Revenues

Total housing revenues in 2010 increased 7.4% to Ps.18,465.2 million from Ps. 17,198.7 million in 2009, driven by higher average prices in the affordable entry-level segment and increased volume in the middle-income segment. Affordable entry-level homes (including our operations in Brazil) represented 67.6 percent of total revenues in 2010 compared to 78.9 percent in 2009. Middle-income homes represented 26.3 percent of total revenues in 2010 compared to 19.5 percent in 2009. In 2010, other revenues increased to Ps.1,187.0 million, compared to Ps.277.7 million in 2009. The increase is primarily a result of construction service contracts we entered into with the Mexican federal government.

Gross Profit

Gross profit increased to 30.1 percent in 2010 from 29.7 percent in 2009, which includes the effects of MFRS D-6. Pursuant to the application of MRFS D-6, which was implemented in 2007, the Company is required to capitalize a portion of its CFC, which includes interest expense, exchange gains and losses and monetary position gains and losses and to apply capitalized CFC to cost of sales as the related inventory is sold in future periods.

During the year ended December 31, 2010, the Company’s capitalized CFC that was applied to cost of sales increased 41.1 percent to Ps.758.3 million compared to Ps.537.4 million during the same period in 2009 primarily as a result of:

a) a 71 percent increase in capitalized interest expense to Ps.789.8 million during the year ended December
31, 2010 from Ps.463.1 million as of December 31, 2009, reflecting the 28 percent increase in total debt in connection with an increased investment in construction-in-process inventory; and

b) capitalized foreign exchange gain applied to cost of sales of Ps.27.9 million, compared to a loss of Ps.80.2 million during the same period in 2009, reflecting the appreciation of the Mexican peso relative to the US dollar.

Costs of sales increased by 11.7 percent for the year ended December 31, 2010 to Ps.13,727.4 million from Ps.12,285.8 million for the same period in 2009, due primarily to the increase in the Company’s capitalized CFC. On a pro-forma basis (without considering the application of MFRS D-6 in 2009 and 2010) Homex’s gross margin in 2010 was 34.0 percent, compared to 32.8 percent in 2009. The increase in gross margin was mainly driven by a higher average price in the Company’s affordable-entry and middle-income level segments homes as mentioned in the revenues section.

Selling, General and Administrative (“SG&A”) Expenses

Selling, general and administrative expenses increased by 20.6 percent to Ps.2,980.3 million in 2010 compared to Ps.2,471.7 million in 2009. As a percentage of total revenues, SG&A expenses increased to 15.2 percent in 2010 compared to 14.1 percent in 2009. The increase in SG&A was primarily a result of the addition of personnel in Homex’s international and tourism divisions, an expense which was not yet offset by revenue contributions from those divisions.

Operating Income

In 2010, income from operations increased by 8.3 percent to Ps.2,944.4 million compared to Ps.2,718.9 million in 2009. On a pro-forma basis (without considering the application of MFRS D-6), the Company’s operating margin in 2010 increased 21 bps to 18.8 percent compared to 18.6 percent in 2009. The higher margin reflects the Company’s increased profitability as a result of higher average prices.

Net Comprehensive Financing Cost

Net comprehensive financing cost (comprised of interest income, interest expense, foreign exchange gains and losses, valuation effects of derivative instruments and monetary position gains and losses) increased to Ps.314.7 million in 2010 compared to Ps.148.5 million in 2009, substantially as a result of the following:

a) net interest expense increased to Ps.177.2 million in 2010 from Ps.141.5 million in 2009, primarily due to an increase in the Company’s total debt of 28 percent;

b) the Company had a foreign exchange loss of Ps.97.8 million in 2010 compared to a foreign exchange gain of Ps.59.5 million in 2009; and

c)  the net valuation effects of financial instruments decreased from Ps.66.4 million in 2009 to Ps.39.6 million in 2010 as a result of the changes in the mark-to-market of the Company’s financial instruments during the year.

Foreign Exchange Exposure and Currency Derivatives

As of December 31, 2010, Homex’s US Dollar denominated debt consisted of two US$250 million bonds issued in 2005 and 2009 with single principal payments due at maturity in 2015 and 2019, respectively. In connection with its US$250 million bond maturing in 2015, the Company entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.13.89 per U.S. dollar through 2012. In connection with its US$250 million bond maturing in 2019, the Company entered into a principal-only swap to hedge the foreign exchange risk associated with the principal amount of this debt at a rate of Ps.12.93 per U.S. dollar through 2019 and at an average weighted cost of 4.39 percent. In addition, the Company entered into an interest-only swap to hedge the foreign exchange risk in respect of the interest payable on this debt at an average rate of Ps.11.67 per U.S. dollar through 2012.

Income Tax Expense

Income tax expense decreased by 8.8 percent to Ps.906.9 million in 2010 compared to Ps.994.3 million in 2009. The effective tax rate was 36 percent in 2010 compared to 39 percent in 2009. The decrease in the effective tax rate was attributable to charges recorded in 2009 related to the adoption of a new tax law in Mexico, along with fewer non-deductible tax items in 2010, partially offset by a higher statutory tax rate in 2010.

Net income

Net income for 2010 remained stable at Ps.1,579.9 million compared to Ps.1,581.4 million during 2009.
Earnings per share for the full year were Ps.4.52, compared with Ps.4.68 in 2009.

EBITDA

For 2010 EBITDA increased 8.9 percent to Ps.4,104.1 million compared to Ps. 3,768.3 million registered during 2009. EBITDA margin during 2010 was 20.9 percent compared to 21.6 percent during 2009.

Land reserve

The Company believes that its geographic diversity is one of the most competitives among home builders in Mexico, reflected by its operations in 34 cities located in 21 Mexican states as of December 31, 2010.

As of December 31, 2010, Homex’ land reserve was 82.3 million square meters, which includes primarily land reserves in Mexico and approximately 2.7 million square meters of land reserves for our operations in Brazil. Our land reserves include both titled land and land in the process of being titled. We estimate we could build approximately 366,680 affordable entry-level homes, approximately 29,680 middleincome homes and approximately 2,230 homes targeting the tourism market on our land reserves.

Liquidity

Homex’ total indebtedness increased to Ps.12,921.1 million as of December 31, 2010 from Ps.10,093.9 million as of December 31, 2009, mainly as a result of working capital requirements.

As of December 31, 2010, our short-term debt was Ps.1,898.1 million, mainly as a result of Ps.982.1 million of various revolving credit lines and financial leases granted by financial institutions in Mexico and Brazil. Our long-term debt was Ps.11,023.0 million, which includes mainly the long-term portion of our equipment lease obligations in the amount of Ps.235.4 million, a line of credit granted by Bancomer, S.A. for Ps. 833.3, a line of credit granted by Banco Nacional de México, S.A. for Ps.1,462.6, a line of credit granted by Grupo Financiero Inbursa S.A. for Ps.2,078.0 million, the Senior Guaranteed Notes due 2015 in the aggregate principal amount of Ps.3,095.4 million and the Senior Guaranteed Notes due 2019 in the aggregate principal amount of Ps. 3,095.4 million.

On September 28, 2005, we issued US$250 million of Senior Guaranteed Notes due 2015 with a coupon rate of 7.50 percent, payable semiannually.

On December 11, 2009, we issued US$250 million of Senior Guaranteed Notes due 2019 with a coupon rate of 9.50 percent, payable semiannually.

Covenants

Financial covenants, derived from the Senior Guaranteed Notes due 2015, the Senior Guaranteed Notes due 2019, the credit lines with Inbursa, Banamex and BBVA Bancomer require the Company to maintain:

• • a total equity of at least Ps.10,000 million; the actual equity as of December 31, 2010 was Ps.12,320.5 million;
  
  •  a ratio of interest coverage Earnings Before Interest, Taxes, Depreciation and Amortization, or “EBITDA” to the net financing expense of at least 3.0 to 1.0. The actual ratio as of December 31, 2010 was 3.17 to 1.0;
  •  a ratio of leverage (liabilities with cost) to EBITDA of less than 3.25 to 1.0. The actual ratio as of December 31, 2010 was 3.15 to 1.0;
  •  a ratio of leverage (liabilities) to equity of less than 2.50 to 1.0. The actual ratio as of December 31,
  2010 was 1.97 to 1.0; and
  •  a ratio of leverage (liabilities with cost) to equity of less than 1.50 to 1.0. The actual ratio as of December 31, 2010 was 1.05 to 1.0.
  •  a liquidity ratio of current assets to short-term liabilities no less than 1.50 to 1.0. The actual ratio as of
  December 31, 2010 was 2.81 to 1.0;
  •  a financing ratio of total liabilities to equity no greater than 1.70 to 1.0. The actual ratio as of December 31, 2010 was 1.60 to 1.0; and
  
  

As of December 31, 2010 and 2009, the Company was in compliance with the financial covenants of its debt agreements.

The Company will utilize cash from operations and new debt financings to finance working capital needs throughout 2011.

In 2011, the Company intends to follow a conservative strategy to improve cash generation and maintain a stable debt level while minimizing land investments and capital expenditures.

Working Capital Cycle

Homex reported total receivables of 10.1 percent of revenues as of December 31, 2010, representing an increase when compared to the 3.0 percent reported as of December 31, 2009, partly as a result of accounts receivable from Homex infrastructure division and as a result of a low base comparison, since during 4Q09 the company reduced its construction-in-process investments to privilege cash generation during the year ago period.

Homex reported a total inventory of 141.6 percent of revenues as of December 31, 2010, an increase of 502bps compared to 136.6 percent of revenues as of December 31, 2009. The yearly inventory increase reflects the Company’s strategy to advance housing infrastructure investments to complete the edification and infrastructure process at the same time in view that Homex’ building pace -as a result of the efficiencies generated through the use of its aluminum mould technology-, has surpassed the speed of construction of its subcontractors who are in charge of the urbanization process.

Accounts payable, calculated as of December 31, 2010, increased 85 bps to 21.5 percent of revenues, from 20.7 percent of revenues as of December 31, 2009. The days of credit improvement derives from Homex’ improved financial terms with its suppliers.