We are rolling out a new post format. Most companies do not have much change quarter to quarter and so rather than make each update 2-3k words, as we have in the past, we will publish shorter updates when warranted. We will still do longer business updates for each company about twice a year, and sometimes more, but we also don’t want to waste your time.
On the other hand, we want to say something on each company each quarter, even if there isn’t a lot new, just so you know we don’t think there is anything thesis changing in the quarter. We think having some shorter updates helps us accomplish this without us wasting your time.
These shorter posts will be called Business Recaps.
Summary.
While DFH continues to see double-digit revenue growth with home closing +16% y/y despite a soft housing market, it was a mixed quarter as profitability lagged. They have maintained their full year guidance of 9,250 home closings, but that includes several new home building acquisitions. This suggests that acquisitions are somewhat hiding the market softness. Peer NVR only grew 3% in the same period for example.
However, cancellation rates, which are an important indicator of the housing market, were “one of the lowest in the company’s history” at 11.7%. On the other hand, though, their backlog has been shrinking q/q, so fewer people are committing to homes in the first place. Furthermore, more homes seem to be built on spec per commentary, (more on this below). New orders grew +10% y/y, which they attributed to “sales incentives” and the “availability of quick, move-in-ready homes”.
This commentary is worrisome as we do not want to see them volume focused at the cost of profitability. Additionally, the push to “move-in-ready” seems to be a euphemism for home speculation. One of the biggest advantages of a capital-light housing model is that you don’t have to build until you have demand, but that advantage is entirely negated when speculating in home purchases. In the 10-Q they noted that in addition to mortgage buydowns, they “focused on building affordable speculative inventory” to meet demand. While the mortgage buydowns are undesirable, they are understandable in this market. The shift to more speculative inventory (the phrasing of which showed up in their last 10-k), could put them in a bad position should the housing market worsen due to a recession.
Having said that, in correspondence with CFO Anabel Ramsay she clarified that “inventory does not sit there long-term as specs” and that homes are sold “when construction is 45-60 days out from completion or as soon as the homes are ready”. In contrast to NVR, DFH commonly built homes prior to getting a purchase commitment. They are trying to spin this as a positive, which it certainly can be in order to win over more buyers, but it also puts them at greater risk should the market turn. It doesn’t seem like there’s been a strategy shift yet, but this should be monitored nevertheless.
Net income for the quarter was flat despite a +20% y/y increase in revenues as SG&A increased +46% y/y. They attributed this in part to their forward mortgage commitment program, which allows buyers to lock in interest rates at the time of sale. It seems likely though that this includes mortgage rate buydowns, which where the company subsidizes a lower interest rate in order to make the monthly payment seem more attractive. (They do advertise reduced interest rates on home purchases their site, it is just unclear if this driving this line item).
While these promos are typical of homebuilders, especially in soft environments, they should be monitored as they have the effect of hiding weakness in their core business by bolstering the top line at the cost of the bottom line.
All in all it was good to see that they continue to find ways to grow, and their acquisitions seem to be net additive. But the flat earnings combined with little clarity around the nature of the elevated expenses leaves something to be desired. The commentary of “focus on building affordable speculative inventory” raises some flags, but it doesn’t appear to be a shift in strategy as they still only exercise the land options once they build a home they are confident they can sell. Currently, DFH trades at around 7x earnings with an estimated $3.20 in EPS for the year. See our prior earnings update for more details.
See some notable commentary from the press release and 10-Q below.
Quarter Notables.
Revenue
- Revenue grew 20% y/y to $990mn. Homebuilding revenue improved 18% at $970.1mn. The Midwest segment primarily benefited homebuilding revenues which saw an increase of 131 closings and an ASP of $580,221 (the highest ASP among homebuilding segments). Financial Services Revenues grew 666% in the quarter to $19.8mn. The key drivers of growth in Financial Services Revenues were the recognition mortgage revenues of $15mn from JetHomeLoans and an 88% increase in Title Services revenues driven by DF Title’s expansion into the Texas market. Financial Services revenues now make up 2% of total revenue.
Gross Margin Improvement
- DFH saw gross margins expand in each market, which in total improved +140bps to 19.2%. They attribute the margin expansion to direct cost reduction and changes in product mix. They do not call out tariffs as potentially increasing building costs, but it is hard to imagine they won’t be impacted if the tariffs stick.
Share Repurchases
- DFH bought back 284k shares in the quarter for $7mn. They still have ~$10.2mn remaining in the share repurchase program.
Home Closings Growth
- Home closings increased +16% y/y to 1,925
- Midwest saw the most unit growth with units increasing +22% y/y
- Mid-Atlantic saw the highest ASP growth at +7% y/y
- Southwest was the only market to have an ASP decrease y/y at -6%
Backlog
- Backlog units fell -38% y/y to 2,802 from 4,524. This has been a continuing trend of their backlog shrinking each quarter.
Pipeline
- DFH continues to add to their controlled lot pipeline. The pipeline increased +11% y/y to 60,538
Improving Cancellation Rates
- Cancellation rate was 11.7%, an improvement of 930bps compared to 21% last year
- It’s important to note that in 1Q24, DFH had one built-for-rent contract of 229 units that was terminated, which elevated the cancellation rate in the Southeast
M&A
- DFH closed 2 acquisitions in the quarter (Liberty Communities and Cherry Creek Mortgage)
- After the quarter ended, DFH announced 2 additional acquisitions: Alliant National Title and Green River Builders.
- From the Green River Builder acquisition, DFH acquired 140 lots and home sites and expects to control 520 lots
- The Liberty Communities and Green River Builders acquisitions are strategic moves to help accelerate growth in the Southeastern market and expand more into Atlanta. Management noted that Atlanta was the largest market in the Southeastern segment where DFH was “lacking presence.” The Liberty Communities acquisition is already paying off, as it helped contribute 4% of total revenue in the quarter.
- DFH has now made 10 acquisitions in the past six years.
Management Comments on Business Outlook
- “Elevated mortgage rates and inflationary pressures, combined with market uncertainty are keeping homebuyers hesitant. To maintain demand, we have used incentives, including mortgage buydowns, and focused on building affordable speculative inventory. Our asset-light strategy has kept us flexible, allowing us to negotiate lot option takedowns to match our sales pace.”
- “We remain optimistic due to the limited supply of affordable homes and favorable demographic trends in the areas we build homes. We believe these factors will continue to support demand and inventory turnover, and we are positioning ourselves for long-term growth through strategic acquisitions and organic expansion.”
- Confirmed guidance of ~9,250 home closings for 2025
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*At the time of this writing, one or more contributors to this report has a position in DFH. Furthermore, accounts one or more contributors advise on may also have a position in DFH. This may change without notice.
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