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Paradise Found; Trading Castro's Cuba For Puerto Rican Capitalism
Victor Galán escaped Castro's Cuba for Puerto Rico's American-style capitalism. Thanks to the mortgage boom, he has done very, very nicely.
March 15, 2004
By the Numbers
High population density and low supply drive Puerto Rico's housing boom.
1,100 people Puerto Rico's population per square mile.
$89,000 The size of R&G's average residential mortgage.
71% Percentage of Puerto Ricans who live in urban areas.
100,000 units Current housing shortage on the island.
Squinting into the bright sun, Victor Galán guides his 68-foot Buddy Davis sportfisherman boat into San Juan's calm harbor. "Whenever things get this good, I get nervous," says Galán. "We have to worry about deficits, terrorists, Iraq--I just don't want to get caught by interest rates."
Still, he likes his chances as a solo pilot. Over three decades Galán has almost singlehandedly turned R&G Financial into the third-most-profitable company in Puerto Rico, with 50 mortgage offices and 46 bank branches on the island and in Florida. With interest rates at 40-year lows, R&G wrote about 28,000 mortgages last year, increased its assets 30% to $8.2 billion and its net income 36% to $131 million. Its stock, which trades on the NYSE, has nearly quadrupled since 2000. That makes Galán's 43% stake, added to other assets of his, worth $700 million. Galán, 70, is set to become the first Puerto Rican on The Forbes 400 list of richest Americans. (He pledged allegiance in 1967.)
Born in Cuba, he was a financial manager at a cement company when Fidel nationalized private industry. Galán left with his wife in 1961. For two years he helped manage some lumber mills in Honduras, but with the Cuban market closed, the business dwindled and Galán found himself liquidating lumber inventory in Puerto Rico, where he decided to stay.
The U.S. territory was replacing Cuba as the most dynamic economy in the Caribbean, thanks to a flood of U.S. manufacturing firms lured by tax breaks. Galán worked for some of them, including General Foods and Hoover. He found his calling, though, by teaming up with Salvador Rodriguez and pairing U.S. banks and real estate investment trusts with Puerto Rican construction outfits just as a housing boom was getting under way.
Setting out on their own in 1972, Rodriguez and Galán launched R&G Mortgage, investing $25,000 each and getting a $50,000 loan to satisfy the minimum capital requirement for a Federal Housing Administration license. As middlemen they brought loans--from community banks and U.S. mortgage REITs hungry for better yields--to island developers, collecting, say, $50,000 for brokering a $5 million construction loan. Late in 1972 Galán bought out his partner when Rodriguez took a job as chief of staff for Puerto Rico's governor.
Galán survived the boom and bust of construction loans by branching into home mortgage lending. Smart move: Housing prices appreciated 5% even in slow years. Galán whipped up enthusiasm among his mortgage office managers with bonuses of up to 75% of their salaries if they reached quotas for new loans. R&G and rival Doral Financial fought each other in the streets, advertising heavily in newspapers and on billboards to induce walk-in traffic at their mortgage offices.
To fund those mortgages Galán needed deposits. In 1990 he bought a small (assets, $52 million), failing San Juan thrift, injecting $4.5 million to rebuild its dry-rotted balance sheet. He drew depositors by offering slightly higher rates, Saturday hours, low fees and new services--first credit cards, then brokerage accounts and insurance. Galán found synergies where he could, putting a mortgage office inside or next to each new branch of R-G Premier, as he called the bank.
Saturdays aren't holidays for the still hard-driving Galán. He's usually at the office, following up on orders to his deputies and sending out e-mails. His wife, Nelida, is struggling to get him to take her to Europe on vacation. "The boat is just another office," says Galán's son, Victor Jr., a 40-year-old R&G vice president. Indeed, the yacht was christened My Way by her North Carolina builders because they were constantly making design modifications to accommodate Galán's wishes.
It pays to keep on top of things. Like many mortgage bankers, Galán sells off most of the mortgages he writes while retaining the right to service the loans (for an annual fee of about 0.5% of the outstanding balance). Also, like the big mortgage issuers on the mainland, he has a habit of booking paper gains on the servicing portfolio: As soon as a loan is closed, he books as income the value of the right to service it. (For more on this controversial practice, see p. 174.) R&G has servicing rights on $10.9 billion of loans, an asset it values at $120 million.
A refinancing boom like the one last year is a mixed blessing: It creates gains from new mortgages at the same time it forces writedowns of servicing rights on old mortgages, which vanish sooner than expected. The cooling of the refi boom could hurt earnings, on balance.
Galán, in fact, is betting that Puerto Ricans, 75% of whom own homes, are likely to continue refinancing mortgages even if rates shoot up, because steady house appreciation means islanders continually tap their homes to support spending habits. Puerto Ricans, who on average earn $11,000 a year, are more prone to falling behind on payments than mainland Americans, but remarkably less likely to wind up in foreclosure. R&G's ratio of nonperforming loans to total loans was recently 2.3%--a heart-grasping four times the U.S. median--but at 0.32% its ratio of net charge-offs to average loans was in line with that of similar mainland banks. "Somehow they always make sure to come up with the money from friends or family," says Galán.
The other hope for maintaining growth rests in central Florida, where in 2002 R&G bought sleepy Crown Bank for $100 million, or just under twice book value. It's tough trying to grab business from much bigger rivals in Florida like SunTrust, Bank of America and Wachovia. So Galán is taking aim at the 450,000 Puerto Ricans living in central Florida. He slapped the name "R&G Crown" on the branches and injected new ATMs, telemarketers and lots of ads into the market. In less than two years assets there have nearly doubled to $1.2 billion. Galán recently bought an apartment in Orlando, where he now spends half his time. Meaning: He's just getting started. Forget that European vacation.