Consorcio ARA, S.A. de C.V.

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Consorcio ARA, S.A. de C.V.

Avenida Bosque de Ciruelos 140
Colonia Bosque de Las Lomas
Mexico City, D.F. 11700
Mexico
Telephone: (525-5) 5246-3100
Fax: (525-5) 5291-2980
Web site: http://www.consorcioara.com.mx

Public Company
Incorporated: 1988
Employees: 6,733
Sales: MXN 6.77 billion ($621.1 million) (2005)
Stock Exchanges: Mexico City; OTC (ADRs)
Ticker Symbols: ARA; CNRF Y; CNRRF
NAIC: 236115 New Single-Family Housing Construction; 236220 Commercial and Institutional Building; 551112 Offices of Other Holding Companies

Consorcio ARA, S.A. de C.V. (ARA), one of the largest homebuilders in Mexico, is a holding company for operational subsidiaries engaged in the design, development, construction, and marketing of entry-level, middle-class, and upper-income houses. ARA also constructs housing for tourism and builds and operates commercial centers in some of the places where it has housing developments. The company also operates as a contractor for other parties in the construction, promotion, and marketing of commercial and industrial developments. It is active in 16 of Mexico's 31 states and in Mexico City.

FLEDGLING HOMEBUILDER: 1977–95

The enterprise was founded in 1977 by Germán and Luis Felipe Ahumada Russek, brothers who were both engineers. It was incorporated as Consorcio ARA in 1988. (ARA stands for Ahumada Russek y Asociados.) When, in late 1994, Mexico teetered on the brink of defaulting on its debts, ARA was one of the few homebuilders that survived the crisis. Because of fiscal prudence the company had not allowed its bank debt to rise above 44 percent of its assets, and hence it was able to continue making payments. Nevertheless, the ensuing year was an extremely difficult one for ARA. Interest rates on its debt rose to 120 percent. The company only built 1,722 houses, 30 percent fewer than in 1994. The number of houses it constructed for middle-income buyers, previously its main activity and a more-profitable market segment than government-subsidized housing, fell by about 70 percent.

SPECIALIZING IN SUBSIDIZED LOW-COST HOUSING: 1996–2001

Under these conditions, ARA made a necessary adjustment, focusing its efforts on building low-cost houses, mostly financed by government agencies. Armed with a $20 million credit line from an agency named Nafinsa, the company built 1,178 low-income homes in 1995 and 2,440 in 1996. These duplex-style homes sold for an average price of MXL 137,500 (about $17,000) in the latter year. In addition to Nafinsa (which took 10 percent of ARA's shares and exacted veto power over decisions by the board), the company depended on the mortgage loans at below-market interest rates extended to qualifying low-income buyers from agencies with the acronyms Infonavit and Fovi.

The Nafinsa credit carried another condition: that ARA become a publicly financed company within three years. Accordingly, the company sold 21.5 percent of its shares of common stock on the Mexico City stock exchange in September 1996, raising about $50 million. This made ARA the first non-exporting Mexican enterprise to make an initial public offering on the Mexico City stock exchange since the 1994–95 financial crisis. Its shares soon found even more favor among investors, and the company began selling American Depositary Receipts, the equivalent of shares, in the United States in 1998.

ARA was able to make healthy profits from low-cost housing for a number of reasons. Its modular method of construction enabled it to complete work in four or five months, while its competitors took up to 8 to 12 months to complete a project. Built of reinforced concrete, with small rooms, these houses were located amidst identical concrete structures on the periphery of Mexico City. ARA's development costs were low because it had purchased land cheaply in such areas for exactly this purpose. The company's debt was low because it built nothing on speculation, demanding, prior to construction, that the prospective buyer present evidence of a mortgage loan from a government program or commercial bank.

The 220 employees in ARA's offices were engaged in a number of essential tasks. Some acquired land and arranged for residential zoning. When a property owner rejected company offers to buy a desired tract, ARA would suggest a shared venture with shared profits. Other employees trolled for customers, offering, as an incentive, company support toward obtaining a mortgage. ARA's staff also solicited other developers, seeking construction contracts for projects that even included industrial plants.

ARA was the largest builder of affordable housing in Mexico City by 1997. It held more than 930 acres in the metropolitan area for future development, more than any other developer, and enough, it calculated, to build houses for a period of three to five years. It was showing off this fully-paid-for reserve by helicopter to potential foreign investors. The company also held land reserves in eight states. Beginning in early 1997, ARA's stock took off, almost doubling in value within six months. One attractive sign for market analysts was its backlog of 11,500 securely financed homes; another was its low debt, which now came to only 8 percent of its assets, lowest in the industry. In addition, ARA was planning on the eastern edge of Mexico City to build the largest housing development in Latin America: 20,000 homes for almost 100,000 inhabitants.

This kind of housing was desperately needed. Mexico's housing deficit was estimated at between four million and eight million units, and growing, since more than half the population was under 25 years of age. Primarily through Infonavit and Fovi, the federal government was providing more than 230,000 loans a year for new housing purchases by Mexico's poorest paid workers. In 1997 a new government program, Prosavi, was adopted to provide prospective buyers of affordable housing with cash subsidies, thereby, it was hoped, stimulating the private mortgage market. Competing for the trade of these new customers were more than 2,000 firms, none of which held more than 7 percent of the low-income housing market. The subsidized market, although significant, was overshadowed by construction for self-employed workers, who, not qualifying for mortgages, typically financed cheaply made homes out of their own pockets. Often they did much of the work themselves or hired contractors who used inferior tools and materials.

ARA's shares of stock reached three times the original price level before dropping precipitously in the summer of 1998. Analysts were disturbed because 96 percent of the homes that the company was building were for subsidized low-income buyers. This made it vulnerable, in the eyes of some, to funding cutbacks, although the company's chief financial officer described as "suicide" the possibility of the ruling party reducing support for the housing sector with a presidential election looming not far in the distance. Infonavit had been especially active on the border with the United States, where assembly plants were hiring 100,000 workers a year, thereby greatly stimulating the demand for new housing. Consorcio ARA and two of its rivals were building 200-to-300-home subdivisions in this region, hewing, according to Joel Millman, writing for the Wall Street Journal, "to a set of specifications so tight that some analysts dub them the Lego homes of Mexico."

COMPANY PERSPECTIVES

Mission: To develop homes and communities for a style of life in which Mexicans will be proud to live.

Consorcio ARA, in 2001, initiated construction of 1,952 subsidized homes on a tract in Monterrey. The basic prototypes were a duplex three-bedroom house of about 860 square feet with 21/2 baths, kitchen, combination living room-dining room, laundry area, and one with about 1,085 square feet, a separate living room in the back of the lower level, and a television room on the higher floor. Each could optionally be converted to a house with about 1,400 square feet of space. Prices ranged between MXL 300,000 and 400,000 (about $31,500 to $42,000).

HOMES AND COMMERCIAL CENTERS: 2002 TO 2005

However, nonsubsidized home buyers were hard to find, since Mexican banks, badly burned in the 1994 financial collapse and strapped for cash themselves, were extremely reluctant to lend money to anyone below a high-income level. By late 2001, the economic slump in the United States was affecting the ability of the Mexican government to continue funding its housing programs at existing levels. The result was that ARA, though now building more than 15,000 homes a year, was suffering from declining growth in its revenues. Rumors of quarrels between the Ahumada brothers also undermined investor confidence. The company's shares fell nearly 62 percent in value between early May and mid-July 2002. On the plus side, however, was its conservative financial management; an operating-profit margin in excess of 20 percent; and its growing presence now in 12 Mexican states.

By the end of 2002 the national economy was improving, and government-run housing trusts were planning a 23 percent increase in lending to home buyers. ARA was beginning work on Las Américas, a 13,000-home upscale development in Ecatepec, in the state of Mexico. This development came to include Centro Las Américas, the second ARA commercial center created by ARA's subsidiary Promotora y Desarrolladora de Centros Comerciales, S.A. de C.V. (PDCC) and O'Connor Capital Partners. Divided into a fashion mall and a "power center," it included a 142-room Fiesta Inn hotel, branches of banks and telecommunications companies, several department stores, 140 smaller stores, a 14-screen movie theater, a restaurant area, and an area for children's games. By late 2005, when the commercial center was opened, Las Américas included not only more than 13,000 homes but schools, parks, and a regional hospital center. ARA had licenses to build another 32,000 houses in the state of Mexico. In 2005 the company sold 19,015 units, of which 16,336 (86 percent) were subsidized housing. Its net profit that year was MXL 1.1 billion ($101 million).

By 2006 ARA had built and sold more than 140,000 homes since its inception. The company had 47 developments in 16 states, including Cancún, Guadalajara, León, Monterrey, Puebla, Tijuana, and Toluca. Its land reserves of 35.7 million square meters—the largest in the industry—in 2005 were deemed sufficient by the company to build 146,943 homes. PDCC, established in 2000, was operating more than 40,000 square meters of commercial centers. These consisted of three full-scale commercial centers: Centro Las Américas, Centro San Buenaventura, and Centro San Miguel; three smaller unicenters; and eight still-smaller minicenters. O'Connor Capital Partners became an equal partner to PDCC in the commercial centers in 2003.

KEY DATES

1977:: Founding of the enterprise by Germán Ahumada Russek and Luis Felipe Ahumada Russek.
1988:: Incorporation of Consorcio ARA (Ahumada Russek y Asociados).
1994:: ARA sells 2,543 houses, more than half built for middle-income buyers.
1995:: ARA receives a $20 million credit from a government agency.
1996:: The company raises about $50 million from an initial public offering of stock in Mexico.
1997:: ARA is the leading builder of affordable housing in Mexico City.
1998:: Ninety-six percent of the homes that ARA builds are for low-income subsidized buyers.
2000:: ARA establishes a subsidiary to build commercial centers.
2002:: ARA builds 15,000 homes a year and has a presence in 12 Mexican states.
2002:: The company begins work on a 13,000-home development in the state of Mexico.
2004:: Mexico's largest bank agrees to provide ARA with $175 million in financing.
2005:: Completion of Centro Las Américas, the company's second commercial center.
2005:: ARA has built 47 developments in 16 states.

A low inflation rate in 2004 resulted in a drop in interest rates, good news for the housing sector and for the shares of publicly traded homebuilders such as ARA. For the first time since the 1994–95 financial crisis, commercial banks accounted for a larger sum in mortgage loans than the specialized lenders known as Sofoles. Grupo Financiero BBVA Bancomer, S.A. de C.V. purchased Hipotecaria Nacional, S.A. de C.V., the largest of these lenders specializing in home mortgages. BBVA Bancomer also agreed to provide $175 million in financing for ARA. A market in mortgage-backed securities was established for the first time, and by early 2005 Infonavit and private lenders had sold about $400 million worth of these securities. Mexican policymakers were hoping that private institutional capital involvement would continue into secondary markets, which could greatly expand sources of financing.

The Ahumada Russek brothers owned 51 percent of ARA's shares of capital stock in 2005, with public investors holding the remainder. Germán was in charge of real estate and was chairman of the board of directors, while Luis Felipe was in charge of construction and was vice-chairman of the board as well as director general of PDCC.

PRINCIPAL UNITS

Construction and Development; Real Estate.

PRINCIPAL SUBSIDIARIES

Asesoria Técnica y Administrativa GAVI, S.A. de C.V.; Comercialización y Ventas S.A.; Consorcio Integral, S.A. de C.V.; Constructora y Urbanizadora ARA, S.A. de C.V.; Inmobilaria ACRE, S.A. de C.V.; Promotora y Desarrolladora de Centros Comerciales, S.A. de C.V.