Investors Warm to Residential Roofing Services

Private equity may have gravitated to commercial contractors and their large ticket services at the start of the roofing sector’s consolidation wave, but investors are beginning to appreciate the residential market thanks to an aging housing stock, greater new home construction and uptick in extreme weather events.

Investors such as Halmos Capital Partners, which acquiredWoodstock, Ga.-based residential roofing business Northpoint Roofing Systems in February, are quickly expanding to follow the demand.

Northpoint is targeting add-ons between $1 million and $7 million in Ebitda east of Texas and Minnesota, with the goal to become a $200 million in revenue platform over the next few years. The portfolio company is also setting up offices in new locations, such as in Tennessee, to grow its reach.

“Residential roofing is not dissimilar to residential HVAC in that it’s profitable, asset-light, fragmented and non-discretionary,” said Halmos partner Daniel Adan.

Residential roofing also has the benefit of being in an earlier stage of consolidation with less competition compared to the residential HVAC market and its sky-high valuations, he added.

Northpoint provides residential roofing repair and replacement as well as gutter, solar and skylight window installation and repair in Alabama, Connecticut, Florida, Georgia, New Hampshire and Tennessee.

The company announced three add-ons since the investment from Halmos —Birmingham, Ala.-based Cardinal Roofing and Restoration in the Southeast and South Windsor, Conn.-based Rising Star Roofing LLC and Manchester, N.H.-based Master Roofers LLC in the Northeast.

“We’ve been super busy thus far and expect to continue being very active with add-ons in residential roofing,” Adan said.

Battered Roofs

The Southeast is “the largest and current most sought-after region for roofing contractors in the United States, due to extreme weather conditions and population trends,” said a report from investment bank Hyde Park Capital Partners LLC.
Roofs typically have an average lifespan of 10 to 25 years but that durability drops by about 30% in the Southeast, making the region more attractive for roofing companies and investors, according to the report.

U.S. housing has also been growing older, with the median age of homes occupied by owners hitting 39 years, according to a 2021 report from the National Association of Home Builders. Homes in Northeastern states such as New York, Massachusetts and Rhode Island have a median age between 55 and 60 years. On the lower end of the spectrum, Nevada has the youngest housing stock at 23 years.

At the same time, new home construction has steadily been increasing since 2009, peaking at 1.8 million housing starts in April 2022 and adding to the future base of homes for roofing businesses to service.

But the housing market has struggled as Federal Reserve rate hikes have pushed mortgage costs higher and homebuilding has dropped to a three-year low as of August, Census Bureau data shows.
Still, total spending on roofing services is expected to grow at a 3%compounded annual growth rate through 2026 taking into account the expected decline in new homebuilding in the short-term, according to a June report from investment bank FMI Capital Advisors Inc.

More intense weather events as well as growing consumer interest in energy efficiency are also driving demand for services such as re-roofing and solar installation.

Aurora Capital Partners in December 2020, for instance, recapitalized Denver-based Premier Roofing LLC, which re-roofs properties primarily damaged by hail or wind and focuses on geographies with strong and recurring storm activity.

Meanwhile, the U.S. added record rooftop solar capacity for a single year in 2022. Rooftop solar panels installed on homes account for a majority of that capacity.

While homeowners can put off repair or re-roofing services for a period of time, those delays will only create a backlog of demand in the next two to three years, the FMI report said.

Repairing Roofing’s Image

Residential roofing investors are looking to revamp a predominantly mom-and-pop sector by investing in technology and marketing, customer experience and selling additional services such as siding and windows as they scale to create value.
“Roofing historically has had a bad rap with poor labor dynamics and terrible customer service but we see that as an opportunity to professionalize and build a brand,” Adan said.

Meanwhile, well-run residential roofing services businesses can grow margins into the mid-teens, supporting private equity’s thesis for investment, Adan added.

Among recent residential roofing deals, Alpine Investors LP in July formed Charlotte, N.C.-based Vertex Service Partners by combining four roofing companies; Morgan Stanley Capital Partners acquiredMinneapolis-based Allstar Services in May; and Gauge Capital LLC in March 2022 acquired Plano, Texas-based Crest Exteriors and Lincoln, Neb.-based Apple Roofing to launch a new residential roofing platform under the latter’s name.

Halmos for its part, is investing in Northpoint’s management, enterprise resource planning, customer relationship management, human resources and compliance, among other organic initiatives.

The firm typically invests in platforms with $2 million to $30 million in Ebitda and $10 million to $100 million in revenue. Lower middle market firm NewSpring Capital Management LLC provided subordinated debt and equity to support Halmos Capital’s investment in Northpoint.

Halmos also owns commercial HVAC platform, Thermal Concepts LLC. The Davie, Fla.-based business is targeting add-ons in a similar size range as Northpoint Roofing but has a narrower geographic focus on the Southeast.

By Nikitha Sattiraju