PBR Petroleo Brasileiro ADR

   (FROM THE WALL STREET JOURNAL 11/11/15) 
   By Craig Karmin and Will Connors 

Global property giant Hines said its head of Brazil operations resigned after the firm began investigating whether improper payments were made to win business with one of Brazil's largest companies.

The episode could complicate Houston-based Hines's ability to raise future capital to invest in Brazil, some institutional investors said, and shows the potential perils of investing in real-estate markets where U.S. firms rely on local partners to navigate foreign territories.

The alleged payments are related to Hines's relationship with a big tenant in Brazil, state-owned oil giant Petroleo Brasileiro SA, known as Petrobras.

In 2004, Petrobras leased a 36-story office tower in downtown Rio de Janeiro developed by Hines.

A July report in Brazilian newspaper O Globo said that Hines paid commissions to a Rio broker, and the paper alleged improper payments.

Hines said that after that report, it started its own investigation to determine if its Brazilian staff did anything improper.

"We launched an internal investigation, which raised sufficient questions surrounding these payments that we decided to share what we have learned to date with the authorities," said Hines Chief Investment Officer Hasty Johnson.

Douglas Munro, head of Hines in Brazil, resigned shortly after the investigation began, according to Hines. Mr. Munro couldn't be reached for comment. Hines declined to say whether his departure was related to the investigation.

Hines is now checking money transfers in Brazil over the past decade, according to a person familiar with the matter.

"We have also initiated a comprehensive review of our internal controls and protocols in order to make enhancements as appropriate," a Hines spokesman said in a statement.

Some investors say the rush by U.S. firms to conquer new global markets can compromise their standards if they spread themselves too thin or rely too heavily on local partners.

"As organizations become larger and more global and more complex, there is a greater chance of this kind of issue becoming more of an everyday experience," said Bill Atwood, executive director of the Illinois State Board of Investment with $15.4 billion under management. His fund doesn't have investments with Hines.

Hines's investigation comes about a year after a much broader investigation of Petrobras was initiated by Brazilian authorities, who have dubbed the probe "Operation Car Wash." A Petrobras spokeswoman said it also has an ongoing internal investigation into its relationship with Hines.

Brazilian investigators said they uncovered a decadelong practice in which some of the nation's largest construction firms allegedly formed a cartel to drive up prices of Petrobras contracts and kicked back some of the windfall to Brazilian politicians, top political parties and executives at the oil firm. The case has resulted in more than 100 arrests and more than 30 convictions. Nearly 50 current and former politicians remain under investigation. Petrobras says it was a victim of the scheme and is cooperating with authorities.

For Hines, the potential scandal could make it harder to attract investments, particularly from public pension funds that tend to avoid negative headlines, say some institutional investors.

"You want to determine if a firm put in place prudent controls and sufficient oversight," said Mr. Atwood.

"We treasure our reputation and are committed to the highest ethical standards of conduct. Our investors, clients and co-workers deserve nothing less," said Mr. Johnson.

The California Public Employees Retirement System, or Calpers, is one of Hines's early investment partners in Brazil. A spokesman for the $296 billion pension fund said it is "monitoring the situation."

The Teacher Retirement System of Texas is another giant public fund that has invested with Hines in Brazil. A spokesman for the Texas fund said its Hines investment "is not part of the alleged allegations."

Founded in 1957 by Gerald Hines, the Houston firm has grown into one of the world's most prominent real-estate developers and managers. It is privately owned, with about $87 billion in property assets under management and a presence in 199 cities world-wide. The firm has worked with famous architects from Frank Gehry to I.M. Pei.

Hines got its start in Brazil when Mr. Munro, a veteran property manager, opened the Sao Paulo office in 1998. The firm now owns or manages more than 40 properties in Brazil and counts units of international firms such as KPMG LLP, Nestle SA and Sony Corp. as tenants.

Calpers got onboard a few years later with a nearly $100 million investment in a Hines fund dedicated to developing and managing office towers, residential buildings and warehouses in the South American country. That fund generated net annual returns of 36.8% for Calpers, buoyed by a surging Brazilian economy and appreciating currency, when it closed in 2011.

The following year Calpers invested in a second Hines property fund in Brazil, which started off strong but has stumbled more recently as that economy cooled off and Brazil's currency, the real, lost ground to a stronger dollar.

The five-year annual return through March is 20%, according to the Calpers website. But it has lost 4.6% over the last year through March.

Hines hasn't showed any signs of retreating from Brazil. Hines has hired an executive-search firm to find a new head for Brazilian operations. Mr. Munro's departure was first reported in the real-estate publication PERE.

"We have a robust development and property management portfolio and we look forward to continuing to deliver superior services and products to investors and clients," a Hines spokesman said.

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Di Pinheiro contributed to this article.

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(END) Dow Jones Newswires

November 11, 2015 02:47 ET (07:47 GMT)

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