Corporación Geo, S.A. de C.V.

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Corporación Geo, S.A. de C.V.

Margaritas 433
Mexico City, D.F. 01050
Mexico
Telephone: (52) (55) 5480-5000
Toll Free: (866) 360-9002
Fax: (52) (55) 5554-6064
Web site: http://www.casasgeo.com

Public Company
Founded: 1973
Employees: 8,761
Sales: MXN 10.09 billion ($951.26 million) (2005)
Stock Exchanges: Mexico City OTC Madrid
Ticker Symbols: GEOB; CVGFY; XGEO
NAIC: 233210 Single Family Housing Construction

Corporación Geo, S.A. de C.V. is a holding company that, through its subsidiaries, functions as the largest homebuilder in Mexico, in terms of annual revenue and houses built. A vertically integrated enterprise, it is involved in all aspects of design, development, construction, marketing, commercialization, and delivery of housing in Mexico. With operations in 19 states, it is also the most geographically diversified homebuilder in Mexico, and, under the "Casas Geo" trademark, is the firm in its field most recognized by the public.

CORPORACIÓN GEO TO 1994

The company was founded in Mexico City in 1973 by Luis Orvañanos Lascurain, an architect by training. Until 1983, it functioned as a general contractor, erecting houses, office buildings, and industrial buildings as well as remodeling and adding to existing structures. It was a contractor for Infonavit and Fovi, the Spanish language acronyms of federal agencies that subsidized low-income homes. It was involved in every sphere of this work, including land acquisition, securing the necessary permits and licensing, and installing infrastructure improvements, as well as the design and construction of the houses.

Geo extended its reach to central Mexico in 1981, northern Mexico in 1985, and Guadalajara in 1986. Between 1983 and 1987 it determined to concentrate its focus on large-scale homebuilding. In the latter year the enterprise introduced "La Morada," a modular system of construction that enabled it to maximize a number of two-level townhouses in a determined area. With this accomplished, the company initiated also the industrialization of its production processes. (A second "La Morada" was developed in 1996 in conjunction with Harvard University.)

Beginning in 1989, Geo decided to specialize in low-income housing. Infonavit was restructured in 1992 in order to function as a mortgage provider to qualified workers, leaving housing development and related activities to the private sector. Companies such as Geo assumed the risk of finding the buyers and delivering houses to their satisfaction. The actual funds were not in doubt, since Infonavit held 5 percent of private-sector employees' salaries. These sums, accumulated in individual accounts, could be used for deposits, and Infonavit granted a guaranteed credit for the rest of the purchase price. Geo initiated its first development of more than 1,000 homes in 1992.

The following year it began work on a development of 5,000 homes. By 1994, when the company went public, it was the largest builder of low-income housing in Mexico. It was also the first housing company in Mexico to be listed on the nation's stock exchange.

In a 1995 article published in Forbes, Christopher Palmeri described Orvañanos as "a kind of Mexican William Levitt, the man who built Levittowns." For about $14,000, Geo's customers were delivered a two-story, 750-square-foot cement townhouse with a living room and small open kitchen below and two bedrooms and a bathroom upstairs. These homes were designed so that an extra room could be easily added to each level. By this time the average weight (and therefore cost) of the houses had been reduced by designing common walls and making the Spanish colonial style tiled roofs of styrofoam, reinforced with steel and cement. American writers called these Lego-like dwellings, but Orvañanos told Palmeri, "When you've just gotten married and you're living with your grandparents, these places are like the Palace of Versailles." Geo sold 8,174 homes in 1994.

Geo's townhouses did not stand in isolation. They were grouped into 460-unit communities with playgrounds, schools, and shared gardens. Given the large number of Mexicans who make their living outside the formal economy, these communities were not strictly residential in nature. Some housewives converted their homes to hair salons or pharmacies; others sold candy to schoolchildren from the windows. Young men in horse drawn wagons trolled the streets, charging money to pick up garbage.

EXPANDING HOMEBUILDER: 1994–2004

Geo's initial public offering of stock came at a propitious time, since before 1994 had ended the Mexican peso had been devalued, the stock market had virtually collapsed, and it would be years before a company could again raise money by selling shares to the public. The funds Geo had collected went for land acquisition and development, and in 1995 the company secured another $50 million in a private placement organized on Wall Street. Despite the recession that followed the economic crisis of 1994, Geo built more houses, raised more revenue, and earned a larger operating profit the following year. Houses built and revenue collected (in real terms, discounting inflation) continued to grow each remaining year in the decade. In 1996 the company built the first of nine "macrocenters," or sales offices. These centers allowed prospective clients to observe the quality of Geo's homes and different prototypes of homes suitable to their needs and particular tastes. By early 1997 Geo had projects under development in 13 Mexican states, and two large complexes in Mexico City, one of them containing 3,400 units. That year the company made its third equity placement—three times oversubscribed—and issued five-year notes.

Some of that money was earmarked for projects Geo was conducting outside Mexico for the first time. The company founded Geosal S.A. in Chile and began building 500 subsidized homes in Santiago, the capital, in collaboration with a local partner, Constructora Salfa S.A. By mid-1999, 4,400 homes had been erected. In the United States, Geo teamed with Beazer Homes USA Inc. to build low-income homes in El Paso, Texas, an endeavor that, as in Mexico, involved taking advantage of public housing subsidies. Geo was also considering establishing subsidiaries in Argentina and Brazil.

Within Mexico, the company acquired Fabricaciones Civiles e Industriales de la Laguna, S.A. de C.V. in 1998, with the purpose of opening up new markets in the northern part of the country. This company was the leading builder of low-income housing in the states of Coahuila, Durango, and Zacatecas. In 1998 Geo began work in the state of Mexico on Santa Elena, its first community of more than 5,000 homes. The following year it broke ground on Santa Bárbara. Also located in the state of Mexico, this development was slated to contain more than 12,000 houses.

COMPANY PERSPECTIVES

Mission: To further integrated and innovative housing developments that guarantee our leadership, in terms of quality and profit, and that generate benefits for our shareholders, clients, collaborators, and society.

The two-bedroom El Paso houses built by the Geo Beazer, L.P. joint venture were considerably larger than Geo's Mexican ones, 1,200 square feet on average and with many more amenities, including central heating and air conditioning. They were freestanding rather than townhouses and had fenced-in yards. The price was $39,000, compared to about $15,000 for the Mexican homes. Geo's point man in the venture complained to Latin Trade in 1999, however, that the permit process was proving much more onerous than in Mexico. The following year Geo announced that it was taking an extraordinary loss of an estimated $3.3 million and shutting down the operation. Geo Beazer was liquidated in 2002.

By this time Geo's thoughts had turned from ambitious expansion projects to servicing the $240 million in debt accumulated in its mostly vain attempts to grow its business outside Mexico. Because of an economic slowdown and cuts in housing subsidies, the number of homes built by the company and its revenues (in real terms) had fallen in 2001. Geo replenished its cash flow by negotiating stretched out payment terms with its suppliers, thereby enabling it to retire more short-term debt. It also laid off personnel and "renewed" its ranks of middle managers.

Geo's remedial efforts proved so successful that the Mexican business magazine Expansión proclaimed 2003 "the year of Geo" when the year was only a few weeks old. It also noted such positive factors as the federal government's determination to make housing construction a priority, the traditional growth of real estate development during times of economic stagnation, and lower interest rates. By this time Geo had completed five complexes of 3,000 or more houses. The largest of these had no less than 11,285 houses. The company was not only the largest "affordable" (that is, low-income) housing developer in Mexico but in all the Americas, as measured by homes sold. During the summer of 2003 Geo announced that it was establishing a joint venture with Prudential Real Estate Investors, the real estate investment advisory business of Prudential Financial Inc. As its first act, the joint venture bought parcels of land in Mexico City and Acapulco. By early 2005, this partnership had invested $175 million to develop more than 80,000 housing units in 42 projects covering 25 cities in 14 states. A second stage was then announced, with $280 million to invest.

A major objective of the company was to build and sell more unsubsidized homes for Mexico's middle and upper classes. By the end of 2002, Geo was the national leader in this segment. In 2004, Geo constructed 3,323 homes of this type, at prices ranging from $33,000 to $500,000. G-Homes, the company's luxury brand introduced that year, was oriented toward homes with prices in excess of $100,000. Sales of these dwellings required efforts that Geo had not made before: more individual touches to the homes and greater participation of the client in design. Some of these homes were apartments rather than houses.

Making possible exploitation of this market had been lower interest rates, enabling many prospective buyers too affluent to qualify for government aid to obtain mortgage credit for the first time. By the end of 2004 the fall in interest rates had enabled Infonavit and private lenders to sell about $400 million in mortgage-based securities. In addition, a new government agency, SHP by its Spanish acronym, established in 2001, was directing federal funds to commercial banks and Sofoles (specialized lenders) for housing development. Qualifiers for SHP-backed loans could be earning as much as $75,000 a year. The booming housing market enabled Geo's shares to triple in value during 2003 and double in price in 2004. In 2005, Geo became the first Mexican homebuilder to introduce its shares for trading in euros when it entered Latibex, the Latin American market of the Madrid stock exchange.

GEO IN 2005–06

Geo, in 2005, sold a record 37,343 houses, generating revenues of MXN 10.09 billion ($951.26 million). This brought the number of homes that the company had constructed since its inception to about 260,000. Geo's net profit for 2005 came to MXN 1.14 billion ($107.48 million) and its net debt at the end of the year to MXN 883 million ($83 million). However, the total debt rose to MXN 3.67 billion ($346 million), an increase of 37 percent. The company was unusual, in Mexico, in not being dominated by members of a founding family. A controlling group of executives held 22 percent of the shares; U.S. institutional investors held 56 percent; and European institutional investors, 13 percent. Orvañanos was still director general and chairman of the board; Miguel Gómez-Mont Urueta had been executive vice-president for over a decade and was described in English-language publications as chief executive officer.

KEY DATES

1973:: Luis Orvañanos Lascurain founds the company in Mexico City.
1984:: The company introduces a system of modular construction.
1994:: Geo makes its initial public offering of stock.
1997:: Geo has projects under development in 13 Mexican states.
2001:: The company restructures its finances to counter declines in revenue and homes built.
2003:: Resurgent Geo has completed five complexes of more than 3,000 or more homes.
2005:: Geo sells a record 37,343 houses.

As a vertically organized holding company, Geo was, through its subsidiaries, engaged in housing design, development, construction, and marketing. Its principal activities in real estate development included land acquisition, obtaining required permits and licenses, installing infrastructure improvements; designing, constructing, and marketing housing developments; and assisting home buyers in obtaining mortgage loans. The company was also acting as a contractor for certain Mexican state government agencies, providing construction activities similar to its development activities. The Casas Geo brand trademark was the most recognized in the Mexican housing industry.

Geo received an award in 2006 from the Mexican Center for Philanthropy as a socially responsible company. The honor was based on such considerations as community ties, quality of life, care and preservation of the environment, and business ethics. The company spent about $3 million during 2005 on social programs that benefited a total of 88,848 persons. Investment in the environment came to almost $6 million more. During its years in business Geo had contributed 200 schools of basic education, 50 health clinics, and more than 20 water treatment plants.

PRINCIPAL SUBSIDIARIES

Crelam, S.A. de C.V.; Evitam, S.A. de C.V. (93 percent); Geo Edificaciones, S.A. de C.V.; Geo Hogares Ideales, S.A. de C.V.; Geo Importex, S.A. de C.V.; Inmobiliaria Anson, S.A. de C.V.; Inmobiliaria Camar, S.A. de C.V.; Inmobiliaria Jumais, S.A. de C.V.; Lotes y Fraccionamientos, S.A. de C.V.; Obras y Proyectos Coma, S.A. de C.V.; Promotora Turística Playa Vela S.A. de C.V.