While the high-profile technology and electric vehicle IPOs have been getting most of the headlines lately, the hot IPO market has seen companies from all sorts of industries take their shares public.
One particularly interesting recent IPO is homebuilder Dream Finders Homes (NASDAQ:DFH), which is rapidly growing into one of the biggest builders in the Sunbelt region. In this Jan. 25 Fool Live video clip, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss Dream Finders and why investors should put it on their radar.
Jason Moser: We'll go ahead and start here with one probably many haven't heard of, it's Dream Finders Homes. Ticker is DFH. This is a company that just went public last week. Small cap, it looks like a two billion dollar market cap so certainly a small company, but talk to us a little bit about Dream Finders. What does this company do and how does it make money?
Matt Frankel: They are a homebuilder, as we said. They operate mostly in the Sunbelt region. Just to name a couple of their biggest markets, they're based in Jacksonville. Other big markets are Orlando, Denver, and DC believe it or not. That's their only Northeast market. You consider DC the Northeast? I don't know.
Moser: Given that I'm from South Carolina, I moved out here from Georgia. Yeah, I do feel like this is the Northeast, but I know most people here try to consider it the South still. We're going to give them the benefit of the doubt and say we're still in the South.
Frankel: Right. But it's only one of their major markets that isn't in that Sunbelt area if that makes sense. But anyway, they were founded in 2008. Like you said, they recently IPOed. They are the 11th largest private homebuilder. So, they're not a market leader or anything like that, which that's OK. They've sold about 9,100 homes since 2008. In their 12-year history, 9,100 homes. They IPOed at a price of $13. It appears that the market likes them because they are trading for about $21 as I write this. Interestingly, they are backed by a company that we cover a lot on the show, Boston Omaha (NASDAQ:BOMN).
Moser: Oh yeah.
Frankel: I've mentioned that Boston Omaha has a bunch of minority investments in adjacent businesses. This was one of them. Boston Omaha owned about six percent of Dream Finders pre-IPOs. This was a nice little windfall for them. But for the Dream Finders business, the reason I really like them and wanted to bring them to people's attention is because they have a very asset-light business model for our homebuilder. A lot of homebuilders, for example, I'm in a D.R. Horton (NYSE:DHI) house right now, that's who built my house.
Frankel: They bought all of the land in my neighborhood, developed it into homes, and one-by-one sold them off. It took them about five years from start to finish to do it. That's a capital-intensive way to be a homebuilder, to buy a giant plot of land like that, develop a whole neighborhood, and hope that people buy them. Dream Finders uses an asset-light business model, meaning that they own options on land, meaning that they have the right to buy land, but they don't actually complete the purchase of the land that they're building on it until they have a buyer lined up.
Frankel: It's a really capital-light business model. The return on equity was over 30 percent last year because of this. Most homebuilders are in the teens. It's a really interesting business, really rapid growth right now. They grew their revenue 30 percent year-over-year through the first nine months of 2020. I know 2020 wasn't really a typical time in the housing market, [laughs] but they have grown impressively just for the past few years. They are one of the fastest-growing homebuilders in the country. They're not a market leader yet, but I could see them getting toward that direction. I took a look at them a while ago when I heard that that was Boston Omaha's homebuilder investment, and I was really glad to see they went public. I'm not one for playing in the IPO market all that much. I think the last recent IPO I bought was Lemonade (NYSE: LMND), but that was the first one in a couple of years. I might wait to see the price normalize, till we get a quarter or two worth of earnings to really value the company on. I want to see how they do in a market that's not 2020. We have all their growth numbers from 2020, but we take that with a grain of salt.
Moser: Matt, homebuilding, it's a fascinating market and it's one where it really seems to favor scale. It definitely seems to favor the bigger players in the space. You mentioned D.R. Horton, for example, 28 some odd billion-dollar market capitalization. That's a company that's been doing it for a while. Obviously, knows what they're doing. With Dream Finders, this is a small company. This is a two billion dollar market cap business. They don't have a ton of financial resources at their disposal, at least not yet. What are the things that you're keeping your eye on to make sure they're able to continue taking that step to the next level? What are the things we need to be watching to see this company really, to know that they're able to take that step and compete with the bigger players in the space?
Frankel: They've grown a lot through acquisition. They're now one of the private homebuilder leaders in the Charlotte area because of that big acquisition they made last year, for example. Growing through acquisition costs money.
Frankel: You wanted to see that they have a reliable and relatively inexpensive source of funding which they don't have yet. They funded their last acquisition by getting a term loan from Boston Omaha, actually. Boston Omaha was equity and debt investor. But it was like a one-year term loan, they paid something like 14 percent interest on the loan.
Frankel: They're going to pay it off with the proceeds from the IPO, it looks like. Right now it's not a big deal. But you want to see them establish a better way to fund their growth. That will come as they grow.
Frankel: As they can really prove their earnings out and things like that. That will come. But that's one thing I'm watching. You're absolutely right, scale is everything in home building. It's not a terribly high-margin industry usually, especially on the lower to mid-range of the market, which is where Dream Finders tends to operate, in the mid-range homes. For starter homes, the reason that you haven't seen a ton of supply and they're such supply constraints is they really haven't been economical for home builders to make. They're very dependent on things like lumber prices which have been high lately, and you want to see the business scale. As they scale, it will get more efficient. That's really what I'm watching. Like I said, I love the growth through acquisition model because home building, aside from the DR Hortons of the world, it's a pretty fragmented market.
Frankel: There's a lot of smaller regional home builders that they could go after. I love that strategy but I'd like to see them be able to finance it a little more efficiently. Because paying 14 percent interest is not the way to go.