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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F/A

(Amendment No. 1)

 

(Mark One)

 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 
December 31, 2010

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report: N/A

 

For the transition period from                       to                        

 

Commission file number: 1-32229

 

Desarrolladora Homex, S.A.B. de C.V.

(Exact name of Registrant as specified in its charter)

 

Homex Development Corp.

(Translation of Registrant’s name into English)

 

United Mexican States

(Jurisdiction of incorporation or organization)

 

Boulevard Alfonso Zaragoza M. 2204 Norte

80020 Culiacán, Sinaloa, Mexico

Telephone: (52667) 758-5800

(Address of principal executive offices)

 

Vania Fueyo Zarain

Boulevard Alfonso Zaragoza M. 2204 Norte

80020 Culiacán, Sinaloa, Mexico

Telephone: (52667) 758-5800

vfueyo@homex.com.mx

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Shares, without par value

 

New York Stock Exchange

 

 

 

American Depositary Shares, each representing six common shares, without par value *

 

New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 



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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

7.50% Senior Guaranteed Exchange Notes due September 28, 2015

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

335,069,167 common shares, without par value

 

Indicate by check mark if the registrant is a well-known, seasoned issuer as defined in Rule 405 of the Securities Act:

x Yes   o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

o Yes   x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

 

IFRS o

 

Other x

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

o Item 17   x Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

o Yes   x No

 


*                                         Not for trading but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

 



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PART I

 

 

 

 

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

6

 

 

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

6

 

 

 

ITEM 3.

KEY INFORMATION

7

 

 

 

ITEM 4.

INFORMATION ON THE COMPANY

19

 

 

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

40

 

 

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

40

 

 

 

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

64

 

 

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

69

 

 

 

ITEM 8.

FINANCIAL INFORMATION

71

 

 

 

ITEM 9.

THE OFFER AND LISTING

72

 

 

 

ITEM 10.

ADDITIONAL INFORMATION

76

 

 

 

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

90

 

 

 

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

91

 

 

 

PART II

 

 

 

 

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

92

 

 

 

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

92

 

 

 

ITEM 15.

CONTROLS AND PROCEDURES

92

 

 

 

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

94

 

 

 

ITEM 16B.

CODE OF ETHICS

94

 

 

 

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

94

 

 

 

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

95

 

 

 

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

95

 

 

 

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

95

 

 

 

ITEM 16G.

CORPORATE GOVERNANCE

95

 

 

 

PART III

 

 

 

 

 

ITEM 17.

FINANCIAL STATEMENTS

97

 

 

 

ITEM 18.

FINANCIAL STATEMENTS

97

 

 

 

ITEM 19.

EXHIBITS

98

 



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20-F/A 2010
EXPLANATORY NOTE

 

This Annual Report on Form 20-F/A is being filed as an amendment to our Annual Report on Form 20-F for the fiscal year ended December 31, 2010.

 

This amendment includes a correction of a typographical error in Exhibit 13 “Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002” to reflect that the certification is filed with respect to our Annual Report for the fiscal year ended December 31, 2010.

 

In addition, we are amending certain combining figures contained in Note 32 (“Supplemental Guarantor Information”) to our accompanying audited consolidated financial statements.   These changes relate only to the combining presentation of Note 32, and in no way impact our consolidated financial position, results of operations and cash flows previously reported under both Mexican Financial Reporting Standards (“MFRS”) and accounting principles generally accepted in the United States of America (“US GAAP”). The reports of our independent registered public accounting firm have been dual-dated accordingly to reflect this change.

 

Except as described above, no other change has been made to the Form 20-F/A. The filing of this Amendment should not be understood to mean that any statements contained herein have been updated to reflect developments as of any date subsequent to June 29, 2011, except for Note 32 as to which the date is September 16, 2011.

 

For the convenience of investors, we are presenting this annual report on Form 20-F/A on an amended and restated basis.

 

* * *

 

PRESENTATION OF FINANCIAL INFORMATION

 

Throughout this annual report, unless the context otherwise requires, the terms “we,” “us,” “our,” “the Company” and “Homex” refer to Desarrolladora Homex, S.A.B. de C.V. and its subsidiaries.

 

Financial Information

 

This annual report includes our audited consolidated financial statements as of December 31, 2009 and 2010 and for each of the three years ended December 31, 2008, 2009 and 2010. Our consolidated financial statements and other financial information included in this annual report, unless otherwise specified, are stated in Mexican pesos.

 

We prepare our financial statements in pesos and in accordance with Mexican Financial Reporting Standards (Normas de Información Financiera), referred to as “MFRS”, as issued by the Mexican Financial Information Standards Board (Consejo Mexicano de Normas de Información Financiera) which differ in certain significant respects from accounting principles generally accepted in the United States, referred to as US GAAP. See Notes 28 through 30 to our audited consolidated financial statements for information relating to the nature and effect of such differences and for a quantitative reconciliation of our total net income and total equity according to MFRS to consolidated net income, and consolidated equity according to US GAAP.

 

Effective January 1, 2008 the Company adopted MFRS B-10, Effects of Inflation. Based on this Standard, the Company did not recognize the effects of inflation in its financial statements for the years ended December 31, 2008, 2009 and 2010. The effects of transactions that occurred after that date are expressed in nominal pesos.

 

According to the provisions of MFRS B-10, an inflationary environment is present when cumulative inflation for the three preceding years is 26% or more, in which case, the effects of inflation must be recognized in the financial statements. Based on this standard, the economic environment in Mexico in 2010, 2009 and 2008 is considered non-inflationary because inflation over 2008, 2009 and 2010 was less than 26%. Accordingly, the Company’s financial information for 2010, 2009 and 2008 was prepared without recognizing the effects of inflation. Accordingly, the financial statements as of December 31, 2010, 2009 and 2008 have been presented based on nominal pesos without including the effects of inflation.

 

Pursuant to MFRS, prior to January 1, 2010, we recognized revenues from the sale of homes based on the percentage-of-completion method of accounting, which required us to recognize revenues measured by the percentage of actual costs incurred to total estimated costs for each development and each project.

 

In December 2008, Interpretation of Mexican Financial Reporting Standards (“IMFRS”) 14 was issued by the CINIF to complement Bulletin D-7, Construction Agreements and Manufacturing of Certain Capital Assets. This Interpretation is applicable to the recognition of revenues, costs and expenses for all entities that undertake the construction of capital assets directly or through sub contractors.

 

Due to the application of this Interpretation, effective January 1, 2010, the Company stopped recognizing its revenues, costs and expenses based on the percentage-of-completion method. At that date, the Company began to recognize them based on methods mentioned in this Interpretation. Revenue and cost recognition more closely approximate what is often referred to as a “completed contract method” (or the “deposit accounting method”) in which revenues, costs and expenses should be recognized when all of the following conditions are fulfilled:

 

·      the Company has transferred the control to the homebuyer, in other words, the significant risks and benefits due to the property or the assets ownership;

 

·      the Company does not retain any continued participation of the actual management of the sold assets, in the usual grade associated with the property, nor does retain the effective control of the sold assets;

 

·      the revenues amount can be estimated reliably;

 

·      it is probable that the Company will receive the economic benefits associated with the transaction; and

 

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·      the costs and expenses incurred or to be incurred related to the transaction can be estimated reliably.

 

The above conditions are typically met upon the completion of construction, and signing by the Company, the customer and (if applicable) the lender the legal contracts and deeds of ownership (escritura) over the property. At that time, the customer would have the legal right to take possession of the home.

 

This Interpretation was adopted as of January 1, 2010, with retrospective application to prior accounting periods with the presentation of 2010 consolidated financial statements as required by MFRS B-1 Accounting Changes and Error Corrections.

 

Effective January 1, 2012, we will be required under applicable regulations of the Mexican Securities Commission  (Comisión Nacional Bancaria y de Valores, or “CNBV”) to report under International Financial Reporting Standards (“IFRS”) in place of MFRS, which may have additional effects on our consolidated financial position and results of operations.

 

Currency Information

 

Unless otherwise specified, references to “US$,” “U.S. dollars” and “dollars” are to the lawful currency of the United States. References to Brazilian “Reals” or “BR$” are to the lawful currency of Brazil. References to “Ps.” and “pesos” are to the lawful currency of Mexico. References to “UDI” and “UDIs” are to Unidades de Inversión, units of account whose value in pesos is indexed to inflation on a daily basis by Banco de México (Mexico’s central bank) and published periodically.

 

This annual report contains translations of various peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. You should not understand these translations as representations that the peso amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, we have translated U.S. dollar amounts in this annual report at the exchange rate of Ps.12.3817 to US$1.00, which was the buying rate published by Banco de México, expressed in pesos per U.S. dollar, on December 31, 2010. On June 29, 2011, such noon buying rate was Ps. 11.8389 to US$1.00.

 

Unless otherwise indicated, references to UDIs are to UDIs at Banco de México’s UDI conversion rate of Ps.4.526308 per UDI on December 31, 2010. On June 29, 2011, the UDI conversion rate was 4.554642 per UDI.

 

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Industry and Market Data

 

Market data and other statistical information used throughout this annual report are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Some data are also based on our estimates, which are derived from our review of internal surveys, as well as independent sources. Although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy or completeness.

 

MARKET SHARE AND OTHER INFORMATION

 

Other Information Presented

 

The standard measure of area in the real estate market in Mexico is the square meter (m(2)). Unless otherwise specified, all units of area shown in this annual report are expressed in terms of m(2), acres or hectares. One square meter is equal to approximately 10.764 square feet. Approximately 4,047 m(2) (or 43,562 square feet) are equal to one acre and one hectare is equal to 10,000 m(2) (or approximately 2.5 acres).

 

FORWARD-LOOKING STATEMENTS

 

This annual report and the documents incorporated by reference into this annual report contain forward-looking statements. We may from time to time make forward-looking statements in our periodic reports to the U.S. Securities and Exchange Commission, or SEC, on Form 6-K, in our annual report to shareholders, in prospectuses, press releases and other written materials and in oral statements made by our officers, directors or employees to analysts, institutional investors, representatives of the media and others. Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “should” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying these statements. Examples of these forward-looking statements include:

 

·      projections of revenues, net income (loss), earnings per share, capital expenditures, dividends, capital structure or other financial items or ratios;

 

·      statements of our plans, objectives or goals, including those relating to anticipated competition, regulation, government housing policy and rates;

 

·      statements about our future economic performance or that of Mexico; and

 

·      statements of assumptions underlying these statements.

 

You should not place undue reliance on forward-looking statements, which are based on current expectations. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results may differ materially from those expressed in forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. All forward-looking statements and risk factors included in this annual report are made as of the date on the front cover of this annual report, based on information available to us as of such date, and we assume no obligation to update any forward-looking statement or risk factor.

 

PART I

 

ITEM 1.          Identity of Directors, Senior Management and Advisors.

 

Not applicable.

 

ITEM 2.          Offer Statistics and Expected Timetable.

 

Not applicable.

 

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ITEM 3.          Key Information.

 

SELECTED FINANCIAL DATA

 

The following tables present our selected consolidated financial information as of and for the periods indicated. Information as of December 31, 2009 and 2010 and for each of the three years ended December 31, 2008, 2009 and 2010 is derived from and should be read together with our audited consolidated financial statements provided in this annual report beginning on page F-1. Our consolidated financial statements and other financial information included in this annual report, unless otherwise specified, are stated in pesos.

 

The information in the following tables should also be read together with “Item 5. Operating and Financial Review and Prospects.”

 

Our consolidated financial statements are prepared in accordance with MFRS, which differ in certain significant respects from US GAAP.  Notes 28 through 30 to our audited consolidated financial statements provide information relating to the nature and effect of such differences as they relate to us, and provide a reconciliation to US GAAP of consolidated net income and consolidated equity.

 

Pursuant to MFRS, and the adoption of IMFRS 14, as of January 1, 2010, we use what is often referred to as “completed contract method” (or  the “deposit accounting method”) of accounting for revenues and costs. For more information on the completed contract method of accounting and how it differs from U.S. GAAP, see “Presentation of Financial Information.”   IMFRS 14 has been retrospectively adopted from January 1, 2008 in the accompanying MFRS consolidated financial statements included in Item 18. Because we are not required to re-file our 2007 and 2006 MFRS consolidated financial statements with our local Mexican regulator with the inclusion of IMFRS 14, and because we believe that it would entail unreasonable effort and expense to compile MFRS selected financial data for 2007 and 2006, such amounts have been excluded from presentation below. However, as we have previously reconciled our MFRS financial information to US GAAP for all periods, we continue to report US GAAP selected financial data for all periods presented below.   Certain of our US GAAP selected financial data for the periods 2006 through 2009 has been restated as indicated below.

 

Pursuant to US GAAP, we apply Accounting Standards Codification (“ASC”) No. 360.20 (formerly FAS 66 Accounting for Sales of Real Estate) for the substantial majority of our revenues.   Revenues under US GAAP’s ASC 360.20  are recognized when all the following events occur: a) a sale is consummated; b) a significant initial down payment is received (when applicable); and c) the earnings process is complete and the collection of any remaining receivables is reasonably assured.  Revenue recognition under IMFRS 14 and US GAAP are much more closely aligned than previous MFRS, although certain differences still exist.  The principal remaining differences between ASC 360.20 and IMFRS 14 relate to revenues from the National Housing Institute, or INVI (Instituto Nacional de Vivienda), other financial institutions and unsecured homebuyers, which are included for MFRS purposes but not for US GAAP. For a further discussion of revenue recognition policies under US GAAP and how they differ from MFRS, refer to Notes 28 through and 30 to our consolidated financial statements.

 

Except for ratios, percentages, and per share, per American Depositary Share, or ADS, and operating data, all amounts are presented in thousands of pesos.

 

For additional information regarding financial information presented in this annual report, see “Presentation of Financial Information.”

 

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Homex Selected Consolidated Financial Information

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009
as restated

 

2008
as restated

 

2007
as restated

 

2006
as restated

 

 

 

(In thousands of Mexican Ps., except as otherwise specified)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Mexican Financial Reporting Standards:

 

 

 

 

 

 

 

 

 

 

 

Revenues (1) 

 

19,652,309

 

17,476,489

 

14,725,828

 

*

 

*

 

Cost of sales (5)

 

13,727,484

 

12,285,836

 

10,356,329

 

*

 

*

 

Gross profit

 

5,924,825

 

5,190,653

 

4,369,499

 

*

 

*

 

Selling and administrative expenses

 

2,980,379

 

2,471,680

 

2,303,402

 

*

 

*

 

Income from operations

 

2,944,446

 

2,718,973

 

2,066,097

 

*

 

*

 

Other (expenses) income, net (4)

 

(142,765

)

5,320

 

(140,238

)

*

 

*

 

Net comprehensive financing cost (2) (5)

 

314,742

 

148,511

 

508,673

 

*

 

*

 

Income before income taxes

 

2,486,939

 

2,575,782

 

1,417,186

 

*

 

*

 

Income tax expense

 

906,997

 

994,389

 

456,256

 

*

 

*

 

Consolidated net income

 

1,579,942

 

1,581,393

 

960,930

 

*

 

*

 

Net income of controlling interest

 

1,511,763

 

1,565,869

 

926,635

 

*

 

*

 

Net income of non-controlling interest

 

68,179

 

15,524

 

34,295

 

*

 

*

 

Weighted average shares outstanding (in thousands)

 

334,748

 

334,830

 

334,870

 

*

 

*

 

Basic and diluted controlling interest earnings per share (in pesos)

 

4.52

 

4.68

 

2.77

 

*

 

*

 

Basic and diluted controlling interest earnings per ADS (3) (in pesos)

 

27.12

 

28.08

 

16.62

 

*

 

*

 

US GAAP:

 

 

 

 

 

 

 

 

 

 

 

Revenues (1)

 

19,628,540

 

17,615,888

 

14,884,701

 

13,849,728

 

13,224,145

 

Cost of sales

 

13,754,383

 

12,658,080

 

10,398,464

 

9,814,725

 

9,311,415

 

Gross profit

 

5,874,157

 

4,957,808

 

4,486,237

 

4,035,003

 

3,912,730

 

Operating income (4)

 

2,955,455

 

2,527,445

 

2,108,793

 

2,116,650

 

2,519,346

 

Consolidated net income

 

2,045,616

 

1,500,006

 

605,913

 

1,604,144

 

1,528,484

 

Net income (loss) of non-controlling interests

 

68,179

 

(11,351

)

38,131

 

128,612

 

48,278

 

Net income of controlling interests

 

1,977,437

 

1,511,357

 

567,782

 

1,475,532

 

1,480,206

 

Weighted average shares outstanding (in thousands)

 

334,748

 

334,830

 

334,870

 

335,688

 

335,869

 

Basic and diluted controlling interest earnings per share (in pesos)

 

5.91

 

4.51

 

1.70

 

4.40

 

4.41

 

Basic and diluted controlling interest earnings per ADS (3) (in pesos)

 

35.46

 

27.06

 

10.20

 

26.40

 

26.46

 

 

 

 

As of and for the Years Ended December 31,

 

 

 

2010

 

2009
as restated

 

2008
as restated

 

2007
as restated

 

2006
as restated

 

 

 

(In thousands of Mexican Ps., except as otherwise specified)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Mexican Financial Reporting Standards:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

3,435,222

 

3,251,416

 

1,268,185

 

*

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

1,975,203

 

519,474

 

1,275,486

 

*

 

*

 

Total current assets

 

23,280,441

 

16,645,875

 

15,755,207

 

*

 

*

 

Land held for future development

 

10,591,499

 

11,765,197

 

9,254,469

 

*

 

*

 

Property and equipment

 

1,002,572

 

1,110,582

 

1,402,928

 

*

 

*

 

Total assets

 

36,641,484

 

31,221,548

 

27,941,432

 

*

 

*

 

Current debt and current portion of long-term debt

 

1,728,513

 

270,595

 

1,417,404

 

*

 

*

 

Current portion of leases

 

169,604

 

108,437

 

89,255

 

*

 

*

 

Total current liabilities

 

8,280,762

 

6,349,619

 

8,742,417

 

*

 

*

 

Long-term obligations

 

10,787,601

 

9,460,163

 

5,990,119

 

*

 

*

 

Swap payable

 

508,160

 

119,084

 

 

*

 

*

 

Long-term leases

 

235,430

 

254,679

 

314,639

 

*

 

*

 

Land suppliers — long-term

 

41,441

 

74,569

 

405,426

 

*

 

*

 

Total long-term liabilities

 

16,040,211

 

13,966,117

 

9,750,374

 

*

 

*

 

Total liabilities

 

24,320,973

 

20,315,736

 

18,492,791

 

*

 

*

 

Common stock

 

528,011

 

528,011

 

528,011

 

*

 

*

 

Total equity

 

12,320,511

 

10,905,812

 

9,448,641

 

*

 

*

 

Total liabilities and equity

 

36,641,484

 

31,221,548

 

27,941,432

 

*

 

*

 

 

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As of and for the Years Ended December 31,

 

 

 

2010

 

2009
as restated

 

2008
as restated

 

2007
as restated

 

2006
as restated

 

 

 

(In thousands of Mexican Ps., except as otherwise specified)

 

US GAAP:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

3,307,692

 

3,122,074

 

1,140,140

 

2,206,834

 

2,381,689

 

Restricted cash

 

127,530

 

129,342

 

128,045

 

156,090

 

37,597

 

Accounts receivable

 

1,759,944

 

321,736

 

1,016,172

 

600,655

 

985,043

 

Total current assets

 

23,496,997

 

17,751,648

 

17,414,199

 

13,850,381

 

12,095,280

 

Land held for future development

 

10,591,499

 

10,912,389

 

9,254,469

 

7,091,074

 

5,180,580

 

Property and equipment

 

1,376,650

 

1,110,582

 

1,402,928

 

1,155,729

 

669,095

 

Total assets

 

37,428,778

 

30,975,025

 

30,136,052

 

23,941,142

 

19,707,619

 

Total current liabilities

 

12,875,279

 

10,625,255

 

14,274,158

 

11,054,629

 

9,147,783

 

Long-term obligations

 

12,249,288

 

9,925,107

 

6,827,855

 

4,510,319

 

3,647,602

 

Total equity

 

12,304,211

 

10,424,663

 

9,034,039

 

8,376,194

 

6,912,234

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

Mexican Financial Reporting Standards:

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

362,351

 

371,402

 

323,727

 

*

 

*

 

Gross margin (6)

 

30.1

%

29.7

%

29.7

%

*

 

*

 

Operating margin (7)

 

15.0

%

15.6

%

14.0

%

*

 

*

 

Net margin (8)

 

8.0

%

9.0

%

6.5

%

*

 

*

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (9)

 

4,104,084

 

3,768,335

 

3,103,800

 

*

 

*

 

Net debt (10)

 

9,375,623

 

6,755,935

 

6,468,708

 

*

 

*

 

Ratio of total debt to total equity

 

104.0

%

91.8

%

81.9

%

*

 

*

 

Ratio of total debt to total assets

 

35.0

%

32.1

%

27.7

%

*

 

*

 

US GAAP:

 

 

 

 

 

 

 

 

 

 

 

Gross margin (6)

 

29.9

%

28.1

%

30.1

%

29.1

%

29.6

%

Operating margin (7)

 

15.1

%

14.3

%

14.2

%

15.2

%

19.1

%

Net margin (8)

 

10.4

%

8.5

%

4.1

%

11.6

%

11.6

%

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (9)

 

3,649,371

 

3,196,530

 

1,357,188

 

2,855,834

 

2,715,514

 

 


(*) Because we are not required to re-file our 2007 and 2006 MFRS consolidated financial statements with our local Mexican regulator with the inclusion of IMFRS 14, and because we believe that it would entail unreasonable effort and expense to compile MFRS selected financial data for 2007 and 2006, such amounts have been excluded from the selected financial data presentation.

 

As discussed in Note 29 to our consolidated financial statements, while preparing our 2010 consolidated financial statements and specifically our adoption of IMFRS 14, we undertook additional reconciliation control procedures which identified certain inflationary effects that were capitalized into US GAAP inventory balances during previous years which were not subsequently relieved when the related US GAAP inventory was sold.   These errors resulted in an overstatement of US GAAP inventory balances and US GAAP equity balances for multiple accounting periods.   The correction of this error had no impact on revenues or net income during 2009 or 2008, although its correction reduced 2007 net income by Ps. 191,702 and 2006 net income by Ps. 152,371. The Company has retrospectively adjusted its US GAAP financial information included herein so as to correct these errors.

 

(1)

The substantial majority of sales are recognized using a completed contract method (or the “deposit accounting method”), which means when title passes to the homebuyer and the homebuyer has the legal right to occupy the home.

 

 

(2)

Represents interest income, interest expense, valuation effects of derivative instruments and foreign exchange gains and losses.

 

 

(3)

Assumes all common shares are represented by ADSs. Each ADS represents six common shares. Any discrepancies between per share and per ADS amounts in the tables are due to rounding.

 

 

(4)

Employee statutory profit-sharing expense is classified as an operating expense under US GAAP, and as other income (expenses), net under MFRS.

 

 

(5)

Interest capitalized as part of the cost of inventories is included in cost of sales under US GAAP and MFRS. Due to the application of MFRS D-6 during 2010, 2009 and 2008, the net comprehensive financing cost capitalized (CFC) related to qualified assets for the same periods was Ps.965,008, Ps.563,154 and Ps.1,250,080, respectively, of which Ps.758,332 (of

 

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which Ps.432,819 is related to the current year CFC and Ps.325,513 is related to prior years), Ps.537,431 (of which Ps.239,597 is related to the current year CFC and Ps.297,834 is related to prior years) and Ps.662,080 (of which Ps.607,622 is related to the current year CFC and Ps.54,458 is related to prior years) related to inventories sold and subsequently were applied to cost of sales of the same periods, respectively. The average period for the amortization of the capitalized comprehensive financing cost is 9 months. The annual capitalization rates are 8.50%, 6.50% and 24.3%, respectively.

 

 

(6)

Represents gross profit divided by total revenues.

 

 

(7)

Represents operating income divided by total revenues.

 

 

(8)

Represents net income divided by total revenues.

 

 

(9)

Adjusted EBITDA is not a financial measure computed under Mexican or US GAAP. Adjusted EBITDA derived from our MFRS financial information means MFRS net income excluding (i) depreciation and amortization; (ii) CFC (which are composed of net interest expense (income), foreign exchange gain or loss and valuation effects of derivative instruments including CFC capitalized to land balances that is subsequently charged to cost of sales); (iii) other expenses related to provision for tax surcharges; and (iv) income tax expense and employee statutory profit-sharing expense.

 

 

 

Adjusted EBITDA derived from our U.S. GAAP financial information means US GAAP net income excluding (i) depreciation and amortization; (ii) interest expense and inflation effect; (iii) other expenses related to provision for tax surcharges; and (iv) income tax expense. Adjusted EBITDA does not exclude interest income (Ps.57,088 in 2010, Ps.52,203 in 2009 and Ps.63,141 in 2008).

 

 

 

Adjusted EBITDA under MFRS excludes the effect of CFC capitalized to land balances that is subsequently charged to cost of sales.  The Company’s computation of Adjusted EBITDA under US GAAP includes such expense in the computation of Adjusted EBITDA for all periods. Accordingly, the two computations are not comparable.

 

 

 

Accordingly, Adjusted EBITDA under MFRS and US GAAP are computed using different inputs and are not comparable.

 

 

 

We believe that Adjusted EBITDA can be useful to facilitate comparisons of operating performance between periods and with other companies in our industry because it excludes the effect of (i) depreciation and amortization, which represent a non-cash charge to earnings; (ii) certain financing costs, which are significantly affected by external factors, including interest rates and foreign currency exchange rates, which have little or no bearing on our operating performance; and (iii) income tax expense and, for Adjusted EBITDA derived from our MFRS financial information, employee statutory profit-sharing expense.

 

 

 

Adjusted EBITDA is also a useful basis for comparing our results with those of other companies because it presents operating results on a basis unaffected by capital structure. You should review Adjusted EBITDA, along with net income and cash flow from operating activities, investing activities and financing activities, when trying to understand our operating performance. While Adjusted EBITDA may provide a useful basis for comparison, our computation of Adjusted EBITDA is not necessarily comparable to Adjusted EBITDA as reported by other companies, as each is calculated in its own way and must be read in conjunction with the explanations that accompany it. While Adjusted EBITDA is a relevant and widely used measure of operating performance, it does not represent cash generated from operating activities in accordance with MFRS or US GAAP and should not be considered as an alternative to net income, determined in accordance with MFRS or US GAAP, as an indication of our financial performance, or to cash flow from operating activities, determined in accordance with MFRS or US GAAP, as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs.

 

 

 

Adjusted EBITDA has certain material limitations: (i) it does not include interest expense, which, because we have borrowed money to finance some of our operations, is a necessary and ongoing part of our costs and assisted us in generating revenue; (ii) it does not include taxes, which are a necessary and ongoing part of our operations; and (iii) it does not include depreciation, which, because we must utilize property and equipment in order to generate revenues in our operations, is a necessary and ongoing part of our costs. Therefore, any measure that excludes any or all of interest expense, taxes and depreciation and amortization has material limitations.

 

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Table of Contents

 

Reconciliation of Net Income to Adjusted EBITDA Computed from Our MFRS Financial Information

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009
(restated)

 

2008
(restated)

 

2007

 

2006

 

 

 

(In thousands of Mexican Ps., except as otherwise specified)

 

Net income

 

1,579,942

 

1,581,393

 

960,930

 

*

 

*

 

Depreciation

 

362,351

 

371,402

 

323,727

 

*

 

*

 

Net comprehensive financing cost

 

314,742

 

148,511

 

508,673

 

*

 

*

 

Other expenses

 

136,193

 

44,155

 

30,312

 

*

 

*

 

Amortization of Beta trademark

 

45,527

 

91,054

 

91,054

 

*

 

*

 

Employee statutory profit-sharing

 

 

 

70,768

 

*

 

*

 

Comprehensive financing cost capitalized and subsequently charged cost of sales

 

758,332

 

537,431

 

662,080

 

*

 

*

 

Income tax expense

 

906,997

 

994,389

 

456,256

 

*

 

*

 

Adjusted EBITDA

 

4,104,084

 

3,768,335

 

3,103,800

 

*

 

*

 

 

Reconciliation of Net Income to Adjusted EBITDA Computed from Our US GAAP Financial Information

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009
(restated)

 

2008
(restated)

 

2007
(restated)

 

2006
(restated)

 

 

 

(In thousands of Mexican Ps., except as otherwise specified)

 

Net income of controlling interest

 

1,977,437

 

1,511,357

 

567,782

 

1,475,532

 

1,480,206

 

Depreciation

 

362,351

 

371,402

 

323,727

 

196,307

 

130,829

 

Interest expense and inflation effect

 

176,996

 

188,173

 

85,926

 

439,971

 

262,238

 

Amortization of backlog (intangible)

 

 

 

 

16,747

 

58,397

 

Amortization of Beta trademark

 

45,527

 

91,054

 

91,054

 

92,958

 

94,477

 

Income tax expense

 

1,087,060

 

1,034,544

 

288,699

 

634,319

 

689,367

 

Adjusted EBITDA

 

3,649,371

 

3,196,530

 

1,357,188

 

2,855,834

 

2,715,514

 

 

(10)                Net debt is not a financial measure computed under MFRS. We compute net debt as the sum of all debt (not including interest payable) less cash and cash equivalents, each of which is computed in accordance with MFRS. Management uses net debt as a measure of our total amount of leverage, as it gives effect to cash accumulated on our balance sheets. Management believes net debt provides useful information to investors because it reflects our actual debt as well as our available cash and cash equivalents that could be used to reduce this debt. Net debt has certain material limitations in that it assumes the use of our cash and cash equivalents to repay debt that is actually still outstanding and not to fund operating activities or for investment.

 

Reconciliation of Total Debt to Net Debt Derived from Our MFRS Financial Information

 

 

 

As of December 31,

 

 

 

2010

 

2009

 

2008

 

 

 

(In thousands of Mexican Ps., except as otherwise specified)

 

Current portion of long-term debt

 

1,618,210

 

184,072

 

1,342,880

 

Current portion of leases

 

169,604

 

108,437

 

89,255

 

Long-term debt

 

11,023,031

 

9,714,842

 

6,304,758

 

Total debt

 

12,810,845

 

10,007,351

 

7,736,893

 

Cash and cash equivalents

 

3,435,222

 

3,251,416

 

1,268,185

 

Net debt

 

9,375,623

 

6,755,935

 

6,468,708

 

 

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Table of Contents

 

DIVIDENDS

 

A vote by the majority of our shareholders present at a shareholders’ meeting determines the declaration, amount, and payment of dividends. Under Mexican law, dividends may only be paid from retained earnings and if losses for prior fiscal years have been recovered.

 

We have not paid dividends since we were formed in 1989 and we do not currently expect to pay dividends. We intend to devote a substantial portion of our future cash flow to funding working capital requirements and purchasing land following a conservative replacement strategy for land bank acquisitions. We may consider adopting a dividend policy in the future based on a number of factors, including our results of operations, financial condition, cash requirements, tax consideration, future prospects, and other factors that our board of directors and our shareholders may deem relevant, including the terms and conditions of future debt instruments that may limit our ability to pay dividends.

 

EXCHANGE RATE INFORMATION

 

The following table sets forth, for the periods indicated, the period-end, average, high and low exchange rate between the peso and U.S. dollar. The average annual rates presented in the following table were calculated by using the average of the exchange rates on the last day of each month during the relevant period. The data provided in this table for the year 2008 is based on buying rates published by Bank of New York. The data provided in this table for the years 2009 and 2010 is based on the exchange rates published by Banco de México. All amounts are stated in pesos, and we have not restated the rates in constant currency units. We make no representation that the Mexican peso amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at all.

 

 

 

Noon Buying Rate (Ps. per US$)

 

Years Ended December 31,

 

Low (1)

 

High (1)

 

Average (2)

 

Period - End

 

2008

 

9.92

 

13.94

 

11.14

 

13.77

 

2009

 

12.60

 

15.37

 

13.50

 

13.07

 

2010

 

12.16

 

13.18

 

12.63

 

12.35

 

 

Month Ended

 

 

 

 

 

 

 

 

 

December 31, 2010

 

12.33

 

12.46

 

12.39

 

12.35

 

January 31, 2011

 

12.02

 

12.26

 

12.13

 

12.15

 

February 29, 2011

 

11.99

 

12.19

 

12.07

 

12.11

 

March 31, 2011

 

11.91

 

12.10

 

12.00

 

11.91

 

April 30, 2011

 

11.53

 

11.85

 

11.72

 

11.53

 

May 31, 2011

 

11.50

 

11.77

 

11.65

 

11.61

 

June 30, 2011 (through June 29)

 

11.58

 

11.96

 

11.80

 

11.84

 

 


(1)                    Rates shown are the actual low and high, on a day-by-day basis for each period.

(2)                    Average of daily rates.

 

On June 29, 2011, Banco de México’s UDI conversion rate was Ps. 4.554642 per UDI.

 

Industry and Market Data

 

Except during a liquidity crisis lasting from September through December 1982, Banco de México has consistently made foreign currency available to Mexican private sector entities (such as us) to meet their foreign currency obligations. Nevertheless, in the event of renewed shortages of foreign currency, it is possible that foreign currency will not continue to be available to private sector companies or that foreign currency that we may need to service foreign currency obligations or to import goods will not be available for purchase in the open market without substantial additional cost.

 

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Table of Contents

 

RISK FACTORS

 

Risk Factors Related to Our Business

 

Decreases in the Amount of Mortgage Financing Provided by Mexican Housing Funds on Which We Depend, or Disbursement Delays, Could Result in a Decrease in Our Sales and Revenues

 

The home building industry in Mexico has been characterized by a significant shortage of mortgage financing. Historically, the limited availability of financing has restricted home building and contributed to the current shortage of affordable entry-level housing. Substantially all financing for affordable entry-level housing in Mexico is provided by entities established for this purpose (“Mexican Housing Funds”) such as:

 

·                     the National Workers’ Housing Fund Institute, or “INFONAVIT” (Instituto del Fondo Nacional para la Vivienda de los Trabajadores), which is financed primarily through mandatory contributions from the gross wages of private sector workers, and securitization of mortgages in the capital markets;

 

·                     the Social Security and Services Institute Public Segment Workers’ Housing Fund, or “FOVISSSTE” (Fondo para la Vivienda y la Seguridad y Servicios Sociales para los Trabajadores del Estado ), which is financed primarily through mandatory contributions from the gross wages of public sector workers; and

 

·                     public mortgage providers such as the Federal Mortgage Society, or “SHF” (Sociedad Hipotecaria Federal, S.N.C., Institucion de Banca de Desarrollo), which is financed through its own funds as well as funds provided by the World Bank and a trust managed by Banco de México.

 

See “Item 4. Information on the Company— Business Overview—The Mexican Housing Market.”

 

The amount of funding available and the level of mortgage financing from these sources is limited and may vary from year to year.

 

These Mexican Housing Funds have significant discretion in terms of the allocation and timing of disbursement of mortgage funds. We depend on the availability of mortgage financing provided by these Mexican Housing Funds for substantially all of our sales of affordable entry-level housing, which represented 67.6% of our revenues for 2010 and 78.9% of our revenues for 2009.

 

Accordingly, our financial results are affected by policies and administrative procedures of INFONAVIT, FOVISSSTE, SHF, and a federal housing subsidy program, as well as by the Mexican government’s housing policy. The availability of mortgage financing granted by INFONAVIT and FOVISSSTE has increased significantly during the past eight years as compared to historical levels, while financing from SHF has decreased due to a change in its policy in 2005. The future Mexican government housing finance policy may limit or delay the availability of mortgage financing provided by these agencies or otherwise institute changes, including changes in the methods by which these agencies grant mortgages and, in the case of INFONAVIT, the geographic allocation of mortgage financing, that could result in a decrease in revenues.

 

Disruptions in the operations of these Mexican Housing Funds, which could occur for any reason, may occur and result in a decrease in our sales and revenues. During 2009, disruptions included a delay in the disbursement of Mexican federal government subsidies in certain cities delaying the timing by which INFONAVIT commits to closing a transaction, and a slowdown in the collection process through FOVISSSTE, who employs sofoles to make payments which result in delays in the payment process.

 

Decreases or delays in the amount of funds available from INFONAVIT, FOVISSSTE, SHF or other sources, or substantially increased competition for these funds, could result in a decrease in our sales and revenues. These funds may not continue to be allocated at their current levels or in regions in which we have or can quickly establish a significant presence.

 

The current administration of President Felipe Calderón has initiated a National Housing Program (Programa Nacional de Vivienda) 2007-2012, through which the government expects that Mexican Housing Funds will provide six million mortgages by 2012, mainly to low-income families. For 2011, the government believes that Mexican Housing Funds will provide 1.1 million residential mortgages.

 

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A Slowdown in the Mexican Economy Could Limit the Availability of Private-Segment Financing in Mexico, on Which We Depend for Our Sales of Middle-Income Housing, Which Could Result in a Decrease in Our Sales and Revenues

 

One of our long-term strategies is to expand our operations in the middle-income and residential housing segments while maintaining our margins and without adversely affecting our financial condition. Our expansion into these markets depends on private sector lenders, such as commercial banks and Limited Purpose Financing Companies and Multiple Purpose Financing Companies (Sociedades Financieras de Objeto Limitado y Sociedades Financieras de Objeto Múltiple, or “sofoles” and “sofomes”), which provide a substantial majority of mortgage financing for the middle-income segment. The availability of private sector mortgage financing in Mexico has been severely constrained in the past as a result of volatile economic conditions in Mexico, the level of liquidity and stability of the Mexican banking system, and the resulting adoption of more stringent lending criteria and bank regulations. From 1995 through 2001, commercial bank mortgage lending was generally unavailable in Mexico. However, during the same period a number of sofoles were formed, serving the mostly middle-income market. Since 2002, private sector lenders have gradually increased their mortgage financing activities as a result of improved economic conditions and increasing consumer demand. However, unfavorable general economic conditions, such as the recession and economic slowdown during 2009 in the United States negatively affected the Mexican economy and the availability of private sector mortgage financing. As a result, commercial lenders tightened their criteria for mortgage origination. Additionally, sofoles and sofomes faced liquidity constraints due to increased exposure to non-performing loans. As a result, since 2009, we decreased our exposure to the middle-income segment as sofoles and sofomes have continued to face liquidity constraints. During 2010, mortgages for the middle income segment continued to be constrained, as commercial banks and sofoles continued to be the main source of financing to the segment. Financing to the segment was importantly supported by co-financing products through INFONAVIT and FOVISSSTE. During 2010, INFONAVIT co-financed products represented 19.7 percent of the total mortgages placed or 93,727 mortgages compared to 9.1 percent or 40,655 mortgages during 2009. A prolonged economic slowdown in the United States and Mexico could result in reduced profitability and negatively affect our financial performance.

 

Our Strategy for Expansion in the Tourism/Resort Housing Market may be Affected by a Slowdown in U.S. General Economic Conditions, Which Could Adversely Affect Our Business or Our Financial Results

 

The tourism/resort homebuilding industry is sensitive to changes in economic conditions and other factors, such as the level of employment, consumer confidence, consumer income, availability of financing, and interest rate levels. Adverse changes in any of these conditions, or in the markets where our targeted clients operate, could decrease demand and pricing for new homes in these areas or result in customer cancellations of pending contracts, which could adversely affect the number of home deliveries we make or reduce the prices we can charge for homes in the tourism/resort housing markets, either of which could result in a decrease in our revenues and earnings and would adversely affect our financial condition. However, the Company believes that the targeted customers will consist of an exclusive sector of senior U.S. and Canadian residents, for whom the availability of financing is not a key requisite for purchasing a second home. Nonetheless, we anticipate a reduction in potential customers for this segment due to continued softer demand from our targeted customers related to the economic slowdown started in 2008.

 

We Experience Significant Seasonality in Our Results of Operations

 

The Mexican affordable entry-level housing industry experiences significant seasonality during the year, principally due to the operational and lending cycles of INFONAVIT and FOVISSSTE. Payment by these lenders for home deliveries is slow at the beginning of the year and increases gradually through the second and third quarters with a rapid acceleration in the fourth quarter. We build and deliver affordable entry-level homes based on the seasonality of this cycle because we do not begin construction of these homes until a mortgage provider commits mortgage financing to a qualified homebuyer in a particular development. Accordingly, we tend to recognize significantly higher levels of revenue in the third and fourth quarters and our debt levels tend to be highest in the first and second quarters. We anticipate that our quarterly results of operations and our level of indebtedness will continue to experience variability from quarter to quarter in the future.

 

We May Experience Difficulty in Finding Desirable Land Tracts or Increases in the Price of Land May Increase Our Cost of Sales and Decrease Our Earnings

 

Our continued growth depends in large part on our ability to continue to be able to acquire land and to do so at a reasonable cost. As more developers enter or expand their operations in the Mexican home building industry, land prices could rise significantly and suitable land could become scarce due to increased demand or decreased supply. A resulting rise in land prices may increase our cost of sales and decrease our earnings. We may not be able to continue to acquire suitable land at reasonable prices in the future.

 

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Table of Contents

 

Increases in the Price of Raw Materials May Increase Our Cost of Sales and Reduce Our Net Earnings

 

The basic raw materials used in the construction of our homes include concrete, concrete block, steel, windows, doors, roof tiles and plumbing fixtures. Increases in the price of raw materials, including increases that may occur as a result of shortages, duties, restrictions, or fluctuations in exchange rates, could increase our cost of sales and reduce our net earnings to the extent we are unable to increase our sale prices. It is possible that the prices of our raw materials will increase in the future.

 

Loss of the Services of Our Key Management Personnel Could Result in Disruptions to Our Business Operations

 

Our management and operations are dependent in large part upon the contributions of a small number of key senior management personnel, including Eustaquio Tomás de Nicolás Gutiérrez, our Chairman, and Gerardo de Nicolás Gutiérrez, our Chief Executive Officer. We do not have employment or non-compete agreements with or maintain key-man life insurance in respect of either of these individuals. Because of their knowledge of the industry and our operations and their experience with Homex, we believe that our future results will depend upon their efforts, and the loss of the services of either of these individuals for any reason could adversely affect our business operations.

 

Competition from Other Home Builders Could Result in a Decrease in Our Sales and Revenues

 

The home building industry in Mexico is highly competitive. Our principal competitors include public companies like Corporación GEO, S.A.B. de C.V., Consorcio ARA, S.A.B. de C.V., URBI Desarrollos Urbanos, S.A.B. de C.V. and SARE, S.A.B. de C.V. Our ability to maintain existing levels of home sales depends to some extent on competitive conditions, including price competition, competition for available mortgage financing, and competition for available land. Competition is likely to continue to decrease as some smaller and medium-sized homebuilding companies in Mexico are experiencing limited growth opportunities due to: (1) their dependence on bridge loans and short-term credit lines; (2) increases in the range of 300 to 400 bps in these companies interest rates for short-term credit lines; and (3) tighter lending restrictions from commercial banks to renew existing credit lines. We may experience pressure to reduce our prices in certain regions if some of our competitors are forced to sell their inventory in distressed sales upon exiting the market. In addition, competitive conditions may prevent us from achieving our goal of increasing our sales volume, or result in a decrease in our sales and revenues.

 

Adverse Economic Conditions in Mexico or in Other Emerging Markets Could Adversely Affect Us

 

We currently maintain operations in Mexico and to a lesser extent in other emerging markets.  We expect that in the future we will have additional operations in the countries where we currently operate or in other countries with similar political and economic conditions.  These emerging markets have a history of economic instability.  Our operations may be adversely affected by trade barriers, currency fluctuations and exchange controls, high levels of inflation and increases in duties, taxes and governmental royalties, as well as changes in local laws and policies of the countries in which we conduct business.  The governments of countries in which we operate, or may operate in the future, could take actions that materially adversely affect us.  Accordingly, our results of operations and financial condition depend upon the overall level of economic activity and political stability in these emerging markets.  Should economic conditions deteriorate in these countries or in emerging markets generally, our results of operations and financial condition may be adversely affected.

 

In addition, we cannot provide any assurance that international markets will provide similar demand for housing as Mexico, that we will have similar success selling the houses that we may develop in international markets, or that the necessary financing from private and public sources will enable the public in these international markets to purchase the supply of housing that we may develop in these markets.  As a result of our expansion into international markets, our profitability could be reduced and our financial performance could be negatively affected.

 

Changes in Building and Zoning Regulations to Which We are Subject Could Cause Delays in Construction and Result in Increased Costs

 

The Mexican housing industry is subject to extensive building and zoning regulation by various federal, state and municipal authorities. These authorities oversee land acquisition, development and construction activities, and certain dealings with customers. The costs associated with obtaining building and zoning permits, paying purchase or development fees and taxes, securing utility service rights and titling new homes are substantially higher in Mexico than in other countries and vary significantly from region to region in Mexico. We are required to obtain the approval of numerous federal, state and local governmental authorities for our development activities. Changes in local circumstances or applicable law or regulations of such entities may require modifying or

 

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applying for additional approvals or changing our processes and procedures to comply with them. It is possible that these factors could cause delays in construction and result in increased costs.

 

Changes to Environmental Laws and Regulations to Which We are Subject Could Cause Delays in Construction and Result in Increased Costs

 

Our operations are subject to Mexican federal, state and municipal environmental laws and regulations. Changes to environmental laws and regulations, or stricter interpretation or enforcement of existing laws or regulations, could cause delays in construction and result in increased costs.

 

Our Uninsured Housing Developments under Construction Could Suffer Unforeseen Casualties, Which Could Result in Significant Losses to Us

 

We do not generally obtain liability insurance to cover housing developments under construction unless it is required by providers of construction financing. In the event that our uninsured housing developments suffer unforeseen casualties, we may experience significant losses.

 

A Reduction in Distributions from Our Operating Subsidiaries Could Limit Our Ability to pay Dividends and Service Our Debt Obligations

 

We are a holding company with no substantial operations and no significant assets other than the common shares of our majority-owned subsidiaries. We depend on receiving sufficient funds from our subsidiaries for virtually all our internal cash flow, including cash flow to pay dividends and service our debt obligations. As a result, our cash flow will be affected if we do not receive dividends and other income from our subsidiaries. The ability of our subsidiaries to pay dividends and make other transfers to us is limited by requirements that need to be satisfied under Mexican law. This ability may also be limited by credit agreements entered into by our subsidiaries.

 

We Cannot Predict the Impact that Changing Climate Conditions, Including Legal, Regulatory and Social Responses Thereto, May Have on Our Business

 

Various scientists, environmentalists, international organizations, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, tornadoes, freezes, other storms and fires) in certain parts of the world.  In response to this belief, a number of legal and regulatory measures as well as social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions which some believe may be chief contributors to global climate change.  We cannot predict the impact that changing climate conditions, if any, will have on our results of operations or our financial condition.  Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business.

 

Risk Factors Related to Mexico

 

Adverse Economic Conditions in Mexico May Result in a Decrease in Our Sales and Revenues

 

We are a Mexican company with substantially all of our assets located in Mexico and substantially all of our revenues derived from operations in Mexico. As such, our business may be significantly affected by the general conditions of the Mexican economy.

 

Mexico experienced a period of slow growth from 2001 through 2003 primarily as a result of the downturn in the U.S. economy. In 2006, GDP grew by 4.5% and inflation increased to 4.1%; in 2007, GDP grew by 5.6% and inflation decreased to 3.7%; in 2008, GDP grew by 1.3% and inflation increased to 6.5%. In 2009, GDP contracted by 6.5% and inflation increased to 5.3% as a result of the global recession and economic slowdown as Mexico witnessed a contraction in the international flow of goods and services, especially to and from Mexico’s main trading partner, the United States. In 2010, Mexico’s GDP grew by 5.4 percent compared to a plunge of 6.5 percent during 2009 due to the global recession while inflation decreased to 4.32% compared to 5.3% during 2009.

 

Historically, Mexico has experienced high real and nominal interest rates. The interest rates on 28-day Mexican government treasury securities (Certificados de la Tesoreria de la Federación) averaged approximately 7.44% and 7.97% for 2007 and 2008, respectively. As a result of the recession and economic slowdown in Mexico during 2009, Mexico’s central bank lowered its

 

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benchmark interest rate (“TIIE”) to 4.50% in an effort to encourage lending and stimulate the economy. As a result, the interest rates on 28-day Mexican government treasury securities decreased to 4.40% during 2010. In the short-term, it is not expected that Mexico’s central bank will increase its benchmark interest rate prior to early 2012. Accordingly, if we incur peso-denominated debt in the future, it could be at high interest rates.

 

As a consequence of the global recession and economic slowdown during 2008, the Mexican economy entered into a recession. In Mexico, GDP contracted 6.5% in 2009. However during 2010, the Mexican economy recovered grew 5.4%. During the first quarter of 2011 the Mexican economy grew by 4.6% compared to the same period in 2010, led by industrial production. Consumer confidence has improved to 89.7 as of April 30, 2011, as compared to an average of 86.3 during 2010. In addition, the unemployment rate has improved to 4.61% as of March 2011, its lowest level since December 2008 when it was 4.32% in the first quarter. As of April 30, 2011, twelve-month accumulated inflation had decreased to 3.36% as compared to 4.27% during the same period in 2010. However, there can be no assurance that the positive trends witnessed in recent months will continue. The Mexican economy’s inability to continue its nascent recovery from the recession could affect our operations to the extent that we are unable to reduce our costs and expenses in response to falling demand. These factors could result in a decrease in our sales and revenues.

 

Fluctuations of the Peso Relative to the U.S. Dollar Could Result in an Increase in Our Cost of Financing and Limit Our Ability to Make Timely Payments on Foreign Currency-Denominated Debt

 

Because substantially all of our revenues are and will continue to be denominated in pesos, if the value of the peso decreases against the U.S. dollar, our cost of financing will increase. Severe depreciation of the peso may also result in disruption of the international foreign exchange markets. This may limit our ability to transfer or convert pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our securities and any U.S. dollar-denominated debt that we may incur in the future. While the Mexican government has not restricted the right or ability of Mexican or foreign individuals to convert pesos into U.S. dollars or to transfer other currencies out of Mexico since 1982, the Mexican government could institute restrictive exchange rate policies in the future.

 

Political Events in Mexico May Result in Disruptions to Our Business Operations and Decreases in Our Sales and Revenues

 

The Mexican government exercises significant influence over many aspects of the Mexican economy. In addition, we depend on Mexican government housing policy, especially with regard to the operation of the Mexican Housing Funds, for a large portion of our business. As a result, the actions of the Mexican government concerning the economy and regulating certain industries could have a significant effect on Mexican private sector entities, including Homex, and on market conditions, prices of and returns on Mexican securities.

 

President Calderón may implement significant changes in laws, public policy and/or regulations that could affect Mexico’s political and economic situation, which could adversely affect our business. Social and political instability in Mexico or other adverse social or political developments in or affecting Mexico could affect us and our ability to obtain financing. It is also possible that political uncertainty may adversely affect Mexican financial markets.

 

We cannot provide any assurance that future political developments in Mexico, over which we have no control, will not have an unfavorable impact on our financial position or results of operations.

 

Developments in Other Countries May Result in Decreases in the Price of Our Securities

 

The market value of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in any of these other countries may have an adverse effect on the market value of securities of Mexican issuers. In recent years, for example, prices of both Mexican debt securities and Mexican equity securities dropped substantially as a result of the levels of public debt, weakness of the economies, and other developments in the United States, Russia, Asia, Brazil, Greece, Italy, Portugal and Spain, among others.

 

In addition, the direct correlation between economic conditions in Mexico and the United States has sharpened in recent years as a result of the North American Free Trade Agreement (NAFTA) and increased economic activity between the two countries. As a result of the slowing economy in the United States and the uncertainty it could have on the general economic conditions in Mexico and the United States, our financial condition and results of operations could be adversely affected. In addition, due to recent developments in the international credit markets, capital availability and cost could be significantly affected and could restrict our ability to obtain financing or refinance our existing indebtedness on favorable terms, if at all.

 

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We are Subject to Different Corporate Disclosure than U.S. Companies

 

A principal objective of the securities laws of the United States, Mexico and other countries is to promote full and fair disclosure of all material corporate information. However, there may be less or different publicly available information about foreign issuers of securities than is regularly published by or about U.S. issuers of listed securities.

 

Mexico has experienced a period of increasing criminal activity and such activities could affect our operations.

 

Recently, Mexico has experienced a period of increasing criminal activity, primarily due to organized crime.  The state of Sinaloa, where our corporate offices are located and we conduct a portion of our business, likewise has been affected by an increase in organized crime and violence.  These activities, their possible escalation and the violence associated with them may have a negative impact on the business environment in which we operate, and therefore on our financial condition and results of operations.

 

Risk Factors Related to Our Common Shares and ADSs

 

Future Issuances of Shares May Result in a Decrease in the Prices of Our ADSs and Common Shares

 

In the future, we may issue additional equity securities for financing and other general corporate purposes, although there is no present intention to do so. Any such sales or the prospect of any such sales could result in a decrease in the prices of our ADSs and common shares.

 

Future Sales of Our Shares by Our Principal Shareholders May Result in a Decrease in the Prices of Our Securities

 

Our principal shareholder, the de Nicolás family, holds 35.1% of our outstanding share capital. Actions by these shareholders with respect to the disposition of the shares they beneficially own, or the perception that such actions might occur, may decrease the trading price of our shares on the Mexican Stock Exchange and the price of the ADSs on the New York Stock Exchange. Our principal shareholders are not subject to any contractual restrictions that limit their right to dispose of their common shares.

 

Pre-emptive Rights May be Unavailable to Holders of Our ADSs, Which May Result in a Dilution of ADS Holders’ Equity Interest in Our Company

 

Under Mexican law, if we issue new shares for cash as part of a capital increase, we must grant pre-emptive rights to our shareholders, giving them the right to purchase a sufficient number of shares to maintain their pro rata interest unless we issue shares in a public offering. However, we may not be legally permitted to offer ADS holders in the United States the right to exercise pre-emptive rights in any future issuances of shares unless we file a registration statement with the SEC with respect to that future issuance of shares, or the issuance qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933, or the “Securities Act”. At the time of any future capital increase, other than through a public offering, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, the benefits of enabling U.S. holders of ADSs to exercise pre-emptive rights, and any other factors that we consider important in determining whether to file a registration statement to permit the exercise of mandatory pre-emptive rights. It is possible that we will not file such a registration statement. As a result, the equity interests of ADS holders would be diluted to the extent that ADS holders cannot participate in a future capital increase.

 

Under the terms of the ADSs, you may instruct the depositary, JPMorgan Chase Bank, to vote the ordinary shares underlying the ADSs, but only if we request the depositary to ask for your instructions. Otherwise, you will not be able to exercise your right to vote unless you withdraw the common shares underlying the ADSs and vote such common shares. However, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your common shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send out or receive your voting instructions on time or carry them out in the manner you have instructed. As a result, you may not be able to exercise your right to vote.

 

In addition, Mexican law and our bylaws require shareholders to provide evidence of their status as shareholders through INDEVAL’s depositors’ list in order to attend shareholders’ meetings. ADS holders will not be able to meet this requirement and are therefore not entitled to attend shareholders’ meetings. ADS holders will also not be permitted to vote the common shares underlying the ADSs directly at a shareholders’ meeting or to appoint a proxy to do so without withdrawing the common shares.

 

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Minority Shareholders Have Different Rights Against Us, Our Directors, or Our Controlling Shareholders in Mexico

 

Under Mexican law, the protections afforded to minority shareholders are different from those afforded to minority shareholders in the United States. The grounds for shareholder derivative actions under Mexican law are extremely limited, which effectively bars most of these kinds of lawsuits in Mexico. Procedures for class-action lawsuits do not exist under Mexican law. Therefore, it may be more difficult for minority shareholders to enforce their rights against us, our directors or our controlling shareholders than it would be for minority shareholders of a U.S. company.

 

It May be Difficult to Enforce Civil Liabilities Against Us or Our Directors, Executive Officers and Controlling Persons

 

We are organized under the laws of Mexico. A majority of our directors, executive officers and controlling persons reside outside the U.S.; all or a significant portion of the assets of our directors, executive officers and controlling persons, and substantially all of our assets, are located outside the U.S.; and certain of the experts named in this annual report also reside outside the U.S. As a result, it may be difficult for you to effect service of process within the U.S. upon these persons or to enforce against them or us in U.S. courts judgments predicated upon the civil liability provisions of the federal securities laws of the U.S. We have been advised by our Mexican counsel, Cortés y Núñez Sarrapy, S.C., that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of U.S. federal securities laws.

 

ITEM 4.                             Information on the Company.

 

BUSINESS OVERVIEW

 

HISTORY AND DEVELOPMENT

 

Desarrolladora Homex, S.A.B. de C.V. is a corporation (sociedad anónima bursátil de capital variable) registered in Culiacán, Sinaloa, Mexico under the Mexican Companies Law ( Ley General de Sociedades Mercantiles ) on March 30, 1998 with an indefinite corporate existence. Our full legal name is Desarrolladora Homex, S.A.B. de C.V. Our principal executive offices are located at Boulevard Alfonso Zaragoza Maytorena 2204 Norte, Fraccionamiento Bonanza, 80020 Culiacán, Sinaloa, Mexico. Our telephone number is +52 (667) 758-5800. Our legal domicile is Boulevard Alfonso Zaragoza Maytorena 2204 Norte, Fraccionamiento Bonanza, 80020 Culiacán, Sinaloa, Mexico.

 

Our Company traces its origins to 1989 and established its current legal structure in 1998. Beginning in 1999, various strategic investors and, in 2002, Equity International Properties, Ltd., or EIP, an entity affiliated with Equity Group Investments, L.L.C., made equity investments in our Company. These strategic investors assisted us to develop and refine our operating and financial strategies. On June 29, 2004 we obtained financing through a public equity offering and dual listing on the Bolsa Mexicana de Valores and the New York Stock Exchange. Since our initial public offering, our annual revenues have grown 232%, and we have expanded our operations into four states and five cities in México, as well as two countries internationally.

 

Capital Expenditures

 

Our operations do not require substantial capital expenditures, as we lease, on a short-term basis, most of the construction equipment we use and subcontract a substantial portion of the services necessary to build the infrastructure of our developments. In 2010 we spent Ps.279.64 million on capital expenditures, primarily to purchase construction equipment, support growth and partially fund our corporate headquarters. Our purchases of land are treated as additions to inventory and not as capital expenditures.

 

Our Company

 

We are a vertically-integrated home development company engaged in the development, construction and sale of affordable entry-level, middle-income and tourism housing in Mexico and affordable entry-level housing in Brazil. During 2010 units closed were 44,347 homes, a decrease of 3.6% compared to 2009. During 2009 units closed were 46,016 homes, an increase of 9.6% over 2008. 89.2% of our homes sold in 2010 and 92.4% in 2009 were in the affordable entry-level segment.

 

As of December 31, 2010, we had 140 developments under construction in 34 cities located in 21 Mexican states, and 3 developments under construction in 3 cities located in 2 Brazilian states. We had total land reserves under title of approximately 82.3 million square meters as of December 31, 2010, which include primarily land reserves in Mexico and approximately 2.7 million square meters of land reserves for our operations in Brazil.  Our land reserves include both titled land and land in the process of being titled. 

 

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We estimate we could build approximately 366,680 affordable entry-level homes, approximately 29,680 middle-income homes and approximately 2,230 homes targeting the tourism market on our land reserves.

 

We believe our geographic diversity is one of the strongest among home builders in Mexico, reflected by our operations in 34 cities located in 21 Mexican states as of December 31, 2010.  For the year ended December 31, 2010, 18% of our revenues were derived from the Mexico City Metropolitan Area and 10% from the state of Jalisco.

 

From time to time, we evaluate investments in real estate projects and companies outside Mexico with a view toward replicating our business model in other jurisdictions. To this end, we may also enter into real estate development joint ventures and strategic alliances with the assistance of knowledgeable local partners. Such investments, if any, are not expected to be material in terms of cost or management time.

 

For our Mexican operations, we acquire land and plan the development of the homes we build through Proyectos Inmobiliarios de Culiacán, S.A. de C.V., or “PICSA”, Casas Beta del Centro, S. de R.L. de C.V., Casas Beta del Norte, S. de R.L. de C.V. and Casas Beta del Noroeste, S. de R.L. de C.V. Desarrolladora de Casas del Noroeste, S.A. de C.V. or “DECANO” builds the developments that PICSA and Beta plan and promote. We also receive executive and administrative services from Administradora PICSA, S.A. de C.V. and Altos Mandos de Negocios, S.A. de C.V. Homex Atizapan, S.A. de C.V., which we operate and control as a joint venture with strategic partners in the region, owns one of our middle-income developments in the Mexico City area and Hogares del Noroeste, S.A. de C.V. owns middle-income developments in Hermosillo, Sonora. Aerohomex, S.A. de C.V. provides transportation services to us as well as building rental services for our corporate offices. Through AAA Homex Trust, a Mexican trust, we establish factoring facilities for the settlement of trade payables to many of our suppliers. For our Brazilian operations, we acquire land and plan the development of the homes we build trough Homex Brasil Incorporacoes a Construcoes Limitada’s subsidiaries. See “—The Mexican  Housing Market — Materials and Suppliers.”

 

Our Products

 

Mexico’s developer-built housing industry is divided into three tiers according to cost:  affordable entry-level, middle-income, and residential. We consider affordable entry-level homes to range in price between Ps.195,000 and Ps.540,000 (US$15,749 and US$43,613); middle-income homes to range in price between Ps.541,000 and Ps.1,885,000 (US$43,694 and US$152,241); and residential homes to have a price above Ps.1,885,000 (US$152,241). We currently focus on providing affordable entry-level and middle-income housing for our customers. In 2008, we launched a new market focused on houses in tourist and resort areas. This housing ranges between US$300,000 and US$950,000.

 

Our affordable entry-level developments range in size from 500 to 20,000 homes and are developed in stages typically comprising 300 homes each. During 2010, our affordable entry-level homes had an average sale price of approximately Ps.338,000 (US$27,298). A typical affordable entry-level home consists of a kitchen, living, dining area, one to three bedrooms, and one bathroom. We are able to deliver a completed affordable entry-level home in approximately 7 to 10 weeks from the time a homebuyer obtains mortgage approval. Currently, our largest affordable entry-level housing developments are located in the states of Jalisco, México, Nuevo León, Baja California Sur, Veracruz, Baja California and Puebla.

 

Our middle-income developments range in size from 400 to 2,000 homes and are developed in stages typically comprising 200 homes each. During 2010, our middle-income homes had an average sale price of approximately Ps.1,086,000 (US$87,710) as compared to Ps.978,000 (US$78,988) for the same period in 2009. A typical middle-income home consists of a kitchen, dining room, living room, two or three bedrooms, and two bathrooms. We are able to deliver a completed middle-income home in approximately 12 to 16 weeks from the time a homebuyer obtains mortgage approval. In response to continued demand for middle-income housing in Mexico and financing available through INFONAVIT’s and FOVISSSTE’s cofinancing products, we launched one new middle-income developments in one city in 2010. In 2010, 26.3% of our revenues were attributable to sales of middle-income housing compared to 19.5% in 2009.

 

In early 2008, we commenced the development of the first stage of the new tourism/resort division called “Las Villas de Mexico.”  As part of Homex’s entry into the development of housing targeting the tourist market, our developments were initially located in the three major tourism centers in Mexico, namely Los Cabos, Puerto Vallarta and Cancún. On July 20, 2010 Homex’s Tourism Division acquired 100 percent of the common stock of CT Commercial Properties, S. de R.L. de C.V. and CT Prop, S. de R.L. de C.V., and on December 31, 2010 acquired 100 percent of the common stock of CT Loreto, S. de R.L. de C.V., three companies that held real estate assets in the town of Loreto, State of Baja California Sur, México. The assets acquired by Homex include The Inn at Loreto Bay Hotel, The Loreto Bay Golf Course and approximately 32.6 hectares of land suitable for the construction of approximately 1,100 apartment and townhouse units, Developments in each of the four markets will have three

 

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different housing styles: residential villas of up to 2,150 square feet in typical lots of 3,230 square feet, townhouses of up to 1,725 square feet in typical lots of 2,690 square feet and apartments or condominiums of up to 1,500 square feet in buildings with five to 10 floors on average. Each style has been developed to maximize space but provide privacy and avoid the perception of high density.  The developments in each area will feature architectural and landscaping elements unique to the geographical region.  Owners will have the opportunity to choose from among the different layouts and a wide variety of architectural and landscaping designs, as well as to tailor a property to their individual tastes. Each development will feature either a private beach or country club (with priority golf club access), as well as a day spa, state-of-the-art fitness facilities, full-time concierge services, and space for exclusive commercial and service areas.

 

In targeting the new tourism resort division to foreign investors who will not live at their residences full-time, we have included a number of important amenities. All of the developments will feature double gates, year-round, 24-hour security, and a choice of two branded property services: Casa Care and Opendoor. Casa Care will handle the maintenance and bill payments for the property while residents are away. The services include payment of monthly expenses, property management, and individually customized packages tailored to residents’ specific needs. Opendoor will allow residents to share or rent their home within the Las Villas private property partnership. Owners will be able to travel throughout Mexico to stay at the different Las Villas developments, use the amenities, and pay the same amount they would for their own residence.

 

Land Reserves

 

We have developed specific procedures to identify land that is suitable for our needs and perform ongoing market research to determine regional demand for housing. Suitable land must be located near areas with sufficient demand, generally in areas where at least 500 homes can be built, and must be topographically amenable to housing development. We also consider the feasibility of obtaining required governmental licenses, permits, authorizations, and adding necessary improvements and infrastructure, including sewage, roads and electricity in keeping with a purchase price that will maximize margins within the limits of available mortgage financing. We conduct engineering and environmental assessments, and in some cases urbanization and land composition studies, of land we consider for purchase in order to determine whether it is suitable for construction. We budget the majority of our land purchases for the second half of the year to coincide with peak cash flow. Historically, our total land reserves fluctuated between 36 to 42 months of future home deliveries depending upon the time of year. During 2010, the Company followed a strategy to replace some of our existing land reserves where we held less than 2 to 3 years of future home deliveries with longer-term land reserves. As a result of this replacement strategy, the amount that we spent on land acquisitions decreased to Ps.582 million during 2010 as compared to Ps.1,119 million during 2009. As of December 31, 2010, the Company had land inventory for 5.4 years of future home deliveries.

 

We had total land reserves under title of approximately 82.3 million square meters, as of December 31, 2010, including primarily land reserves in Mexico and approximately 2.7 million square meters of land reserves for our operations in Brazil.  Our land reserves include both titled land and land in the process of being titled.  We estimate we could build approximately 366,680 affordable entry-level homes, approximately 29,680 middle-income homes and approximately 2,230 homes targeting the tourism market on our land reserves. For 2011, we anticipate minimizing investments by continuing to follow a conservative replacement strategy for land bank acquisitions.

 

International Expansion: Brazil, Sao Jose dos Campos, Marilia and Campo Grande Affordable Entry- Level Projects

 

During the first quarter of 2009, the Company initiated operations in Brazil with the construction of a 1,300-unit affordable entry-level development in Sao Jose dos Campos, northeast of Sao Paulo.  As of December 31, 2010 we had three projects under construction equivalent to approximately 6,000 homes in the cities of Sao Jose dos Campos, Marilia and Campo Grande. For the years ended December 31, 2010 and 2009 the Company recognized revenues from its Brazilian operations of Ps. 173,272 and Ps. 7,741, respectively, which represented 0.88% and 0.04% of the consolidated revenues, respectively.

 

International Expansion: Indian Joint Venture

 

On December 15, 2010 the Company, through its subsidiary Homex India Private Limited, entered into an investment agreement with Kotak Real State Fund — I, by means of which, subject to conditions precedent related to obtaining all required permits, licenses and necessary authorization for the construction of a real estate development in the city of Chennai, India, the Company will acquire all equity shares of KS Realty Constructions Private Limited (KS Realty), the company that owns the land on which the project will be developed. As of June 29, 2011, the Company is still waiting on the conditions precedent to be achieved in order to acquire all equity shares of KS Realty.

 

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Tourism Division

 

Homex has pursued a conservative strategy for its tourism division by launching the first phase of its development in Los Cabos. To improve the Company’s profitability and product offering in its tourism division, Homex reduced the size of the initial phases, increased the density of the projects and retained a leading U.S.-based firm that specializes in high-end properties in Mexico to undertake all sales efforts.  Overall, we retain a positive outlook for this division in 2011, as Mexico becomes a top destination for Americans living outside the U.S.

 

Our Relationship with Equity International Properties, Ltd.

 

Beginning in 2002, EIP became a major investor in Homex. However, EIP has been reducing its ownership position in the Company. On February 1, 2008, EIP sold 5.1% (17.1 million common shares) of Homex common stock to the de Nicolás family, who are Homex’s founders. On April 25, 2008, pursuant to the liquidation plans for EIP’s investment fund, EIP decided to sell the remainder of its stake in Homex, and sold approximately 11.0 million common shares in private transactions. As of June 29, 2011 EIP had no ownership interest of the Company’s common shares.

 

Homex’s Information Sharing Project with INFONAVIT

 

Homex has implemented an electronic file capture system with INFONAVIT which enables the Company to upload customer information to INFONAVIT’s webpage directly from Homex’s sales offices. Through this system, the Company is able to directly upload customers’ mortgage files to create a more expedited mortgage authorization process for its clients. The Company will also realize significant process efficiencies including a faster collection process from INFONAVIT.

 

Fovissste’s Factoring Program with “NAFINSA”

 

During the third quarter of 2009, FOVISSSTE implemented a factoring program with Mexico’s National Development Bank Nacional Financiera, S.N.C. or “NAFINSA”, which provided FOVISSSTE with a funding source to complement its housing programs. Pursuant to this program, Homex is able to collect payments directly from NAFIN at an average 4% discount rather than following the regular payment process from FOVISSSTE. Homex is among the first home developers in Mexico to benefit from participation in this program. The Company will continue to work closely with FOVISSSTE in connection with this program, which will help Homex to realize important efficiencies in the collection process with this entity.

 

Business Strengths

 

Standardized Business Processes

 

We have developed and refined scalable and standardized business processes that allow us to enter new markets rapidly and efficiently.  We have designed proprietary information technology systems that are intended to integrate and monitor our operations, including land acquisition, construction, payroll, purchasing, sales, quality control, financing, delivery, and maintenance.  Our systems connect every one of our branch locations and help us monitor and control the home building process, administer our customer relations, and oversee the financing process for our customers. This standardized model drives our growth, geographic diversification, and profitability, and is an integral component of our culture. During 2009, our proprietary information technology systems were successfully implemented at our pilot project at Sao Jose dos Campos, Brazil. The replication of our business model is strongly supported by our integrated and proprietary IT system, which strategically supports sales and construction and monitors both in real-time, helping us to attain more efficient and timely working capital management. Our proprietary IT platform is used and adapted to each of our divisions and projects.

 

Efficient Working Capital Management

 

Our standardized processes allow us to time the construction and delivery of our homes and payment to our suppliers efficiently, which has allowed us to reduce our borrowing needs and minimize working capital requirements.  We do not commence construction on a development stage until prospective buyers representing at least 10% of the planned number of homes in that stage have qualified to receive mortgage financing and until December 31, 2009 we did not recognize revenue on a given home until all the criteria under the percentage-of-completion method had been met.  We seek to maintain a construction period of less than 10 weeks for affordable entry-level housing and less than 16 weeks for middle-income housing by using our systems to maximize the efficiency of our standardized methods. This process allows us to maximize our working capital by minimizing overhead costs and coordinating payables with receivables, which reduce our borrowing needs, minimizing our costs.

 

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Geographic Diversification

 

We believe that we are one of the most geographically diversified housing development companies in Mexico. As of December 31, 2010, our operations included 140 developments in 34 cities located in 21 Mexican states, which represent 78% of Mexico’s population, according to the Mexican Institute of Statistics, Geography and Computer Sciences, or “INEGI” (Instituto Nacional de Estadistica, Geografia e Informática). Many of our developments are located in markets where none of our major competitors currently operate.  In 2010, 18% of our revenues originated in Mexico City, the largest city in Mexico, and 10% in the state of Jalisco.  The remaining revenues originated in 32 other cities.  We believe that this geographic diversification reduces our risk profile as compared to our less-diversified competitors.

 

Experienced and Committed Management Team

 

Eustaquio Tomás de Nicolás Gutiérrez, our Chairman, co-founded Homex’s predecessor in 1989, and Gerardo de Nicolás Gutiérrez, our CEO, joined us in 1993.  Our senior management team is comprised of executives with an average of 17 years of experience in their respective areas of responsibility.  Senior management owns an aggregate of approximately 23.76% of our common shares. Consistent with our standardized business processes and geographic diversification, we delegate significant managerial responsibility to our seasoned team of branch managers. Upon completion of a development, we typically relocate our branch managers to another development in order to capitalize on their significant experience.

 

Focus on the Affordable Entry-Level Segment

 

Our affordable entry-level segment continues to succeed primarily due to the availability of mortgage financing provided by the main mortgage suppliers in Mexico. In 2010, INFONAVIT and FOVISSSTE provided mortgage financing for 475,072 and 91,050 mortgages throughout Mexico, respectively.  Additionally, we continue to experience high demand for affordable entry-level homes in Mexico due to the large deficit of housing stock, a growing young population, high rates of urban growth, new household formation, and a decreasing number of occupants per home. In Mexico, 84.5 percent of the population earns a monthly income of approximately Ps.5,000 and we believe that an entry-level home valued at Ps.338,000 is an affordable option for this population.  Our focus and expertise in the affordable entry-level segment has enabled us to increase our market share. As of December 31, 2010, our market share in the affordable entry-level segment had remained relatively stable at 31.3% compared to 32.2% during the previous year.  In addition, 67.6% of revenues during 2010 fell into the affordable-entry level category.

 

Business Strategies

 

Maintain a Conservative Financial Position

 

We operate our business with the goal of reducing our exposure to interest rate and financing risk.  We begin construction only when an approved homebuyer has qualified for a mortgage and, if applicable, made a down payment, thereby reducing our working capital needs.  We believe the resulting financial flexibility enhances our ability to respond quickly to market opportunities and lessens any negative effects that might result from a downturn in the economy.

 

Strategic Growth in Tourism Housing

 

On February 7, 2008 the Company announced plans to strengthen its position in the tourism market.  The Company plans to achieve this goal by developing communities in key tourist destinations within Mexico targeted to potential customers in the United States and Canada.  See “—Our Products.”

 

The first stage of development includes launching sales of two “Las Villas de Mexico” developments in the cities of Cancún and Los Cabos. These private communities, with superior product and service offerings, will reflect the architecture and culture of Mexico adapted to the customs and living traditions of our target markets.  The developments will include residential villas, townhouses, and apartments.

 

Initially we decided to curtail development of our tourism division due to the impact of the economic slowdown in the United States and Canada during 2008 and 2009.  During the later part of 2009, Mexico became more attractive to foreigners and demand in the tourism segment increased slightly as a result in part of the sharp decline in the value of the Peso compared to the U.S. Dollar, Canadian Dollar and Euro during the final quarter of 2008.  During 2010, demand for the tourism segment showed improvements as a result of a sustained although slow recovery in the United States and Mexican economies.  In 2010, Homex acquired real estate in Loreto, Baja California Sur, which we intend to develop as either apartments or townhouses. As of December 31, 2010 the Company

 

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had recognized revenues from its tourism operations of Ps.64,931. As of December 31, 2009 the Company had signed applications for ten units at its Los Cabos project, however no revenues were recognized during that year.

 

Maintain Appropriate and Balanced Land Reserves

 

Our ability to identify, acquire and improve land is critical to our success.  Because the success of our operations depends, among other things, on managing our land reserves efficiently, we continually review our portfolio and seek new development opportunities.  As of December 31, 2010, the Company had land inventory for 5.4 years of future home deliveries by pursuing land investment opportunities.  For 2011, we anticipate minimizing investments by following a conservative replacement strategy for land bank acquisitions.  We target having an average land inventory equal to 2 to 3 years of future home deliveries.

 

We generally purchase large parcels of land in order to amortize our acquisition and infrastructure costs over a large number of homes, minimize competition, and take advantage of economies of scale. We had total land reserves under title of approximately 82.3 million square meters, as of December 31, 2010, which include primarily land reserves in Mexico and approximately 2.7 million square meters of land reserves for our operations in Brazil. We estimate we could build approximately 366,680 affordable entry-level homes, approximately 29,680 middle-income homes and approximately 2,230 homes targeting the tourism market on our land reserves.

 

Continue to Build and Contribute to Successful Communities

 

We seek to foster brand loyalty by enhancing the quality and value of our communities through building spaces for schools, day-care facilities, parks and churches, and by providing other social services to residents of the housing we develop.  We are committed to fulfilling our customers’ needs by responding to and meeting their demands.  In 2008, we responded to our clients’ needs by launching a customization program that allows our clients to choose from a full array of custom options, adding a personal touch to clients’ homes.  At the same time, we seek to become the best employer to our employees through training and educational opportunities.  We seek to hire and retain talented employees and invest in training our workforce at all levels by offering programs such as middle-school equivalency courses for our construction laborers.  We are committed to becoming the best customer to our suppliers by offering various payment alternatives and opportunities for cooperative growth, and through our factoring structure and other initiatives, including electronic ordering and payment systems.  We believe that these factors make us a preferred home builder, employer and customer and ultimately enhance our overall business.

 

During 2010, we continued with the expansion of our Homex Community concept initially launched in 2008. The Homex Community is an initiative designed to improve the urban planning of our communities to offer our customers integrated communities attractive to a younger population. We believe a younger demographic prefers to live closer to the city, in an environment where families can enjoy a living experience that promotes social interaction and shopping, and where services and entertainment are convenient. The Homex Community is a concept for constructing cities which apply modern urban development models, as well as innovative techniques for social development, primarily focused on improving the quality of life and enhancing home and project appraisal. Homex Communities include commercial areas, special and general services and recreational spaces that facilitate social interaction.

 

In addition, Homex Communities follow CONAVI and INFONAVIT initiatives designed to promote green  homes and orderly urban planning through increased project density resulting from vertical construction. As of year-end 2010, vertical prototypes represented approximately 30 percent of total Homex homes under construction. We believe  we are one of the first developers to actively implement vertical prototypes in many Mexican cities, which has helped us drive sales. As a result, and based on our ongoing efforts to engage our customers in dialogue concerning the future of their communities, we believe the aforementioned community initiatives and improved building practices are tailored to our customers’ specific needs.

 

Mold Construction System

 

The Company employs cutting-edge construction technology based on aluminum molds that it has uses in some, but not all, of its projects.  This technology has improved the efficiency of the construction process.  Among the advantages of the molds are:

 

·                  shorter construction time;

 

·                  better quality and reduced reprocessing;

 

·                  the ability to re-use the same mold for several prototypes of homes, with an estimated life of 2,000 usages per mold;

 

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·                  versatility, because it permits construction ranging from simple floors to apartment buildings using the same system;

 

·                  labor savings;

 

·                  compatibility among international suppliers;

 

·                  eco-friendliness because, unlike traditional construction methods, mold construction does not utilize timber and therefore reduces our carbon footprint and the impact of our operations on deforestation; and

 

·                  durability, due to the use of concrete.

 

During the year ended December 31, 2010 we used this technology in the construction of 36,160 homes.  The Company intends to continue using this technology in the future.

 

Our Markets

 

We operate in geographically diverse markets throughout Mexico, from Tijuana in the north to Tuxtla in the south, including 140 developments in 21 states and 34 cities as of December 31, 2010, which states represent 78% of Mexico’s population, according to INEGI. For the year ended December 31, 2010, 18% of our revenues originated in Mexico City Metropolitan Area, the largest city in Mexico, and 10% in the state of Jalisco. The remaining revenues originated in 31 other cities.  As a diversified homebuilder, our national footprint covers: (i) capital cities, where we benefit from a stable demand from government employees; (ii) industrial cities, including Puebla, Monterrey, Guanajuato, Saltillo and Chihuahua, where we benefit from Mexico’s export-oriented economy; and (iii) tourism and service-oriented cities.  During 2010, México’s service sector accounted for 60.8% of the country’s GDP, as the industry employs approximately 42.1% of the active population.  Our geographic diversity within Mexico has enabled the Company to mitigate our risk exposure to any one region.

 

We seek to continue operations in markets where we have a strong presence and to expand into underserved markets where demand for housing is high. However, we do not anticipate expanding into any new markets in Mexico during 2011. Rather, we intend to take a conservative approach and focus on consolidating our presence in the markets where we have existing operations.

 

During 2009, the Company initiated operations in Brazil with the construction of a 1,300-unit affordable entry-level development in Sao Jose dos Campos, northeast of Sao Paulo and as of December 31, 2010 we had three projects under construction equivalent to approximately 6,000 homes in the cities of Sao Jose dos Campos, Marilia and Campo Grande.

 

Total Homes Closed

 

The following table sets forth information on our historical sales by country and state. During 2008, 91.5% and 8.5% of the homes we closed were affordable entry-level and middle-income, respectively, during 2009, 92.4% and 7.6% of the homes closed were affordable entry-level and middle-income, respectively, and during 2010, 89.2% and 10.8% of the homes closed were affordable entry-level and middle-income, respectively.

 

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In 2010 and 2009, the Company recognized revenues outside Mexico in connection with 282 and 13 affordable entry-level homes, respectively, in Sao Jose dos Campos, northeast of Sao Paulo, Brazil.

 

Presented below is a summary of homes closed:

 

 

 

Years Ended December 31,

 

 

 

2010

 

2009

 

2008

 

 

 

Affordable
entry-level

 

Middle-
income

 

Affordable
entry-level

 

Middle-
income

 

Affordable
entry-level

 

Middle-
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

 

 

 

 

 

 

 

 

 

 

 

 

Baja California

 

2,797

 

419

 

3,648

 

206

 

1,081

 

235

 

Baja California Sur

 

2,899

 

71

 

1,168

 

131

 

2,030

 

193

 

Chiapas

 

974

 

104

 

1,427

 

232

 

2,305

 

249

 

Chihuahua

 

650

 

36

 

98

 

58

 

365

 

105

 

Coahuila

 

2,295

 

 

1,490

 

30

 

8

 

 

Durango

 

746

 

 

1,318

 

 

 

 

Guanajuato

 

235

 

287

 

1

 

134

 

535

 

97

 

Estado de Mexico

 

7,926

 

722

 

13,919

 

898

 

10,237

 

978

 

Guerrero

 

23

 

413

 

333

 

72

 

1,364

 

210

 

Hidalgo

 

48

 

252

 

 

1

 

 

99

 

Jalisco

 

5,680

 

323

 

4,608

 

526

 

5,797

 

440

 

Michoacán

 

768

 

136

 

811

 

15

 

854

 

272

 

Morelos

 

839

 

312

 

936

 

164

 

 

 

Nuevo Leon

 

4,354

 

616

 

5,205

 

255

 

4,790

 

63

 

Oaxaca

 

 

 

 

 

 

 

Puebla

 

1,427

 

 

1,945

 

 

1,104

 

7

 

Querétaro

 

1,109

 

 

1,125

 

 

1,226

 

 

Quintana Roo

 

1

 

584

 

81

 

265

 

339

 

 

Sinaloa

 

913

 

135

 

1,114

 

62

 

1,621

 

130

 

Sonora

 

1,057

 

116

 

97

 

227

 

718

 

64

 

Tamaulipas

 

330

 

147

 

61

 

56

 

763

 

50

 

Veracruz

 

4,226

 

95

 

3,135

 

151

 

3,288

 

383

 

Subtotal

 

39,297

 

4,768

 

42,520

 

3,483

 

38,425

 

3,575

 

Brazil

 

282

 

 

13

 

 

 

 

Total

 

39,579

 

4,768

 

42,533

 

3,483

 

38,425

 

3,575

 

 

THE MEXICAN HOUSING MARKET

 

We have obtained the following information from public sources, including publications and materials from the Mexican Ministry of Social Development, or “SEDESOL” (Secretaría de Desarrollo Social), the Mexican Population Council, or CONAPO      (Consejo Nacional de Población), INEGI, INFONAVIT, SHF, the Mexican Chamber of Industrial Housing Promoters and Development, or “CANADEVI” (Cámara Nacional de la Industria de Desarrollo y Promoción de la Vivienda), CONAVI (Comisión Nacional de Vivienda) and SOFTEC, S.C. Although we believe our sources and estimates are reliable, we have not independently verified the information or data from third parties and cannot guarantee the accuracy or completeness of such information from third parties or the information and data we have obtained ourselves.

 

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General

 

The housing market in Mexico is influenced by several social, economic, industrial, and political factors, including demographics, housing supply, market segmentation, government policy, and available financing.

 

Demographics

 

National demographic trends drive demand for housing in Mexico. These trends include:

 

·                  sustained growth of a relatively young population;

 

·                  a high rate of new household formation;

 

·                  a high urban area growth rate; and

 

·                  a decrease in number of occupants per home.

 

According to INEGI, Mexico had a population of approximately 112.3 million in 2010 and estimates that this will grow to 113.6 million in 2011. CONAPO estimates that there will be approximately 28.7 million households in Mexico in 2011 and that there will be approximately 29.3 million households by year-end 2012, approximately 32.9 million by year-end 2018 and approximately 34 million by year-end 2020.

 

Mexico experienced a period of particularly high population growth during the 1970s and 1980s. The children born during this boom are contributing to the current increased demand for housing. The target consumer group for our homes is typically between 25 and 50 years old. In 2010, the 20-50 year-old age group represented approximately 49.7 million people or 44.3% of Mexico’s population. CONAPO estimates that by 2020, this age group will represent 44.3 million or 38.0% of Mexico’s population. The size stability of this group is expected to contribute to increased housing demand in Mexico.

 

Housing Supply

 

In 2010, CONAVI’s housing statistics indicated there was a shortage of 8.9 million homes in Mexico. This figure included the need for:

 

·                  1.7 million new homes to accommodate multiple households currently living in a single home and households living in homes that must be replaced; and

 

·                  7.2 million substandard homes in need of extensive repair and possible replacement.

 

CONAVI estimates that the growth of the Mexican population will generate a sustained demand for new homes of at least 550,000 units per year into the near future. To address the immediate shortage of 8.9 million homes as well as the anticipated new demand, the Mexican government committed to financing and/or building at least 1.1 million units in 2011.

 

Instituto de Vivienda del Distrito Federal (“INVI”)

 

INVI is a public, decentralized institution for the public administration in the Federal District (Distrito Federal), legally autonomous with its own working capital; its functions are the design, proposal, promotion, coordination, execution and evaluation of policies and housing programs focused mainly on families with limited economic resources, all of which is regulated within the General Development for the Federal District Program (Programa General de Desarrollo del Distrito Federal) derived from the Housing Law for the Federal District (Ley de Vivienda del Distrito Federal).

 

The mission of INVI is to satisfy the need for housing of families with limited economic resources located in the Federal District through the granting of mortgages for affordable entry-level homes, with the goal of creating 192,544 new housing units in the years 2007-2012. For the year ended December 31, 2010, INVI had granted 2,020 mortgages for new homes, and 8,694 credits for home improvements.

 

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Market Segments

 

In general, Mexico’s developer-built (as opposed to self-built) housing market is divided into four segments according to cost: affordable entry-level, middle-income, residential and tourism. The developer-built housing market includes homes built by contractors and developers, which are generally financed by mortgage providers. These homes are built with official permits, have municipal services, and are located on land that is registered and titled by the homebuyer. Developers must obtain clear title to the land, proper zoning permits and any necessary financing commitments from lenders in addition to installing infrastructure.

 

Mexico’s developer-built housing market is categorized in the table below:

 

Housing Market Segments

 

Segment

 

Cost

 

Size

 

Characteristics

Affordable entry-level

 

Between Ps.195,000 and Ps.540,000 (US$15,749-US$43,613)

 

45 m2-76 m2 (484 sq. ft. -818 sq. ft.)

 

Kitchen; living, dining area; 1-3 bedrooms; 1 bath; parking; titled; all utilities available

 

 

 

 

 

 

 

Middle-income

 

Between Ps.541,000 and Ps.1,885,000 (US$43,694-US$152,241)

 

76 m2-172 m2 (818 sq. ft.-1,851 sq. ft.)

 

Kitchen, family room, living, dining room; 2-4 bedrooms; 2-4 baths; 1-4 parking; service quarters; titled; all utilities available

 

 

 

 

 

 

 

Residential

 

More than Ps.1,885,000 (US$152,241)

 

more than 172 m2 (1,851 sq. ft.)

 

Kitchen; family room; living room; dining room; 3-4 bedrooms; 3-5 baths; 3-6 parking; service quarters; titled; all utilities available

 

 

 

 

 

 

 

Tourism

 

Between US$300,000 and US$950,000

 

Between 1,500 sq. ft. and 2,150 sq. ft.

 

Kitchen; family room; living room; dining room; 3-4 bedrooms; 3-5 baths; 3-6 parking; service quarters; titled; all utilities available

 

Government Policy and Available Financing

 

The size of the developer-built market depends to a great extent on the availability of mortgage financing. Over the last 20 years, Mexico has experienced fluctuations in the availability of mortgage financing, particularly from private sector sources. As a result, the supply of affordable entry-level and middle-income housing has also remained low during this period.

 

During the 1980s, Mexican government policy focused on encouraging investment by the private sector, reducing development costs, and stimulating construction. Mexican Housing Funds provided mortgage loan guarantees and direct payment and savings procedures. In 1994, Mexico experienced an economic crisis that led to the devaluation of the Mexican peso and a steep rise in interest rates. Smaller housing development companies went out of business, and the industry experienced a sharp fall in home sales between 1995 and 1996 due to diminished commercial bank lending.

 

Following the 1994 economic crisis, government policy sought to counterbalance the shortage of available financing and the increases in interest rates that resulted by focusing primarily on providing mortgages and construction financing via Mexican Housing Funds in the affordable entry-level segment. Government funds no longer provided development or sales activities and functioned instead as true savings-and-loan programs. Legislative reforms with regard to community-owned agricultural territories (ejidos), which made it possible to sell these formerly restricted properties, also increased the potential supply of land available for development. During this period, the government authorized the creation of sofoles, which underwrite mortgages with funds and guarantees provided by government agencies, private investment, national, foreign or development bank loans, or through the Mexican capital markets. Furthermore, the government encouraged industry growth and private sector lending by supporting consolidation in the housing development industry.

 

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Between 1997 and 1998, home sales stabilized, growing slightly in 1997 due to improving economic conditions. During 1999 and 2000, mortgage financing increased due to stabilizing economic conditions. The level of available financing has continued to grow as a result of Mexican government policies. President Calderón’s administration’s goal is to finance six million mortgages during his administration. As of 2010, 5.7 million mortgages have been financed since Calderón took office in 2006, satisfying 95% of the administration’s goal. President Calderón’s administration has supported four objectives for the homebuilding industry, as originally set forth by President Fox:

 

·                  make more adequate land available, including infrastructure such as sewage and utilities;

 

·                  increase deregulation of the housing industry;

 

·                  encourage consolidation within the industry; and

 

·                  increase financing opportunities available to qualified homebuyers.

 

In conjunction with these efforts, the Mexican legislature amended existing tax regulations in order to allow individuals to deduct a portion of their mortgage loan interest payments from their personal income taxes beginning in 2003, which the administration expects will lead to increased mortgage financing activity.

 

The Mexican government implemented a new program to meet the housing needs of families in the very low end of the economic spectrum, a sector of the population whose monthly income would otherwise be insufficient for them to be able to afford the lower valued homes in the market.  This program demonstrates the commitment of Mexican federal government to improving the quality of life for families in Mexico by providing affordable housing.

 

The actions taken by President Calderón’s administration to accelerate the housing and mortgage supply in Mexico has resulted in the emergence of an active housing industry supported by solid private and public institutions. The developer-built market has continued to expand due to higher levels of available mortgage financing, especially through Mexican Housing Funds such as INFONAVIT, SHF and FOVISSSTE. According to CONAVI, from 2000 to 2010 mortgage providers in Mexico granted 6,489,487 mortgages, a 12.9% compound annual growth rate from 331,880 in 2000 to 1,142,035 in 2010.  For the year ended December 31, 2010, a total of 1,142,035 mortgages were granted by all public and private entities involved in the Mexican housing market, according to CONAVI.

 

President Calderón has indicated that he will continue to support and promote the housing industry on three main lines: urban development, very affordable housing and home improvement. His administration’s goal is for the Mexican Housing Funds to provide six million mortgages by 2012.

 

In early 2009, the Mexican federal government announced a stimulus bill, the “National Agreement in Favor of Personal Finance and Employment” (Acuerdo Nacional en Favor de la Economía Familiar y el Empleo), that contains assistance for the homebuilding industry. Under the bill, the government increased aid from Ps.5.2 billion to Ps.7.4 billion for a federal housing subsidy program designed to provide assistance to low-income families. In addition, the Mexican federal government, homebuilders and suppliers signed a separate agreement, the “National Housing Program” that confirms the housing industry’s importance to the Mexican economy during the 2008-2009 recession and economic slowdown.

 

Changes in the availability of mortgage financing from government agencies could adversely affect us. See “Item 3. Key Information—Risk Factors—Risk Factors Related to Our Business—Decreases in the Amount of Mortgage Financing Provided by Mexican Housing Funds on Which We Depend, or Disbursement Delays, Could Result in a Decrease in Our Sales and Revenues.”

 

Sources of Mortgage Financing

 

Principal sources providing mortgage financing for Mexico’s housing market are:

 

·                  mortgage providers financed by mandatory employer or member contributions to public funds, including INFONAVIT & FOVISSSTE, serving private and public sector employees, respectively, and;

 

·                  SHF, which provides financing to credit-qualified homebuyers through financial intermediaries such as commercial banks, sofoles and sofomes through funds from the World Bank, the Mexican government, and its own portfolio;

 

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·                  commercial banks and sofoles using their own funds; and

 

·                  direct subsidies from public housing agencies and state housing trusts, including the Mexican Fund for Popular Housing, or “FONHAPO” (Fideicomiso Fondo Nacional de Habitaciones Populares).

 

According to CONAVI, these mortgage providers originated 1,142,035 home mortgages in 2010 from which 845,229 mortgages were granted for new homes.

 

INFONAVIT

 

INFONAVIT was established by the Mexican government, labor unions and private sector employees in 1972 as a social service entity to administer the National Housing Fund for the benefit of private sector employees. INFONAVIT provides financing, primarily for affordable entry-level housing, to credit-qualified homebuyers. INFONAVIT makes loans for home construction, acquisition or improvement, to workers whose individual monthly earnings are generally less than five times the minimum monthly wage. It is funded through payroll contributions by private sector employers on behalf of their employees equal to 5.0% of their employees’ gross wages.

 

Homebuyers qualify for INFONAVIT loans according to a point system whereby points are awarded based on income, age, amount of monthly contributions, and number of dependents, among other factors.  The total loan amount may equal 100% of the cost of a home, up to a maximum of between 300 and 350 times the Salario Mínimo General Mensual del Distrito Federal, the minimum monthly general wage in Mexico City, depending on geographical region.  As of December 31, 2010, the daily minimum wage in the Federal District was Ps.57.46 (US$4.64).  Repayment is calculated based on the borrower’s wages, for a term of up to 30 years, and is made by direct wage deductions by employers.  INFONAVIT generally grants loans at variable annual interest rates, which are indexed to inflation and based on a borrower’s income.

 

INFONAVIT has a program called Apoyo INFONAVIT that is directed at assisting higher-income borrowers obtain mortgage financing. Apoyo INFONAVIT customers can use the amounts contributed via payroll deductions to their INFONAVIT accounts as collateral for mortgage loans held by private sector lenders. In addition, these customers can apply their monthly INFONAVIT contributions toward the monthly mortgage payments owed to private sector lenders.

 

In 2007, INFONAVIT inaugurated a program called Cofinanciamiento, or “Cofinavit”, which is meant to assist high-income borrowers in a manner similar to the Apoyo INFONAVIT program. This new program enables Cofinavit customers to obtain a mortgage loan granted by INFONAVIT in conjunction with a commercial bank or a sofol. In addition, the customers can use their individual contributions in their INFONAVIT accounts as part of the financing or as collateral for the mortgage loan. Apoyo INFONAVIT and Cofinavit do not have a maximum limit on the value of the home to be financed.

 

INFONAVIT also introduced a new program called “INFONAVIT Total” targeted at workers who qualify for the traditional INFONAVIT program.  Through INFONAVIT Total, the loan recipient agrees to a partial assignment of the INFONAVIT mortgage loan to a commercial bank.  The terms of the INFONAVIT Total mortgage loan are substantially equal to the traditional INFONAVIT loan, and INFONAVIT continues to administer and service the loans under this program, yet INFONAVIT shares the funding burden and the economic risks and benefits of the portfolio with the commercial bank participating in the program.

 

In addition, during late 2004 and early 2005, INFONAVIT initiated a mortgage financing system, enabling it to expedite the issuance of mortgages in response to public demand by reducing documentation necessary for initial processing thereby helping it to achieve its year-end goals. In addition, this new system enhances transparency and quality of service in connection with mortgage services.

 

Early in 2009, INFONAVIT launched a guarantee program (Garantía INFONAVIT) designed to provide assistance to borrowers who have lost their job, borrowers who have had their wages decreased, and borrowers suffering economic difficulties due to age or sickness. The program provides mortgage relief to borrowers who have lost their jobs by: (1) allowing for a one-year grace period with no interest or principal payment; (2) providing partial unemployment insurance, where borrowers pay a minimum required payment of 10.64 times the daily minimum wage in Mexico City and receive a 50% discount on their accrued interest payments; and (3) providing a payment protection program, where borrowers pay a minimum fee of 2% of their monthly mortgage and are protected for up to 6 months every 5 years. The guarantee program also provides relief to borrowers who have had their wages reduced by allowing these borrowers to take advantage of mortgage payment reductions of up to 25% monthly, reductions corresponding to the borrowers’ new salary, and other adjustments depending on the borrowers’ individual circumstances.

 

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Additionally, the guarantee program provides assistance to borrowers seeking to prepay their mortgages by offering a 30% discount for prepayment of mortgages entered into prior to July 31, 1995, a 10% discount for mortgages in good standing that are at least two years old.

 

INFONAVIT provided approximately 41.6% of all home mortgage financing in Mexico during the year ended December 31, 2010.

 

INFONAVIT has made a commitment to provide 480,000 new mortgages in 2011. In addition, this agency has agreed to guarantee mortgage loans granted to employees by commercial banks and sofoles in the case of job loss. INFONAVIT expects to continue to modernize its operations and increase available financing by focusing on reducing payment defaults, participating more closely with the private sector, and implementing a voluntary savings program. INFONAVIT has also recently begun securitizing its loan portfolio in order to contribute to the growth of the secondary mortgage market in Mexico and expand its available sources of funds.

 

The forecasted INFONAVIT lending goal for 2011-2015 period has been recently announced as follows:

 

Year

 

Mortgages

 

2011

 

480,000

 

2012

 

490,000

 

2013

 

510,000

 

2014

 

530,000

 

2015

 

555,000

 

 

FOVISSSTE

 

The Mexican government established FOVISSSTE in 1972 as a pension fund on behalf of public sector employees to provide financing for affordable housing. FOVISSSTE obtains funds from Mexican government contributions equal to 5% of public sector employee wages. The Mexican government administers FOVISSSTE similarly to INFONAVIT and permits FOVISSSTE to co-finance mortgage loans with private sector lenders in order to maximize available funds.

 

FOVISSSTE mortgage financing is typically available for housing ranging from the affordable entry-level segment through the lower end of the middle-income segment. Eligible applicants can obtain FOVISSSTE mortgage loans to purchase new or used homes, remodel or repair existing homes, finance construction of self-built homes, and make down payments on homes not financed through FOVISSSTE. FOVISSSTE loans are granted based on seniority within the public sector and allocated on a first-come first-served basis that also takes into account wages, number of dependents, and geographic location. Once the program establishes a number of approved applicants, it allocates mortgage loans by state based on historical demand.

 

FOVISSSTE generally grants loans at variable interest rates, indexed to inflation, for a maximum amount of approximately Ps.803,544 (US$64,898). Repayment is calculated based on the borrower’s wages, for a term of up to 30 years, and is made by direct wage deductions.

 

FOVISSSTE has announced that it is seeking to increase the total number of mortgages it grants.  During 2010, FOVISSSTE granted more than 91,050 mortgages. FOVISSSTE provided approximately 8.0% of all home mortgage financing in Mexico during the year ended December 31, 2010.

 

FOVISSSTE’s forecasted lending goal for 2011 is to grant at least 90,000 mortgages.

 

SHF

 

SHF was created in 2002 as a public sector development bank. SHF obtains funds from the World Bank, the Mexican government, and SHF’s own portfolio and provides financing through intermediaries such as commercial banks and sofoles. In turn, financial intermediaries administer SHF-sponsored mortgage loans, including disbursement and servicing.

 

Traditionally, SHF has been an important source of construction financing for housing developers by providing loans to commercial banks, sofoles and sofomes (which in turn make direct bridge loans to developers). As of September 1, 2004, however, SHF provided funding for bridge loans only for homes with a purchase price of up to UDI 166,667 (approximately Ps.754,386 or

 

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US$60,927 as of December 31, 2010). In lieu of funding bridge loans for homes with a higher purchase price of up to UDI 500,000 (approximately Ps.2,263,154 or US$182,782 as of December 31, 2010), SHF will provide guarantees to support efforts by commercial banks and sofoles to raise capital for the financing of bridge loans to build such homes.

 

In addition, SHF makes financing available to commercial banks and sofoles for the purpose of providing individual home mortgages for affordable entry-level and middle-income homes. Historically, SHF has only financed a total amount equal to 80% to 90% of a home’s value, generally for a maximum of approximately UDI 500,000 (approximately Ps. 2,263,154 or US$182,782 as of December 31, 2010). Beginning in 2005, however, in order to maximize the availability of affordable entry-level mortgages, SHF has replaced its financing of mortgages for homes with a purchase price greater than UDI 150,000 (approximately Ps.678,946 or US$54,835 as of December 31, 2010) with credit enhancements and loan guarantees for commercial banks and sofoles to support their capital-raising efforts for the financing of such individual mortgage loans. In terms of total homes financed, SHF provided approximately 3.5% of all home mortgage financing in Mexico during the year ended December 31, 2010.

 

In connection with its mortgage financing operations, SHF also took an active role in issuing mortgage backed securities (Bonos Respaldados Por Hipotecas or “BORHIS”) as well as market making in these securities during 2010.  In addition, SHF reviews issuances of BORHIS to ensure that they comply with market eligibility requirements and criteria, and provides information and analysis regarding historical information, risk of default, and market evolution concerning BORHIS issuances. By engaging in market-making activities and providing mortgage financing to underserved segments of the population, SHF also provided liquidity to the Mexican housing market. Additionally, SHF has committed to focus its strategy on the promotion of Self-Sustainable Housing Environments (Desarrollos Urbanos Integrales Sustentales) and in the re-population of urban areas.

 

Commercial Banks, Sofoles and Sofomes

 

Commercial banks generally target the middle-income and residential markets while sofoles generally target the affordable entry-level housing market and a portion of the middle-income housing market using SHF financing, and the balance of the middle-income housing market as well as the residential housing market using other sources of funding. Sofoles and sofomes provide mortgage loans to borrowers using funds from securities offerings on the Mexican stock market, loans from Mexican and foreign lenders, their own portfolios, and public agencies such as SHF. They are not allowed to accept deposits from the public.

 

Although commercial banks, sofoles and sofomes provide mortgage financing directly to homebuyers, the financing is commonly coordinated through the home builder. In order to obtain funding for construction, a home builder must submit proposals, including evidence of title to the land to be developed, architectural plans, necessary licenses and permits, and market studies demonstrating demand for the proposed housing. On approval, lenders provide construction financing and disburse funds at each stage of the housing development.

 

Commercial bank, sofol and sofom mortgage loans generally mature in 10 to 30 years, and payments are sometimes adjusted for increases in the monthly minimum wage and rates of inflation.

 

Commercial banks, sofoles and sofomes provided approximately 11.3% of all home mortgage financing in Mexico during the year ended December 31, 2010.

 

Other Public Housing Agencies

 

Other public housing agencies such as FONHAPO, CONAVI and OREVIS (Organismos Estatales de Vivienda), operate at the federal and local levels and target mainly non-salaried workers earning less than 25 times the minimum annual wage, often through direct subsidies. These agencies lend directly to organizations such as state and municipal housing authorities, housing cooperatives, and credit unions representing low-income beneficiaries, as well as to individual borrowers. Financing is made available to both the self-built and developer-built markets. The total amount of available funds depends on the Mexican government budget.

 

Other public housing agencies provided approximately 35.6% of all mortgage financing in Mexico during the year ended December 31, 2010.

 

Competition

 

The Mexican home development and construction industry is highly fragmented and includes a large number of regional participants and a few companies with a more national market presence, including publicly traded companies like Corporación GEO, S.A.B. de C.V., Consorcio ARA, S.A.B. de C.V, SARE, S.A.B. de C.V. and URBI Desarrollos Urbanos, S.A.B. de C.V.

 

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All things considered, we estimate that approximately 1,417 different companies operate new home developments in Mexico. The following table sets forth the approximate operating information of the largest home builders in Mexico with which we compete based on public information and our estimates:

 

Competitor

 

2010 Home Sales

 

2010 Sales
(millions of Ps.)

 

Location in Mexico

 

GEO

 

56,093

 

19,154.4

 

National

 

URBI

 

33,478

 

14,950.7

 

North, Mexico City and Guadalajara areas

 

ARA

 

18,244

 

7,371.0

 

National

 

SARE

 

2,684

 

2,341.4

 

Mexico City region

 

 

Source: Companies’ 2010 fourth quarter financial releases.

 

We believe that we are well-positioned to capture future growth opportunities in the affordable entry-level and middle-income housing segments because of our principal business strengths and strategies, as described above.

 

Seasonality

 

The Mexican affordable entry-level housing market experiences significant seasonality during the year, principally due to the operational and lending cycles of INFONAVIT and FOVISSSTE. The programs, budgets, and changes in the authorized policies of these mortgage lenders are approved during the first quarter of the year. Payment by these lenders for home deliveries is slow at the beginning of the year and increases gradually through the second and third quarters with a rapid acceleration in the fourth quarter. We build and deliver affordable entry-level homes based on the seasonality of this cycle because we do not begin construction of these homes until a mortgage provider commits mortgage financing to a qualified homebuyer in a particular development. Accordingly, we also tend to recognize significantly higher levels of revenue in the third and fourth quarters and our debt levels tend to be highest in the first and second quarters. We budget the majority of our purchases for the second half of the year to coincide with peak cash flows. We anticipate that our quarterly results of operations and our level of indebtedness will continue to experience variability from quarter to quarter in the future. Mortgage commitments from commercial banks, sofoles and sofomes for middle-income housing are generally not subject to significant seasonality. We do not expect significant changes in the overall seasonality of our results.

 

Marketing

 

We conduct advertising and promotional campaigns principally through print media, including billboards, fliers, and brochures designed specifically for the target market, as well as local radio and television. Moreover, we complement these campaigns with additional advertising efforts, including booths at shopping centers and other high traffic areas, to promote open houses and other events. In some locations, we work with the business to business (which allows us to present local employers and other groups with information on our communities to their employees or members) and our massive sales program (which consists in organizing massive events in which the benefits of acquiring a Homex home are explained in a communal recreation gathering, and prospects are contacted). We rely on positive word-of-mouth from satisfied customers for a large percentage of our sales.

 

Sales

 

In general, we make sales either at sales offices or model homes. Using data we gather through our marketing efforts, we open sales offices in areas where we identify demand. As of December 31, 2010, we operated 66 sales offices, one in each of the developments we have established. Similarly, once we have purchased land and planned a development in regions we have identified as underserved, we build and furnish model homes to display to prospective customers. We have sales offices in each of our branches where trained corporate sales representatives are available to provide customers with relevant information about our products, including financing, technical development characteristics, and information about our competitors and their products. We provide the same information through trained corporate sales representatives at model homes. We compensate our sales agents on an exclusively performance-based commission method, typically 2.3% of the total home price.

 

We provide our customers with assistance through our sales departments from the moment they contact us, during the process of obtaining financing, and through the steps of establishing title to their new home. We have specialized sales areas in each of our offices that advise customers on financing options, collecting necessary documentation, and applying for a loan. We also help

 

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to design down payment plans tailored to each customer’s economic situation. Once houses are sold and delivered, our specialized teams are available to respond to technical questions or problems during the two-year warranty period following the delivery.

 

Customer Financing

 

We assist qualified homebuyers in obtaining mortgage financing by participating in all the stages of applying for and securing mortgage loans from housing funds, commercial banks Sofomes and Sofoles.

 

For sales of affordable entry-level homes, the process of obtaining customer financing generally occurs as follows:

 

·                  a potential homebuyer enters into an agreement by signing a purchase application and furnishes the necessary documentation to us;

 

·                  we review the documentation to determine whether all the requirements of the relevant mortgage provider have been met;

 

·                  we create an electronic credit file for each homebuyer and submit it to the relevant mortgage provider for approval;

 

·                  we supervise and administer each client file via our database through all the phases of its processing and arrange for signing the required documentation once approval has been obtained;

 

·                  the homebuyer makes any required down payment;

 

·                  once the home has been completed, the homebuyer signs the deed of transfer of title and the mortgage agreement; and

 

·                  we deliver the home to the homebuyer and register the title.

 

For sales of middle-income homes, the process of obtaining customer financing occurs as above, except that we collect a down payment of between 10% to 25% of a home’s total sale price immediately following the homebuyer’s execution of the purchase application, and the homebuyer signs the deed of transfer of title and the mortgage agreement when the home is at least 95% complete.

 

In all cases, the procedures and requirements for obtaining mortgage financing are determined by the mortgage provider.

 

We have not experienced and do not expect to experience losses resulting from rejections by homebuyers of their purchase applications because we generally have been able to locate other buyers immediately in these cases.  However, we cannot guarantee that we will be able to continue to find replacement buyers in the future.

 

The purchase price of the homes we sell is denominated in pesos and is subject to an upward adjustment for the effects of inflation, except for the purchase price of homes in our tourism division which is denominated in US dollars. In cases where the price of a home is subject to adjustment and increases due to inflation, any difference is payable by the homebuyer.

 

Design

 

Most of the designs that we use in our construction are developed internally. Our architects and engineers are trained to design structures that maximize efficiency and minimize production costs. Our standardized modular designs, which focus on quality and size of construction, allow us to build our homes quickly and efficiently. By allowing our customers to upgrade finishing details on a custom basis after homes are delivered, we experience savings that allow us to build larger homes than our competitors.

 

We use advanced computer-assisted design systems and combine market research data in order to plan potential developments. We believe that our comprehensive design and planning systems, which are intended to reduce costs, maintain competitive prices, and increase sales, constitute a significant competitive advantage in the affordable entry-level housing market. In order to further enhance the residential nature of our communities, we often design our developments as gated communities, install infrastructure for security surveillance, and arrange street layouts to foster road safety. We continue to invest in the development of design and planning construction systems to further reduce costs and continue to meet clients’ needs.

 

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Construction

 

We manage the construction of each development directly, coordinate the activities of our laborers and suppliers, oversee quality and cost controls, and ensure compliance with zoning and building codes. We have developed efficient, durable, and low-cost construction techniques, based on standardized tasks, which we are able to replicate at all of our developments. We pay each laborer according to the number of tasks completed. We generally subcontract preliminary site work and infrastructure development such as roads, sewage and utilities. Currently, we also subcontract the construction of a limited number of multi-unit middle-income apartment buildings in the Mexico City Metropolitan Area.

 

Our designs are based on modular forms with defined parameters at each stage of construction, which are closely controlled by our central information technology systems. Our methods result in low construction costs and high quality products. We use substantially similar materials to build our middle-income homes, with higher quality components for certain finishing details and fixtures.

 

During 2007, the Company acquired cutting-edge construction technology based on aluminum molds; this new technology has improved the efficiency of the construction process. Among the advantages are the shorter construction time; better quality and reduced reprocessing; re-use of the same mold for several prototypes of homes, with an estimated life of 2,000 usages per mold; versatility, because the molds permit construction ranging from simple floors to apartment buildings using the same system; labor savings; compatibility among international suppliers; eco-friendliness because, unlike traditional construction methods, mold construction does not utilize timber; and durability, due to the use of concrete. As of December 31, 2010 we used this technology in the construction of 36,160 homes.

 

Materials and Suppliers

 

We maintain strict control over our building materials through a sophisticated electronic barcode identification system that tracks deliveries and monitors all uses of supplies. In general, we reduce costs by negotiating supply arrangements at the corporate level for the basic materials used in the construction of our homes, including concrete, concrete block, steel, windows, doors, roof tiles, and plumbing fixtures. We take advantage of economies of scale in entering into agreements for materials and services in every situation and seek to establish excellent working relationships with our suppliers. In order to better manage our working capital, we also arrange lines of credit for many of our suppliers through a factoring program sponsored by Nacional Financiera, S.N.C., or NAFINSA, a Mexican government-owned development bank, as well as certain additional financial institutions. We guarantee a portion of the financing provided to some of our suppliers for materials we buy from them during construction and repay these lenders directly with funds received when homes are delivered, which allows us to ensure suppliers are paid on time while minimizing our need to secure construction financing.

 

Our main suppliers include Cemex, S.A. de C.V., Lámina y Placa Comercial, S.A. de C.V., Aceros Turia, S.A. de C.V., Aceros de Toluca, S.A. de C.V., Electroferretera Orvi, S.A. de C.V., Distribuidora Jama, S.A. de C.V., KS Tubería, S.A. de C.V., Prefabricados y Sistemas, S.A. de C.V., Industrial Bloquera Mexicana, S.A. de C.V., Sanitarios Azulejos y Recubrimientos, S.A. de C.V., Mexicana de Laminación, S.A. de C.V., Coacero, S.A. de C.V., Aceros el Arbol, S.A. de C.V., Grupo Forestal el Nayar, S.A. de C.V., Materiales para Construcción los Grandes, S.A. de C.V., Distribuidora de Acero Comercial, S.A. de C.V., Armasel, S.A. de C.V., Distribuidora Tamex, S.A. de C.V., Masonite de México, S.A. de C.V., Termoplásticos del Centro, S.A. de C.V. and Logística Distribución y Servicios, S.A. de C.V.

 

Substantially all of the materials that we use are manufactured in Mexico and are delivered to our sites from the supplier’s local facilities on a time-efficient basis designed to keep low levels of inventory on hand. Our principal materials and supplies are readily available from multiple sources and we have not experienced any shortages or supply interruptions.

 

Labor

 

As of December 31, 2010 we had a total of approximately 23,085 employees, of whom 20,757 were employed in Mexico, 51 were employed in India and 2,277 in Brazil. Our total employees at December 31, 2009 and 2008 were 12,295 and 17,280, respectively.  Approximately 51% of our employees as of December 31, 2010 were administrative and managerial personnel.

 

We hire local labor forces for specific housing developments in each region that we operate in, as well as experienced in-house personnel for supervisory and highly skilled work. We have an efficient information technology system that controls payroll costs. Our systems, using bar-coded identification cards, track the number of tasks completed by each employee according to the

 

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parameters of our modular construction designs, assign salaries according to tasks and homes completed, and award incentives for each stage of the development based on team performance. We also streamline governmental and social security costs for our workforce using a strict attendance control system that captures information fed via our system through workers’ identification cards.

 

We have implemented programs throughout Homex to assist our employees in obtaining elementary and middle-school equivalency degrees. We believe that these programs enhance our ability to attract and retain high quality employees. In 2004, 2005, 2007 and 2008 we were named as one of the top 100 “Great Places to Work” in Mexico by the Great Place to Work Institute, which is based in the United States.

 

As of December 31, 2010, all of our construction employees were members of a national labor union of construction workers. The economic terms of our collective bargaining agreements are negotiated on an annual basis. All other terms and conditions of these agreements are negotiated every other year. We believe that we have an excellent working relationship with our workforce. We have not experienced a labor strike or any significant labor-related delay to date.

 

Customer Services and Warranties

 

The Company holds insurance that covers defects, hidden or visible, during construction and which also covers the warranty period provided by the Company to homebuyers. As mentioned in Note 25 to the Company’s consolidated financial statements, we provide a two-year warranty to all of our customers. This warranty could apply to damages derived either from our operations or from defects in materials supplied by third parties (such as electrical installations, plumbing, gas, waterproofing, etc.) or other circumstances outside our control.

 

For manufacturing defects, we do not recognize a warranty accrual in our consolidated financial statements since we obtain a security bond from our contractors that covers the claims related to the quality of their work. We withhold a guarantee deposit from them, which is reimbursed to our contractors once the warranty for manufacturing defects period expires. Generally, the warranty period lasts for one year after the contractors complete their work and covers any visible or hidden defect. We believe that at December 31, 2010 we had no unrecorded losses with respect to these warranties.

 

Community Services

 

We seek to foster brand loyalty after construction is complete, by strengthening community relations in the developments we build. As part of agreements with potential customers and governmental authorities, we donate land and build community infrastructure such as schools, day-care centers, churches, and green areas, often amounting to 10% to 15% of the total land area of the developments we construct. For a period of 18 months, we also provide for community development specialists to assist in promoting community relations in certain developments by organizing neighborhood events such as competitions for beautiful homes and gardens.

 

Risk Management

 

The Company is exposed both to general entrepreneurial risks and to industry-specific risks. Key areas of exposure are capacity and utilization risks, strategy-related risks, political risks, operational risks, procurement risks, wage policy risks, IT risks and financial and treasury management risks. The Company’s risk management strategy permits the exploitation of business opportunities that present themselves as long as a risk-return ratio in line with market conditions can be realized and the associated risks are an appropriate and sustainable component value creation.

 

Sensible management of entrepreneurial opportunities and business risks is an integral part of the Company’s corporate management and decision-making. Consequently, the Company’s system for the timely detection and management of risk consists of a large number of components that are systematically embedded in the entire organization and operational structure of the Company. There is no autonomous organizational structure; instead, risk management is regarded as a primary responsibility of the managers of all business entities and of the process and project managers in the Company. One of their management responsibilities is to ensure that the staff is also integrated into the risk management system.

 

The Risk Management Committee ensures, on behalf of the board of directors, that risks are identified and assessed continuously across the Company’s many functions and processes. The Committee reports to the board of directors and is responsible for refining and verifying the effectiveness of the Company’s risk management system. The Committee develops the Company’s risk policy and evaluates the Company’s compliance with this policy. In addition, the Committee disseminates the Company’s risk policy,

 

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determines the documentation required to comply with the policy and initiates any reviews of specific aspects of the risk management system that may be necessary by the internal audit department.

 

All major potential risks to the Company’s profitability or continued existence are documented by a risk map. This risk map is regularly updated and extended, where appropriate. Potential interdependencies between risks are duly noted. This measure is designed to ensure that the timely detection, limitation and elimination of these risk systems are regularly reviewed and reinforced.

 

Over and above appropriate insurance solutions, contingency plans tailored to each individual risk situation are in place for the purpose of combating and controlling risks. An analysis of risks, together with the possibilities of limiting and overcoming them, also forms an integral part of the Company’s strategy development process and is incorporated into the Company’s operational planning.

 

Regulation

 

General

 

Our operations are subject to Mexican federal, state and local regulation as a corporation doing business in Mexico. Some of the most relevant statutes, regulations and agencies that govern our operations as a housing development company include the following:

 

·                    the Mexican General Human Settlements Law (Ley General de Asentamientos Humanos), which regulates urban development, planning and zoning and delegates to the Mexico City and state governments the authority to promulgate urban development laws and regulations within their jurisdiction, including the Urban Development Law (Ley de Desarrollo Urbano) of each state where we operate, which regulates state urban development.

 

·                    the Mexican Federal Housing Law (Ley Federal de Vivienda), which coordinates the activities of states, municipalities and the private sector within the context of the housing industry. As in effect, the Federal Housing Law seeks to encourage and promote the construction of affordable entry-level housing.

 

·                    local Building Regulations (Reglamentos de Construcción) and urban development plans promulgated by the states, Mexico City, and local municipalities, which control building construction, establish the required licenses and permits, and define local zoning and land-use requirements.

 

·                    the Mexican INFONAVIT Law (Ley del Instituto del Fondo Nacional de la Vivienda para los Trabajadores), which requires that financing provided by INFONAVIT be granted only to homebuyers of registered developers that participate in public INFONAVIT bidding processes.

 

·                    the Federal Mortgage Society Organizational Law (Ley Orgánica de la Sociedad Hipotecaria Federal), which encourages the development of the primary and secondary home mortgage markets by authorizing SHF to grant home mortgage loans pursuant to the Federal Mortgage Society General Financing Conditions (Condiciones Generales de Financiamiento de Sociedad Hipotecaria Federal), which regulate the general terms and conditions on which these loans may be granted.

 

·                    the Mexican Federal Consumer Protection Law (Ley Federal de Protección al Consumidor), which promotes and protects consumer rights and seeks to establish equality and legal certainty in relationships between consumers and commercial suppliers.

 

Environmental

 

Our operations are subject to the Mexican General Environmental Protection Law (Ley General del Equilibrio Ecológico y la Protección al Ambiente), the Mexican General Waste Prevention and Management Law (Ley General para la Prevención y Gestión Integral de los Residuos), and the related regulations. The Mexican Ministry of the Environment and Natural Resources (Secretaría del Medio Ambiente y Recursos Naturales) and the Mexican Federal Environmental Protection Agency (Procuraduría Federal de Protección al Ambiente) are the Mexican federal government authorities responsible for enforcing environmental regulations in Mexico, including environmental impact studies, which are required for obtaining land-use permits, investigations and audits, as well

 

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as to provide guidelines and procedures regarding the generation, handling, disposal and treatment of hazardous and non-hazardous waste.

 

We are committed to conducting our business operations in a manner that minimizes their environmental impact. Our business processes include procedures that are intended to ensure compliance with the Mexican General Environmental Protection Law, the Mexican General Waste Prevention and Management Law, and the related regulations. In accordance with these laws, we build our homes with aluminum mold metal instead of wooden beams and treat waste water. We plant trees on the land of homes we sell and provide seedlings on land that we donate to our communities. Our internal teams conduct environmental studies for each project and produce environmental reports that are intended to identify environmental issues and assist in project planning in order to minimize adverse environmental effects, such as limiting the felling of trees during the process of urbanizing rural land for use in our developments. Our costs include the cost of complying with applicable environmental regulations. To date, the cost of complying and monitoring compliance with environmental regulations applicable to us has been immaterial.

 

Significant Subsidiaries

 

We are a holding company and conduct our operations through subsidiaries. The table below sets forth our principal subsidiaries as of December 31, 2010 and 2009.

 

 

 

Jurisdiction
 of

 

Ownership
percentage

 

 

 

Name of Company

 

Incorporation

 

2010

 

2009

 

Products/Services

 

Proyectos Inmobiliarios de Culiacán, S.A. de C.V. (“PICSA”)

 

Mexico

 

100

%

100

%

Promotion, design, construction and sale of entry-level, middle-income and upper-income housing

 

Nacional Financiera, S.N.C. Fid. del Fideicomiso AAA Homex 80284

 

Mexico

 

100

%

100

%

Financial services

 

Administradora Picsa, S.A. de C.V.

 

Mexico

 

100

%

100

%

Administrative services and promotion related to the construction industry

 

Altos Mandos de Negocios, S.A. de C.V.

 

Mexico

 

100

%

100

%

Administrative services

 

Aerohomex, S.A. de C.V.

 

Mexico

 

100

%

100

%

Air transportation and lease services

 

Desarrolladora de Casas del Noroeste, S.A. de C.V. (DECANO)

 

Mexico

 

100

%

100

%

Construction and development of housing complexes

 

Homex Atizapán, S.A. de C.V.

 

Mexico

 

67

%

67

%

Promotion, design, construction and sale of entry-level and middle-income housing

 

Casas Beta del Centro, S. de R.L. de C.V. (1)

 

Mexico

 

100

%

100

%

Promotion, design, construction and sale of entry-level and middle-income housing

 

Casas Beta del Norte, S. de R.L. de C.V.

 

Mexico

 

100

%

100

%

Promotion, design, construction and sale of entry-level housing

 

Casas Beta del Noroeste, S. de R.L. de C.V.

 

Mexico

 

100

%

100

%

Promotion, design, construction and sale of entry-level housing

 

Hogares del Noroeste, S.A. de C.V. (2)

 

Mexico

 

50

%

50

%

Promotion, design, construction and sale of entry-level and middle-income housing

 

Opción Homex, S.A. de C.V.

 

Mexico

 

100

%

100

%

Sale, lease and acquisition of properties

 

Homex Amuéblate, S.A. de C.V.

 

Mexico

 

100

%

100

%

Sale of housing-related products

 

Homex Global, S.A. de C.V. (3)

 

Mexico

 

100

%

100

%

Holding company for foreign investments

 

Sofhomex, S.A. de C.V. S.F.O.M. E.R.

 

Mexico

 

100

%

100

%

Financial services

 

Nacional Financiera, S.N.C. Fid. del Fideicomiso Homex 80584

 

Mexico

 

100

%

100

%

Employee stock option plan administration

 

 

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HXMTD, S.A. de C.V.

 

Mexico

 

100

%

100

%

Promotion, design, construction and sale of upper-income tourism housing

 

Homex Central Marcaria, S.A. de C.V.

 

Mexico

 

100

%

100

%

Administration of industrial and intellectual property

 

Homex Infraestructura, S.A. de C.V. (4)

 

Mexico

 

100

%

%

Design and construction service for public or private services

 

CRS Morelos, S.A. de C.V. (4)

 

Mexico

 

100

%

%

Construction services to government

 

CT Prop, S. de R.L. de C.V. (5)

 

Mexico

 

100

%

%

Promotion, design, construction and sale of tourism housing

 

CT Loreto, S. de R.L. de C.V. (5)

 

Mexico

 

100

%

%

Promotion, design, construction and sale of tourism housing

 

 


(1)                      Casas Beta del Centro, S. de R.L. de C.V. (“CBC”) owns 100% of the outstanding stock of Super Abastos Centrales y Comerciales, S.A. de C.V. and 50% of the outstanding stock of Promotora Residencial Huehuetoca, S.A. de C.V. (“Huehuetoca”), which are engaged in the promotion, design, construction and sale of entry-level housing. Huehuetoca is fully consolidated in accordance with MFRS B-8, Consolidated or Combined Financial Statements, since the Company has control over this subsidiary. Through October 20, 2009, CBC owned 100% of the outstanding stock of Comercializadora Cántaros, S.A. de C.V. That company was sold to a third party on that date.

 

(2)                      Hogares del Noroeste, S. A. de C.V. is a 50% owned and controlled subsidiary of Desarrolladora Homex, S.A.B. de C.V., which is engaged in the promotion, design, construction and sale of entry-level and middle-income housing. This entity is fully consolidated in accordance with the guidance included in Bulletin B-8 Consolidated and Combined Financial Statements and Valuation of Permanent Investments, since the Company has control of this subsidiary.

 

(3)                      Homex Global, S.A. de C.V, (“Homex Global”) owns the outstanding stock of the following companies:

 

(a)          Effective March 2008, Homex Global owns 100% of the outstanding stock of Homex India Private Limited, a subsidiary located in India and that is to perform the construction and development of entry-level and middle-income housing in India. This company had no significant operations during 2008, 2009 and 2010.

 

(b)         Effective September 2007, Homex Global owned 15% of the outstanding stock of Orascom Housing Communities “S.A.E.”, a company located in Cairo, Egypt that performs the construction and development of entry-level and middle-income housing in Egypt. Pursuant the application of MFRS C-7, Investments in Associates and Other Permanent Investments, effective January 1, 2009, this company was no longer considered an associate but another permanent investment. On December 31, 2009 the Company sold its total investment in this company to a third party.

 

(c)          Effective February 2008, Homex Global owns 100% of the outstanding stock of Desarrolladora de Sudamérica, S.A. de C.V., a Mexican company that had no operations from 2008 to 2010.

 

(d)         Effective November 2008, Homex Global owns 100% of the outstanding common stock of Homex Brasil Incorporacoes a Construcoes Limitada (“Homex Brasil”), through its subsidiaries Éxito Construcoes e Participacoes Limitada and HMX Empreendimentos Imobiliarios Limitada. Through twenty three subsidiaries, Homex Brasil performs construction and development of entry-level housing in Sao Paulo, Brazil. During 2009, Homex Brasil started operations in Brazil with a 1,300-unit affordable entry-level development in Sao Jose dos Campos, northeast of Sao Paulo. As of December 31, 2010 and 2009 the Company had recognized revenues from its Brazilian operations of Ps. 173,272 and Ps. 7,741, respectively.

 

(4)                  These companies were incorporated in 2010; however, they had no significant operations during 2010.

 

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(5)                  These companies were acquired in 2010. See “Item 4.  Information on the Company—Business Overview—History and Development—Our Products” and Note 4 to our consolidated financial statements. CT Prop, S. de R.L. de C.V. owns 100% of the outstanding stock of CT Commercial Properties, S. de R.L. de C.V.

 

ITEM 4A.       Unresolved Staff Comments.

 

Not applicable.

 

ITEM 5.        Operating and Financial Review and Prospects.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our audited consolidated financial statements and their accompanying notes included elsewhere herein. Our consolidated financial statements are stated in thousands of historical pesos. Other financial information included in this annual report, unless otherwise specified, is also stated in historical pesos. Our consolidated financial statements have been prepared in accordance with Mexican Financial Reporting Standards (“MFRS”), which differ in certain respects from US GAAP as described in Notes 28 through 30 to our audited consolidated financial statements.

 

This annual report contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly in “Forward-Looking Statements” and “Item 3. Key Information.”

 

Critical Accounting Estimates

 

Our consolidated financial statements have been prepared in accordance with MFRS, which require that we make certain estimates and use certain assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Although these estimates are based on our best knowledge of current events, actual results may differ. Our critical accounting estimates are listed below:

 

Revenue and Cost Recognition

 

Pursuant to MFRS, prior to January 1, 2010, we recognized revenues from the sale of homes based on the percentage-of-completion method of accounting, which required us to recognize revenues measured by the percentage of actual costs incurred to total estimated costs for each development and each project.

 

In December 2008, IMFRS 14 was issued by the CINIF to complement Bulletin D-7, Construction Agreements and Manufacturing of Certain Capital Assets. This Interpretation is applicable to the recognition of revenues, costs and expenses for all entities that undertake the construction of capital assets directly or through sub contractors.

 

Due to the application of this Interpretation, effective January 1, 2010, the Company stopped recognizing its revenues, costs and expenses based on the percentage-of-completion method. At that date, the Company began to recognize them based on methods mentioned in this Interpretation. Revenue and cost recognition will then more closely approximate what is often referred to as a “completed contract method” (or the “deposit accounting method”) in which revenues, costs and expenses should be recognized, when all of the following conditions are fulfilled:

 

·                  the Company has transferred the control to the homebuyer, in other words, the significant risks and benefits due to the property or or the assets ownership;

 

·                  the Company does not retain any continued participation of the actual management of the sold assets, in the usual grade associated with the property, nor does retain the effective control of the sold assets;

 

·                  the revenues amount can be estimated reliably;

 

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·                  it is probable that the Company will receive the economic benefits associated with the transaction; and

 

·                  the costs and expenses incurred or to be incurred related to the transaction can be estimated reliably.

 

The above conditions are typically met upon the completion of construction, and signing by the Company, the customer and (if applicable) the lender the legal contracts and deeds of ownership (escritura) over the property. At that time, the customer would have the legal right to take possession of the home.

 

This Interpretation was adopted as of January 1, 2010, with retrospective application to prior accounting periods presented with these 2010 consolidated financial statements as required by MFRS B-1 Accounting Changes and Error Correction.

 

Pursuant to US GAAP, we apply ASC No. 360.20 for the substantial majority of our revenues. Revenues under US GAAP’s ASC 360.20 are recognized when all the following events occur: a) a sale is consummated; b) a significant initial down payment is received (when applicable); and c) the earnings process is complete and the collection of any remaining receivables is reasonably assured.

 

The principal remaining differences between ASC 360.20 and IMFRS 14 relate to: (1) revenues from FOVI and INVI financial institutions, which are typically recognized for MFRS purposes before they are recognized for US GAAP purposes, since for US GAAP purposes they do not yet comply with one of the ASC conditions above, specifically that a significant down payment is received, that is typically more than 10%, and (2) the deferral and thus recognition on a cash basis for US GAAP of unsecured home-buyer receivables.

 

The remaining variations in the Company’s gross profit and gross profit margin between MFRS and US GAAP principally relate to differences in amounts included in cost of sales.  Under MFRS certain financing costs are included in interest expense that are considered a component of cost of sales for US GAAP.   Furthermore, under both MFRS and US GAAP, certain other financing costs are capitalized and ultimately charged to cost of sales when inventory is sold.  However, the method and amounts capitalized varies between MFRS and US GAAP and can result in varying gross profit margins and thus operating profits.

 

In 2010, revenues under MFRS were Ps.19,652 million while revenues under US GAAP were Ps.19,629 million. In 2009, restated revenues under MFRS were Ps.17,476 million while revenues under US GAAP were Ps.17,616 million. For a further discussion of revenue recognition policies under US GAAP, refer to Notes 28 through 30 to the Company’s consolidated financial statements.

 

Total units closed and recognized as MFRS revenue in 2010 were 44,347 units (46,016 in 2009) compared to 44,277 units closed under US GAAP in 2010 (46,631 in 2009). Total units closed of 44,347 in 2010 represents a 3.6% decrease compared to total units closed in 2009 of 46,016. The decrease is attributable primarily due to the Company’s strategy of focusing on home prototypes in the affordable entry-level and middle-income segment, which produce higher revenue and profit margins. Thus, while the number of units has decreased, resulting revenues and profits have increased.

 

Impairment evaluation of inventories

 

The Company reviews the carrying amounts of its inventories annually or earlier when an impairment indicator suggests that such amounts might not be recoverable. If events or changes in circumstances indicate that the carrying value may not be recoverable an assessment is undertaken to determine whether carrying values are in excess of their net realizable value. Net realizable value is the estimated sales price in the ordinary course of business, less estimated costs for completion and effecting a sale.

 

Net realizable value for development properties is based on internal project evaluations where assumptions are made about the project’s expected revenues and expenses. Valuation of these projects is performed according to lower cost of market principle. If the carrying amount of a project exceeds the net realizable value, a provision is recorded to reflect the inventory at the recoverable amount in the balance sheet. Impairment losses are recognized in the income statement.

 

As of December 31, 2010 and 2009, no impairment was recognized with respect to our inventories.

 

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Income Taxes

 

We recognize deferred tax assets and liabilities based on the differences between the financial statements, carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and, if necessary, establish a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. If these estimates and related assumptions change in the future, we may be required to record a valuation allowance against deferred tax assets resulting in additional income tax expense. Included as a component of our net deferred tax liabilities are tax loss carry-forward assets (“NOL carry-forwards”) of Ps. 3,099,644 (post-tax effected — Ps. 930,107) as of December 31, 2010 related to our operations in Mexico.  We believe that it is more likely than not that such NOL carry-forwards will be ultimately recovered, primarily through the reversal of deferred tax liabilities. Accordingly, no valuation allowance has been recognized against these NOL carry-forwards in our consolidated financial statements, except by NOL carry-forwards mentioned in Note 24 f) to our consolidated financial statements. We also have tax loss carry-forward assets (“NOL carry-forwards”) of Ps. 415,805 (post-tax effected Ps. 141,374  ) as of December 31, 2010 related to our operations in Brazil.  Given the start-up nature of our Brazilian operations, a valuation allowance has been recognized against these NOL carry-forwards in our consolidated financial statements. See Notes 3 and 24 to our consolidated financial statements.

 

On December 7, 2009, a tax reform bill was approved and published which reformed, amended and annulled certain tax dispositions that were effective on January 1, 2010. This new bill reform enacted and income tax rate (Impuesto Sobre la Renta, or “ISR”) effective as follows:  (a) from 2010 to 2012, 30%; (b) for 2013, 29%; and (c) for 2014 and future years, 28%.

 

We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes evident that the tax position is “more likely than not” to not be sustainable upon challenge by the tax authorities.  For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position, and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken.

 

A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction and is generally five years for the countries in which the Company principally operates. The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in our income tax expense in the first period in which: (1) the tax position meets such threshold, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.

 

We have taken certain positions in our annual tax returns which are classified as uncertain tax positions for financial reporting purposes. Specifically, uncertain tax positions currently outstanding relate to our interpretation of the Mexican Income Tax Law (MITLA) related to the inclusion of certain debts in the calculation of the inflation adjustment, and the deduction of land by real estate developers. As of December 31, 2010 and 2009, uncertain tax positions resulted in Ps. 604,139 and Ps. 421,843, respectively,  in deferred tax assets which had been provided for through a full valuation allowance, and an additional current liability in the amount of Ps. 775,946 and Ps. 248,781 in our consolidated financial statements, respectively.

 

OPERATING RESULTS

 

The following table sets forth selected data for the periods indicated, stated in nominal pesos. The table also sets forth the data as a percentage of our total revenues:

 

 

 

2010

 

2009 (restated)

 

2008 (restated)

 

 

 

(in thousands of Mexican pesos (Ps.))

 

MFRS:

 

 

 

 

 

 

 

Revenues

 

Ps.

19,652,309

 

Ps.

17,476,489

 

Ps.

14,725,828

 

Cost of sales

 

13,727,484

 

12,285,836

 

10,356,329

 

Gross profit

 

5,924,825

 

5,190,653

 

4,369,499

 

Selling and administrative expenses

 

2,980,379

 

2,471,680

 

2,303,402

 

Income from operations

 

2,944,446

 

2,718,973

 

2,066,097

 

 

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Other (expenses) income, net

 

(142,765

)

5,320

 

(140,238

)

Net comprehensive financing cost (1)

 

314,742

 

148,511

 

508,673

 

Income tax expense

 

906,997

 

994,389

 

456,256

 

Net income

 

Ps.

1,579,942

 

Ps.

1,581,393

 

Ps.

960,930

 

 

 

 

(as a percentage of sales)

 

MFRS:

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

Cost of sales

 

69.9

%

70.3

%

70.3

%

Gross profit

 

30.1

%

29.7

%

29.7

%

Selling and administrative expenses

 

15.2

%

14.1

%

15.6

%

Income from operations

 

15.0

%

15.6

%

14.0

%

Other (expenses) income, net

 

(0.7

)%

0.0

%

(1.0

)%

Net comprehensive financing cost

 

1.6

%

0.8

%

3.5

%

Income tax expense

 

4.6

%

5.7

%

3.1

%

Net income

 

8.0

%

9.0

%

6.5

%

 


(1)                    Represents interest income, interest expense, foreign exchange gains and losses and valuation effects of derivative instruments.

 

Results of Operations for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009 - MFRS

 

Revenues

 

Total housing revenues in 2010 increased 7.4% to Ps. 18,465.2 million from Ps. 17,198.7 million in 2009, driven by higher average prices in the affordable-entry level segment and increased volume in the middle-income segment. Affordable entry-level homes (including our operations in Brazil) represented 67.6% of total revenues in 2010 compared to 78.9% in 2009.  Middle-income homes represented 26.3% of total revenues in 2010 compared to 19.5% in 2009.  In 2010, other revenues increased to Ps.1,187.0 million, compared to Ps.277.7 million in 2009. The increase is primarily a result of construction service contracts we entered into with the Mexican Federal Government.

 

Units closed in 2010 decreased 3.6% to 44,347 homes, from 46,016 homes in 2009 primarily due to the Company’s strategy of focusing on home prototypes in the affordable entry-level and middle-income segment, which produce higher revenue and profit margins. Thus, while the number of units closed has decreased, resulting revenues and profits have increased. Affordable entry-level sales volume decreased to 39,579 homes in 2010 or 89.2% of total sales volume compared to 92.4% in 2009. Middle-income sales volume increased 10.8% to 4,768 homes in 2010 compared to 3,483 homes in 2009, reflecting the Company’s strategy of focusing on home prototypes that can be financed through co-financing mortgage programs with INFONAVIT and FOVISSSTE in response to commercial banks providing mortgages that are co-financed by such agencies.

 

Gross Profit

 

Gross profit increased to 30.1% in 2010 from 29.7% in 2009 which includes the effects of MFRS D-6. Pursuant to the application of MFRS D-6, which was implemented in 2007, the Company is required to capitalize a portion of its CFC, which includes interest expense, exchange gains and losses and monetary position gains and losses and to apply capitalized CFC to cost of sales as the related inventory is sold in future periods.

 

During the year ended December 31, 2010, the Company’s capitalized CFC that was applied to cost of sales increased 41.1% to Ps.758.3 million compared to Ps.537.4 million during the same period in 2009 primarily as a result of:

 

·                  a 71% increase in capitalized interest expense to Ps.789.8 million during the year ended December 31, 2010 from Ps.463.1 million as of December 31, 2009, reflecting the 28% increase in total debt in connection with an increased investment in construction-in-process inventory; and

 

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·                  capitalized foreign exchange gain applied to cost of sales of Ps.27.9 million, compared to a loss of Ps.80.2 million during the same period in 2009, reflecting  the appreciation of the Mexican peso relative to the US dollar.

 

Costs of sales increased by 11.7% for the year ended December 31, 2010 to Ps.13,727.4 million from Ps.12,285.8 million for the same period in 2009, due primarily to the increase in the Company’s capitalized CFC.  On a pro-forma basis (without considering the application of MFRS D-6 in 2009 and 2010) Homex’s gross margin in 2010 was 34.0%, compared to 32.8% in 2009. The increase in gross margin was mainly driven by a higher average price in the Company’s affordable-entry and middle-income level segments homes as described under “Revenues” above.

 

Selling, General and Administrative (“SG&A”) Expenses

 

Selling, general and administrative expenses increased by 20.6% to Ps.2,980.3 million in 2010 compared to Ps.2,471.7 million in 2009.  As a percentage of total revenues, SG&A expenses increased to 15.2% in 2010 compared to 14.1% in 2009.  The increase in SG&A was primarily a result of the addition of personnel in Homex’s international and tourism divisions, an expense which was not yet offset by revenue contributions from those divisions.

 

Income from Operations

 

In 2010, income from operations increased by 8.3% to Ps.2,944.4 million compared to Ps.2,718.9 million in 2009. On a pro-forma basis (without considering the application of MFRS D-6), the Company’s operating margin in 2010 increased 21 bps to 18.8% compared to 18.6% in 2009. The higher margin reflects the Company’s increased profitability as a result of higher average prices.

 

Net Comprehensive Financing Cost

 

Net comprehensive financing cost (comprised of interest income, interest expense, foreign exchange gains and losses, valuation effects of derivative instruments and monetary position gains and losses) increased to Ps.314.7 million in 2010 compared to Ps.148.5 million in 2009, substantially as a result of the following:

 

·                  net interest expense increased to Ps.177.2 million in 2010 from Ps.141.5 million in 2009, primarily due to an increase in the Company’s total debt of 28 percent;

 

·                  the Company had a foreign exchange loss of Ps.97.8 million in 2010 compared to a foreign exchange gain of Ps.59.5 million in 2009; and

 

·                  the net valuation effects of financial instruments decreased from Ps.66.4 million in 2009 to Ps.39.6 million in 2010 as a result of the changes in the mark-to-market of the Company’s financial instruments during the year.

 

Foreign Exchange Exposure and Currency Derivatives

 

As of December 31, 2010, Homex’s US Dollar denominated debt consisted of two US$250 million bonds issued in 2005 and 2009 with single principal payments due at maturity in 2015 and 2019, respectively.  In connection with its US$250 million bond maturing in 2015, the Company entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.13.89 per U.S. dollar through 2012.  In connection with its US$250 million bond maturing in 2019, the Company entered into a principal-only swap to hedge the foreign exchange risk associated with the principal amount of this debt at a rate of Ps.12.93 per U.S. dollar through 2019 and at an average weighted cost of 4.39%.  In addition, the Company entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.11.67 per U.S. dollar through 2012.

 

The net valuation effects of financial instruments for the years ended December 31, 2010, 2009 and 2008, were Ps.39,654, Ps.66,451 and Ps.313,962, respectively.

 

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Income Tax Expense

 

Income tax expense decreased by 8.8% to Ps.906.9 million in 2010 compared to Ps.994.3 million in 2009. The effective tax rate was 36% in 2010 compared to 39% in 2009. The decrease in the effective tax rate was attributable to charges recorded in 2009 related to the adoption of a new tax law in Mexico, along with fewer non-deductible tax items in 2010, partially offset by a higher statutory tax rate in 2010.

 

Net Income of controlling interest

 

Net income of controlling interest decreased 3.5% to Ps.1,511.7 million in 2010 compared to Ps.1,565.8 million in 2009, as a result of the factors described above.

 

Results of Operations for the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008 - MFRS

 

Revenues

 

Total housing revenues in 2009 increased 16.9% to Ps.17,198.7 million from Ps.14,715.7 million in 2008, driven both by increased sales volume and higher average prices in the affordable entry-level segment. Affordable entry-level homes represented 78.9% of total revenues in 2009 compared to 76.7% in 2008.  Middle-income homes represented 19.5% of total revenues in 2009 compared to 23.3% in 2008.  In 2009, other revenues increased to Ps.277.7 million, compared to Ps.100.0 million in 2008.  The increase is mainly due to construction service contracts we entered into with the Mexican federal government.

 

Units closed in 2009 increased 9.6% to 46,016 homes, from 42,000 homes in 2008 primarily due to the Company’s focus on affordable entry-level and low-cost products in view of the availability of mortgage financing in this segment through INFONAVIT and others.  Affordable entry-level sales volume increased to 42,533 homes in 2009 or 92.4% of total sales volume compared to 91.5% in 2008.  Middle-income sales volume decreased 2.6% to 3,483 homes in 2009 compared to 3,575 homes in 2008, reflecting the Company’s strategy to reduce its exposure to the middle-income segment in light of economic conditions that affected mortgage financing availability for this segment as well as consumer confidence.

 

Gross Profit

 

Gross profit remained unchanged at 29.7% in 2009 compared to 2008. Pursuant to the application of MFRS D-6, which was implemented in 2007, the Company is required to capitalize a portion of its CFC, which includes interest expense, exchange gains and losses and monetary position gains and losses and to apply capitalized CFC to cost of sales as the related inventory is sold in future periods.

 

During the year ended December 31, 2009, the Company’s capitalized CFC that was applied to cost of sales decreased 18.8% to Ps.537.4 million compared to Ps.662.0 million during the same period in 2008 primarily as a result of:

 

·                  a 39% increase in capitalized interest expense to Ps.463.1 million during the year ended December 31, 2009 from Ps.333.4 million for the year ended December 31, 2008. The increase in capitalized interest expense that was applied to cost of sales was partially driven by the recognition of previous years’ capitalized interest expense on inventory pursuant the application of MFRS D-6 and a 29% increase in the Company’s total debt position in 2009; and.

 

·                  capitalized foreign exchange loss applied to cost of sales of Ps.80.2 million, compared to a loss of Ps.350.9 million during the same period in 2008. The decrease in the loss was a result of the appreciation of the Mexican peso relative to the U.S. dollar during 2009.

 

Costs of sales increased by 18.6% for the year ended December 31, 2009 to Ps.12,285.8 million from Ps.10,356.3 million for the same period in 2008, due to primarily a higher CFC capitalization applied to cost of sales during 2009 as explained above. On a pro-forma basis (without considering the application of MFRS D-6 in 2008 and 2009) Homex’s gross margin in 2009 was 32.8%, compared to 34.2% in 2008. The decrease in gross margin was mainly driven by a decline in the percentage of our total revenues generated from sales of middle-income homes, from 23.3% in 2008 to 19.5% in 2009.

 

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Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased by 7.3% to Ps.2,471.6 million in 2009 compared to Ps.2,303.4 million in 2008. As a percentage of total revenues, SG&A expenses decreased to 14.1% in 2009 compared to 15.6% in 2008. The increase in SG&A was primarily a result of the addition of personnel in our tourism and international divisions, an expense which was not offset by additional revenue contributions from those divisions.

 

Income from Operations

 

In 2009, income from operations increased by 31.6% to Ps.2,718.9 million compared to Ps.2,066.0 million in 2008. On a pro-forma basis (without considering the application of MFRS D-6), the Company’s operating margin in 2009 was stable at 18.6% compared to 18.5% in 2008.

 

Net Comprehensive Financing Cost

 

Net comprehensive financing cost (comprised of interest income, interest expense, foreign exchange gains and losses, valuation effects of derivative instruments and monetary position gains and losses) decreased to Ps.148.5 million in 2009 compared to Ps.508.6 million in 2008, substantially as a result of the following:

 

·                  net interest expense increased to Ps.141.5 million in 2009 from Ps.29.8 million in 2008, primarily due to an increase in the Company’s total debt of 29 percent;

 

·                  the Company had a foreign exchange gain of Ps.59.5 million in 2009 compared to a foreign exchange loss of Ps.164.8 million in 2008, which was caused by the appreciation of the Mexican peso relative to the US dollar; and

 

·                  the net valuation effects of financial instruments decreased from Ps.313.9 million in 2008 to Ps.66.4 million in 2009, partially due to the cancellation of a foreign currency derivative transaction in October 2008 and the fact that certain financial instruments entered into in 2009 qualified for “hedge accounting” treatment, while certain of the Company’s previous financial instruments did not qualify for such accounting treatment.

 

Foreign Exchange Exposure and Currency Derivatives

 

As of December 31, 2009, Homex’s US Dollar denominated debt was mainly limited to two US$250 million bonds issued in 2005 and 2009 with single principal payments due at maturity in 2015 and 2019, respectively.  In connection with its US$250 million bond maturing in 2015, the Company entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.13.89 per U.S. dollar through 2012.  In connection with its US$250 million bond maturing in 2019, the Company entered into a principal-only swap to hedge the foreign exchange risk associated with the principal amount of this debt at a rate of Ps.12.93 per U.S. dollar through 2019 and at an average weighted cost of 3.87%.  In addition, the Company entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.11.67 per U.S. dollar through 2012.

 

The net valuation effects of financial instruments for the years ended December 31, 2009, 2008 and 2007, were Ps.66,451, Ps.313,962 and Ps.(147,977), respectively.

 

Income Tax Expense

 

Income tax expense increased by 117.9% to Ps.994.3 million in 2009 compared to Ps.456.2 million in 2008. The effective tax rate was 39% in 2009 compared to 31% in 2008. The increase in the effective tax rate was attributable to changes recorded related to the adoption of a new tax law in México, along with higher non-deductible tax items in 2009 compared to 2008.

 

Net Income of controlling interest

 

Net income of controlling interest increased 69% to Ps.1,565.8 million in 2009 compared to Ps.926.6 million in 2008, as a result of the factors described above.

 

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Results of Operations —Years Ended December 31, 2009 and 2010 —US GAAP

 

As disclosed in Note 28 to the Company’s consolidated financial statements, until the adoption of IMFRS 14, the primary differences between the Company’s financial statements prepared under MFRS and US GAAP related to revenue and cost recognition for construction projects, although certain smaller differences existed for other accounts. However, pursuant to the adoption of IMFRS 14, the Company’s revenue recognition policy under MFRS is more similar to US GAAP.

 

In 2010, revenues under MFRS were Ps.19,652 million while revenues under US GAAP were Ps.19,629 million.  In 2009, revenues under MFRS were Ps.17,476 million while revenues under US GAAP were Ps.17,616 million.  Revenues under US GAAP’s ASC 360.20 are recognized when all the following events occur: a) a sale is consummated; b) a significant initial down payment is received (when applicable); and c) the earnings process is complete and the collection of any remaining receivables is reasonably assured. Subsequent to the Company’s adoption of IMFRS 14, its revenue recog