Brazil Value Talks: Marcelo Fayh
Brazilian REITs Specialist
Today I have the pleasure of interviewing Brazilian investor Marcelo Fayh
Marcelo is currently a Brazilian REITs analyst.
Shall we meet him?
BS: Marcelo, could you tell us a little about yourself?
MF: Of course! I am a certified investment analyst (CNPI), accredited by the CVM and specialized in Real Estate Funds. I have almost two decades of experience in the financial market, including stints at XP, investment firms, family offices, advising on corporate mergers and acquisitions, and as an independent investment analyst. During this time, I have helped thousands of people invest better, either directly or through my content.
I am the author of the book “Fayh Method: Discover how to Choose the Best Real Estate Funds on the Market and Live off the Income”, published on Amazon, which has already helped many people understand what really matters when investing in Brazilian REITs.
Today, I dedicate a good part of my time to my Real Estate Fund recommendations subscription, the “Fayh Method in Practice”, where I share with subscribers the Brazilian REITs that I consider to be of the highest quality, the maximum price worth paying for them, and how to build a diversified and balanced portfolio with these assets. I am also the creator of ETF360, an ETF subscription for those looking to invest with simplicity and security, and of US Wealth, my personalized investment consulting service.
I have a strong presence on social media and enjoy transforming complex financial topics into clear and accessible explanations. My goal is to be the main reference in Real Estate Funds in Brazil, helping as many people as possible to achieve financial freedom through good investments.
BS: What is your strategy for making money with REITs in Brazil?
MF: The simplest of all: buy and accumulate high-quality Brazilian REITs, whenever they are cheap. There is no mystery, anyone can do it.
The secret lies in two fundamental points. First, knowing how to separate the wheat from the chaff and identify which are the best Brazilian REITs on the market. Second, defining the maximum price worth paying for each of them.
After that, the next step is to put together a balanced portfolio with these funds. This is exactly what I deliver to my subscribers: the path and the recipe ready to be executed.
BS: What is the advantage of a Brazilian REIT over a good dividend-paying stock, besides the monthly distribution?
MF: A Brazilian REIT is easier for the average investor to understand. They are already familiar with the logic of owning a property and putting it up for rent, which makes investing more intuitive and makes it easier to maintain discipline in the long term.
I often hear from my clients that the monthly distribution brings a very positive feeling — that satisfaction of seeing the money fall into the account every month. This experience reinforces the habit of investing and even creates a kind of “gamification”: the investor feels like increasing their monthly income and, as a result, continues to reinvest and make new contributions. This reinforces the good habit of investing.
From a technical point of view, investing in Brazilian REITs is also more solid and safe. The collateral is a physical property, which tends to preserve its value even in difficult economic scenarios, such as crises or recessions. On the other hand, a company — even a good dividend payer — can be more sensitive to market changes and, in extreme situations, even go bankrupt.
Of course, this is an extreme scenario, but it illustrates the difference: even in very adverse conditions, a property maintains its value. A company may not.
BS: What is your process for finding a new Brazilian REIT purchase opportunity? What filters do you use?
MF: There are currently around 400 Brazilian REITs on the market, and it would be impossible to analyze all of them individually. That's why I developed a method with some initial filters, based on seven objective criteria. Only around 60 funds go through this initial screening.
From there, I can analyze each one individually. Those that pass the filters go on to a subjective and fundamentalist analysis. This is the stage where my list of the best Brazilian REITs in each segment comes up, which I recommend within my subscription.
These filters serve to eliminate risks that I am not willing to take, regardless of whether the fund seems good in other aspects. For example: I do not invest in single-asset funds, I do not invest in single-tenant funds, I do not invest in Brazilian REITs with low liquidity and I do not invest in funds that are new to the market, among others.
First, I do this screening to select the best Brazilian REITs. Then, I set the maximum price that is worth paying for each of them. When you combine these two steps — choosing the best ones and determining the price ceiling — you have my investment process: selecting, pricing, and building a balanced portfolio based on these choices.
Throughout the interview, we will talk more about each of these steps.
BS: How do you value a Brazilian REIT?
MF: There are three main methods, each with its advantages and limitations.
The first is the Gordon Model, which is an almost crude simplification of the Discounted Cash Flow (DCF). It basically estimates how much the Brazilian REIT should be worth based on the dividend distribution, growth rate and discount rate. The problem is that it is based on unrealistic assumptions, such as a constant growth rate for dividends. In addition, it is extremely sensitive to the discount rate chosen — over time, you understand the mechanics of the formula and realize that you can practically “choose the result” you want. That is why I do not like to use it, but I do not ignore its existence.
The second is the Discounted Cash Flow itself, which in theory would be the ideal model. In this method, the value of the Brazilian REIT is defined by how much cash it can generate in the future. The problem is that it is extremely complex to build. And when you finally master the model, you realize that the result depends entirely on the assumptions you yourself defined — projections of revenue, expenses, growth, vacancy, interest rate, and many other variables. As a result, the model ends up being highly subjective, and the time spent does not necessarily translate into greater security in the final number.
The third is the P/BV (Price over Book Value), which is the most widely used in the market. Every Brazilian REIT publishes its Asset Value monthly, calculated by the sum of the fund's assets minus the fund's obligations. In the case of brick-and-mortar funds, the properties are evaluated annually by independent consultants, who issue reports based on three methods: 1) Comparative, using values of similar and nearby properties; 2) Discounted Cash Flow, according to the property's income-generating capacity; and 3) Replacement Cost, estimating how much it would cost to build that property from scratch and applying a discount according to its age and condition.
In other words, the best of the methods — the DCF — is already built into the P/BV gears.
Still, I know that the Equity Value should not be interpreted literally. That is why I use a BV multiple, calculated by me based on the fund's fundamental analysis, its prospects, market momentum and other factors. Based on this analysis, I will demand a discount on the equity value or I may even accept a premium on it. It is subjective, yes, but I prefer it that way — with my own criteria and safety locks.
One of these locks is clear: as much as I like a Brazilian REIT, I never pay more than 5% above the BV in MBS, FoFs or Hedge Funds funds, nor more than 10% above the BV in brick funds.
BS: How do you like to build your Brazilian REIT portfolio, considering the number of Brazilian REITs, sectors and concentration?
MF: I like to think of a well-diversified and balanced portfolio, which allows me to invest with peace of mind, without having to make short-term tactical moves to try to take advantage of the “trendy segment”. I prefer to be exposed to (almost) all market segments, always selecting within each one the Brazilian REITs that I consider to be of the best quality.
A portfolio that I put together usually has between 12 and 20 Brazilian REITs. No fund represents more than 10% of the portfolio, nor less than 4%. I like to divide the portfolio between Brick Funds, MBS, FoFs and Hedge Funds.
Within the brick category, I try to have at least one Brazilian REIT from each segment: corporate slabs, logistics, urban income, shopping centers and hybrids. In MBS, I like to have at least one with exposure to inflation, another to risk free rate and a third that is hybrid (inflation + risk free rate). In addition, I include at least one FoF and one Hedge Fund to complement the portfolio.
This is the basic skeleton of a portfolio that I put together. With it, the investor will be safe, well diversified and will be able to go through practically any scenario — be it bullish, bearish, crisis or euphoria — without having to try to guess which segment will stand out next.
The idea is to invest peacefully, with little effort, and receive your monthly income without stress.
BS: How often do you like to rebalance your portfolio?
MF: Since there are monthly reinvestments and also frequent contributions, the portfolio ends up being rebalanced gradually, naturally, month after month.
It is very rare that I need to make any movement that involves selling assets. The dynamics of the contributions themselves correct the small deviations in proportion between the funds, keeping the portfolio always adjusted without much effort.
BS: How long do you keep a Brazilian REIT in your portfolio on average?
MF: Every fund is included in my portfolio to stay “forever”, but that does not mean that it will be kept at any cost.
If the Brazilian REIT loses its fundamentals, becomes too expensive or if I need the money for some reason, it can be sold. The rationale is simple: I buy good assets at a good price and only keep them as long as that logic makes sense.
I am not inventing trends. Permanence is a consequence of quality and discipline in the strategy.
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with buying and selling Brazilian REITs?
MF: I don't believe that technical analysis helps in the case of Brazilian REITs.
I exclusively follow fundamental analysis and price analysis. I buy what I consider good and cheap. Without trying to get the timing right, without using charts, without applying any type of technical analysis.
For me, the focus is on the fundamentals of the asset and the value I am paying for it.
BS: What are your favorite sectors in Brazilian REITs? And which ones do you avoid? Why?
MF: In my opinion, the average investor should have a portfolio with (almost) all the main market segments. Still, if I had to highlight a favorite sector, I really like the urban income and retail segment. I see enormous potential in it, both for growth and for extracting value from properties.
In this thesis, the fund buys several properties — often in batches — and can sell them one by one at a profit over time. HGRU11, for example, does this very well. They are extremely diversified funds, in which a possible slip-up by the manager with one or another asset does not compromise the performance of the portfolio as a whole. I really like this characteristic.
On the other hand, the segment I avoid is development. Activities such as real estate development or construction involve high risks, with many variables that can compromise the profitability of the project. These are high risks for a type of investment that, in my opinion, should be based on security and constant income generation. For this level of risk, I prefer to invest directly in a developer listed on the stock exchange, where the potential for gain better compensates for the risk assumed.
BS: What is your opinion on single-asset funds?
MF: These funds are becoming extinct. The few that remain tend to become almost collector's items: rare, little traded and with a loyal base of investors who are passionate about them.
I prefer to stay away, for the sake of capital preservation. A fund that owns only one property concentrates all the risks in that single asset. If something goes wrong with it — prolonged vacancy, default, legal or structural problems — the entire fund suffers.
In theory, I could sell the shares, but these funds generally have very low liquidity. This means that, when problems appear, the exit becomes too narrow for everyone. I don't want to take that kind of risk.
BS: The vast majority of brick-and-mortar Brazilian REITs with a longer history do not show an increase in net equity over time. Is it worth buying one of these Brazilian REITs to receive, say, a 10% per year cap rate net of income tax, in your opinion?
MF: Yes, it is. What really matters is the Brazilian REIT's total return, which is made up of two elements: 1) the income distributed and 2) the variation in the share or its net asset value.
When you look at the total return, you will see that many funds do indeed deliver very good results. Do most of them do this? No. Just as most investment funds do not outperform the risk free rate, or most stocks do not perform well either. Making money in the market requires knowing how to find good assets — be they Brazilian REITs, stocks or funds.
An example will help you understand: imagine a fund with assets of R$100,000 that buys a property for that amount. After one year, the property appreciates to R$150,000. The fund's equity also increases to R$150,000. If the fund then decides to sell the property, it makes a profit of R$50,000, which will be distributed in full to the shareholders. As a result, the net equity returns to R$100,000.
An inattentive investor may look at the final equity — R$100,000 — and say that the fund did not grow. But he forgets that R$50,000 was distributed in income. The equity appreciation did occur, but it was delivered to the shareholder in the form of dividends.
Therefore, the only fair way to evaluate the performance of a Brazilian REIT is by looking at the total return. When you ignore one of the variables or try to isolate one of them, the analysis becomes short-sighted — and can lead you to wrong conclusions.
BS: How do you view the misalignment of interests that occurs in the vast majority of Brazilian REITs, since the managers are not the largest shareholders?
MF: I do not see any misalignment on the part of the manager due to this. The managers' careers, their monthly remuneration, annual bonuses and, often, a large part of their assets — especially when they are partners in the management company, which is quite common — are already tied to the performance of the funds they manage.
From a personal financial planning standpoint, it would not make sense for them to further concentrate their investments on the same risk they already face professionally. Even so, many of them invest in their own funds.
In addition, since Brazilian REITs are traded on the stock exchange, there are regulatory barriers that make this type of investment even more difficult. In many cases, the manager needs to inform the management company's compliance department of their intention to buy shares, wait for formal authorization and only then execute the transaction. When it is time to sell, the process is repeated.
If I were hired to put together the investment portfolio of a Brazilian REIT manager, I probably wouldn't include Brazilian REITs in it. He is already naturally overexposed to the risk of the real estate fund market. His portfolio should serve as a counterbalance, not reinforce this concentration.
This is different from equity funds, which are not traded on the stock exchange and therefore do not face these limitations. In these cases, it is common for the manager to invest in the fund itself, but even so, this only represents the variable income portion of the portfolio — which tends to be much more diversified.
This idea that there is a major misalignment because of this is, in fact, a narrative repeated by those who do not like Brazilian REITs. At first glance, it may seem to make sense, but you only need to think a little more to realize that the argument does not hold up.
BS: Why are corporate slab Brazilian REITs avoided by many investors?
MF: I believe this is due to the sector's recent negative history, especially during and after the pandemic. These were difficult years for the segment, with increased vacancy and contract renegotiations, which left a bad impression on many investors.
It is natural for people to look back, see this poor performance and think: “I'm not going to invest in this”. But this is a mistaken way of analyzing investments. The focus should be on the future, not the past.
The right question to ask is: “From now on, how should the segment behave?” If you believe it will continue to do badly, that's fine, it makes sense to stay out of it. But I don't see it that way.
I have been following the data from the physical market and there have been several consecutive quarters of improvement. The shares, however, still do not reflect this recovery. In my view, it is only a matter of time until the market prices these assets better.
BS: What is your opinion on the Plug & Play thesis that has been seen in some corporate slab funds?
MF: I think it is an excellent strategy. It allows slabs to be rented more quickly and, at the same time, adds value to the contract, making it stronger and generating higher revenue.
From the owner's point of view, the benefits are clear: the property is rented more quickly, the contract becomes more robust and revenue increases. On the tenant's side, who would normally need to carry out extensive and expensive work right from the start, the scenario also improves: the owner is the one who makes the investment, and the tenant “reimburses” this amount over the course of the contract. It is as if he were to spread this cost over the years.
In practice, it is a win-win for both parties, and a trend that I see as positive for the sector.
BS: What do you think of hospital and educational Brazilian REITs?
MF: I don't like Brazilian REITs with this specific theme. I prefer that hospital and educational properties represent only a small part of the portfolio of large and diversified funds — and not that they be the main focus of a fund.
I see these two segments as riskier, mainly due to the specificity of the properties, which makes it difficult to find a new lease if the tenant leaves. In addition, dealing with this type of tenant can be especially challenging if they become problematic.
Think about the situation: what judge would issue an eviction order against a hospital or an educational institution? In practice, if you need to take legal action, you will have a very difficult life.
On the other hand, these contracts tend to be strong and with good revenue. So there are pros and cons. In my view, the risk involved is too high to justify a fund 100% exposed to this type of property.
I prefer that they be part of the fund's portfolio, but not that the fund is exclusively formed by them.
BS: What is the biggest investment opportunity in Brazilian REITs today in your opinion? Could you briefly explain the case?