Dream Finders Homes (NASDAQ: DFH) went public earlier this year, and the rapidly growing homebuilder sold more than 1,500 homes in the second quarter of 2021 -- 92% more than it did in the same quarter a year ago. The company, based in Jacksonville and operating in some of the fastest-growing markets in the Sun Belt region, has grown quite a bit through acquisitions in recent years and just made a big one. Here's what investors need to know.
Dream Finders Homes just made a big acquisition
Dream Finders Homes just announced that it has agreed to acquire McGuyer Homebuilders, which is based in Houston and has operations in that market, as well as in Dallas, San Antonio, and Austin, Texas. McGuyer is a long-established homebuilder, having built more than 55,000 homes, including 2,000 last year alone.
McGuyer has about 1,850 homes in backlog, which will transfer to Dream Finders, adding to the company's existing backlog of 4,137 (at the end of Q2). Dream Finders will also acquire 200 finished lots and options to purchase another 4,500 upon closing.
While we don't know the exact purchase price, we do know that Dream Finders is planning to simultaneously complete a $150 million convertible preferred stock offering to fund the transaction.
To be clear, this is a big acquisition for a company the size of Dream Finders. I mentioned McGuyer closing on more than 2,000 homes last year. To put that number into context, Dream Finders closed on about 3,150. The company is actively selling homes in about 120 communities, and McGuyer will add 100 more -- making Dream Finders a significantly larger operation when it closes (expected in early Q4 2021).
While Dream Finders has certainly experienced significant organic growth, acquisitions have been a pretty big part of the strategy. In Oct. 2020, Dream Finders acquired H&H Homes in North Carolina, and in May 2019, the company acquired South Carolina-based Village Park Homes.
Will it pay off?
Dream Finders Homes seems to be in all-out growth mode, as evidenced by its multiyear acquisition spree. And it's not hard to see why -- demand for new homes is massive right now.
In fact, a recent study by Realtor.com shows that demand could support an additional 5.24 million homes in the U.S., and this demand likely skews in favor of the fast-growing Sun Belt markets where Dream Finders Homes operates. The larger Dream Finders gets, the more it can take advantage of the supply/demand imbalance.
It's also important to realize that scale is a major advantage in homebuilding, which can be a relatively low-margin business. For example, Dream Finders and McGuyer employed two executive leadership teams, and now, they'll only need one. This is certainly a simplified example, but operational efficiencies like this add up.
To be sure, investors may be worried that Dream Finders is trying to grow a little too fast, as evidenced by a sharp drop in Dream Finders' stock price after the acquisition was announced. Plus, Dream Finders is taking on significant debt in the form of convertible preferred stock that pays a hefty 9% dividend yield and could eventually dilute shareholders, which isn't exactly a cheap cost of capital.
The Millionacres bottom line
So, will the acquisition pay off? There's no way to know for sure, but it's encouraging to see Dream Finders getting aggressive when pursuing high-growth markets like Houston, Dallas, and San Antonio.
And I'm optimistic that the scale advantages and the ability to build its presence in key markets will more than make up for the high cost of capital required to make the acquisition. But I'll be watching in the coming quarters to see how it translates to top-and bottom-line growth on the company's next few earnings reports.