We have a serious housing shortage in the United States, with existing home inventories at their lowest level in recent history and labor, material, and supply chain issues preventing new home builders from keeping up with demand. However, this is also creating a long-tailed opportunity for builders as labor markets and supply chains gradually normalize.
One homebuilder in particular that could be worth a look for long-term investors is Dream Finders Homes (DFH -0.32%), which uses an asset-light business model.
A capital-light business model and a focus on hot real estate markets
Dream Finders is a homebuilder, but CEO Patrick Zalupsky thinks of himself as more of a capital allocator than anything else, as he told me in a recent interview. Take the company's business model, for example. Dream Finders uses an asset-light homebuilding model that was pioneered by industry heavyweight NVR (NVR 0.42%) and allowed that company to produce 52,000% total returns (not a typo) since its 1993 IPO.
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Dream Finders doesn't buy land in bulk to develop its neighborhoods as most homebuilders do. Instead, the company buys options to purchase land, but only buys when it has a home under contract. Virtually all of the lots Dream Finders owns have a house currently under construction on them, and the company has rights on over 38,000 buildable lots for future growth, without having to lay out millions in capital in the meantime.
What's more, Dream Finders is focused on some of the hottest U.S. real estate markets, particularly those in the Sun Belt region. Top markets include Jacksonville, Florida (Dream Finders' home market), Orlando, Florida, the Carolinas, and Texas. These areas have above-average job and wage growth, positive net migration trends, and relatively low costs of living that should keep demand strong and home values rising for years to come.
Dream Finders Homes is firing on all cylinders
To be sure, 2021 wasn't an ideal environment for homebuilders. Specifically, labor and material shortages and supply chain issues made it impossible for many builders to keep up with demand. But even with these challenges, Dream Finders had a phenomenal year.
For starters, revenue grew by 70% to $1.9 billion year-over-year. And not only did revenue soar, but Dream Finders' gross margin improved by 140 basis points, which caused pre-tax income to increase by about 88%. Dream Finders closed on 4,874 homes in 2021, the most in its history.
However, the real story is the backlog. Dream Finders ended the year with a backlog of 6,381 homes, representing nearly $3 billion in expected revenue, which should help make 2022 another record year for the business. In fact, Dream Finders expects to close a minimum of 7,000 home sales in 2022. And with more than 38,000 controlled lots and over 200 active communities, there is plenty of room to keep volume high, especially as the industry limitations start to work themselves out.
The bottom line on Dream Finders Homes
Obviously, no stock that can produce big returns is without risk, and Dream Finders certainly isn't an exception. There are still significant near-term challenges when it comes to labor and materials, for example, and there's simply no way to know how rising rates and inflation could affect demand for new homes in the coming years.
However, this small-cap homebuilder has a great business model, a focus on the hottest U.S. housing markets, and fantastic growth momentum, making it worthy of a closer look for patient long-term investors.
