NYU International Studies Program - Socovesa

KEVIN CHEN | RIO HODGES | JENNY RYOO | JULIA SHI | TAMMY TAN | WEILIN TU YE

Infilling in Chile Mass urbanization is transforming the typical residence

Steady relocation to cities in 5 years

7.8% Increase in average apartment price

More demand for city center living

200k

6x

Pain Points of Modern Living How can Socovesa address the growing issues associated with urban living?

Shrinking Spaces

RisingPrices

Limited Functions

Identical Apartments

Compression of Choices

Choke point in housing

Central Access

Limited Choices

+

Urbanization limits the choices home owners can make today

The ultimate living spaces empower through flexibility and personalization.

⏣

Typically, we forego what we want, to be where we are

⏣

City density is innevitable, but do we have to sacrifice?

Pick two COST

LOCATIONPersonalization

A progressive firm in a traditional industry, Socovesa is well positioned to lead the trend

SOCOVESA’S TRANSITION TO A CONSUMER AND DESIGN ORIENTED Company

Backward integration to increase architectural skillset

Forward-facing managers seeking better customer insights

History of leveraging huge cash pile to invest in strategic acquisitions

An innovative, sustainable construction delivery method that balances affordability, durability, and flexibility

THE ASSEMBLY LINE

MODULES MANUFACTUREDOFF-SITE

TO BEASSEMBLEDON-SITE

UNDERSTANDING PREFABRICATEDmodular HOUSING

+ -

Skeletal Panelized

Combined

Versatile external structures+

Flexible internal panels

Movable panels : compartmentalization + Customization

Prefabricated modular construction creates cost, time, and waste savings, whilst integrating flexibility and customization.

Prefabricated modular: A compelling alternative

Prefabricated Modular Site-built

Construction Types

0

1Construction Timeline

Resource Efficiency

Functionality and AestheticsAdaptability to Chilean Environment

Environmental Impact

Streamlined and predictable construction timeline, leading to cost savings

Less site damage, material exposure, and waste

Earthquake resistant; durable

Built with factory precision; less labor and fewer materials used

Incremental improvements at lower cost and shorter time period

Compared to traditional site-built construction, prefabricated modular saves time, optimizes construction productivity, and results in faster returns

UNDERSTANDING PREFABRICATED modular HOUSING

Time saved, quicker occupancy,

faster returns

Design Eng. Permits and Approval

Site Development & Foundation

Install & Site Restoration Time Savings

Building Construction at Plant


Site Development & Foundation Building Construction Site Restoration

Modular Construction Schedule

Site Built Construction Schedule

Source: Modular Building Institute, 2014

INFINISKI: Combing design principles with prefabricated modular construction techniques

Modular | Sustainable | Affordable

Limited scalability: housing distribution limited by market access

Infiniski: Product Portfolio

Main focus on residential housing market, with a few commercial estates

Tailored according to individual specifications; caters to high income bracket (ABC1)

Problems of accessing the market and distributing its modular design

Aligning stakeholder interests

Innovative designs

Great reputation in the industry

Expertise in sustainable, modular housing

InfiniskiInternational status

Large capital

Scalable access to the market

Socovesa

Current market share and brand name in Chilean market

Large capital on hand

Familiarity with the locals and Chilean systems

No experience in modular housing

No existing prefab construction sites or factories

Strengths Weakness

Socovesa and Infiniski’s strengths and weaknesses are complementary

Able to distribute to a larger market

Design collaboration

Possible foreign investment inflow

Government subsidies

Progressive brand image

Acquisition Synergies

Leveraging assets to aid efforts to scale up

Access to European investor base (specific to prefab)

Marrying complementary skillsets to deliver a better product

Cement its position as a progressive market leader in the real estate market

Capitalizing on the government’s 2050 energy efficiency plan for the housing and construction sector

Synergies lead to new competitive advantages

Pursuing Synergies in StagesSocovesa is experienced in acquiring companies and successfully helping them develop

Short-term partnership phase

Promoting the “creative brain” and establish culture

Establishing a fully autonomous prefab branch:

Infiniski

Integrating Infiniski into Socovesa’s structureHow can Socovesa manage the transition seamlessly?

Establish a new culture within Infiniski post-

acquisition by using teams from both companies to

collaborate on the initial project

Short-term partnership phase

As Infiniski pursues more projects, its identity needs to

be preserved so that it can assert its creative

advantages—especially in prefab

Promote “creative brain” and establish culture

Ultimately transition Infiniskiinto the architectural and prefab arm of Socovesa.

Commissioning customized houses and spearheading

larger projects.

Establishing a separate branch: Infiniski

Acquisition Financials - key financial statisticsThe enterprise value for Infiniski is USD$ 23.2 million, which is estimated based on comparable public companies & a sensitivity analysis

Housing type Revenue

Residential $ 3.645 m

Commercial $ 18.225 m

Total $ 21.870 m

EBIT margin 7.97%

Multiple 13.3x

EBIT $ 1.742 mEnterprise Value $ 23.231 m

Key Financial Statistics (million)

Terminal Value (UF) 2.399

NPV (UF) 0.201

Value of Investment (UF) 2.601

Gross Profit (UF) 0.578

Terminal Value (USD) 94.045

NPV (USD) 7.907

Value of Investment (USD) 101.951

Gross Profit (USD) 22.665

Gross Profit Margin 37.8%

Unleveraged IRR 16.1%

Leveraged IRR 28.3%

Payback Period (years) 6.80

Currency Conversions1 UF 25,889.57 CLP1 UF 39.2 USD1 USD 660.45 CLP

Estacion Central: A prime location

Close to the City Center

⏣

Size of apartments not heavily regulated

⏣

On the rise but not overpriced (west side)

Modular housing saves time and resources while yielding more sustainable projects

Location: North of Estación Central

Population: 144,982

Nearest Subway Stop: Line 1 – San Alberto Hurtado

Time to City Center: 15 minutes

Construction Site

Downtown Santiago

Sky Garden1400 feet2

24’ x 58’Communal gardenIndividual plots for residents

Lounge & Courtyard345 feet2

20’ x 17’Bioclimatic Architecture

Basement1700 feet2

30’ x 57’Thermal Storage ConditionedStorage and laundry roomCreative working spaces

FoyerMail roomStorage/bike accessLounge seating arrangement

Project protoype: los bloques

Kitchen36 feet2

6’ x 6’Efficient factory built space folding counter and full fridge

Storage Loft72 cubic feet12’ x 2’ x 3’

Juliette Balcony63 feet2

7’ x 9’EnergyStar® rated sliding glass panels

Bathroom60 feet2

10’ x 6’Fully outfitted with bathroom with separate closet compartment

Living/Bedroom140 feet2

14’ x 10’Multipurpose convertible living space

Project Prototype: Los Bloques

50 apartments in the building, each around 300ft2

45.2UF/m2

1259UF for a 300ft2 apartment

Outfitted with some of the latest sustainable technology

Eco-friendly, cheap and modern

Foldable bed to save space

Foldable table and counter

Storage compartments and shelves

10 f

eet

30 feet

Ultra-efficient insulated walls and windows

EnergyStar® appliances

Project Prototype: Los Bloques

Santiago Communes Price per m2 (UF)

Apartment Prices (UF)

Estación Central 45.20 1,259.76

Santiago 50.60 1,410.27

Nuñoa 65.60 1,828.33

Providencia 75.80 2,112.61

PROTOTYPE Financials - key financial statistics

Key Financial Statistics

Interest Rate 3.50%

Discount Rate 7.42%

Gross Margin 36.53%

Net Profit Margin 17.61%

EBITDA $0.902 m

Unleveraged NPV $0.215 m

Leveraged NPV $0.942 m

Unleveraged IRR 16.23%

Leveraged IRR 46.02%

Payback period (Years) 2.54

Net Profits $0.435 m

LONG TERM implications: an open road

Revitalize spaces in the city: convert unused industrial spaces into new low cost housing in the city/on the periphery

Expand to other segments: commercial;/office buildings

Reach scale economy and efficiency to satisfy unmet demand

Explore opportunities to integrate renewable energy generation systems into development projects

1

2

3

4

Strategy

Introducing new technology in Chile

Infiniski acquisition plan

Competition against international companies and new market entrants

Prototype

Potential migration of city center in the future

Risks and Considerations

3 m

11 m

6 m

8 m

1m10 m

Complete acquisition of Infiniski

Legal / restructuring

Acquire project site, capital, and permit

Acquire buyers / potential residents

Assemble modules on project site

Manufacture modules for project 2

LongTerm

Revitalized unused spaceOffice/commercial projects

Government “city planning” opportunitiesPartnership with renewable energy

companies

10 m8 mAcquire project site, capital, permit, buyers/residents for

project 2

3 m Design

6 m Site development / foundation

Manufacture modules for project 1

’16 ’17 ’18 ’19 ‘20 à

Proposed timelineFocus on prefabricated modular construction leads to higher project turnover and faster returns

Q&A

Num

ber o

f Peo

ple

0

75000

150000

225000

300000

Inside Vespucio Outside Vespucio Suburban1992-2002 2002-2011

Santiago City Center Demand Rising

Source: Atisba, INE

Metric Number as of 2015

Population 17,508,260

Median Age 33.7 years

Population Growth Rate

0.82%

Urban Population 89.5% of total

Urbanization rate 1.09% annual

Source: CIA Factbook, 2015

Appendix a1: infilling phenomenon - Shifting Demographics

Appendix A2: infilling phenomenon - Housing Prices in Santiago

Region of Santiago % Price Increase

Central 10.8%

Western 7.9%

Eastern 10.7%

Southern 11.7%

Santiago Apartment Price 2011-2012

Source: COCC

Housing Prices in Santiago 2013-Present

Source: Central Bank of Chile

Source: http://www.cchc.cl//centro-de-informacion/indicadores

(Thousands of units)

(Sales of Large homes in Santiago)

(Houses) (Apartments)

Appendix a3: infilling phenomenon - Shifting DemographicsDwelling density at the census district level (2011)

Apar

tmen

ts Almagro

ABC1 C2 C3 D E

Pilares

Hou

ses Socovesa Santiago

Socovesa South

Socio-economic Status

Appendix B: socovesa Product diversification strategy

ABC1:Upper class (2.5%) to upper-middle class (7.5%) (10% of the population, collectively)Monthly income: $3.5 million pesos (about USD$7,000)

C2: Middle Class (<20% of the population) Monthly Income:$1 million pesos a month (~US$2,000)

C3: Lower Middle classMonthly Income: $600 thousand pesos (about US$1,200)

D:Lower Income Class$300 thousand pesos (about US$600)

E: Lowest Income Class (10% of population) $90 thousand pesos (about US$180)

APPENDIX C1: Acquisition - Quick comparables Analysis The enterprise value for Infiniski is $ 23.2 million, which is estimated based on comparable public companies

Company Name LTM Revenues TEV/EBIT LTM - Latest EBIT Margin %

Cavco Industries, Inc. (NasdaqGS:CVCO)

619.7 18.5x 6.00%

Deer Valley Corporation (OTCPK:DVLY)

35.66 1.2x 5.80%

Nobility Homes Inc. (OTCPK:NOBH)

29.63 12.4x 10.60%

Thor Industries Inc. (NYSE:THO)

4,237.83 9.1x 7.30%

Liberty Homes, Inc. (OTCPK:LIBH.A)

87.21 -

Cavalier Homes, Inc. 108.09

Champion Home Builders, Inc.

Champion Enterprises Holdings, LLC

APPENDIX C2: Acquisition - Sensitivity Analysis for Acquisition

Multiple

11.3 12.3 13.3 14.3 15.3

EBIT Margin

5.97% 19.72 21.46 23.2 24.94 26.68

6.97% 23.02 25.05 27.09 29.12 31.15

7.97% 26.33 28.65 30.97 33.3 35.62

8.97% 29.63 32.25 34.86 37.48 40.09

9.97% 32.94 35.84 38.75 41.66 44.56

The enterprise value for Infiniski is $ 31 million, which is estimated based on comparable public companies

Appendix C3: Acquisition FinancialsThe enterprise value for Infiniski is USD 23.2 million, which is estimated based on comparable public companies & a sensitivity analysis

Acquisition Discounted Cash Flows (in UF)

Year 0 1 2 3 4 5 6 7 8 9 10Year Over Year Revenue Growth - - 50% 33% 25% 25% 20% 17% 14% 13% 11%

Total Revenues - $25,195.29 $37,792.94 $50,390.59 $62,988.23 $78,735.29 $94,482.35 $110,229.41 $125,976.47 $141,723.53 $157,470.59

Total Interest - (349.79) (743.32) (1,136.86) (1,530.40) (11,917.86) (11,568.07) (11,174.54) (10,781.00) (10,387.46) (9,233.30)

Total Cost (435,046.26) (40,675.26) (41,462.34) (42,249.41) (43,036.49) (50,209.24) (57,381.98) (64,554.73) (71,727.48) (78,900.23) (86,072.98)Current INFINISKI Operating Income 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47 58,628.47

Cashflows from Operations (376,417.79) 43,148.50 54,959.07 66,769.64 78,580.22 87,154.53 95,728.84 104,303.15 112,877.46 121,451.77 130,026.08 Discounted Unleveraged Cashflows (376,417.79) 40,168.03 47,628.74 53,867.10 59,016.39 60,934.63 62,306.29 63,197.71 63,668.71 63,773.10 63,559.28

Discounted Leveraged Cashflows (267,656.23) 49,878.66 57,094.92 63,076.27 67,958.89 75,960.00 77,290.15 78,054.24 78,343.99 78,221.29 77,462.88

Key FinancialsTerminal Value (UF) 2,399,005.14 NPV (UF) 201,702.20 Value of Investment (UF) 2,600,707.33 Gross Profit (UF) 578,163.74

Terminal Value (USD) $94,044,776.44 NPV (USD) $7,906,947.61 Value of Investment (USD) $101,950,581.65Gross Profit (USD) $22,664,928.34

Gross Profit Margin 37.8%Unleveraged IRR 16.1%Leveraged IRR 28.3%Payback Period (years) 6.80

Currency Conversions1 UF 25889.57 CLP1 UF 39.2 USD1 USD 660.45 CLP

Assumptions

• Model assumes no fluctuations in the US and Chilean Currency

• Current Infiniski operations will continue to ensure optimal usage of their factory and expertise

• Chile will eventually develop into a stable economy (like the US)

• New product technology will create barriers to entry that will slowly erode over the period of the investment

• Total costs include land, labor, capital, and other operating expenses

Appendix C4: Sample Acquisition Timeline

Source: Baker & McKensey (2011)

Appendix C5: Acquisition - Integration Flow Chart

Appendix C6: Acquisition – impact on socovesa

Market analysis and

business decisions

ProjectDevelopment Construction Commercial Stage After Sales

Service

Land Bank Strategy

Market Analysis Land

Identification

Preliminary Project Development

Land Purchase

Product Definition

Architectural Design

City Planning Design

Engineering Development

Project Approval by planning authorities

Socovesa Construction under sum-jump scheme

Pilot houses to be sold in shell form

Quality Control

Launch Strategy

Marketing

Dedicated Sales Force

Coordinator of customer’s financing

Post sales service

Warranties

More time unlocked for the commercial stage

Appendix C7: Acquisition – split of responsibilities


Site Development & Foundation

Install & Site Restoration Time Savings

Building Construction at Plant

Post-acquisition: Modular Construction Schedule

Socovesa

Time Savings

Infiniski


Site Development & Foundation Building Construction Site Restoration

Pre-acquisition: Site Built Construction Schedule

Source: Modular Building Institute, 2014

Outsourcing Joint venture Acquisition

Investment Cost

Lowest, BUT extremely high transportation costs

Shared Costs Highest, BUT low transportation costs

Operating Control

Relinquishment of Control of Asset(s)

Shared Control Control over the acquiree

Risk/Reliance on the other party

Reliance on supplier increases supplier power; Also increases transportation costs

Shared Risk; Lack of control over technology

Least risk to technology leakage, and able to reduce exposure to risk

Primary Driver Cost reduction, least risk Co-dependence Quickly acquire new capabilities; protect technology and realize location and experience economies

Long Term Potential

Hard to make significant changes or innovation

A temporary contract Growth in new markets

Appendix C8: Heat Map – Outsourcing vs JV vs acquisition

Key:

Most Ideal

Average

Not Ideal

Appendix C9: Heat Map – M&A Options

Merger Stock Purchase Asset Purchase

Restructuring Efforts

High Medium Medium

Typical Target Companies of the same size

Private companies/wholly-owned subsidiaries

Specific divisions of companies

Asset + Liability Changes

All automatically transferred

All automatically transferred

Assets retitled and liabilities assumed

Strengthening the Target Company

Restructure and strengthen the involved companies

Increase in funds for target company

Limited to the assets acquired

Shareholder Negotiations

High High Disposition of >50% of corporation’s assets needs shareholder approval

Key: Most Ideal

Average

Not Ideal

Discount Rate calculationChilean interest rate 0.035Corporate Tax Rate 0.24Assumed Cap Rate 9%Debt to Value Ratio 0.25Equity to Value Ratio 0.75WACC 7.42%

Permit Cost Estimates (Pesos)Assessment from regional sanitary authority 16000Request/obtain building permit 2200000Certificate of Urbanization 4200Certificate of Compliance for roads 8468Receive Connection to water services 315671Total 2544339Converted Total (UF) 98.28

Costs Projections (monetary units in UF)

UF/m2 Cost of terrain 30

Terrain Area (meters) 162.58

Terrain Area (sqft) 1750

Project terrain cost (UF/m2) 4877.4

Apartment size (sqft) 300

Apartment size (meters) 28.7

Number of apartments 50

Estimated Construction costs 700

Construction Costs 35000

Permit Cost 98.29

Total Costs 39975.69

Debt 9993.92

Key FinancialsNPV (UF) 5,482.45 EBITDA (UF) 23,012.54 Net Profit (UF) 11,094.68 EBITDA (USD) 902,116.82 NPV (USD) 214,918.06 Net Profit (USD) 434,923.63 Leveraged IRR 46.02%Unleveraged IRR 16.23%Gross Margin 36.53%Net Profit Margin 17.61%Payback Period (years) 2.54

Discounted Cash Flows (in UF)

Occupancy Increase 0 0.4 0.2 0.2 0.2 0

Year 0 1 2 3 4 5

Revenue - 25,195.29 12,597.65 12,597.65 12,597.65 -

Cost (39,975.69) - - - -

Interest Expense - (349.79) (393.54) (393.54) (393.54) (10,387.46)

Cashflows from Operations (39,975.69) 24,845.51 12,204.11 12,204.11 12,204.11 (10,387.46)

Discounted Unleveraged Cashflows (39,975.69) 23,130.39 10,577.33 9,847.17 9,167.40 (7,264.15)

Discounted Leveraged Cashflows (29,981.77) 23,456.03 10,918.41 10,164.70 9,463.02 -

Appendix D1: Prototype Financials

Indicator Chile OECD High Income Country Avg.

Procedures (number)

13 12.4

Time (days) 152.0 152.1

Cost (% of value) 0.6 1.7

Building Quality Control (0-15)

13.0 11.4

Chile Construction Consideration vs. OECD Averages

Appendix D2: Dealing with Construction Permits

Source: World Bank Group – Doing Business in Chile 2016

Appendix D3: Timeline & Costs of construction permits

Source: World Bank Group – Doing Business in Chile 2016

Location: Ruta 68, kilómetro 48, Curacaví

[Around 50 mins away from the city center]

Volume: Able to manufacture 15-20 small 300ft units at once,

a warehouse that could store 50% of the production

Just-in-time delivery to match module manufacturing

schedule with installation rate

Appendix D4: infiniski factory & Inventory management

Appendix E: Long term impact – office segment to take off In 2017