THE FACES OF JUSTICE

Judge Sergio Moro (left) and the Attorney General, Rodrigo Janot (right), the faces of justice in Brazil’s largest corruption investigation.

The Prolifico Report Jul & Aug 2015 22nd September

IS BRAZIL STARTING TO LOOK CHEAP?

“I think the most interesting period will start now. There will be distressed assets and distressed sellers: which

means motivated sellers. That hasn’t existed before.”

- Rafael Fritsch, Partner at Canvas Capital (Financial Times Confidential Research, September 9th)

“Investors see a crisis, as the one Brazil is currently going through, as an opportunity. There are many assets for

sale with really attractive prices.”

- Augusto Sales, Head of KPMG' Strategy Group in Brazil (Valor Econômico, August 5th)

“Could it continue to sell off in the short term? Of course. But in my mind it now has more upside than downside

if you are looking 12 months out.”

- Andrés Garcia-Amaya, research analyst with JPMorgan Asset Management, who says that based on some measures the

Brazilian real is trading at 29 per cent below fair value. (Financial Times, September 17th)

In Brazil the storm continues and the darkest clouds are currently hovering over Brasilia, Brazil’s political capital. The

political disarray is causing fallout across the economy and was one of the main reasons for the recent downgrade by

S&P. The president’s popularity is the lowest on record, at below 10%, and this is adding to the difficulties of getting

many of the fiscal adjustment measures agreed by congress. Some of the opposition are calling for her impeachment,

but Dilma seems to still have enough support in congress. Her opposition was also weakened last month, when some

of the senior members of the Brazilian business community declared themselves against the impeachment.

The recession is forecast to continue into 2016 and this is already hurting tax revenues and therefore making it more

difficult to achieve results in the fiscal adjustment. However, the government has just announced a BRL 66.2 billion

package that would assure a primary surplus of 0.7% of GDP in 2016, for which it now needs to obtain congressional

approval.

The Brazilian Real has been weathering much of this storm, which has been further compounded by external factors,

mainly China, commodity prices and the US. The Brazilian currency has now hit a new record low of over 4 to 1 US

dollar, it almost reached 4 in 2002, when Lula came to power and the days of hyperinflation, mass poverty and

military rule were still relatively fresh in people’s minds. Brazil has come a long way since those days and although

Brazil is going through difficult times, the markets, as is often the case, assume the perceived risk is greater than the

actual risk and therefore the market gets oversold. Furthermore, the cycles are normally shorter in emerging markets

and hence once the rebound comes, it should come relatively quickly.

Prolifico has recently closed its largest deal (a distressed block in the heart of Rio) and because we are focusing on

real estate investment in Brazil with a 4-5 year horizon, the future looks bright and we believe that now presents a

very attractive opportunity (especially for USD investors) on a medium term view. Brazil is still supported by strong

fundamentals which should unlock growth as soon as the fiscal situation starts to improve, which is expected to

happen in 2016 but as soon as the market sentiment turns, it will then be difficult to achieve the same distressed

valuations that we are seeing in the market today.

All the best,

The Prolifico Team

INSIDE BRAZIL

Joaquim Levy, Finance Minister

Eduardo Cunha and Renan Calheiros

Speakers of Congress

Standard & Poor’s headquarters, NY

China turmoil affecting Brazil

Commodities and corruption are the villains of Brazil’s economy

Brazil’s GDP contracted 1.9% in Q2. Whilst many large construction

companies in Brazil are involved in the Petrobras investigation, the

construction sector shrank by 8.4% in Q2, which along with high

interest rates and rising unemployment, have put the brakes on

consumer spending and investment. Estimates suggest that the

construction sector alone has been responsible for a fall of 0.8% in

GDP. Abroad, low commodity prices and slower growth in China

(Brazil’s main trading partner) are compounding the slowdown.

Exports to China fell by 19% in the first seven months of the year.

Government reduces fiscal target to reflect economic environment

The decrease in tax revenues, due to the weakening economy, has

forced the government to reduce the target for this year’s primary

fiscal surplus, from 1.2% of GDP to 0.15%. 2016 and 2017 targets

were also reduced from 2% to 0.7% and 1.3%, respectively. The

government admits the possibility of having a primary deficit this

year, if new measures fail to pass in congress.

Congress to play an important role in 2016’s fiscal target

The government sent the 2016 budget to congress forecasting a

primary deficit of -0.34% of GDP. Rousseff’s administration opted to

present a realistic budget, not taking into account the expected

revenues from proposals to raise taxes and cut spending that will be

presented to congress. The Finance Minister said, however, that the

government remains committed to a target of 0.7% of GDP.

Standard & Poor’s downgrades Brazil

Brazil has been downgraded by S&P from BBB- to BB+, losing its

investment grade, which it held since 2008. The move was

attributed to “political challenges” with balancing the budget.

Moody’s and Fitch, are still maintaining Brazil’s investment grade

status and both are currently saying that they still support this.

However, a potential downgrade from either would be unlikely to

cause a market shock, wrote the FT. According to the CEO of Itaú

BBA, Jean-Marc Etlin, “the reaction to the downgrade has been

somewhat muted, which suggests it was mostly priced in”.

The BRL fall continues

The BRL has fallen more than 49% in USD terms since the beginning

of the year and is now trading at over 4, a new record high. The

USD appreciation has been affecting emerging markets across the

globe. According to NN Investment Partners, the total net capital

outflows from the 19 largest EM reached USD 940bn in the 13

months to July, almost twice the amount that flowed out over 3

quarters during the height of the financial crisis. In Brazil, political

and fiscal uncertainties have exacerbated the weakening.

BRAZIL EXTRA

Dilma Rousseff, Forbes (Aug/12)

Rodrigo Janot, Attorney General

Souza Cruz Factory, RS - Brazil

AXE commercial at Ibirapuera Park

Law against corruption may prove to be Rousseff’s legacy, says FT

The FT (Aug 6th) highlighted how Dilma Rousseff has been dealing

with corruption, saying that it was under her rule that a reform on

legislation “has enabled prosecutors to use informants to tackle

corruption”. The FT says it “proved to be a weapon of mass

destruction against corruption” and it may become Dilma’s

“greatest legacy”. So far, Dilma has not been involved in the

Petrobras probe, in spite of suspicions of illegal donations to her

campaign. In the past, she “allowed a succession of ministers to fall

on their own swords” and didn’t try to interfere when members of

her own party were convicted.

Rodrigo Janot remains in the post of Attorney General

President Dilma Rousseff and the Senate approved Rodrigo Janot

for a new term as Attorney General. Janot, along with judge Sergio

Moro, are the 2 main faces in the Petrobras probe, which has led to

the incarceration of senior figures that were once seen as

untouchable in Brazil. Janot has authorized a number of

investigations against senior politicians and recently has formally

accused the lower house speaker of congress, Eduardo Cunha.

Since the beginning of the probe, early last year, 125 people have

been charged and more than 30 convicted.

BRL devaluation increases number of takeover bids in Brazil

The BRL devaluation, along with cheaper stock prices, has increased

the number of takeover bids this year. Currently there are 15 bids in

progress, compared with 6 last year. One of the deals is the

acquisition of Souza Cruz by British American Tobacco (BAT),

which in February offered USD 3.43bn. More recently, BAT

increased its offer by 6% in BRL terms, which now translates to USD

3bn and more than a USD 400 million discount, due to the BRL

devaluation.

Brazilian population grows by almost 2 million in one year

According to IBGE, the Brazilian population has grown by almost 2

million between July 2014 and July 2015, going from 202.7 million

people to 204.4 million. The most populous state is São Paulo, with

44.4 million people, followed by Minas Gerais and Rio de Janeiro,

respectively with 20.8 million and 16.5 million people.

São Paulo has the best city park in the world

According to The Guardian, Ibirapuera Park in Sao Paulo, is the best

park in the world, ahead of the Buttes-Chaumont, in Paris, and the

Boboli, in Florence. Ibirapuera is 2 million m2 and was created in

1954 by Roberto Burle Marx in collaboration with the world-

renowned Brazilian architect, Oscar Niemeyer.

REAL ESTATE

Prologis CCP warehouses, RJ - Brazil

Trump Hotel, Rio de Janeiro

Peer Buergin, Prolifico

Demand for AAA warehouses remains strong

Despite the recession, demand for AAA warehouses remains

consistent in Brazil, with the market forecasting growth in 2015.

According to Fernando Terra, from CBRE, gross absorption of

warehouses in the state of São Paulo was 600.000m2 in the first

semester, of which 350.000 were AAA buildings. Prologis CCP has

vacancy of 0.8% and is investing up to BRL 700 million to expand.

Log Commercial Properties has reached its lowest ever vacancy

rate and GLP has leased 204.000m2 to new clients so far this year.

Donald Trump builds luxury hotel in Rio de Janeiro

The controversial candidate for the next presidential election in the

USA, Donald Trump, is building a luxury hotel in Rio de Janeiro with

a local partner. The hotel will have 171 rooms over 13 floors. It is

estimated to cost USD 120 million and charge BRL 1.700 per night. It

will have a swimming pool made of glass suspended over a

nightclub with capacity for 800 people. Operation is expected to

commence before the Olympics next year.

Founding partner of Prolifico in an interview with PrivcapRE

Peer Buergin, founding partner of Prolifico, was recently interviewed

by PrivcapRE, where he talked about Self Storage, Student Housing

and Senior Living, the three main focus businesses of Prolifico in

Brazil. Peer explained that these three are early stage in Brazil and

show great growth potential. Regarding the Self Storage market,

Peer compared the number of facilities in Brazil (120) with the

number in USA (50.000), mentioning that “there is room for about

5.000 facilities” in Brazil. He also highlighted that Brazil has 20

cities with more than 1 million inhabitants and “there is absolutely no

reason why there shouldn’t be a number of Self Storage facilities in

every single one of these 20 cities”. On Senior Living, Peer pointed

out that the Brazilian “population over 80 years old is expected to

grow over 5% a year until 2050” and when asked about the Student

Housing market, he mentioned that “today the student population is

about 6 million” of which, depending on the city, “10% to 30% live

and study away from their home town”. He stated that the student

population is expected to double by 2020. Peer said that Prolifico

structures its operation by separating PropCo and OpCo, in order to

“maximize flexibility with regard to growth and exit”. He said

because the markets are early stage and lack significant know-how,

Prolifico partners with foreign professionals, such as the CEO and

co-founder of Big Yellow, “which is one of the leading European Self

Storage owners and operators” and “the most recognized brand in

the UK”.

Watch the complete interview by clicking on this link:

www.privcapre.com/brazil-alternative-real-estate

Sources: Financial Times, FT Confidential, Wall Street Journal, The New York Times, CNN, Infomoney, Valor Econômico, Valor International, O Globo, G1, Folha de S. Paulo, Brazilian Central Bank, PrivcapRE

PROLIFICO UPDATE

Prolifico is launching a Pledge Fund to focus on the current

distressed opportunities in the market.

Moby has recently purchased a distressed, fully built 140,000 sq ft

building in the heart of Rio and plans to start operating self storage

there over the next 6 months.

Moby has compiled a pipeline of assets totaling USD 100 million+,

consisting of distressed, as well as ground-up developments. All

assets are ready to purchase, develop and retrofit. Prolifico is

currently conducting talks with a number of interested investors.

ZAK obtained planning permissions on a site in Rio to develop a 100

room SmartHotel.

ZAK has initiated talks to develop a large student housing asset in

Rio.

ZAK has been requested by a US investor to put together a pipeline

of assets for rolling out its student housing platform.

Currently negotiating on a large senior living facility in Rio, which is

the retrofit of a distressed asset.

Full planning submitted to retrofit an office building into a senior

living home on one of Prolifico’s F&F Fund assets.

Months since inception Asset appreciation

F&F Fund 46 +245% (3.5x)

São Paulo Self Storage Fund 32 +222% (3.2x)

Rio Self Storage Fund 18 +64% (1.6x)

Trancoso Beach Fund 42 +280% (3.8x)

Underlying assets valued as at 31st December 2014 by KPMG Avaliações Patrimoniais Ltda / NAI Miami

Student Housing & Smart Hotels

KEY ECONOMIC DATA

GDP Q2 2015

(12 months) - 1.2% US Dollar

1 R$ 3.98

2015 4 2016

4

Benchmark Interest

Rate (Selic) 1

14.25% Dollar

variation YTD 3

+49.9% GDP -2,70% -0,80%

Inflation - IPCA

August’15 2

9.52% British Pound

1

Euro 1

R$ 6.17

R$ 4.46 Selic 14,25% 12,25%

IBOVESPA

Year to Date 1

-6.83% Unemployment

(PME) July’15 7.5% US Dollar R$ 3,86 R$ 4,00

IBOVESPA

change Jul/Aug’15 -12.16%

International

Reserves 1

US$ 371

billion Inflation 9,34% 5,70%

1.

2.

3.

4.

As of September 21st 2015

twelve month period variation of the price of 1 USD in BRL terms (as of September 21st 2015)

projections for year-end, as of September 18th 2015, according to the focus bulletin of the Central Bank (median of market expectations)

Source: Brazilian Central Bank, IBGE, IPEA, Google Finance and Portal Brasil. (Data as of September 17th 2015 or the most recent available)

Prolifico is an alternative real estate & private equity investment management firm in Brazil. The company invests in high

yielding real estate backed business models that are resilient in all macroeconomic scenarios, such as self storage,

student housing, senior living and data centres. http://www.prolifico.com.br/

LEGAL DISCLAIMER: No representation or warranty, express or implied, is given by Prolifico, their respective advisers or any of their respective partners, directors or employees or any other person as to the accuracy or completeness of the contents of this overview. Neither this overview nor any of the information contained in it shall constitute an offer, invitation or inducement to purchase or acquire any shares or other assets.