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Could This Homebuilder Have 10X Potential?

By Matthew Frankel, CFP® - Updated Jun 23, 2021 at 3:19PM

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This homebuilder just went public, but is growing rapidly.

Dream Finders Homes (DFH 0.40%) isn't exactly a household name, but it's heading in that direction. In this Fool Live video clip, recorded on June 15, Fool.com contributor Matt Frankel, CFP, along with chief growth officer Anand Chokkavelu, discuss why this Sunbelt-region homebuilder could get much bigger in the coming years. 

Matt Frankel: Dream Finders is a home builder. We've already talked three home builders. This is No. 4 out of the five on our list. Dream Finders is new to the public markets. They are a very rapidly growing home builder. They specialize in the Sunbelt market. Every home builder is growing their presence in the Sunbelt market because that's where people are moving right now.

Anand Chokkavelu: Yeah.

Frankel: People are leaving areas like where Jason lives and going to the Sunbelt, in large numbers. No offense, Jason, California I hear is very nice. But they want to live where it's cheaper, there's more space, you get more for your money. Dream Finders started in Jacksonville in 2008. They have presence in the Carolinas. They have presence in a lot of the key Florida markets like Jacksonville, obviously Orlando. They have a D.C. presence, so Anand might actually see their signs when driving around. They are a pretty small company right now. They are the 11th-largest private home builder right now. They just recently went public. They have an asset-light business model. Like I said, there are some home builders, like NVR, which we're going to talk about. They buy purchase contracts on land, they don't actually buy the land until they're ready to build or until someone's committed to buy that home. It means their need for capital is a lot lower. Dream Finders in the trailing 12 months, their return on equity was about 37% -- I can't talk, it's Friday afternoon -- compared to about 13% for the average home builder. Seems this is a much more profitable way with less capital to be a home builder. Year-over-year growth in the fourth quarter was 189%. A lot of that was acquisitions. Dream Finders is growing a lot through acquisitions. But a lot of that is just their business fundamentals are improving. Their gross margin improved dramatically in the first quarter. 14.9% is a pretty impressive gross margin for a home builder, and that improved from 12.8% a year ago. The IPO is really going to accelerate their growth in my opinion. They were not a SPAC, even though it's 2021, they were not a SPAC. But this really improves their access to cheaper capital to grow. I said they are capital-light, that doesn't mean they're capital-free.

Chokkavelu: But you still have to build the house.

Frankel: Right. You still have to build a house. Boston Omaha, one of the companies that we follow a lot here is a backer of theirs. They own 5% of the company. Before their IPO, they were also their lender. But Boston Omaha charged them 14% interest to borrow money.

Chokkavelu: Yeah.

Frankel: Now, they can just issue some new shares and get the same amount of money at a really low cost of capital. I think there's IPO, the fact that they are now a public company, the fact that their shares are now twice where their IPO price was, I think is the biggest competitive advantage to keep their growth going right now. It's capital-light and growing really, really fast. They've built a little over 9,000 homes since they were founded. They have a backlog of over 3,600 and they're anticipating up to 6,000 closings this year. They're growing really fast.

Anand Chokkavelu, CFA has no position in any of the stocks mentioned. Matthew Frankel, CFP owns shares of Boston Omaha Corporation and Dream Finders Homes, Inc. The Motley Fool owns shares of and recommends Boston Omaha Corporation. The Motley Fool recommends NVR. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dream Finders Homes, Inc. Stock Quote
Dream Finders Homes, Inc.
DFH
$12.72 (0.40%) $0.05
NVR, Inc. Stock Quote
NVR, Inc.
NVR
$4,445.00 (0.86%) $37.80
Boston Omaha Corporation Stock Quote
Boston Omaha Corporation
BOC
$28.74 (1.09%) $0.31

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