Desarrolladora Homex, S.A. De C.V.

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Desarrolladora Homex, S.A. De C.V.

THE FIRST DECADE: 1989–98

RAISING BUILDINGS AND CAPITAL: 1999–2003

PUBLIC COMPANY: 2004–06

THE FIRST DECADE: 1989–98

Homex got its start in 1989 when four sons of Eustaquio de Nicolás Vera established, in Culiacán, Sinaloa, Proyectos Inmobiliarios de Culiacán, S.A. de C.V. (Picsa), a real estate development firm. Its first jobs involved the construction of commercial areas, but it gradually focused on designing, building, and selling houses. Picsa began producing government-subsidized housing in 1991. By this time Mexico had a housing deficit of at least six million units, and demand was growing rapidly since more than half the population was under 25 and certain to need new housing in the near future. Homex started building low-cost housing for government employees, financed by a fund known by its Spanish-language acronym, Fovi.

The main need, however, was to construct housing for the much larger number of poor Mexicans employed in the private sector. An institute known by its Spanish-language acronym of Infonavit was established in 1972 and was chiefly funded by a 5 percent payroll tax collected by employers. Infonavit purchased land, issued mortgages, and hired contractors to build housing, providing them with financing, but the process was marked by inefficiency and corruption. A law passed in 1992 retained the institute’s source of funding but credited the money to individual workers’ accounts. Infonavit continued to extend mortgages but no longer was involved in buying land and hiring contractors. Instead, it was authorized to make loans to construction companies for this purpose and loans to commercial banks extending the same types of mortgages and credits. Picsa began building Infonavit-financed homes in 1993, and the institute’s program quickly became its chief source of business.

Government deficit spending led to capital flight in 1994, resulting in the devaluation of the peso and an economic recession that persisted into the middle of the decade. Mortgage financing ground to a halt. Picsa, like many other Mexican firms, had debts to meet and little liquidity. “That was a mortal sin at the time,” Eustaquio de Nicolás Gutiérrez, chief executive of the firm, later told Miriam Pineda of the Mexico City daily Reforma. “But we completely paid our debts by selling land earmarked for development. We learned a lot from the experience.”

Primarily through Infonavit and Fovi, in 1997 the federal government was providing financing for about 80 percent of low-income housing in Mexico (excluding the large amount of informal construction done by and for poor people, most of them self employed). In that year Infonavit began to provide mortgages to workers earning more than the prior maximum of seven times the minimum wage of about $100 a month. Infonavit and Fovi were handling two-thirds of all mortgage originations in Mexico. A new government program, known by the acronym Prosavi, provided direct cash subsidies of at least 20 percent of the value of the house instead of simply offering below market interest rates. It was available to workers, whether or not formally employed, earning no more than three times the minimum wage.

Vying for this enhanced business were more than 2,000 construction firms, none of them holding more than 7 percent of the low-income housing market. Picsa was not one of the majors, but it was competing with them, especially along the U.S.-Mexican frontier, where whole subdivisions of 200 to 300 units were being constructed to accommodate a rapidly growing population. By mid-1998 Picsa was operating in 14 cities in seven states, most of them in western Mexico but also including Yucatán and Chiapas in the east. Half of these houses were for Fovi, Infonavit, and another federal agency, Fovissste. The other half were for Prosavi.

Since the average price of sale was very economical, only about MXN 90,000 (a little under $10,000), Picsa needed simplified administration to make a profit at this level. All back office duties involving customers were directed from headquarters in Culiacán. The branch offices in the cities where the company was operating were staffed with only six people each, including sales personnel. Headquarters also maintained a close watch on materials, and any losses were deducted from the salaries of workers who were paid on the basis of how fast the homes were built rather than on a regular hourly wage. Picsa established its own software system to manage construction. In addition, to save money, the company avoided operating in big cities where the cost of land acquisition and labor was high.

RAISING BUILDINGS AND CAPITAL: 1999–2003

Picsa was renamed Desarrolladora Homex in 1999, when the company had become the fifth largest home-builder in Mexico and the largest one in the Prosavi program. By this time the company had constructed 14,000 subsidized homes and was expected to build 8,000 more before the year ended. It was, by that time, engaged in more than 50 subsidized housing developments in 18 cities and planned to enter two more cities by 2000.

In August 1999 Homex sold a 20 percent stake in the business to ZN México Capital Management LLC, a U.S.-based investment fund, for $12.5 million. ZN México, whose principals included José Juan Alvarez, Luis Alberto Harvey, and Arturo Saval, had as partners the investment bank Nexxus Capital and another U.S. investment firm, Zephyr Management, directed by Tom Barry. It administered two private capital funds and one publicly owned enterprise engaged in several emerging markets. Nexxus had aided a competitor of Homex, Consorcio Ara, S.A. de C.V., to convert to public ownership, and its investment in Homex was expected to have the same purpose.

In April 2001 Infonavit announced a new program that made nearly two million workers paying into its fund newly eligible for home mortgages. However, the economic slowdown in the United States that began in 2000 had spread to Mexico, resulting in fewer jobs and thus less money available for mortgage lending. Homex lost money in 2001 and had to postpone an initial public offering (IPO) of company shares until market conditions improved.

COMPANY PERSPECTIVES

To improve the quality of life of our community through superior quality real estate developments.

Homex moved into Guadalajara, Mexico’s second largest city, in 2002, opening an office and planning to build 2,650 subsidized homes in a development named Hacienda Santa Fe. By this time the company had constructed more than 20,000 of these homes and hoped to complete 10,000 in 2002 alone. That year the de Nicolás brothers found a powerful investor in billionaire real estate tycoon Samuel Zell. His international investment arm, Chicago-based Equity International Properties Ltd., purchased 22.3 percent of Homex for $32 million in 2002. Zell successfully lobbied Homex to adopt U.S. accounting standards. He also urged top managers to improve their English skills.

Homex enjoyed an excellent 2003, selling 13,396 homes, earning a return of about 11 percent on its revenues, and reducing its debt margin in relation to its assets. It had 32 housing developments in 20 cities in 14 states. The largest were in Culiacáan, Guadalajara, and Nuevo Laredo, but the company had, in mid-2004, also entered Acapulco, Metepec, Monterrey, Tapachula, and Tijuana. The future of housing continued to look bright because of high demand, with 5.3 million new homes forecast between 2004 and 2010.

PUBLIC COMPANY: 2004–06

Homex was ready to go public. Zell directed the IPO of stock, speaking to potential investors at meetings in Boston and New York and even deciding how many shares to allot different funds. The IPO, in Mexico City and New York, for some 20 percent of the company’s shares in June 2004, was oversubscribed sixfold. About $160 million was raised, almost three-quarters in New York, where Homex became the first Mexican housing construction company to sell American Depositary Receipts (the equivalent of shares) on the New York Stock Exchange. More than half the money was earmarked for investments such as buying more land for future development, and another one-fourth was designated to pay down debt.

Homex was the fastest-growing homebuilder in Mexico in 2004, advancing to fourth place. Unit sales had grown 64 percent since 2001, compared to average growth of 15 to 18 percent for the industry as a whole. It was the industry leader in Guadalajara and had operations in at least 20 Mexican cities. An article by David Isaac in Investor’s Business Daily credited the company’s business model for much of this growth. “The business model runs on a strong information technology system which we control out of our corporate office,” Homex Chief Financial Officer Cleofas Hinojosa told Isaac. “We basically control every stage and every step of our construction with this information system. [It] allows us to very quickly and very effectively open branches in the cities we choose to go.”

By 2004 the building sector had proved a success story for the administration of President Vicente Fox Quesada, who took office in late 2000 with the goal of nearly doubling the construction of new homes by 2006. Established in 2001, Sociedad Hipotecaria Federal, a government development bank covering housing, was directing funds to commercial banks and Sofoles, the acronym for single-purpose financial corporations engaged in activities such as mortgage lending. Sofoles made over two million loans in 2004, compared to less than one million in 2000. SHF’s sales of packages of virtually default-free securities were intended to increase the pool of funds available to private home lenders, and thus to create more middle-income housing.

KEY DATES

1989:: Company, known by the acronym Picsa, is founded.
1991:: Picsa begins building government-subsidized low-income housing.
1998:: Picsa is operating in 14 cities in seven Mexican states.
1999:: The company is renamed Desarrolladora Homex.
2002:: Homex gains a powerful backer in Chicago-based real estate tycoon Samuel Zell.
2004:: Homex makes an initial public offering of stock in Mexico City and New York.
2005:: The company acquires Casas Beta, Mexico’s seventh largest homebuilder.
2006:: Homex has built more homes this year than any of its competitors.

Homex significantly expanded its scope in April 2005, when it acquired Controladora Casas Beta, S.A. de C.V., for $194 million in cash and stock. Mexico’s seventh largest homebuilder, Casas Beta had sold 11,055 homes in 2004 in three states, including México, and the Federal District (Mexico City), where Homex did not have a presence. The acquisition made Homex the second largest homebuilder in Mexico. By this time the value of the company’s shares had more than doubled since its IPO of stock less than a year before. Zell’s investment had, on paper, increased fourfold in value. Some financial analysts felt the stock was ripe for a correction, however, noting that only 10 percent of Homex’s houses were in the growing middle-income market, which offered a higher profit margin than low-income housing. They were also concerned by the company’s high level of uncollected invoices and its low land reserves compared to competitors, only enough for two years of construction.

In September 2005 Homex sold $250 million worth of ten-year senior guaranteed notes in order to lower its borrowing costs and extend debt maturity. This transaction, earmarked to repay $215 million in existing debt, about 80 percent of the total outstanding, was preparatory to a secondary stock offering in January 2006 that raised about the same amount and was applied to paying the shareholders of Casas Beta for the Homex stock they had received in selling the company, as well as Zell’s Equity International Properties, which retained 13 percent of the shares at the end of the month. The de Nicolás family held 41 percent and public investors 46 percent; ZN México was no longer a shareholder.

Homex entered the cities of Puebla and Mexicali in 2006, raising its development activities to 28 cities in 18 states. It enjoyed another banner year, building 43,044 homes, more than any of its competitors, and raising its net profit to MXN 1.24 billion ($114.81 million) on revenue of MXN 12.54 billion ($1.16 billion), a 41 percent increase over the previous year. It was in a virtual dead heat with Corporación Geo in terms of annual revenue. The mainstay of the company’s business continued to be construction of modest homes of between 42 and 76 square meters, with one to three bedrooms, bath, kitchen, living room–dining room, and one parking place. These houses averaged MXN 238,000 (about $22,000) in price in 2006. They constituted 90 percent of the homes that the company built in 2006, and about 75 percent of them were financed by Infonavit. Eustaquio de Nicolás remained chairman of the board, while Gerardo de Nicolás was chief executive.

Homex, like many Mexican enterprises, was eager to stress corporate social responsibility as part of its activities. Developers were obligated, by law, to set aside 10 percent of their land holdings for municipal use. Homex offered to develop schools, day care centers, parks, and other services on these tracts. The company conceded that such offers were also useful as marketing tools, since working parents would benefit from ease in placing and picking up their children. Homex also said that its workforce was fully employed and that it was cooperating with the federal government’s institute for adult education by allowing the institute’s teachers to offer classes on its construction sites, even ending the workday a little early for this purpose.

Robert Halasz

PRINCIPAL SUBSIDIARIES

Acro Homex, S.A. de C.V.; Administración Picsa, S.A. de C.V.; Altos Mandos de Negocios, S.A. de C.V.; Casas Beta del Centro, S.A. de C.V.; Casas Beta del Noreste, S.A. de C.V.; Casas Beta del Norte, S.A. de C.V.; Desarrolladora de Casas del Noreste, S.A. de C.V.; Homex Atizapán, S.A. de C.V.; Proyectos Inmobiliarios de Culiacán, S.A. de C.V.