

 

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.

 

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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, 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

 

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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. U.S. Holders should consult their tax advisers as to whether the Brazilian tax on gain would be creditable 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 2019 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.

 

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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 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 currently operate mainly in São Paulo, but we still have a small portion of our inventory in Rio de Janeiro and other cities.

 

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In 2006 Gafisa acquired Alphaville Urbanismo S.A., or “Alphaville,” 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 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.

 

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

 

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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 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. As of the date of this annual report, the share capital is comprised of 28,040,162 common, registered and non-par value shares.

 

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

 

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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 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

 

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Company should not be subject to any further sanctions and will keep its shareholders and the market informed of any developments in that regard.

 

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 15, 2019 and April 30, 2020, 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) Denise dos Passos Ramos, (iv) Eduardo Larangeira Jácome, (v) Nelson Sequeiros Rodriguez Tanure, (vi) João Antônio Lopes Filho, (vii) Thomas Cornelius Azevedo Reichenheim, and (viii) Gilberto Benevides.

 

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. 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 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 will remain 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

 

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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 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 Masini 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.

 

Capital Expenditures

 

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 million.

 

In 2018, under the Gafisa brand, we invested R$12.5 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 R$9.7 million.

 

In 2017, under the Gafisa brand, we invested R$20.5 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 and software acquisitions, which amounted to R$7.3 million and R$6.4 million, respectively.

 

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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.

 

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, 2019, we did not launch new projects as we focused on our corporate restructuring. 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.

 

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:

 

   For the year ended December 31,
   2019  2018  2017
  

(in thousands of reais

  (% of total) 

(in thousands of reais

  (% of total) 

(in thousands of reais

  (% of total)
                   
Residential buildings    —      —      655,974    100.0    553,954    100.0 
Commercial    —      —      —      —      —      —   
Potential sales (1)    —      —      655,974    100.0    553,954    100.0 

_________________

(1)The spin-off of the Tenda business unit was concluded on May 4, 2017.

 

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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:

 

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   For the year ended December 31,
   2019  2018  2017
   (in thousands of reais)  (% of total)  (in thousands of reais)  (% of total)  (in thousands of reais)  (% of total)
                   
Residential buildings    —      —      401,836    100.0    277,029    100.0 
Commercial    —      —      —      —      —      —   
Sales (1)    —      —      401,836    100.0    277,029    100.0 

_________________

(1)The spin-off of the Tenda business unit was concluded on May 4, 2017.

 

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,
   2019  2018  2017
   (in thousands of reais, unless otherwise stated)
São Paulo         
Potential sales value of units launched(1)    —      655,974    496,785 
Developments launched(2)    —      5    4 
Usable area (m2)(3)   —      77,658    72,406 
Units launched(4)    —      948    1,467 
Average sales price (R$/m2)(3) (5)    —      9,840    6,861 
Rio de Janeiro               
Potential sales value of units launched(1)    —      —      —   
Developments launched(2)    —      —      —   
Usable area (m2)(3)    —      —      —   
Units launched(4)    —      —      —   
Average sales price (R$/m2)(3)(5)    —      —      —   
Other Markets   —             
Potential sales value of units launched(1)    —      —      57,168 
Developments launched(2)    —      —      1 
Usable area (m2)(3)    —      —      10,534 
Units launched(4)    —      —      134 
Average sales price (R$/m2)(3)(5)    —      —      5,427 
Total Gafisa               
Potential sales value of units launched(1)    —      655,974    553,954 
Developments launched(2)    —      5    5 
Usable area (m2)(3)    —      77,658    82,940 
Units launched(4)    —      948    1,601 
Average sales price (R$/m2)(3)(5)    —      9,840    6,679 

_________________

(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$6,400, R$8,661 and R$6,679 in 2019, 2018 and 2017, respectively, for Gafisa’s ventures only.

 

Our developments for sale are divided into two broad categories: (1) residential buildings and (2) commercial buildings.

 

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Overview of Residential Buildings

 

In the residential buildings category, we develop three 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$15,000. 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$9,000 to R$15,000. 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, 2017 and December 31, 2019:

 

Project Description 

Year Launched 

Gafisa Participation (%) 

Usable Area (m2) (1) (2) 

Completion Year 

Number of Units (2) 

Units Sold (%) (As of December 31, 2019) 

Upside Pinheiros 2018 100% 11,261 2021 76 99%
Upside Paraíso 2018 100% 10,881 2021 109 79%
J330 Jardins 2017 100% 3,896 2021 28 46%
Parque Ecoville 2017 100% 10,534 2020 134 78%
 

_________________

(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.

 

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, 2017 and December 31, 2019:

 

Project Description 

Year Launched 

Gafisa Participation (%) 

Usable Area (m2) (1) (2) 

Completion Year 

Number of Units (2) 

Units Sold (%) (As of December 31, 2019) 

Belvedere Lorian Boulevard 2018 100% 24,975 2022 223 37%
Moov Belém 2018 100% 14,512 2021 392 94%
Scena Tatuapé 2018 100% 16,028 2021 147 24%
Moov Estação Brás 2017 100% 12,866 2021 543 50%

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Project Description 

Year Launched 

Gafisa Participation (%) 

Usable Area (m2) (1) (2) 

Completion Year 

Number of Units (2) 

Units Sold (%) (As of December 31, 2019) 

Moov Espaco Cerâmica 2017 100% 24,396 2021 396 99%
Moov Parque Maia 2017 100% 31,248 2021 500 59%

_________________

(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, 2019, with percentage of units sold less than 90%:

 

 

As of December 31, 2019 

Project Description 

Units Sold (%)
Smart Vila Madalena (1) 89.81%
Varandas Grand Park F2 (2) 88.80%
Smart Santa Cecília (3) 88.49%
Varandas Grand Park F4 (4) 88.03%
Mood Lapa (5) 85.90%
Varandas Grand Park F3 (6) 80.57%
Sao Way (7) 79.73%
Today Modern Residences (8) 78.79%
Bambu (9) 78.70%
Varandas Grand Park F6 (10) 78.02%
067 Hermann Junior (11) 77.40%
Laguna Mall (12) 76.77%
Barra Vista (13) 76.17%
Alphamall (14) 70.61%
Varandas Grand Park F5 (15) 68.12%
Americas Avenue (16) 64.70%
Target Offices & Mall (17) 63.87%
Sao Gate (18) 51.02%
 
(1)Smart Vila Madalena. This development was 100% completed at December 31, 2019 at which time 89.81% 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.

 

(2)Varandas Grand Park F2. This development was 100% complete at December 31, 2019 at which time 88.80% 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)Smart Santa Cecília. This development was 100% completed at December 31, 2019 at which time 88.49% 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 24–36 months.

 

(4)Varandas Grand Park F4. This development was 100% completed at December 31, 2019 at which time 88.03% 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.

 

(5)Mood Lapa. This development was 100% completed at December 31, 2019 at which time 85.90% 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.

 

(6)Varandas Grand Park F3. This development was 100% completed at December 31, 2019 at which time 80.57% 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 24-36 months.

 

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(7)Sao Way. This development was 100% completed at December 31, 2019 at which time 79.73% 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 24-36 months.

 

(8)Today Modern Residence. This development was 100% completed at December 31, 2019 at which time 78.79% 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

 

(9)Bambu. This development was 100% completed at December 31, 2019 at which time 78.70% 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)Varandas Grand Park F6. This development was 100% completed at December 31, 2019 at which time 78.02% 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 24-36 months.

 

(11)067 Hermann Júnior. This development was 100% completed at December 31, 2019 at which time 77.40% 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)Laguna Mall. This development was 100% completed at December 31, 2019 at which time 76.77% 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 24-36 months.

 

(13)Barra Vista. This development was 100% completed at December 31, 2019 at which time 76.17% 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.

 

(14)Alphamall. This development was 100% completed at December 31, 2019 at which time 70.61% 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 36-48 months.

 

(15)Varandas Grand Park F5. This development was 100% completed at December 31, 2019 at which time 68.12% 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 24-36 months.

 

(16)Americas Avenue. This development was 100% completed at December 31, 2019 at which time 64.70% 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 48-60 months. 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.

 

(17)Target Offices e Mall. This development was 100% completed at December 31, 2019 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 horizon. 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.

 

(18)Sao Gate. This development was 100% completed at December 31, 2018 at which time 51.02% 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 horizon.

 

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, Global Offices, Golden Office, Icon Business & Mall, Laguna Mall, Sao Gate, Sao Way, Scena Alto da Lapa, Target Offices & Mall, Today Modern Residences, Smart Vila Madalena, Smart Santa Cecília, Moov Parque Maia, Moov Belém, Vision Capote Valente, single units of Olavo Bilac and single units of Reserva das Ruínas.

 

Commercial Buildings

 

In 2017, 2018 and 2019, we did not launch any commercial buildings.

 

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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.

 

The table below sets forth the real estate developments for third parties currently under construction, in which we also have an equity interest, between January 1, 2017 and December 31, 2019:

 

Project 

First Year of Construction 

Gafisa Participation
(%) 

Partner 

Type of Project 

Marques 2900 2016 50% Bueno Netto Residential
044 Vila Rica 2017 50% Atins Empreendimentos Residential

 

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.

 

Our Clients

 

Our clients mainly consist of development clients. Development clients are clients who purchase units in our developments. As of December 31, 2019, our development-client database was comprised of more than 60,000 individuals. We currently have approximately 18,000 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, 2019, our main construction services client was Atins Empreendimentos, with whom we retain an equity interest in the 044 Vila Rica development.

 

No individual client represents more than 5% of our revenues from residential developments or construction services.

 

Our Operations

 

The stages of our development process are summarized in the diagrams below:

 

 

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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, 2019, we had an inventory of 32 land parcels under Gafisa, in which we estimate we could develop a total of 7,315 units (residential and commercial) with a sales value of R$ 4.0 billion, of which 8.1% 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    2,145    6.6%
Rio de Janeiro    1,254    13.4%
Other states    608    2.3%
Total    4,008    8.1%

 _________________

(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 130 independent Gafisa Vendas brokers, 4 sales coordinators and 3 sales managers.

 

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 2019, 2018, 2017, 2016 and 2015, Gafisa Vendas was responsible for approximately (i) 74%, 73.7%, 68.0%, 61.1% and 60.9%, respectively, of our sales in the state of São Paulo, and (ii) 60%, 64.9%, 63%, 48.8% and 60.6%, 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 to increase sales velocity. We have been successful with this strategy, usually selling approximately 30% of the units before construction starts.

 

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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 9002 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.

 

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

 

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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, 2019:

 

Sales Term  Luxury and Middle Income (average)  Entry-Level (average)
Mortgage lending (delivery)    90.15%   99.64%
Gafisa 36 months    5.47%   0.18%
Gafisa 60 months    0.36%   0%
Gafisa 120 months    4.02%   0.18%

 

Mortgages. In 2019, approximately 96.51% 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 2019:

 

Credit Lines 

Typical Interest rate 

Maximum Home Value 

Maximum Loan Value 

Mortgage portfolio (Carteira Hipotecária) or CH up to 7.99% 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 Minha Casa Minha Vida up to 9.16% annually + TR R$240,000.00 R$240,000.00
 

_________________

(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.

 

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;

 

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·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, 2019, our clients’ default level, related to amounts overdue for over 30 days, was 15.1% 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 

2019 

2018 

2017 

Gafisa 15.1% 14.3% 14.1%

 

The increase in our default levels is mainly due to the weakening economic conditions and political instability in Brazil since 2018.

 

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 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.

 

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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, 2019  As of December 31, 2018  As of December 31, 2017
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    832    292,087    2,332    1,040,848    2,908    1,131,823 
Volume/Sales value of cancelations    (193)   (97,531)   (520)   (227,677)   (801)   (411,658)
Percentage    23.2%   33.0%   22.3%   21.9%   27.5%   36.4%
Volume/Sales value, net of cancelations    639    194,556    1,813    813,172    2,107    720,164 
Total sales value net of cancelation    639    194,556    1,813    813,172    2,107    720,164 

 

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 land, the only raw materials that represent more than approximately 5% of our total costs are steel and concrete. 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 12.75% during the three year period ended December 31, 2019, resulting in an increase in the construction costs of Gafisa over that period. During the three year period ended December 31, 2019 the IGP-M increased 15.41%. 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.

 

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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., Votorantim Cimentos Brasil Ltda., Elevadores Atlas Shindler S.A., Portobello S.A. and IBRAP Industria Brasileira de Aluminio e Plastico 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;

 

·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, simulate unit designs and check their outstanding balances; and

 

·the development of the “Gafisa House Up Store,” through which buyers of certain units are able to customize their units in accordance with plans and finishing touches offered by Gafisa. Such options vary by development.

 

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.

 

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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 market:

 

São Paulo (1) — Gafisa’s Market Share

 

   Year ended December 31,
Year  2019  2018  2017
   (Launches in R$ million)
Local market    31,442    19,514    16,582 
Gafisa(2)    —      728    497 
Gafisa’s market share    —      3.7%   3.0%
                
 

_________________

Source: EMBRAESP and SECOVI.

 

(1)Metropolitan region.

 

(2)Gafisa interest.

 

In 2019, 2018 and 2017, 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, 2019, Gafisa had 138 direct and indirect subsidiaries, 22 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 138 SPEs or invested companies, 112 are wholly-owned by us, and we hold an interest of 50% or less in 26.

 

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.

 

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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 50 pending trademark applications and 136 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 59 domain names including our and our subsidiaries’ principal websites. The term of each domain name registration is 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 April 2020 and April 2023. We will seek to renew our domain names expiring in April 2020, 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., Porto Seguro Cia de Seguros Gerais, Swiss RE, Fator Seguradora, Ace Seguradora, Berkley Seguros, Tokio Marine Seguradora S.A., J Malucelli Seguradora S.A., Zurich Brasil Seguros 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

 

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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.

 

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.

 

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.

 

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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 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.

 

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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 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,

 

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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 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.

 

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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. SFI real estate credits may be freely negotiated by the parties, under the following conditions: (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.

 

Real estate sales, rental, or other real estate property financing in general, can 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 made through real estate securitization companies, non-financial institutions formed as joint stock companies whose objective is to acquire and securitize real estate credits. Funds raised by the securitizing companies can be made 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: they are issued in book-entry form, they may have fixed or floating interest rates and can be paid in installments, they may contain adjustment provisions, they are registered and traded through centralized systems of custody and financial settlement of private securities and they can be secured by the assets of the issuing company.

 

Minha Casa, Minha Vida program

 

Provisional Measure No. 459 enacted on March 25, 2009, converted into Law No. 11,977 enacted on 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. 13,043 enacted on November 13, 2014 and Law No. 13,097 enacted on January 19, 2015, created a public housing program called “Minha Casa, Minha Vida.” Provisional Measure No. 514 enacted on December 1, 2010, converted into Law No. 12,424 enacted on June 16, 2011, modified the aforementioned legislation, which calls for government investment of more than R$30 billion and is focused on building one million houses for families with monthly incomes of up to ten times the minimum wage. Under this program, the government is authorized to finance families purchasing houses with assessed values between R$90,000 and R$240,000. Law No. 12,868 enacted on October 15, 2013, released resources for “Minha Casa Melhor”, in which CEF provides to each beneficiary of the program “Minha Casa Minha Vida” subsidized credit up to R$5,000 for the purchase of furniture and appliances, with interest rate of 5% per year and repayable in 48 months.

 

Municipal Legislation

 

Municipal planning is regulated by articles 182 and 183 of the Federal Constitution and by Law No. 10,257 of July 10, 2001 (Estatuto da Cidade), as amended, or Law No. 10,257. Law No. 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:

 

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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 are 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.

 

Municipal Law No. 11,228 of June 25, 1992, approved the Code of Works and Construction, regulated by Decree 32,329 of September 23, 1992, which governs administrative and executive procedures and sets forth the rules to be followed in 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.

 

On July 31, 2014, Municipal Law No. 16,050 was published, replacing Municipal Law No. 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 16 years, in order to (i) incentivize 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) incentivize the development of urban areas already equipped with public transportation infrastructure, among other guidelines.

 

On March 22, 2016, Municipal Law No. 16,402 was published, replacing Municipal Law No. 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;

 

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(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;

 

(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

 

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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).

 

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.

 

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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 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

 

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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 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:

 

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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 Floor, 04543-900 – São Paulo, SP – Brazil. Currently, we lease approximately 950 square meters in this office. We believe our current facilities are adequate for the full development of our operations.

 

As of December 31, 2019, 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$14.2 million.

 

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ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A.       Operating Results

 

The financial statements for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 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,
   2019  2018  2017
   (%, unless otherwise stated)
Real growth in GDP    1.1    1.1    1.0 
Inflation rate (INPC)(1)    4.5    3.4    2.1 
Inflation rate (IGP—M)(2)    7.3    7.6    (0.5)
National Construction Cost Index (INCC)(3)    4.2    3.8    4.3 
TJLP rate(4)    5.6    7.0    7.0 
CDI rate(5)    4.7    6.4    9.9 
Appreciation (devaluation) of the real vs. US$    (4.0)   (17.1)   (1.5)
Exchange rate (closing) — US$1.00    R$ 4.031    R$ 3.88    R$ 3.31 
Exchange rate (average)(6) — US$1.00    R$ 3.944    R$ 3.65    R$ 3.20 
 

_________________

(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

 

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Industrializados), or IPI, levied on the acquisition of important construction products, including certain 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.

 

Critical Accounting Policies and 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.

 

In this sense, we set forth below summarized information related to our critical accounting policies. 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.

 

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

 

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annually or when circumstances indicate a decrease in the carrying amount. As of December 31, 2014, the Company recorded a provision for impairment for land and goodwill related to the acquisition of Cipesa Empreendimentos Imobiliários S.A. 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. 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.

 

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.

 

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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.

 

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

 

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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

 

·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,

 

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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; (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:

 

(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.

 

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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 5.5.17 (c).

 

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, 

 

2019 

2018 

2017(3) 

Launches (in millions of reais) 729 554
Number of projects launched 6 5
Number of units launched(1) 1,036 1,601
Launched usable area (m2)(2) 84,132 82,940
Percentage of Gafisa investment 100% 98%
 

_________________

(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.

 

(3)The information as of and for the year ended December 31, 2017 and December 31, 2016 does not include developments launched under the Tenda brand, the results of operations of which have been presented as discontinued operations in our consolidated statements of operations as of December 31, 2016, and its spin-off was concluded in May 2017.

 

In 2019, we did not launch any residential developments.

 

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In 2018, we launched under the Gafisa brand 6 residential developments with a total potential sales value of R$728.7 million and 100% of these developments were located in the state of São Paulo.

 

In 2017, we launched under the Gafisa brand 5 residential developments with a total potential sales value of R$553.9 million and 80% of these developments were in the state of São Paulo and 20%, 1 project, is located in Curitiba. During the year, approximately 10.3% of our launches in terms of potential sales value was generated from launches outside the states of São Paulo and Rio de Janeiro.

 

Gafisa segment

 

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 2018, Gafisa launches totaled R$728.7 million, a 31.5% increase compared with 2017.

 

Contracted sales for 2018 totaled R$813.2 million, up 12.9% from 2017. Sales of units launched over the year accounted for 49.4%, while sales of inventories accounted for the remaining 50.6%.

 

In 2017, Gafisa launches totaled R$553.9 million, a 39.8% decrease compared with 2016.

 

Contracted sales for 2017 totaled R$720.2 million, down 11.1% from 2016. Sales of units launched over the year accounted for 38.5%, while sales of inventories accounted for the remaining 61.5%.

 

In 2019, Gafisa delivered 2 ventures/stages and 365 units, accounting for R$171.4 million in Potential Sales Volume.

 

The market value of Gafisa segment inventories reached R$ 881.7 million at the end of 2019, compared to R$1.23 billion at the end of 2018 and R$1.5 billion at the end of 2017.

 

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,
   2019  2018  2017(2)
Type of development  (in millions of reais, unless otherwise stated)
Luxury middle-income buildings    109.3    333.4    358.7 
Entry-level developments    94.5    459.2    343.9 
Commercial    (8.1)   20.6    17.6 
Total contracted sales(1)    195.7    813.2    720.2 
Sale of units launched in the year    —      401.8    277.7 
Percentage of total contracted sales    —      49.4%   39%
Sale of units launched during prior years    —      411.3    442.5 
Percentage of total contracted sales    —      50.6%   61%
 

_________________

(1)Amount net of sales cancellation.

 

(2)The information as of and for the year ended December 31, 2017 do not include developments launched under the Tenda brand, which was spun off on May 4, 2017.

 

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The following table shows our and our main subsidiaries’ contracted sales for the periods presented:

 

   As of and for the year ended December 31,
   2019  2018  2017
   (in millions of reais, unless otherwise stated)
Contracted sales(1)         
Gafisa    195.7    813.2    720.2 
Total contracted sales    195.7    813.2    720.2 
 

_________________

(1)Amount net of sales cancellation.

 

In 2019, we did not launch any developments.

 

In 2018, we sold 49% of the launched units, which combined with the sales of units launched during prior periods, resulted in total contracted sales of R$813.2 million, an increase of approximately 13% compared to 2017.

 

In 2017, we sold 50.0% of the launched units, which combined with the sales of units launched during prior periods, resulted in total contracted sales of R$720.2 million, a decrease of approximately 11% compared to 2016.

 

We provide a limited amount of post-construction client financing. Our default rate was 15.1%, 14.3% and 14.1% as of December 31, 2019, 2018 and 2017, 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, 

 

2019 

2018 

2017 

  (in millions of reais)
Gafisa 3.2 12.5 20.3

 

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,
   2019(4)  2018(4)  2017(4)
   (in millions of reais, unless otherwise stated)
Sales to be recognized    437.7    572.2    644.3 
Net sales to be recognized(1)    421.7    551.3    620.8 
Cost of units sold to be recognized(2)    (271.1)   (354.5)   (405.1)
Expected gross margin—yet to be recognized(3)    150.6    196.8    215.7 
Expected margin percentage    35.7%   35.7%   34.8%
 

_________________

(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.

 

(4)This amount relates to the Gafisa segment only, since Tenda was spun off on May 4, 2017.

 

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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, 2019, 0.03% 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.

 

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,
   2019  2018  2017
Land    14.15%   32.51%   31.98%
Construction costs    70.11%   50.74%   51.73%
Financial costs    13.54%   13.35%   12.85%
Development costs    2.20%   3.40%   3.44%
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, 27.90% 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 4.2%, 3.8% and 4.3% in 2019, 2018 and 2017, 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:

 

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Period of construction

Percentage of costs incurred(1) 

1st to 6th month 10%
7th to 12th month 22%
13th to 18th month 23%
19th to 24th month 18%
25th to 30th month 17%
 

_________________

(1)Including cost of land.

 

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:

 

·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

 

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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 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.

 

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, 2019 and 2018

 

Net operating revenue

 

Net operating revenue for the year ended December 31, 2019, recognized by the percentage of completion revenue recognition method, was R$400.4 million, a decrease of 58% from R$960.9 million for the year ended December 31, 2018, mainly due to the lack of new launches during the year.

 

The gross revenue generated from the sale of property and barter transactions, net of the cancellation provision (reversal) totaled R$437.3 million for the year ended December 31, 2019, a decrease of R$610.9 million or 58.3% compared with the same period in 2018 of R$1.05 billion. The tax deductions from gross revenue reached R$36.8 million in 2019 from R$87.3 million in 2018, representing a decrease of 57.8%, which was mainly impacted by the lack of new launches during the year.

 

During 2019, inflation as measured by the INCC, the main Brazilian indicator for civil construction costs, was 4,2%. This resulted in an increase in our construction costs and consequently, the prices of our units for some projects, notably those launched in 2018 and 2019 and expected to be delivered in 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.

 

Operating costs

 

Operating costs in 2019 totaled R$282.6 million, a 66.6% decrease compared to R$846.2 million in 2018, as a result of the lack of new launches and a reversal of impairment adjustments in our landbank and inventory in the amount of R$27.1 million, compared to an expense of R$63.1 million in 2018.

 

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Gross profit

 

Gross profit in 2019 totaled R$117.7 million, representing an increase of approximately 3% from gross profit of R$114.7 million in 2018. This increase reflects the more efficient measures taken by the Company’s new management during the period, despite the decrease in revenues during the same period.

 

In 2019, the gross margin generated from our activities increased to 29.4% compared to 11.9% in 2018.

 

Selling expenses

 

Selling expenses in 2019 totaled R$14.8 million, representing a decrease of 82.4% compared to R$84.4 million in 2018.

 

General and administrative expenses, not including depreciation and amortization expenses

 

General and administrative expenses were R$54.1 million in 2019, a 5.2% decrease from the R$57.1 million recorded in 2018. However, recurring general and administrative expenses decreased from R$74.4 million in 2018 to R$50.8 million in 2019, with savings of R$23.6 million, or 31.7% Overall, these savings are attributable to implementation of our expenses reduction plan over the course of the year, which adjusted our expenses structure in line with our new business model.

 

Depreciation and amortization

 

Depreciation and amortization in 2019 was R$14.1 million, a decrease of 33.4% when compared to the R$21.3 million recorded in 2018. This decrease was mainly due to the lack of new launches in 2019 and lower investments in sales stands.

 

Other income and expenses, net

 

Net other expenses totaled R$31.6 million in 2019, compared to R$298.9 million in 2018. This decrease is mainly due to (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. In 2018, the amount of R$298,9 million was related to loss on realization of investment stated at fair value in the amount of R$112.8 million and R$172.4 million related to lawsuits expenses.

 

Financial income and expenses, net

 

Net financial expenses totaled R$59.6 million in 2019, compared to net financial expenses of R$80.5 million in 2018. The decrease is mainly due to a decrease in interest expenses as a result of a decrease in our levels of indebtedness during the period.

 

Taxes on income

 

Income tax and social contribution had a positive impact of R$37.2 million in 2019 compared to R$25.1 million in 2018. This increase 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. Accordingly, the provision for income tax and social contribution had a positive impact of R$35.3 million in 2019, compared to R$25.1 million in 2018.

 

Net income attributable to non-controlling interest

 

Net income attributable to non-controlling interests decreased from a net loss of R$1.8 million in 2018 to a net loss of R$0.4 million in 2019.

 

Net income (loss) attributable to owners of Gafisa

 

Net loss attributable to owners of Gafisa was of R$26.0 million in 2019, compared to a net loss of R$419.5 million in 2018. This variation resulted from the Company´s comprehensive restructuring process, reducing expenses, renegotiating material indebtedness, a reduction in accounting provisions and the reestablishment of healthy margins.

 

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If we exclude the effect of the divestment of Alphaville Urbanismo S.A., we would have had a net profit of R$15.1 million.

 

Results of Operations for the Years Ended December 31, 2018 and 2017

 

Net operating revenue

 

Net operating revenue for the year ended December 31, 2018, recognized by the percentage of completion revenue recognition method, was R$960.9 million, an increase of 22.2% from R$786.2 million for the year ended December 31, 2017, mainly due to (i) the increase in the recognition of revenue from construction projects and their improved performance, and (ii) the two projects launched in 2018, Upside Pinheiros and Moov Belém, which are almost 100% sold as of December 31, 2018.

 

The gross revenue generated from the sale of property and barter transactions, net of the cancellation provision (reversal) totaled R$1.05 billion for the year ended December 31, 2018, an increase of R$213.1 million or 26% compared with the same period in 2017 of R$835.1 million. The tax deductions from gross revenue reached R$87.3 million in 2018 from R$48.9 million in 2017, representing an increase of 78%, which was mainly impacted by higher launch volumes.

 

During 2018, inflation as measured by the INCC, the main Brazilian indicator for civil construction costs, was 3.84%. This resulted in an increase in our construction costs and consequently, the prices of our units for some projects, notably those launched in 2017 and 2018 and expected to be delivered in 2019. 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 2018 totaled R$846.2 million, a 6.7% decrease compared to R$906.5 million in 2017, as a result of a lower impact of impairment adjustments in our landbank and inventory in the amount of R$63.1 million, compared to R$147.3 million in 2017

 

Gross profit

 

Gross profit in 2018 totaled R$114.7 million, representing an increase from gross loss of R$120.3 million in 2017. This increase was mainly due to (i) higher volume of launches and sales, (ii) better macroeconomic conditions in Brazil, (iii) a decrease in dissolutions (cancellations of sales), and (iv) the effects of the impairment adjustments in our landbank and inventory in the amount of R$63.1 million.

 

In 2018, the gross margin generated from our activities increased to 11.9% as compared to negative 34.5% in 2017.

 

Selling expenses

 

Selling expenses in 2018 totaled R$84.4 million, representing a decrease of 3.6% as compared to R$87.6 million in 2017, mainly due to a decrease in (i) product marketing and selling expenses, as a result of our corporate restructuring; and (ii) brokerage and sales commission expenses, as a result of lower sales volume during the period. Selling expenses in 2018 represented 8.8% of our net operating revenue compared to 14.4% in 2017.

 

General and administrative expenses, not including depreciation and amortization expenses

 

General and administrative expenses were R$57.1 million in 2018, a 38% decrease from the R$92.7 million recorded in 2017. This decrease was mainly due to (i) the net reversal of bonus provisions for 2017 and 2018, amounting to R$14.8 million in 2018; (ii) reduced services expenses; and (iii) lower salaries and charges expenses.

 

Depreciation and amortization

 

Depreciation and amortization in 2018, was R$21.3 million, a decrease of R$10.7 million when compared to the R$32.0 million recorded in 2017. Additionally, in 2017 the amount of R$25.5 million was recognized as an amortization related to the write off of the goodwill on the AUSA acquisition.

 

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Financial income and expenses, net

 

Net financial expenses totaled R$80.5 million in 2018, compared to net financial expenses of R$107.3 million in 2017. The decrease is mainly due to a decrease in interest expenses as a result of a decrease in our levels of indebtedness during the period.

 

Taxes on income

 

Income tax and social contribution had a positive impact of R$25.1 million in 2018 compared to R$25.9 million in 2017, reflecting a tax credit of R$26 million from the impairment of goodwill that resulted from the remeasurement of our remaining 30% interest in AUSA in 2018. Accordingly, the provision for income tax and social contribution had a positive impact of R$21.7 million in 2018, compared to R$23.1 million in 2017.

 

Net income attributable to non-controlling interest

 

Net income attributable to non-controlling interests increased from a loss of R$0.3 million in 2017 to a net loss of R$1.8 million in 2018.

 

Net income (loss) attributable to owners of Gafisa

 

Net loss attributable to owners of Gafisa was of R$419.5 million in 2018, compared to a net loss of R$760.2 million in 2017. This variation was mainly due to (i) higher launches and sales, (ii) lower cancellations and (iii) reduced expenses.

 

Business Segment

 

See “Item 4. Information on the Company—A. History and Development of the Company—Historical Background and Recent Developments.”

 

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), the Company operates one business segment. Accordingly, our management, who is responsible for monitoring our business progress, uses data derived from our consolidated financial statements to make decisions. Therefore, in line with CPC 22 – Operating Segments, the Company understands that there is no reportable business segment to be disclosed in the years ended December 31, 2019, 2018 and 2017.

 

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 2019, we did not carry out any receivables sales with recourse.

 

In 2018, we did not carry out any receivables sales with recourse.

 

In 2017, we carried out the following receivables sales with recourse:

 

On March 28, 2017, Gafisa and its subsidiaries entered into a CCI transaction related to a portfolio comprising selected residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$30.2 million in exchange for cash at the transfer date, discounted to present value, for R$23.0 million.

 

Construction financing lines of credit are available and we have fulfilled substantially all of our construction financing needs for 2019, 2018 and 2017 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

 

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the Brazilian Saving and Loan System (Sistema Brasileiro de Poupança e Empréstimo — SBPE) indexed to TR (Taxa Referencial) and a fixed rate spread.

 

During 2019, our customers’ ability to obtain bank mortgage loans continued to improve, with interest rates in the range of 7.99% to 9.75%+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,
   2019  2018  2017(1)
   (in millions of reais)
Real estate development receivables:         
Current    442.5    468.0    374.9 
Long-term    103.0    174.0    199.3 
Total    545.5    642.0    574.2 
Receivables to be recognized on our balance sheet according to percentage of completion method:               
Current    —      —      —   
Long-term    437.6    572.2    644.3 
Total    437.6    572.2    644.3 
Total receivables from clients – portion recognized plus portion not recognized    995.0    1,214.2    1,328.4 

_________________

(1)This amount relates to the Gafisa segment only, since Tenda’s results of operations have been presented as discontinued operations in our consolidated financial statements as of December 31, 2017, and since the Tenda business spin-off was completed on May 4, 2017.

 

The total balance of receivables on the balance sheet has the following maturity profile:

 

   As of December 31, 2019
   (in millions reais)
Maturity   
Overdue    159.3 
2020    577.1 
2021    239.9 
2022    5.3 
2023    3.2 
2024 onwards    10.3 
Total    995.1 

 

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, 2020, our clients’ default level was 15.3% 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$53.8 million as of December 31, 2019 and is considered sufficient by our management to cover incurred losses on the realization of accounts receivable.

 

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Cash Flows

 

Operating activities

 

In 2019, net cash generated from operating activities totaled R$44.0 million, compared to R$31.5 million in 2018. In 2018, net cash generated from operating activities totaled R$31.5 million, compared to R$206.9 million in 2017. This decrease is mainly composed of (i) a R$95.7 million increase in receivables from clients and a R$339.6 million decrease in inventory; (ii) a R$14.5 million decrease in related party transactions; (iii) expenses in the net amount of R$227.2 million which did not affect our cash and cash equivalents, of which R$38.1 million relates to impairment adjustments of AUSA goodwill and impairment adjustments in our landbank and inventory, R$15.5 million of equity losses during the period, and R$172.4 million of which relates to provisions for contingencies; and (v) other less relevant increases and decreases in other operational categories.

 

Investing activities

 

Net cash used in investing activities, including the acquisition of assets, equipment and new investments was R$300.6 million in 2019, compared to R$3.1 million in 2018. This variation is mainly due to the increase in short term investments in the amount of R$387.3 million, related to the capital increases in 2019.

 

Net cash used in investing activities, including the acquisition of assets, equipment and new investments was R$3.1 million in 2018, compared to cash generated from investing activities of R$445.4 million in 2017.

 

Financing activities

 

Net cash generated from financing activities in 2019 totaled R$236.7 million, compared to the net cash used from financing activities in 2018 of R$24.6 million. The higher cash generated in 2019 compared to 2018 was mainly attributable to (i) the R$404.9 million capital increases in 2019 (ii) a reduction on increase and amortization of loans and financing.

 

Net cash used from financing activities in 2018 totaled R$24.6 million, compared to the net cash used from financing activities in 2017 of R$528.6 million. The lower cash used in 2018 compared to 2017 was mainly attributable to (i) the R$250.8 million capital increase concluded in February and (ii) a reduction on amortization of loans and financing. There was no net cash used from financing activities related to the disposal group held for sale in 2018 compared to R$24.1 million in 2017.

 

Pledged mortgage receivables and short-term investments

 

As of December 31, 2019, substantially all of our mortgage receivables totaling R$132.3 million are pledged. In addition, R$33.6 million of our short-term investments and collaterals are restricted as they have been pledged.

 

Capital Expenditures

 

In 2019, we invested R$3.6 million in machinery and equipment, information technology equipment, software, project

 

In 2018, we invested R$12.5 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 R$9.7 million.

 

In 2017, we invested R$20.5 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 and software acquisitions, which amounted to R$7.3 million and R$6.4 million, respectively.

 

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.

 

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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, 2019, we had outstanding debt in the total amount of R$730.7 million, a decrease of 17.8% as compared to December 31, 2018. As of December 31, 2019, our indebtedness principally consisted of: (1) debentures totaling R$197.5 million, (2) working capital loans totaling R$55.0 million, and (3) other loans (mainly SFH) totaling R$478.2 million.

 

As of December 31, 2018, we had outstanding debt in the total amount of R$889.4 million, a decrease of 19.5% as compared to December 31, 2017. As of December 31, 2018, our indebtedness principally consisted of: (1) debentures totaling R$265.7 million, (2) working capital loans totaling R$95.6 million, and (3) other loans (mainly SFH) totaling R$528.1 million.

 

   Maturity as of December 31, 2019
   Total  2020  2021  2022  2023 and thereafter
   (in millions of reais)
Debentures (Projects)    159.5    146.8    11.9    0.8    —   
Housing Finance System (SFH)    279.1    279.1    —      —      —   
Real State Finance System (SFI)    177.1    116.1    61    —      —   
Bank credit notes (Projects)    37.8    0.1    37.7    —      —   
Project debt total    653.5    542.1    110.6    0.8    —   
Debentures (Working Capital)    38.1    11.4    11.2    10.5    5.0 
Other Working Capital    39.1    30.9    4.4    3.8    —   
Working Capital debt total    77.2    42.3    15.6    14.3    5.0 
Total    730.7    584.4    126.2    15.1    5.0 

 

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.

 

On September, 2018, we issued a CCB in the amount of R$40 million due in 2021. The CCB is guaranteed by real estate receivables.

 

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.

 

The actual ratios and minimum and maximum amounts stipulated by restrictive covenants related to these CCBs at December 31, 2019 are as follows:

 

 

At December 31, 2019 

Loans and Financing  
Total accounts receivable (2) plus inventory required to be below zero
or 2.0 times over venture debt (3)
4.52 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)
(9.04) times
Total debt, less venture debt, less cash and cash equivalents and short-term
investments, cannot exceed 75% of equity plus non-controlling interests
16.03%
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
3.79 times

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_________________

(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 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 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 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 Interbank Deposit (DI) plus 5% per annum.

 

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, 2019 are as follows:

 

 

At December 31, 2019 

Total accounts receivable (2) plus inventory required to be below zero or 2.0 times over net debt (4) less venture debt (3) (14.62) 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 -15.81%
 

_________________

(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.

 

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(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

 

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, 2019, 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, 2019, the interest rates on these loans generally varied between 10.0% and 14.2% per annum, plus TR, and the loans generally mature through March 2020 and July 2021. This financing is secured by mortgages on property and by security interests on the receivables from clients. As of December 31, 2019, we had 13 loan agreements in effect, with a balance of R$456.2 million. At the same date we also had R$4.5 million in aggregate principal amount of financing agreements with SFH, the funds of which will 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.

 

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.

 

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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 2019 and 2018, 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. Additionally, as a result of the Tenda spin-off which was consummated on May 4, 2017, we received cash totaling R$219.5 million in connection with the exercise by the Gafisa shareholders of their preemptive rights to acquire up to 50% of the share capital of Tenda, as well as cash totaling R$105.2 million in connection with the Tenda share capital reduction, both of which have contributed to solidifying the liquidity and capital structure of the Company. As a result of the gradual recovery of the Brazilian economy and as 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, 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 was allocated to capital, and R$14.99 per share was allocated to capital reserves.

 

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.

 

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 loss of R$26.0 million, R$419.5 million and R$760.2 million in 2019, 2018 and 2017, respectively. Under U.S. GAAP, our net losses were R$60.7 million, R$452.6 million and R$621.8 million in 2019, 2018 and 2017, respectively.

 

Our equity, in accordance with Brazilian GAAP, was R$882.8 million, R$493.2 million and R$715.1 million as of December 31, 2019, 2018 and 2017, respectively. Under U.S. GAAP, we recorded total equity of R$595.4 million, R$240.4 million and R$495.4 million as of December 31, 2019, 2018 and 2017, 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, 2019

 

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, 2019.

 

The following standards are in effect beginning on January 1, 2019:

 

On January 13, 2016, the IASB published IFRS 16 – Leases (“IFRS 16”), which establishes principles that will apply to the recognition, measurement, presentation and disclosure of leases in the financial statements of lessors and lessees. IFRS 16 will require lessors to recognize a lease liability reflecting future lease payments and a “right-of-use assets” for all lease contracts, except certain short-term leases and leases for low-value assets. The principles that apply to the recognition, measurement, presentation and disclosure of leases in the financial statements of lessees will remain substantially the same. IFRS 16 will be effective for annual periods beginning on or after January 1, 2019, and earlier application of IFRS 16 will be permitted for IFRS purposes. In Brazil, earlier application of IFRS 16 will be subject to the implementation of IFRS 16 in Brazil and the prior approval of the CPC and the CVM. The standard can be applied either on the cumulative catch-up approach or the full retrospective method, and is currently being evaluated by the Company.

 

Based on available information, the right-of-use assets and lease liabilities was recognized in the amount of R$4.5 million as of January 1, 2019.

 

The ICPC 22 – Uncertainty Over Income Tax Treatments deals with the recognition of income taxes in the cases in which the tax treatments involve uncertainty that affects the application of IAS 12 (CPC 32) and does not apply to taxes out of the scope of IAS 12 nor do specifically include the requirements related to the interest and fines associated with uncertain tax treatments. The interpretation did not have impact on the Company’s Financial Statements.

 

The following standard amendments and interpretations will not have a significant impact on the consolidated financial statements of the Company:

 

·Amendments to references to the conceptual framework in IFRS standards (CPC 00)

 

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·Definition of a business (amendments to the CPC 15/IFRS 3)

 

·Definition of materiality (amendments to the CPC 26/IAS 1 and CPC 23/IAS8)

 

·IFRS 17 Insurance Contracts

 

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 2019, 2018 and 2017 were immaterial. See also “Item 4. Information on the Company—B. Business Overview—Construction.”

 

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, 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

 

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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 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.

 

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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 Masini 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.

 

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. The duration and severity of the COVID-19 pandemic in Brazil and globally is still uncertain, 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. Moreover, the construction of our projects continue to be on schedule. However, due to the COVID-19 pandemic, we have postponed launches planned for the second quarter and the second half of 2020. 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, 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 are going to continue to monitor the COVID-19 pandemic to continually update our projections and analysis on any effect on our financial information, and we cannot currently estimate the impact that COVID-19 will have on our 2020 financial performance and cash flows.

 

E.       Off Balance Sheet Arrangements

 

We currently do not have any off-balance sheet arrangements or significant transactions with unconsolidated entities not reflected in our consolidated financial statements. All of our interests in and/or relationships with our subsidiaries or jointly-controlled entities are recorded in our consolidated financial statements.

 

F.       Disclosure of Contractual Obligations

 

The table below presents the maturity of our significant contractual obligations as of December 31, 2019. The table does not include deferred income tax liability.

 

   Maturity Schedule
   Total  Less than 1 year  1-3 years  3-5 years  More than 5 years
   (in millions of reais)
Loans and financing    533.1    426.1    107.0    —      —   
Debentures    197.5    158.2    39.3    —      —   
Interest(1)    128.7    64.6    60.4    3.7    —   
Real estate development obligations(2)    488.0    296.4    191.4    0.2    —   
Obligations for land purchase    208.3    115.2    73.6    19.5    —   
Credit assignments    40.3    20.5    15.3    3.6    0.9 
Obligations from operating leases    9.6    2.1    4.4    3.1    —   
Other accounts payable    144.6    135.5    9.1    —      —   
Total    

1.750.1 

    

1.218.6 

    500.5    30.1    0.9 

 

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_________________

(1)Estimated interest payments are determined using the interest rate as of December 31, 2019. However, our long-term debt is subject to variable interest rates and inflation indices, and these estimated payments may differ significantly from payments actually made.

 

(2)Including commitments not reflected in the balance—CFC Resolution No. 963. Pursuant to Brazilian GAAP, and since the adoption of CFC Resolution No. 963, the total costs to be incurred on the units launched but not sold are not recorded on our balance sheet. As of December 31, 2019, the amount of “real estate development obligations” related to units launched but not sold was R$178.5 million.

 

We also recorded provisions for contingencies in relation to labor, tax and civil lawsuits in the amounts of R$153.0 million and R$123.9 million in current and non-current liabilities, respectively, as of December 31, 2019.

 

G.       Safe Harbor

 

See “Cautionary Statement Regarding Forward-Looking Statements.”

 

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:

 

Name 

Age 

Position