Optimism at US LBM and 9 Other Takeaways from L.E.K.'s Building and Infrastructure Conference

Panelists speak out on M&A activity, the mortgage interest deducting, housing starts, and the lending market

By Craig Webb

US LBM president L.T. Gibson spoke for many participants at the Building and Infrastructure Conference in New York last week co-sponsored by L.E.K. Consulting and Lincoln International. "Our appetite for acquisitions is high because we're convinced of the recovery," he declared at the Oct. 4 event. "There are plenty (of investors) coming in that are looking for good, well-run companies," he added, while dealers are becoming aware of those opportunities as they make plans to grow.

Gibson--whose three-year-old, 40-location, 1,500-employee company ranks among the fastest-growing LBM operations in the nation--found plenty of fellow optimists in the investment community and among economists at the Oct. 4 event. While attendees were interested in all types of home products and companies and not just those sold at pro-oriented dealers, much of what they said has implications for ProSales readers. Among the key takeaways from the conference:

"The lending market is white hot," particularly for companies with EBITDA (earnings before interest, taxes, depreciation, and amortization) of $50 million to $300 million per year, declared Uzair Dossani, a principal at Warburg Pincus, whose holdings include Builders FirstSource. He noted that he knew of two private transactions, one involving tools and another concerning a big-box retailer, where the amount loaned was six times the company's earnings.
Gibson indicated he certainly has noticed the change in attitude among lenders. "We refinanced our revolver [i.e., US LBM's revolving line of credit] and got interest from several banks," he said. "That varied greatly from a few years ago, when we didn't have any interest--not even from our existing lender."
John Burns, president of John Burns Real Estate Consulting, fretted more over how the elections would affect the future of the Federal Housing Administration (FHA) than the mortgage interest deduction. Burns cited Republican presidential nominee Mitt Romney's comment about possibly eliminating FHA's parent, the Department of Housing and Urban Development. "I do not think Congress would let FHA go away," particularly at a time when FHA backs 25% of all the mortgages being granted today, Burns said. "It would be suicide.
As for the mortgage interest deduction, which might get phased out as part of an effort to balance the federal budget, Burns said semi-ironically that "Wiping it out altogether ... would be devastating to the housing industry, but not as devastating as you think." That's because a lot of people never use the deduction; they live in homes that are so low-priced or have mortgages that are so low that their standard deduction is more valuable. Burns said the most likely choice that Washington will make would be to eliminate the deduction on second homes and reduce to $500,000 from $1 million the maximum amount of mortgage borrowings for which the loan interest is deductible. But he added that the Simpson-Bowles commission's recommendation of getting rid of the deduction entirely as provide a 12% credit instead would raise more money and do more for smaller homeowners.
In contrast to the lending market, M&A firms are basing what they're paying on current performance, not future prospects, suggested Ira Starr, a founding partner at Long Point Capital. "We've had a lot of head fakes over the past few years, so I'll believe it when I see it," Starr said of the recovery. "I don't think [the market] is going to explode." He added later: "We're trying to buy things on today's profitability rather than on expectations of profitability."
That said, Andrew Prete, vice president for business development at Nortek, said he was "inundated" between May and mid-September with prospects and proposals. "It felt like there were five years worth of pent-up deals," he said. And while the pace has slowed, "I expect 2013 to still be robust," he said.
Richard McPhail, vice president of strategic business development at The Home Depot (HD), introduced a new acronym to the group: BOPUS, short for Buy Online, Pick Up at the Store. It's part of HD's ramped-up efforts to more tightly link its online and physical stores. Only 2% of HD's total sales occur at www.homedepot.com, he said, but the company estimates 50% of all its sales are influenced by the online presence. "We've had will-call forever, delivery forever,"he said. "But [now we're] thinking about how to enable the pros to buy with us more easily. BOPUS is the first step."
In an interview with ProSales before the event, Robert Rourke, head of L.E.K.'s Chicago office, said dealers in lots of LBM sections should be concerned about how Amazon Supply, the company's new venture serving pros, will affect their sales. "We see Amazon taking market share from a lot of categories," he said. While lumber is unlikely to see much impact, Rourke said Amazon could win sales in areas such as plumbing, electrical, and lighting.
As always, the construction industry varies markedly by region. "Some of my private builder clients in the Southwest are printing money," Burns said, "and some in the Northeast are still having problems."