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Dream Finders Homes IPO: Should This Homebuilder Be in Your Portfolio?

[Updated: Feb 09, 2021] Jan 20, 2021 by Matt Frankel, CFP
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To say that the past year has been an active time in the IPO markets would be an understatement. We've seen all sorts of real estate companies enter the public markets, from iBuyers to real estate brokerages to mortgage companies.

We recently learned that among the companies planning to go public in early 2021 is homebuilder Dream Finders Homes. According to its registration statement, the company plans to sell 9.6 million shares of common stock in a range of $12 to $15 per share and will trade on the Nasdaq under the ticker symbol DFH. At the midpoint of this range, Dream Finders would have a valuation of approximately $1.6 billion.

Companies generally go public within a couple weeks of announcing their IPO price range, and Dream Finders did that on Jan. 11. As of the latest information, the IPO is expected to be completed on Thursday, Jan. 21.

With that in mind, here's a quick introduction to Dream Finders Homes and whether it deserves a place on investors' radar.

An introduction to Dream Finders Homes

Dream Finders Homes was founded in 2008 and is based in Jacksonville, Florida. In just over 12 years in existence, it has grown into one of the top homebuilders in the Sun Belt region through a combination of organic growth and acquisitions. Over its history, Dream Finders has sold more than 9,100 homes, and including a recent acquisition is the 11th largest private homebuilder in the nation based on 2019 sales.

Through the first nine months of 2020, Dream Finders' revenue grew by 37% year over year to $672.7 million. The company has $41.8 million in cash and $395.2 million in debt and other liabilities as of September 30, 2020.

The company is one of the fastest-growing homebuilders in the United States, and it focuses on high-growth markets, primarily in Sun Belt states. According to the company's registration statement, more than 70% of all U.S. migration from 2010 to 2018 was into states where Dream Finders operates.

Dream Finders' largest markets include Jacksonville and Orlando, Florida; Denver; Washington D.C.; and Austin, Texas. Plus, the company recently made a big move to the high-growth Charlotte and Raleigh, North Carolina, markets through its 2020 acquisition of H&H Homes.

Unlike most other homebuilders, Dream Finders uses an "asset-light" business model, where it purchases land just before building a home once a purchaser is already lined up, as opposed to acquiring large tracts of land and then hoping they'll sell to buyers. This has created a highly profitable business model -- for the full year 2019, Dream Finders generated a 34% return on equity as compared with 13% for the average homebuilder.

In addition to building homes, Dream Finders also offers real estate title insurance and mortgage services.

Should you invest?

It's been an exciting time in the real estate market, with low mortgage rates and a limited supply of existing homes for sale creating an excellent environment for homebuilders. In fact, Dream Finders reported net new orders for homes grew by a staggering 189% year over year in the fourth quarter. Plus, the company's major markets could be in the early stages of a large wave of population growth, as the work-from-home trend has accelerated in the past year and is causing people to move away from expensive metropolitan areas.

A final thought: While Dream Finders' business is certainly impressive, especially when it comes to growth, it's important to realize that IPO investing can be volatile and unpredictable. If you plan to add Dream Finders Homes (or any other newly public company, for that matter) to your portfolio, it's important to be prepared for quite a roller-coaster ride.

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