Adverse economic conditions in the regions where our shopping centers are located may adversely affect our levels of occupancy and our ability to lease available areas, and, consequently, have an adverse effect on us.
Our results of operations depend substantially on our ability to lease the areas available in the shopping centers that we own and/or manage. Adverse conditions in the regions where we operate may reduce our occupancy levels and restrict our ability to increase lease prices, as well as reduce our leases that are based on store revenue. Should our shopping centers fail to generate sufficient revenue for us to meet our obligations, our financial condition and results of operations could be adversely affected. The following factors, among others, may have an adverse effect on us:
- recessions or periods of increased interest rates could result in an increase in vacancy levels at our developments;
- negative perceptions regarding security, convenience and the attractiveness of the regions where our shopping centers are located;
- our inability to attract and maintain first-rate tenants, such as our anchor stores;
- decrease in lease rates, default or breaches by our tenants of their contractual obligations;
- increases in our operating costs, including the need for capital increases;
- increases in the taxes levied on our business; and
- regulatory changes affecting the shopping center industry, including zoning regulations and tax regulations.
We may not succeed in fully implementing our business strategies
We may not be successful in fully achieving our future goals and strategies. As a result, we may not be capable of expanding our activities and of replicating our business structure so as to develop our growth strategy and meet the demands of our different markets. In addition, we may not be capable of implementing our high quality operational, financial and personnel management standards to our greenfield projects. If we fail to implement our strategy, the implementation of our business policy will be affected, and our financial condition, results of operations and the trading price of our shares could be adversely affected.
We are exposed to risks associated with construction and development activities
The development and construction of new shopping centers includes the following risks:
- We may expend substantial resources on development plans that ultimately are not implemented;
- Construction costs may exceed our original estimates;
- Lease rates may be lower than projected;
- We may not obtain construction financing on favorable terms, or at all;
- Construction and other delays may result in an increase in costs of construction and debt service;
- Registration of our property rights with the appropriate notary could be delayed;
- We may be held liable for defects and problems in construction; and
- We may fail to obtain, or obtain on a delayed basis, zoning, land use, construction, occupancy, and other required government licenses and permits.
In addition, the time required for the development, construction and occupancy of our properties usually result in years passing before significant cash returns are obtained. Any of the above events may hinder our growth and adversely affect our results of operations.
The results of the shopping centers that we own or manage depend on our tenants‘ sales.
The Brazilian retail industry is historically susceptible to periods of economic slowdown, which generally leads to a decrease in consumer spending. More broadly, the success of our operations depends on several factors that relate to consumer spending and/or affect consumer income, including prevailing economic conditions in Brazil (and, to a lesser extent, worldwide), general business conditions, interest and exchange rates, inflation, availability of consumer credit, taxation, consumer confidence in future economic conditions, employment levels and salaries.
Our performance substantially depends on the sales volume of our tenants and on their ability to create a flow of customers in the shopping centers that we own or manage. Our results and the sales in our shopping centers may be adversely affected by external factors, such as an economic decline in the region in which a shopping center is located, the opening of other shopping centers that compete with our shopping centers, the closing of stores in our shopping centers or a decline in the activities of the stores in our shopping centers.
A reduction in the customer traffic in our shopping centers, as a result of any of these or other factors, could result in a decline in the number of customers visiting the stores located in our shopping centers and, consequently, in a decline in the sales volume of these stores. This would adversely affect us, given that a substantial portion of our income derives from lease payments by tenants tied to sales volume and from merchandising in the shopping centers. Difficulties experienced by our tenants could also result in defaults in their obligations to us and in the reduction of prices and volume of merchandising in our properties.
In addition, our ability to increase our revenue and operating income partially depends on the steady growth of demand for the products offered by the stores located in the shopping centers that we own and manage, especially high value-added products. A decrease in demand, whether as a result of changes in consumer preferences, reduction of purchasing power or slowdowns in the Brazilian or global economy, could result in a reduction of store revenue and, consequently, adversely affect us.
We may be adversely affected by the non-payment of rent from our tenants, revised lease amounts, or increased vacancy in our shopping centers.
Lease payments are our main source of revenue. Non-payment of rent by our tenants and/or any revision resulting in the reduction of lease paid by our tenants or increase vacancy in our shopping centers, including in the event of unilateral decision of the tenant to leave the property before the expiration of the lease term established in the respective lease agreement, will result in non-receipt or reduction of our revenue. The occurrence of any of these events may adversely affect us.
The properties we acquire and our construction activities may expose us to environmental obligations and adversely affect our results of operations.
The acquisition of properties and our construction activities may subject us to various environmental obligations. Our operating expenses may be higher than estimated due to costs related to compliance with existing and future environmental laws and regulations. In addition, according to several federal and local laws and regulations, we can be considered the land owners or operators of properties and be required to remove or treat hazardous or toxic substances. We may be required to incur such costs, which can significantly adversely affect our results of operations and our financial condition.
Because our shopping centers are public places, incidents beyond our control may occur, which could result in material damages to the image of our shopping centers and could expose us to civil liability.
Because shopping centers are public, they are exposed to a number of incidents that may take place within their premises and that are beyond our control or our ability to prevent. Such incidents may also harm our customers and visitors. If any of these incidents were to occur, the relevant shopping center could face material damages to its image and finance, since the flow of customers could be reduced due to lack of confidence in the premises‘ security. In addition, we may be exposed to civil liability and be required to indemnify the victims, which could adversely affect us.
Certain of our shopping centers are organized as condominiums in which we hold ownership interests and whose respective owners are responsible for costs of contingencies that occur there. If any of these condominiums lack the resources to cover liabilities, we may be liable for the full amount of the obligations.
Some of our shopping centers are organized as condominiums in which we hold ownership interests. These condominiums are responsible for settling contingencies of any nature related to their respective facilities. There can be no assurance that these condominiums will have the financial resources needed to pay such contingencies and if they do not, we, as participants in the condominium, may be required to cover the liabilities, which may adversely affect us.
The loss of members of our management and/or the failure to attract and retain additional qualified management personnel could adversely affect us.
Our business strategy, as well as the selection, structuring and implementation of our investments in the shopping center industry, is dependent to a large degree upon the performance of our management team. Accordingly, our success and future growth are directly linked to our ability to maintain our current management team and attract and retain additional qualified personnel. The market in which we operate is competitive and there is no assurance that we will succeed in attracting and retaining qualified personnel. The loss of any member of our management team or our inability to attract and retain additional qualified personnel could adversely affect us.
We outsource a substantial part of our activities, which could adversely affect us.
We outsource a significant amount of our labor, such as maintenance, cleaning and security. If one or more of the third-party companies that we have contracted with fails perform to its obligations, particularly labor, pension or tax obligations, we may be deemed secondarily liable and obligated to pay corresponding costs to the employees of these companies. In addition, we cannot guarantee that employees of third-party companies will not attempt to establish that we are their employers, which could also adversely affect us.
We may find it difficult to consummate land acquisitions, at the appropriate locations and prices, and competition for these lands may lead to a cost increase, thereby adversely affecting us.
Our growth strategy includes the development of greenfield projects. Therefore, we depend largely on our ability to continue to acquire land at reasonable prices and in strategic locations. With the development of real estate in Brazil and the growth of our competitors, land prices may rise significantly, and there may be a shortage of land at suitable locations and prices for the development of our new projects. The rise in land prices may increase the cost of new ventures, which may adversely affect us.
We may not successfully integrate our new acquisitions into our current portfolio, and new acquisitions may expose us to additional liabilities with respect to our new shopping centers or acquired companies.
We have grown through strategic acquisitions not only in shopping centers which are already part of our current portfolio, but also through acquisitions of new shopping centers, and we intend to continue this strategy. The successful integration of new businesses depends on our ability to manage such businesses successfully and to eliminate redundant and/or excessive costs. We may be unable to reduce costs or to benefit from the gains resulting from these acquisitions, which may adversely affect us.
Acquisitions may also expose us to liabilities resulting from contingencies involving our new shopping centers or acquired companies, their management, or liabilities incurred prior to such acquisitions. The due diligence we conduct regarding new acquisitions, and any contractual guarantees or indemnities given by sellers of acquired assets, may not be sufficient to protect us or compensate us in the event of contingencies, which could adversely affect us.
Losses not covered by insurance or the inability to renew our current insurance policies may adversely affect us.
We maintain insurance policies that are customary in our market to cover our shopping centers and real estate developments. However, certain types of losses are not typically covered by insurance. In addition, our inability to renew our current insurance policies on the same terms and conditions could also adversely affect us. If any uninsured event occurs, our investments may be lost, and we will incur costs and expenses to recover damages caused to the shopping centers and real estate developments. In addition, courts may hold us liable for indemnifying victims, which may adversely affect us.
Compensation paid to our management is closely linked to our results of operations. As a result, our management may decide to focus on activities that enhance our profitability in the short term.
Our management‘s compensation includes significant elements of variable compensation and stock options. See "Management and Fiscal Council--Stock Option Plan." Because a substantial part of the compensation paid to our management is closely linked to our results of operations, our management may decide to focus our business on strategies that result in maximizing profits in the short term, which could conflict with our long term investment strategies.
Unfavorable judicial or administrative decisions may adversely affect us.
We are defendants in several judicial and administrative proceedings related to civil, labor and tax matters. We cannot assure you that we will obtain favorable decisions in such proceedings, or that they will be dismissed, or that our reserves for such proceedings are sufficient.
We have filed a judicial proceeding seeking to overrule a decision issued by the Brazilian Antitrust Agency (Conselho Administrativo de Defesa Econômica), or CADE, which declared that the exclusivity and geographic restrictions clause in the lease agreements for Iguatemi São Paulo is invalid. This clause prevents tenants of Iguatemi São Paulo from opening stores in certain other shopping centers or in shopping centers located within a certain radius of Iguatemi São Paulo. Such decisions contrary to our interests may adversely affect us.
Finally, tax authorities may have different understandings or interpretations than we apply in structuring our business, which may result in investigations, assessments, or judicial or administrative proceedings, the final decision of which could adversely affect us.
Our growth may require additional capital, which may not be available or, if available, may not be obtained on satisfactory terms.
Our growth may require significant amounts of capital, particularly for the acquisition or development of new real estate properties. Aside from internally generated cash flow, we may need to raise additional capital through offerings of securities or loans from financial institutions, in order to ensure the growth and development of our future activities. We cannot guarantee the availability of additional capital or, if available, that it will be obtained on satisfactory terms. Lack of access to additional capital on satisfactory terms may restrict the growth and development of our business, which could adversely affect us.
Financial contracts and other instruments representing our debts establish specific obligations, and any failure to comply with these obligations may result in the early maturation of these obligations and have an adverse effect on us.
We enter into various loans, some of which require the fulfillment of specific obligations. Potential defaults of these loans that are not promptly remedied, or for which lenders do not waive their right to declare early maturity of the loans, may trigger the decision of these lenders to declare the early maturity of our debt under these instruments and result in the early maturity of other financial instruments that we are party to. Our assets and cash flow may not be sufficient to fully pay the outstanding balance of our obligations in these cases, which could adversely affect us.
As owner of the properties on which the shopping centers in which we hold ownership interests are located, we may incur extraordinary expenses, which could have an adverse effect on us.
As owner of the properties on which the shopping centers in which we hold ownership interests are located, we may incur extraordinary expenses, such as apportionments for building and remodeling, painting, decorating, maintenance, installing security equipment and any other extraordinary expenses for maintaining the properties and condominiums in which our shopping centers are located. We are subject to costs and expenses arising from lawsuits related to leases collections, as well as any other unpaid amounts by tenants, such as taxes, condominium expenses and costs for repairing properties not fit for lease after eviction or the amicable departure of the tenant. Paying these expenses may have an adverse effect on us.
Our controlling shareholder may have interests that conflict with those of our other shareholders.
Our controlling shareholder may have interests that conflict with those of our other shareholders, decisions that may include corporate reorganizations and payment of dividends conditions. Our controlling shareholder‘s decisions may differ from those of our minority shareholders. See "Principal Shareholders" and "Business— History."
We share control of our shopping centers with other investors, whose interests may differ from ours.
We share control of certain of our shopping centers with other institutional investors, including pension funds and other groups whose interests may differ from ours. We depend on the consent of these other investors to make certain significant decisions affecting our shopping centers.
Our partners in some shopping centers may not support, and may even delay, our expansions and other proposed projects. In addition, our partners in some shopping centers may have economic interests different from ours and may not support our strategic and business purposes. In the event that we are not able to achieve sufficient support to approve certain actions that could affect our shopping centers, we may not succeed in adequately implementing our business strategies, which may adversely affect us.
Disputes could result in litigation or arbitration, which would increase our expenses and could divert our directors and officers from maintaining full focus on our business, which may adversely affect us.
We depend on the availability of public utilities and services, especially for water and electric power. Any reduction or interruption of these services may adversely affect us.
Public utilities, especially those that provide water and electric power, are fundamental for the sound operation of our shopping centers. Any material interruption of these services could result in an increase in our costs and failure in our ability to provide our services. In addition, if we became responsible for the operation of these utility services, we would be required to hire specialized contractors, which would likely involve additional costs and a significant increase in our operating expenses. Accordingly, any interruption in the provision of these essential services may adversely affect us.
A price increase of raw materials could increase our costs and reduce returns and profits.
The main raw materials used to build shopping malls include concrete, concrete blocks, steel, bricks, glass, wood, equipment, windows, doors, tiles and pipes. Increases in the prices of these and other raw materials, including increases that may occur as a result of shortages, taxes, and restrictions or fluctuations in exchange rates, could increase our cost of construction, adversely affecting our returns and profits and, as a consequence, our business and the trading price of our securities.
The Brazilian shopping center industry is highly competitive, which may result in a reduction in the volume of our operations and adversely affect us.
The Brazilian shopping center industry is highly competitive and fragmented. The format and operational strategy of shopping centers must be continuously reviewed. Changes in customer preferences, the advent of alternative retail models and the construction of a growing number of shopping centers have led to modifications in existing shopping centers in response to the increased competition. Competition for customers and the search for diversification are closely linked to projects to revitalize and redefine shopping centers. These projects include increasing marketing expenditures; selecting or modifying tenant mix; selecting or modifying anchor tenants, hosting promotional events, increasing the number of parking spaces, developing architectural projects, expanding the number of leisure and service centers, personnel, and streamlining and computerizing operations.
Other companies, including foreign companies working with local companies, may become active in the shopping center industry in Brazil in the near future, which may further increase this competition. To the extent that one or more of our competitors launches a successful marketing or sales campaign and is able to significantly increase sales in their shopping centers and we cannot respond promptly and effectively, we could be adversely affected.
Competition near the shopping centers that we own or manage may require unplanned investments and may hinder our ability to renew our store leases or to lease them to new tenants, which could adversely affect us.
Competition, particularly from new shopping centers in the areas surrounding any of our shopping centers, may affect our ability to lease our stores under favorable conditions. The arrival of new competitors in the regions where we operate could require unplanned investments in our shopping centers, which may have an adverse affect on us.
We may also have difficulty in renewing store leases or in leasing stores to new tenants, which may lead to a reduction in our cash flow and operating income, since the proximity of new competitors could divert existing or new tenants to such competitors, resulting in vacancies in our shopping centers.
Brazilian tenancy laws have specific characteristics that may adversely affect us.
Our lease agreements with our tenants are regulated by the Brazilian Lease Law (Lei de Locação), or Lease Law, which grants certain rights to tenants, including mandatory renewal of leases when certain conditions are met. Accordingly, the mandatory renewal of a lease may present two principal risks that may adversely affect us: (i) if we request a tenant to vacate a given store in order to vary the store mix, the tenant could file a lease renewal lawsuit and obtain a judicial order allowing the tenant to remain in the store for another term; and (ii) in a lease renewal lawsuit, both parties may request an adjustment of the lease, but the final lease is determined at the judge’s discretion. Accordingly, we are subject to the interpretation and the decisions of the courts, which may establish leases in amount lower than those paid previously, or require the return of amounts received if. The compulsory renewal of leases and/or a judicial adjustment to leases, if decided against us, may adversely affect us.
The Brazilian shopping center industry is subject to extensive regulation, which may affect the development of our projects.
Our activities are subject to federal, state and municipal laws and to regulations and licensing requirements with respect to real estate development, construction and expansion, zoning, land use and land purchases, environmental protection and preservation, as well as activities of a shopping center. We are required to obtain licenses and permits from different governmental authorities to carry out our business. In the event of noncompliance with these laws, licenses and regulations, we face fines, project shutdowns, cancellation of licenses and revocation of authorizations, as well as administrative, criminal and other penalties. We may also be prohibited from entering into agreements with public authorities and may become exposed to civil liability.
Furthermore, public authorities may issue new and stringent standards or interpret existing laws and regulations, including those related to tax and contractual matters, in a more restrictive manner, which may force companies in the shopping center industry, including us, to incur additional expenses in order to comply with new rules or interpretations. Any such action on the part of public authorities may negatively affect us and the industry.