Friday Letter Brazilian sideshow

 Global Logistic Properties’ first foray into Brazil shows that if you know your sector, you don’t have to be an expert on the country.  

In the long term, Global Logistic Properties’ (GLP) capture of pole position in the race to build out distribution facilities in South America’s largest economy might seem a sideshow to the firm’s main event in China. Nonetheless, the transaction announced to the markets this Wednesday serves up a lesson in deal generation and execution.

During GLP’s second quarter earnings call to analysts this week, sector veteran, serial company-builder and co-founder Jeff Schwartz explained the story behind the R$2.9 billion (€1.14 billion; $1.45 billion) acquisition, which gives the firm more than 22 million square feet of stabilised assets and developable land (mostly in the prime hubs of São Paulo and Rio de Janeiro) and plants GLP’s flag as the largest logistics owner and investment manager in the country.

The story began in 2008, the same year Schwartz quit as chief executive of rival logistics giant ProLogis. Amid the early tremors of the global financial crisis (and before bringing his 14-year reign to its end), Schwartz had been cultivating a relationship with Prosperitas, the São Paulo developer-cum-fund manager on the other end of the transaction, keen to continue pushing the Denver-based firm’s brand into emerging markets. Fate meant he was unable to realise a union for ProLogis (which later inherited its own partner in local rival Cyrela Commercial Properties and a $422 million Brazil fund through its merger with AMB Property). However, the groundwork had been laid for his next firm, GLP, to pick up the reigns.

Unsurprisingly, the 34 properties bought from Prosperitas look remarkably similar to what GLP manufactures in China currently. “We gave them the spec, worked with them for a long time and now it’s paying off,” Schwartz said. Add in exclusive rights to Prosperitas' portfolio for a year, discounted entry pricing and an asset management team inherited for nothing – “we helped build it after all” – and you start to see why the Canada Pension Plan Investment Board (CPPIB), China Investment Corporation (CIC) and the Government of Singapore Investment Corporation (GIC) climbed aboard.

GLP has bought the properties at a cap rate of more than 10 percent (interest rates in Brazil are still relatively high) and with rents meaningfully below market levels – an average of R$17 per square metre per month versus the market rate of R$20. Even the developments come complete with full planning permissions in place. Opportunistic IRRs of between 18 percent and 19 percent, before fees and promote, have been targeted as a result.

Schwartz calls GLP an early mover benefiting from economies of scale and, by the nature of the transaction, has erected barriers of entry for competitors in the sector. The flipside to this nascent arrival is an immature market into which to sell. Brazilian pension funds will buy logistics property for as low as an 8.5 percent yield (they are tax-exempt), according to Schwartz, but they typically buy portfolios of no larger than $100 million “so we’d need to break it up,” he admitted. Regardless, there’s plenty of growing to be had between now and when GLP needs to consider serious exits. Capital markets evolve just as logistics markets do.

Schwartz and GLP have made a bed for themselves in aiding the forging of assets before buying them in what is still essentially a non-institutional market. Still, core buyers CPPIB, CIC and GIC are handsomely committed in this transaction and that, in itself, is one step forward in that regard.

Given the nature of its 200 million strong population versus China’s 1.3 billion, GLP’s Brazilian business would unlikely constitute more than one fifth the size of its China business and the firm does not want it to: “We want to make sure that nothing we do in Brazil detracts even one percent from the massive growth we see in China and Japan,” Schwartz said.

That doesn’t make the firm’s approach to the country any less impressive.