Management Comments

EZTEC’s management announces its consolidated results for the fourth quarter of 2016, beginning the report by remarking that, for the real estate development market, this has been the most complex fiscal year of the past two decades. Despite the Brazilian broader economic contraction, the deepening of the sector’s crisis has been a result of the proliferation of sale cancellations for units under construction, as clients have been finding support in the Brazilian Judicial Branch.

Nonetheless, the Company has upheld a conservative operational and financial management, reaching positive results and positive net cash position. These have also permitted the direct financing of clients with ready units. Given the Company’s belief that the worst is already behind us, the moment calls for the preparation to resume its operational growth. Next, we will lay out the details for the year’s highlights.

SALES AND GROSS MARGIN: the year of 2016, much like 2015, presented low gross sales if compared to the Company’s historical standards. That is explained by a context in which unemployment has risen, clients’ income has deteriorated, and access to credit has become more stringent, ultimately affecting the motivation for further launches. Sales have been particularly weak in the months of July and August, as they were marked by the RIO 2016 Olympic Games and by political instability at the national sphere. The subsequent months, after the presidential impeachment, have presented a recovery, resuming the condition of positive net sales (as net sales reached R$ 39 million in the 4Q16 and R$ 76 million in 2016). The Company’s sales department has dedicated its efforts towards the sales of ready units. These are definitive in nature and, representing 62% of gross sales, have assisted in the Company’s cash generation. Concerning the gross margin, we have noticed a drop relative to the Company’s historical standards, which is mainly caused by the discount offered for some of the projects—even though, it must be emphasized, such discount policy has been judicious, in a way that has not endanger the already existent sales of units under construction.

MANAGEMENT OF RECEIVABLES AND CANCELLATIONS: the deterioration in the macroeconomic scenario, the great volume of deliveries (the largest in the Company’s history), as well as the drop in unit prices, have collectively contributed for a strong increase in cancellations in 2016 relative to 2015. The penalties applied to real estate developers due to dissolutions have caused serious problems for the sector and, thus, the drafting of regulations is fundamental to the sector’s health—regulations that foster the necessary judicial security to safeguard new investments and non-delinquent clients. Regarding the management of receivables, the Company has put effort to maintain its portfolio with a low level of delinquency. It does so by proactively reaching out to the clients, attempting to understand their financial condition in a case-by-case basis, and putting forward the most appropriate solution: be it debt renegotiation, credit transfer, or, in the worst case scenario, the dissolution of the sale. It is worth highlighting that the Company’s direct financing of the client—through a judicious credit score analysis—has assisted with new sales, as well as with the maintenance of clients whose projects has already been delivered. The receivables for ready units have totaled, by the end of 2016, R$ 389 million, rewarded at an interest rate of 10% to 12%y.y. plus inflation, contributing to the Company’s positive financial result.

LAUNCHES AND LAND BANK: the Company has launched three projects in 2016, totaling R$ 205 million, apart from the acquisition of shares in two projects where it already had participation (contributing with additional R$ 26 million, reaching a total of R$ 241 million). Regarding the purchase of plots, the administration believes, despite its land bank being worth R$ 5.7 billion in PSV, that it can find opportunities for the acquisition of plots that are well positioned (within the city of São Paulo), in the mid-high- or high-income segments, with high liquidity, and with a diluted PSV (smaller plots with fewer units). Thus, three plots with such characteristics were acquired in the 4Q16, reaching a PSV of R$ 200 million. Nonetheless, aiming for the best mix in the composition of its land bank, the Company has sold a portion of a plot in the city center, earning a profit while still leaving some of the adjacent area left for real estate development.

FINANCIAL RESULTS: despite the more challenging context where constructions, launches, and net sales have diminished, EZTEC has earned a Consolidated Net Revenues of R$ 572 million in the year of 2016, for a Net Profit of R$ 230 million and Net margin of 40%. The sum of its operational expenses has remained practically unaltered; administrative expenses have fallen and sales expenses—especially when it comes to the maintenance cost of ready units in its inventory—have risen.

CASH POSITION: the Company has concluded the year of 2016 with a R$ 210 million Net Cash Position. Throughout the year, thanks to inventory sales a high volume of deliveries, the generation of cash was approximately R$ 200 million. Such financial position is a characteristic trait of EZTEC’s business model, enabling its endurance through the toughest periods of the market, and directing it towards decisions that foster the Company’s sustainability and profitability.

EZ TOWERS / EZ MARK: EZ Towers’s Tower B, the Company’s primary corporate asset, is currently 62.5% leased. In the case of EZ Mark, 39% of the Company’s inventory was leased in the year of 2016. It is important to emphasize that the purpose of these projects ultimately is their sale, which will happen in the appropriate moment, such that it generates the highest possible value for EZTEC’s shareholders.

DIVIDENDS AND CAPITALIZATION: considering a payout of 25%, after legal deductions from Net Profit, we will obtain a sum of R$ 54.7 million to be distributed in dividends. Regarding the profit reserve, the Company’s administration will submit the extraordinary distribution of R$ 126 million for approval in its Ordinary General Assembly, culminating in R$ 180 million in total dividends and a payout of 78%.

The results presented celebrate the administration’s capacity to manage the Company with focus and economic and financial sustainability. However, it must be noted that, regardless of our belief in the resuming of activities already in 2017, the organizational and operational challenges will linger throughout the year. The central challenges still being renegotiations, cancellations, inventory sales and the transferring of the client to banks ("repasse"). However, "new launches" will be fundamental in altering the Company’s dynamic, exploring its execution capacity, its land bank, and its capital structure. Thus, we shall observe the return of investments towards the creation of a new cycle of economic growth; offering our contribution to the generation of the jobs and income that are so much needed in Brazil.

EZTEC Management.