Dream Finders Home
Each archive contains the following sections: General, YouTube, Write-Ups, Tweets, Podcasts, and Miscellaneous.
As I come across a relevant piece, it will be added.
Happy perusing.
Last Updated: 08/12/2023
Ticker: DFH 0.00%↑
General
We strive to provide above-market results, with industry-best returns on shareholders’ equity. As you may recall from last year’s letter — and I believe it is worth reiterating — there is no greater alignment of interests than the fact that your Founder, CEO and Chairman owns approximately 65% of outstanding shares. Over 99% of my net worth is invested directly in this company that I founded and have managed for 14 years. There are not many public businesses that can quote a statistic like that and you should take comfort in knowing that nearly every waking hour is spent thinking about how we protect this business to insure its success over the next 14 years.
As I have outlined the value of my control of Dream Finders Homes business and the long-term benefits I believe that will produce for all shareholders, I note the one aspect out of my control — our stock price. The divergence in 2022 between our 110% basic EPS growth and our 55% share price decline should illustrate that I am laser focused on the former and cannot dictate the latter!
We have compounded shareholder equity, earnings, and revenue by more than 40% annually since our Company’s 2008 inception. We started with our first home in January 2009, nearly at the bottom of the Great Financial Crisis, and have grown methodically from 27 homes in 2009 to nearly 7,000 homes closed in 2022. With a high degree of confidence, I can state that every year the team has gotten better and we have increased intrinsic value for shareholders. While our growing capital base will make this mathematically more challenging, and there is no guarantee of future performance, you can rest assured these are the metrics by which we managers evaluate success.
I would categorize these attributes into three buckets: Asset-Light, Alignment of Interests, and Relationships. While some of these may vary in importance, we believe we are most successful by effectively implementing all three aspects together.
First — and perhaps most importantly — we utilize what we refer to as an asset-light business model. This means that DFH does not own any land on balance sheet unless management is actively in process of permitting or building a home on the homesite. While the current market trend by most public homebuilders is to move towards an asset-light business model — in our opinion, and evident during the 2008 Financial Crisis — you are either 100% asset-light or you pay the price when there is a market correction. While this is not an indicator of future performance, it is interesting to compare NVR, Inc.’s (NVR) financials against other public builders during the financial crisis. During this time NVR was the only publicly traded builder utilizing a 100% asset-light structure and today, post our IPO, NVR is joined by DFH and together are the only two 100% asset-light public builders. Interestingly, builders’ optioned lots percentage today is nearly identical to what it was going into the financial crisis — about 62% in 2021 vs. 61% in 2005.
A second important feature of DFH is that we focus heavily on strong alignment of interests among employees, the Company, and shareholders. This gives our employees the ability to earn above market compensation by producing above market results. Not every position in the organization is easily geared towards this philosophy, but we are constantly working to ensure that each employee does well when the Company is doing well. We believe that meritocracy and the right incentive structures drive outperformance. The cream rises to the top at DFH, and we go to great lengths to reward talent, as we know this is a critical difference maker in our organization. We want the best and most talented individuals to move up, regardless of tenure, rank, education, or background — hard work and results are what matter. It is this balance in alignment of interests that we believe drives the best long term results and I can assure you we spend tremendous time making sure we take care of our team and want them to be at DFH for a long- time.
Lastly, Relationships are the foundation of DFH. We work extremely hard to build long term partnerships with everyone who does business with DFH. We have land sellers from whom we bought land in 2009 and are still doing deals with today, which is a testament to our culture and the way we do business. We have plumbers, electricians, and framers we supported when they were just starting their businesses who have grown beyond their furthest expectations. We constantly strive to find win-win solutions for all parties, and we can only be successful in the long term if our land and trade partners are also successful. It is a lot more efficient and profitable for both sides to replicate a similar transaction many times versus a “one and done” scenario. Maybe one side was able to squeeze a few more dollars out of the deal, but if that is the last deal between parties, who really won? We try to apply this approach to every aspect of our business. We want to be the preferred partner to work with in all aspects of home building as we believe that to be the winning approach.
QuickFS (ignore 2018 / 2019 - went public in 2021)
YouTube
Write-Ups
The 10th Man Deep Dives: Dream Finders Homes (DFH)
There is no doubt that this is a cyclical industry and all competitors will see activity ebb and ow with that cycle, DFH included. There are also multiple reasons to expect that 2023 and 2024 could be challenging years for the industry (which I explain in Part 1). Nevertheless, I think expectations for key drivers implied by the current share price are extremely punitive and my base case is nearly 2x higher than the current price.
DFH is managed/controlled by what I consider to be a very strong CEO, has a good capital allocation track record, operates in some of the most compelling markets in the country, utilizes a relatively unique asset-light strategy that improves returns and minimizes risk, and appears to have an opportunity to deliver margin expansion o a more normalized level. They also have what I consider to be a very strong balance sheet, with nearly 30% of their current market cap sitting in cash. Even after stress-testing the model, I’m convinced they could weather a serious storm if there was a recession tomorrow, and likely come out stronger on the other side. In my view, the risk/reward at the current price is quite compelling if you don’t expect a full-blown housing Armageddon in the next 12 months.
The Magic of OPM: Other People’s Money
Over the last 14 years, Patrick has grown his upstart home builder by nearly 50% every year, starting with 27 homes in 2009, growing to 85 in 2010, then 150 in 2011 and 260 in 2012. The company crossed $1 billion in sales in 2020, and increased revenue by an average of 65% per year over the last three years. Perhaps the most impressive part is how he achieved this meteoric growth with no upfront capital, while generating positive earnings every year along the way.
The company is still in the early innings of rapid expansion, and we believe the best is yet to come.
That’s why today we’re recommending Patrick’s home building company. Outside of NVR, it’s the only other publicly traded home builder using this 100% asset-light playbook.
Kairos Research: Dream Finders Homes
Quality companies like NVR 0.00%↑ have been a long time favorite of value investors for a long time. NVR is a home builder that’s in a league of its own, they generate high returns on capital, they don’t keep a bunch of risky land on their balance sheet, they buy back tons of stock, and they minimize leverage. What more could you want? At the end of the day they’ve been great capital allocators and shareholders have been rewarded because of it.
DFH is a newer home builder that claims to have studied NVR and modeled their business after them. So the questions is why has NVR done done so well? and is Dream Finders Homes really the next NVR? or just a wannabe copycat?