Here's 3 Need-To-Knows On LGI's $40M Deal To Acquire Austin-Market Operator

An LGI deal in the U.S.'s torrid 5th-largest market signals an accelerating pace of acquisitions driving combos through the end of 2021 and into 2022.


Here's 3 Need-To-Knows On LGI's $40M Deal To Acquire Austin-Market Operator

An LGI deal in the U.S.'s torrid 5th-largest market signals an accelerating pace of acquisitions driving combos through the end of 2021 and into 2022.

John McManus
July 16th, 2021
Here's 3 Need-To-Knows On LGI's $40M Deal To Acquire Austin-Market Operator

No. 10-ranked U.S. homebuilder LGI announced yesterday it's acquiring Buffington Homebuilding Group for approximately $40 million.

  • Here, we'll look at what the strategic acquisition means for a top 10 builder whose stated goal is to become a top-5 builder;
  • We'll also take a step back from this particular M&A deal to get a higher-level view of 2021-2023-and-beyond market dynamics around land and lot supply.
  • We'll add perspective as well on what the risk-opportunity quotient looks like, not just in the context of expected structural demand, but in light of tax and capital-flow dynamics that could shift within a 12-to-18 month horizon.

The deal adds several – seven or so -- actively-selling communities to the LGI Austin division. It's noteworthy that LGI doesn't currently rank as a top-10 builder in the Austin, Round Rock, Georgetown, and San Marcos markets, which are scorching hot now and due to keep spiralling as Silicon Valley juggernauts and other corporate growth pathways gravitate to Central Texas.

Specifically, Buffington's active-selling neighborhoods couldn't come at a better time, as four out of the five LGI communities that have been selling in the torrid market now list as sold out.

Buffington's 100 homes under construction, its fully-owned vacant developed lot portfolio of 350 sites, and its pipeline of an additional 150 lots move across to LGI's balance sheet. Average selling prices for Buffington's home designs – ranging from the low $30o,000s to the mid-to-high $600,000s, to square well with LGI's primary focus on entry-level homebuyers and its more-recent push into move-up level offerings, Terrata Homes.

The impact could show up in LGI Q3 and Q4 revenue and profitability, as LGI integrates its "systems-based" disciplines, GS&A efficiencies and values, and canny land growth strategy in with the already-proven talent and operational chops of the Buffington team.

Strategic acquirers in today's hot-and-getting-hotter M&A dynamic either want to open up – for example, into markets formerly off the radar as secondary or tertiary metro areas that have leapfrogged into focus in light of work-from-anywhere scenarios – or deepen local scale in markets they've already got a footprint.

An extra goose to the M&A vibration comes with the recent chokehold supply constraint has put on the builder orders, starts, and completions stream of activity. Due to the supply disruptions a number of the public builders are at risk of showing a drop in activity year-on-year when they get into third and fourth quarter financial reporting, and they're likely to try to offset those volume, revenue, and margin declines via strategic acquisition for immediate incremental impact to their businesses.

The most-active market activity seller targets in M&A – no matter who or what capital structure the acquirers may consist of – are in Florida, the Carolinas, Texas, California, and the Pacific Northwest.

Here's the five boxes they'll look to check. We expect M&A activity to run hot over the next 24 to 30 months, at least, with focus on

  • Profitable revenue – based on a good valuation – with an immediate impact to both sales volume and margins, with the benefit of an extended 18-to-24 month minimum pipeline of developed lots.
  • Direct exposure to both demographically-powers entry-level and – depending on business sector job-formations -- move-up product segments, aligned with the character of economic development in the area.
  • New geography – economic, social, health, future-of-livelihood, technology, environmental, and demographic forces may signal shifting ground over the longer-term future. Market desirability looks quite different today in some respects – i.e. the emergence of farther-out suburbs and fly-to destinations as hybrid work-life solutions – than it may have mapped in 2018 and 2019.
  • Cycle resilience – acquirers tend to gravitate toward seasoned operators who've weathered turbulence in the past and showed both survival and thriving skills through market ups and downs
  • Talent pool – relationships, agility, energy, and leadership – are in scarce supply up and down the ranks, particularly as challenges focus on community acceptance, land-seller intel, technological transformation and upskilling, and product design, engineering, and development.

Strategic buyers – primarily the 20-or-so pure-play public homebuilding enterprises, a few well-capitalized and acquisitive privately-held companies, several Asia-based global powers that include Daiwa House, Sekisui House, Sumitomo Forestry, and Landsea (to name the bigger entities), Knoxville, TN-based Berkshire Hathaway unit Clayton, and several highly-active Canada-based builder-developers. Another strategic entity – a group of high-net-worth individuals with experience in homebuilding – has been taking shape under the name of American Southern Homes, having acquired three homebuilding operators so far.

Added among those strategic trollers are land-hungry institutional investment and development enterprises keen to stoke and profit from the quickly emerging business opportunity of purpose-developed Built-to-Rent communities, neighborhoods, and portfolios.

We've never seen as many potential buyers as there are now," Tony Avila, co-founder and managing principal of Encore Capital Management and ceo of Builder Advisor Group tells John Burns Real Estate Consulting principal Dean Wehrli in this podcast on IPOs and M&A activity. "Our potential buyer list for homebuilders is literally in the hundreds, but active buyers, we're north of 40.

Always a land acquisition strategy counter-puncher, LGI looks at opportunity, both for organic growth and acquisitions, with a particular eye to the model and human management "fit" with a business and selling culture that has set itself apart from peers with its by-the-book template, particularly successful at drawing renters to morph their monthly payment power into new-homeownership.

For prospective sellers – as with everything in residential real estate right now – the driver's seat is theirs, and they can choose from buyers behind any door, whether its price, terms, succession planning, plans to grow, chemistry, legacy or any and all of the above.

Again, Builder Advisory Group's Tony Avila, in conversation with JBREC's Wehrli, notes that homebuilding seller motivations are both obvious and less-so. It should be noted that Avila's Builder Advisory Group has participated in eight M&A transactions so far in 2021 – including the LGI-Buffington Homebuilder Group deal, and Avila's sense is that 2021 and beyond are setting up to be bumper-crop years for deals.

  • Valuations are high.
  • Nerves – having endured The Great Recession, some sellers got spooked or remain wary of both asset-bubble risk and or a recession in the offing, given inflationary pressures.
  • 90% of sellers' net worth are in a single vehicle – their homebuilding vehicle – and may want to take chips off the table so they can diversify their personal net worth portfolio or they may just want to retire within the next two to three years, and figure that now's the moment to exit, versus later.
  • Still others, younger entrepreneurial hard-chargers who've struck on a solid market niche and simply need a capital infusion to compete in the arena for lot and land futures.

Look for Letters of Agreement, announcements, and settlements to pick up pace in the third and fourth quarters, with a flurry of M&A closings by year-end. It's a risk-on land market that will draw on all of builders' scarce reserves of discipline to make deals pencil profitably.

What about those escalators for land appreciation? Most builders vow that they pencil lots to current land basis pricing minus appreciation. We'll see.

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John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.