(Adds details on outlook, share performance)
By Ana Mano
SAO PAULO, Aug 10 (Reuters) - Brazilian homebuilder Cyrela Brazil Realty SA expects sales cancellations to persist through 2016, it said on Wednesday in a sign that the highest borrowing costs in a decade are preventing customers from securing mortgages.
Shares of Cyrela, the nation's largest listed company in its sector, fell as much as 5.23 percent to 10.50 reais in their biggest intraday drop since June 24. It also blamed cancellations for lower-than-expected earnings for the second quarter.
The company will keep setting aside cash to protect against sales cancellations for the medium term, executives said on a conference call.
Provisions for cancellations are around 200 million reais ($64 million) at this point, Chief Financial Officer Eric Alencar said. In the second quarter, the company paid 30 million reais in claims for cancellations, a 150 percent rise from a year earlier.
The surge in cancellations drove up expenses, Cyrela said.
Net income fell 62 percent to 45 million reais ($14 million) from a year earlier, missing a consensus estimate of 59.2 million reais compiled by Thomson Reuters.
Sales cancellations, particularly in northern Brazil, are also weighing down Cyrela's ability to generate free cash flow, Alencar said. Free cash flow is the money left for holders of bonds and shares after a company pays all operating and financial expenses.
As Brazil struggles with its harshest recession in eight decades, rising unemployment and high inflation, Cyrela has remained cautious about the outlook for a recovery in homebuilding activity.
"Credit restrictions and a rise in unemployment affect our daily operations," co-Chief Executive Officer Raphael Horn said during the call. "Conservative cash management policies are allowing the company to pass through the turbulence."
Earnings before interest, tax, debt and amortization came in at 63 million reais, 50 percent below consensus estimates.
$1 = 3.1414 Brazilian reais Reporting by Ana Mano Editing by W Simon and Lisa Von Ahn