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This Under-the-Radar Homebuilder Has a Huge Backlog: Here's Why It Could Get Much Bigger

By Jason Hall and Tyler Crowe - Dec 12, 2020 at 6:00AM

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Housing is at the forefront of a decade-long megatrend, and NVR is likely to be a massive winner.

Housing is a massive industry, and it's one that is often overlooked by investors. That's particularly true for homebuilders, a tough, competitive business that requires a lot of debt to buy land to develop, and at the risk of holding that land when the cycle turns down. 

Homebuilder NVR ( NVR 0.80% ) has been an incredible investment for years, and possesses a massive backlog of orders after a huge 40% growth in orders last quarter. On the Nov. 6 edition of "The Wrap" on Motley Fool Live, host Jason Hall, Millionacres contributor and editor Tyler Crowe, and Millionacres editor Deidre Woollard talked about NVR's business, and the reasons why it could get much, much bigger in the years ahead. 

Transcript: 

Tyler Crowe: You look at the numbers that you get from NVR, very similar to what you're seeing across the entire housing industry right now. Their are new orders -- not what they actually delivered in the quarter, but what people have signed up to get, and they will fulfill -- increased 40% year-over-year to 6,000 units. That's three times what we're seeing over LGI Homes ( LGIH 1.13% ).

They have a $4.65 billion backlog of houses they need to build, which is important for NVR because they don't do spec build, as much as LGI Homes does. They get an order and they do custom builds. Backlog is a much more important number to look at when you're talking about somebody like NVR versus an LGI Homes. Another thing you can look at with them is that, gross margins for them were about 20%, so not as great, but that's very typical for a custom build home builder, such as NVR.

Jason Hall: Yeah, 20% is still a pretty solid number.

Tyler Crowe: Yeah.

Jason Hall: Especially, in this environment where lumber prices are high.

Tyler Crowe: Average selling price for them was about $384,000, which is obviously higher, but it's really hard to get an idea of the mix of sales that they get in terms of new entry, move up, luxury. They have all of them in their portfolio, but they don't break it out. Management at NVR is a bit of a black box. On their quarterly earnings report, they give you an income statement, they give you a balance sheet, and that's it. There is no management commentary, there is no quarterly conference calls to discuss the numbers, it is just the income statement.

Jason Hall: We had a conversation on Slack before we get on earlier today. Either they're like Berkshire Hathaway, or they were taken over by robots a decade ago. Tyler tends to lead toward the robots, I think. (laughs)

Tyler Crowe: (laughs) Here's why I go for robots, if you go online, there is no picture of the CEO that exists on the Internet. He has never done an interview. Glassdoor doesn't even have a picture of him, or anything like that. The board descriptions, nonexistent. I'm wholly convinced that it's some Weekend at Bernie's event over at NVR, where nobody knows where the CEO is. It's just run by robots, it's very quiet.

But unsurprisingly, they're the best management team in the entire home building industry for years. They have had the highest returns on capital, they've done the best to actually grow shareholder value and look at actual returns on capital, rather than just growing for growth stake. They were the only company that turned a profit during the 2008 financial crisis. Perhaps, it's robots, maybe, I don't know, but whatever is going on there, it works.

Jason Hall: Well, they're incredibly disciplined, and part of it is they use the model of not just throwing out a bunch of debt and buying land that they sit on for three years and pay interest on, and they get stuck with the land when the market cycle turns. They do use a lot of options we've talked about before. They take options on land, and then if they don't need the land, they're out the option money, but they're not stuck with land and they have to resell to get off their books potentially at a loss, or keep paying interest. They're just so well run, they do a good job.

One thing I noticed too, I just want to mention, and then we either will move over to Meritage Homes as we're coming up on about 15 minutes left on the show, but I just wanted to point out something else that NVR does, is they do a lot of mortgage financing. They do a lot of originations I think so that can be part of their business. Low interest rates showed on the income statement, it's having a little bit of an impact. Their interest income was down about a third, but that's not a big part of the business. They don't manage a big portfolio of loans. They broker these loans.

But they make a ton of money on originations. Fees income from their mortgage business was up almost double. Their total mortgage banking income, more than doubled to $52 million. That was like 20% of NVR's net income in the quarter. That's just a tremendous amount of additional income that they're earning that most other home builders aren't earning that at all. There's a few that do, but they're just really good across the board. Deidre, any thoughts on that?

Deidre Woollard: I just wanted to say, the median new home price for last month was $326,000. The interesting thing is the existing home median price was $311,000.

Jason Hall: You're talking about national numbers. 

Deidre Woollard: National numbers. Usually, those are really far apart, and so what's interesting is the existing home price is now getting so much higher that it's getting so much closer to the new home mark. What that's going to do is, that's going to encourage a lot of people to start thinking about new homes. Some of the trends demographically, the millennial generation tends to be less inclined toward fixer-uppers. Everybody's different, but there is that desire for new homes for a lot of people who are maybe not so interested in finding something that needs a lot of work.

Tyler Crowe: Goes back to that Home Depot ( HD 0.11% ) contractor business.

Jason Hall: There you go.

Tyler Crowe: I was going to say a little.

Jason Hall: Please.

Tyler Crowe: I'm very curious. NVR also is sitting on a huge pile of cash right now. They've got about $2.5 billion sitting just on the books. I'm little curious what they do with it. They have made acquisitions before, and acquisitions is a very prototypical thing you see in the homebuilder business because it is a pretty fragmented one. It's a great way for a company in this business, like the large ones, they will acquire somebody mostly just to get their lots.

With this massive pile of cash, I'm wondering, are they going to make an acquisition of somebody else to pick up some lots? Maybe they're going to do what they always do, buyback a ton of shares to return capital to shareholders, or maybe, they're just going to go on a big lot spending spree.

Jason Hall: It'll be interesting to see how it plays out. One thing that they could consider doing is maybe buying somebody that is more focused on the entry level part of the market, because that is where the sweet spot is going to be over the next decade. That's not their entire business by any stretch.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

NVR, Inc. Stock Quote
NVR, Inc.
NVR
$5,671.38 (0.80%) $45.24
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$284.97 (1.28%) $3.59
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$416.18 (0.11%) $0.48
Meritage Homes Corporation Stock Quote
Meritage Homes Corporation
MTH
$120.65 (0.09%) $0.11
LGI Homes, Inc. Stock Quote
LGI Homes, Inc.
LGIH
$156.87 (1.13%) $1.75
Slack Technologies, Inc. Stock Quote
Slack Technologies, Inc.
WORK

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