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Financial Statements

Gafisa S.A.

December 31, 2013

with Independent Auditor’s Report

on the Financial Statements

(A free translation of the original report in Portuguese as published in Brazil containing Financial Statement prepared in accordance with accounting practices adopted in Brazil)

Gafisa S.A.

Financial Statements

December 31, 2013

Table of contents

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

Dear Shareholders,

The Management of Gafisa S.A. (“Gafisa” or the “Company”) is proud to submit to your examination this Management Report and the accompanying Financial Statements, and the related Reports of Independent Auditors and Fiscal Council, for the year ended December 31, 2013. All information is reported in millions of Reais and on a consolidated basis, except when otherwise indicated, and in accordance with the accounting practices adopted in Brazil.

The end of 2013 marks the completion of the work on the strategic repositioning devised by the Company in the beginning of 2012. Our goal at that time was clear: we had to reduce our indebtedness and limit the Company’s exposure in non-profitable markets and businesses. This process has positively evolved over the past two years in several fronts, among which is the improvement in margins and focus on cash generation, culminating with the sale of the 70% interest in Alphaville, which brought significant value to Gafisa, contributing to the reduction in the Company’s leverage, and adjusting its capital structure.

In the beginning of 2012 significant changes were made in our strategic positioning, through the implementation of a new structure, segmented by brand, and the appointment of respective executives, besides the redesign of each business operations. Confident that throughout 2012 we had successfully completed the initial phase of our turnaround plan, and that the cash generation was no longer a top priority, we developed a plan for 2013 aimed at achieving a better balance between cash generation, investment, deleverage and profitability, in order to begin a new cycle of sustainable development for the Company.

Gafisa ended 2013 very confident about the operating and financial results achieved over the period. The volume of launches reached R$1.6 billion for the 4Q13, consolidating R$2.9 billion in launches for the year, in line with the disclosed guidance. Sales totaled R$1.3 billion for the 4Q13 and R$2.6 billion for the year, reflecting a healthy market performance. Over 2013, with the reduction in the operational complexity, combined with the strategic consolidation of Gafisa, and the resumption of Tenda’s launches, we noted a gradual evolution of the Company’s margins, the gross margin having reached 31.2% in 2013 while it stood at 24.4% in 2012 before interests.

We should also stress the good cash performance noted in 2013, especially in the second half of the year. The Company reached an operating cash generation of R$667.6 million in 2013 in the operations of Gafisa and Tenda, attaining a free cash generation in the amount of R$97.3 million.

The completion of the Alphaville transaction represented a cash inflow of R$1.5 billion, and had a strong contribution to the profit for the 4Q13, which reached R$921.3 million, ending the year with R$867.4 million. With this event, we could adjust the capital structure of the company, reducing leverage, and arriving at a net debt to equity ratio of 36%.

The funds from the settlement of the Alphaville transaction are being used in the amortization of approximately R$700 million in corporate debt falling due until December 2014. In addition to debt reduction, the funds were used in the distribution to the Company’s shareholders throughout the payment of nearly R$130 million in interest on equity in February, plus R$32 million as additional dividends, payable throughout 2014. We also launched a new share repurchase program in the amount of 32 million shares, ratifying the confidence of Gafisa in the value and future prospects for the Company.

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

Finally, at the end of 2013 we completed the formulation of our five-year business plan for 2014-2018. In this planning process, we set out the guidelines for the development of our business over the following years, like the expected size of Gafisa and Tenda’s operations, the adequate leverage, profitability guidelines, and mainly our commitment to capital discipline and creating value to shareholder, reflected in our guidance disclosed to the market at the end of 2013.

Gafisa begins 2014 well positioned so that it is able to get benefits from all initiatives implemented in the last two years. The reduction in our operational complexity, the adjustment of our cost and expense structure, the new operating model of Tenda and the consolidation of Gafisa’s strategic positioning, combined with the financial flexibility obtained with the sale of the interest in Alphaville, were important measures in the preparation of the Company for future challenges.

As a consequence, we have announced on February 7, 2014 the beginning of studies on the potential separation of the business units Gafisa and Tenda into two publicly-held and independent companies. In the Company’s evaluation, the separation would be the next step in a grand management plan primarily aimed at improving and reinforcing the capacity of both business units of creating value. The management team that conducted the turnaround process is now prepared to lead Gafisa and Tenda in a profitable and sustainable way, in a moment when these brands are embarking on a new phase in the company’s history.

Finally, I would like to mention that this year GAFISA commemorates its 60^th anniversary, a milestone in the Brazilian real estate sector. Its many accomplishments are evidenced in development of over 1,100 real estate ventures, but the most important of all is the intensity, determination and passion that we invest to keep going forward.

Congratulations, Gafisa!

In 2013, the total launched by the Company was R$ 2.9 billion, representing a decrease of 2.2% on 2012. The volume launched is in line with the guidance on launches that the Company reported for the year, in the range R$ 2.7 to R$ 3.3 billion.

In 2013, 37 ventures/stages were launched in 11 states. In terms of total sales value, Gafisa accounted for 38% of launches for the year, Tenda for 12% and Alphaville for the remaining 50%.

Contracted sales totaled R$ 2.5 billion in 2013, stable as compared to the R$ 2.6 billion for 2012, sales of launches accounted for 60% of this total, while inventory sales accounted for the remaining 40%. In the end of the period, consolidated inventory at market value increased 9.6%, reaching R$ 3.9 billion, as compared to R$ 3.6 billion in the end of the 3Q13.

The consolidated sales-to-inventory ratio showed a strong expansion, reaching 24.8% for the 4Q13, whereas it stood at 10.6% for the previous quarter. In 2013, the consolidated sale speed reached 38.7%.

Throughout 2013, the Company delivered 13,842 units, within the range of delivery guidance for the year (13,500 – 17,500).

Regarding financial indicators, in 2013 our net sales dropped 11.7% year-on-year, totaling R$ 2.5 billion; whereas the gross profit reported for the period reached R$ 614.1 million, as compared to R$ 528.8 million in 2012, an expansion of 16.1%. The adjusted gross margin increased to 24.8%, as compared to 18.9% reported in the previous year.

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

Adjusted EBITDA amounted to R$978.9 million for the 4Q13 and R$1.3 billion for 2013, reflecting the contribution of the Alphaville transaction. If we do not consider the result of the Alphaville transaction, the adjusted EBITDA reached R$138.9 million for the 4Q13 and R$430.6 million for the year.

Net income for the 4Q13 reached R$921.3 million, and in 2013 the net income amounted to R$867.4 million. If we do not add the result of the Alphaville transaction, the net income amounted to R$81.3 million for the 4Q13 and R$27.4 million for the year.

Our key indicators of the balance sheet have significantly improved due to the better operating performance of the Company and also because of the contribution to liquidity from the sale of interest in Alphaville. The Gafisa Group ended 2013 with R$2.0 billion in cash, above the R$781.6 million at the end of the 3Q13.

The Company’s total indebtedness was reduced to R$3.1 billion, as compared to R$3.5 billion at the end of the pervious quarter, while net indebtedness dropped to R$ 1.2 billion as of December 31, 2013, as compared to R$2.9 billion for the previous period.

The leverage level, calculated by the net debt-to-equity ratio, dropped to 36.1% in 2013, a strong reduction compared to 126.0% for the 3Q13, and also compared to 89.2% in 2012. Excluding the venture funding, the ratio stands at -26.6% (positive net cash).

2013 was marked by the successful response to important challenges. The operating and financial results for the year reflect the Company’s assertiveness in the implementation of the corrective actions adopted since the beginning of the turnaround process, the maintenance of the Gafisa consolidation strategy in Rio de Janeiro and São Paulo, the reduction in the number of ventures related to the legacy, the resumption of the launches of the Tenda brand according to its new operating model, and also the improvement in the capital structure of the Company by means of the Alphaville transaction, producing the reduction in our indebtedness, thus positioning the Company for a new cycle of sustainable growth and profitability.

Launches for the year totaled R$1.1 billion, a 32.5% decrease year-on-year, with the Gafisa segment accounting for 38% of the consolidated launches for the period.

Contracted sales for the year totaled R$ 961 million, down 39.9% on 2012. Sales of units launched over the year accounted for 60% of total, while sales of inventories accounted for the other 40%. The sale speed stood at 31.4% in 2013.

In 2012, Gafisa delivered 22 ventures/stages and 4,315 units, attaining 102% of the mean of the guidance (3,500 – 5,000) for the year.

The market value of Gafisa inventories, at the end of 2013, accounts for 52% of total inventories, reaching R$2.1 billion.

In 2013 Gafisa reached R$1.6 billion in net sales.

The year 2013 marked the resumption of Tenda’s launches. Throughout 2012, Tenda worked to reduce the complexity of its operations and master the fundamentals of its new operating model.

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

Tenda resumed the launch of new ventures in 2013, reaching R$ 338.8 million in the launches of 8 new developments. In the year that has passed, the brand accounted for 12% of the consolidated launches for 2013.

In view of this new scenario, net contracted sales of Tenda for the year totaled R$490.4 million, as compared to the negative net sales of R$ 74.3 million noted in 2012. It reflected the good sales performance of the ventures launched in 2013, and also Tenda’s assertiveness in the completion of works and consolidation of inventory sales. Sales speed reached for the segment stood at 44% in 2013.

We should also emphasize the strong reduction in the cancellation level noted throughout 2013, among the main factors that contributed to this reduction we could undoubtedly mention the higher efficiency and control achieved by Tenda in the process of passing on sales to financial agents. Noteworthy is that out of the R$ 338.8 million launched in 2013, we recorded sales of R$ 217.4 million, of which R$ 122.0 million were already passed on and the remaining R$ 95.4 million are in the passing on process. It also represents 1,096 units relating to Tenda’s launches for the year, already effectively passed on to financial institutions.

In 2013, Tenda delivered 41 ventures/stages, and 7,027 units, attaining 101% of the mean of the guidance (6,500 – 7,500) on deliveries for the year.

The market value of Tenda inventories totaled R$ 618.4 million at the end of 2013, accounting for 16% of total inventory for the period.

In 2013, Tenda reached R$817.5 million in net sales.

In the segment, launches for 2013 totaled R$ 1.5 billion, an increase by 9% year-on-year, accounting for 50% of consolidated launches for the period.

Net contracted sales for the year totaled R$ 1.0 billion, remaining stable as compared to the result of R$ 1.1 billion recorded in the previous year. Sales speed reached 45.6%.

In 2013, Alphaville delivered 5 ventures/stages and 2,500 units, attaining 59% of the mean of the guidance (3,500 – 5,000) on delivery for the year. The deviation in relation to the estimated guidance is related to delays in obtaining the final documentation for the effective delivery of units.

The market value of Alphaville inventories totaled R$ 1,265 billion at the end of 2013, accounting for 32% of the consolidated inventory for the period.

In 2013 Alphaville reached R$959.2 million in net sales.

Gafisa has People as its main asset. Our team is composed of people with unique nature: aligned with the corporate vision, values and culture built throughout 60 years of history. The commitment of Gafisa People to the achievement of results and to respect to customers is the base of the competitive differential of the brand.

We have a professionalized, experienced and vanguard team in the Brazilian real estate sector. Some of the professionals that are in our staff began their careers in the Company, an example of the excellence in the management training program of Gafisa. Nearly 70% of our leaders – Executive Officers, Managers and Coordinators – were trained in house, through talent development programs: Internship, Trainee and International MBA.

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

§  Internship program: we have permanently in our staff about 500 interns who are Civil Engineering undergraduates.

§  Trainee program: about 20 recent graduates are employed every year. They are trained over a year, period when they are prepared to take on outstanding positions in the Company.

§  International MBA: recruiting of Brazilian youths graduated in courses abroad and who want to continue their career in Brazil.

The selection, assessment and compensation of our employees are based on the daily exercise of our values. These should be perceived by everybody in day-to-day activities, decision-making, strategic actions and in the relationship with customers, suppliers, investors and community.

The Company’s employee compensation policy, which includes that of members of the Board of Director and Fiscal Council, and Officers (statutory and non-statutory) is in line with the best corporate governance practices. We thus aim at attracting and retaining the best professionals in the market. Compensation is established based on market surveys and is directly related to the alignment of the interests of the executives with those of the Company’s shareholders.

The meritocratic model is based on variable compensation. A significant percentage of total compensation is tied to the fulfillment of corporate results and individual goals. All employees have individual objective goals directly related to the Company’s strategy and our main business indicators.

In the case of Executive Officers and Managers, besides the short-term variable compensation, there is also a portion of long-term incentives (by granting stock options), which enable sharing the risk and results of the Company with its main executives, a characteristic of a policy that is transparent and focused on the fulfillment of long-lasting results.

Occupational safety and accident prevention are priorities. Accordingly, we maintain a continuous program for identification, prevention and mitigation of risks that aims at not only preserving the physical condition of our employees, but also offering basis for a healthier life. For us, investing in safety is ensuring wellness in and out of the work environment. We offer training programs to the fieldwork teams (directly related to works), as well as to outsourced employees, who provide services on our sites.

The Company currently counts on the collaboration of 3,345 employees in the Gafisa, Tenda and Alphaville brands (basis Dec/13).

Gafisa, with the objective of exercising its leading role, has since 2006 an area named Operations and Technology Development (DOT, in Portuguese), mainly focused on the search for technological innovation and process improvements that bring competitive market advantage in the market. In order to approve a development project it is necessary to analyze if the project will:

- Enhance the quality perceived by the customer,

- Reduce the construction period,

- Cut cost.

At present, DOT is composed of ten professionals who also use the resources allocated to all areas of the company in order to implement and provide feedback to development projects. Such structure requires an investment of approximately R$ 1 million per year.

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

For each project to be launched there is a different approval dynamics, and several authorizations are required by the proper authorities, including environmental ones, since each municipality follows a specific land use regulation, and in many times their own environmental legislation. In this context, Alphaville has a fundamental role, as it contributes to the regulation of many municipalities that do not require important licenses, raising the standard and getting a closer relationship with such authorities.

At each beginning of the project, a complete research is conducted about the city’s legislation, so that the Company may operate within its own standards, always considering and abiding by the local environmental legislation in the preparation of the Environmental Impact Study.

In order to assure the performance of the commitments assumed in the licensing process and minimize the environmental impacts, Alphaville created in 2008 the environmental management, which is, among other things, responsible for providing advisory on environmental licensing and monitoring construction works, mainly with the engineers in charge.

Giving continuity to the improvement in internal processes, the Company purchased environmental management software and started to store data of all stages of each venture, from licensing from proper authorities to the construction. Information such as hiring, agreements, costs and compliance with conditions are fed to the software. Therefore we created an easily accessible database, which will facilitate the preparation and setting of controls and goals. The objective is to implement over the coming years an Environmental Management System in the Company and, in this process, the employees will be trained to use and maintain (feed with data) this system.

The Board of Directors of Gafisa is the body responsible for making decisions and formulating general guidelines and policies related to the Company’s businesses, including its long-term strategies. In addition, the Board also appoints executive officers and supervises their activities.

The Board of Directors’ decisions are taken by the majority vote of its members. In case of a tie, the Board Chairman, besides his personal vote, must cast the tie-breaking vote.

The Board is formed by nine members, elected at the Annual Shareholders’ Meeting, of which eight (89%) are independent, in compliance with the rules of the Novo Mercado of BM&FBovespa and also of the New York Stock Exchange (NYSE), which is stricter. The fact that the Company has 89% of independent members also meets the NYSE resolution, which sets forth that all listed companies must have a board of directors composed of a majority of independent members, while the BM&FBovespa listing rules establish a minimum of 20% of independent members. The term of office of each member is two years, with reelection permitted, and subject to removal by shareholders at a shareholders’ meeting, as required by the Novo Mercado Rules.

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

The following table shows the members of the Board of Directors.

* Odair G. Senra is a member not independent of the board of directors, according to the NYSE rules and the Novo Mercado listing rules.

Gafisa’s Bylaws provide for a non-permanent Fiscal Council, the annual shareholders’ meeting being able to establish it and its members, as provided for in the Law. The Fiscal Council, when established, must be composed of three to five members, and an equal number of alternates.

The operation of the Fiscal Council, when established, ends at the first annual shareholders’ meeting after its establishment, and its members can be reelected. The compensation of fiscal council members is set at the shareholders’ meeting that elects them.

At the Annual Shareholders’ Meeting held on April 19, 2013, the Fiscal Council was established for the fourth consecutive term of office, and will operate until the next Annual Shareholders’ Meeting of the Company in 2014.

The Fiscal Council is currently composed of Messrs. Olavo Fortes Campos Rodrigues Junior, Adriano Rudek de Moura and Luis Fernando Brum de Melo as effective members, and Messrs. Marcello Mascotto Iannalfo and Marcelo Martins Louro, and Ms. Laiza Fabiola Martins de Santa Rosa as alternates.

Gafisa’s Board of Executive Officers must be composed of a minimum of two and a maximum of eight members, including the CEO, the Financial Officer and the Investor Relations Officer, elected by the Board of Directors for a three-year term of office, their reelection being permitted, as provided for in the Bylaws.

In the current term of office, six members compose the Board of Executive Officers, the legal representative body of the Company and mainly responsible for the management and daily monitoring of the general policies and guidelines formulated at the Annual Shareholders’ Meeting and the Board of Directors.

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

The Board of Directors is supported by the following Committees:

§  Nominating and Corporate Governance Committee: it has the purpose of considering and periodically reporting on matters related to the size, identification, selection and qualification of the Boards of Directors and of Executive Officers, and the candidates nominated for the Board of Directors and its Committees, as well as preparing and recommending Governance principles applicable to the Company. This Committee is statutory and should be composed of three independent members of the Board of Directors of the Company.

§  Audit Committee: it is responsible for planning and reviewing the annual and quarterly reports of the Company – which is submitted to the review and final approval of the Board of Directors –, for the involvement of the auditors in the process and put special focus on the legal provisions and accounting standards, ensuring the maintenance of an effective internal controls system. This Committee is statutory and should be composed of three independent members of the Board of Directors of the Company, taking into account that members should have experience in matters related to accounting, audit, finance, taxation and internal controls, and one of the members must have extensive experience in accounting and financial management.

§  Compensation Committee: it has the duty to evaluate and make recommendations to the members of the Board of Directors regarding the policies on compensation and all forms of bonus to be provided to the Executive Officers and other employees of the Company. This Committee is statutory and should be composed of three independent members of the Board of Directors of the Company.

§  Ethics Executive Committee: it has the duty to monitor the practices adopted by the entire organization, assuring that they are compatible with the beliefs and values that represent Gafisa and the principles and instructions on conduct provided for in the Code of Ethics. This Committee is composed of the Executive Officers and Managers of the Company, with the duty of providing assistance to the Board of Directors and is overseen by the Audit Committee.

§  Investment Executive Committee: has the duty to analyze, discuss and recommend land acquisitions and new real estate developments; advise the executive officers during the negotiation of new deals and the structuring of new developments; follow-up the approval of budgets and the cash flow; and, in special cases, participate in the negotiation and structuring of new types of businesses. This Committee is composed of the Company’s Statutory Officers with the duty of providing assistance to the Board of Directors.

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

§  Finance Executive Committee: it operates by evaluating and making recommendations to the members of the Board of Directors regarding risk and financial investments policies of the Company. This Committee is composed of the Company’s Statutory Officers with the duty of providing assistance to the Board of Directors.

The members of each one of these committees can be found on the Investor Relations website of the Company: www.gafisa.com.br/ri.

In order to protect the interest of all of its shareholders equally, the Company establishes, according to the effective legislation and the best governance practices, the following rights to the holders of Gafisa’s shares:

§  Vote at a Shareholders’ Meeting, either Annual or Extraordinary, and make recommendation and give instructions to the Board of Directors related to decision making;

§  Receive dividends and share of profit or other distribution related to shares, in proportion to their interests in capital;

§  Oversee the management of Gafisa, according to the Bylaws, and resign from the Company in the events provided for in the Brazilian Corporate Law; and

§  Receive at least 100% of the price paid for common share of the controlling block, according to the “Novo Mercado” listing rules, in case of tender offer as a result of the disposal of the Company’s control.

According to the terms of Article 36, Paragraph 2 (b) of the Bylaws, the net income for the year, calculated after the deductions prescribed in the Bylaws and adjusted as provided in Article 202 of the Brazilian Corporate Law, shall have 25% of its balance allocated to the payment of mandatory dividends to all shareholders of the Company.

In view of the result of R$921.3 million determined in the year ended December 31, 2013, the Company’s management is going to propose for approval at the Annual Shareholders’ Meeting the distribution of approximately R$32 million, about R$0.08 per share, in addition to the R$130 million paid as interest on equity on last February 12. This distribution of value allowed our shareholders have a dividend yield at nearly 11.0% in 2013.

The Company, which has diluted capital, continues to be the only Brazilian real estate development company to have its shares traded on the New York Stock Exchange, and has one of the most liquid shares in the real estate sector. In 2013, we reached an average daily trading volume of R$ 10.6 million at BM&FBovespa, in addition to an amount equivalent to approximately R$ 1.9 million at NYSE, totaling R$ 12.5 million in daily average volume.

In 2013, the Bovespa index recorded a drop of 15.5%, and the Company’s shares ended the year at a closing price of R$3. 53 (GFSA3) and US$3.13 (GFA), which represents a drop of 25.0% and 35.2%, respectively, as compared to the closing price in 2012.

Gafisa’s shares are included in the following indexes: IBOV - Bovespa, IBX - Bovespa, IBX50 – Bovespa.

9

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

During 2013, we implemented our business plan satisfactorily and had a fourth quarter with strong operating results, with increase in launches and sales. Therefore, we ended the year with figures in line with the guidance established for 2013.

We thus announce our guidance for the following years.  

Guidance on Launches (2014E)

Leverage Guidance (2014E)

Administrative Expenses Guidance / Volume of Launches

In the Company’s understanding, the Return on Invested Capital in three years shall stand between 14% and 16%, both for the Tenda and Gafisa segments.

Guidance of Return on Invested Capital (2014E)

The policy on the Company’s conduct in contracting services unrelated to external audit from our independent auditors is based on principles that preserve the autonomy of the independent auditor.  These internationally accepted principles consist of the following:  (a) an auditor cannot audit its own work; (b) an auditor cannot serve a management function at its client; and (c) an auditor shall not promote the interests of its clients.

According to Article 2 of CVM Instruction No. 381/03, Gafisa informs that KPMG Auditores Independentes, the independent audit firm of the Company and its subsidiaries, did not provide services other than independent audit in 2013.

10

2013 MANAGEMENT REPORT (A free translation from the original in Portuguese into English)

 

The Board of Executive Officers states, in accordance with Article 25, paragraph 1, items V and VI, of CVM Instruction 480/2009, that it revised, discussed and agrees with the Financial Statements contained in this Report and the related opinion issued in the Report of Independent Auditors.

Gafisa thanks the valuable contribution of its employees, customers, suppliers, partners, shareholders, financial institutions, governmental bodies, regulating authorities and other stakeholders for their support throughout 2013.

Independent Auditor’s Report on the Financial Statements

To shareholders and management of

Gafisa S.A.

São Paulo - SP

We have audited the accompanying individual and consolidated financial statements of Gafisa S.A. (Company), identified as Company and Consolidated, respectively, comprising the balance sheet as of December 31, 2013 and the related statement of profit or loss, statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, as well as the summary of main accounting practices and other notes to the financial statements.

Management responsibility for the financial statements

Management is responsible for the preparation and fair presentation of the individual and consolidated financial statements in accordance with the accounting practices adopted in Brazil, and of the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) applicable to real estate development entities in Brazil, as approved by the  Accounting Pronouncements Committee (CPC), by the Brazilian Securities Commission (CVM) and by the Federal Accounting Council (CFC), and for such internal control as Management determines is necessary to enable the preparation of individual and consolidated financial statements that are free from material misstatements, whether due to fraud or error.

Independent auditor’s responsibility

Our responsibility is to express an opinion on these individual and consolidated financial statements based on our audit. We conducted our audit in accordance with Brazilian auditing standards and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the individual and consolidated financial statements.  The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the individual and consolidated financial statements, whether due to fraud or error.  In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the individual and consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the individual and consolidated financial statements. 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 

Opinion on the financial statements prepared in accordance with the accounting practices adopted in Brazil

In our opinion, the aforementioned individual (Company) and consolidated financial statements present fairly, in all material respects, the financial position of Gafisa S.A. as of December 31, 2013, and of its individual and consolidated financial performance, and its  individual and consolidated cash flows for the year then ended, in accordance with the accounting practices adopted in Brazil.

Opinion on the consolidated financial statements prepared in accordance with the International Financial Reporting Standards (IFRS), applicable to real estate development entities in Brazil and approved by the Accounting Pronouncements Committee (CPC), the Brazilian Securities Commission (CVM) and the Federal Accounting Council (CFC)

In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the consolidated financial position of Gafisa S.A. as of December 31, 2013, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) applicable to real estate development entities in Brazil and approved by the Accounting Pronouncements Committee (CPC), the Brazilian Securities Commission (CVM) and the Federal Accounting Council (CFC).

Emphasis of a matter

Guideline OCPC 04 issued by the Accounting Pronouncements Committee

As mentioned in Note 2.1, the individual (Company) and consolidated financial statements were prepared in accordance with the accounting practices adopted in Brazil. The consolidated financial statements prepared in accordance with the IFRS applicable to real estate development entities also consider Guideline OCPC 04 issued by the Accounting Pronouncements Committee (CPC). This guideline deals with the recognition of the revenue from this sector and involves matters related to the meaning and adoption of the concept of continuous transfer of the risks, benefits and control over real estate unit sales, as described in further details in Note 2.2.2. Our opinion does not contain exception in view of this matter. 

Other matters

Statement of added value

We have also examined the individual (Company) and consolidated statements of added value for the year ended December 31, 2013, prepared by management, whose presentation is required by Brazilian corporate law, but is not required under IFRS. These added value statements were included in the previously described audit procedures and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements prepared in accordance with the accounting practices adopted in Brazil taken as a whole.

Audit of corresponding amounts

The corresponding amounts, individual and consolidated, related to the balance sheets as of January 1, 2012 (derived from the financial statements for the year ended December 31, 2011) and December 31, 2012, and the financial statements related to the statement of profit or loss, the statement of comprehensive income, the statement of changes in equity, the cash flows statement and the statement of added value (supplementary information) for the year ended December 31, 2012, presented for comparison purposes, restated herein as a result of the matters described in Note 3.1, were audited by other independent auditors, who issued a report dated February 26, 2014, without any modification.

São Paulo (SP), February 26, 2014

KPMG Auditores Independentes

CRC 2SP014428/O-6

Original report in Portuguese signed by

Giuseppe Masi

Accountant CRC 1SP176273/O-7

Gafisa S.A.

Balance sheet

December 31, 2013

(In thousands of Brazilian Reais)

Gafisa S.A.

The accompanying notes are an integral part of these financial statements.

Gafisa S.A.

Statement of profit or loss

Years ended December 31, 2013 and 2012

(In thousands of Brazilian Reais, except if stated otherwise)

The accompanying notes are an integral part of these financial statements.

Gafisa S.A.

Statement of comprehensive income

Years ended December 31, 2013 and 2012

 (In thousands of Brazilian Reais, except if stated otherwise)

The accompanying notes are an integral part of these financial statements.

Gafisa S.A.

Statement of changes in equity

Years ended December 31, 2013 and 2012

(In thousands of Brazilian Reais)

The accompanying notes are an integral part of these financial statements.  

Gafisa S.A.

Cash flow statement

Years ended December 31, 2013 and 2012

(In thousands of Brazilian Reais) 

The accompanying notes are an integral part of these financial statements.

Gafisa S.A.

Statement of added value

Years ended December 31, 2013 and 2012

(In thousands of Brazilian Reais)

The accompanying notes are an integral part of these financial statements.

21

1.   Operations 

Gafisa S.A. ("Gafisa" or "Company") is a publicly traded company with headquarters at Avenida das Nações Unidas, 8.501, 19º andar, in the City of São Paulo, State of São Paulo, Brazil and started its operations in 1997 with the objectives of: (i) promoting and managing all forms of real estate ventures on its own behalf or for third parties, taking into consideration that in the case of the latter, as construction company and proxy; (ii) selling and purchasing real estate properties in general; (iii) carrying out civil construction and civil engineering services and (iv) developing and implementing marketing strategies related to its own or third party real estate ventures; and (v) investing in other companies which have similar objectives as the Company’s.

Real estate development projects entered into by the Company with third parties are structured through specific purpose partnerships (“Sociedades de Propósito Específico” or– “SPEs”) or the formation of consortia and condominiums. Controlled entities substantially share the managerial and operating structures and the corporate, managerial and operating costs with the Company. SPEs, condominiums and consortia operate solely in the real estate industry and are linked to specific ventures.

On June 7, 2013, the Company disclosed a material fact informing about the signature of a contract for selling the majority interest of 70% it held in Alphaville Urbanismo (“AUSA”) to Private Equity AE Investimentos e Participações S.A., represented by Blackstone Real Estate Advisors L.P and Pátria Investimentos Ltda, giving continuity to the material fact disclosed on September 10, 2012, related to the analysis of strategic options regarding the AUSA business.

On July 3, 2013, the Company disclosed a material fact informing about the acquisition of the remaining shares of AUSA, corresponding to 20% of its capital stock, through the acquisition by the subsidiary Tenda of the totality of shares of EVP Participações S.A. amounting to R$366,662, giving continuity to the material fact disclosed on June 7, 2013.

On December 9, 2013, the Company disclosed a material fact informing about the completion of the above-mentioned sale transaction. All conditions precedent for the completion of the transaction were met. The transaction was carried out with the sale of an interest of 50% by the Company and 20% by the subsidiary Tenda. As of December 31, 2013, the Company holds a remaining 30% interest in the capital of AUSA. The funds from this transaction totaled R$1,545,183, of which R$1,254,521 through payment from the AE Fund for the acquisition of shares and R$290,662 received by means of dividends distributed by AUSA.