Q&A – Sandor Valner

The principals of Chicago-based Walton Street Capital, the private equity real estate firm founded by JMB Realty head Neil Bluhm, has been investing in Mexico for more than a decade - the firm did its first property investment in the country in 1998. Walton Street's Mexico operations are headed up by Sandor Valner, who was formerly the chief executive officer of VALOR, a real estate merchant bank he founded in 2001. Prior to this, Valner had leadership roles with M&A advisor EMVA and Credit Suisse in Mexico. Walton is raising its sixth global fund, which has exposure to Mexico. In addition, the firm is raising a dedicated Latin America fund, with a target of $350 million and a majority allocation to Mexico. Between the two funds, Walton Street will have around $700 million to invest in the region, with 75 percent of the capital going to Mexico. Last year, the firm opened an office in Mexico. Valner took a few minutes to speak with PERE about the attractions of Mexican real estate.

When did Walton Street first invest in Mexico?
The principals of Walton Street have been investing in Mexico since 1993. Subsequently, when Walton was formed, they saw some investment opportunities here and started investing through Walton funds in later years. At first it was a private equity investment in a multiplex cinema theater chain—that was 1993—and then in 1998 Walton invested in their first shopping center.

How is your firm set up?
The firm, since late last year, has an office in Mexico with six professionals, plus four professionals in Chicago devoting 100 percent of their time to Mexico. We have a dedicated vehicle to manage our investments down here.

How would you sum up the firm’s strategy in Mexico?
It’s a diverse opportunity strategy. We are investing—and have invested—in low- and middle-income residential, as well as vacation resorts. We have two housing platforms. One that does low-income housing—we are doing about 8,000 houses a year—and one that does high-income—we’re doing about 1,500 condos. We have two retail platforms: One for fashion malls and the other one for grocery-anchored malls. The next is hotels and we’re also exploring smaller opportunities in office, industrial and land development.

What are some of the fundamentals that make Mexico an interesting place to invest?
We like the stable political backdrop. The country has made substantial progress towards democracy and sovereign institutions. Secondly, we like the economic stability that Mexico has reached, which is confirmed by its being rated investmentgrade by all the agencies. We like the favorable demographics of the young and growing population. And the combination of these things creates an economy that is growing and the recent advent of credit has created substantial increased disposable income and created a growing middle class. In terms of big picture, that is what we like. All of this, plus the scarcity of high-quality real estate assets, creates very compelling risk-adjusted returns. Also, when Mexico became investment grade, the government first started issuing long-term debt paper, which then allowed the banks to issue longer-dated debt paper and that allowed banks to lend money at a long-term fixed rate to both consumers and corporations – so this availability of long-term debt financing has been another significant fuel in the sector.

What risks remain?
Many of the risks are not only found in Mexico. I think the most significant risk in real estate investment has to do with the interest rate: Part of that has to do with the Mexican economy. Part of that has to do with the global economy. You have to look at each product and each region. They are all different. There are some sectors that would be adversely affected by a slowdown in the US economy, such as housing for Americans. Another sector that would be affected by a US slowdown would be industrial, where most of the investment is going to export-oriented manufacturing facilities. There are other sectors which, I would argue, are very isolated from that, like low-income housing and grocery-anchored shopping centers.

Are projects easier to finance these days?
Yes. The first mall, for example, that we developed had to be built with equity and there was really no possibility of a takeup on that. All of that is now a common practice in Mexico. Ten years ago, non-low-income housing mortgages virtually did not exist. Now mortgages are very common in Mexico for homebuyers.

Is there a strong exit market developing in Mexico?
Mexico is becoming increasing attractive to institutional investors from around the world and is attracting a growing number of institutions of all kinds. That, to us, is good news because it provides more exits. Alternatively, there are now US-based REITS coming directly into Mexico to buy property. There are some larger pensions that are investing almost directly—Americans, Germans and other Europeans. The Mexican pension funds have just recently been allowed to invest in equities and real estate-related securities, so that’s another mechanism. Mexican REITs should come to bear certainly in the next 12 months, so that will provide another exit alternative. So the market is becoming larger and much more liquid.

Is there product to buy or are you focused on development?
There is product to buy. We did a leveraged buyout of the Mexican arm of Pulte Homes, now called Altta Homes. Walton owns the company jointly with the largest privately owned housing company called SADASI, which is a low-income housing developer. We did the leveraged buyout about 18 months ago [see story below].

Altta vistaWalton Street’s buyout of a Mexican homebuilder is a bet on the buying power of the Mexican middle class.

In 2005, Walton Street acquired a stake in the Mexican division of Pulte Homes and renamed the company Altta Homes. Details released by Walton Street shows an investment in the future of Mexican property values. Real Estate Fund V, which held a final close in 2006 on $1.6 billion (the firm is currently raising a Mexican fund, according to sources). According to the firm, the transaction involved a $60 million bridge loan with a two-year term.
The deal was done in conjunction with Grupo Sadasi, which owns 50 percent of the company (Walton Street owns 47 percent and operating consultants own 3 percent). Walton Street saw that Altta operated at a gross margin of 20 percent and an EBITDA margin of 10 percent, while industry averages were 28 percent to 32 percent and 20 percent to 22 percent respectively, indicating room for improvement.
Sadasi is the largest homebuilder in Mexico, according to Walton Street. Altta is engaged in land acquisitions and marketing homes in 11 Mexican cities to low- and middle-income families. The primarily single-family homes typically have price tags of between $20,000 and $200,000. In 2006, sales revenue grew 8.6 percent to $209 million and EBITDA grew 36 percent to $22 million. The gross margin had increased to 26.5 percent, up 230 basis points.
The $129 million investment came out of Walton Street