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Executives

Vania Fueyo Zarain - Head of Investor Relations and Chairman of Disclosure Committee

Gerardo De Nicolás Gutiérrez - Chief Executive Officer, President, Director, Chairman of Executive Committee, Member of Disclosure Committee, Member of Ethics Committee and Member of Risk Management Committee

Carlos J. Moctezuma Velasco - Chief Financial Officer and Member of Disclosure Committee

Analysts

Denis Parisien - Deutsche Bank AG, Research Division

Vivian Salomon-Karam - Itaú Corretora de Valores S.A., Research Division

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

Aaron Holsberg - Santander, Equity Research

Carlos Peyrelongue - BofA Merrill Lynch, Research Division

Javier Gayol

Rafael C. Pinho - Morgan Stanley, Research Division

Roy Yackulic - BofA Merrill Lynch, Research Division

Alexander Monroy

Desarrolladora Homex, SAB de CV (HXM) Q4 2012 Earnings Call February 27, 2013 10:00 AM ET

Operator

Good morning, ladies and gentlemen. My name is Mel, and I will your conference operator today. At this time, I would like to welcome everyone to the Homex Fourth Quarter 2012 Earnings Results Conference Call. [Operator Instructions] I would now like to pass this call over to your host, Ms. Vania Fueyo.

Vania Fueyo Zarain

Thank you. Good morning, and welcome to the Homex Fourth Quarter and Full Year 2012 Earnings Call.

Before we start, I want to remind you that certain statements made during the course of this conference call about future events and financial results constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. A discussion of factors that may affect future results are contained in our filings with the Securities and Exchange Commission. We undertake no obligation to correct or update any forward-looking statement provided as a result of new information, future events or even changes in our expectation.

On the call with me today are Gerardo De Nicolás, Chief Executive Officer; and Carlos Moctezuma, our Chief Financial Officer.

I will now turn the call over to Gerardo, who will share some thoughts about Homex's strategies and results for each of the company divisions. Following Gerardo's discussion, Carlos will briefly carry you through our fourth quarter financial statement. After a summary remarks from Gerardo, we will take your questions.

Gerardo De Nicolás Gutiérrez

Thank you, Vania, and good morning, everyone, and thank you for joining us on today's call. As I have been doing for the previous quarter, I would like to concentrate my comments on the more relevant events and trends at Homex. And as we have also started a new year, essentially with a new administration in Mexico, I imagine many of you have questions on how things are progressing, as well as our expectations for the full year, and I will also concentrate my remarks here. First, I would like to start with our Mexico Division.

The year 2012 was challenging and the last quarter was no exception. Throughout the year, we faced a number of challenges, which are a reflection of the continuing evolution of the housing industry in Mexico, into one, that is much supportive of better-planned communities that provide for a better quality of life for Mexican families. We are happy to be an integral part of this positive transition. Despite its initial negative financial effect, as we are confident that this is the right path for the long-term positive performance of housing in Mexico. As you may recall, during the first half of the year, we were impacted by some administrative delays in regard to the housing registry system, RUV, and to CONAVI's score system, as well as to the uneven allocation of subsidies between vertical and horizontal homes, where the initial commitment from the past administration was to assign up to 70% of dollar resources for vertical homes, while only approximately 14% was allocated for vertical new homes.

In addition, as you may recall, during the last quarter of the year, there was a commitment to advance resources from the 2013 budget to pay vertical homes from 2012. As resources were [indiscernible], that also affected our collection cycle during the last quarter of the year. During the year, as a strategic consequence of this, we're excited to intentionally slow down our production of homes. During the last half of the year, including the fourth quarter, we concentrated our efforts on finishing homes under construction to materialize our investment in construction in progress, which includes investments in the amenities of our better-planned community, housing starts, as well as the actual buildout of homes in our various development.

Despite our diligence in attempting to improve collections, our collection rhythm was slower-than-expected during the last quarter of the year, as a result of continuing administrative delays in the subsidy program, and also due to the program interruptions inherent to the transition effect during the last quarter of the year. During the quarter, Mexico Division revenues were up by 2.8% year-over-year, boost by revenues from real estate and land sales at our housing development, while housing revenues were down by 1.8% with volumes declining 8.0%. Importantly, on a sequential basis, our volume increased 10.5%, reflecting an improvement in sales despite the fact that during the quarter, we continued to face delays in the allocation of resources from the subsidy program. Delays that as of today, still continue to affect our speed of collection and more importantly, reinvestment rhythm in the construction of new homes.

Here, I would like to share with you our current view for 2013 in our Mexico Division and as well, share our thoughts about the recent announcement made about the national housing policy.

As anticipated in our 2013 guidance published in December 2012, during 2013, we are not planning to grow our operations in Mexico, instead concentrating our energies and efforts in the generation of positive cash flow. Nonetheless, I want to clarify that we continue to see a strong market demand and positive fundamentals in the housing industry. And this is a strategic decision that we're taking to improve our profitability. At the same time, we're certain that this will help us to continue to concentrate on improving the quality of our product offering and our competitive advantage that ultimately, will reflect it in enhanced customer preferences and sales.

Furthermore, during the first week of February, President Enrique Peña Nieto announced new guidelines for the national housing policy that will dictate the housing policies for this new administration. The national housing policy will continue to encourage the creation of sustainable and better-planned communities and the work that we have done here will continue to serve us well. In our view, the main points from the national housing policy are the following: number one, during 2013, there will not be changes to the rules of operation of the industry. However, it's anticipated that changes that will apply in 2014 or 2015 will be announced later this year and we will have a transition period of up to 24 months to adapt to any such changes. Importantly, we do expect greater subsidy support for vertical home construction. Point number two, through the Secretaria de Desarrollo Agrario, Territorial y Urbano (Sedatu), which is headed by Mr. Ramirez Marin, we expect greater coordination among government housing institutions, positively impacting administrative procedures that sometimes cause bottlenecks, and there will also be greater alignment between housing policies and land development policy.

We know that the land bank is a subject of great interest and concern, and I want to highlight here important information in regard to the value, quality and alignment of our land bank to policies that promote closeness to urban centers. From our total land bank as of December 31, 2012, which was equivalent approximately to 75.2 million square meters, at 88 -- 87% of it, we already have projects under construction. Therefore, our land already qualifies as land bank that is close to urban centers that has all the required services. Moreover, such projects under construction have been graded as level S1 or S2.

On the remainder, 13% or 9.5 million square meters, today, we do not have projects under construction. Therefore, that land bank does not have a grade as of today. But let's put more numbers on this analysis. Our land bank at our balance sheet, which is recorded at cost value, as of December 31, 2012, had a value of MXN 10,372 million or MXN 10.3 billion. The land plot that I mentioned, that currently do not have a project under construction, have a value of approximately MXN 241 million or 2.3% of our total land bank value. As you can see, most of our land bank continues to be suitable and aligned to housing policies that promote the creation of communities closer to urban centers. And if we take a worst-case scenario, where we will have to sell our land that today is not well-located, let's say, at a 60% discount, the impact in the value of our land bank will be equivalent to MXN 144 million or 1.4% of the total value of our land, or 0 4.3% of our total assets. The low impact here is also driven by the fact that as this land is less favorably located, its value is naturally much lower. Continuing with the highlights of the national housing policy, a third highlight relates to the reduction of the housing deficit. The new administration has clearly explained their intention to serve formal workers that are not affiliated to INFONAVIT or FOVISSSTE, specifically focusing on formal employees of federal and state government, such as the army, police force and state teachers. The size of these formal workers is about 2.5 million people. Moreover, this is a segment that Homex has explored and served in the past, and we feel very strongly about our opportunity to advantage the company in this respect.

Point number four. Promote the creation of better homes. Sedatu is strongly supporting the creation of homes that at least have 2 living spaces and 2 bedrooms. This is aligned with our improved product offering facilitated by our shift to vertical construction. Today, the apartments that we are building for the affordable entry-levels have more square meters than the comparable home that we used to produce before shifting to vertical products. All in all, the outlook for the industry and for Homex in Mexico continues to be positive and we believe that today we are prepared to take advantage of all the work that we have done during the last 2 years, to adapt, to improve product offerings, through the transition to vertical production and housing projects, with all the required and desirable amenities to improve the quality of life of families in our community. And we are confident that the new administration in charge of housing will provide greater support to homebuilders, such as Homex, who have committed to the creation of better-planned communities.

Moving to our International Division. As reflected in our results, the performance of our operation in Brazil continues to be much slower than we expected. As we have shared with you in the past, we have taken proactive measures to reduce capital flow to this division, and we will continue to follow a conservative path for the division in terms of capital investment and growth expectation. At the same time, we continue to feel confident about our prospects in Brazil, recognizing the continuing strong housing needs in the country especially in the low-income bracket of 3x to 6x minimum wage supported by financing through the Caixa Economica Federal.

Also, I would like to share with you that effective -- as of January 2013, our India project has been postponed and we are currently closing our research and development office that we have at the country. This is a decision that we have taken in line with our focus to concentrate on generating a positive free cash flow in our consolidated operations.

At our Infrastructure Division. As you saw in our quarterly and yearly results, we had an accounting adjustment in relation to the recognition of cost and revenues from the penitentiary. And I will leave that discussion to Carlos. I will concentrate my comments for the division on what we expect for 2013 and beyond.

First, to start with the prisons, as we mentioned in our 2013 guidance, we got an extension from the Public Security Secretary to deliver the projects up to May without any penalty. We are working to deliver the first one, the one located in Chiapas, in March, and the one located in Morelos in May. Therefore, we expect that at Chiapas, we will have approximately 7 months of operations in 2013 and we will operate the Morelos prison for 5 to 6 months during this year.

From a long-term perspective, the value of these projects hasn't changed as we continue to have a 20-year concession where we will receive an annual payment for both prisons of approximately MXN 2.2 billion. As we have mentioned in the past, the added value from these projects to Homex's future cash flow is very positive. Additionally, today, we are also working on monetizing the projects in a medium-term scenario, where different alternatives are under evaluation, our values look very attractive. I also want to share with you that some additional modifications we're working on to further improve the value of the Morelos prison project. Today, we are working with the Public Security Secretary to increase the value of the project as effectively. We have built more square meters than the original plan as per the modifications that we have done in agreement with them. Through this modification, we will be able to withdraw more resources from the long-term financing from another, and more importantly, our annual payment when the operation starts, will potentially increase. We will keep you updated as these positive qualifications are materialized.

Moreover, in the master plan of the Morelos project, we have enough space to increase the capacity for 500 more inmates. We believe there is a good possibility that the government will decide to build up this additional space after the fact that Mexico has an important space deficit in the federal penitentiaries. And of course, it easier, faster and less costly to enlarge an already built prison, than to start a new one. This is a short-term opportunity that we will have for additional contracts in our Infrastructure Division, that we will also potentially increase the annual payment for the concession.

In addition to these concessions, we're also securing on other construction projects with the state governments and for 2013, we expect to have revenues from these projects of up to MXN 2.0 billion. As you can see, we have already gained recognition as a construction company, and this is already opening new doors for us to participate in bids for additional projects during the year. We see our Infrastructure Division as an important contributing and strategic asset for we also take advantage of the greater focus that this new government is already providing to the construction projects in Mexico. We want to be very clear that we are taking a prudent capital policy to participate in new projects.

Today, the projects that we have are initially funded through the downpayment that we received from the government. And as we advance on the execution of the projects, we are paid on a percentage of completion basis. The projects are self-funded with these resources.

Now, I will turn the call to Carlos to discuss our fourth quarter and full year 2012 financial results.

Carlos J. Moctezuma Velasco

Thank you, Gerardo, and thank you, all, for joining us this morning. To benefit those who have already read and analyzed our quarterly release published yesterday and following your very welcome recommendations to improve our communications with you, I will only briefly discuss the main subjects on our quarterly results. Therefore, leaving more time for our question-and-answer session.

In Mexico, during the fourth quarter of 2012, our titled home volumes totaled 13,837 homes, an increase of 8% compared to the fourth quarter of 2011, mainly driven by a 7.7% decline in affordable entry-level collected units. Middle income volume in the fourth quarter of 2012 decreased 11.2% to 1,280 homes, from the 1,442 homes during the fourth quarter of last year. In Brazil, our intention, not to be repetitive, our results continued to be down in relation to the last year and our expectations for the full year 2012. At the same time, the Division generated a negative free cash flow. For the quarter and year, the revenues from the field represented 0.5% of total revenues.

Now moving to our first penitentiary project. As you noticed, we have an accounting effect of a negative contribution from these projects during the quarter, as we decided not to consolidate the Chiapas penitentiary project. As described in our previous filings with the CNBV and the SEC, on March 21, 2012, the company Marindal [ph] the original holder of the Chiapas penitentiary concession amended the Marcovil/Sercolus [ph] agreement. That amendment includes an agreement whereby Homex, who holds 24% of the shares of Marcovil, was granted the right to purchase the remaining 76% ownership interest in Marcovil from Marindal [ph], for a total purchase price of MXN 1.1 billion. Consummation of this purchase, payment of the purchase price and transfer of shares ownership is subject to both the completion of the construction and satisfactory reception of the prison complex by the authorities. When the asset is delivered, and as we have disclosed before, we will have up to 30 months to pay, then the share is being completely transferred to Homex.

As the year ended 2012, the financial statement's closing process started in Homex. We requested from Marcovil additional information in connection with [indiscernible] financial statement. The delivery of such information was delayed and only partially delivered early February 2013. When received, and after an initial assessment of all the available information, the company undertook test controls to determine whether Homex has full control of Marcovil for the 2012 full fiscal year and concluded that it did not.

It's important to highlight that what we have decided on is an accounting treatment for the recognition of the project and this has no effect on our commitment to acquire the project once it is completed and delivered to the authorities. As well, it does not affect the concession contract for 20 years and the flows that we anticipate to receive as the operation starts. After the Sercolus [ph] agreement, our Homex [indiscernible] subsidiary, we are subcontracted by Marcovil as the construction company for the project. Therefore, the executed construction service from Chiapas is recognized as revenue from this subsidiary and is reflected in the Infrastructure Division revenue line, rather than the federal penitentiary's revenue line.

As an effect of this accounting decision, during the quarter, we had negative contribution from the federal penitentiary revenue line, as we are only recognizing revenues from the Morelos project. Revenues from the Infrastructure Division, where we recognize the construction services for the federal and state governments, had the opposite affect, increasing significantly to MXN 3.9 billion due to the recognition of the Chiapas project in this line. It's important to note that from the Chiapas project, Homex is only recognizing construction services, with Homex at an 8% margin, therefore, negatively affecting the 2012 growth margin from the Infrastructure Division and consolidated margin.

On our balance sheet, we are not recognizing the accounts receivable, accounts payable and financing related to the Chiapas project. For the full year, the revenues from penitentiaries were MXN 3.8 billion reflecting the contributions from Morelos project. During the quarter, the advance of the Morelos project was lower-than-expected, as we encountered delays we attributed to the anticipation of the government transition, at the time the former administration needed to close books to the legal office to the coming administration. This affected not only the issuance of the certificates of completion, or CAPS, but our ability to withdraw resources from the [indiscernible] loans and continue advancing with the construction work of the project. As Gerardo already mentioned, we expect the completion of this project in May, while Chiapas is expected to be completed in late March.

Here, I would like to note that our EBITDA margin continues to be lower than our projected margin for this project. Whereas at December 31, 2012, we had a margin of approximately 15%. Our margin is expected to improve, however, as the final works related to technology and finishings are completed.

Overall for the fourth quarter of 2012, revenues increased 21.5% to MXN 7.9 billion from the MXN 6.6 billion in the same period of 2011. For the year, total revenues increased 30.5% to MXN 28.5 billion compared to MXN 21.8 billion during 2011. In terms of profitability, our decision not to consolidate the Chiapas project, as well as the recognition of this project as infrastructure revenue, driving a lower margin, had an impact on our profitability. It is important to clarify that this is an accounting effect-related impact and should not be considered a reflection of a future performance.

Our gross margin for the quarter adjusted by the capitalization of interest was 11.4%. And for the year, 25.6%. Also, I would like to note that in our Mexico Division during the quarter, which had a lower margin derived from the sale of land and commercial space, which implicitly have a lower margin.

During the quarter, we registered MXN 635 million related to these sales. Nonetheless, profitability from home sales has been stable at approximately 30% at the gross margin level. As part of ongoing effects to improve profitability, we have continued to generate efficiencies at the SG&A level. During the quarter, SG&A decreased to 6.7% as a percentage of total revenues, compared to 11% during the year-ago period. For the year, SG&A was 8.7% which compared to 12.7% during 2011. During the fourth quarter of 2012, and something as well from the accounting effects from the penitentiary projects, our consolidated EBITDA margin decreased to 6.2%, which compares to an EBITDA margin of 20.4% during the fourth quarter of 2011. On a 12-month accumulated basis, our EBITDA margin was 18.4%, which compares to 21.6% during the year-ago period.

As we explained last quarter, from the statement of changes that will provide for our free cash flow reconciliation, you can obtain the implicit margins from our operations without the penitentiary projects, which for the quarter was approximately 18.5%. Once again, I want to highlight that this margin is reflecting the construction services recognition at the Chiapas project with a low margin and it's not a reflection of our margin of the Mexico Division. In Mexico, including land and sales of commercial spaces, our EBITDA margin for the year was approximately 23.4%. Net comprehensive financing costs, which excludes capitalized interest recognizing our cost of goods sold, pursuant to bulletin IF 23, were MXN 164 million compared to MXN 262 million in the fourth quarter of 2011. The lower cost of financing during the fourth quarter of 2012 reflects the reversal effect of the interest from the long-term financing in relation to the Chiapas project, as well as from the recognition of a lower foreign exchange loss during the recent quarter compared to the fourth quarter of 2011.

For the year, net comprehensive financing cost was MXN 577 million, compared to MXN 1.1 billion during the year-ago period. Net income adjusted by FX effects for the fourth quarter of 2012 was negative MXN 60 million or a negative 0.8% margin, compared to MXN 153 million and a margin of 2.3% reported in the same period in 2011. On an accumulated basis as of December 31, 2012, net income margin was 6%, compared to 7.5% during 2011, and their performance during the recent period was mainly driven by the disclosed effects, from the decision not to consolidate in full the Chiapas penitentiary project.

Turning now to the balance sheet. During the quarter, our inventory balance increased to MXN 33.3 billion from MXN 32.5 billion as of September 30, 2012. On a yearly basis, our inventory increased by MXN 2.7 billion from MXN 30.6 billion during 2011. This reflects an increase of MXN 3.5 billion in our construction in progress inventory, as a result of the higher level of investments executed during the year in relation to the alignment to better-planned communities, as well from the decision to slow down our construction rhythm due to a longer collection cycle.

During the year, we continued to follow a conservative land investment strategy, and from our budget of MXN 1 billion, we acquired land equivalent to 642 million. Our land balance was MXN 10.4 billion, a reduction of MXN 869 million when compared to the land inventory level of MXN 11.2 billion registered in September 31, 2011.

I want to share with you that we are working on different alternatives to continue to reduce our inventory in Mexico, Brazil and -- our Tourism Division. Our balance of housing/accounting receivables was MXN 4.5 billion or 86 days, up from MXN 2.2 billion as of September 30, 2012, or 42 days. The increase is mainly driven by a longer collection process with the different sources of financing from our customers. We made with [ph] subsidy disbursement as well as the effects of the former administration of the government transition. Our collection procedures was lower-than-expected. Receivables from the Infrastructure Division, and not considering the prison projects, were MXN 1.3 billion, a MXN 100 million reduction when compared to the level as of September 30, 2012. Accounts Payable days, not considering payables from the prison projects, decreased to 88 days from 125 days from September 30, 2012. And also take note, that the MXN 1.1 billion payment in relation to a partnership acquisition at the Chiapas project is not recognized in our financial statements. The payables without land or payables from construction materials, decreased to 71 days compared to 108 days as of September 30, but stable when compared to 72 days business days as of the December 31, 2011.

Quarter by quarter, total housing debt considering the same exchange rate for both periods, increased MXN 17 billion from MXN 16 billion as of September 30, 2012. The MXN 1 billion increase was mainly due to higher receivables and investments reflected in our construction in progress inventory. During the fourth quarter, the company complied with all of its debt covenants. Be reminded that covenant computation do not include the outline contribution from our penitentiary projects or the long-term project financing in connection to the execution of these projects. The long-term project financing for the 12-month accumulated period totaled MXN 2.9 billion, down from the MXN 5 billion as of September 30, 2012, as a result of the decision not to consolidate the Chiapas penitentiary project as previously explained.

Please also note that this financing is in a different line in our balance sheet. I would like to comment and highlight that we do not feel comfortable with our actual levels of debt and that we are working to decrease our leverage. During 2013, our main focus, as Gerardo mentioned, is to improve our profitability, while at the same time reducing our leverage and producing positive free cash flow through the monetization of our accounts receivable, inventory in progress, new strategic assets, as well from our commitment to further reduce SG&A.

Also I want to share with you, that today, we have a good relation with our banks and we're working closely together to strengthen and then do [ph] it. I thank them for their continued support.

Now moving to the free cash flow discussion. As you know since the first quarter of the year, we have separated our free cash flow reconciliation to facilitate the analogies of the performance of Homex apart from the penitentiary project. As of December 31, 2012, and as a result of the accumulated -- of the cumulative FX gain of the peso against the U.S. dollar, the company's statement of changes in financial position, which we have historically presented as free cash flow, reflected the booking of noncash items. As of December 31, 2012, we had a total noncash positive impact of MXN 239 million, including the peso raised during the -- in the P&L statement and balance sheet. Considering noncash FX effect, on a consolidated basis, we generated a negative free cash flow of MXN 6.4 billion, which was driven by the recognition of the advances in construction from the penitentiary project. According to the required accounting treatment for these projects, such as advances must be booked as accounts receivable. Outside of our penitentiary project, Homex generated negative free cash flow of MXN 2.7 billion and adjusted for the 12-month accumulated noncash foreign exchange gain, our free cash flow was negative MXN 3 billion.

During the quarter, the company generated a negative free cash flow of MXN 2.5 billion from a negative balance of MXN 522 million raised as of September 30, 2012, a level that also includes the FX adjustments and the recognition of the accounts payable from the acquisition of the Chiapas penitentiary project. The negative cash generation, as I have previously mentioned, was driven by the increase in our accounts receivable and investments in construction in progress, as well as by a lower level of accounts payable.

Now I will turn to Gerardo for some final remarks.

Gerardo De Nicolás Gutiérrez

Thank you, Carlos. The year 2012 was more challenging than we expected and our results are a reflection of this. Nonetheless, we are confident that at Homex, we have taken the right decision to ensure a profitable long-term future. In Mexico, we have adapted to the required changes and today, vertical construction represents 55% of our total production. And as we expect greater support from the government to higher density projects, we believe that we will continue to be a key player in the housing industry and that our collection delays will be solved during 2013. As all the homes that we will collect with a subsidy, will be vertical.

As Carlos mentioned, during 2013, we will principally work on reducing our working capital cycle, specifically our level of construction in progress and accounts receivable, to generate positive free cash flow during the year. We also welcome the proposal of Mr. Alejandro Murat, the new of INFONAVIT to reduce the collection time without affecting the quality of their mortgage or [indiscernible] and collection procedures. We are confident that with their support, we will be able to work together to improve our collection cycle with the institute. Regarding the prison projects, as we already mentioned, we have made important advances. And this year, we will start the operation of both projects. Overall, we see our Infrastructure Division as a strategic division that will continue to grow and add material value to the company.

Finally, I would like to make some comments in regard to our 2013 guidance, which we shared with you early December. Overall, we reaffirm our guidance for 2013, where in Mexico, strategically, we will not grow our operation. In our Infrastructure Division, we expect a contribution of MXN 2 billion. Originally, we were expecting a flat growth. Nonetheless, at the 2012 results, not considering the construction recognition of the Chiapas project, was lower than we expected. For 2013, this division will grow approximately 30%. For Brazil, we plan to title approximately 360 homes at our 2 ongoing projects at the country.

On a consolidated basis, originally, we were estimating a revenue decline around 22% to 23%, as the 2012 base of comparison included most of the construction of the 2 prison projects. Due to the decision not to consolidate Chiapas, as Carlos mentioned, today, our 2012 base is lower and for 2013, we will only recognize the remaining revenues of the Morelos project as we complete the construction. Derived from this accounting practice, for 2013, on a consolidated basis, our revenue growth, including the federal penitentiaries, will decrease approximately 16% to 17%.

We continue to expect an EBITDA margin for the year of approximately 22% to 23% without considering revenues from the penitentiaries. And as a construction margin from the Morelos penitentiary has been lower-than-expected, we expect a margin of 21% to 22% when considering revenues from these projects, from an original guidance of 23% to 24%. Importantly, we continue to reaffirm our positive cash flow generation guidance in the range of MXN 700 million to MXN 1 billion, without considering the contribution of revenues from the penitentiary projects. We look forward with confidence, and very much appreciate your interest in Homex. Now, we will take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Denis Parisien with Deutsche Bank.

Denis Parisien - Deutsche Bank AG, Research Division

I'm wondering, the piece of information that you received from your joint venture partner, that was late and that caused you to change the accounting treatment of the statement, your financial statements for every quarter for the entire year, in such a dramatic fashion, can you give us some clarity on what that piece of information was? And if adopting a more conservative stance, a more cautious conservative stance, in your financial reporting, was taken for as of this quarter, then what was it prior to that? Would we term that a lack of caution? I'm just -- is the whole dramatic change given that already investors and analysts were struggling with the transparency of your cash flows, that having such a dramatic restatement, I think requires sort of behooves you give us a little bit more clarity on what it was that triggered this, and was the thought process was before and after?

Carlos J. Moctezuma Velasco

Well, first of all, let me as clear be as clear and as thorough -- straightforward as possible. Be reminded that Homex is a publicly traded company in the U.S. We trade our stock in the New York Stock Exchange. So we are subject to Sarbanes-Oxley Act, not only the Mexican securities law and rules. And for that, we need to follow the Sarbanes-Oxley procedures and test and controls for every single piece of financial information that we cover. The amount of information that we receive from Marcovil, by running these tests and controls for SOX [ph] procedures did not make us comfortable of the fact that we shut the control of the Marcovil operations for the full year 2012. That was -- the decision was made in order to protect our shareholders from an opinion or a negative note on our financial statements coming from our [indiscernible]. If the company was not sufficiently comfortable with the fact that we have the control for an entire year, then it was very difficult to prove otherwise. That is the rationale, and it's not one single piece of paper. It's a cumulative of information that which we believe the quality and depthness of the information is not sufficient for us to make that assessment at this point. Now, let me just walk you through the rationale. I'll try to reduce the logic to a minimum expression. What we did, once we made the decision, what we did is to recognize Chiapas using the method of participation. We owned 24% of the Chiapas project, and therefore, we recognized 24% of the net income of the project. Why we did it is -- I think just to explain it, and I think it's just extensively or as much -- or as -- in my opinion, was extensively explained in the press release, most importantly, I think that this is an accounting change. This do not affect the nature or the extension of the shareholders and everyone with Marcovil, neither a commitment to acquire it, as [indiscernible]. And what are the main changes coming from that? Basically, in the P&L, our revenue recognition on the advance of completion of Marcovil, as of September, that was MXN 2.5 billion, was eliminated from the recognition of the full year. Obviously, the cost related to that revenue was also eliminated, and the SG&A to the net income is eliminated. And consequently, we recognized the construction services of the Homex infrastructure to Marcovil because Homex infrastructure was -- is the contracted company to do the construction. That is MXN 2.3 billion recognized as of September 30, just to give you a comparative number that you can check, and it's provided in the [indiscernible] release as well. So the main difference, the difference in revenues is MXN 140 -- MXN 184 million as of September. So all the effects are booked in the fourth quarter, that's why it looks so diminished. But we presented a performance for you comparing the assets [ph] of the previous quarter. And that's why, also the year looks more, I'll say, consistent. All in all, that's...

Denis Parisien - Deutsche Bank AG, Research Division

Sorry. I kind of gathered all of that in the press release. I'm just still confused why you would completely change -- the company would completely change its thought process as to how to report it from before to now. You haven't really explained what it was that triggered that decision. And if this is cautious, then before, you were being uncautious, you were being loose. Why would you not have come to that decision at the beginning of last year and reported it in a consistent manner for us to follow quarter-by-quarter through the year? This last minute rejigging of the numbers, at this stage of the game causes a lot of confusion and a lack of transparency, a lack of visibility and it's quite frustrating for investors and analysts, if I may say so. That said, even abstracting from those accounting changes, the underlying fundamentals of your business, once again, failed to meet your guidance and expectations. This is perhaps, what 3 years in a row, that the fourth quarter has not come even close to guidance. And every year, there's always a list of excuses and people to blame other than yourselves. When does the company become -- when do you take ownership of the poor execution and just say, we need to do better? It's always this government agency, that trend toward higher vertical. You simply never come anywhere as close to your guidance, and now we're supposed to believe that your current guidance is you're going to deliver on that. Why would we believe you now after 3 years of just completely failing to come even remotely close to your guidance? And I'm just being mouthpiece here for, as you know, I speak to a lot of investors, so this is -- I'm just reflecting what I'm hearing, the frustration that you're -- that I'm hearing from the entire investor base in your asset class.

Gerardo De Nicolás Gutiérrez

Thank you, Denis. I'm sorry you feel that way. I think that the company has been trying to improve, not only its communications but its performance. We are extremely depending on the government's performance. As you know, the entire housing business is based on a platform controlled by the government, and we also acknowledge that we have a lot of things to improve in this process. It has been a, let me say, a stormy-weather journey in the last 24 months. With all these modifications, we have done the best we could in order to adapt as fast as possible. And I'm sorry you feel that way, and we will continue working towards bringing the value locked into our balance sheet to our shareholders.

Denis Parisien - Deutsche Bank AG, Research Division

Well, all I can tell you, sir, is the transparency and visibility is -- and trust are the cornerstones of credit worthiness and again, I'm just reflecting what I'm hearing from your investor base. Once you lose those assets of trust and transparency and credibility, they're very hard to regain. So, good luck.

Carlos J. Moctezuma Velasco

Thank you, Denis. I think in the case -- I mean in the -- I think in this particular case, transparency in our view, is not an issue. We have been as transparent as possible with the information that we have on hand. We are taking protective decisions to our shareholders in order to prevent the higher issue, a higher level of an issue. Again, I'm sorry you feel that way. I'm sure as you mentioned, your view is shared by a number of investors, and we have been complying with our communications rules from the different authorities. So I think if you have some transparency in this sector, it's coming from this company.

Operator

Your next question comes from the line of Vivian Salomon with Itaú.

Vivian Salomon-Karam - Itaú Corretora de Valores S.A., Research Division

I just -- I wanted to clarify some questions, regarding what Gerardo mentioned about monetization of the Infrastructure Division, mainly the 3 things. Can you please talk a little bit more about that? And also, can you -- you've mentioned around the payments for the partner of around MXN 1 billion off balance, can you describe those details [ph] as you mentioned over the call, please?

Carlos J. Moctezuma Velasco

Regarding to the monetization of the prison projects, we're working on different initiatives. One is to securitize the loan, the actual loan to change it for a loan with better terms in terms of financing cost. We're working in a structure complementary to this to monetize the future flows. We are analyzing the opportunities to contribute this prisons project to a Fibra or REIT, that are something new in Mexico that are just starting, with a very successful track record. Those are the most important initiatives that we are taking. We are optimistic on the focus of the new administration -- the new federal administration to infrastructure, and we believe that the government will promote new ways to finance all the infrastructure that is required in Mexico during the next 6 years. And Vivian, one thing more. Can you repeat your second question, please?

Vivian Salomon-Karam - Itaú Corretora de Valores S.A., Research Division

Yes, about the payment of the MXN 1 billion that was mentioned over the call that you have it off balance, did I hear correctly or...

Carlos J. Moctezuma Velasco

Vivian, this is Carlos. If you remember, we communicated to you and the market that according to the shareholders agreement with the partner in Marcovil, we have the right to acquire the 76% remaining share equity in Marcovil for a purchase price of MXN 1.1 billion, that was registered as of September, as an accounts payable because we have that right and obligation. With the decision not to consolidate in full the Chiapas project into Homex Holdings and just consolidate the 24% of the net income and the construction services, according to the IFRS ruling, we should not recognize the accounts payable since we are not recognizing either the accounts receivable or the debt of this endeavor. That does not mean, as I previously mentioned and tried to be, but [ph] I think that the shareholders agreement loses any significance. On the contrary, we are still committed to acquire it. We know that the purchase price to consume that acquisition is MXN 1.1 billion, and we still have the same conditions previewed in the circular [ph] [indiscernible] to pay.

Vivian Salomon-Karam - Itaú Corretora de Valores S.A., Research Division

Okay. And if I just -- could I ask just one more question? You mentioned about reducing leverage, how much do you expect for this year that you should be in terms of leverage ratio? Can you please guide that?

Carlos J. Moctezuma Velasco

Thank you, Vivian. Well, with the current market we want to get back to the levels we were back in the third quarter of last year, at least. We have currently some visibility about what the second half of the year should look like. And if we have a better outlook or a better visibility, we'll probably get back to you with a different view.

Operator

Your next question comes from the line of Jamie Nicholson with Crédit Suisse.

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

Just getting back to the cash flow miss in the fourth quarter, I'm trying to understand what occurred that caused you to go from expecting positive free cash flow to such a negative amount? I know that the accounts receivables in the home-building sector increased significantly, and you mentioned it was due to a longer collection process. But can you explain a little bit more what drove that? For example, how long is the collections in front of [indiscernible] Viste [ph] and your other mortgage forces, how does this compare to the overall industry and what they're experiencing? And was it because of any timing issues like were your sales weighted towards the very last weeks of the quarter? And then finally, why do you expect this to change in 2013? Why are you expecting positive free cash flow?

Gerardo De Nicolás Gutiérrez

Thank you, Jamie. During the last year, we have received many promises, mostly from the CONAVI about the subsidy disbursement. Most of these promises were never met since August. In different factors, they didn't meet the amount of the subsidies, they didn't meet the day that the subsidy will be disbursed, and more importantly, they don't meet the commitment on giving a specific percentage to vertical construction. At the beginning of 2012, we listened from CONAVI the idea that they will dedicate around 60% to 70% of the subsidies to vertical construction. At the end of the year, they delivered only 14% to vertical construction. During the third and fourth quarters, they were -- they promised the reassignation of subsidies that were not dues in a specific program, like the Crediferente program. And at the end of the previous administration, they were not able to reallocate those subsidies for vertical or for new homes. That causes a lot of the delays in the collection of homes, mostly in that price range in the -- for the subsidy. And the impact is not only on the subsidy homes, the impact is in the reinvestment, in the construction, because we have a lot of homes waiting to be paid. What we have for this year is a commitment of the new authorities that at least 50% of the subsidy will be dedicated to vertical construction, we're working to increase that number to 60%, but for sure it would be at least 50%. That means that for the homebuilders that are -- that have taken the decision to move to vertical, we will have more subsidies, much more subsidies compared with the previous year. And that's why we feel confident that in 2013, we will not face delays in the subsidy program as the new government will be congruent in terms of promoting vertical and the allocation of subsidies for this specific program.

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

Okay. So just to make sure I understand this, so it seems like the collection issue was more on the subsidies side rather than delays and let's say, INFONAVIT or FOVISSSTE issuing mortgages, is that the case?

Gerardo De Nicolás Gutiérrez

In the subsidy, probably is where the impact is much higher, and we faced delays in INFONAVIT, too, and FOVISSSTE, too, and one important thing to consider is the transition. This is the second time in our -- in the Mexican history that we are transitioning to a new political party at the presidential level. And for sure, there are more things to consider as the previous administration was completing their work and the new administration is taking place, making changes in the structure, in the policies, et cetera. And mostly at the operating level as the president has mentioned, they are not going to change any policies on the broader level for 2013.

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

And we're now 2 months into the year, have you seen any improvement in this, in like -- what are you seeing for the first quarter? Are you seeing improvements in collections, or not yet?

Gerardo De Nicolás Gutiérrez

Not yet. Due to the transition and the assignment of the new working team at every institution because every -- of the 4 major housing institutions changed the head and the rest of the team, that's the most important part of their team. And we have seen not a significant change. And just to give you more detail, the subsidies for 2013, we believe that we will start collecting those subsidies next week, that will be the first week of March. Then that means that we are -- and we believe that the first quarter will be a slow quarter, and this is mainly due to the transition. As Carlos mentioned, we feel comfortable for the full year and we are sharing the visibility that we have from different conversations with the new authority.

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

Can you just -- can you give us some guidance of how bad the first quarter is going to look like, in terms of sales volumes and free cash flow, just given the fact that the first 2 quarters -- I mean, the first 2 months, have been weak and challenging?

Carlos J. Moctezuma Velasco

No, Jamie. Unfortunately, the -- we do not provide a quarterly guidance. It's not in the company's practice. We still have a month to go, and we will keep you informed as the rest of the market on the results of the quarter.

Jamie Nicholson-Leener - Crédit Suisse AG, Research Division

Okay. But it sounds like it would be negative free cash flow in the first quarter, is that correct?

Carlos J. Moctezuma Velasco

Seasonally speaking, the first quarter is usually the lowest quarter in the year and it is usually the -- relative in terms of cash flow. So I'm assuming because you can presume that.

Operator

Your next question comes from the line of Aaron Holsberg with Santander.

Aaron Holsberg - Santander, Equity Research

Yes, a couple of questions, again focusing on the cash flow, most in particularly the increase of MXN 2.3 billion in receivables on the homebuilding, or $175 million. So these are units, which were mostly homebuilding. So these are units, which were titled, the mortgage was granted but you haven't received the subsidy portion of the cash payment?

Gerardo De Nicolás Gutiérrez

Yes, Aaron, and not only, in some cases, the subsidy portion and in some cases, the full amount, because the regular procedure on the collection and some delays due to the transition.

Aaron Holsberg - Santander, Equity Research

Okay. And as you said, since they only started to address this in March, a lot of this would logically still be pending on March 31?

Gerardo De Nicolás Gutiérrez

We are working to reduce the increase that we have in the accountancy rules, but we don't have a specific information about what will be the level at the end of this first quarter.

Aaron Holsberg - Santander, Equity Research

Okay, 2 other quick questions. You had said on your land bank that all of the projects and 87% of the land were S1 and S2 qualified for under the government's ranking for subsidies and mortgages. Could you tell us what percent of S1 and what percent of S2?

Carlos J. Moctezuma Velasco

At this time, I don't have the details with me, but we can contact you later to give you the specific information.

Aaron Holsberg - Santander, Equity Research

And as a follow-up to that, I note that being qualified under those guidelines from mortgages and subsidies, isn't the same as actually generating end-user demand for the houses in the locations in which you have them. Is it your opinion that the problems, the bottleneck on Mexican home sales, particularly yours, are entirely due to bottlenecks and the government agency's policies and then financing? Or is there any problem with end-user demand for any of the units?

Gerardo De Nicolás Gutiérrez

We believe that we still have a strong demand to attend in the future, and not only because more people are becoming part of the formal sector but because the demographics in the country, the demand for at least the next 10 years will continue growing. And the efforts of the government to attend markets that were unattended in the past, that's why we feel comfortable that the demand is there. And we have mentioned, since the second quarter of last year, that these new policies from the government, in terms of ranking the homes, ranking the projects and now ranking the land banks, all of those are great initiatives and at the same time, we are having a negative impact during the implementation of those initiatives. And we still are -- we agree with the new policies mostly from INFONAVIT for the collection procedures, the new workshop, the new callback or the new different procedures to collect. We agree with those procedures, and at the same time, we recognize that those new procedures are impacting negatively our working capital cycle.

Aaron Holsberg - Santander, Equity Research

So how do you account for the fact that homebuyer demand for used homes and also for renovating existing homes seems to be increasing at the expense of interest in new homes?

Carlos J. Moctezuma Velasco

We believe that, that market is growing. The market that is interested in used home. We have, in general, more mobility of the workforce. That means that more people are moving to different jobs or different -- or new cities to work, and that is causing a growth in that market, in the market of the used homes. The inflation, in general, is making the home suitable to be sold. In the past, with high inflation, the people -- the workers were not able to sell their homes because in some months, the interest were capitalized and sometimes, the debt balance was much higher than the value of the home. That is changing because in the last, maybe 10 years, we have had low inflation levels. And that's why the used home market is growing. But we believe that they don't have the technology in terms of the time, in terms of amenities, in terms of school, et cetera. And for sure, there's a market for used homes, but more importantly, the big market is still for new homes.

Aaron Holsberg - Santander, Equity Research

Okay. And last question, you said you've decided to reduce leverage. I wanted to confirm, you meant reduce leverage in absolute terms, not just ratios? And if you monetize the prisons, will any of that money come back into Homex to reduce Homex level debt?

Gerardo De Nicolás Gutiérrez

Yes, when we said that we want to reduce levels it's in absolute terms. And we are starting the different alternatives that we have to monetize the prisons and depending on the alternative, we need to study then, the possibilities or the alternatives that we have to flow those resources up to the holding company, and obviously a good use of that is to reduce debt.

Operator

Your next question comes from the line of Carlos Peyrelongue with Merrill Lynch.

Carlos Peyrelongue - BofA Merrill Lynch, Research Division

My question is related to the prisons. You mentioned that you plan deliver the Chiapas prison in March and the Morelos prison in May, and then, start collecting right away. In the case of others such as [indiscernible] you've had a 3-month trial period and they haven't collected rent yet. So can you explain why you believe you will be able to deliver the prisons and immediately start collecting rent, please?

Gerardo De Nicolás Gutiérrez

Carlos, when we say that we're going to deliver the Chiapas project in March and the Morelos project in May, we are considering, at the signing of the contract, a 2-month preoperational period and then, we will start collecting. That's why we mentioned that we expect to collect the monthly payment from Chiapas in around 7 months during this year and for the Morelos project, around 5 months during this year. That's what we stated in the script and we're pursuing that 2-month period, that is what is signed in the contract with the authority.

Carlos Peyrelongue - BofA Merrill Lynch, Research Division

Okay, understood perfectly. And then, with regards to taking out the Chiapas project, not consolidating it. That means that you took out about MXN 3 billion of debt from the balance sheet, that when you deliver the prison and pay your partner and get control, you will be recognizing, then, about MXN 4.5 billion of debt in the balance sheet and accounts receivable of about MXN 5.3 billion, is that correct?

Gerardo De Nicolás Gutiérrez

That is very correct, Carlos. We will recognize both the accounts receivable and the debt associated with the Chiapas project as well as the capital of the project.

Operator

And our next question comes from the line of Javier Gayol with GBM.

Javier Gayol

I just have a couple of questions. First of all, I'd like a bit of clarification with this adjustment to your P&L. Could you just give me a breakdown of how the operating and gross margins look like for the housing division? That'll be my first question.

Gerardo De Nicolás Gutiérrez

Yes, Javier, we gave you the numbers for both the operating and the gross margin on the housing division and more importantly, the EBITDA margin, too. And Carlos will give you the details.

Carlos J. Moctezuma Velasco

The EBITDA margin for the housing division, Javier, is 23.4% during the period. I'm not sure what -- obviously, that 15% that we disclosed in the release for the prison of Morelos at the gross level, so implicit in that in the results. I'm not sure what else -- numbers do you want us to share with you.

Javier Gayol

That's okay, with the margins. That's okay. And another question, could you tell us how much construction the Morelos project has taken and, like, in absolute terms like you fit on the total[ph]?

Gerardo De Nicolás Gutiérrez

For the Morelos project, the percentage of completion is in the range of 75% to 80%. That's why we feel comfortable that we will be able to deliver in May, that project.

Javier Gayol

Yes, so just to get an understanding of how are you standing now, to your guidance that you said in December, I wonder how much construction you've made on this penitentiary project during this quarter. because in your guidance you mentioned, if I remember correctly, that this quarter would represent, like, a MXN 3 billion investment. So is that divided by 2 so implicitly, you'll be recognizing, what, MXN 1.5 million from the penitentiary? Is that correct? Just the projects you mentioned, the construction phase of the Morelos project?

Gerardo De Nicolás Gutiérrez

Javier, yes, we have recognized about MXN 3.8 billion accumulated as of the investments in these projects. The growth of the project is calculated at MXN 5.2 billion, this is the value of the projects. So the difference between those 2 lines would be recognized in the first quarter -- in the first quarter, and probably, a smaller portion in the first part of the second quarter before -- right before the delivery of the asset.

Javier Gayol

Okay. And I don't want to monopolize the call, but I have a couple of questions. The government penitentiaries. You mentioned you will be revealing a revenue of MXN 2.2 billion, is that correct?

Gerardo De Nicolás Gutiérrez

That is correct.

Javier Gayol

So just to better understand, this will entirely go into your top line for this year, or would we have to take part of your construction revenues that you're already recognizing? Will we have to take some of it out? That's the way I see it in any construction project because you're already recognizing some construction's overpayment from the government, it implies that some of the MXN 2.2 billion are already being recognized, if I'm correct, just to clarify that.

Carlos J. Moctezuma Velasco

We didn't go through the detail of the recognition with you. The basic is pretty simple. You have -- you're receiving a counterpart for a concession, which is basically divided into 3. One is to amortize the construction, in this case, you have to serve the debt for the construction project. Another portion is to actually pay for the operation of the project, which we have -- we're the operating company. And the latter is to -- is basically the profit for the entire flows. So that's the way it works. Obviously, when we account for this, a portion of it will go to cancel the accounts receivable that we're building in the balance sheet because that's the way it works. And another portion will go through the P&L straight, way down to the net income. We can go through it with you, obviously.

Javier Gayol

Okay. Yes, now that's pretty clear. I think I had it right. We won't be recognizing on your top line, through the P&L, the MXN 2.2 billion, without trying to [indiscernible] project. But if you want, we can go over that. I just want to get through another question in here quickly. You have mentioned that multiple delays in receivables came from subsidies. On this matter I have 2 questions, if you clarify for me. How much of the 46,000 units you sold were sold throughout subsidy?

Gerardo De Nicolás Gutiérrez

The number, it goes around 20% of that number, Javier.

Javier Gayol

20% of the 46,000. Okay. And then, yesterday we had a conference with the Alejandro [indiscernible] and he told us that, there was a MXN 1 billion project for subsidies to reallocate in 2012 and only MXN 700 million were executed. Could you tell us that Homex was in any part of the program, that is the FOVISSSTE program?

Gerardo De Nicolás Gutiérrez

Yes. We participated in that program and more importantly, we are one of the leaders in the vertical prototypes with subsidy and that's why we feel comfortable that for this year, we will be able to collect. As we said, all the homes that we are planning to collect with subsidy are vertical properties. And that's why we feel comfortable that we will be able to collect in time and to significantly reduce the delays that we suffered in 2012.

Javier Gayol

Okay. And one -- just to -- I've got -- I came a little late to the conference call, but you guys mentioned you were -- definitely, you're in good terms with your bank? I just wanted to get back here, because I've been hearing some different things from investors and I wanted to get your opinion that you're in the positive side and you're all working with banks? You are in the clear with them?

Gerardo De Nicolás Gutiérrez

Yes, Javier, as we mentioned in the call, we enjoy a good relationship with our banks. We worked very closely with them to strengthen that relationship and so far, I think we are one of the companies in the, I'm sure, a short list of companies in the homebuilding sector that they want to work with.

Operator

Your next question comes from the line of Rafael Pinho with Morgan Stanley.

Rafael C. Pinho - Morgan Stanley, Research Division

Carlos, I wanted to check with you the following. I mean, you've talked about reducing leverage and you've talked about, as far as I understand, generating some cash this year. But it looks clear to us that a lot of the control over either if you generate or not, cash is not in your hands, not in the hands of Homex, it solely depends on what the government wants here. So what gives you -- so question one would be, what gives you that much certainty other than hope that the government will pay? And number two is actually, what are the risks here? Because it's clear that you need to delever, so what are the risks here that Homex needs to recapitalize at these levels, which would mean massive dilution? I mean, when or let me rephrase that, when is equity in your plans? Because at some point, you've got to recapitalize in order to show a better balance sheet.

Carlos J. Moctezuma Velasco

Rafael, well, as you mentioned, I think we have a fair visibility with the authorities on the Mexican industry to assess that housing continues to be an important element of the country's development. And therefore, we believe we have a fairly good opportunity or chance to collect on our receivables to them. Nevertheless, we do have the opportunity or the permission to monetize our infrastructure division in some way that will create additional source, of course, to go to the delever of the company and obviously, producing good free cash flow. When this equity comes in line when -- or by selling the -- or by trying to contribute the assets to a form of [indiscernible] or some other form of as that investment fee or -- it's partially or potentially an equity option of it. So we are working on it. I think that's more than 1 option here to get resources enough to delever the company in the year and we will continue working on it.

Operator

Your next question comes from the line of Roy Yackulic of Bank of America.

Roy Yackulic - BofA Merrill Lynch, Research Division

Just curious, given the cash burn and the lowered cash balance now and there appear to be short-term payables for land acquisitions of MXN 905 million versus cash of about MXN 2.3 billion, how will you address the land payables and it seems that your liquidity is squeezed now in terms of cash and being able to operate the business, so how can you comment on that? And do you have to pay these land payables in the short term or how are you going to address them?

Gerardo De Nicolás Gutiérrez

We are -- the land payables are not short term or the portion that is short term are very small and is not really impacting the liquidity. But as you said, we have reduced our cash levels. We're working very tightly to improve this cash cycle. Now we have more visibility on the subsidies of 2013 and the new management team at every housing, national housing institution is in play, and we feel comfortable that we will be able to go back on track in terms of the number of homes collected per week, et cetera. And as we mentioned, the initiative of Mr. Alejandro Murat to speed up the collection process at INFONAVIT, that is our most important supplier of mortgages. Those are different initiatives that we're working on to improve our cash. We have another initiative that are not directly related to the operation and as Carlos mentioned, one is the reduction of the SG&A, and the second is the sales of some strategic -- nonstrategic assets like commercial areas and land back from the Tourism Division. And most importantly, the monetization of the prison business, that we will keep you updated on the progress of this initiatives that will give us a lot of cash flow to reduce our debt and improve our liquidity.

Roy Yackulic - BofA Merrill Lynch, Research Division

Okay. Just to make sure, on the balance sheet it says, for December 2012, there are short-term land payables of MXN 905 million, is that incorrect?

Gerardo De Nicolás Gutiérrez

It's correct. But it's not that -- it will not be paid in this quarter or the next quarter. It's mostly during the next 24 months.

Operator

Your next question comes from the line of Alex Monroy with Nomura.

Alexander Monroy

Some of my questions were already answered, but still, let me just launch right into it. Can you go over what your free cash flow number, including penitentiaries -- what it looks like if you had not implemented this accounting recognition change that you did in the fourth quarter? And then, I have another couple of questions real quick.

Gerardo De Nicolás Gutiérrez

Alex, the free cash flow and -- on a consolidated basis would have been more negative if they...

Alexander Monroy

Right. So I guess, what I'm getting to is the fact that you're not recognizing of the MXN 3 billion, something like this, of receivables for the penitentiaries division, I guess, reduces your free cash flow including the penitentiary divisions, roughly, by that amount, correct?

Carlos J. Moctezuma Velasco

That is correct. Honestly, I don't see the relevance of it because these are noncash, it's coming from the receivables to the free cash flow statement.

Alexander Monroy

Okay. And then, further down the line, let's say fast forwarding, let's say, 5 years from now where do you see -- where would you like to see the penitentiaries division going, what is your sort of strategic objective of how much of the business will stem from infrastructure/penitentiaries and then, how much of the business will stem from homebuilding?

Gerardo De Nicolás Gutiérrez

For this year, Alex, the Infrastructure Division, without the prisons, will be around 10% of the business. And we will continue working to increase that number. But maybe, for 3 years we'll be in the range -- so maybe 20% of the business will be the Infrastructure Division.

Carlos J. Moctezuma Velasco

Alex, Infrastructure Division, meaning the construction contracts that we get with a fair value.

Alexander Monroy

And then, my last question. Looking at your -- the loans that you guys have outstanding with the banks, and so forth, what are the most onerous covenant level that we should be looking out for here in terms of, let's say, not leveraged?

Gerardo De Nicolás Gutiérrez

In terms of our debt and our internal package, debt would cross to EBITDA, is a ratio that we look more closely -- right now we're at 3.62x and the incremental growth for 3.75x.

Operator

Your final question comes from the line of Jonathan Schwartz with Black River.

Unknown Analyst

It's actually Jaime [ph] at Black River. I think some of my questions have been already addressed. I have a couple of more, but let me revisit the cash flow situation. I'm very focused on the short-term simply because you're citing, you're quoting your intentions with respect to monetizing penitentiaries and selling some assets that I feel may take a bit longer than the banks may afford. So I just want to hear from you, what are banks affording you in the very short-term in order to bridge this period while you monetize assets or do whatever you can do? And it is not just a concern of what is the discussion with the banks in how they're supporting you but also your absolute cash levels seems quite outside the comfort zone. And I wonder if that's going to be enough for you to continue funding new construction during the first quarter. So if you can just address the very short-term or your cash flow situation from those 2 perspectives? And then I'll add another question if you don't mind.

Carlos J. Moctezuma Velasco

Jaime, well, as I mentioned during the call, I think the bank relationship -- the relationship we have with our banks is fairly good. They have been very supportive on this transition period, along the line, along the way. We keep our conversations with them, we keep them updated on what's going on in the sector with a lot of frequency. As you mentioned, our absolute cash levels are not comfortable, that's for sure. We have a lower level of cash on hand to upgrade the business group share up from the levels we are posting to or which -- is having a cash position of probably 20% of the business at every point in time. We are working towards improving, as Gerardo mentioned, this cash position, not only with the housing business but with our infrastructure business. In the short term, I think our conversations with the banks are very positive. And I think as Gerardo mentioned, we do not have imminent payments for land in the coming quarters. And we will continue to look for extensive ways to expedite the processes to get the cash at the levels that we enjoy.

Unknown Analyst

And Carlos, are the banks agreeing to roll their short term maturities such that they, once again, afford you the time to monetize various situations you described earlier? Are they rolling, what's -- I'm just trying to get better insight on the dynamics with the banks. I'm not sure if they're putting more pressure, asking you to reduce some of the exposure or simply rolling the absolute amounts, what's -- if you don't mind expanding on that?

Gerardo De Nicolás Gutiérrez

Honestly, there's tension in the banking system because -- I mean, coming from the housing industry is higher than in the previous years, that's a thing well known for everybody. As I mentioned, the support of this business we're working has been great. We have been able to roll multiple lines, we have been very communicative with the institutions. We haven't finished our conversations with some of them in those terms, but I believe that as I mentioned, the bank consisting [ph] in Mexico have been very supportive with us and we are, I would say, comfortable that we were able to get through this period with their help and their support as we have done so far.

Unknown Analyst

All right. let me just switch quickly with a couple of questions related to the prison, Carlos. You quoted Valores, the drawdowns on that credit line being delayed. Have you now been able to draw down and restore your cash at this point?

Carlos J. Moctezuma Velasco

Yes, Jaime. We were able to restart the drawdown processes in the first week of February. The new administration of the Valores team, it's -- in my impression, it's pretty efficient, pretty professional. They get the idea and the operations of the bank very quickly, and our process were made much more expedited during the early part -- the latter part of January. So we could collect on the facility by February 1.

Unknown Analyst

Is that expectation to collect the whole amount that's been delayed or you're just thinking February is just a partial drawdown? How do you envision restoring that cash? And once again, I'm just trying to see if you're going to recover it quickly or is it going to take much longer for you to draw down on the entire amount that was delayed.

Carlos J. Moctezuma Velasco

First of all, we believe that the current phase of construction we intend to deliver in May. That's what we are certain of. The process of drawing down the facility is in an advance of completion process. So we need to -- we can only draw what is certified in the cap so it depends on...

Operator

Ladies and gentlemen, please hold. You may proceed with your conference. [Operator Instructions]

Carlos J. Moctezuma Velasco

Well, I was saying that the bottom line, we have been able to draw down from there. We believe that as long as we -- I mean, as we progress in the construction and the cap certificates, we will continue to be able to do so.

Unknown Analyst

All right. You mentioned earlier that you have this -- it's actually in your disclosure, that you will have about 30 months to repay the 79% that you're pursuing, about MXN 1 billion, it sounds to me, Carlos, that some quasi-seller refinancing, I'm not sure if I should describe it in such a way. My concern is that upon delivery and your start of the 30-month payment period, does it require some kind of guarantee from Homex for this, Arendal, I think it's called, company to extend that 30-month period or guarantee, or what are they asking for? Or is it just straight up unsecured, unguaranteed seller paper? Do you need to deliver something to them for them to extend that credit -- it feels like a credit because they're delivering in the asset and then, they're telling you, "You've got 30 months," but will they ask for something in exchange?

Carlos J. Moctezuma Velasco

Jaime, actually, that is in our accounts payable. In essence, it's not financing. I'm going to circle this agreement, the 30 months came through -- it came with an interest rate of 12% per annum. So that's kind of gross and effectively for financing. The way it works in terms of the -- it has no guarantee or whatsoever. The way it works is a cross-sharing of the equity. For instance, we have 24% of the equity today, right? By the time they -- Makobil delivers the asset to the authorities and the authorities are able to receive it, we will flip the position. We will get 76% of the equity. And Makobil -- or in this case, Arendal, will retain 24% of the equity until we end with the last payment of the MXN 1.1 billion. So we have a double, I'll say, double incentive to give the refinancing. First of all, it's a 12% interest rate -- financing, which is not cheap, if you ask me. And second of all, they will retain 24% of the equity as a company. The guarantee differences is, basically, our guarantee for us to finish the payment after 30 months. I don't know if I was clear enough.

Unknown Analyst

It's not an easy structure and we can, perhaps, follow-up. But is it going to show up in our balance sheet as another loan now, once they deliver, it's going to show up like a loan, like a bail, or an obligation on your behalf? It's not an option, it sounds.

Gerardo De Nicolás Gutiérrez

It's an obligation and we'll be able to place it in payables.

Unknown Analyst

But one last question with respect to that same prison situation. You've been saying that one of the things you'll pursue to improve your liquidity is monetizing these assets, could you give us an order of magnitude of the amount of money, perhaps just a range, that you could raise when you monetize one or both of these things? What does it mean for us and the cash -- can you raise $50 million, $100 million or -- can you give us an order of magnitude of what this could mean for us?

Gerardo De Nicolás Gutiérrez

So Jaime, that's exactly what we are -- what we're realizing with the different options that we have. We need to be very careful on the extent of what we are envisioning to and how. So we'll keep you informed on what the company's options are and what we decided to do and et cetera, once we have more lines of decisions we make in the quarter.

Operator

And now I'd like to pass this call back to Ms. Vania Zarain for closing remarks.

Vania Fueyo Zarain

Thank you to everyone. And as usual, the conference call replay will be placed in our website and as well, we are available for further Q&A in the usual numbers. So thank you, for your interest today.

Operator

And ladies and gentlemen, with this, we conclude today's presentation. We thank you for joining. You may now disconnect.

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