Building materials giant Louisiana-Pacific Corporation agreed this past week to invest $45 million in Ireland-based off-site framing firm, Entekra, a breakthrough for vertical integration of residential materials and products supply, distribution, design, engineering, and construction processes. The investment is "a potential game-changer for home building in the United States," Builder Editorial Director John McManus says.

"The agreement provides a big-time capital launch for one of American residential construction's Silicon Valley-like moonshots, and meaningfully changes rules of the game in effect since the 18th Century on how things get done," McManus writes today. The deal marks a "catapulting forward into 21st Century style technology-enabled work-streams that house builders in many parts of Europe and Asia have routinely practiced for decades. "

Here's the rest of his column:

This deal pairs a $2.2 billion publicly-traded global forest products brand with a home construction maven new to the North American marketplace, but with decades of factory-based wood-frame construction experience in Ireland, the European continent, and Asia under his belt. LP produces and processes all things wood framing, and Entekra designs, pre-engineeers, and, with advanced tooling, automation, and manufacturing assembly lines, makes building enclosure systems--walls, floor, and roofing--in its factories. Then, delivered to sites on flat-bed 16-wheeler trucks, panelized wall, flooring, and roofing systems can be assembled to plate level on a pre-poured slab by four skilled workers and a crane in a matter of six hours.

Gerard McCaughey, ceo and chairman, Entekra
Gerard McCaughey, ceo and chairman, Entekra

In a sense, the new financial connection that allies LP and Entekra bears striking deja vu similarities to a 2005 deal in which Entekra founder and CEO Gerard McCaughey made when he was the CEO of an Irish company, Century Homes, which delivered 8,000 homes a year from factories around the United Kingdom--selling to global insulation giant Kingspan for $100 million euro.

Entekra, whose Northern California factory operations opened its doors in late 2016, and delivered its first homes for Stonefield Home's Mission Village project in Los Banos this past August, now can crank up production to capacity in its Ripon, Calif., plant, and build a second, much larger facility outside Modesto to come online late 2019. Whelan Advisory, LLC, served as exclusive capital advisor to Entekra in the LP deal.

Here, from a profile we did of Entekra in January, is the outlook for the company's trajectory, given that it has at last secured funding from LP to move forward on its cap-ex operational ramp-up, and that it has had--up to now--to turn away business from a growing roster of blue-chip high-volume home builders..

[They've kicked] the Ripon factory into continuous production mode, and McCaughey and his co-founding chief operating officer Bran Keogh expect that plant to reach its 500-home annualized run rate target in mid-2018. Revenue for Entekra gets its rocket-fuel if and when it can tap growth capital enough to open a second, 175,000 sq. ft. facility in Northern California by the fourth quarter of next year, capable of delivering 3,000 homes a year on single shifts of production. Going into 2020, Entekra’s strategy calls for yet another big 3,000-unit-a-year facility in Southern California, allowing it to cover home building epicenters from within a 250-mile range. By then, McCaughey and Keogh and team plan to be running a $166 million operation, throwing off gross margins of 27%, and net income of $13 million.

McCaughey has confirmed that Entekra has signed business with a number of the largest public home building companies to build enclosures for Northern California projects, as well as a host of high-volume private builders. Now, with the LP capital infusion, Entekra's design-engineering-construction-as-a-service model joins a rapidly forming, nationally dispersed infrastructure of factory facilities capable of supplying builders ready-to-crane-in-and-assemble precisely pre-framed wall, flooring, roofing panels, components, modules, and systems.

Just last week, we reported of a similar strategic collaboration pairing off-site builder Bensonwood/Unity Homes and CertainTeed/St. Gobain, another global manufacturing empire in the business of marketing interior wallboard and exterior cladding, roofing, and trims.

On the Bensonwood-CertainTeed venture, we wrote:

A joint development agreement with CertainTeed/Saint Gobain to develop software automation with interface and modularity standards, that aims to help fuse industry fragmentation with the development of a software system to allow plug-and-play systems, and standardized/algorithmic modularity.

As Bensonwood/Unity Homes' Andrew Dey writes:

The eventual fruits of this collaboration will include new wall assemblies with specific performance characteristics, designed and engineered to be manufactured efficiently using off-site construction methods that Unity is pioneering in North America. These assemblies will be incorporated into the software platform that is also being developed as part of this partnership. While early versions of the software will feature CertainTeed assemblies, ultimately the software will be “open source,” with a broad array of assemblies and components from many manufacturers.

To an ever greater degree, especially as labor capacity--writ large--looms as a bigger and bigger constraint on builders' ability to deliver homes on schedule and at prices they can predict and keep to as promised, integrated off-site makes more and more sense, even among hold-outs skeptical of any fundamental change to stick-built, site build processes that have dominated construction for a century. Many of those processes evolved out of remarkably cheap access to materials and labor, conditions that have long since gone away. Now, as building's skilled labor ranks dwindle without realistic hope of reversing momentum, and as global economic trade conflict forces up materials prices, the urgency around finding alternative, innovative, more-efficient, and more automated building processes is intensifying toward an inflection point.

”There is a lot of capital chasing investment opportunities in innovative and disruptive businesses that focus on improving the housing construction process," Whelan Advisory founder and ceo Margaret Whelan says. "LP management recognized the Entekra team’s extensive experience with offsite solutions and this new relationship should facilitate its continued success in offering a Fully Integrated Offsite Solution. I believe that we’ll look back on 2018 as an inflection point for the U.S. housing industry in adapting more efficient building processes. We were honored to work on this transaction and to contribute to Entekra’s success.”

The big challenge of the moment for both off-site services like Entekra, Bensonwood's Tektoniks, Katerra, and other factory facilities as well as for builders is two-fold.

One is for builders, ultimately, to re-do their business and operations models. It's the only way they can ultimately achieve efficiencies gained from the speed, precision, and materials waste elimination of off-site construction processes. The economic equation for what builders buy--in materials, labor, real estate, time, and overhead expense--and what they sell based on the value they generate on the home site needs to focus on their skill at matching home buyers to home models they want in communities they want.

The other noteworthy challenge is for off-site providers to deliver on their promises, of time-compression, of quality work, of waste elimination, and of ultra-high performing enclosures. The "first cost" per-square-foot expense of producing flooring, walls, and roofing off-site is higher--on an item basis--than it is to bring all those materials to a site and stick build them from scratch on site.

It's only by factoring in the time, the ability to gain velocity on multiple units at the same time, and the ability to extract waste of days, human error, materials, and labor hours where the scalable economic benefits of off-site start to make sense. Of course, in expensive-to-build places like California, where labor costs are soaring and where rules require that homes meet net zero energy standards by 2020--most of which are achieved through the precision and engineering of the building envelope, the economic benefits of off-site become dramatically clear more swiftly.

What the LP-Entekra partnership also makes clear, however, is a rapid re-formation of dynamics in the channel of distribution and value creation for products, materials, and their globally-sourced subcomponent parts into construction's supply chain.

The ability for building products manufacturers and materials suppliers to continue to participate and profit in a supply chain where new technology, logistics, and purchasing practices aim squarely at taking out expense that does not produce value for end-user home buyers now depends on more than legacy relationships with local trades and deals with nearby lumber yards.

Increasingly, as the ability to mark up land, materials and labor by several orders of magnitude--to maintain margins for each stage of the procurement-to-delivery process of home building--becomes more rigid and unyielding, builders, trades, and manufacturing and materials partners are going to have to join with equal skin in the game to take costs out that don't produce home buyer value.

The LP investment in Entekra affirms that that future era in home building has arrived. Per this morning's announcement:

“This investment marks a logical extension of our strategy to position LP as a leading building solutions company,” LP CEO Brad Southern said. “The overriding constraint of supply in the housing industry today is a shortage of labor, and combined with rising construction costs, underscores the need for more efficient and innovative building techniques. Entekra’s off-site framing solutions are designed to help builders meet market demand, while increasing productivity, reducing waste and improving quality of the home construction process. We are excited by the prospects in the burgeoning off-site market and the long-term opportunities this investment presents for LP.”