Home Improvement Market
By Garth Martin | November 12, 2018
Real Estate Market Going Strong
The U.S. real estate market is hotter than pre-recession periods in ’07–’08 driven by an excess of applicable home buyers and a shortfall of available homes. Although interest rates are still near historical lows, they are slowly rising with expectations that they will continue to do so. Home buyers are left at a disadvantage in a highly competitive “seller’s” market. Given this competitive landscape, a multitude of individuals that are currently homeowners are turning to home renovations and home improvement options for potential to increase home values further or avoiding the purchase of a new home in this competitive market.
The Federal Housing Finance Agency tracks real estate price information over time in different regions of the United States as well as a national average. The “Home Pricing Index” measures each region’s home prices as compared to 1991 (set to 100). These Home Pricing Indexes are now similar to, if not higher than, the indexes in the ’07–’08 era, as depicted below.
Home Pricing Indexes
To better understand home ownership and home improvement markets by region, we evaluated the U.S. by population size and age demographics. As it relates to populations and age demographics according to 2016 U.S. Census Bureau statistics, the Southern region of the United States, consisting of highly populated states like Texas and Florida, have the highest population of people and also consists of the most states — slightly providing an advantage in obtaining the largest population compared to the other three regions. The Northeast consists of the smallest population group, but also consists of the smallest geographical area.
Market Segmentation: U.S. Census Snapshot
Taking a brief snapshot of the real estate market we found that housing prices are rising and in some instances home renovations outweigh the benefits of purchasing a new home. Also, the homeowner demographic is rapidly changing with millennials stepping into home ownership and the baby boomers entering an age where home renovations to accommodate life changes are a necessity. As we explored geographical regions, the Southern and Western regions seemingly demonstrate an attractive market potential due to larger populations, but the Northeast region presents a strong market opportunity when considering family income levels and the affordability of housing. With all these factors taken into account, the real estate and home improvement market look strong moving forward.
M&A Market Landscape
To get an understanding of some high-performing public companies in the home improvement space, 7 Mile Advisors analyzed home improvement-related organizations. The quadrants below depict public entities in the Building Products, Distribution & Services (shown in blue) sector and shows their reported profitability (as measured by Gross Margin percentage (GM%)) and valuation (as measured by Total Enterprise Value as a multiple of EBITDA (TEV / EBITDA x)) metrics as well as their Year Over Year Revenue Growth Rate (Rev Growth YoY) compared to valuation metrics. These organizations primarily operate as contractors, retailers, and/or suppliers within this space.
Public Benchmarking Quadrant
Quadrant 1: GM% vs. TEV / EBITDA Multiples
Quadrant 2: Revenue Growth Rates vs. TEV / EBITDA Multiples
Two key financial metrics that are potential indicators of EBITDA and Revenue trading multiples are Gross Margin percentage and Revenue Growth Percentage shown in the quadrants above. For the Home Improvement market we typically see GM%s in the 25–35% range, higher margins tend to indicate higher trading multiples as shown. Revenue growth rates year-over-year can help to explain why some companies are trading with high multiples given a lower gross margin, which helps to explain the case for BlueLinx Holdings.
Looking at this space from an M&A perspective, we found that partially due to the strong real estate market and partially due to strong company performance, EBITDA multiples are trading at all-time highs. Large strategic organizations and private equity groups are relentlessly trying to find the next good investment in a highly competitive market in order to deploy large amounts of cash as we round out another year of bullish growth. Like the consumer real estate market, the Home Improvement M&A market is absolutely a seller’s market. Public companies are demonstrating growth quarter after quarter with almost no immediate signs of a slowdown. Now some type of economic recession is not out of the question in the next 12–24 months, which makes the current M&A market all the more enticing for sellers.
See below for a listing of recent transactions in this space, private equity groups and some companies on our watch list.
Private Equity Groups
If you’re a business owner looking into the various options when selling your business, private equity groups are great buyer candidates — and now is as good as any time to pursue this type of investment because private equity groups have large amounts of cash to deploy. There are a number of groups that focus on the home improvement space, or more specifically, commercial and residential building products and distribution, light manufacturing, construction services and more. Within these sectors, there are several funds that focus on lower middle market sellers; we thought we would highlight below:
Summit Park: Private equity firm specializing in buyouts, growth capital, industry consolidations, and recapitalization transactions. Preferring to invest in lower middle market, later stage, and mature companies. It does not invest in startups, early stage companies, and turnaround transactions. Summit Park currently holds an investment in Parkline, a specialist in industrial building applications.
Tecum Capital: Tecum Capital Management is a private equity firm specializing in mezzanine debt investments, subordinated notes, management buyouts, recapitalizations, generational transitions, mergers and acquisitions, and growth capital investments. The firm is sector agnostic and focuses its investments on plastic products, aerospace and defense, trading companies and distributors, commercial services and supplies, distributors, food products, healthcare services, and components. Tecum currently holds investments in Marwin, a specialist in attic stairways among other door systems, and Kitchen Cabinet Distributors.
Shorehill Capital: Shorehill Capital LLC is a private equity firm specializing in buyout and add-ons acquisitions, in lower middle market companies. The firm seeks to make investments in industrial services, engineered industrial products, and distribution sector. Within the industrial services sector, it focuses on energy management and power components, industrial components and parts, injection molded parts, power transmission products, protective products, specialty contracting, value-added maintenance and repair service, technical support and services, assembly, kitting and calibration, installation and aftermarket support, pumps and valves, test and measurement. Currently Shorehill Capital holds an investment in Beacon Roofing Supply.
Recent Notable M&A Transaction Per CapIQ
- TopBuild acquired United Subcontractors, Inc. as of May-18 to continue their roll-up strategy of contracting firms. USI is significantly larger than other targets TopBuild ($475m) acquired in recent years. According to TopBuild’s CEO, “Acquisitions remain our number one capital allocation priority and we continue to look for opportunities that will enhance our customer value proposition, market share and earnings growth.” Look for them to continue their aggressive acquisition profile.
- Installed Building Products announced the acquisition of several recent entities including the following: Cutting Edge Glass (Aug-18), Water-Tite Solution Inc. (Sept-18), Trademark Roofing and Gutters (Sept-18), and Advanced Fiber Technology (Oct-18). So far in 2018, Installed Building Products has closed 10 acquisitions, adding approximately $76m in revenues. The CEO stated, “Acquisitions remain a key component of our growth plan and we continue to have a robust pipeline of acquisition opportunities across multiple geographies, products and end markets.”
- Beacon Roofing Supply announced the acquisition of Atlas Supply, Inc. in July-18. Atlas expands Beacon’s sealant coatings, and waterproofing business and adds capacity in the Pacific Northwest. Beacon’s CEO stated, “The Atlas acquisition enables Beacon to serve customers along the entire west coast and a portion of the Southwest and enhances our strategy to grow our strong margin complementary products business.”
Middle-Market Home Improvement Companies to Watch
- Alure Home Improvements — A Northeastern focus with wide offerings of Kitchen, Bath, Windows, Siding, Roofing, and Alterations with a long list of awards including Best Houzz 2017, Forbes Enterprise Awards, Qualified Remodeler Top 500, Master Design Awards 2016 and more.
- Treeium — California based with vast offerings in Home Remodels as well as Energy Saver & Green Energy Services. Awarded by Inc. 500, Houzz, Best of Home Advisor 2018, Qualified Remodeler Top 500, 550 Remodeling and more.
- Neil Kelly Company — Pacific Northwest based with a full service offering in the remodeling industry and highly reviewed for high-end work on Houzz and Angie’s List.
- Greater Dayton Construction Group — Midwestern based with Insurance Restoration and Building/Remodeling services. Continually nominated nationally and regionally for the CotY awards.
- Allen Construction — California-based high-end remodeling organization awarded for Best in Santa Barbara in 2018, Pacific Coast Fastest Growing Companies List, Best of Houzz 2018, Qualified Remodeler Top 500 list.
- Normandy Design Build Remodeling — Chicago-based remodeling organization awarded with 2018 Design Awards in Professional Remodeler Magazine, 2018 Top Design Award, 2018 Top 500 Remodelers and many more.
- Case Architects & Remodeling — East-coast based and highly recognized by 2018 Crystal Design Awards, 2018 Top 500 Remodelers from Qualified Remodeler, Top 550 Remodeling in 2018 from Remodeling magazine and more.
- The Airoom Companies — Illinois based and awarded with best of Houzz, Qualified Remodeler, Best Residential Remodeler and more.
- Pacific Homeworks — Southwest Pacific based and awarded by Qualified Remodeler, Owen’s Corning Platinum Preferred Contractor, Texcote and more.
- BOWA — Based in Virginia with awards from/as Best of Arlington 2018, Bethesda Magazine 2018 Top Vote Getter, Contractor of the Year in 2018, Best of Houzz 2018 and more
This listing of companies was selected based on a mixture of company size, acknowledgments, and service offerings.
Author: Garth Martin, Associate at 7 Mile Advisors
About 7 Mile Advisors
7 Mile Advisors provides Investment Banking & Advisory Services to the Business Services & Technology Industries globally. 7 Mile Advisors advises on M&A and private capital transactions, and provides market assessments and benchmarking. As a close-knit team with a long history together and a laser focus on our target markets, 7 Mile Advisors helps its clients sell companies, raise capital, grow through acquisitions, and evaluate new markets. For more information, including research on the M&A markets, visit www.7mileadvisors.com.