Dream Finders Homes: The Dream Sounds Cool (NYSE: DFH)

These are far from dream times for homebuilders like Home Dream Finders (NASDAQ: DFH) as a cocktail of a tight labor market, huge (material) inflation and rapidly rising interest rates (and therefore mortgage rates) create severe headwinds.

In October last year I concluded that I was finding value in homes with Dream Finders as its shares had seen a big reversal since the summer when earnings power was still very strong and the crisis Ukrainian was not yet on the radar. The cyclicality of the real estate market prevented me from getting involved in size at the same time.

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Founded in 2009, Dream Finders has grown rapidly as a homebuilder that focuses on regional markets with growing populations, particularly the construction of single-family and entry-level homes. Besides construction, the company offers adjacent services such as insurance and mortgage, operating with an asset light model focusing on the just-in-time purchase of land plots.

The shares went public at $13 in January 2021, but fell to $22 on the first day of trading, giving the company a stock valuation of $2.1 billion. Such a valuation was applied to a company with sales of $744 million, on which it recorded profits of $39 million, all based on some 2,000 units sold at an average price of over 360. $000 that year.

Revenues rose sharply to over $1 billion in 2020, but earning capacity was relatively limited, translating into high multiples at the time of the offering, certainly as shares hit a high of $34 in June . This stock momentum was boosted by corporate momentum, as a $2 billion revenue rate could be in the works, and with margins of 6-8%, this could translate to a capacity beneficiary of $1.50 per share.

Over the summer, the company announced a big deal with the purchase of nearly half a billion from McGuyer Homebuilders in a deal adding nearly a billion in sales. The big deal, complicated financing and headwinds in the economy made investors a bit cautious. With shares down to $16 and earning power still pegged at $1.50 per share, I noted the attractiveness of valuation as I initiated a small position in the fall of last year, but uncertainty about trading strategy and the health of the real estate market prevented me from taking a sizeable position.

And now?

Relatively few news events have occurred since the start of the year, other than the regularly scheduled quarterly earnings release. The shares have been trading in the $15-$23 range since then, currently trading at $17 and changing.

The McGuyer deal was completed in the fourth quarter. This was the driving force behind an 84% increase in sales to $850 million, the fourth quarter alone, when the backlog reached $2.9 billion. Pretax profit rose 86% to $71 million, which translates to decent margins, but that’s relatively easy with average selling prices up 28% from a year earlier. Net income of $57 million was reduced to earnings of $0.55 per share, implying that the run rate of $1.50 per share might be too conservative, but the question is whether this operational dynamic could be maintained.

Some consideration should be given to leverage as the company operates with half a billion in net debt, looking at cash minus construction debt, but this definition of leverage excludes over 150 million dollars of preferred mezzanine equity and VIE outstandings, resulting in somewhat higher leverage. ratios by this calculation.

In May, the publication of first quarter results showed contradictory trends. Revenue increased 94% to $662m, a sequential decline as it is of course a milder seasonal quarter, while backlog increased again dramatically to $3.4bn of dollars. Pre-tax profit was $63 million, with margins of 10%. This coincided with a 40% increase in house prices over the year.

Earnings were $0.42 per share in this milder seasonal quarter as net debt climbed to $670 million based on the simplified calculation described above, much of the cash flow necessary to go to inventory, land, but especially for ongoing construction.

Become cautious

Having held a very small position since the beginning of the year, I am happy to come out with a profit in dollars. Although this profit is very small, it actually marks an underperformance compared to the market, because my biggest concern is that the outside world has deteriorated a lot in terms of rising rates and rising construction costs, casting a real shadow over the medium-term outlook. in my eyes. I’m happy to come out of the stock in this situation with broadly balanced investment results.