LGI Homes is buying Minneapolis-based homebuilder KenRoe for $27 million, an acquisition that gives The Woodlands company a valuable pipeline of lots at a time when there is a historically low inventory of homes on the market.
As the pandemic and work-from-home added to the surge in homebuying demand that was underway as millennials begin moving into single-family homes, finished lot deliveries has been the bottleneck determining homebuilding capacity, LGI executives said in an earnings call.
“I think it’s pretty clear that there’s a lot of competition for land,” said Eric Lipar, the company’s chief executive. “Every builder wants to increase their community count. A lot of single-family rental operators are looking for land positions as well.”
Acquiring KenRoe will give LGI Homes 85 homes under construction, 130 finished lots, 390 lots that are either raw or under development, and control over 2,500 raw lots available for future sales. That represents a 9 percent increase over the 28,784 controlled lots LGI Homes reported at the end of the first quarter. The KenRoe properties are all in the Minneapolis area.
“We are pleased to add KenRoe’s valuable portfolio of land and their experienced and dedicated team to the LGI Homes family,” Lipar said in a release. “This opportunistic purchase complements our existing positions while expanding our geographic presence and product offerings, in the highly attractive and growing Minneapolis market.”
Lawrence Dean, the Houston regional director for the housing market research company Zonda, said that buying other homebuilding companies “is a current strategy that builders are implementing to increase their pipeline of lots.”
The sudden surge in demand has caught some developers “flat footed,” he said.
“Because nobody anticipated that we would suddenly need 20 (percent) to 30 percent more lots, developers weren’t pushing forward with trying to plan and entitle,” he said, “and all of the steps in the process that have to be done sometimes two years in advance to have a lot to build on now.”
Buying another homebuilder is a fast way to increase home starts and sales. In late 2020, Dean said, an Arkansas builder, Rausch Coleman Homes, bought Greenco Homes in Houston for the same reason.
LGI’s purchase comes as sales and income have soared for the homebuilder.
On May 4, LGI reported that in the quarter ended March 31 it recorded net income of $99.7 million on revenue from home sales of $706 million, compared to income of $42.8 million on sales of $455 million in the year-earlier period.
The company has seven operating regions, with Minneapolis as the sole market in the Midwest segment. It did not have significant sales in that market in the first quarter, according to its most recent filing with the Securities and Exchange Commission. The largest region, Central, which includes Houston, accounted for about 41 percent of the company’s home sales in the first quarter.
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