The Prolifico Report FEBRUARY 2016

2016 - THE FUTURE STARTS HERE

Nelson Barbosa, ’s new finance minister (top right), Google headquarters in California (bottom right) and the city of Recife (left)

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“Investments in dollar are cheaper and we’re looking into doing more business in Brazil” - George Logothetis, CEO of Libra Group (Valor, January 25 th )

“We will see a real turn in Brazil during the first quarter, and then Brazil will be one of the best places to be in 2016” - Larry McDonald, Head of US Macro Strategy at Société Générale (Infomoney, Dec. 28 th )

“The buyer who is looking at Brazil with a horizon greater than three years is getting a good deal” - Rogerio Gollo, head of M&A for PricewaterhouseCoopers Brazil (Wall Street Journal, Nov. 19 th )

Dear reader,

After much of 2015 was overshadowed by calls for the impeachment of President Rousseff, the opposition has finally managed to get the lower house speaker to initiate the process. Therefore Brasilia will continue being more interested in politics than until this is resolved. However, it is widely expected that the impeachment will be voted against in Congress and once this is finally off the table (forecast April or May), the focus can return to the economy.

At the end of 2015, replaced as Finance Minister. Barbosa has already shown that he is committed to the fiscal adjustment, advocating for pension and constitutional reforms. As he has wider support than his predecessor, within the ruling party, some analysts believe that he could help unlock the current situation and help to speed up decision-making.

The weak BRL is improving Brazil’s exports and international trade, with a record trade surplus in December 2015. It is also attracting foreign investors, who see Brazil at “half price”, as reported by Valor Econômico from the World Economic Forum, in Davos. All major parties in Brazil are already presenting the need for reform and will likely contest the next election on reform agendas. Given the strong underlying fundamentals that support Brazil today, once the necessary reforms start being implemented, Brazil is well placed for a new period of strong yet sustainable growth.

Please read on for more on the above, an update on Prolifico’s progress and some other interesting topics.

All the best, The Prolifico Team

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already INSIDE BRAZIL

Cunha initiates impeachment proceedings against Rousseff In December, the lower house speaker, Eduardo Cunha, initiated impeachment proceedings against on charges she has been fiddling public accounts. A congress committee is now expected to vote on accepting or blocking the process. If accepted, Rousseff will be asked to present her defence to the lower house, which will then vote to remove or to keep her in office. If Rousseff loses, she will be ousted temporarily to face a trial in the Senate. With congress currently in recess, a vote in the lower house should take place by March. To stay in office, Rousseff only needs 1/3 of the votes, which is widely regarded as the most likely scenario.

Brazil has a new Finance Minister

Former Planning Minister, Nelson Barbosa, was appointed as Brazil’s Eduardo Cunha, lower house speaker new Finance Minister, replacing Joaquim Levy, who left after Brazil

was downgraded by a second major rating agency. Barbosa, who is seen as a more heterodox economist than Levy, has ensured that the government’s “commitment to fiscal stability stays the same”. In an interview with Valor, he said to be committed with the primary surplus target of 0.5% of GDP in 2016, highlighting the need for structural reforms and to cut mandatory expenses. He said the government’s low credibility demands for immediate action and committed to new fiscal measures during the first quarter.

Fitch downgrades Brazil’s credit rating In December, Fitch became the second major rating agency to downgrade Brazil from investment grade. The rating company first awarded Brazil with investment grade status in 2008. A deeper than anticipated recession, adverse fiscal developments and increased Nelson Barbosa, new finance minister political uncertainty were the reasons cited to justify the move. According to the Wall Street Journal, Brazil’s government responded to the downgrade with a note highlighting the country’s many economic advantages, including the low household debt, a competitive agricultural sector, the absence of a real-estate bubble, and an oil-and-gas sector with strong growth potential.

Central Bank holds interest rates After the first Copom meeting of 2016, the Brazilian Central Bank decided to keep the benchmark interest rate steady at 14.25%, in an effort to avoid deepening the recession. Most economists were expecting a rise, after seeing inflation at 10.7% in 2015. However, last year, inflation was significantly affected by cap removals and major currency depreciation, whereas in 2016, inflation is forecast to start falling back towards its target. According to the Focus survey (January 29 th ), which gathers projections from 100 financial , president of Brazil’s Central Bank institutions, inflation will end this year at 7.26%.

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already BRAZIL EXTRA

Record trade surplus in December 2015 Brazil ended last year with a record trade surplus in December, which completed the year with an annual trade surplus of USD 19.7bn, the best since 2011, in comparison to a trade deficit of USD 4bn in 2014. With a weakened BRL, Brazilian products became more attractive to foreign markets. The amount of exported products grew by 10% in 2015 but due to the currency depreciation and consequent cheaper prices, exports were down 14% in USD terms,

reaching USD 191bn. Imports, on the other hand, fell 25% in 2015, Loading containers also in USD terms. This year, the market forecasts an even better

result, with the trade surplus expected to increase by over 92% to

reach USD 37.9bn, according to the Focus survey (January 29th).

Foreign investors lead M&A activity in Brazil According to PwC, international investors have outpaced locals in M&A activity in Brazil for the first time since 2000. The sharp BRL depreciation has created good opportunities for foreign investors in Brazil, which over the first 10 months of 2015 had closed 285 deals, up 5% from the same period in 2014. Activity from local investors PricewaterhouseCoopers dropped by 26% to 275 deals, during the same period. Rogerio Gollo, head of M&A for PwC Brazil, believes that for those willing to endure some volatility, betting on Brazil now could pay off handsomely. He says that “the buyer who is looking at Brazil with a horizon greater than three years is getting a good deal”.

Scania’s unit in Brazil will export trucks to Europe With its plants operating at full capacity in Europe, Scania’s unit in Brazil will start producing engines complying with European legislation, in order to export trucks to the European market. With sales dropping in Brazil due to the recession, the Brazilian plant has increased sales to other markets. Today, it already exports 60% of its production to 20 different countries. The Brazilian plant is one of

Scania truck the group’s most advanced lines in the world and is currently receiving a BRL 32 million investment to create an engine-testing laboratory. Per Hallberg, Scania’s CEO, says exports are preserving the unit’s profitability, assuring that “Brazil still makes money”.

Google opens start-up incubator in São Paulo Next month, São Paulo will become one of the six cities in the world that have a Google Campus, a start-up incubator which offers space for entrepreneurs to run their businesses, exchange experiences and meet potential partners and investors. The Campus will be located in a seven-story building. The other 5 cities with a Google Campus are London, Madrid, Seoul, Tel Aviv and Warsaw. The Brazilian bank Itaú has also opened recently an incubator in the city. Operating

Google headquarters, California since September, it is already home to 50 companies.

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REAL ESTATE

Trancoso’s exclusiveness for New Year’s Eve Located in the state of Bahia, in the Northeast, Trancoso is a small, charming village with beautiful beaches. Due to its exclusivity and natural beauty, it is often a vacation destination for many well- known national and international superstars, ranging from Beyoncé and Kate Moss to Will Smith and Matthew McConaughey. Terravista, one the main hotel complexes in the area, has a private jet airport which has received princes and presidents from all around the world, according to its manager. On New Year’s eve 2015, a 6 bedroom villa in the complex cost up to BRL 18.000 per night, with a minimum stay of 10 nights. Prolifico has a development project in Trancoso.

Brookfield set to keep investing in Brazil’s real estate The Canadian investment firm Brookfield, which is about to close a deal to pay BRL 1.35bn for a stake of 24.4% in Invepar, a Brazilian

Kate Moss, British supermodel infrastructure company, continues to have a strong appetite for more deals in Brazil during 2016, with real estate and infrastructure

being the company’s main targets. In May last year, Brookfield says that it had USD 2bn to invest in Brazil’s infrastructure through the end of 2016. At the time, the company said that Brazilian assets were cheaper and therefore creating good investment opportunities. For real estate, the company did not disclose an amount, but last year it bought 7 commercial buildings in São Paulo and for BRL 2.1bn.

GuardeAqui Self Storage grows during the recession The Self Storage company Guarde Aqui, has been taking advantage

Trancoso, Bahia of the economic crisis to grow its business and expand in Brazil. According to its CEO, Allan Paiotti, the crisis has brought new

customers, from businesses reducing their offices and needing space to store computers and furniture, to the younger generation returning to their parents’ home and needing to store their belongings. For larger companies holding big distribution centres, Self Storage has also been growing as a solution to having inventories in the cities, as in the case of L’Oréal, which rents an unit in all Guarde Aqui’s facilities, in order to be closer to the pharmacies it supplies. Mr. Paiotti also points to the great opportunities for expansion that the recession is creating, due to lower real estate prices. He says the company is going “through an expansion process, acquiring new sites amid the crisis”. Over the last 18 months, Guarde Aqui has tripled its portfolio, currently accounting for 14 facilities, which makes them the market leader in Brazil. The company is controlled by Sam Zell’s Equity International and its investors include Morgan Stanley Alternative Investment Partners

Self Storage facility and the Teacher Retirement System of Texas.

Sources: Financial Times, Wall Street Journal, Bloomberg, BusinessWire, Valor Econômico, Valor International, Folha de S. Paulo, Estado de S. Paulo, Exame, UOL, Investe São Paulo, Trading Economics, Economist. 5

already BRAZIL – A STRONG DECADE ON T HE HORIZON?

Brazil is currently weathering a “perfect storm”. Although Brazil recently lost investment grade with two of the three major rating agencies, due mainly to deteriorating public finances, it is important to remember that the Brazilian economy is far from the near bankrupt situation of 2002 that necessitated an IMF bailout. In fact, the current crisis is more political than economic. The current “hangover” from profligate spending by the PT governing party, the ongoing corruption purge and the record low popularity of the President, has resulted in a political crisis that is slowing the passage of much needed fiscal adjustment and has recently driven the Brazilian Real to its lowest level ever against the US Dollar. However, once impeachment is no longer an issue causing paralysis in Brasilia (widely forecast to be off the table by April or May), it is expected that congress will focus their attention back on economics instead of politics and begin to tackle the macro deterioration in Brazil. As soon as there is some “light at the end of the tunnel” it is likely that investor sentiment and the market will turn quickly. Furthermore, all major parties in Brazil are already presenting the need for reform and will likely contest the next election on reform agendas.

Given the strong underlying fundamentals that support Brazil today, once the necessary reforms start being implemented, Brazil is well placed for a new period of strong yet sustainable growth.

Below are a summary of some of the notable points that may lend support to a change in sentiment towards Brazil this year and many to conclude that another strong decade is on the horizon: • First ever middle class majority (60%) is already changing Brazil irreversibly (e.g. ongoing corruption purge & all parties leading their agendas with reform) (see chart 1) • Brazil’s export-to-GDP ratio of 10% is one of the lowest in the world • One of the world’s highest foreign reserves ($375B) • Total Gross External Debt ($340B) is largely hedged • Record trade surplus (Dec 2015) and forecast to grow 92% (YoY) in 2016 • Low debt: mortgage credit <10% of GDP; consumer credit 27% of GDP • Fully diversified democracy with strong and independent institutions • Corruption currently being dealt a hammer blow (expect increased competitiveness & improved efficiency in capital allocation) • Vast infrastructure improvements during past 10 years • High interest rates allow for medium term stimulus (see chart 2) • Inflation peaking at around 10.7% (despite lifting of price caps & rapid currency depreciation to an historic low) (see chart 2) • Unprecedented consensus on difficult structural reform required to unlock Brazil’s potential • Well capitalised banking sector and a wave of young companies challenging inefficient majors

Note: The information on this page is an extract from a recent macro report written by Prolifico. If you would like to read the full report, please e-mail us at [email protected]

6 already PROLIFICO UPDATE

Prolifico has now launched its Pledge Fund to focus on the current distressed opportunities in the market. It already has a number of committed investors and is planning a first close in Q1’16.

Moby is in the process of purchasing another distressed asset in Rio,

which it will retrofit for self storage.

The retrofit of Moby’s recently purchased distressed asset is now underway and on schedule to open doors in May 2016. The property is 140,000 sq ft in the heart of Rio.

Moby has recently updated its 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 is currently analysing a distressed asset deal in the centre of

Sao Paulo, which was originally built as a hotel, for conversion into a 88 unit student housing/young professional facility, walking distance from several universities. Student Housing & Smart Hotels

ZAK is in ongoing talks to develop a large student housing asset in Rio.

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 31 st December 2014 by KPMG Avaliações Patrimoniais Ltda / NAI Miami

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already KEY ECONOMIC DATA

GDP Q3 2015 - 2.5% US Dollar 1 R$ 3.96 2016 4 2017 4 (12 months)

Benchmark Interest Dollar 14.25% +1.31% GDP -3,01% +0,70% Rate (Selic) 1 variation YTD 3

Inflation - IPCA British Pound 1 R$ 5.76 10.67% Selic 14,25% 12,75% December’15 2 Euro 1 R$ 4.35

IBOVESPA Unemployment -8.68% 6.9% US Dollar R$ 4,35 R$ 4,40 Year to Date 1 (PME) Dec’15

IBOVESPA International US$ 370 -6.79% Inflation 7,26% 5,80% January’16 Reserves 1 billion

1. As of February 3 rd 2016 2. twelve month period 3. variation of the price of 1 USD in BRL terms (as of January 3 rd 2016) 4. projections for year -end, as of January 29 th 2016, 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 February 3 rd 2016 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 implie d, 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 contai ned in it shall constitute an offer, invitation or inducement to purchase or acquire any shares or other assets.

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