BC Office Fund (Fund) is Brazil‘s largest publicly-listed real estate investment fund of corporate towers and its shares have been traded on the B3 organized market since its December 2010 IPO, under ticker BRCB11. The Fund was created in June 2007, and stands out for actively managing a portfolio of investments in high-quality commercial real estate properties strategically located in the main Brazilian cities. Among the target assets invested are completed or nearly completed commercial real estate or the rights related to these properties.
BC Office Fund’s portfolio currently consists of 10 office buildings in São Paulo and Rio de Janeiro, focusing primarily on high quality (Class AAA and A) office buildings. The Fund’s properties are leased out to several domestic and multinational renowned companies, such as Gerdau, Volkswagen, Linkedin, Santander and Samsung, among others. BC Office Fund seeks the controlling interest in the its properties, allowing it to actively participate in the management of these properties, aiming to make them more attractive to current and future lessees, as well as always keep them renovated and modern. The Fund holds investments in shares of other Real Estate Investment Funds (FIIs), Real Estate Receivables Certificates (LCIs) and Commercial Mortgage Backed Securities (CRIs), whose earnings are also exempt from Fund taxation.
BC Office Fund’s active management policy is based on four pillars: (i) efficient negotiations of market-value lease agreements in the minimum intervals permitted by law; (ii) investment in expansion, improvements and retrofits of properties in order to obtain higher rent amounts and lower vacancy rates; (iii) efficient recycling of a part of its portfolio, with a view to increased revenue and realization of capital gains; and (iv) securitization for financing new acquisitions and/or shares of other FIIs, giving the Fund greater flexibility to manage cash reserves and maximize shareholders’ returns.
FIIs are structured investment vehicles whose purpose is to invest in real estate, aiming to promote and develop properties. One of the main advantages of investing in an FII is 100% exemption from taxes on revenue and profit from real estate backed assets. This allows FIIs to earn potentially higher revenues than legal entities operating in the real estate industry, since legal entities are generally subject to a 9.25% tax on revenue and a 34% nominal tax on actual profits. Additionally, FII payouts to retail investors, provided certain legal requirements are met, are tax exempt.
Investments in FII shares also offer other potential advantages vis-à-vis direct investments in companies operating in the real estate industry, or direct investments in properties, including: (i) savings from the non-payment of taxes, employment-related charges and/or bonus payments to executives thanks to the fact that FIIs are prohibited, by law, from directly hiring employees, (ii) more predictable and constant cash flows since an FII’s revenues are mainly derived from rental of own properties, (iii) transparency and ability to pay the expenses incurred by FII service providers, whose remuneration is normally established as a percentage of the Fund’s financial performance, (iv) a ban on a fund using its portfolio properties as collateral or acting as a joint obligor in any transactions, (v) potential higher liquidity in transactions carried out in stock markets and fractioning investments by acquiring shares, and (vi) transparency and easiness of obtaining information.
The Funds’s monthly distribution policy focused management’s strategic decisions, based on Brazil’s economic scenario and on the real estate industry’s outlook. In 2016, with the signal of falling interest rates, the Fund reduced its cash level by amortizing capital and changing its monthly distribution policy, which was previously based on fixed earnings. BC Fund’s earnings are currently distributed based on the minimum legal limit of 95% of the income earned in the six-month period, calculated under the cash regime, in accordance with the Fund’s law and regulation in force.
Although FIIs are prohibited from taking on corporate debt, they may still leverage their assets by buying real estate in installments or assigning receivables in securitization transactions. The guarantees offered in these transactions are not binding in relation to the shareholders nor do they result in the creation of any obligation against the Fund, which is not jointly obligated for the solvency of the receivables assigned.
BC Office Fund selects its acquisitions based on a close monitoring of the commercial real estate markets, focusing São Paulo and Rio de Janeiro, on a rigorous due diligence on the properties and on the ability of the fund manager and investment advisor to prospect and recommend the best investment opportunities. Frequent investment in mapping commercial office space supply and demand allows the Fund to identify real estate acquisition opportunities with major price appreciation potential. Even during periods of economic uncertainty in the real estate market, such as between 2009 and 2010, BC Office Fund has been able to identify and profit from investments and, in 2015 and 2016, years when real estate transactions were lower, the Fund sold properties generating a significant amount of capital to its shareholders.
BC Office Fund stands out in the FII market for its pioneering and innovative feature, always aiming at approaching investors and reducing imbalances. Among the measures taken in this regard, we highlight the Fundamentals Worksheet, which is monthly updated and made available to the market, and the Monitoring Committee, comprised of a group of six shareholders acting on behalf of the Fund and its contact with investors, who periodically meet to discuss the paths and strategies outlined for the Fund’s portfolio.