Mexican Home Builder
Pays Off for Investors

If Sam Zell is in, it must be good.

That was the attitude last year among many big U.S. investors when the billionaire landlord -- one of the biggest rent collectors on everything from office space to mobile homes -- pitched the initial public offering of stock in a little-known Mexican home builder he had spent two years grooming.

So far, shareholders of Desarrolladora Homex SA have reason to celebrate: The stock's price has risen more than 90% since its IPO, reflecting optimism for Mexico's booming housing market.

Even so, the stock isn't a favorite of money managers who specialize in Latin America. Many doubt the company can achieve enough long-term growth to justify its soaring price. Among the problems they see are uncollected bills, low land reserves and questions about whether the company benefited from weak regulation in a key market.

Indeed, Merrill Lynch pointed out that sales of Homex's more-profitable, middle-class homes were 40% below investor expectations at the end of the third quarter, just three months after the IPO. Merrill, which managed the IPO, last week lowered its rating on Homex to "neutral" from "buy."

"We don't like their valuation," says Jules Mort, who manages Europe's biggest Latin investment fund, the $1.2 billion Threadneedle Latin America Growth Fund, and who recently sold all his Homex shares . He currently is a large investor in two of Homex's chief competitors, Urbi Desarrollos Urbanos SA and Consórcio ARA SA, whose stocks also have risen in the past six months.

The diverging views on Homex reflect a kind of geographic divide. Latin American specialists at Baring Asset Management, AIM Investments, T. Rowe Price and others passed on the Homex IPO and are betting heavily on its competitors. Meanwhile, Homex attracted many investors who rarely are seen south of the U.S. border.

Founded in 1989 by the de Nicolás family, Culiacán, Mexico-based Homex and other low-cost home builders have grown rapidly amid a huge increase in government mortgage lending to the working class. Homex's revenue grew by about 60% in 2004 -- three times the rate of its larger and more-established competitors -- as the company exceeded its annual sales target of 20,000 homes.

Homex's chief executive, Gerardo de Nicolás, said that the company should be able to grow faster than its competitors over the next three years because it is more productive. It uses a proprietary software system to manage construction. Smart cards issued to workers help track how many bricks and other materials are being used. Laborers are paid on the basis of how fast the homes get built, rather than getting a regular hourly wage.

Homex is the only Mexican home builder that trades on the New York Stock Exchange, largely because of Mr. Zell, whose Chicago-based Equity International Group owns a 22% stake. Mr. Zell persuaded Homex to adopt U.S. accounting standards and exhorted top managers to improve their English and start using it during board meetings.

Before the IPO, Mr. Zell pitched the stock to investors during events in Boston and New York, and then personally decided how many shares were distributed among various funds. Mr. Zell's $32 million stake has turned a paper profit of more than $300 million since.

In 4 p.m. composite Big Board trading, Homex's American depositary shares fell 32 cents to $30.48, giving the company a market capitalization of $1.6 billion.

But Homex skeptics say the roaring share price is based on growth projections that will be tough to maintain. For starters, the company has struggled in the market for middle-class homes, which are more lucrative to build and sell than low-end homes.

The middle-class market, almost nonexistent just three years ago, is poised for growth because commercial banks are ramping up lending to borrowers who can afford homes costing $50,000 or more. The banks largely eschew the low-cost housing market, which is financed almost entirely by Mexican federal government lending, whose commitment may fluctuate with the political winds. Homex lost money in 2001 when federal mortgage lending slowed after the presidency changed hands in late 2000.

Homex's large amount of uncollected bills also may be a problem. The company's accounts receivable, a key measure of how efficiently it builds, sells and collects payment on homes, were equal to 60% of total sales at the end of the third quarter, compared with an industry average closer to 40%.

Homex says the hefty accounts receivable are due to its faster growth. But in a capital-intensive industry, the company's critics argue, the unpaid bills could cause Homex to burn through its cash too quickly, eventually stifling growth.

Homex is betting it can grow rapidly even though it only owns enough land parcels to allow for about two years of growth -- less than its chief competitors. In Mexico, buying land and obtaining the proper building permits can take years.

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