There is Life After DebtTue, 11/01/2016 - 11:57
Q: What was behind the jump in Casas GEO’s share price to MX$13 (US$0.68) from MX$5 (US$0.26) in April 2016?
A: The company filed for bankruptcy two years ago, the first large case under the new bankruptcy law. We were subsequently suspended from trading on the Mexican Stock Exchange (BMV) but we worked along with Banorte, one of our main creditors, to restructure all of our bank debt and bonds. The restructuring was approved by the judge with agreements from our creditors and banks. Thanks to Banorte and fund administrator Capital Inmobilario, we received a capital infusion of MX$3.5 billion (US$184 million). At the moment we are restarting all the operations we had. The company’s share prices are the result of a restructuring process that took place in midDecember 2015. Our largest bond worth MX$170 million (US$8.9 million), Geo Met, had to be restructured. After that transaction was announced, the share price overshot, closed and settled in mid-June at MX$9.3 (US$0.48), which is closer to the true value.
Q: What are you doing differently now that you have restructured?
A: We have completely changed our production strategy and reduced our production cycle. Casas GEO positioned itself at one point to be the third largest producer of concrete but can no longer afford to be a fully integrated company like before. We have moved from a totally vertical integration model to outsourcing. Our focus now involves obtaining financing, developing land, supervising construction and selling. In the long run, we want to move closer to cities and higher up in the socioeconomic level for first homes and continue developing our high-quality second-home models. Our company agrees with the government’s decision to stop focusing on volume when it comes to construction projects because those can only be built far away from the city at a reasonable price. The government then ends up spending more capital in the long run by having to build sewage facilities and other basic services.
Starting next year, our goal is to improve our projects when it comes to urban design and other similar details, and be less dependent on subsidies. Our main goals are to reduce debt and produce cash flow. Casas GEO is realistic when it comes to its objectives. In the long term, we should be able to dwell further on segments, geographies and the product itself. In the short term, we need to finish what we started as efficiently as possible. The company will likely not be able to start new projects until 2018. Not only our company but the country in general needs be less dependent on subsidies because this disrupts purchasing power. There is no solution for this yet but the nature of subsidies needs to change to make it feasible to build near cities. In the past, the government had us move out of the city to produce the required volume and this changed the economics of the industry since it demanded infrastructure building. Authorities need to find a solution in which we can purchase land near cities at a reasonable price that will enable us to produce low-income housing.
Q: How has Casas GEO adapted its financial model to address higher mortgage rates?
A: We see mortgage lending rates as a big opportunity because INFONAVIT has stable finances. There is a surplus in terms of mortgages and the financial sector is quite strong with minimal default rates. Mortgage lending rates are relatively low when compared to GDP. Bank balance sheets do not exceed 30 percent, a rate well below international standards. INFONAVIT is starting to pay more attention to how a project’s infrastructure is developed. Projects outside of cities often needed new infrastructure financed by the government or developers to continue. INFONAVIT has been strict but willing to help us with a credit line that is being used to invest in infrastructure gaps. Casas GEO supports INFONAVIT’s Vive program, which helps subsidize projects with a smaller carbon footprint.
Q: How can Casas GEO help reduce the housing deficit?
A: We are kick-starting our projects and staying on track with production and development. Today, we have 25 active projects in 14 states. Casas GEO is renewing its credit lines and should stay on budget. We have over 2,000 houses in production and we are starting to grant titles. We can eventually reach a market share of between 3-4 percent of INFONAVIT subscribers.