Description

Brazil is a country of over 200 million people.  We have been investing there for over ten years now.  I believe it was Ruchir Sharma who said about Brazil, “It is the country of the future…and always will be.”  Yes, that is how investing in Brazil often feels, but it has its moments.  And we think we are at one of them.

Brazilian inflation rates and interest rates made the U.S. look stable the last couple of years but Brazil has seen inflation before and their central bank didn’t waste a precious year saying “it’s transitory”.  They started hiking the Selic (our Fed Funds rate) in March 2021, fully a year before the Fed woke up.  By the time the U.S. Fed acted, Brazil had already raised rates from 2% covid emergency level to 11%, and rates peaked at nearly 14%. 

Brazil started cutting rates in August 2023, as inflation subsided, and has cut short term rates 150 bp from the peak.  We would think this very likely continues. 

It is no coincidence that Multiplan is a real estate company.  If our thesis on a country is that we are on the other side of inflation and interest rates have started the process of coming down, we think real estate is the kind of thing we want to own. 

We consider the currency modestly attractive relative to the dollar so we welcome domestic exposures in Brazil unhedged.  Brazilian currency can get wild but it is actually the U.S. dollar we are much more worried about at the moment. 

Multiplan is without question the highest quality shopping mall operator in Brazil.  Their malls are 5% of Brazil’s square footage but 10.4% of revenues, meaning rent is 2x average.  Morgan Stanley did an analysis that you can probably find showing that of the Brazilian malls outperforming on rent growth exiting covid, nearly half of them are Multiplan’s.  And there are only a few Multiplan malls on the underperforming quintiles of the sector. 

These are Brazil’s A and A+ malls.  Think Simon in the U.S.  We have seen in the U.S. and we see in Brazil that there are malls that have a lot of problems but it is not the A and especially not the A+.  We have zero interest in owning the other ones because they might be “cheaper”. 

I have invested in REITs and real estate for many years and this is the only one we own right now in a global portfolio.  We just don’t see cap rates as terribly attractive relative to interest rates in most places.  We don’t know of another real estate company of anywhere near this quality in the world trading at a double digit cap rate.  Of course we can see why – interest rates are very high in Brazil.  But they are coming down.  And the quality of this one is exceptional.  This is absolutely not some office REIT where nobody is in the buildings on Mondays and Fridays. 

Numbers are volatile the last few years for obvious reasons as mall rents have a sales participation component which went down a lot in 2020 and then recovered big so growth rates of line items are very distorted.  And their reported financials are complex through a partnership structure, but they are reporting them honestly in the NOI number reflecting just their proportion of ownership.

Management gives you an estimate of what they call “fair value” for their real estate in the quarterly release.  It is calculated on a 6% cap rate which we think is aggressive, though if Brazil came back in favor with investors it would not surprise us at all if the stock were to trade at that level in a year or two.  That number is 48, nearly double the current share price.  On a boring company without a lot of financial leverage.  Like I said, that is not our number, but it would not surprise us if it got there.

They present that in the context of repurchasing shares which should tell us that management understands that repurchasing shares below intrinsic value matters.  They are not repurchasing a lot because they are paying most out as dividend and have been taking down debt.  But debt is so low now that we would expect to see more going to share repurchase in future quarters which we would welcome.

Incidentally, the page in their quarterly deck where they show their calculation of intrinsic value they use NYU Professor Damodaran’s methodology.  If you haven’t spent time learning from him run, don’t walk to listen his class free online!  I found him later in life than I should have but I am glad I did.  I don’t think I have ever seen that in a company report!  At the very least it shows a management that really cares about what the right answer is to the important question of intrinsic value, which is not a simple question when you are dealing with Brazil.

They are not building any new properties at the moment.  They are paying their dividend and buying back stock. 

Summary:

I am going to keep this very simple.  I have been posting on VIC for over 20 years so you can see I am both old and capable of writing a long report.  I just don’t see the need for that here as it is a pretty simple idea and you will get very full disclosure if you just read their latest quarterly release – extremely informative.  The five things that really jump out at us about Multiplan are:

1. Very high quality real estate – this is not the laggard or the one with problems.  We looked at a lot of “cheaper” real estate companies in Brazil before buying this one.
2. Cap rate of over 10%.  If you can find me another one of those of anywhere near this quality please post it or tell me in the Q&A.
3. Debt is low, 1.6x EBITDA.  That is probably because interest rates in Brazil are so high but the point is this isn’t “cheap” because its levered to the hilt.  This is not a management that takes big risk.
4. I really like management.  Their disclosure is exceptional for an emerging markets company and they think about capital allocation the right way. 
5. The reason it is so cheap is the country not the company, and interest rates are already coming down.

The very simple buy case for Multiplan is that NOI is about 1.8bn and enterprise value is 17.4bn, implying an entry cap rate of over 10%.  Put an 8% cap rate on that and a year of growth and our equity we think is worth about R$ 37 per share.  A 7% cap rate certainly should be considered well in the range of possibility for real estate of this quality and that would get you to R 43 per share.

A very strong company, well managed, just located in the wrong place at the moment but that place is getting better.

The views expressed are those of the author and do not necessarily represent the views of any other person. The information herein is obtained from public sources believed to be accurate, reliable and current as of the date of writing.  The author will not undertake to supplement, update or revise such information at a later date.  The author may hold a position in the securities discussed. 

Catalyst

Falling interest rates