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Jax Daily Record Friday, Mar. 12, 202105:10 AM EST

Dream Finders opens the door for shareholders

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From breaking ground 12 years ago to $1 billion in revenue today, founder Patrick Zalupski says ‘being a public company was the best option’ for growth.
by: Mark Basch Contributing Writer

Dream Finders Homes Inc.’s stock doubled in price after the Jacksonville-based homebuilder launched its initial public offering in late January.

That’s good news for Dream Finders founder and CEO Patrick Zalupski, who retains a controlling voting interest in the company after the IPO.

Patrick Zalupski

But Zalupski wasn’t celebrating the price spike.

“Of course, up is always better than down but believe it or not, we don’t spend a lot of time watching the share price,” Zalupski said March 8 by email.

“We are confident that if we deliver great results to our investors, then the value we create will ultimately be reflected positively in the share price,” he said.

Dream Finders impressed Wall Street with its “asset-light” approach to the business, which has been delivering higher returns on investment than other homebuilders.

“Asset-light means we do not own any land on the balance sheet, which minimizes our exposure to development risks and we believe is the more prudent way to run a homebuilding company,” Zalupski said.

“This requires discipline and allows us to generate higher returns for shareholders, as recognized with our best in class return on equity, but also protects the company against the downside risk of owning land in a severe downturn,” he said.

“By keeping the two separate it allows DFH to focus on being a great homebuilder and our land is held with investors who have a different investment horizon than that of DFH, which is a win-win for both parties.”

Dream Finders said its return on equity for the 12 months ended Sept. 30 was 41%, while the average ROE for publicly traded homebuilders was 15% during that period.

RBC Capital Markets analyst Mike Dahl said in an initiation report on Dream Finders’ stock that the strategy “effectively minimizes the capital required to hold land on the balance sheet and accelerates asset turns. 

“This is done through the use of finished lot option contracts and/or third-party financing partners, which comes at increased costs, though this is offset by the improved efficiency gains.”

“DFH has used this type of arrangement since its founding which in our opinion has allowed the company to grow as fast as it has,” Wedbush analyst Jay McCanless said in his initiation report on Dream Finders.

The analysts said the only other publicly traded homebuilder that uses a similar asset-light model is Virginia-based NVR Inc., which has produced a similarly high return on equity.

“The biggest drawback however is the difficulty to grow an asset-light business given the lack of scaled land development partners and general difficulty to find partners willing to sell lots on option contract in an environment of tight lot supply,” Dahl said.

McCanless said Dream Finders is profiting by focusing its business on first-time and first move-up homebuyers.

“The company’s historical focus on first time and first move up lots is on trend with current demand patterns,” he said.

McCanless said 52% of its closings in the first half of 2020 were from first-time homebuyers and 37% were homeowners making their first move up.

Dream Finders said its home prices range from the low $200,000s to more than $2 million in its Luxury division.

Following population growth

The analysts said Dream Finders also is benefiting from a focus on attractive markets. 

The company said in its IPO filing that 70% of U.S. migration between 2010 and 2018 was in states where it operates.

“We select the geographic markets in which we operate our homebuilding business through a rigorous selection process based on our evaluation of positive population and employment growth trends, favorable migration patterns, attractive housing affordability, low state and local income taxes and desirable lifestyle and weather characteristics,” the filing said.

“Recently, we believe these favorable factors have been amplified by a general migration from urban areas to nearby suburbs in which we build homes, a trend that has increased further as a result of the COVID-19 pandemic,” it said.

“The Jacksonville market remains DFH’s largest MSA, but the company’s reliance on that market is diminishing via acquisition and via organic growth in Orlando and other markets outside Florida,” McCanless said.

Besides Jacksonville, other primary markets are Orlando; Austin, Texas; Washington, D.C.; Denver; Myrtle Beach, South Carolina; and North Carolina markets Charlotte, Raleigh-Durham and Fayetteville.

The kitchen in a Montauk II model home at Beachwalk.

Revenue to top $1 billion

Zalupski formed Dream Finders in late 2008 and the company says it broke ground on its first home in Jacksonville on Jan. 1, 2009.

Before starting Dream Finders, Zalupski was managing partner of Bay Street Condominiums, which was developing riverfront property in Green Cove Springs.

Dream Finders was headquartered in Orange Park but moved in 2018 to new offices at 14701 Philips Highway in Jacksonville, just north of the St. Johns County line.

Dream Finders closed on 27 homes during that first year in 2009 but in the first nine months of 2020, it closed 2,419, including results from acquired companies.

Revenue is projected to exceed $1 billion when final results for 2020 are reported.

The company’s growth made the IPO a logical step.

“The goal has always been to do what is in the best interest of our customers and shareholders,” Zalupski said.

“We felt that with the historic and anticipated future growth, along with the long-term goals of the company, that being a public company was the best option for Dream Finders to maintain and accelerate the success we have experienced.”

Dream Finders sold 11.04 million shares of Class A common stock at $13 each in its IPO.

The stock immediately jumped higher when trading opened Jan. 21, closing at $20.95 that day and reaching as high as $26 the next day. It eventually reached a high of $31.98 in early February.

The stock fell back later in February when the first analyst ratings on Dream Finders came in and has been trading in the low $20s recently. 

While analysts like the company’s prospects, they said the big early gains probably were overdone.

“It was exciting for the employees and our investors, but we are building a business that is going to be around for a long time,” Zalupski said.

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