Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
DREAM FINDERS HOMES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | 1. Nature of Business and Significant Accounting Policies |
Nature of Business
Dream Finders Homes, Inc. (the “Company” or, “DFH, Inc.” or “we”) was incorporated in the State of Delaware on September 11, 2020. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its common stock and related transactions in order to carry on the business of Dream Finders Holdings LLC, a Florida limited liability company (“DFH LLC”), as a publicly-traded entity. Pursuant to a corporate reorganization and completion of theits IPO on January 25, 2021, the Company became a holding company for DFH LLC and its subsidiaries.
In connection with the IPO, and pursuant to the terms of the Agreement and Plan of Merger by and among DFH, Inc., DFH LLC and DFH Merger Sub LLC, a Delaware limited liability company and a direct, wholly ownedwholly-owned subsidiary of DFH, Inc., DFH Merger Sub LLC merged with and into DFH LLC with DFH LLC as the surviving entity (the “Merger”). As a result of the Merger, all of the outstanding non-voting common units and Series A Preferred Units of DFH LLC converted into 21,255,329 shares of Class A common stock of DFH, Inc., all of the outstanding common units of DFH LLC converted into 60,266,15260,226,153 shares of Class B common stock of DFH, Inc. and all of the outstanding Series B Preferred Units and Series C Preferred Units of DFH LLC remained outstanding. We refer to this and certain other related events and transactions, as the “Corporate Reorganization”.
Following the Corporate Reorganization, the Company owns all of the voting membership interest of DFH LLC.
The Company successfully completed its IPO of 11,040,000 shares of Class A common stock (which included full exercise of the over-allotment option) at an IPO price of $13.00 per share. Shares of the Company’s Class A common stock began trading on the NASDAQ Global Select Market under the ticker symbol “DFH” on January 21, 2021, and the IPO closed on January 25, 2021. On January 27, 2021, the Company redeemed all of the outstanding Series C Preferred Units for $26.0 million, including accrued unpaid preferred distributions.
Basis of Presentation and Consolidation
The Company isaccompanying unaudited, condensed consolidated financial statements include the sole manageraccounts of DFH, LLCInc., its wholly-owned subsidiaries and owns 100% of the voting membership interest in DFH LLC.
its investments that qualify for consolidation treatment (see Note 7). The accompanying statements have been prepared in accordance with generally accepted accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for a complete set of financial statements. As such, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission on March 30, 2021.
Principles of Consolidation
The accompanying condensed consolidated financial statements include all adjustments that are of a normal recurring nature and necessary for the accountsfair presentation of DFH LLC,our results for the Company’s wholly owned subsidiaries and its investments that qualifyinterim periods presented, which are not necessarily indicative of results to be expected for consolidation treatment (see Note 9).the full year. All intercompany accounts and transactions have been eliminated in consolidation. There are no other components of comprehensive income not already reflected in net and comprehensive income on our Condensed Consolidated Statements of Comprehensive Income.
BasisAs a result of Presentation
The accompanying unaudited condensed consolidated financial statements include all adjustments that arethe Corporate Reorganization, for accounting purposes, our historical results included herein present the combined assets, liabilities and results of a normal recurring natureoperations of DFH, Inc. and necessaryDFH LLC and its direct and indirect subsidiaries for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of resultsperiod January 1 to be expected for the full year.
January 21, 2021.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the valuation and impairment of goodwill, impairment of inventories and business combination estimates. Actual results could differ materially from those estimates.
Accounts Receivable
Accounts receivable are included on the Condensed Consolidated Balance Sheets and consist primarily of closing proceeds in transit. Of the total $31,845,905 balance as of September 30, 2021, $10,858,907 is related to proceeds in transit from various title companies, which is typically received in the first week of the subsequent month.
Other Assets
Other assets are included on the Condensed Consolidated Balance Sheets, and primarily consist of prepaid expenses, debt issuance costs and contract assets.
Contingent Consideration
In connection with applicable acquisitions, the Company records the fair value of contingent consideration as a liability on the acquisition of Village Park Homes, LLC (“VPH”) in May 2019, the Company recorded contingent considerationdate, based on estimated pre-tax net income of the acquired entityacquiree for fiscal years 2019, 2020, 2021 and 2022. In connection withfuture periods prescribed by the acquisition of H&H Constructors of Fayetteville, LLC (“H&H”) in October 2020 (Note 2), the Company recorded contingent consideration based on estimated pre-tax income of the acquired entity for the fourth quarter of 2020, fiscal years 2021, 2022, 2023 and the first three quarters of 2024.underlying agreement. The initial measurement of contingent consideration wasis based on projected cash flows such as revenues, gross margin, overhead expenses and pre-tax income and is discounted backto present value using the discounted cash flow method. The Company recorded the fair value of the contingent consideration as a liability on the respective acquisition dates. Theremaining estimated earn-out payments are subsequently remeasured to fair value at each reporting date based on the estimated future earnings of the acquired entities. The contingent consideration for each acquisition is scheduled to be paid out each year subsequent toentities and the anniversaryre-assessment of the respective acquisition closing date.
As of September 30, 2021 and December 31, 2020, the Company remeasured contingent consideration related to the acquisition of VPH and adjusted the liability to $7,387,429 and $6,847,524, respectively, based on revised pre-tax income forecasts as of the balance sheet date. The Company recorded contingent consideration adjustments resulting in $78,665 of expense and $204,251 of expense for the three months ended September 30, 2021 and 2020, and $539,905 of expense and $112,521 of income for the nine months ended September 30, 2021 and 2020, respectively. These adjustments are included in other expenses related to contingent consideration revaluations on the Condensed Consolidated Statements of Comprehensive Income.
The Company measured contingent consideration related to the acquisition of H&H on October 5, 2020, which approximated the value at December 31, 2020 of $16,310,000. As of September 30, 2021, the Company remeasured contingent consideration for the H&H acquisition and adjusted the liability to $20,325,141. The Company recorded contingent consideration adjustments resulting in $523,425 and $0 of expense for the three months ended September 30, 2021 and 2020, and $5,221,910 and $0 of expense for the nine months ended September 30, 2021 and 2020, respectively.
As of September 30, 2021, total contingent consideration on the Consolidated Balance Sheets is $27,712,570. The Company’s contingent consideration related to acquisition earn-out payments is based on a percentage of pre-tax net and comprehensive income achieved by the acquired entity, and as such, is revised accordingly. In addition, the payment of the H&H earn-out is subject to certain minimum earnings thresholds which must be met by H&H before an earn-out payment occurs.
risk-adjusted discount rates that reflect current market conditions. Maximum potential exposure for contingent consideration is not estimable based on the contractual terms of the contingent consideration agreements, which allow for a percentage payout based on a potentially unlimited range of pre-tax net income.
As of June 30, 2022, and December 31, 2021, the Company remeasured contingent consideration related to the acquisition of Village Park Homes, LLC and adjusted the liability to $3.4 million and $7.6 million, respectively. The Company recorded contingent consideration adjustments resulting in $2.4 million and $0.1 million of expense for the three months ended June 30, 2022 and 2021, and $2.8 million and $0.5 million of expense for the six months ended June 30, 2022, and 2021, respectively.
As of June 30, 2022, and December 31, 2021, the Company remeasured contingent consideration related to the acquisition of H&H Constructors of Fayetteville, LLC (“H&H”) and adjusted the liability to $17.8 million and $19.8 million, respectively. The Company recorded contingent consideration adjustments resulting in $0.7 million and $3.9 million of expense for the three months ended June 30, 2022 and 2021, and $2.5 million and $4.7 million of expense for the six months ended June 30, 2022, and 2021, respectively.
The Company measured contingent consideration related to the acquisition of MHI on October 1, 2021 (see Note 2), and recorded a liability in the opening balance sheet of $94.6 million. As of June 30, 2022 and December 31, 2021, the Company remeasured contingent consideration related to the MHI acquisition and adjusted the liability to $94.4 million and $96.7 million, respectively. The Company recorded contingent consideration adjustments resulting in $1.9 million and $3.9 million of expense for the three and six months ended June 30, 2022, respectively.
The contingent consideration re-measurement adjustments are included in contingent consideration revaluation on the Condensed Consolidated Statements of Comprehensive Income. The payment of the H&H and MHI earn-outs are also subject to certain minimum earnings thresholds, which must be met by H&H and MHI, respectively, before an earn-out payment occurs.
During the three months ended June 30, 2022 and 2021, the Company made total contingent consideration payments of $17.7million and $1.2 million, respectively. See Note 10, Fair Value Disclosures, for additional discussion on fair value measurement inputs related to contingent consideration.
Change in Accounting Principle – Cash and cash equivalents
On December 31, 2021, the Company elected to change its accounting policy for the presentation of cash proceeds that are in transit from or held within title company escrow accounts for the benefit of the Company, typically for less than five days. Under the new principle, these proceeds are included in cash and cash equivalents, whereas previously, they were considered accounts receivable and included in other assets. The Company believes this reclassification to be preferable because it is a more accurate reflection of its liquidity at period end and the predominant method used in the industry. This change in accounting principle has been applied retrospectively. This reclassification had no impact on the Condensed Consolidated Statements of Comprehensive Income or Condensed Consolidated Statements of Equity.
The impact of the retrospective presentation change on the Condensed Consolidated Statement of Cash Flows for the six month period ended June 30, 2021, is shown below (in thousands):
| | | | | | | | | | | | | | | | | |
| As previously reported | | As adjusted | | Effect of change |
| Net cash used in operating activities | $ | (121,287) | | | $ | (93,432) | | | $ | 27,855 | |
Reclassifications
Certain other reclassifications have been made in the 2021 condensed consolidated financial statements to conform to the classifications used in 2022.
Recent Accounting Pronouncements
In AprilMarch 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides practical expedients and exceptions for applying GAAP when modifying contracts and hedging relationships that use LIBOR as a reference rate. In addition, these amendments are not applicable to contract modifications made, and hedging relationships entered into or evaluated after December 31, 2022. We do not anticipate a material increase in interest rates from our creditors as a result of the shift away from LIBOR as a reference rate. In June 2022, we amended and restated our revolving credit facility, with no material impact as a result of the shift away from LIBOR (see Note 3). We will continue to evaluate the impact of the shift and relevant guidance on our financial statements and disclosures, as applicable.
2. Business Acquisitions
Century Homes
On January 31, 2021, the Company completed the acquisition of Century Homes Florida, LLC (“Century Homes”) from Tavistock Development Company for a total purchase price of $35.6 million. The acquisition was accounted for as a business combination under FASB Topic 805, Business Combinations (“Topic 805”). We recorded an allocation of the purchase price to Century Homes’ tangible assets acquired and liabilities assumed based on their estimated fair values as of January 31, 2021. There were no identifiable intangible assets. Goodwill was recorded as the residual amount by which the purchase price exceeded the provisional fair value of the net assets acquired and is expected to be fully deductible for tax purposes. Goodwill consists primarily of expected synergies of combining operations, the acquired workforce, and growth opportunities, none of which qualify as separately identifiable intangible assets. As of January 31, 2022, the Company has completed its allocation of the purchase price and no measurement period adjustments were identified.
The final purchase price allocation as of January 31, 2022 was as follows (in thousands):
| | | | | |
| Cash acquired | $ | 3,993 | |
| Other assets | 754 | |
| Goodwill | 1,795 | |
| Inventories | 34,324 | |
| Property and equipment, net | 549 | |
| Liabilities | (5,831) | |
| Total purchase price | $ | 35,584 | |
MHI
On October 1, 2021, we completed the acquisition of certain assets, rights and properties, and assumed certain liabilities of privately held Texas homebuilder McGuyer Homebuilders, Inc. and related affiliates (“MHI”), including: (i) single-family residential homebuilding; (ii) owning model homes; (iii) acquisition, ownership and licensing of intellectual property (including architectural plans); (iv) purchasing and reselling homebuilding supplies; (v) development, construction and sale of condominium units in Austin, Texas; (vi) mortgage origination through a mortgage company; and (vii) title insurance, escrow and closing services through a title company. The acquisition allows the Company to expand its existing footprint in the Texas market.
Total cash paid at closing of approximately $471.0 million included $463.0 million in purchase price based on the preliminary value of purchased net assets and a 10.0% deposit on a separate land bank facility. On December 3, 2021, the Company paid $1,206,769an additional $25.2 million in contingentcash for customary post-closing adjustments based on the final value of the net assets acquired as of September 30, 2021. Additionally, the Company agreed to the future payment of additional consideration of up to H&H.25.0% of pre-tax net income for up to 5 periods, the last of which ends 48 months after the closing, subject to certain minimum pre-tax income thresholds and certain overhead expenses, estimated at approximately $94.6 million as of the acquisition date.
The total purchase price was as follows (in thousands):
| | | | | |
| Cash consideration | $ | 488,178 | |
| Contingent consideration based on future earnings | 94,573 | |
| Total consideration | $ | 582,751 | |
The Company used $20.0 million of cash on hand and proceeds from the sale of the Convertible Preferred Stock (see Note 6) and from unsecured debt incurred under the Credit Agreement, to fund the MHI acquisition. On October 1, 2021, the Company borrowed approximately $300.0 million under the Credit Agreement and paid off MHI’s vertical lines of credit in connection with the closing of the acquisition (see Note 3).
The acquisition was accounted for as a business combination under Topic 805. We recorded an allocation of the purchase price to MHI tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of October 1, 2021. The amounts for intangible assets were 0based on third-party valuations performed. Goodwill was recorded as the residual amount by which the purchase price exceeded the provisional fair value of the net assets acquired and is expected to be fully deductible for tax purposes. Goodwill consists primarily of expected synergies of combining operations, the acquired workforce, and growth opportunities, none of which qualify as separately identifiable intangible assets. As of June 30, 2022, the Company has substantially completed its purchase price allocation. The principal open items relate to the valuation of certain contingencies as management is awaiting additional information to complete its assessment. Estimates have been recorded as of the acquisition date and updates to these estimates may increase or decrease goodwill.
Pursuant to Topic 805, the financial statements will not be retrospectively adjusted for any provisional amount changes that occur in subsequent periods. Rather, we will recognize any provisional adjustments during the reporting period in which the adjustments are determined. We will also be required to record, in the same period’s financial statements, the effect on earnings, if any, as a result of any change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
The purchase price allocation as of June 30, 2022, was as follows (in thousands):
| | | | | |
| Cash acquired | $ | 297 | |
| Inventories | 473,037 | |
| Lot deposits | 40,452 | |
| Other assets | 14,722 | |
| Property and equipment, net | 3,163 | |
| Equity method investments | 6,192 | |
| Intangible assets, net of amortization | 8,840 | |
| Goodwill | 141,071 | |
| Operating lease right-of-use assets | 1,508 | |
| Accounts payable | (41,466) | |
| Accrued expenses | (25,801) | |
| Customer deposits | (37,756) | |
| Operating lease liabilities | (1,508) | |
| Total purchase price | $ | 582,751 | |
On January 31, 2022, the Company made a cash payment of $34.9 million for model homes from MHI Models, Ltd., a Texas limited partnership (“the MHI Model Homes”). The post-close consideration payment completed the asset purchase transaction, which was considered to be economically separate from the acquisition of MHI and related purchase price allocation above.
On March 24, 2022, the Company sold 93 completed model homes for $55.4 million, including the MHI Model Homes. The Company simultaneously entered into 93 individual lease agreements. The Company is responsible for paying the operating expenses associated with the homes while under lease. The Company considered the terms of the sale and leaseback arrangement and based on applicable GAAP guidance, concluded the transaction qualifies for sale treatment and that the leases should be classified as operating leases.
3. Construction Lines of Credit
On January 25, 2021, the Company entered into a $450.0 million syndicated senior credit facility with Bank of America, N.A. (the “Credit Agreement”), and subsequently repaid $340.0 million in outstanding debt and terminated all then-existing construction lines of credit. Through subsequent amendments in September 2021 (“the Amendments”), additional lenders were added as well as provisions for any existing lender, at the Company’s request, to increase its revolving commitment under the Credit Agreement, add new revolving loan tranches under the Credit Agreement or add new term loan tranches under the Credit Agreement, not to exceed an aggregate of $1.1 billion, which would include the exercise of the accordion feature (collectively, the "Existing Credit Agreement").
On June 2, 2022, the Company entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement") to amend and restate its Existing Credit Agreement. The Amended and Restated Credit Agreement is substantially similar to the Existing Credit Agreement except that the Amended and Restated Credit Agreement, among other paymentsthings, (i) provides for an increase in the aggregate commitments under the facility from $817.5 million to $1.1 billion; (ii) allows the facility to expand to a borrowing base of contingent considerationup to $1.6 billion through its accordion feature; (iii) extends the maturity date from January 25, 2024 to June 2, 2025; and (iv) transitions the applicable interest rate from a Eurodollar based rate to a Secured Overnight Financing Rate (“SOFR”) based rate, as described below.
Under the Amended and Restated Credit Agreement, loans bear interest at the Company’s option of (1) a “Base Rate”, which means, for any day, a fluctuating rate per annum equal to credit spreads of 1.5% to 2.6%, which are determined based on the Company’s debt to capitalization ratio, plus the highest of (a) the Federal Funds Rate plus 0.5%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” (c) Term SOFR plus 1.0% and (d) 1.0%, or (2) a “Term SOFR/Letter of Credit Rate”, which means for any day a fluctuating rate
per annum equal to credit spreads of 2.5% to 3.6%, which are determined based on the Company’s debt to capitalization ratio, plus the adjusted term SOFR rate (based on one, three or six-month interest periods).
On June 30, 2022, the Company received an additional commitment of $50.0 million under the terms of the accordion feature.
As of June 30, 2022 and December 31, 2021, the outstanding balance under the Amended and Restated Credit Agreement was $875.0 million and $760.0 million, respectively, and the effective interest rate was 4.1% and 3.8%, respectively. Under the Amended and Restated Credit Agreement, the funds available are unsecured and availability under the borrowing base is calculated based on finished lots, construction in process, and finished homes inventory on the Condensed Consolidated Balance Sheets.
The Company had capitalized debt issuance costs related to the line of credit and notes payable, net of amortization, of $9.0 million and $5.5 million as of June 30, 2022 and December 31, 2021, respectively, which were included in other assets on the Condensed Consolidated Balance Sheets. The Company amortized $1.1 million and $0.6 million of debt issuance costs for the ninethree months ended SeptemberJune 30, 2022 and 2021, and 2020,$1.9 million and $1.4 million of debt issuance costs for the six months ended June 30, 2022 and 2021, respectively.
The Credit Agreement contains restrictive covenants and financial covenants. The Company was in compliance with all debt covenants as of June 30, 2022 and December 31, 2021. The Company expects to remain in compliance with all debt covenants over the next twelve months.
4. Inventories
Inventories consist of finished lots, construction in process (“CIP”) and finished homes, including capitalized interest. In addition, lot option fees related to off-balance sheet arrangements and due diligence costs related to land development are also capitalized into inventories – finished lots and land. Finished lots are purchased with the intent of building and selling a home, and are generally purchased just-in-time for construction. CIP represents the homebuilding activity associated with homes to be sold and speculative homes. CIP includes the cost of the finished lot and all of the direct costs incurred to build the home. The cost of the home is expensed on a specific identification basis.
Interest is capitalized and included within each inventory category above. Capitalized interest activity is summarized in the table below for the three and six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Capitalized interest at the beginning of the period | $ | 49,392 | | | $ | 18,842 | | | $ | 33,266 | | | $ | 21,091 | |
| Interest incurred | 25,447 | | | 7,329 | | | 50,433 | | | 13,997 | |
| Interest expensed | (13) | | | (16) | | | (26) | | | (658) | |
| Interest charged to homebuilding cost of sales | (12,790) | | | (7,365) | | | (21,637) | | | (15,640) | |
| Capitalized interest at the end of the period | $ | 62,036 | | | $ | 18,791 | | | $ | 62,036 | | | $ | 18,791 | |
5. Commitments and Contingencies
The Company is currently involved in the appeals phase of civil litigation related to defective products provided by Weyerhaeuser NR Company (“Weyerhaeuser”) (NYSE: WY), one of our lumber suppliers. Our Colorado division builds a number of floor plans that include basements using specialized fir lumber. On July 18, 2017, Weyerhaeuser issued a press release indicating a recall and potential solution for TJI Joists with Flak Jacket Protection manufactured after December 1, 2016. The press release indicated the TJI Joists used a Flak Jacket coating that included a formaldehyde-based resin that could be harmful to consumers and produced an odor in certain newly constructed homes. We had 38 homes impacted by the potentially harmful and odorous Flak Jacket coating and incurred significant costs directly related to Weyerhaeuser’s defective TJI Joists. Accordingly, we sought remediation and damages from Weyerhaeuser. The press release by Weyerhaeuser had a pronounced impact on our sales and cancellation rates in Colorado. We filed suit on December 27, 2017—Dream Finders Homes LLC and DFH Mandarin, LLC v. Weyerhaeuser NR Company, No. 17CV34801 (District Court, City and County of Denver, State of Colorado)—and included claims against Weyerhaeuser for manufacturer’s liability based on negligence, negligent misrepresentation causing financial loss in a business transaction and fraudulent concealment. Weyerhaeuser asserted a counterclaim asserting an equitable claim for unjust enrichment. After completion of a jury trial on November 18, 2019, the District Court issued a verdict in our favor on our claims, awarding Dream Finders Homes LLC $3.0 million in damages and DFH Mandarin, LLC $11.7 million in damages. On February 21, 2020, the District Court dismissed Weyerhaeuser’s counterclaim. Weyerhaeuser appealed the Colorado District Court’s jury verdict and on December 2, 2021, the Colorado Court of Appeals reversed the judgment entered against Weyerhaeuser for negligence, negligent misrepresentation and fraudulent concealment. As a result, Dream Finders Homes LLC and DFH Mandarin, LLC filed a petition for writ of certiorari to the Colorado Supreme Court on January 13, 2022 to appeal the Colorado Court of Appeals ruling —Dream Finders Homes LLC and DFH Mandarin, LLC v. Weyerhaeuser NR Company, Case No. 2022SC24 (Colorado Supreme Court)—and that appeal is currently pending. We are awaiting the Colorado Supreme Court’s decision on whether it will grant our petition for writ of certiorari. We have incurred all costs to date related to the Weyerhaeuser matter and have recognized 0 gain on the damages awarded to us by the District Court.
On October 9, 2019, Silver Meadows Townhome Owners Association, Inc. filed a lawsuit in Boulder County Colorado District Court against DFH Mandarin, LLC (“Mandarin”) and Dream Finders Homes, LLC (collectively with Mandarin, “DFH”), both wholly-owned subsidiaries of the Company, as well as other named defendants. The lawsuit alleges certain construction and development defects. Mandarin successfully compelled arbitration. On March 2, 2022 during arbitration proceedings, the parties settled the matter for $12.0 million subject to the execution of a mutually acceptable settlement agreement, including a denial of any admission of liability on behalf of DFH. DFH’s insurance carrier agreed to pay the policy limit of $4.0 million toward the settlement. In April 2022, the parties executed a mutually acceptable settlement agreement and DFH paid the settlement amount, net of the insurance proceeds received. In April 2022, DFH also commenced the formal legal process to seek contribution toward DFH’s portion of the settlement amount from responsible
subcontractors and vendors who performed work on the project. As of June 30, 2022, DFH has settled with one subcontractor for contribution toward DFH's reimbursement of amounts paid toward the settlement and continues its
proceedings to collect additional contributions from responsible subcontractors and vendors.
6. Equity
Pursuant to the Corporate Reorganization effective January 25, 2021, the Company is authorized to issue 350,000,000 shares of common stock, par value of $0.01 per share, consisting of 289,000,000 shares of Class A common stock and 61,000,000 shares of Class B common stock. In addition, the Board of Directors of the Company (the “Board of Directors”) has the authority to issue 1 or more series of preferred stock, par value $0.01 per share, without stockholder approval. As a result of the Corporate Reorganization, all of the outstanding non-voting common units and Series A Preferred Units of DFH LLC converted into 21,255,329 shares of the Company’s Class A common stock and all of the outstanding common units of DFH LLC converted into 60,226,153 shares of the Company’s Class B common stock.
On September 29, 2021, the Company filed a Certificate of Designations with the State of Delaware establishing 150,000 shares of Series A Convertible Preferred Stock with an initial liquidation preference of $1,000 per share and a par value $0.01 per share (the “Convertible Preferred Stock”) and sold 150,000 shares of the Convertible Preferred Stock for an aggregate purchase price of $150.0 million. The Company used the proceeds from the sale of the Convertible Preferred Stock to fund a portion of the MHI acquisition (see Note 2).
All of the Company’s outstanding preferred shares are classified in mezzanine equity as they can be redeemed in a deemed liquidation of the Company outside of the Company’s control.
7. Variable Interest Entities
The Company participatesholds investments in joint venturescertain limited partnerships and similar entities that conduct land acquisition, land development and/or other homebuilding activities in various markets where the Company’sour homebuilding operations are located.located, which are considered variable interests. The Company also has an interest in Jet Home Loans LLC (“Jet Home Loans” or “Jet LLC”), where the primary activities include underwriting, originating and selling home mortgages. The Company’s investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. Additionally, the Company, in the ordinary course of business, enters into option contracts with third parties and unconsolidated entities for the ability to acquire rights to land for the construction of homes. Under these contracts, the Company typically makes a specified earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Consideration paid for
The VIEs are funded by initial capital contributions from the Company, as well as its other partners and generally do not have significant debt. In some cases, an unrelated third party is the general partner or managing member and in others, the general partner or managing member is a related party. The primary risk of loss associated with the Company’s involvement in these contractsVIEs is recordedlimited to the Company’s initial capital contributions due to bankruptcy or insolvency of the VIE; however, management has deemed the likelihood of this as lot deposits on the Consolidated Balance Sheets.
Pursuantremote. The maximum exposure to Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 810 and subtopicsloss related to the consolidation of variable interest entities,VIEs is disclosed below for both consolidated and unconsolidated VIEs, which equals the CompanyCompany’s capital investment in each entity.
Management analyzes its joint venturesthe Company’s investments first under the variable interest model to determine if suchthey are required to be consolidated inVIEs and, if so, whether the Company’s condensed consolidated financial statements. The accounting standard requires a VIE to be consolidated by a company if that companyCompany is determined to be the primary beneficiary. The primary beneficiary is defined as the entity having both of the following characteristics: 1) the power to direct the activities that most significantly impact the VIE’s performance, and 2) the obligation to absorb losses and rights to receive the returns from the VIE that would be potentially significant to the VIE. See Note 9 for a description of the Company’s joint ventures, including those that were determined to be VIEs, and the related accounting treatment. Management determines whether the Company is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion continually.if changes to the Company’s involvement arise. To make this determination, management considers factors such as whether the Company shouldcould direct finance, determine or limit the scope of the entity, sell or transfer property, direct development or direct other operating decisions.
Management consolidates the entity if the Company is the primary beneficiary or if a standalone primary beneficiary does not exist and the Company and its related parties collectively meet the definition of a primary beneficiary. If the joint venture does not qualify as a VIE under the variable interest model, management then evaluates the entity under the voting interest model to assess if consolidation is appropriate.
Joint ventures for which the Company is not identified as the primary beneficiary are typically accounted for as equity method investments.investments based on the voting interest model. The Company and its unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to each party’s respective equity interests. The obligationsoption to make capital contributions areis governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents. Partners in these unconsolidated joint ventures are unrelated homebuilders, land developers or other real estate entities.
For distributions received from these unconsolidated joint ventures, the Company has elected to use the cumulative earnings approach for the Condensed Consolidated Statements of Cash Flows. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized are treated as returns on investment within operating cash flows and those in excess of that amount are treated as returns of investment within investing cash flows.
The Company typically has obtained options to acquire portions of the land held by the unconsolidated joint ventures in which the Company currently participates. When an unconsolidated joint venture sells land to the Company, the Company defers recognition of its share of such unconsolidated joint venture’s earnings (losses) until the Company recognizes revenues on the corresponding home sale. At that time, the Company accounts for the earnings (losses) as a reduction (increase) to the cost of purchasing the land from the unconsolidated joint venture.
The Company shares in the earnings (losses) of these unconsolidated joint ventures generally in accordance with its respective equity interests. In some instances, the Company recognizes earnings (losses) that differ from its equity interest in the unconsolidated joint venture. This typically arises from the Company’s deferral of the unconsolidated joint venture’s earnings (losses) from land sales to the Company.
Non-Controlling Interests
The equity interests in DFH Leyden LLC, DFH Amelia LLC, DFH Clover LLC, DFH Leyden II LLC, DFH MOF Eagle Landing LLC, DCE DFH JV LLC, DFH Capitol LLC, DFC Mandarin Estates LLC, DFC East Village LLC, DFC Wilford LLC, DFC Amelia Phase III LLC, DFC Sterling Ranch LLC and DFC Grand Landings LLC have been reflected as non-controlling interests in the Consolidated Balance Sheets. Income attributable to these non-controlling interests are presented in the Condensed Consolidated Statements of Comprehensive Income as net income attributable to non-controlling interests.
Income Taxes
We are a corporation subject to income taxes in the United States. Our proportional share of the Company’s subsidiaries’ provisions are included in our condensed consolidated financial statements. Our deferred income tax assets and liabilities are computed for differences between the asset and liability method and financial statement amounts that will result in taxable or deductible amounts in the future. We compute deferred balances based on enacted tax laws and applicable rates for the periods in which the differences are expected to affect taxable income. A valuation allowance is recognized for deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine we would be able to realize our deferred tax assets for which a valuation allowance had been recorded, then we would adjust the deferred tax asset valuation allowance, which would reduce our provision for income taxes. We evaluate the tax positions taken on income tax returns that remain open and positions expected to be taken on the current year tax returns to identify uncertain tax positions. Unrecognized tax benefits on uncertain tax positions are recorded on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is more than 50 percent likely to be realized is recognized. Interest and penalties related to unrecognized tax benefits are recorded in income tax benefit. We have 0 uncertain tax positions that qualify for inclusion in our condensed consolidated financial statements. See “Note 10—Income Taxes.”
Equity-Based Compensation
Certain individuals on our executive-level management team are eligible for equity-based compensation, which is awarded according to the terms of individual contracts with those managers.The Company records compensation cost for stock awarded to employees in return for employee service. The cost is measured at the grant-date fair value of the award and recognized as compensation expense over the employee service period, which is normally the vesting period. The Company does not estimate forfeitures. In the event of forfeitures, the compensation expense recognized would be adjusted.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Report (Topic 848), which provides practical expedients and exceptions for applying GAAP when modifying contracts and hedging relationships that use LIBOR as a reference rate. In addition, these amendments are not applicable to contract modifications made and hedging relationship entered into or evaluated after December 31, 2022. We do not anticipate a material increase in interest rates from our creditors as a result of the shift away from LIBOR as a reference rate, and we are currently evaluating the impact of the shift and this guidance on our financial statements and disclosures.
On October 5, 2020, the Company acquired 100% of the issued and outstanding membership interests in H&H, an operative homebuilder, for a purchase price of $44,096,448, net of a $1,710,275 in purchase price reduction related to customary closing adjustments. To fund the acquisition, the Company obtained a $20,000,000 bridge loan from Boston Omaha Corporation, LLC, with an interest rate of 14% per annum maturing on May 1, 2021, paid cash of $9,496,723 and agreed to pay contingent consideration estimated in the amount of $16,310,000 if H&H met certain financial metrics.
Accordingly, the Company recognized the excess purchase price over the fair value of the net assets acquired as goodwill of $16,357,450. The goodwill arising from the acquisition consists largely of synergies and economies of scale from H&H’s operating footprint, which includes owned properties, increased future revenue and earnings from organic growth, new business opportunities and strategic initiatives. Transaction costs were not material and were expensed as incurred.
The business combination was accounted for under the acquisition method, and the acquisition has been included in the Company’s consolidated results of operations since the date of acquisition. The fair value of assets acquired included cash of $10,956,359, other assets of $8,253,966, tradename of $2,660,000, inventories of $143,817,075 and liabilities assumed of $137,949,737, including $116,894,907 of construction lines of credit.
On January 31, 2021, the Company completed the acquisition of Century Homes from Tavistock Development Company. The Company paid $35,500,000 to acquire 134 units under construction and 229 finished lots on which the Company has begun construction during 2021 and will continue to release into production throughout 2022. The Company evaluated the Century Homes acquisition for significance under SEC Rule 3-05, and determined the acquisition did not meet the significance threshold.
The following unaudited pro forma condensed consolidated results of operations are provided for illustrative purposes only and have been presented as if the H&H and Century Homes acquisitions had occurred on January 1, 2020. This unaudited pro forma information should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had occurred on that date, nor of the results that may be obtained in the future.
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| Unaudited Pro Forma | | 2021
| | | 2020
| | | 2021
| | | 2020
| |
| Total revenue | | $ | 362,983,638 | | | $ | 369,580,015 | | $ | 1,078,402,698 | | | $ | 892,504,467 | |
| Net and comprehensive income attributable to Dream Finders Homes, Inc. | | $ | 19,135,499 | | | $ | 27,486,299 | | $ | 64,151,994 | | | $ | 49,799,142 |
|
3. | Construction Lines of Credit |
On January 25, 2021, the Company entered into a $450,000,000 syndicated credit facility with Bank of America, N.A. (the “Credit Agreement”), and subsequently repaid $340,000,000 in outstanding debt, including the $20,000,000 bridge loan with Boston Omaha Corporation, LLC, and terminated all then-existing construction lines of credit. Under the Credit Agreement, the Company has the option to enter into Base Rate or LIBOR Rate contracts. The interest is payable based on the contract terms and is variable dependent on the Company’s debt to capitalization ratio, and applicable interest rates in the market (LIBOR Rate, Prime Rate, etc.).
On September 8, 2021, the Company entered into a First Amendment and Commitment Increase Agreement (the “Amendment”) to its Credit Agreement. The Company exercised its right, and the Amendment provides, for an increase in the aggregate commitments under the Credit Agreement of up to $300,000,000. The aggregate commitments increase amounted to $292,500,000, and the total availability under the Credit Agreement reached $742,500,000. NaN new lenders were added as additional lenders under the Credit Agreement. As amended by the Amendment, the Credit Agreement includes provisions for any existing lender to, at the Company’s request, increase its revolving commitment under the Credit Agreement, add new revolving loan tranches under the Credit Agreement or add new term loan tranches under the Credit Agreement, in all cases not to exceed an aggregate of $1,050,000,000. In addition, the Amendment clarified and modified certain definitions and covenants as more fully set forth therein, including modifications of certain financial covenants to facilitate the consummation of the MHI Acquisition (Note 15). On September 29, 2021, in connection with the closing of the MHI Acquisition, the Company exercised its right to further increase the aggregate commitments under the Credit Agreement to $817,500,000 and 1 lender was added as an additional lender under the Credit Agreement. Certain of the Company’s subsidiaries guaranteed the Company’s obligations under the Credit Agreement. The Credit Agreement will mature on January 25, 2024.
As of September 30, 2021, the outstanding balance under the Credit Agreement was $440,000,000 and the effective interest rate was 3.75%. As of December 31, 2020, the Company had 34 lines of credit with cumulative maximum availability of $762,979,000, and an aggregate outstanding balance of $289,878,716. During 2020, the effective interest rates for these lines of credit ranged from 3.81% to 10.33%.
Our indebtedness as of December 31, 2020, was fully collateralized by homes under construction and, to a much smaller extent, finished lots. Under the Credit Agreement, the funds available are unsecured and availability under the borrowing base is calculated based on work-in-progress inventory.
The outstanding lines of credit were paid in full during 2021 (in connection with the Company entering into the Credit Agreement), are no longer active and the Company does not intend to renew these facilities. The outstanding balance in the lines of credit were payable upon the delivery of the collateralized individual homes to end-home buyers.
The Company capitalized $7,505,214 and $2,249,683 as of September 30, 2021 and December 31, 2020, respectively, and amortized $489,986 and $553,772 of debt issuance costs for the three months ended September 30, 2021 and 2020, and $1,266,784 and $1,560,795 of debt issuance costs for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 the company extinguished unamortized Debt Issuance Costs of $506,466.Debt issuance costs related to the Company’s lines of credit and notes payable, net of amortization, were $6,238,429 and $506,466 as of September 30, 2021 and December 31, 2020, respectively, included in other assets on the Condensed Consolidated Balance Sheets.
The Credit Agreement contains restrictive covenants and financial covenants. The Company was in compliance with all debt covenants as of September 30, 2021 and December 31, 2020. The Company expects to remain in compliance with all debt covenants over the next twelve months.
Notes payable consisted of the following as of September 30, 2021 and December 31, 2020:
| | | | | As of September 30, | | | As of December 31, | |
| Maturity Date | | | | Payment Terms | | 2021
| | | 2021
Effective Rate | | | 2020
| | | 2020
Effective Rate | |
| May 1, 2021 | | | | Interest is payable monthly at 14.00%
| | $ | 0 | | | | 0 | | | $ | 20,000,000 | | | | 14.00 | % |
| February 28, 2022 | | | (1) |
| Non-interest bearing
| | | 1,216,000
| | | | 0.00
| %
| | | 832,000
| | | | 0.00
| %
|
April 1, 2022
| | | (1) |
| Interest is payable monthly at 12.50%
| | | 717,642
| | | | 12.50
| % | | | 1,735,161
| | | | 12.50
| % |
July 31, 2022
| | | (1) |
| Interest is payable monthly at 9.25%
| | | 1,979,389
| | | | 9.25
| % | | | 3,984,174
| | | | 9.25
| % |
March 25, 2023
| | | (1) |
| Interest is payable monthly at 5.00% | | | 0
| | | | 0
| | | | 3,101,947
| | | | 5.00
| % |
| Total notes payable | | | | | | | $ | 3,913,031 | | | | | | | $ | 29,653,282 | | | | | |
| Less: Debt issuance costs from notes payable | | | | | | | | 0 | | | | | | | | (15,444 | ) | | | | |
| Notes payable, net of discount | | | | | | | $ | 3,913,031 | | | | | | | $ | 29,637,838 | | | | | |
(1) These notes payable relate to our consolidated joint ventures and are non-recourse to the Company.
Included within notes payable as of December 31, 2020, is a $20,000,000 bridge loan from Boston Omaha Corporation, LLC, which was utilized to fund a portion of the purchase price of the H&H Homes acquisition (Note 2). This note was paid off in January 2021.
The principal balance on all notes payable is payable upon the sale of project specific collateral, and is collateralized by a real estate mortgage and a limited guarantee ensuring project completeness and the nonexistence of fraudulent acts.
During the nine months ended September 30, 2021 and 2020, there were no material changes in the contractual maturities of our notes payable.
Inventories consist of entitled raw land, finished lots, and construction in process (“CIP”), including capitalized interest. Raw land is purchased with the intent to develop such land into finished lots. Finished lots are held with the intent of building and selling a home. The asset is owned by the Company either as a result of developing purchased raw land or purchasing developed lots. CIP represents the homebuilding activity associated with both homes to be sold and speculative homes. CIP includes the cost of the developed lot as well as all of the direct costs incurred to build the home. The cost of the home is expensed on a specific identification basis when the home is closed to the end customer.
As mentioned in Note 9, the Company consolidated several joint ventures that own land and finished lots. The Company owns a percentage of these joint ventures but does not own the underlying assets. The table below shows the Company’s owned real estate inventory and real estate inventory owned by the joint ventures.
| | | As of September 30, | | | As of December 31, | |
| | | 2021
| | | 2020
| |
| Construction in process | | $ | 595,643,030 | | | $ | 396,630,945 | |
| Finished lots and land | | | 50,140,666 | | | | 46,839,616 | |
| Inventories owned by the Company | | | 645,783,696 | | | | 443,470,561 | |
| | | | | | | | | |
Inventories owned by VIEs
| | | 20,708,390 | | | | 40,900,552 | |
| Total inventories | | $ | 666,492,086 | | | $ | 484,371,113 | |
| | | | | | | | | |
| Percentage of inventories owned by the Company | | | | | | | | |
| Construction in process | | | 92 | % | | | 89 | % |
| Finished lots and land | | | 8 | % | | | 11 | % |
Interest is capitalized and included within each inventory category above. Capitalized interest activity is summarized in the table below for the three months ended September 30, 2021 and 2020 and for the nine months ended September 30, 2021 and 2020.
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2021
| | | 2020
| | | 2021
| | | 2020
| |
| Capitalized interest at the beginning of the period | | $ | 18,790,661 | | | $ | 27,094,143 | | | $
| 21,091,297 | | | $
| 25,335,924 | |
| Interest incurred | | | 9,671,286 | | | | 6,126,791 | | | | 23,668,584 | | | | 19,765,176 | |
| Interest expensed | | | (14,496 | ) | | | (42,373 | ) | | | (672,153 | ) | | | (124,026 | ) |
| Interest charged to cost of contract revenues earned | | | (5,600,052 | ) | | | (7,763,661 | ) | | | (21,240,329 | ) | | | (19,562,174 | ) |
| Capitalized interest at the end of the period | | $ | 22,847,399 | | | $ | 25,414,900 | | | $ | 22,847,399 | | | $ | 25,414,900 | |
6. | Commitments and Contingencies |
In April 2020, the Company received proceeds from the Paycheck Protection Program (“PPP”) in the amount $7,220,207, which was classified in accrued expenses on the Consolidated Balance Sheets and accounted for as an in-substance grant as of March 31, 2021. The Company utilized all of the PPP proceeds to pay payroll and permissible operating expenses. On June 16, 2021, approximately the total amount of the PPP proceeds were forgiven by the Small Business Association (“SBA”). As such, the Company has included the PPP proceeds as other income on the condensed Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2021.
7. | Members’ Equity, Mezzanine Equity and Shareholders’ Equity |
Redeemable Common Units, Redeemable Preferred Units and Common Units
All of the Company’s outstanding preferred units are classified in mezzanine equity as they can be redeemed in a deemed liquidation of the Company outside of the Company’s control. Additionally, prior to the Corporate Reorganization, the Company had certain non-voting common units that could have been redeemed outside the Company’s control, and therefore, were classified in mezzanine equity (the “Redeemable Common Units Mezzanine”).
Pursuant to the Corporate Reorganization effective January 25, 2021, the Company is authorized to issue 350,000,000 shares of common stock, par value of $0.01 per share, consisting of 289,000,000 shares of Class A common stock and 61,000,000 shares of Class B common stock. The Board of Directors of the Company (the “Board of Directors”) has the authority to issue 1 or more series of preferred stock, par value $0.01 per share, without stockholder approval.
As a result of the Corporate Reorganization, all of the outstanding non-voting common units and Series A Preferred Units of DFH LLC converted into 21,255,329 shares of the Company’s Class A common stock, all of the outstanding common units of DFH LLC converted into 60,266,153 shares of the Company’s Class B common stock and all of the outstanding Series B Preferred Units and Series C Preferred Units of DFH LLC remained outstanding. Following the Corporate Reorganization, the Company owns all of the voting membership interest of DFH LLC.
Redeemable Series A Preferred Units of DFH LLC
As a result of the Corporate Reorganization, all of the outstanding Series A Preferred Units of DFH LLC were converted into a total of 21,255,329 shares of the Company’s Class A common stock.
Redeemable Series B Preferred Units of DFH LLC
As of September 30, 2021 and December 31, 2020, the Company had 7,143 and 7,143, respectively, of Redeemable Series B Preferred Units (“Series B Preferred Units”) issued and outstanding with a carrying value of $6,897,365 and $6,333,036, respectively. In the event of a liquidation, dissolution or winding up of DFH LLC, the Series B Preferred Units have a liquidation preference of $1,000 per unit and are senior to common units. The Series B Preferred Units have an 8% annual cumulative preferred distribution on the liquidation preference that is payable if and when distributions are declared. The Series B Preferred units do not participate in discretionary distributions, and each unit has the right to 1 vote on any matter presented for a vote of the members of DFH LLC. As of September 30, 2021 and December 31, 2020, these units have an aggregate unpaid amount of cumulative preferred distributions of $2,667,021 and $2,102,692, respectively, which is $373.38 and $294.37, respectively, per unit.
The Series B Preferred Units can be redeemed at DFH LLC’s option for $1,000 per unit plus any accrued and unpaid preferred distributions per unit at any time prior to December 31, 2022. The units may also be redeemed at the option of the holder upon a sale of DFH LLC for $1,000 per unit plus any accrued and unpaid preferred distributions. As the units are not currently probable of becoming redeemable outside the Company’s control, 0 accretion has been recorded.
Redeemable Convertible Series C Preferred Units of DFH LLC
In April 2020, the Company redeemed 1,000 Series C Preferred Units for $1,000,000 plus accrued unpaid preferred distributions of $62,500. On January 27, 2021, the Company redeemed all of the outstanding Series C Preferred Units for $26,000,000, including $500,000 of discounted costs, plus accrued unpaid preferred distributions of $200,000.
Series A Convertible Preferred Stock of the Company
On September 29, 2021, the Company filed a Certificate of Designations with the State of Delaware establishing 150,000 shares of Series A Convertible Preferred Stock with an initial liquidation preference of $1,000 per share and a par value $0.01 per share (the “Convertible Preferred Stock”) and sold 150,000 shares of Convertible Preferred Stock for an aggregate purchase price of $150 million. The Company used the proceeds from the sale of the Convertible Preferred Stock to fund a portion of the MHI Acquisition (See Note 15).
Pursuant to the Certificate of Designations, the Convertible Preferred Stock ranks senior to the Company’s Class A and B common stock with respect to dividends and distributions on liquidation, winding-up and dissolution. Upon a liquidation, dissolution or winding up of the Company, each share of Convertible Preferred Stock will be entitled to receive the initial liquidation preference of $1,000 per share, subject to adjustment, plus all accrued and unpaid dividends thereon. In addition, the Convertible Preferred Stock has the following terms:
Cumulative Dividends: The Convertible Preferred Stock accumulates cumulative dividends at a rate per annum equal to 9.00% payable quarterly in arrears.
Duration: The Convertible Preferred Stock is perpetual with call and conversion rights. The Convertible Preferred Stock is not convertible by the Purchasers in the first five years following issuance, with the exception of the acceleration of the Conversion Right (as defined below) upon breach of the protective covenants (described below). The Company can call the outstanding Convertible Preferred Stock at any time for one-hundred and two percent (102%) of its liquidation preference during the fourth year following its issuance and for one-hundred and one percent (101%) of its liquidation preference during the fifth year following its issuance (in each case, for the avoidance of doubt, plus accrued but unpaid dividends, if any). Subsequent to the fifth anniversary of its issuance, a Purchaser can convert the Convertible Preferred Stock into Class A common stock of the Company (the “Conversion Right”). The conversion price will be based on the average of the trailing 90 days’ closing price of Class A common stock of the Company, less 20% of the average and subject to a floor conversion price of $4.00 (the “Conversion Discount”).
Protective Covenants: The protective covenants of the Convertible Preferred Stock require the Company to maintain compliance with all covenants related to (i) the Credit Agreement, as may be further amended from time to time; provided that any amendment, restatement, modification or waiver of the Credit Agreement that would adversely and materially affect the rights of the Purchasers will require the written consent of holders of a majority of the then-outstanding shares of Convertible Preferred Stock; and (ii) any agreement between the Company and any Purchaser (the covenants referred to in clauses (i) and (ii), collectively, the “Protective Covenants”). Non-compliance beyond any applicable cure period with the Protective Covenants (in the case of the Protective Covenants related to the Credit Agreement) will accelerate the Conversion Right, and in the event of such acceleration that occurs before the fifth anniversary following the issuance of the Convertible Preferred Stock, the “Conversion Discount” shall be increased from 20% to 25%.
Voting Rights. Except as may be expressly required by Delaware law, the shares of Convertible Preferred Stock have no voting rights.
Redemption in a Change of Control: The Convertible Preferred Stock will be redeemed, contingent upon and concurrently with the consummation of a change of control of the Company. Shares of Convertible Preferred Stock will be redeemed in a change of control of the Company at a price, in cash, equal to the liquidation preference, subject to adjustment, plus all accumulated and unpaid dividends, plus, if the change of control occurs before the fourth anniversary of the date of issuance of the Convertible Preferred Stock, a premium equal to the dividends that would have accumulated on such share of Convertible Preferred Stock from and after the change of control redemption date and through the fourth anniversary of the issuance of the Convertible Preferred Stock.
Pursuant to the terms of the Certificate of Designations, unless and until approval of the Company’s stockholders is obtained as contemplated by Nasdaq listing rules, no shares of Class A common stock will be issued or delivered upon conversion of any Convertible Preferred Stock to the extent that such issuance would (i) result in the holder beneficially owning in excess of 19.99% of the outstanding Class A common stock as of the date of the Certificate of Designations or (ii) exceed 19.99% of the outstanding shares of Class A and Class B common stock combined as of the date of the Certificate of Designations.
In addition, in connection with the sale of the Convertible Preferred Stock, on September 29, 2021, the Company and the Purchasers entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which, among other things, the Company granted the Purchasers certain registration rights. Under the Registration Rights Agreement, the Company is required to register the Convertible Preferred Stock owned by the Purchasers and the shares of Class A common stock issuable upon conversion of such shares equal to 19.99% of the outstanding shares of Class A common stock for resale within the earlier of (i) 3 business days after the filing of the Company’s Form 10-K for the fiscal year ended December 31, 2021 and (ii) six months after September 29, 2021. If the Company fails to comply with its registration requirements under the Registration Rights Agreement, the Purchasers, in addition to any regular dividends, will be entitled to an additional 2% per annum dividend for an additional quarter period on the Convertible Preferred Stock if the breach is cured within 30 days and for each additional 30 day period in which the Company fails to cure such breach, each Purchaser will be entitled to an additional 2% per annum for an additional quarter period until cured. In addition, the Purchaser has rights to demand the registration of the Convertible Preferred Stock and the shares of Class A common stock in certain instances.
8. | Equity-Based Compensation |
Dream Finders Homes, Inc.
On January 20, 2021, the Board of Directors approved and adopted the DFH, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan is administered by the Compensation Committee of the Board of Directors, and authorizes the Company to grant incentive stock-based awards. The Company granted 759,709 restricted stock grants to certain executives and directors, which had a weighted-average grant date fair value of $23.15 per share, in conjunction with the adoption of the 2021 Plan. These stock grants vest over a period of three years of continuous service, commencing on the date of the grant and vesting ratably in one third increments at the end of each quarter of a three-year term. The fair value of these grants was derived by using the closing stock price on the date of the grant. Expense related to equity-based compensation under the 2021 Plan was $1,472,037 and $0 for the three months ended September 30, 2021 and 2020, and $4,032,106 and $0 for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, and December 31, 2020, the total unrecognized compensation expense under the 2021 Plan was $13,488,366 and $0, which will be recognized over a weighted-average period of 2.3 years.
Dream Finders Holdings LLC
In January 2021, certain common non-voting units in DFH LLC were converted into shares of the Company’s Class A common stock and Class B common stock. As a result, DFH LLC expensed the remaining unrecognized stock compensation expense associated with these units in the amount of $0 for the three months ended September 30, 2021 and $1,240,309 for the nine months ended September 30, 2021. Expense related to equity-based compensation was $697,054 for the nine months ended September 30, 2020.
As of December 31, 2020, the Company had 3,532 non-vesting, non-common units issued to employees, valued at $4,741,657, which converted into shares of the Company’s Class A common stock on January 21, 2021.
9. | Variable Interest Entities and Investments in Other Entities |
The Company holds investments in certain limited partnerships and similar entities that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located. The Company also has an interest in 1 unconsolidated VIE, Jet Home Loans LLC, where the primary activities include underwriting, originating and selling home mortgages. The Company’s VIEs are funded by initial capital contributions from the Company, as well as its other partners and generally do not have significant debt. The primary risk of loss associated with the Company’s involvement in these VIEs is limited to the Company’s initial capital contributions due to bankruptcy or insolvency of the VIE; however, management has deemed the likelihood of this to be remote. The maximum exposure to loss related to the VIEs is disclosed below for both consolidated and unconsolidated VIEs, which equals the Company’s capital investment in each entity.
In some cases, an unrelated third party is the general partner or managing member and in others, the general partner or managing member is a related party. Management analyzed the Company’s investments first under the variable interest model to determine if they are VIEs and, if so, whether the Company is the primary beneficiary. Management consolidates the entity if the Company is the primary beneficiary or if a standalone primary beneficiary does not exist and the Company and its related parties collectively meet the definition of a primary beneficiary. If the joint venture does not qualify as a VIE under the variable interest model, management then evaluates the entity under the voting interest model to assess if consolidation is appropriate.
The assets of a VIE can only be used to satisfy the obligations of that specific VIE, even for assets that are included within the Consolidated Balance Sheets.consolidated. The Company and its partners do not have an obligation to make capital contributions to the VIEs and there are no liquidity arrangements or other agreements that could require the Company to provide financial support to the VIEs. Furthermore, the creditors of the VIEs have no recourse to the Company’s general credit.
Consolidated VIEs
For VIEs that the Company does consolidate, management has the power to direct the activities that most significantly impact the VIE’s economic performance. The Company typically serves as the party with homebuilding expertise in the VIE. The Company does not guarantee the debts of the VIEs, and creditors of the VIEs have 0no recourse against the Company. There were 0no new consolidated VIEs during the ninesix months ended SeptemberJune 30, 20212022 or 2020.2021.
The table below displays the carrying amounts of the assets and liabilities related to the consolidated VIEs:VIEs (in thousands):
| | | As of September 30, | | | As of December 31, | |
| Consolidated | | 2021
| | | 2020
| |
| Assets | | $ | 27,895,849 | | | $ | 50,982,111 | |
| Liabilities | | $ | 10,636,828 | | | $ | 20,114,132 | |
| | | | | | | | | | | |
| As of
June 30, | | As of
December 31, |
| Consolidated | 2022 | | 2021 |
| Assets | $ | 15,796 | | | $ | 30,830 | |
| Liabilities | $ | 6,881 | | | $ | 10,203 | |
Unconsolidated VIEs and Other Equity Method Investments
For VIEs that the Company does not consolidate, the power to direct the activities that most significantly impact the VIE’s economic performance is held by a third party. These entities are accounted for as equity method investments. The Company’s maximum exposure to loss is limited to its investment in the entities because the Company is not obligated to provide any additional capital to or guarantee any of the unconsolidated VIEs’ debt.
The table below shows the Company’s investment in the unconsolidated VIEs:VIEs (in thousands):
| | | As of September 30, | | | As of December 31, | |
| Unconsolidated | | 2021
| | | 2020
| |
| Jet Home Loans | | | 6,106,173 | | | | 3,872,089 | |
| Total investment in unconsolidated VIEs | | $ | 6,106,173 | | | $ | 3,872,089 | |
| | | | | | | | | |
| Other equity method investments | | | 1,237,624 | | | | 673,260 | |
| Total equity method investments | | $ | 7,343,797 | | | $ | 4,545,349 | |
| | | | | | | | | | | |
| As of
June 30, | | As of
December 31, |
| Unconsolidated | 2022 | | 2021 |
| Jet Home Loans | $ | 6,331 | | | $ | 6,133 | |
| Other unconsolidated VIEs | 7,857 | | | 9,834 | |
| Total investment in unconsolidated VIEs | $ | 14,188 | | | $ | 15,967 | |
Lot Option Contracts
The Company generally does not engage in the land development business. Instead, we employ an asset-light land financing strategy, providing us optionality to purchase lots on a ‘‘just-in-time’’ basis for construction and affording us flexibility to acquire lots at a rate that matches the expected sales pace in a given community at predetermined market prices from various land bank entities. We typically execute this strategy through the purchase of finished lot option and land bank option contracts, which require deposits in the form of cash or letters of credit.
We primarily employ 2 variations of our asset-light land financing strategy, finished lot option contracts and land bank option contracts, pursuant to which we secure the right to purchase finished lots at market prices from various land sellers and land bank partners, by paying deposits based on the aggregate purchase price of the finished lots (typically 10% or less in the case of finished lot option contracts and 15% or less in the case of land bank option contracts). These option contracts generally allow us, at our option, to forfeit our right to purchase the lots controlled for any reason, and our sole legal obligation and economic loss as a result of such forfeitures is limited to the amount of the deposits paid pursuant to such option contracts and, in the case of land bank option contracts, any related fees paid to the land bank partner.
None of the creditors of any of the land bank entities with which we enter into lot option contracts have recourse to our general credit. We generally do not have any specific performance obligations to purchase a certain number or any of the lots or guarantee any of the land bankers’ financial or other liabilities. We are not involved in the design or creation of the land bank entities from which we purchase lots under lot option contracts. The land bankers’ equity holders have the power to direct 100%100.0% of the operating activities of the land bank entity. We have 0 voting rights in any of the land bank entities. The sole purpose of the land bank entity’s activities is to generate positive cash flow returns for such entity’s equity holders. Further, we do not share in any of the profit or loss generated by the project’s development. The profits and losses are passed directly to the land banker’sbankers’ equity holders.
The deposit placed by us pursuant to the lot option contracts is deemed to be a variable interest in the respective land bank entities. Certain of those land bank entities are deemed to be VIEs. Therefore, the land bank entities with which we enter into lot option contracts are evaluated for possible consolidation by the Company.
We believe the activities that most significantly impact a land bank entity’s economic performance are the operating activities of the land bank entity. In the case of development projects, unless and until a land bank entity delivers finished lots for sale, the land bank entity’s equity investors bear the risk of land ownership and do not earn any revenues. The operating development activities are managed by the land bank entity’s equity investors.
We possess no more than limited protective legal rights through the lot option contracts in the specific finished lots that we are purchasing, and we possess no participative rights in the land bank entities. Accordingly, we do not have the power to direct the activities of a land bank entity that most significantly impact its economic performance. For the aforementioned reasons, the Company concluded that it is not the primary beneficiary of the land bank entities with which it enters into lot option contracts, and therefore the Company does not consolidate any of these VIEs. These option contracts generally allow us, at our option, to forfeit our right to purchase the lots for any reason. Our sole legal obligation and economic loss as a result of such forfeitures is limited to the amount of the deposits paid pursuant to such option contracts including accrued interest, any related fees paid to the land bank partner, management of the development to completion and any cost overruns related to the project. The Company’s total risk of loss related to finished lot option contractsand land bank option contract deposits and related fees and interest was $156,605,165$355.2 million and $66,272,347$274.9 million as of SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively.
As a result of Any potential cost overruns relative to the IPO and the Corporate Reorganization completed in January 2021, we own all of the Common Units of DFH LLC, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, DFH LLC is generally not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by DFH LLC is passed through to and included in the taxable income or loss of its member, Dream Finders Homes, Inc., in accordance with the terms of the Operating Agreement. The Company is a corporation subject to U.S. federal income taxes, in addition to state and local income taxes, based on our share of DFH LLC’s pass-through taxable income.
Deferred tax assets arise principally as a result of various accruals required for financial reporting purposes which are not currently deductible for tax return purposes.
Management believes that we will have sufficient future taxable income to make it more likely than not that the net deferred tax assets willproject cannot be realized. As of September 30, 2021, the Company had 0 valuation allowance recorded against deferred tax assets. Taxable income is estimated to be $23,246,292 and $0 for the three months ended September 30, 2021 and 2020, and $77,235,617 and $0 for the nine months ended September 30 2021 and 2020, quantified as the Company didhas not exist at such time and DFH LLC was treated as a partnership generally not subject to U.S. federal and most applicable state and local income taxes.
19experienced any significant cost overruns historically.
The Company’s8. Income Taxes effective tax rate for the three months ended September 30, 2021 and 2020 is estimated to be 20% and 0%, respectively
. The Company’s effective tax rate for the ninesix months ended SeptemberJune 30, 2022 and 2021 was 27.4% and 2020 is estimated to be 17% and 0%17.0%, respectively. PriorThe effective tax rate increase of 10.4% is due to the IPO,exclusion of the Company didEnergy-Efficient Home Credit (Section 45L) in the current year, as this tax credit has not have any business operationsyet been extended through December 31, 2022; non-deductible executive compensation, and DFH LLC was treated as a partnership for U.S. federal and most applicable state and local income tax purposes. The income tax provision for the three and nine months ended September 30, 2021 was different than the U.S. federal statutory incomeFlorida corporate tax rate increase from 3.5% in 2021 to 5.5% in 2022. In addition, in the second quarter of 21% primarily attributable to2021, the inclusionCompany's Paycheck Protection Program loan was forgiven and the related income of the PPP income as a permanent difference which is$7.2 million was not subject to taxation.taxable.
We file a consolidated U.S. federal income tax return, as well as state and local tax returns in all jurisdictions where we maintain operations.
9. Segment Reporting
TheThe Company primarily operates in the homebuilding business and is organized and reported by division. There are 12 operating segments and 78 reportable segments: (i) the Carolinas (H&H),Jacksonville, (ii) Jacksonville,Colorado, (iii) Orlando, (iv) Colorado, (v) Washington DC (“DC Metro”), (v) The Carolinas, (vi) Texas, (vii) Jet Home Loans LLC, (“Jet”), the Company’s mortgage operations, and (vii) other.(viii) Other. The Company includes the Century Homes data acquiredoperations within the Orlando segment and the MHI operations comprise the Texas segment. The revenues of each remaining operating segmentsegments are not material and are therefore combined into anthe “Other” category, foralong with the purposes of segment reporting. The corporate component, of the Company’s operations, which is not considered an operating segment, is also included in the “Other” category.segment.
In accordance with ASC Topic 280, Segment Reporting, operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-makers (“CODMs”) in deciding how to allocate resources and in assessing performance. The Company’s CODM primarily evaluates performance based on the number of homes closed, average sales price, and financial results. Segment profitability is measured by net and comprehensive income.
The Company’s homebuilding operations employ an asset-light business model with a focus on the design, construction and sale of single-family entry-level and first-time move-up homes.
The Company’s mortgage operations are conducted through Jet, which is a licensed home mortgage broker that underwrites, originates and sells mortgages to FBC Mortgage LLC, an Orlando-based mortgage lender. The Company owns 49.9% of Jet, and FBC Mortgage, LLC owns the remaining 50.1%. Jet is accounted for as an equity method investment.
Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.
The following tables summarize home sale revenues and net and comprehensive income by segment for the three and six months ended SeptemberJune 30, 2022 and 2021 as well as total assets and 2020, and the nine months ended September 30, 2021 and 2020:
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| Revenues: | | 2021
| | | 2020
| | | 2021
| | | 2020
| |
| Jacksonville | | | 114,266,233 | | | | 119,727,582 | | | | 304,784,533 | | | | 273,663,603 | |
| Colorado | | | 30,777,384 | | | | 39,041,645 | | | | 70,784,907 | | | | 82,927,544 | |
| Orlando | | | 51,187,866 | | | | 36,220,117 | | | | 175,805,150 | | | | 71,787,288 | |
| DC Metro | | | 22,288,381 | | | | 32,342,467 | | | | 60,134,866 | | | | 80,192,685 | |
| Jet Home Loans | | | 7,105,321 | | | | 7,015,000 | | | | 19,950,615 | | | | 22,377,000 | |
| The Carolinas (H&H) | | | 77,022,277 | | | | 0 | | | | 270,355,045 | | | | 0 | |
| Other | | | 67,441,497 | | | | 56,835,016 | | | | 189,955,603 | | | | 164,135,268 | |
| Total segment revenues | | $ | 370,088,959 | | | $ | 291,181,827 | | | $ | 1,091,770,719 | | | $ | 695,083,388 | |
| | | | | | | | | | | | | | | | | |
| Reconciling items from equity method investments | | | (7,105,321 | ) | | | (7,015,000 | ) | | | (19,950,615 | ) | | | (22,377,000 | ) |
| | | | | | | | | | | | | | | | | |
| Consolidated revenues | | $ | 362,983,638 | | | $ | 284,166,827 | | | $ | 1,071,820,104 | | | $ | 672,706,388 | |
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30,
| |
| Net and comprehensive income: | | 2021
| | | 2020
| | | 2021 | | | 2020 | |
| Jacksonville | | | 15,893,270 | | | | 10,631,703 | | | | 35,379,244 | | | | 20,084,482 | |
| Colorado | | | 2,883,421 | | | | 5,431,919 | | | | 5,723,432 | | | | 9,627,350 | |
| Orlando | | | 3,173,384 | | | | 3,303,306 | | | | 13,612,888 | | | | 4,682,466 | |
| DC Metro | | | 804,973 | | | | 1,423,273 | | | | 2,803,812 | | | | 2,059,612 | |
| Jet Home Loans | | | 2,585,411 | | | | 2,790,850 | | | | 7,633,428 | | | | 9,497,000 | |
| Carolinas (H&H) | | | 2,185,613 | | | | 0 | | | | 7,409,557 | | | | 0 | |
| Other | | | (2,342,069 | ) | | | 1,730,056 | | | | 5,250,817 | | | | 3,041,753 | |
| Total segment net and comprehensive income | | $ | 25,184,003 | | | $ | 25,311,107 | | | $ | 77,813,178 | | | $ | 48,992,663 | |
| | | | | | | | | | | | | | | | | |
| Reconciling items from equity method investments | | | (1,615,988 | ) | | | (1,233,291 | ) | | | (4,589,532 | ) | | | (4,653,351 | ) |
| | | | | | | | | | | | | | | | | |
| Consolidated net and comprehensive income | | $ | 23,568,015 | | | $ | 24,077,816 | | | $ | 73,223,646 | | | $ | 44,339,312 | |
The following table summarizes Company assetsgoodwill by segment as of SeptemberJune 30, 20212022 and December 31, 2020:2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| Revenues: | 2022 | | 2021 | | 2022 | | 2021 |
| Jacksonville | $ | 180,853 | | | $ | 93,937 | | | $ | 315,684 | | | $ | 190,518 | |
| Colorado | 39,431 | | | 24,797 | | | 77,584 | | | 40,007 | |
| Orlando | 60,468 | | | 60,182 | | | 107,311 | | | 124,618 | |
| DC Metro | 12,363 | | | 23,898 | | | 24,243 | | | 37,846 | |
| The Carolinas | 118,180 | | | 94,829 | | | 201,763 | | | 193,332 | |
| Texas | 305,068 | | | — | | | 580,492 | | | — | |
| Jet Home Loans | 6,695 | | | 5,826 | | | 13,653 | | | 12,845 | |
Other (1) | 76,771 | | | 67,633 | | | 150,123 | | | 122,515 | |
| Total segment revenues | 799,829 | | | 371,102 | | | 1,470,853 | | | 721,681 | |
| | | | | | | |
| Reconciling items from equity method investments | (6,695) | | | (5,826) | | | (13,653) | | | (12,845) | |
| | | | | | | |
| Consolidated revenues | $ | 793,134 | | | $ | 365,276 | | | $ | 1,457,200 | | | $ | 708,836 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| Net and comprehensive income: | 2022 | | 2021 | | 2022 | | 2021 |
| Jacksonville | $ | 27,548 | | | $ | 11,277 | | | $ | 45,007 | | | $ | 19,486 | |
| Colorado | 4,638 | | | 2,385 | | | 9,159 | | | 2,840 | |
| Orlando | 3,972 | | | 5,111 | | | 6,886 | | | 10,439 | |
| DC Metro | 383 | | | 1,609 | | | 1,055 | | | 1,999 | |
| The Carolinas | 6,871 | | | 1,074 | | | 9,051 | | | 5,224 | |
| Texas | 23,183 | | | — | | | 40,607 | | | — | |
| Jet Home Loans | 2,037 | | | 2,216 | | | 4,326 | | | 5,048 | |
Other (1) | (804) | | | 9,558 | | | (300) | | | 7,593 | |
| Total segment net and comprehensive income | 67,828 | | | 33,230 | | | 115,791 | | | 52,629 | |
| | | | | | | |
| Reconciling items from equity method investments | (1,457) | | | (1,171) | | | (3,086) | | | (2,974) | |
| | | | | | | |
| Consolidated net and comprehensive income | $ | 66,371 | | | $ | 32,059 | | | $ | 112,705 | | | $ | 49,655 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets: | | Goodwill: |
| As of
June 30, | | As of
December 31, | | As of
June 30, | | As of
December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Jacksonville | $ | 283,657 | | | $ | 207,502 | | | $ | — | | | $ | — | |
| Colorado | 152,101 | | | 116,121 | | | — | | | — | |
| Orlando | 206,892 | | | 131,882 | | | 1,795 | | | 1,795 | |
| DC Metro | 89,611 | | | 62,051 | | | — | | | — | |
| The Carolinas | 284,166 | | | 247,250 | | | 16,853 | | | 16,853 | |
| Texas | 770,383 | | | 743,306 | | | 141,071 | | | 141,071 | |
| Jet Home Loans | 68,966 | | | 77,074 | | | — | | | — | |
Other (1) | 319,465 | | | 379,859 | | | 12,208 | | | 12,208 | |
| Total segments | 2,175,241 | | | 1,965,045 | | | 171,927 | | | 171,927 | |
| | | | | | | |
| Reconciling items from equity method investments | (62,455) | | | (70,798) | | | — | | | — | |
| | | | | | | |
| Consolidated | $ | 2,112,786 | | | $ | 1,894,248 | | | $ | 171,927 | | | $ | 171,927 | |
(1)Other includes the Company’s title operations, homebuilding operations in non-reportable segments, operations of the corporate component, and corporate assets such as cash and cash equivalents, cash held in trust, prepaid insurance, operating and financing leases, as well as property and equipment.
| | | As of September 30, | | | As of December 31, | |
| Segments | | 2021
| | | 2020
| |
| Jacksonville | | | 211,346,145 | | | | 162,668,740 | |
| Colorado | | | 107,427,943 | | | | 51,605,969 | |
| Orlando | | | 133,934,318 | | | | 77,299,028 | |
| DC Metro | | | 66,594,450 | | | | 41,327,694 | |
| Jet Home Loans | | | 70,442,668 | | | | 38,696,793 | |
| The Carolinas (H&H) | | | 221,583,127 | | | | 161,242,384 | |
Other (1) | | | 485,469,030 | | | | 235,664,336 | |
| Total segment assets | | $ | 1,296,797,681 | | | $ | 768,504,944 | |
| | | | | | | | | |
| Reconciling items from equity method investments | | | (64,215,898 | ) | | | (34,824,703 | ) |
| | | | | | | | | |
| Consolidated assets | | $ | 1,232,581,783 | | | $ | 733,680,241 | |
| (1) | Other includes the Company’s title operations, homebuilding operations in non-reportable segments, operations of the corporate component, and corporate assets such as cash and cash equivalents, cash held in trust, prepaid insurance, operating and financing leases, lot deposits, goodwill, as well as property and equipment. |
10. Fair Value Disclosures
12. | Fair Value Disclosures |
ASC 820, Fair Value Measurement, defines fair value asrepresents the priceamount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and requires assets and liabilities to be carried atdate. The fair value.
GAAP assignsvalues are determined using a fair value hierarchy tobased on the inputs used to measure fair value. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs.and significant to the fair value.
| | | | | |
| Beginning balance, December 31, 2021 | $ | 124,056 | |
| Fair value adjustments related to prior year acquisitions | 9,234 | |
| Contingent consideration payments | (17,735) | |
| Ending balance, June 30, 2022 | $ | 115,555 | |
Fair value measurements may also be utilized on a nonrecurring basis, such as for purchase accounting, inventory, and the impairment of long-lived assets and goodwill.inventory. The fair value of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, notes payable and construction lines of credit,customer deposits, approximate their carrying amounts due to the short-term nature of these instruments.
13. | Related Party Transactions |
During the nine months ended September 30, 2021 and 2020, the11. Related Party Transactions
The Company enteredenters into or participatedparticipates in related party transactions. Thetransactions and the majority of these transactions wereare entered into to controlsecure finished lots for homebuilding.
the construction of new homes.
Consolidated Joint Ventures
The Company has entered into joint venture arrangements to acquire land, develop finished lots and build homes. Certain stockholders, of DFH, Inc. and directors and members of management of the Company, have invested in these joint ventures and some are limited partners in these joint ventures. DFH Investors LLC (which owned 15,400 Series A Preferred Units, representing 11.65%11.7% of the membership interest in DFH LLC, prior to the Corporate Reorganization) is the managing member of certain of these joint ventures. The joint ventures are consolidated for accounting purposes. Details of each are included inpurposes (see Note 1.7).
DF Residential I, LP
DF Residential I, LP (Fund I)(“Fund I”) is a real estate investment vehicle, organized for the purpose of acquiringto acquire and developingdevelop finished lots. Dream Finders Homes LLC has entered into 6 joint ventures and 10 land bank projects with Fund I since its formation in January 2017. DF Capital Management, LLC (“DF Capital”) is the investment manager in Fund I. The Company owns a 49%49.0% membership interest in DF Capital. DF Capital is controlled by unaffiliated parties. Certain directors and executive officers have made investments in Fund I as limited partners. In addition, certain members of management have made investments in Fund I. The total committed capital in Fund I was $36,706,163 as of September 30, 2021 and December 31, 2020. Collectively, the Company’s directors, executive officers and members of management have invested $8,725,000 or 23.77% of the total committed capital of Fund I as of September 30, 2021 and December 31, 2020.
The general partner of Fund I is DF Management GP, LLC (“DF Management”). Dream Finders Homes LLC is one of four members of DF Management with a 26.13%25.8% membership interest. Certain members of DFH Investors LLC, including one of the Company’s directors, have a 65.33%65.3% membership interest.
The total committed capital in Fund I, which was fully committed in 2019, is $36.7 million. Collectively, the Company’s directors, executive officers and members of management invested $8.7 million or 23.8% of the total committed capital in Fund I. Additionally, Dream Finders Homes LLC and DFH Investors LLC, havecollectively invested $1,400,000 in Fund I as of September 30, 2021 and December 31, 2020. This investment represents 3.81%$1.4 million or 3.8% of the total committed capital inof Fund I of $36,706,163.
I.
DF Residential II, LP
DF Residential II, LP a Delaware limited partnership (“Fund II”) initiated its first close on March 11, 2021. DF Management GP II, LLC, a Florida limited liability company, serves as the general partner of Fund II (the “General Partner”). Fund II has raised total capital commitments of approximately $155$322.1 million to date, and will remain open for a periodwas fully committed as of at least three months, seeking to raise a total of at least $200 million in capital commitments.January 2022. DF Capital is the investment manager of Fund II.
The Company indirectly owns 72%72.0% of the membership interests in the General Partner and receives 72%72.0% of the economic interests. The General Partner is controlled by unaffiliated parties. The Company’s investment commitment in Fund II is $3$3.0 million or 1.5%0.9% of the total expectedcommitted capital commitment of Fund II of $200 million.
II.
On March 11, 2021, the Company entered into land bank financing arrangements and a Memorandum of Right of First Offer with Fund II, under which Fund II has an exclusive right of first offer on any land bank financing projects up to $20$20.0 million that meet its investment criteria and are undertaken by the Company during Fund II’s investment period.
Certain directors, executive officers and other officersmembers of management have made investment commitments as limited partners in Fund II in an aggregate amount $33.9of $133.9 million and $0, or 17% and 0.0%, as of September 30, 2021 and December 31, 2020, respectively,41.6% of the total expectedcommitted capital commitment of Fund II as of June 30, 2022, inclusive of a $100.0 million commitment from Rockpoint Group, LLC discussed below. As of December 31, 2021, these investment commitments were $33.9 million or 10.5% of the total committed capital of Fund II.
Land Bank Transactions with DF Capital
After Fund I was fully committed, DF Capital provided land bank financing in a total of seven further projects and subsequently raised additional commitments from limited partners inthrough funds other than Fund I as well as other parties.and Fund II, which provided land bank financing for specific projects. One of the Company’s officers, invested $180,000$0.2 million in one of these funds managed by DF Capital as a limited partner in 2019. The Company continues to purchase lots controlled by these funds.
As of SeptemberJune 30, 2021, funds managed by DF Capital (other than Fund I and Fund II) controlled an additional 397 lots as a result of these transactions outside of Fund I and Fund II. As of December 31, 2020, funds managed by DF Capital (other than Fund I and Fund II) controlled an additional 595 lots as a result of these transactions outside of Fund I and Fund II. During the three months ended September 30, 2021,2022, the Company purchased 14 of these lots and thehad $68.1 million in outstanding lot deposit balancedeposits in relation to these projects was $3,837,426. During the nine months ended September 30, 2021, the Company purchased 198 of these lots and the outstanding lot deposit balance in relation to these projects was $3,837,426. In addition, the Company paid lot option fees related to these transactions of $27,474 for the three months ended September 30, 2021, and $273,890 for the nine months ended September 30, 2021.
Land Bank Transactions with LB Parker Owners, LLC
TheOn August 10, 2021, the Company entered into a land banking transaction with LB Parker Owners, LLC, a Delaware limited liability company, which is beneficially owned by Rockpoint Group, LLC (“Rockpoint”) in connection with the Company’s acquisition and development of certain residential real property located in Parker, Colorado known as “Looking Glass” pursuant to which LB Parker Owners, LLC provided $3,300,000$3.3 million for the acquisition of the real property. BillWilliam H. Walton III is the founding principal of Rockpoint Group, LLC and also a member of the Company’s boardBoard of directors,Directors, its Audit Committee, and a member of its compensation committee.Compensation Committee.
Varde Capital
Certain DF Capital joint ventures in whichOn July 29, 2022, the Company isexercised its option with LB Parker Owners, LLC as it pertains to the Looking Glass real property through assignment to a member havethird party land bank. As of that date, LB Parker Owners, LLC has no further interest in the property. DFH retains interest through an option with the new, unrelated third party land bank.
Rockpoint Group, LLC
On February 15, 2022, DFH entered into lending arrangementsa Memorandum of Right of First Offer with the holdersRockpoint, under which Rockpoint has an exclusive right of the Series C Preferred Units in DFH LLC. The Varde Private Debt Opportunities Fund (On Shore), L.P. (Varde Capital) has a loan with a principal amount of $18,000,000, whose borrowersfirst offer on certain land bank financing projects that meet certain criteria and are DFC East Village, LLC, DFC Seminole Crossing, LLC and DFC Sterling Ranch, LLC. These joint ventures are between Fund I and the Company. As of September 30, 2021 and December 31, 2020, the outstanding loan balance was $717,642 and $1,700,000, respectively.
In addition, DFH LLC and DF Capital are, individually and collectively, the “Guarantor” in favor of the Varde Private Debt Opportunities Fund (On Shore), L.P. in connection with this loan agreement. The DFH LLC guarantee provides additional assurance to Varde Capital, as they have recourse to the assets ofundertaken by the Company beyondduring Fund II’s investment period. On the pledged collateral in the joint venturessame date, Rockpoint provided funding relating to be made whole in instances of default. The Company believes an event of default is unlikely.
its $100.0 million commitment to Fund II.
Jet Home Loans
Jet LLC performs mortgage origination activities for the Company. Jet underwritesCompany, including underwriting and originatesoriginating home mortgages for Company customers and non-Company customers. The Company owns 49.9% of Jet LLC, but is not the primary beneficiary. Jet LLC is accounted for under the equity method and is a related party of the Company.
Guarantees
Dream Finders Homes LLC is a limited Guarantor in favor of Flagstar Bank (Lender), in connection with a loan of $5,670,000 to DFC Seminole Crossing, LLC (Borrower) as of September 30, 2021 and December 31, 2020. The latter is a landbank between the Company and DF Capital. The guaranty is a Limited Recourse Carve-out (Guaranty). There was no consideration provided by DF Capital to the Company for this guaranty. The Dream Finders Holdings LLC guarantee provides additional assurance to Flagstar Bank, as they have recourse to the assets of the Company beyond the pledged collateral in the joint venture to be made whole in instances of default. The Company believes an event of default is unlikely.
14. | 12. Earnings per Share |
The following weighted-average shares and share equivalents were used to calculate basic and diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 2021:2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Numerator | | | | | | | |
| Net and comprehensive income attributable to Dream Finders Homes, Inc. | $ | 62,624 | | | $ | 28,573 | | | $ | 106,340 | | | $ | 44,694 | |
Less: Preferred dividends (1) | 3,616 | | | 188 | | | 7,195 | | | 1,003 | |
Add: Loss prior to reorganization attributable to DFH LLC members(2) | — | | | — | | | — | | | (1,244) | |
| Net and comprehensive income attributable to common stockholders | $ | 59,008 | | | $ | 28,385 | | | $ | 99,145 | | | $ | 44,935 | |
| Denominator | | | | | | | |
| Weighted-average number of common shares outstanding - basic | 92,758,939 | | | 92,521,482 | | | 92,758,939 | | | 92,521,482 | |
| Add: Common stock equivalent shares | 11,807,304 | | | 149,245 | | | 10,772,621 | | | 119,740 | |
| Weighted-average number of shares outstanding - diluted | 104,566,243 | | | 92,670,727 | | | 103,531,560 | | | 92,641,222 | |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | | 2021
| | | 2021
| |
| Net and comprehensive income attributable to Dream Finders Homes, Inc. | | | 19,135,499
| | | | 63,830,023
| |
| Less: Preferred dividends | | | 193,903 | | | | 1,197,100 | |
| Add: Loss prior to reorganization attributable to DFH LLC members | | | 0 | | | | (1,244,083 | )
|
| Net and comprehensive income attributable to common stockholders | | | 18,941,596 | | | | 63,877,006 | |
| | | | | | | | | |
| Weighted-average number of shares outstanding used to calculate basic EPS | | | 92,521,482 | | | | 92,521,482 | |
| Dilutive securities: | | | | | | | | |
| Restricted stock | | | 173,715 | | | | 137,396 | |
| Weighted-average number of shares and share equivalents outstanding used to calculate diluted EPS | | | 92,695,197 | | | | 92,658,878 | |
(2)The Corporate Reorganization created the current capital structure of DFH, Inc. Therefore, the net incomebasic and diluted earnings per share for DFH, Inc. is not shown for the fiscal yearssix months ended December 31, 2020. In addition, the basic and diluted net income per shareJune 30, 2021 only includesinclude earnings subsequent to January 21, 2021, the date of the Corporate Reorganization.
Basic net incomeearnings per share is calculated by dividing net income attributable to DFH, Inc. for the period subsequent to the Corporate Reorganization, by the weighted-average number of shares of Class A common stock and Class B common stock outstanding for the period. The total outstanding shares of common stock are made up of Class A common stock and Class B common stock, which participate equally in their ratable ownership share of the Company. Diluted net incomeearnings per share has been calculated in a manner consistent with that of basic net incomeearnings per share while giving effect to shares of potentially dilutive restricted stock grants outstanding during the period and Series Athe convertible preferred stock.
The13. Subsequent Events
The Company has evaluated subsequent events through November 10, 2021, the date the financial statements were issued and no additional matters were identified requiring recognition or disclosure in the financial statements except for events described below.in Note 11.
MHI Acquisition
On October 1, 2021 (the “Closing”), the Company, through its subsidiaries Dream Finders Holdings LLC, a Florida limited liability company, and DFH Coventry, LLC, a Florida limited liability company, completed the acquisition of certain assets, rights and properties, and assumed certain liabilities, comprising the following businesses of MHI Partnership, Ltd., a Texas limited partnership, MHI Models, Ltd., a Texas limited partnership, McGuyer Homebuilders, Inc., a Texas corporation, FMR IP, LLC, a Texas limited liability company, HomeCo Purchasing Company, Ltd., a Texas limited partnership, and 2019 Sonoma, LLC, a Texas limited liability company (the “MHI Acquisition”): (i) single-family residential home-building; (ii) owning model homes; (iii) acquisition, ownership and licensing of intellectual property (including architectural plans); (iv) purchasing and reselling homebuilding supplies; (v) development, construction and sale of condominium units in Austin, Texas; (vi) mortgage origination through a mortgage company; and (vii) title insurance, escrow and closing services through a title company. The consideration given for the MHI Acquisition was (a) cash at the Closing in the amount of $471 million, subject to customary post-closing adjustments based on the Closing date net asset value of the purchased assets, (b) the assumption of approximately $97 million of liabilities, and (c) the future payment of additional consideration of up to 25% of pre-tax net income for up to 5 periods, the last of which ends 48 months after the Closing, subject to certain minimum pre-tax income hurdles and thresholds and certain overhead expenses. The Company has not yet completed its evaluation and determination of consideration paid and certain assets and liabilities acquired in accordance with Topic 805.
The Company used $20 million of cash on hand, proceeds from the sale of the Convertible Preferred Stock and from unsecured debt incurred under the Credit Agreement, to fund the MHI Acquisition. On October 1, 2021, the Company borrowed $300 million in revolving loans under the Credit Agreement and paid off vertical lines of credit in connection with the closing of the MHI Acquisition.
ITEM 2. | ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Unless otherwise indicated or the context requires, “DFH,” “Dream Finders,” the “Company,” “we,” “our” and “us” refer collectively to Dream Finders Homes, Inc. and its subsidiaries. On January 25, 2021, we completed an initial public offering (the “IPO”) of 11,040,000 shares of our Class A common stock. As a result of the reorganization transactions in connection with the IPO, for accounting purposes, our historical results included herein present the combined assets, liabilities and results of operations of Dream Finders Homes, Inc. since the date of its formation and Dream Finders Holdings LLC, a Florida limited liability company (“DFH LLC”) and its direct and indirect subsidiaries prior to the IPO.
Business Overview
We design, build and sell homes in high growthhigh-growth markets, including Charlotte, Raleigh, Jacksonville, Orlando, Denver, the Washington D.C. metropolitan area, Austin, Dallas and Austin.Houston. We employ an asset-light lot acquisition strategy with a focus on the design, construction and sale of single-family entry-level, first-time move-up and second-time move-up homes. To fully serve our homebuyer customers and capture ancillary business opportunities, we also offer title insurance and mortgage banking solutions (our Jet Home Loans segment) through our mortgage banking joint venture, Jet Home Loans, LLC (“Jet LLC”).
Our asset-light lot acquisition strategy enables us to generally purchase land in a “just-in-time” manner with reduced up-front capital commitments, which in turn has increased our inventory turnover rate, enhanced our returns on equity and contributed to our growth.
We are currently engaged in the design, construction and sale of new homes in the following markets:
•Denver, CO
•Orlando, FL
•Washington D.C. metropolitan area (“DC Metro”)
•Charlotte, NC, Fayetteville, NC, Raleigh, NC, Greensboro, NC, High Point, NC and Winston-Salem, NC (“The Carolinas” or “H&H Homes”)
Washington D.C. metropolitan area (“DC Metro”)
•Austin, TX (legacy operations excluding MHI operations comprising Texas above), Savannah, GA and Bluffton and Hilton Head, SC, (“VPH”),and Active Adult and Custom Homes in Jacksonville, FL (“Other”)
Since breakingbreaking ground on our first home on January 1, 2009 we have closed over 13,00018,700 home sales through SeptemberJune 30, 20212022 and have been profitable every year since inception. During the three months ended SeptemberJune 30, 2021,2022, we received 1,3011,426 net new orders, an increasea decrease of 142,95, or 12%6%, as compared to the 1,1591,521 net new orders received for the three months ended SeptemberJune 30, 2020.2021. For the three months ended SeptemberJune 30, 2021,2022, we closed 9161,649 homes, an increase of 136,653, or 17%66%, as compared to the 780996 homes closed for the three months ended SeptemberJune 30, 2020.2021. During the ninesix months ended SeptemberJune 30, 2021,2022, we received 4,8303,828 net new orders, an increase of 2,031,297, or 73%8%, as compared to the 2,7993,531 net new orders received for the ninesix months ended SeptemberJune 30, 2020.2021. For the ninesix months ended SeptemberJune 30, 2021,2022, we closed 2,9143,020 homes, an increase of 1,097,1,022, or 60%51%, as compared to the 1,8171,998 homes closed for the ninesix months ended SeptemberJune 30, 2020.2021. As of SeptemberJune 30, 2021,2022, our backlog of sold homes was 4,5207,190 valued at $1,819 million.$3.3 billion. In addition, as of SeptemberJune 30, 2021,2022, we owned and controlled over 34,00039,400 lots. Our owned and controlled lot supply is a critical input to the future revenue of our business. We sell homes under the Dream Finders Homes, DF Luxury, H&H Homes, Village Park Homes, and Century Homes and Coventry Homes brands.
COVID-19 Impact
There remains uncertainty regarding the extent and timing of the disruption to our business that may result from the COVID-19 pandemic and any future related governmental actions. There is also uncertainty as to the effects of the COVID-19 pandemic and related economic relief efforts on the U.S. economy, unemployment, consumer confidence, demand for our homes and the mortgage market, including lending standards, interest rates and secondary mortgage markets. We are unable to predict the extent to which this will impact our operational and financial performance, including the impact of future developments such as the duration and spread of the COVID-19 virus or variants thereof, corresponding governmental actions and the impact of such developments and actions on our employees, customers and trade partners and the supply chain in general.
Our primary focus remains on doing everything we can to ensure the safety and well-being of our employees, customers and trade partners. In all markets where we are permitted to operate, we are operating in accordance with the guidelines issued by the Centers for Disease Control and Prevention, as well as state and local guidelines.
For more information, see Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Recent Developments
Initial Public Offering
On June 2, 2022, the Company entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement") to amend and restate its existing credit agreement. The Amended and Restated Credit Agreement is substantially similar to the existing credit agreement except that the Amended and Restated Credit Agreement, among other things, (i) provides for an increase in the aggregate commitments under the facility from $818 million to $1.1 billion; (ii) allows the facility to expand to a borrowing base of up to $1.6 billion through its accordion feature; (iii) extends the maturity date from January 25, 2021, we completed2024 to June 2, 2025; and (iv) transitions the IPO of 11,040,000 shares of our Class A common stock atapplicable interest rate from a priceEurodollar based rate to the public of $13.00 per share, which was conducted pursuant to our Registration Statement on Form S-1 (File No. 333-251612), as amended, that was declared effective on January 20, 2021. The IPO provided us with net proceeds of $134 million. On January 25, 2021, we used the net proceeds from the IPO, cash on hand and borrowings under our Credit Agreement to repay (i) all borrowings under our then-existing 34 separate secured vertical construction lines of credit facilities totaling $320 million and upon such repayment terminated such facilities and (ii) the bridge loan from Boston Omaha Corporation, LLC (the “BOMN Bridge Loan”a Secured Overnight Financing Rate (“SOFR”) that was used to finance the acquisition of H&H Homes, totaling $20 million, plus contractual interest of $0.6 million.
Corporate Reorganization
In connection with the IPO and pursuant to the terms of the Agreement and Plan of Merger by and among the Company, DFH LLC and DFH Merger Sub LLC, a Delaware limited liability company and direct, wholly owned subsidiary of the Company, DFH Merger Sub LLC merged with and into DFH LLC with DFH LLC as the surviving entity (the “Merger”). As a result of the Merger, all of the outstanding non-voting common units and Series A preferred units of DFH LLC converted into 21,255,329 shares of Class A common stock of the Company, all of the outstanding common units of DFH LLC converted into 60,226,153 shares of Class B common stock of the Company and all of the outstanding Series B preferred units and Series C preferred units of DFH LLC remained outstanding. We refer to this and certain other related events and transactions, as the “Corporate Reorganization”. In connection with the Corporate Reorganization, we made distributions to the members of DFH LLC for estimated federal income taxes of approximately $28.0 million on earnings of our predecessor, DFH LLC (which was a pass-through entity for tax purposes), for the period from January 1, 2020 through January 21, 2021 (the date of the Corporate Reorganization).
Immediately following the Corporate Reorganization, (1) the Company became a holding company and the sole manager of DFH LLC, with no material assets other than 100% of the voting membership interests in DFH LLC, (2) the holders of common units, non-voting common units and Series A preferred units of DFH LLC became stockholders of the Company, (3) the holders of the Series B preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization continued to hold all 7,143 of the outstanding Series B Preferred Units of DFH LLC, and (4) the holders of the Series C preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization continued to hold all 26,000 of the outstanding Series C preferred units of DFH LLC.
On January 27, 2021, we redeemed all 26,000 outstanding Series C preferred units of DFH LLC at a redemption price of $26 million, plus accrued distributions and fees of $0.2 million.
Century Acquisition
During the nine months ended September 30, 2021, we increased our market presence in the Orlando, Florida market with our acquisition (the “Century Acquisition”) of Century Homes Florida, LLC (“Century Homes”). Effective as of January 31, 2021, we consummated the first phase of the Century Acquisition of Orlando-based homebuilder Century Homes from Tavistock Development Company (“Tavistock”). We paid $36 million to acquire 134 units under construction and 229 finished lots on which the Company has begun construction during 2021 and will continue to release into production throughout 2022. The Company funded the entire purchase price of the Century Acquisition with cash on hand and borrowings under our Credit Agreement.
MHI Acquisition
On October 1, 2021, we completed the acquisition (the “MHI Acquisition”) of the homebuilding, mortgage banking and title insurance assets of privately held Texas homebuilder McGuyer Homebuilders, Inc. and related affiliates for $471 million in cash at closing, subject to post-closing adjustments. The acquisition is expected to significantly increase our geographic operations in the Austin, Texas metro area, and is expected to allow us to expand into the Texas markets of Houston, Dallas and San Antonio. Assets acquired include 1,850 home sites, a backlog of 1,844 homes and 5,500 lots under control. To fund the MHI Acquisition, we used $20 million of cash on hand, $150 million of proceeds from the sale of 150,000 shares of newly-created Convertible Preferred Stock (See Note 7 to the Financial Statements) and we used $300 million from the Credit Agreement to pay-off MHI’s vertical lines of credit (Seebased rate. See Note 3 to our condensed consolidated financial statements for information on the Financial Statements).changes to this revolving credit facility.
Key Results
Key financial results as of and for the three months ended SeptemberJune 30, 2021,2022, as compared to the three months ended SeptemberJune 30, 2020,2021, were as follows:
•Revenues increased 28%117% to $363$793 million from $284$365 million.
•Net new orders increased 12%decreased 6% to 1,301 net new orders1,426 from 1,159 net new orders.
1,521.
•Homes closed increased 17%66% to 916 homes1,649 from 780 homes.
996.
•Backlog of sold homes increased 146%74% to 4,520 homes7,190 from 1,836 homes.
4,137.
•Average sales price of homes closed increased 4%29% to $375,693$463,447 from $361,442.
$358,604.
•Gross margin as a percentage of home saleshomebuilding revenues increased to 16.0%19.7% from 14.8%16.5%.
Adjusted gross margin (non-GAAP) as a percentage of home sales revenues decreased to 21.8% from 22.0%.
Net and comprehensive income decreased 2% to $24 million from $24 million.
Net and comprehensive income attributable to Dream Finders Homes, Inc. decreased 15% to $19 million from $23 million.
EBITDA (non-GAAP) as a percentage of revenues decreased to 8.2% from 11.5%.
Active communities at September 30, 2021 increased to 107 from 79 at September 30, 2020.
Return on equity was 42% for the trailing twelve months ended September 30, 2021, compared to 44% for the same period in the prior year.
Key financial results as of and for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, were as follows:
Revenues increased 59% to $1,072 million from $673 million.
Net new orders increased 73% to 4,830 net new orders from 2,799 net new orders.
Homes closed increased 60% to 2,914 homes from 1,817 homes.
Backlog of sold homes increased 146% to 4,520 homes from 1,836 homes.
Average sales price of homes closed decreased 2% to $354,222 from $363,279.
Gross margin as a percentage of home saleshomebuilding revenues increased to 15.9%25.7% from 13.9%23.5%.
Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 22.3% from 21.3%.
•Net and comprehensive income increased 65%107% to $73$66 million from $44$32 million.
•Net and comprehensive income attributable to Dream Finders Homes, Inc. increased 56%119% to $64$63 million from $41$29 million.
•EBITDA (non-GAAP) as a percentage of total revenues decreasedincreased to 9.7%13.2% from 9.8%11.6%.
•Active communities at SeptemberJune 30, 2022 increased to 203 from 117 at June 30, 2021.
•Return on participating equity was 44.0% for the trailing twelve months ended June 30, 2022, compared 44.3%.
•Basic earnings per share was $0.64 and diluted earnings per share was $0.60, compared to $0.31 and $0.31, respectively.
Key financial results as of and for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, were as follows:
•Revenues increased 106% to $1,457 million from $709 million.
•Net new orders increased 8% to 3,828 from 3,531.
•Homes closed increased 51% to 3,020 from 1,998.
•Backlog of sold homes increased 74% to 7,190 from 4,137.
•Average sales price of homes closed increased 33% to $463,318 from $347,261.
•Gross margin as a percentage of homebuilding revenues increased to 10719.2% from 7915.8%.
•Adjusted gross margin (non-GAAP) as a percentage of homebuilding revenues increased to 25.1% from 22.6%.
•Net and comprehensive income increased 127% to $113 million from $50 million.
•Net and comprehensive income attributable to Dream Finders Homes, Inc. increased 138% to $106 million from $45 million.
•EBITDA (non-GAAP) as a percentage of total revenues increased to 12.3% from 10.5%.
•Active communities at SeptemberJune 30, 2020.
2022 increased to 203 from 117 at June 30, 2021.
•Basic earnings per share was $1.07 and diluted earnings per share was $1.02 compared to $0.31 and $0.49, respectively.
For reconciliations of the non-GAAP financial measures, including adjusted gross margin, EBITDA and adjusted EBITDA, to the most directly comparable GAAP financial measures, please see “—Non-GAAP Financial Measures.”
Results of Operations
Three Months Ended SeptemberJune 30, 20212022 Compared to Three Months Ended SeptemberJune 30, 20202021
The following table sets forth our resultsresults of operations for the periods indicated:
| | | For the Three Months Ended September 30, (unaudited) | |
| | | 2021 | | | 2020 | | | Amount Change | | | % Change | |
| Revenues | | $ | 362,983,638 | | | $ | 284,166,827 | | | $ | 78,816,811 | | | | 28 | % |
| Cost of sales | | | 303,386,434 | | | | 240,701,064 | | | | 62,685,370 | | | | 26 | % |
| Selling, general and administrative expense | | | 32,434,505 | | | | 19,856,843 | | | | 12,577,662 | | | | 63 | % |
| Income from equity in earnings of unconsolidated entities | | | (1,372,690 | ) | | | (1,557,559 | ) | | | 184,869 | | | | -12 | % |
| Loss/(Gain) on sale of assets | | | (55,347 | ) | | | (18,711 | ) | | | (36,636 | ) | | | 196 | % |
| Loss on extinguishment of debt | | | - | | | | - | | | | - | | | | 100 | % |
| Other Income | | | | | | | | | | | | | | | | |
| Other | | | (4,849,766 | ) | | | (252,461 | ) | | | (4,597,305 | ) | | | 100 | % |
| Paycheck Protection Program forgiveness | | | - | | | | - | | | | - | | | | 100 | % |
| Other Expense | | | | | | | | | | | | | | | | |
| Other | | | 5,145,106 | | | | 1,113,211 | | | | 4,031,895 | | | | 362 | % |
| Contingent consideration revaluation | | | 602,090 | | | | 204,251 | | | | 397,839 | | | | 100 | % |
| Interest expense | | | 14,496 | | | | 42,373 | | | | (27,877 | ) | | | -66 | % |
| Income before taxes | | $ | 27,678,810 | | | $ | 24,077,816 | | | $ | 3,600,994 | | | | 15 | % |
| Income tax expense | | | (4,110,795 | ) | | | - | | | | (4,110,795 | ) | | | 100 | % |
| Net and comprehensive income | | $ | 23,568,015 | | | $ | 24,077,816 | | | $ | (509,801 | ) | | | -2 | % |
Net and comprehensive income attributable to non-controlling interests | | | (4,432,516 | ) | | | (1,516,755 | ) | | | (2,915,761 | ) | | | 192 | % |
| Net and comprehensive income attributable to Dream Finders Homes, Inc. | | $ | 19,135,499 | | | $ | 22,561,061 | | | $ | (3,425,562 | ) | | | -15 | % |
| | | | | | | | | | | | | | | | | |
Earnings per share(6) | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.20 | | | $ | - | | | $ | 0.20 | | | | 100 | % |
| Diluted | | $ | 0.20 | | | $ | - | | | $ | 0.20 | | | | 100 | % |
| Weighted-average number of shares | | | | | | | | | | | | | | | | |
| Basic | | | 92,521,482 | | | | - | | | | 92,521,482 | | | | 100 | % |
| Diluted | | | 92,695,197 | | | | - | | | | 92,695,197 | | | | 100 | % |
| Consolidated Balance Sheets Data (at period end): | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 85,539,220 | | | $ | 35,495,595 | | | $ | 50,043,625 | | | | 141 | % |
| Total assets | | $ | 1,232,581,783 | | | $ | 733,680,241 | | | $ | 498,901,542 | | | | 68 | % |
| Long-term debt, net | | $ | 443,913,031 | | | $ | 29,653,282 | | | $ | 414,259,749 | | | | 1397 | % |
| Finance lease liabilities | | $ | 242,623 | | | $ | 345,062 | | | $ | (102,439 | ) | | | -30 | % |
| Preferred mezzanine equity | | $ | 154,892,565 | | | $ | 55,638,450 | | | $ | 99,254,115 | | | | 178 | % |
| Common mezzanine equity | | $ | - | | | $ | - | | | $ | - | | | | 0 | % |
| Common members’ equity | | $ | - | | | $ | - | | | $ | - | | | | 0 | % |
| Common stock - Class A | | $ | 322,953 | | | $ | - | | | $ | 322,953 | | | | 100 | % |
| Common stock - Class B | | $ | 602,262 | | | $ | - | | | $ | 602,262 | | | | 100 | % |
| Additional paid-in capital | | $ | 256,761,849 | | | $ | - | | | $ | 256,761,849 | | | | 100 | % |
| Retained earnings | | $ | 64,552,332 | | | $ | - | | | $ | 64,552,332 | | | | 100 | % |
| Non-controlling interests | | $ | 22,771,618 | | | $ | 31,939,117 | | | $ | (9,167,499 | ) | | | -29 | % |
| | | | | | | | | | | | | | | | | |
| Other Financial and Operating Data | | | | | | | | | | | | | | | | |
Active communities at end of period(1) | | | 107 | | | | 79 | | | | 28 | | | | 35 | % |
| Home closings | | | 916 | | | | 780 | | | | 136 | | | | 17 | % |
Average sales price of homes closed(7) | | $ | 375,693 | | | $ | 361,442 | | | $ | 14,251 | | | | 4 | % |
| Net new orders | | | 1,301 | | | | 1,159 | | | | 142 | | | | 12 | % |
| Cancellation rate | | | 13.9 | % | | | 9.9 | % | | | 4.0 | % | | | 41 | % |
| Backlog (at period end) - homes | | | 4,520 | | | | 1,836 | | | | 2,684 | | | | 146 | % |
| Backlog (at period end, in thousands) - value | | $ | 1,819,300 | | | $ | 683,743 | | | $ | 1,135,557 | | | | 166 | % |
Gross margin (in thousands)(2) | | $ | 57,936 | | | $ | 41,881 | | | $ | 16,055 | | | | 38 | % |
Gross margin %(3) | | | 16.0 | % | | | 14.8 | % | | | 2.7 | % | | | 18 | % |
| Net profit margin | | | 5.3 | % | | | 7.9 | % | | | 1.9 | % | | | 24 | % |
Adjusted gross margin (in thousands)(2)(4) | | $ | 78,694 | | | $ | 62,287 | | | $ | 16,407 | | | | 26 | % |
Adjusted gross margin %(3) | | | 21.8 | % | | | 22.0 | % | | | -0.3 | % | | | -1 | % |
EBITDA (in thousands)(4) | | $ | 29,776 | | | $ | 32,602 | | | $ | (2,826 | ) | | | -9 | % |
EBITDA margin %(3)(5) | | | 8.2 | % | | | 11.5 | % | | | -3.3 | % | | | -28 | % |
(1) | A community becomes active once the model is completed or the community has its fifth sale. A community becomes inactive when it has fewer than five units remaining to sell.
|
(2) | Gross margin is home sales revenue less cost of sales.
|
(3) | Calculated as a percentage of home sales revenue.
|
(4) | Adjusted gross margin and EBITDA are non-GAAP financial measures. For definitions of adjusted gross margin and EBITDA and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
|
(5) | Calculated as a percentage of revenues.
|
(6) | The Company calculated earnings per share (“EPS”) based on net income attributable to common stockholders for the period January 21, 2021 through September 30, 2021 over the weighted average diluted shares outstanding for the same period. The total outstanding shares of common stock are made up of Class A common stock and Class B common stock, which participate equally in their ratable ownership share of the Company. For the three months ended September 30, 2021, the diluted shares of common stock outstanding were 92,695,197.
|
(7) | Average selling price of homes closed is calculated based on home sales revenue, excluding the impact of deposit forfeitures and percentage of completion revenues, over homes closed.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30,
(unaudited) |
| 2022 | | 2021 | | Amount Change | | % Change |
| Revenues: | | | | | | | |
| Homebuilding | $ | 791,230 | | | $ | 363,743 | | | $ | 427,487 | | | 118 | % |
| Other | 1,904 | | | 1,533 | | | 371 | | | 24 | % |
| Total revenues | 793,134 | | | 365,276 | | | 427,858 | | | 117 | % |
| Homebuilding cost of sales | 635,422 | | | 303,589 | | | 331,833 | | | 109 | % |
| Selling, general and administrative expense | 66,015 | | | 30,137 | | | 35,878 | | | 119 | % |
| Income from equity in earnings of unconsolidated entities | (3,334) | | | (1,125) | | | (2,209) | | | 196 | % |
| Contingent consideration revaluation | 5,042 | | | 3,977 | | | 1,065 | | | 27 | % |
| Other (income) expense, net | 278 | | | (7,856) | | | 8,134 | | | -104 | % |
| Interest expense | 13 | | | 16 | | | (3) | | | -19 | % |
| Income before taxes | 89,698 | | | 36,538 | | | 53,160 | | | 145 | % |
| Income tax expense | (23,327) | | | (4,479) | | | (18,848) | | | 421 | % |
| Net and comprehensive income | 66,371 | | | 32,059 | | | 34,312 | | | 107 | % |
| Net and comprehensive income attributable to non-controlling interests | (3,747) | | | (3,486) | | | (261) | | | 7 | % |
| Net and comprehensive income attributable to Dream Finders Homes, Inc. | $ | 62,624 | | | $ | 28,573 | | | $ | 34,051 | | | 119 | % |
| | | | | | | |
Earnings per share(1) | | | | | | | |
| Basic | $ | 0.64 | | | $ | 0.31 | | | $ | 0.33 | | | 106 | % |
| Diluted | $ | 0.60 | | | $ | 0.31 | | | $ | 0.29 | | | 94 | % |
| Weighted-average number of shares | | | | | | | |
| Basic | 92,758,939 | | | 92,521,482 | | | 237,457 | | | 0 | % |
| Diluted | 104,566,243 | | | 92,670,727 | | | 11,895,516 | | | 13 | % |
| Consolidated Balance Sheets Data (at period end): | | | | | | | |
| Cash and cash equivalents | 84,097 | | | 6,154 | | | 77,943 | | | 1267 | % |
| Total assets | 2,112,786 | | | 932,282 | | | 1,180,504 | | | 127 | % |
| Long-term debt | 876,568 | | | 369,049 | | | 507,519 | | | 138 | % |
| Preferred mezzanine equity | 155,621 | | | 6,703 | | | 148,918 | | | 2222 | % |
| Common stock - Class A | 323 | | | 323 | | | — | | | 100 | % |
| Common stock - Class B | 602 | | | 602 | | | — | | | 100 | % |
| Additional paid-in capital | 261,207 | | | 255,290 | | | 5,917 | | | 100 | % |
| Retained earnings | 217,346 | | | 45,611 | | | 171,735 | | | 100 | % |
| Non-controlling interests | 12,056 | | | 20,874 | | | (8,818) | | | -42 | % |
| | | | | | | |
| Other Financial and Operating Data | | | | | | | |
Active communities at end of period(2) | 203 | | | 117 | | | 86 | | | 74 | % |
| Home closings | 1,649 | | | 996 | | | 653 | | | 66 | % |
Average sales price of homes closed(3) | $ | 463,447 | | | $ | 358,604 | | | $ | 105 | | | 29 | % |
| Net new orders | 1,426 | | | 1,521 | | | (95) | | | -6 | % |
| Cancellation rate | 21.0 | % | | 14.4 | % | | 6.6 | % | | 46 | % |
| Backlog (at period end) - homes | 7,190 | | | 4,137 | | | 3,053 | | | 74 | % |
| Backlog (at period end, in thousands) - value | $ | 3,334,945 | | | $ | 1,646,725 | | | $ | 1,688,220 | | | 103 | % |
Gross margin (in thousands)(4) | $ | 155,808 | | | $ | 60,154 | | | $ | 95,654 | | | 159 | % |
Gross margin %(5) | 19.7 | % | | 16.5 | % | | 3.2 | % | | 19 | % |
| Net profit margin % | 7.9 | % | | 7.8 | % | | 0.1 | % | | 1 | % |
Adjusted gross margin (in thousands)(6) | $ | 203,731 | | | $ | 85,452 | | | $ | 118,279 | | | 138 | % |
Adjusted gross margin %(5) | 25.7 | % | | 23.5 | % | | 2.2 | % | | 9 | % |
EBITDA (in thousands)(6) | $ | 104,974 | | | $ | 42,421 | | | $ | 62,553 | | | 147 | % |
EBITDA margin %(7) | 13.2 | % | | 11.6 | % | | 1.6 | % | | 14 | % |
Adjusted EBITDA (in thousands)(6) | $ | 106,766 | | | $ | 43,873 | | | $ | 62,893 | | | 143 | % |
Adjusted EBITDA margin %(7) | 13.5 | % | | 12.0 | % | | 1.5 | % | | 12 | % |
Revenues(1).The Company calculated earnings per share (“EPS”) based on net income attributable to common stockholders for the period January 21, 2021 through June 30, 2021 over the weighted average diluted shares outstanding for the same period. EPS was calculated prospectively for the period subsequent to the Company’s initial public offering and corporate reorganization as described in Note 1 to our condensed consolidated financial statements, Nature of Business and Significant Accounting Policies, resulting in 92,521,482 shares of common stock outstanding as of the closing of the initial public offering. The total outstanding shares of common stock are made up of Class A common stock and Class B common stock, which participate equally in their ratable ownership share of the Company. Diluted shares were calculated by using the treasury stock method for stock grants and the if-converted method for the convertible preferred stock and the associated preferred dividends.
(2)A community becomes active once the model is completed or the community has its fifth sale. A community becomes inactive when it has fewer than five units remaining to sell.
(3)Average sales price of homes closed is calculated based on homebuilding revenues, excluding the impact of deposit forfeitures, percentage of completion revenues and land sales, over homes closed.
(4)Gross margin is homebuilding revenues less homebuilding cost of sales.
(5)Calculated as a percentage of homebuilding revenues.
(6)Adjusted gross margin, EBITDA and adjusted EBITDA are non-GAAP financial measures. For definitions of these non-GAAP financial measures and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
(7)Calculated as a percentage of total revenues.
Revenues. Revenues for the three months ended SeptemberJune 30, 20212022 were $363$793 million, an increase of $79$428 million, or 28%117%, from $284$365 million for the three months ended SeptemberJune 30, 2020.2021. The increase in revenues was primarily attributable to an increase in home closings of 142653 homes, or 12%66%, during the three months ended SeptemberJune 30, 20212022 as compared to the three months ended SeptemberJune 30, 2020.2021. Our October 20202021 acquisition of the homebuilding business of H&H Constructors of Fayetteville, LLCMcGuyer Homebuilders, Inc. (“H&H Homes”MHI”), a North Carolina limited liabilityTexas company, contributed 249 527 home closings and $77 $305 million in homebuilding revenues for the three months ended SeptemberJune 30, 2021.2022. The average sales price of homes closed for the three months ended SeptemberJune 30, 20212022 was $375,693,$463,447, an increase of $14,251$104,843 or 4%29%, over an average sales price of homes closed $361,442of $358,604 for the three months ended SeptemberJune 30, 2020.2021. The increase was due to home price appreciation out-pacing cost inflation, partially offset by lowera higher average sales price of homes closed within the H&H Homes segment.
Homebuilding Cost of Sales and Gross MarginMargin.. Cost Homebuilding cost of sales for the three months ended SeptemberJune 30, 20212022 was $303$635 million, an increase of $63$332 million, or 26%109%, from $241$304 million for the three months ended SeptemberJune 30, 2020.2021. The increase in homebuilding cost of sales was primarily due to the increase in home closings for the three months ended SeptemberJune 30, 20212022 as compared to the three months ended SeptemberJune 30, 2020. Home building2021. Homebuilding gross margin for the three months ended SeptemberJune 30, 20212022 was $58$156 million, an increase of $16$96 million, or 38%159%, from $42$60 million for the three months ended SeptemberJune 30, 2020. Home building2021. Homebuilding gross margin as a percentage of home sales revenuehomebuilding revenues was 16.0%19.7% for the three months ended SeptemberJune 30, 2021,2022, an increase of 121320 basis points, or 2.7%19%, from 14.8%16.5% for the three months ended SeptemberJune 30, 2020.2021. The increase in gross margin percentage is largely attributablewas due to lowerprice appreciation ahead of cost of funds.
Adjusted Gross MarginMargin. . Adjusted gross margin for the three months ended SeptemberJune 30, 20212022 was $79$204 million, an increase of $16$118 million, or 26%138%, from $62$85 million for the three months ended SeptemberJune 30, 2020.2021. Adjusted gross margin as a percentage of home sales revenuehomebuilding revenues for the three months ended SeptemberJune 30, 20212022 was 21.8%25.7%, a decreasean increase of 26220 basis points, or 1%9%, as compared to 22%23.5% for the three months ended SeptemberJune 30, 2020.2021. The increase in adjusted gross margin is attributable to overall price appreciation ahead of cost inflation. Adjusted gross margin is a non-GAAP financial measure. For the definition of adjusted gross margin and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
Selling, General and Administrative Expense. Selling, general and administrative expense for the three months ended June 30, 2022 was $66 million, an increase of $36 million, or 119%, from $30 million for the three months ended June 30, 2021. The increase in selling, general and administrative expense was primarily due to higher closing volume and the inclusion of $27 million in expenses from MHI for the second quarter of 2022. Selling, general and administrative expenses as a percentage of homebuilding revenues was 8% in the second quarter 2022, remaining consistent when compared to 8% in the year-ago quarter.
Income from Equity in Earnings and Unconsolidated Entities. Income from equity in earnings of unconsolidated entities for the three months ended June 30, 2022 was $3 million, an increase of $2 million, or 196%, as compared to $1 million for the three months ended June 30, 2021. The increase in income from equity in earnings of unconsolidated entities was largely attributable to income from mortgage and title JV's acquired in conjunction with the MHI acquisition for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.
Contingent Consideration Revaluation. Contingent consideration expense for the three months ended June 30, 2022 was $5 million, an increase of $1 million or 27%, as compared to $4 million for the three months ended June 30, 2021. The increase in contingent consideration expense is primarily due to to fair value adjustments of future expected earn-out payments from the acquisitions of VPH and MHI. The MHI contingent consideration adjustment was not included in the previous period ended June 30, 2021.
Other (Income) Expense, Net. Other expense for the three months ended June 30, 2022 was $0 million, as compared to $8 million in other income, a decrease of $8 million or 104% for the three months ended June 30, 2021. The decrease in other income, net is primarily due to the forgiveness of the Company's Paycheck Protection Program ("PPP") loan included in the previous period ended June 30, 2021.
Net and Comprehensive Income. Net and comprehensive income for the three months ended June 30, 2022 was $66 million, an increase of $34 million, or 107%, from $32 million for the three months ended June 30, 2021. The increase in net and comprehensive income was primarily attributable to an increase in gross margin on homes closed of $96 million, or 159%, during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.
Net and Comprehensive Income Attributable to Dream Finders Homes, Inc. Net and comprehensive income attributable to Dream Finders for the three months ended June 30, 2022 was $63 million, an increase of $34 million, or 119%, from $29 million for the three months ended June 30, 2021. The increase was primarily attributable to the increase in home closings and gross margin. We closed 1,649 homes for the three months ended June 30, 2022, an increase of 653 units, or 66%, from the 996 homes closed for the three months ended June 30, 2021. Gross margin for the three months ended June 30, 2022 was $156 million, an increase of $96 million, or 159%, from $60 million for the three months ended June 30, 2021.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
The following table sets forth our results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended
June 30,
(unaudited) |
| 2022 | | 2021 | | Amount Change | | % Change |
| Revenues: | | | | | | | |
| Homebuilding | $ | 1,453,703 | | | $ | 705,910 | | | $ | 747,793 | | | 106 | % |
| Other | 3,497 | | | 2,926 | | | 571 | | | 20 | % |
| Total revenues | 1,457,200 | | | 708,836 | | | 748,364 | | | 106 | % |
| Homebuilding cost of sales | 1,174,290 | | | 594,626 | | | 579,664 | | | 97 | % |
| Selling, general and administrative expense | 127,725 | | | 59,452 | | | 68,273 | | | 115 | % |
| Income from equity in earnings of unconsolidated entities | (6,294) | | | (2,857) | | | (3,437) | | | 120 | % |
| Contingent consideration revaluation | 9,234 | | | 5,160 | | | 4,074 | | | 79 | % |
| Other (income) expense, net | (691) | | | (7,153) | | | 6,462 | | | -90 | % |
| Interest expense | 26 | | | 658 | | | (632) | | | -96 | % |
| Income before taxes | 152,910 | | | 58,950 | | | 93,960 | | | 159 | % |
| Income tax expense | (40,205) | | | (9,295) | | | (30,910) | | | 333 | % |
| Net and comprehensive income | 112,705 | | | 49,655 | | | 63,050 | | | 127 | % |
| Net and comprehensive income attributable to non-controlling interests | (6,365) | | | (4,961) | | | (1,404) | | | 28 | % |
| Net and comprehensive income attributable to Dream Finders Homes, Inc. | $ | 106,340 | | | $ | 44,694 | | | $ | 61,646 | | | 138 | % |
| | | | | | | |
Earnings per share(1) | | | | | | | |
| Basic | $ | 1.07 | | | $ | 0.49 | | | $ | 0.58 | | | 118 | % |
| Diluted | $ | 1.02 | | | $ | 0.49 | | | $ | 0.53 | | | 108 | % |
| Weighted-average number of shares | | | | | | | |
| Basic | 92,758,939 | | | 92,521,482 | | | 237,457 | | | 0 | % |
| Diluted | 103,531,560 | | | 92,641,222 | | | 10,890,338 | | | 12 | % |
| Consolidated Balance Sheets Data (at period end): | | | | | | | |
| Cash and cash equivalents | 84,097 | | | 6,154 | | | 77,943 | | | 1267 | % |
| Total assets | 2,112,786 | | | 932,282 | | | 1,180,504 | | | 127 | % |
| Long-term debt | 876,568 | | | 369,049 | | | 507,519 | | | 138 | % |
| Preferred mezzanine equity | 155,621 | | | 6,703 | | | 148,918 | | | 2222 | % |
| Common stock - Class A | 323 | | | 323 | | | — | | | 100 | % |
| Common stock - Class B | 602 | | | 602 | | | — | | | 100 | % |
| Additional paid-in capital | 261,207 | | | 255,290 | | | 5,917 | | | 100 | % |
| Retained earnings | 217,346 | | | 45,611 | | | 171,735 | | | 100 | % |
| Non-controlling interests | 12,056 | | | 20,874 | | | (8,818) | | | -42 | % |
| | | | | | | |
| Other Financial and Operating Data | | | | | | | |
Active communities at end of period(2) | 203 | | | 117 | | | 86 | | | 74 | % |
| Home closings | 3,020 | | | 1,998 | | | 1,022 | | | 51 | % |
Average sales price of homes closed(3) | $ | 463,318 | | | $ | 347,261 | | | $ | 116,057 | | | 33 | % |
| Net new orders | 3,828 | | | 3,531 | | | 297 | | | 8 | % |
| Cancellation rate | 16.4 | % | | 10.9 | % | | 5.5 | % | | 50 | % |
| Backlog (at period end) - homes | 7,190 | | | 4,137 | | | 3,053 | | | 74 | % |
| Backlog (at period end, in thousands) - value | $ | 3,334,945 | | | $ | 1,646,725 | | | $ | 1,688,220 | | | 103 | % |
Gross margin (in thousands)(4) | $ | 279,413 | | | $ | 111,284 | | | $ | 168,129 | | | 151 | % |
Gross margin %(5) | 19.2 | % | | 15.8 | % | | 3.4 | % | | 22 | % |
| Net profit margin % | 7.3 | % | | 6.3 | % | | 1.0 | % | | 16 | % |
Adjusted gross margin (in thousands)(6) | $ | 365,287 | | | $ | 159,683 | | | $ | 205,604 | | | 129 | % |
Adjusted gross margin %(5) | 25.1 | % | | 22.6 | % | | 2.5 | % | | 11 | % |
EBITDA (in thousands)(6) | $ | 179,160 | | | $ | 74,621 | | | $ | 104,539 | | | 140 | % |
EBITDA margin %(7) | 12.3 | % | | 10.5 | % | | 1.8 | % | | 17 | % |
Adjusted EBITDA (in thousands)(6) | $ | 182,404 | | | $ | 78,421 | | | $ | 103,983 | | | 133 | % |
Adjusted EBITDA margin %(7) | 12.5 | % | | 11.1 | % | | 1.4 | % | | 13 | % |
(1)The Company calculated earnings per share (“EPS”) based on net income attributable to common stockholders for the period January 21, 2021 through June 30, 2021 over the weighted average diluted shares outstanding for the same period. EPS was calculated prospectively for the period subsequent to the Company’s initial public offering and corporate reorganization as described in Note 1 to our condensed consolidated financial statements, Nature of Business and Significant Accounting Policies, resulting in 92,521,482 shares of common stock outstanding as of the closing of the initial public offering. The total outstanding shares of common stock are made up of Class A common stock and Class B common stock, which participate equally in their ratable ownership share of the Company. Diluted shares were calculated by using the treasury stock method for stock grants and the if-converted method for the convertible preferred stock and the associated preferred dividends.
(2)A community becomes active once the model is completed or the community has its fifth sale. A community becomes inactive when it has fewer than five units remaining to sell.
(3)Average sales price of homes closed is calculated based on homebuilding revenues, excluding the impact of deposit forfeitures, percentage of completion revenues and land sales, over homes closed.
(4)Gross margin is homebuilding revenues less homebuilding cost of sales.
(5)Calculated as a percentage of homebuilding revenues.
(6)Adjusted gross margin, EBITDA and adjusted EBITDA are non-GAAP financial measures. For definitions of these non-GAAP financial measures and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
(7)Calculated as a percentage of total revenues.
Revenues. Revenues for the six months ended June 30, 2022 were $1,457 million, an increase of $748 million, or 106%, from $709 million for the six months ended June 30, 2021. The increase in revenues was primarily attributable to an increase in home closings of 1,022 homes, or 51%, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. Our October 2021 acquisition of the homebuilding business of McGuyer Homebuilders, Inc. (“MHI”), a Texas company, contributed 1,010 home closings and $580.5 million in homebuilding revenues for the six months ended June 30, 2022. The average sales price of homes closed for the six months ended June 30, 2022 was $463,318, an increase of $116,057 or 33%, over an average sales price of homes closed of $347,261 for the six months ended June 30, 2021. The increase was due to a higher numberaverage sales price of closings.homes closed within the MHI segment, as well as overall price appreciation ahead of cost inflation.
Homebuilding Cost of Sales and Gross Margin. Homebuilding cost of sales for the six months ended June 30, 2022 was $1,174 million, an increase of $580 million, or 97%, from $595 million for the six months ended June 30, 2021. The increase in homebuilding cost of sales was primarily due to the increase in home closings for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. Homebuilding gross margin for the six months ended June 30, 2022 was $279 million, an increase of $168 million, or 151%, from $111 million for the six months ended June 30, 2021. Homebuilding gross margin as a percentage of homebuilding revenues was 19.2% for the six months ended June 30, 2022, an increase of 340 basis points, or 22%, from 15.8% for the six months ended June 30, 2021. The increase in gross margin was due to overall price appreciation ahead of cost inflation.
Adjusted Gross Margin. Adjusted gross margin for the six months ended June 30, 2022 was $365 million, an increase of $206 million, or 129%, from $160 million for the six months ended June 30, 2021. Adjusted gross margin as a percentage of homebuilding revenues for the six months ended June 30, 2022 was 25.1%, an increase of 250 basis points, or 11%, as compared to 22.6% for the six months ended June 30, 2021. The increase in adjusted gross margin is attributable to overall price appreciation ahead of cost inflation. Adjusted gross margin is a non-GAAP financial measure. For the definition of adjusted gross margin and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
Selling, General and Administrative Expense. Selling, general and administrative expense for the threesix months ended SeptemberJune 30, 20212022 was $32$128 million, an increase of $12$68 million, or 63%115%, from $20$59 million for the threesix months ended SeptemberJune 30, 2020.2021. The increase in selling, general and administrative expense was primarily due to higher closing volume and the inclusion of $8.1$52 million in expenses from MHI for the operationsfirst six months of H&H Homes for the three months ended September 30, 2021. 2022. Selling, general and administrative expenseexpenses as a percentage of revenuehomebuilding revenues was 8.9%9% for the threesix months ended SeptemberJune 30, 2021,2022, as compared to 7.0%8% for the threesix months ended SeptemberJune 30, 2020.2021.
Income from Equity in Earnings and Unconsolidated Entities. Income from equity in earnings of unconsolidated entities for the six months ended June 30, 2022 was $6 million, an increase of $3 million, or 120%, as compared to $3 million for the six months ended June 30, 2021. The increase in income from equity in earnings of 190 basis pointsunconsolidated entities was mainlylargely attributable to higher compensation expense and other overhead expense coupledincome from mortgage/title JV's acquired in conjunction with a lower level of revenue than expectedthe MHI acquisition for the current quartersix months ended June 30, 2022 as we buildcompared to the backlog of homes expected to be delivered in the next three to nine months.six months ended June 30, 2021.
Other Expense – Contingent Consideration.Consideration Revaluation. Contingent consideration expense for the threesix months ended SeptemberJune 30, 20212022 was $602 thousand,$9 million, an increase of $4 million or 79%, as compared to $204 thousand$5 million for the threesix months ended SeptemberJune 30, 2020.2021. The increase in contingent consideration expense is primarilydue to fair value adjustmentsthe MHI contingent consideration adjustment, which was not included in the previous period ended June 30, 2021.
Other (Income) Expense, Net. Other income for the six months ended June 30, 2022 was $1 million, as compared to $7 million in other income, a decrease of future expected earnout payments from$6 million or 90% for the acquisitionsix months ended June 30, 2021. The decrease in other income, net is primarily due to the forgiveness of H&H Homes and to a lesser extent, VPH Homes.
Net and Comprehensive Income. Net and comprehensive income for the threesix months ended SeptemberJune 30, 20212022 was $24 million, a decrease of $400 thousand, or 2%, from $24 million for the three months ended September 30, 2020. The decrease in net and comprehensive income was primarily attributable to the $4 million in income tax expense for the three months ended September 30, 2021, which was not applicable to DFH LLC, for the three months ended September 30, 2020, partially offset by higher home closings.
Net and Comprehensive Income Attributable to Dream Finders Homes, Inc. Net and comprehensive income attributable to Dream Finders for the three months ended September 30, 2021 was $19 million, a decrease of $3.5 million, or 15%, from $23 million for the three months ended September 30, 2020. The decrease was mainly due to $4 million in income tax expense for the three months ended September 30, 2021, which was not applicable to DFH LLC for the three months ended September 30, 2020.
Nine months ended September 30, 2021 Compared to Nine months ended September 30, 2020
The following table sets forth our results of operations for the periods indicated:
| | | For the Nine Months Ended September 30, (unaudited) | |
| | | 2021 | | | 2020 | | | Amount Change | | | % Change | |
| Revenues | | $ | 1,071,820,104 | | | $ | 672,706,388 | | | $ | 399,113,716 | | | | 59 | % |
| Cost of sales | | | 898,012,615 | | | | 575,683,384 | | | | 322,329,231 | | | | 56 | % |
| Selling, general and administrative expense | | | 88,086,880 | | | | 55,071,469 | | | | 33,015,411 | | | | 60 | % |
| Income from equity in earnings of unconsolidated entities | | | (4,230,084 | ) | | | (4,843,649 | ) | | | 613,565 | | | | -13 | % |
| Loss/(Gain) on sale of assets | | | (72,830 | ) | | | (53,006 | ) | | | (19,824 | ) | | | 37 | % |
| Loss on extinguishment of debt | | | 697,423 | | | | - | | | | 697,423 | | | | 100 | % |
| Other Income | | | | | | | | | | | | | | | | |
| Other | | | (7,000,248 | ) | | | (1,171,675 | ) | | | (5,828,573 | ) | | | 497 | % |
| Paycheck Protection Program forgiveness | | | (7,219,794 | ) | | | - | | | | (7,219,794 | ) | | | 100 | % |
| Other Expense | | | | | | | | | | | | | | | | |
| Other | | | 10,482,934 | | | | 3,669,048 | | | | 6,813,886 | | | | 186 | % |
| Contingent consideration revaluation | | | 5,761,815 | | | | (112,521 | ) | | | 5,874,336 | | | | 100 | % |
| Interest expense | | | 672,153 | | | | 124,026 | | | | 548,127 | | | | 442 | % |
| Income before taxes | | $ | 86,629,240 | | | $ | 44,339,312 | | | $ | 42,289,928 | | | | 95 | % |
| Income tax expense | | | (13,405,594 | ) | | | - | | | | (13,405,594 | ) | | | 100 | % |
| Net and comprehensive income | | $ | 73,223,646 | | | $ | 44,339,312 | | | $ | 28,884,334 | | | | 65 | % |
| Net and comprehensive income attributable to non-controlling interests | | | (9,393,623 | ) | | | (3,474,116 | ) | | | (5,919,507 | ) | | | 170 | % |
| Net and comprehensive income attributable to Dream Finders Homes, Inc. | | $ | 63,830,023 | | | $ | 40,865,196 | | | $ | 22,964,827 | | | | 56 | % |
| | | | | | | | | | | | | | | | | |
Earnings per share(6) | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.69 | | | $ | - | | | $ | 0.69 | | | | 100 | % |
| Diluted | | $ | 0.69 | | | $ | - | | | $ | 0.69 | | | | 100 | % |
| Weighted-average number of shares | | | | | | | | | | | | | | | | |
| Basic | | | 92,521,482 | | | | - | | | | 92,521,482 | | | | 100 | % |
| Diluted | | | 92,658,878 | | | | - | | | | 92,658,878 | | | | 100 | % |
| Consolidated Balance Sheets Data (at period end): | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 85,539,220 | | | $ | 35,495,595 | | | $ | 50,043,625 | | | | 141 | % |
| Total assets | | $ | 1,232,581,783 | | | $ | 733,680,241 | | | $ | 498,901,542 | | | | 68 | % |
| Long-term debt, net | | $ | 443,913,031 | | | $ | 29,653,282 | | | $ | 414,259,749 | | | | 1397 | % |
| Finance lease liabilities | | $ | 242,623 | | | $ | 345,062 | | | $ | (102,439 | ) | | | -30 | % |
| Preferred mezzanine equity | | $ | 154,892,565 | | | $ | 55,638,450 | | | $ | 99,254,115 | | | | 178 | % |
| Common mezzanine equity | | $ | - | | | $ | - | | | $ | - | | | | 0 | % |
| Common members’ equity | | $ | - | | | $ | - | | | $ | - | | | | 0 | % |
| Common stock - Class A | | $ | 322,953 | | | $ | - | | | $ | 322,953 | | | | 100 | % |
| Common stock - Class B | | $ | 602,262 | | | $ | - | | | $ | 602,262 | | | | 100 | % |
| Additional paid-in capital | | $ | 256,761,849 | | | $ | - | | | $ | 256,761,849 | | | | 100 | % |
| Retained earnings | | $ | 64,552,332 | | | $ | - | | | $ | 64,552,332 | | | | 100 | % |
| Non-controlling interests | | $ | 22,771,618 | | | $ | 31,939,117 | | | $ | (9,167,499 | ) | | | -29 | % |
| | | | | | | | | | | | | | | | | |
| Other Financial and Operating Data | | | | | | | | | | | | | | | | |
Active communities at end of period(1) | | | 107 | | | | 79 | | | | 28 | | | | 35 | % |
| Home closings | | | 2,914 | | | | 1,817 | | | | 1,097 | | | | 60 | % |
Average sales price of homes closed(7) | | $ | 354,222 | | | $ | 363,279 | | | $ | (9,057 | ) | | | -2 | % |
| Net new orders | | | 4,830 | | | | 2,799 | | | | 2,031 | | | | 73 | % |
| Cancellation rate | | | 11.8 | % | | | 12.9 | % | | | -1.1 | % | | | -8 | % |
| Backlog (at period end) - homes | | | 4,520 | | | | 1,836 | | | | 2,684 | | | | 146 | % |
| Backlog (at period end, in thousands) - value | | $ | 1,819,300 | | | $ | 683,743 | | | $ | 1,135,557 | | | | 166 | % |
Gross margin (in thousands)(2) | | $ | 169,219 | | | $ | 93,293 | | | $ | 75,926 | | | | 81 | % |
Gross margin %(3) | | | 15.9 | % | | | 13.9 | % | | | 1.9 | % | | | 14 | % |
| Net profit margin | | | 6.0 | % | | | 6.1 | % | | | -0.1 | % | | | -2 | % |
Adjusted gross margin (in thousands)(2)(4) | | $ | 238,373 | | | $ | 142,398 | | | $ | 95,975 | | | | 67 | % |
Adjusted gross margin %(3) | | | 22.3 | % | | | 21.3 | % | | | 1.0 | % | | | 5 | % |
EBITDA (in thousands)(4) | | $ | 103,488 | | | $ | 66,135 | | | $ | 37,353 | | | | 56 | % |
EBITDA margin %(3)(5) | | | 9.7 | % | | | 9.8 | % | | | -0.2 | % | | | -2 | % |
(1) | A community becomes active once the model is completed or the community has its fifth sale. A community becomes inactive when it has fewer than five units remaining to sell.
|
(2) | Gross margin is home sales revenue less cost of sales.
|
(3) | Calculated as a percentage of home sales revenue.
|
(4) | Adjusted gross margin and EBITDA are non-GAAP financial measures. For definitions of adjusted gross margin and EBITDA and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
|
(5) | Calculated as a percentage of revenues.
|
(6) | The Company calculated earnings per share (“EPS”) based on net income attributable to common stockholders for the period January 21, 2021 through September 30, 2021 over the weighted average diluted shares outstanding for the same period. EPS was calculated prospectively for the period subsequent to the IPO and Corporate Reorganization as described in Note 1 – Nature of Business and Significant Accounting Policies, resulting in 92,521,482 shares of common stock outstanding as of the closing of the IPO. For the nine months ended September 30, 2021, the diluted shares of common stock outstanding were 92,658,878. The total outstanding shares of common stock are made up of Class A common stock and Class B common stock, which participate equally in their ratable ownership share of the Company.
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(7) | Average selling price of homes closed is calculated based on home sales revenue, excluding the impact of deposit forfeitures and percentage of completion revenues, over homes closed.
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Revenues. Revenues for the nine months ended September 30, 2021 were $1,072$113 million, an increase of $399$63 million, or 59%127%, from $673$50 million for the ninesix months ended SeptemberJune 30, 2020. The increase in revenues was primarily attributable to an increase in home closings of 1,097 homes, or 60%, during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Our October 2020 acquisition of the homebuilding business of H&H Homes, contributed 907 home closings and $270 million in homebuilding revenues for the nine months ended September 30, 2021. The average sales price of homes closed for the nine months ended September 30, 2021 was $354,222, a decrease of $9,057 or 2%, over the average sales price of homes closed of $363,279 for the nine months ended September 30, 2020, primarily due to the lower average sales price of homes closed within the H&H Homes segment.
Cost of Sales and Gross Margin. Cost of sales for the nine months ended September 30, 2021 was $898 million, an increase of $322 million, or 56%, from $576 million for the nine months ended September 30, 2020. The increase in cost of sales was primarily due to the increase in home closings for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Home building gross margin for the nine months ended September 30, 2021 was $169 million, an increase of $76 million, or 81%, from $93 million for the nine months ended September 30, 2020. Home building gross margin as a percentage of home sales revenue was 15.9% for the nine months ended September 30, 2021, an increase of 191 basis points, or 1.9%, from 13.9% for the nine months ended September 30, 2020. The increase in gross margin percentage is largely attributable to price appreciation outpacing cost inflation as well as lower cost of funds.
Adjusted Gross Margin. Adjusted gross margin for the nine months ended September 30, 2021 was $238 million, an increase of $96 million, or 67%, from $142 million for the nine months ended September 30, 2020. Adjusted gross margin as a percentage of home sales revenue for the nine months ended September 30, 2021 was 22.3%, an increase of 100 basis points, or 5%, as compared to 21.3% for the nine months ended September 30, 2020. The increases in adjusted gross margin and adjusted gross margin percentage are attributable to a higher number of closings and price appreciation outpacing cost inflation. Adjusted gross margin is a non-GAAP financial measure. For the definition of adjusted gross margin and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
Selling, General and Administrative Expense. Selling, general and administrative expense for the nine months ended September 30, 2021 was $88 million, an increase of $33 million, or 60%, from $55 million for the nine months ended September 30, 2020. The increase in selling, general and administrative expense was primarily due to the inclusion of $27 million in expenses for the operations of H&H Homes for the nine months ended September 30, 2021. Selling, general and administrative expense as a percentage of revenue was 8.2% for the nine months ended September 30, 2021, compared to 8.2% for the nine months ended September 30, 2020. SG&A remained relatively consistent for the 9-month period and is expected to decrease in future quarters when the backlog is converted to home closings.
Other Income – Paycheck Protection Program Forgiveness. Other income related to the forgiveness of the PPP grant for the nine months ended September 30, 2021 was $7 million, as compared to $0 for the nine months ended September 30, 2020. The increase is attributable to the SBA forgiving the Company’s PPP grant in full, during the second quarter of 2021.
Other Expense. Other expense for the nine months ended September 30, 2021 was $10.5 million, an increase of $6.8 million, or 186%, as compared to $3.6 million for the nine months ended September 30, 2020. The increase in other expenses is primarily attributable to the acceleration of stock compensation expense as a result of the Corporate Reorganization, an increase in stock compensation expense related to the initial public offering, and an increase in expenses related to the sale of model homes repurchased from investors.
Other Income / Expense – Contingent Consideration. Contingent consideration expense for the nine months ended September 30, 2021 was $6 million, an increase of $6 million, as compared to $112 thousand income for the nine months ended September 30, 2020. The increase in contingent consideration expense is due to fair value adjustments of future expected earnout payments from the acquisition of H&H Homes. The increase in contingent consideration was due to H&H Homes exceeding initial projections.
Net and Comprehensive Income. Net and comprehensive income for the nine months ended September 30, 2021 was $73 million, an increase of $29 million, or 65%, from $44 million for the nine months ended September 30, 2020. The increase in net and comprehensive income was primarily attributable to an increase in gross margin on homes closed of $76$168 million, or 81%151%, forduring the ninesix months ended SeptemberJune 30, 20212022 as compared to the ninesix months ended SeptemberJune 30, 2020.
Net and Comprehensive Income Attributable to Dream Finders Homes, Inc. Net and comprehensive income attributable to Dream Finders for the ninesix months ended SeptemberJune 30, 20212022 was $64$106 million, an increase of $23$62 million, or 56%138%, from $41$45 million for the ninesix months ended SeptemberJune 30, 2020.2021. The increase was primarily attributable to a significantthe increase in home closings and gross margin. The change in net and comprehensive income attributable to Dream Finders Homes, Inc. is reduced by $13 million in income tax expenseWe closed 3,020 homes for the ninesix months ended SeptemberJune 30, 2021, which2022, an increase of 1,022 units, or 51%, from the 1,998 homes closed for the six months ended June 30, 2021. Gross margin for the six months ended June 30, 2022 was not applicable to DFH LLC.
Backlog. Backlog at September 30, 2021 was 4,520 homes valued at approximately $1,819$279 million, an increase of 2,684 homes and $1,136$168 million, respectively, or 146% and 166%151%, respectively, as compared to 1,836 homes valued at approximately $684from $111 million at September 30, 2020. The increase in backlog was primarily attributable to an elevated level of net sales throughout our active communities for the first nine months of 2021. Net sales for the ninesix months ended SeptemberJune 30, 2021 were 4,830 homes, an increase of 2,031 homes or 73% when compared to the 2,799 net sales for nine months ended September 30, 2020. The average monthly sales per community for the nine months ended September 30, 2021 were 4.3, an increase of 16%, from 3.7 average monthly sales per community during the nine months ended September 30, 2020.
Non-GAAP Financial Measures
Adjusted Gross Margin
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin excluding the effects of capitalized interest, amortization included in thehomebuilding cost of sales (including adjustments resulting from the application of purchase accounting in connection with acquisitions) and commission expense. Our management believes this information is meaningful because it isolates the impact that capitalized interest, amortization (including purchase accounting adjustments) and commission expense have on gross margin. However, because adjusted gross margin information excludes capitalized interest, amortization (including purchase accounting adjustments) and commission expense, which have real economic effects and could impact our results of operations, the utility of adjusted gross margin information as a measure of our operating performance may be limited. We include commission expense in homebuilding cost of sales, not selling, general and administrative expense, and therefore commission expense is taken into account in gross margin. As a result, in order to provide a meaningful comparison to the public company homebuilders that include commission expense below the gross margin line in selling, general and administrative expense, we have excluded commission expense from adjusted gross margin. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.
The following table presents a reconciliation of adjusted gross margin to the GAAP financial measure of gross margin for each of the periods indicated (unaudited and in thousands, except percentages).:
| | | For the Three Months Ended September 30, |
| Column1 | | 2021 | | | As a % of Home Sales Revenue | | 2020 | | | As a % of Home Sales Revenue |
| Revenues | | $ | 362,984 | | | | | | $ | 284,167 | | | | |
| Other revenue | | | 1,662 | | | | | | | 1,585 | | | | |
| Home sales revenue | | | 361,322 | | | | | | | 282,582 | | | | |
| Cost of sales | | | 303,386 | | | | 84.0 | % | | | 240,701 | | | | 85.2 | % |
Gross Margin(1) | | | 57,936 | | | | 16.0 | % | | | 41,881 | | | | 14.8 | % |
| Interest expense in cost of sales | | | 5,600 | | | | 1.5 | % | | | 7,764 | | | | 2.7 | % |
Amortization in cost of sales(3) | | | - | | | | 0.0 | % | | | 1,396 | | | | 0.5 | % |
| Commission expense | | | 15,158 | | | | 4.2 | % | | | 11,246 | | | | 4.0 | % |
| Adjusted gross margin | | | 78,694 | | | | 21.8 | % | | | 62,287 | | | | 22.0 | % |
Gross margin %(2) | | | 16.0 | % | | | | | | | 14.8 | % | | | | |
Adjusted gross margin %(2) | | | 21.8 | % | | | | | | | 22.0 | % | | | | |
| | | For the Nine Months Ended September 30, |
| Column1 | | 2021 | | | As a % of Home Sales Revenue | | 2020 | | | As a % of Home Sales Revenue |
| Revenues | | $ | 1,071,820 | | | | | | $ | 672,706 | | | | |
| Other revenue | | | 4,588 | | | | | | | 3,730 | | | | |
| Home sales revenue | | | 1,067,232 | | | | | | | 668,976 | | | | |
| Cost of sales | | | 898,013 | | | | 84.1 | % | | | 575,683 | | | | 86.1 | % |
Gross Margin(1) | | | 169,219 | | | | 15.9 | % | | | 93,293 | | | | 13.9 | % |
| Interest expense in cost of sales | | | 21,240 | | | | 2.0 | % | | | 19,562 | | | | 2.9 | % |
Amortization in cost of sales(3) | | | 1,621 | | | | 0.2 | % | | | 3,054 | | | | 0.5 | % |
| Commission expense | | | 46,293 | | | | 4.3 | % | | | 26,489 | | | | 4.0 | % |
| Adjusted gross margin | | | 238,373 | | | | 22.3 | % | | | 142,398 | | | | 21.3 | % |
Gross margin %(2) | | | 15.9 | % | | | | | | | 13.9 | % | | | | |
Adjusted gross margin %(2) | | | 22.3 | % | | | | | | | 21.3 | % | | | | |
(1) | Gross margin is home sales revenue less cost of sales.
|
(2) | Calculated as a percentage of home sales revenues.
|
(3) | Includes purchase accounting adjustment, as applicable.
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| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Gross margin(1) | $ | 155,808 | | | $ | 60,154 | | | $ | 279,413 | | | $ | 111,284 | |
| Interest expense in homebuilding cost of sales | 12,790 | | | 7,365 | | | 21,637 | | | 15,640 | |
Amortization in homebuilding cost of sales(3) | 1,991 | | | 2,072 | | | 5,821 | | | 1,624 | |
| Commission expense | 33,142 | | | 15,861 | | | 58,416 | | | 31,135 | |
| Adjusted gross margin | $ | 203,731 | | | $ | 85,452 | | | $ | 365,287 | | | $ | 159,683 | |
Gross margin %(2) | 19.7 | % | | 16.5 | % | | 19.2 | % | | 15.8 | % |
Adjusted gross margin %(2) | 25.7 | % | | 23.5 | % | | 25.1 | % | | 22.6 | % |
(1)Gross margin is homebuilding revenues less homebuilding cost of sales.
(2)Calculated as a percentage of homebuilding revenues.
(3)Includes purchase accounting adjustments, as applicable.
EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA are not measures of net income as determined by GAAP. EBITDA and adjusted EBITDA are supplemental non-GAAP financial measures used by management and external users of our condensed consolidated financial statements, such as industry analysts, investors, lenders and rating agencies. We define EBITDA as net income before (i) interest income, (ii) capitalized interest expensed in homebuilding cost of sales, (iii) interest expense, (iv) income tax expense and (v) depreciation and amortization. We define adjusted EBITDA as EBITDA before stock-based compensation expense.
Management believes EBITDA and adjusted EBITDA are useful because they allow management to more effectively evaluate our operating performance and compare our results of operations from period to period without regard to our financing methods or capital structure or other items that impact the comparability of financial results from period to period. EBITDA and adjusted EBITDA should not be considered as alternatives to, or more meaningful than, net income or any other measure as determined in accordance with GAAP. Our computations of EBITDA and adjusted EBITDA may not be comparable to EBITDA or adjusted EBITDA of other companies. We present EBITDA and adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business.
The following table presents a reconciliation of EBITDA and adjusted EBITDA to the GAAP financial measure of net income for each of the periods indicated (unaudited and in thousands, except percentages).:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net and comprehensive income attributable to Dream Finders Homes, Inc. | $ | 62,624 | | | $ | 28,573 | | | $ | 106,340 | | | $ | 44,694 | |
| Interest income | (32) | | | — | | | (73) | | | (4) | |
| Interest expensed in cost of sales | 12,790 | | | 7,365 | | | 21,637 | | | 15,640 | |
| Interest expense | 13 | | | 16 | | | 26 | | | 658 | |
| Income tax expense | 23,327 | | | 4,479 | | | 40,205 | | | 9,295 | |
| Depreciation and amortization | 6,251 | | | 1,988 | | | 11,024 | | | 4,337 | |
| EBITDA | $ | 104,974 | | | $ | 42,421 | | | $ | 179,160 | | | $ | 74,621 | |
| Stock-based compensation expense | 1,792 | | | 1,452 | | | 3,244 | | | 3,800 | |
| Adjusted EBITDA | $ | 106,766 | | | $ | 43,873 | | | $ | 182,404 | | | $ | 78,421 | |
EBITDA margin %(1) | 13.2 | % | | 11.6 | % | | 12.3 | % | | 10.5 | % |
Adjusted EBITDA margin %(1) | 13.5 | % | | 12.0 | % | | 12.5 | % | | 11.1 | % |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| Column1 | | 2021 | | | 2020 | | | | 2021 . | | | | 2020 . | |
| Net income | | $ | 19,135 | | | $ | 22,561 | | | $ | 63,830 | | | $ | 40,865 | |
| Interest income | | | - | | | | (4 | ) | | | (4 | ) | | | (39 | ) |
| Interest expensed in cost of sales | | | 5,600 | | | | 7,764 | | | | 21,240 | | | | 19,562 | |
| Interest expense | | | 14 | | | | 96 | | | | 672 | | | | 259 | |
| Income tax expense | | | 4,111 | | | | - | | | | 13,406 | | | | - | |
| Depreciation and amortization | | | 916 | | | | 2,185 | | | | 4,344 | | | | 5,488 | |
| EBITDA | | $ | 29,776 | | | $ | 32,602 | | | $ | 103,488 | | | $ | 66,135 | |
| Stock-based compensation expense | | | 1,472 | | | | 250 | | | | 5,272 | | | | 697 | |
| Adjusted EBITDA | | $ | 31,248 | | | $ | 32,852 | | | $ | 108,760 | | | $ | 66,832 | |
EBITDA margin %(1) | | | 8.2 | % | | | 11.5 | % | | | 9.7 | % | | | 9.8 | % |
Adjusted EBITDA margin %(1) | | | 8.6 | % | | | 11.6 | % | | | 10.1 | % | | | 9.9 | % |
(1) | Calculated as a percentage of revenues.
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Backlog, Sales and Closings
A new order (or new sale) is reported when a customer has received preliminary mortgage approval and the sales contract has been signed by the customer, approved by us and secured by a deposit, typically approximately 1-3%3-6% of the purchase price of the home. These deposits are typically not refundable, but each customer situation is evaluated individually.
Net new orders are new orders or sales (gross) for the purchase of homes during the period, less cancellations of existing purchase contracts during the period. Sales to investors that intend to lease the homes are recognized when the Company has received a nonrefundablenon-refundable deposit. Our cancellation rate for a given period is calculated as the total number of new (gross) sales purchase contracts canceled during the period divided by the total number of new (gross) sales contracts entered into during the period. Our cancellation rate for the three months ended SeptemberJune 30, 20212022 was 13.9%21.0%, an increase of 400660 basis points when compared to the 9.9%14.4% cancellation rate for the three months ended SeptemberJune 30, 2020. The2021. Our cancellation rate for the ninesix months ended SeptemberJune 30, 20212022 was 11.8% a decrease16.4%, an increase of 110550 basis points when compared to the 12.9%10.9% cancellation rate for the ninesix months ended SeptemberJune 30, 2020.2021.
The following tables present information concerning our new home sales (net), starts and closings in each of our markets for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020.2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | Period Over Period
Percent Change |
| 2022 | | 2021 | |
| Segment | Sales | Starts | Closings | | Sales | Starts | Closings | | Sales | Starts | Closings |
| Jacksonville | 285 | | 529 | | 377 | | | 307 | | 379 | | 265 | | | -7 | % | 40 | % | 42 | % |
| Colorado | 55 | | 119 | | 69 | | | 27 | | 108 | | 47 | | | 104 | % | 10 | % | 47 | % |
| Orlando | 159 | | 329 | | 100 | | | 328 | | 166 | | 147 | | | -52 | % | 98 | % | -32 | % |
| DC Metro | 81 | | 71 | | 21 | | | 20 | | 49 | | 35 | | | 305 | % | 45 | % | -40 | % |
| The Carolinas | 329 | | 375 | | 351 | | | 499 | | 584 | | 315 | | | -34 | % | -36 | % | 11 | % |
Texas (1) | 318 | | 525 | | 527 | | | — | | — | | — | | | — | | — | | — | |
Other(2) | 199 | | 156 | | 204 | | | 340 | | 297 | | 187 | | | -41 | % | -47 | % | 9 | % |
| Grand Total | 1,426 | | 2,104 | | 1,649 | | | 1,521 | | 1,583 | | 996 | | | -6 | % | 33 | % | 66 | % |
| | | | | | For the Three Months Ended September 30, | | | | |
| | | 2021(1) | | | 2020 | | | Period Over Period Percent Change | |
| Market | | Sales | | | Starts | | | Closings 1
| | | Sales 2
| | | Starts 2
| | | Closings 2
| | | Sales 3
| | | Starts 3
| | | Closings 3
| |
| The Carolinas (H&H Homes) | | | 362 | | | | 483 | | | | 249 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Jacksonville | | | 545 | | | | 327 | | | | 305 | | | | 513 | | | | 441 | | | | 371 | | | | 6 | % | | | -26 | % | | | -18 | % |
Orlando(1) | | | 222 | | | | 124 | | | | 123 | | | | 160 | | | | 195 | | | | 108 | | | | 39 | % | | | -36 | % | | | 14 | % |
| Colorado | | | 44 | | | | 71 | | | | 60 | | | | 79 | | | | 70 | | | | 86 | | | | -44 | % | | | 1 | % | | | -30 | % |
| DC Metro | | | 14 | | | | 24 | | | | 32 | | | | 77 | | | | 53 | | | | 60 | | | | -82 | % | | | -55 | % | | | -47 | % |
Other(2) | | | 114 | | | | 275 | | | | 147 | | | | 330 | | | | 253 | | | | 155 | | | | -65 | % | | | 9 | % | | | -5 | % |
| Grand Total | | | 1,301 | | | | 1,304 | | | | 916 | | | | 1,159 | | | | 1,012 | | | | 780 | | | | 12 | % | | | 29 | % | | | 17 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended
June 30, | | Period Over Period
Percent Change |
| 2022 | | 2021 | |
| Segment | Sales | Starts | Closings | | Sales | Starts | Closings | | Sales | Starts | Closings |
| Jacksonville | 917 | | 976 | | 646 | | | 867 | | 783 | | 560 | | | 6 | % | 25 | % | 15 | % |
| Colorado | 141 | | 215 | | 139 | | | 166 | | 182 | | 81 | | | -15 | % | 18 | % | 72 | % |
| Orlando | 288 | | 563 | | 206 | | | 609 | | 338 | | 308 | | | -53 | % | 67 | % | -33 | % |
| DC Metro | 144 | | 129 | | 36 | | | 72 | | 81 | | 59 | | | 100 | % | 59 | % | -39 | % |
| The Carolinas | 482 | | 663 | | 603 | | | 1,146 | | 997 | | 658 | | | -58 | % | -34 | % | -8 | % |
Texas (1) | 1,135 | | 1,242 | | 1,010 | | | — | | — | | — | | | — | | — | | — | |
Other(2) | 721 | | 335 | | 380 | | | 671 | | 586 | | 332 | | | 7 | % | -43 | % | 14 | % |
| Grand Total | 3,828 | | 4,123 | | 3,020 | | | 3,531 | | 2,967 | | 1,998 | | | 8 | % | 39 | % | 51 | % |
| | | | | | For the Nine Months Ended September 30, | | | | |
| | | 2021(1) | | | 2020 | | | Period Over Period Percent Change | |
| Market | | Sales | | | Starts | | | Closings 1
| | | Sales 2
| | | Starts 2
| | | Closings 2
| | | Sales 3
| | | Starts 3
| | | Closings 3
| |
| The Carolinas (H&H Homes) | | | 1,506 | | | | 1,480 | | | | 907 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Jacksonville | | | 1,412 | | | | 1,109 | | | | 865 | | | | 1,333 | | | | 1,109 | | | | 895 | | | | 6 | % | | | 0 | % | | | -3 | % |
Orlando(1) | | | 831 | | | | 462 | | | | 431 | | | | 392 | | | | 394 | | | | 206 | | | | 112 | % | | | 17 | % | | | 109 | % |
| Colorado | | | 210 | | | | 253 | | | | 141 | | | | 223 | | | | 199 | | | | 183 | | | | -6 | % | | | 27 | % | | | -23 | % |
| DC Metro | | | 86 | | | | 105 | | | | 91 | | | | 189 | | | | 161 | | | | 148 | | | | -54 | % | | | -35 | % | | | -39 | % |
Other(2) | | | 785 | | | | 869 | | | | 479 | | | | 662 | | | | 492 | | | | 385 | | | | 19 | % | | | 77 | % | | | 24 | % |
| Grand Total | | | 4,830 | | | | 4,278 | | | | 2,914 | | | | 2,799 | | | | 2,355 | | | | 1,817 | | | | 73 | % | | | 82 | % | | | 60 | % |
(1) | Includes sales, starts and closings for Century Homes from the acquisition date of January 31, 2021.
|
(2) | Austin, Savannah, Village Park Homes, Active Adult and Custom Homes.
|
Our “backlog” consists of homes under a purchase contract that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but such home sales to end buyers have not yet closed. Ending backlog represents the number of homes in backlog from the previous period plus the number of net new orders generated during the current period minus the number of homes closed during the current period. Our backlog at any given time will be affected by cancellations and the number of our active communities. Homes in backlog are generally closed within one to six months, although we may experience cancellations of purchase contracts at any time prior to such home closings. Certain sales to investors that intend to lease the homes may be delivered over a longer duration. It is important to note that net new orders, backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance. Backlog may be impacted by customer cancellations for various reasons that are beyond our control, and, in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation of the purchase contract.
The following table presentstables present information concerning our new orders, cancellation rate and ending backlog for the periods (and at the endand as of the period)dates set forth below.below:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net New Orders | 1,426 | | | 1,521 | | | 3,828 | | | 3,531 | |
| Cancellation Rate | 21.0 | % | | 14.4 | % | | 16.4 | % | | 10.9 | % |
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | | 2021 | | | | 2020 | | | | 2021 | | | | 2020 | |
Net New Orders | | | 1,301 | | | | 1,159 | | | | 4,830 | | | | 2,799 | |
Cancellation Rate | | | 13.9 | % | | | 9.9 | % | | | 11.8 | % | | | 12.9 | % |
| | | | | | | | | | | |
| As of
June 30, |
| 2022 | | 2021 |
| Ending Backlog - Homes | 7,190 | | | 4,137 | |
| Ending Backlog - Value (in thousands) | $ | 3,334,945 | | | $ | 1,646,725 | |
| | | September 30, | |
| | | 2021 | | | | 2020 | |
Ending Backlog - Homes | | | 4,520 | | | | 1,836 | |
Ending Backlog - Value (in thousands) | | $ | 1,819,300 | | | $ | 683,743 | |
Land Acquisition Strategy and Development Process
We operate an asset-light and capital efficientcapital-efficient lot acquisition strategy and in contrast to many other homebuilders, generally seek to avoid engaging in land development, which requires significant capital expenditures and can take several years to realize returns on the investment. Our strategy is intended to avoid the financial commitments and risks associated with direct land ownership and land development by allowing us to control a significant number of lots for a relatively low capital cost. We primarily employ two variations of our asset-light land financing strategy, finished lot option contracts and land bank option contracts, pursuant to which we secure the right to purchase finished lots at market prices by paying deposits based on the aggregate purchase price of the finished lots (typically 10% or less in the case of finished lot option contracts and 15% or less in the case of land bank option contracts) and, in the case of land bank option contracts, any related fees paid to the land bank partner.
As of SeptemberJune 30, 2021,2022, our lot deposits and investments in finished lot option and land bank option contracts were $157 million, of which $2 million was refundable at our option.$288 million. As of SeptemberJune 30, 2021,2022, we controlled 30,77637,983 lots under lot option and land bank option contracts.
Owned and Controlled Lots
The following table presents our owned orfinished lots purchased just in time for production and controlled lots by home building segmentshomebuilding segment as of SeptemberJune 30, 20212022 and December 31, 2020.2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of
June 30, | | As of
December 31, | |
| 2022 | | 2021 | |
| Segment | Owned (2) | Controlled | Total | | Owned | Controlled | Total | % Change |
| Jacksonville | 1,177 | | 9,613 | | 10,790 | | | 774 | | 10,311 | | 11,085 | | -3 | % |
| Colorado | 258 | | 5,560 | | 5,818 | | | 152 | | 4,883 | | 5,035 | | 16 | % |
| Orlando | 858 | | 4,908 | | 5,766 | | | 537 | | 5,487 | | 6,024 | | -4 | % |
| DC Metro | 169 | | 1,775 | | 1,944 | | | 97 | | 1,680 | | 1,777 | | 9 | % |
| The Carolinas | 1,320 | | 5,844 | | 7,164 | | | 1,452 | | 5,196 | | 6,648 | | 8 | % |
| Texas | 1,624 | | 5,701 | | 7,325 | | | 1,569 | | 6,304 | | 7,873 | | -7 | % |
Other(1) | 859 | | 4,582 | | 5,441 | | | 764 | | 4,634 | | 5,398 | | 1 | % |
| Grand Total | 6,265 | | 37,983 | | 44,248 | | | 5,345 | | 38,495 | | 43,840 | | 1 | % |
| | | As of September 30, | | | As of December 31, | | | | |
| | | 2021 | | | 2020 | | | % Change of | |
| Segments | | Owned | | | Controlled | | | Total 1
| | | Owned 1
| | | Controlled 1
| | | Total 1
| | | Total | |
| The Carolinas (H&H Homes) | | | 1,487 | | | | 5,413 | | | | 6,900 | | | | 1,348 | | | | 4,107 | | | | 5,455 | | | | 26 | % |
| Jacksonville | | | 945 | | | | 9,287 | | | | 10,232 | | | | 715 | | | | 4,445 | | | | 5,160 | | | | 98 | % |
Orlando(1) | | | 551 | | | | 4,168 | | | | 4,719 | | | | 256 | | | | 2,504 | | | | 2,760 | | | | 71 | % |
| Colorado | | | 150 | | | | 5,835 | | | | 5,985 | | | | 106 | | | | 4,145 | | | | 4,251 | | | | 41 | % |
| DC Metro | | | 98 | | | | 1,745 | | | | 1,843 | | | | 77 | | | | 566 | | | | 643 | | | | 187 | % |
Other(2) | | | 887 | | | | 4,328 | | | | 5,215 | | | | 629 | | | | 3,509 | | | | 4,138 | | | | 26 | % |
| Grand Total | | | 4,118 | | | | 30,776 | | | | 34,894 | | | | 3,131 | | | | 19,276 | | | | 22,407 | | | | 56 | % |
(1) | Includes owned and controlled lots for Century Homes from the acquisition date of January 31, 2021.(2)As of June 30, 2022, 5,277 of the 6,265 owned lots were completed or under construction. The remaining lots are ready for construction.
|
(2) | Austin, Savannah, Village Park Homes, Active Adult and Custom Homes.
|
Owned Real Estate Inventory Status
The following table presents our owned real estate inventory status as of SeptemberJune 30, 20212022 and 2020.December 31, 2021:
| | | | | | | | | | | |
| As of
June 30, 2022 | | As of
December 31, 2021 |
| % of Owned Real Estate
Inventory | | % of Owned Real Estate
Inventory |
Construction in process and finished homes (1) | 93 | % | | 92 | % |
Company owned land and lots (2) | 7 | % | | 8 | % |
| Total | 100 | % | | 100 | % |
| | | As of September 30, 2021 | | | As of December 31, 2020 | |
Owned Real Estate Inventory Status (1) | | % of Owned Real Estate Inventory | | | % of Owned Real Estate Inventory | |
Construction in progress and finished homes 1
| | | 92.2 | % | | | 88.8 | % |
Finished lots and land under development 1
| | | 7.8 | % | | | 11.2 | % |
| Total | | | 100 | % | | | 100 | % |
(1) | Represents our owned homes under construction, finished lots and capitalized costs related to land under development. Land and lots from consolidated joint ventures are excluded.
|
Our Active Communities
We define an active community as a community where we have recorded five net new orders or a model home is currently open to customers. A community is no longer active when we have less than five home sites to sell to customers. Active community count is an important metric to forecast future net new orders for our business. As of SeptemberJune 30, 2021,2022, we had 107203 active communities, an increase of 2886 communities, or 35%74%, whenas compared to our 79117 active communities at Septemberas of June 30, 2020.2021. Our active community count excludes communities under the Company’s built-for-rent contracts, as all sales to investors occur at one point in time and these communities would have no home sites remaining to sell. As of SeptemberJune 30, 2021,2022, the Company had eight24 active communities for built-for-rent contracts.contracts and built-for-rent homes comprised approximately 26% of the homes in the Company’s backlog.
Our Mortgage Banking Business
For the three months ended SeptemberJune 30, 2021,2022, our mortgage banking joint venture, Jet LLC, originated and funded 556622 home loans with an aggregate principal amount of approximately $182$228 million as compared to 612540 home loans with an aggregate principal amount of approximately $179$173 million for the three months ended SeptemberJune 30, 2020.2021. For the ninesix months ended SeptemberJune 30, 2021,2022, our mortgage banking joint venture, Jet LLC, originated and funded 1,5651,149 home loans with an aggregate principal amount of approximately $501$415 million as compared to 1,6061,011 home loans with an aggregate principal amount of approximately $458$319 million for the ninesix months ended SeptemberJune 30, 2020.2021. For the three months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, Jet LLC had net income of approximately $3 million and $3$2 million. For the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively, Jet LLC had net income of approximately $8$6 million and $9$6 million. Our interest in Jet LLC is accounted for under the equity investment method and is not consolidated in our condensed consolidated financial statements, as we do not control and are not deemed the primary beneficiary of the variable interest entity (“VIE”). See “Note 9.7, Variable Interest Entities and Investments in Other Entities,” to our condensed consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for a description of our joint ventures, including those that were determined to be VIEs and the related accounting treatment.
Costs of Building Materials and Labor
Our cost of sales includes the acquisition and finance costs of home siteshomesites or lots, municipality fees, the costs associated with obtaining building permits, materials and labor to construct the home, interest rates for construction loans, internal and external realtor commissions and other miscellaneous closing costs. Home siteHomesite costs range from 20-25% of the average cost of a home. Building materials range from 40-50% of the average cost to build the home, labor ranges from 30-40% of the average cost to build the home, and interest, commissions and closing costs range from 4-10% of the average cost to build the home.
In general, the cost of building materials fluctuates with overall trends in the underlying prices of raw materials. The cost of certain of our building materials, such as lumber and oil-based products, fluctuates with market-based pricing curves. We often obtain volume discounts and/or rebates with certain suppliers of our building materials, which in turn reduces our cost of sales.
However, increases in the cost of building materials may reduce gross margin to the extent that market conditions prevent the recovery of increased costs through higher home sales prices. The price changes that most significantly influence our operations are price increases in commodities, including lumber. SignificantAs a result, significant price increases of these materials may negatively impact our cost of sales and, in turn, our net income.
Seasonality
In all of our markets, we have historically experienced similar variability in our results of operations and capital requirements from quarter to quarter due to the seasonal nature of the homebuilding industry. We generally sell more homes in the first and second quarters and close more homes in our third and fourth quarters. As a result, our revenue may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels. As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular quarter, especially our first quarter, are not necessarily representative of the results we expect at year end.year-end. We expect this seasonal pattern to continue in the long term.
Liquidity and Capital Resources
Overview
As of September 30, 2021, we had $86 million in cash and cash equivalents (excluding $196 million of restricted cash), an increase of $50 million, or 100%, from $35 million as of December 31, 2020. Additionally, the Company has $369 million of availability under the Credit Agreement and $11 million of closing proceeds in transit, for a total of $466 million in liquidity. On October 1, 2021, we borrowed $300 million in revolving loans under the Credit Agreement and paid off the vertical lines of credit in connection with the MHI Acquisition. Following the MHI Acquisition, on October 1, 2021, we had $69 million of availability under the Credit Agreement.
We generate cash from the sale of our inventory and we intend to re-deploy the net cash generated from the sale of inventory to acquire and control land and further grow our operations year over year. We believe that our sources of liquidity are sufficient to satisfy our current commitments.
Immediately following the closing of We also maintain our IPO, we replaced all of our secured vertical construction lines of credit facilities with our credit agreement (the “Credit Agreement”)Amended and Restated Credit Agreement with a syndicate of lenders and Bank of America, N.A, as administrative agent, providing for a senior unsecured revolving credit facility, which currently has an initial aggregate commitment of up to $450$1.1 billion and matures on June 2, 2025. As of June 30, 2022, we had $84 million in cash and an accordion feature that allowscash equivalents, excluding $45 million of restricted cash. Additionally, the facility to expand to a borrowing baseCompany had $250 million of up to $750 million (our “Credit Facility”). We believe thatavailability under the consolidation of our indebtedness into a single credit facility will continue to reduce our financing costs, create operating efficienciesAmended and enhance returns. On September 8, 2021, we entered into a First Amendment and Commitment Increase Agreement (the “Amendment”) to ourRestated Credit Agreement and increased the aggregate commitments to $742.5 million and three lenders were added as additional lenders under the Credit Agreement. As amended by the Amendment, the Credit Agreement includes provisions for any existing lender to, at the Company’s request, increase its revolving commitment under the Credit Agreement, add new revolving loan tranches under the Credit Agreement or add new term loan tranches under the Credit Agreement, in all cases not to exceed an aggregatea total of $1.1 billion. In addition, the Amendment clarified and modified certain definitions and covenants as more fully set forth therein, including modifications of certain financial covenants to facilitate the consummation of the MHI Acquisition (Note 15).
On September 29, 2021, in connection with the closing of the MHI Acquisition, we exercised our right to further increase the aggregate commitments under the Credit Agreement to $817.5 million and one lender was added as an additional lender under the Credit Agreement. On October 1, 2021, we borrowed $300$334 million in revolving loans under the Credit Agreement and paid off vertical lines of credit in connection with the MHI Acquisition.total liquidity. Certain of our subsidiaries guaranteed the Company’s obligations under the Credit Agreement. The Credit Agreement matures on January 25, 2024.Amended and Restated credit agreement.
On September 29, 2021, we sold 150,000 shares of newly-created Series A Convertible Preferred Stock with an initial liquidation preference of $1,000 per shareWe continue to evaluate our capital structure and a par value $0.01 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of $150 million.explore options to strengthen our Balance Sheet. We usedwill remain opportunistic while assessing available capital in the proceeds from the sale of the Convertible Preferred Stock to fund the MHI Acquisitiondebt and for general corporate purposes.
Our principal uses of capital are lot deposits and purchases, vertical home construction, operating expenses and the payment of routine liabilities. During the nine months ended September 30, 2021, we also used cash in hand to make non-recurring payments in relation to the IPO.
Cash flows generated by our projects can differ materially from our results of operations, as these depend upon the stage in the life cycle of each project. The majority of our projects begin at the land acquisition stage when we enter into finished lot option contracts by placing a deposit with a land seller or developer. Our lot deposits are an asset on our balance sheets and these cash outflows are not recognized in our results of operations. Early stages in our communities require material cash outflows relating to finished rolling option lot purchases, entitlements and permitting, construction and furnishing of model homes, roads, utilities, general landscaping and other amenities, as well as ongoing association fees and property taxes. These costs are capitalized within our real estate inventory and are not recognized in our operating income until a home sale closes. As such, we incur significant cash outflows prior to the recognition of earnings. In later stages of the life cycle of a community, cash inflows could significantly exceed our results of operations, as the cash outflows associated with land purchase and home construction and other expenses were previously incurred.
We actively enter into finished lot option contracts by placing deposits with land sellers of typically 10% or less of the aggregate purchase price of the finished lots. When entering into these contracts, we also agree to purchase finished lots at pre-determinedpredetermined time frames and quantities that match our expected selling pace in the community. For the three months ended September 30, 2021, the majority
From time to time, weWe also enter into land development arrangements with land sellers, land developers and land bankers. We typically provide a lot deposit of 10% or less, or 15% or less in the case of land bank option contracts, of the total investment required to develop lots that we will have the option to acquire in the future. In these transactions, we also incur lot option fees that have historically been 15% or less of the outstanding capital balance held by the land banker. The initial investment and lot option fees require our ability to allocate liquidity resources to projects that will be not materialize into cash inflows or operating income in the near term. The above cash strategies are designed to allow us to maintain adequate lot supply in our existing markets and support ongoing growth and profitability. AsIn spite of the current economic uncertainty, we continue to operate in a low interest ratean environment with consistent increase in the demand for new homes and constrained lot supply compared to population and job growth trends, we intend to continue to re-investreinvest our earnings into our business and focus on expanding our operations. In addition, as the opportunity to purchase finished lots in desired locations becomes increasingly more limited and competitive, we are committed to allocating additional liquidity to land-bankland bank deposits on land development projects, as this strategy mitigates the risks associated with holding undeveloped land on our balance sheet, while allowing us to control adequate lot supply in our key markets to support forecasted growth. As of SeptemberJune 30, 2021,2022, our lot deposits and investments related to finished lot option contracts and land bank option contracts were $157 million, including $2 million of refundable lot deposits. For the nine months ended September 30, 2021, we closed 2,914 homes, acquired 3,764 lots and started construction on 4,278 homes.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | For the Nine Months Ended September 30, | |
| | | 2021 1
| | | 2020 | |
| Net cash provided by (used in) operating activities | | $ | (123,144 | ) | | $ | 3,171 | |
| Net cash provided by (used in) investing activities | | | (24,513 | ) | | | 4,127 | |
| Net cash provided by (used in) financing activities | | | 329,837 | | | | (700 | ) |
| | | | | | | | | | | |
| For the Six Months Ended
June 30, |
| 2022 | | 2021 |
| Net cash used in operating activities | $ | (222,538) | | | $ | (93,432) | |
| Net cash used in investing activities | (1,474) | | | (23,485) | |
| Net cash provided by financing activities | 72,083 | | | 112,652 | |
Net cash used in operating activities was $123$223 million for the ninesix months ended SeptemberJune 30, 2021, an increase of $126 million,2022, as compared to $3$93 million of net cash providedused in operating activities for the ninesix months ended SeptemberJune 30, 2020.2021. The increasechange in net cash used in operating activities was driven by an increase of $153 million in inventories and an increaseof $289 million. The decrease in lot deposits of $90 million as the Company deploys its available cash from the Credit Agreement into future growth,balance was partially offset by higher customer deposits of $60 million, income from the Paycheck Protection Program of $7$13 million and the increase in net income generated on home closings for the ninesix months ended SeptemberJune 30, 2021.
Net cash used in investing activities was $25$1 million for the ninesix months ended SeptemberJune 30, 2021, a decrease of $29 million,2022, as compared to $4$23 million of cash provided byused in investing activities for the ninesix months ended SeptemberJune 30, 2020.2021. The increasechange in net cash used in investing activities was primarily attributable to the acquisition of Century Homes during the first quarter of 2021.
Net cash provided by financing activities was $330$72 million for the ninesix months ended SeptemberJune 30, 2021, an increase of $330 million,2022, as compared to $1$113 million of cash used inprovided by financing activities for the ninesix months ended SeptemberJune 30, 2020.2021. The increasechange in net cash provided by financing activities was primarily attributable to the following activities in the first quarter of 2021, which did not recur in the first quarter of 2022: the Corporate Reorganization, which included IPO net proceeds of $130 million, the issuance of $149 million of convertible preferred stock (net of issuance costs), and borrowings from our Credit Agreement. The increases were partially offset by the redemption of the Series C preferred units of DFH LLC of $26 million, and payments to terminate the Company’s historical vertical construction lines of credit and notes payable, including the $20 million bridge loan utilized in funding the H&H Acquisition, in connection with the new unsecured Credit Agreement.
Credit Facilities, Letters of Credit, Surety Bonds and Financial Guarantees
As of SeptemberJune 30, 2021,2022, under our Amended and Restated Credit FacilityAgreement, we had a maximum availability of $817.5 million and$1.1 billion, an outstanding balance of $449$875 million, including $9 million of Letters of Credit obligations. On October 1, 2021,and we borrowed $300 million in revolving loans under the Credit Agreement and paid off the vertical lines of credit in connection with the MHI Acquisition. Following the MHI Acquisition, on October 1, 2021, we had $69 million of availability under the Credit Agreement.could borrow an additional $250 million. As of December 31, 2020,2021, we had 34 vertical construction linestotal outstanding borrowings of $760 million under our credit agreement prior to its amendment and restatement and an additional $8 million in letters of credit facilities with a cumulative maximum availabilitythe lenders such that we could borrow an additional $49 million under the agreement. As of $763June 30, 2022, we were in compliance with the covenants set forth in our Amended and Restated Credit Agreement.
We enter into surety bonds and letter of credit arrangements with local municipalities, government agencies and land developers. These arrangements relate to certain performance-related obligations and serve as security for certain land option agreements. At June 30, 2022, we had outstanding letters of credit and surety bonds totaling $1 million and an aggregate$77 million, respectively.
Series B Preferred Units
Following the Corporate Reorganization and upon completion of the IPO, MOF II DF Home LLC and MCC Investment Holdings LLC (both controlled by Medley Capital Corporation) continue to hold the Series B preferred units of DFH LLC. As such, they have certain rights and preferences with regard to DFH LLC that holders of our Class A common stock do not have.
At any time on or prior to September 30, 2022, DFH LLC has the right to redeem some or all of the outstanding balanceSeries B preferred units at a price equal to the sum of $290 million. Historically,(i) the difference of (A) $1,000 and (B) the amount of previous distributions having already been paid towards each such unit and (ii) unreturned capital contributions for such unit plus the Series B Preferred Return (the “Series B Redemption Price”).
In the event of a liquidation or dissolution of DFH LLC, the holders of Series B preferred units shall have preference over our vertical construction linesmembership interest in DFH LLC. Further, in the event of credit facilities were fully collateralized by finished lots and homes under construction.
Series C Preferred Units
On January 27, 2021, we redeemed all 26,000 outstanding Series C preferred units of DFH LLC at a redemption price of $26 million, including accrued unpaid preferred distributions.
Convertible Preferred Stock
On September 29, 2021, we sold 150,000 shares of newly-created Convertible Preferred Stock with an initial liquidation preference of $1,000 per share and a par value of $0.01 per share, for an aggregate purchase price of $150 million. We used the proceeds from the sale of the Convertible Preferred Stock to fund the MHI acquisition and for general corporate purposes. Pursuant to the Certificate of Designations, the Convertible Preferred Stock ranks senior to the Class A and B common stock with respect to dividends and distributions on liquidation, winding-up and dissolution. Accordingly, upon liquidation, dissolution or winding up of the Company, each share of Convertible Preferred Stock is entitled to receive the initial liquidation preference of $1,000 per share, subject to adjustment, plus all accrued distributions and fees of $0.2 million.unpaid dividends thereon. Refer to Note 6 to the condensed consolidated financial statements herein and Note 9 to the consolidated financial statements within our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for further details on the terms.
Off-Balance Sheet Arrangements
Asset-Light Lot Acquisition Strategy
We operate an asset-light and capital efficientcapital-efficient lot acquisition strategy and generally seek to avoid engaging in land development. We primarily employ two variations of our asset-light land financing strategy, finished lot option contracts and land bank option contracts, pursuant to which we secure the right to purchase finished lots at market prices from various land sellers and land bank partners by paying deposits based on the aggregate purchase price of the finished lots. The deposits required are typically 10% or less in the case of finished lot option contracts and 15% or less in the case of land bank option contracts.
As of SeptemberJune 30, 2021,2022, we owned and controlled 34,89437,983 lots through finished lot option contracts and land bank option contracts. Our entire risk of loss pertaining to the aggregate purchase price of contractual commitments resulting from our non-performance under our finished lot option contracts and land bank option contracts is limited to approximately $157$288 million in lot deposits and investments made as of SeptemberJune 30, 2021—$1572022. In addition, we have capitalized costs of $67 million relating to our off-balance sheet arrangements and land development due diligence.
Surety Bonds and Letters of Credit
We enter into letter of credit and surety bond arrangements with local municipalities, government agencies and land developers. These arrangements relate to certain performance-related obligations and serve as security for certain land option agreements. At SeptemberAs of June 30, 2021,2022, we had outstanding letters of credit and surety bonds totaling $10.5$1 million and $50$77 million, respectively. We believe we will fulfill our obligations under the related arrangements and do not anticipate any material losses under these letters of credit or surety bonds.
Contractual Obligations
As of SeptemberJune 30, 2021,2022, there have been no material changes to our contractual obligations appearing in the “Contractual Obligations, Commitments and Contingencies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
Critical Accounting Policies
We prepare our condensed consolidated financial statements in accordance with GAAP. Our critical accounting policies are those that we believe have the most significant impact toon the presentation of our financial position and results of operations and that require the most difficult, subjective or complex judgments. In many cases, the accounting treatment of a transaction is specifically dictated by GAAP without the need for the application of judgment.
In certain circumstances, however, the preparation of condensed consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period.
We believe that there have been no significant changes to our critical accounting policies during the ninesix months ended SeptemberJune 30, 20212022 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
Cautionary Statement about Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q includes “forward-looking statements.” Many statements included in this Quarterly Report on Form 10-Q are not statements of historical fact, including statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “projection,” “should” or “will” or the negative thereof or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
•our market opportunity and the potential growth of that market;
•the expected impact of the COVID-19 pandemic;
•our strategy, expected outcomes and growth prospects;
•trends in our operations, industry and markets;
•our future profitability, indebtedness, liquidity, access to capital and financial condition; and
our integration of companies that we have acquired into our operations.
We have based these forward-looking statements on our current expectations and assumptions about future events based on information available to our management at the time the statements were made. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. The following factors, among others, may cause actual results to differ materially from those expressed or implied in our forward-looking statements:
adverse effects of the COVID-19 pandemic on our business, financial conditions and results of operations and our suppliers and trade partners;
adverse effects of the COVID-19 pandemic and other economic changes either nationally or in the markets in which we operate, including, among other things, increases in unemployment, volatility of mortgage interest rates and inflation and decreases in housing prices;
a slowdown in the homebuilding industry or changes in population growth rates in our markets;
volatility and uncertainty in the credit markets and broader financial markets;
the cyclical and seasonal nature of our business;
our future operating results and financial condition;
changes in our business and investment strategy;
the success of our operations in recently opened new markets and our ability to expand into additional new markets;
our ability to continue to leverage our asset-light and capital efficient lot acquisition strategy;
our ability to develop our projects successfully or within expected timeframes;
our ability to identify potential acquisition targets and close such acquisitions;
our ability to successfully integrate acquired businesses with our existing operations;
availability of land to acquire and our ability to acquire such land on favorable terms, or at all;
availability, terms and deployment of capital and ability to meet our ongoing liquidity needs;
restrictions in our debt agreements that limit our flexibility in operating our business;
disruption in the terms or availability of mortgage financing or an increase in the number of foreclosures in our markets;
decline in the market value of our inventory or controlled lot positions;
shortages of, or increased prices for, labor, land or raw materials used in land development and housing construction, including due to inflation or changes in trade policies;
delays in land development or home construction resulting from natural disasters, adverse weather conditions or other events outside our control;
uninsured losses in excess of insurance limits;
the cost and availability of insurance and surety bonds;
changes in (including as a result of the change in the U.S. presidential administration), liabilities under, or the failure or inability to comply with, governmental laws and regulations, including environmental laws and regulations;
the timing of receipt of regulatory approvals and the opening of projects;
the degree and nature of our competition;
decline in the financial performance of our joint ventures, our lack of sole decision-making authority thereof and maintenance of relationships with our joint venture partners;
negative publicity or poor relations with the residents of our projects;
existing and future warranty and liability claims;
existing and future litigation, arbitration or other claims;
availability of qualified personnel and third-party contractors and subcontractors;
information system failures, cyber incidents or breaches in security;
our ability to retain our key personnel;
our ability to maintain an effective system of internal control and produce timely and accurate financial statements or comply with applicable regulations;
our leverage and future debt service obligations;
the impact on our business of any future government shutdown;
the impact on our business of acts of war or terrorism;
our reliance on dividends, distributions and other payments from our subsidiaries to meet our obligations;
other risks and uncertainties inherent in our business;
other factors we discuss under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” and
the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the operation of our business. These risks include, but are not limited to, the risks described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022. Should one or more of thesuch risks or uncertainties described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
COVID-19 Impact
There remains uncertainty regarding the extent and timing of the disruption to our business that may result from the COVID-19 pandemic and any future related governmental actions. There is also uncertainty as to the effects of the COVID-19 pandemic and related economic relief efforts on the U.S. economy, unemployment, consumer confidence, demand for our homes and the mortgage market, including lending standards, interest rates and secondary mortgage markets. We are unable to predict the extent to which this will impact our operational and financial performance, including the impact of future developments such as the duration and spread of the COVID-19 virus or variants thereof, corresponding governmental actions and the impact of such developments and actions on our employees, customers and trade partners and the supply chain in general.
Our primary focus remains on doing everything we can to ensure the safety and well-being of our employees, customers and trade partners. In all markets where we are permitted to operate, we are operating in accordance with the guidelines issued by the Centers for Disease Control and Prevention, as well as state and local guidelines.
For more information, see Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
ITEM 3. | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our operations are interest rateinterest-rate sensitive. As overall housing demand is adversely affected by increases in interest rates, a significant increase in interest rates may negatively affect the ability of homebuyers to secure adequate financing. Higher interest rates could adversely affect our revenues, gross margins and net income. We do not enter into, nor do we intend to enter into in the future, derivative financial instruments for trading or speculative purposes to hedge against interest rate fluctuations.
Quantitative and Qualitative Disclosures About Interest Rate Risk
Market risk is the risk of loss arising from adverse changes in market prices and interest rates. Our market risk arises from interest rate risk inherent in our financial instruments and debt obligations. Interest rate risk results from the possibility that changes in interest rates will cause unfavorable changes in net income or in the value of interest rate-sensitiverate sensitive assets, liabilities and commitments. Lower interest rates tend to increase demand for mortgage loans for home purchasers, while higher interest rates make it more difficult for potential borrowers to purchase residential properties and to qualify for mortgage loans. We have no market rate sensitiverate-sensitive instruments held for speculative or trading purposes.
The Amended and Restated Credit Agreement provides for a senior unsecured revolving credit facility, which has an aggregate commitment of uploans to $817.5 million. As of September 30, 2021, we had $449 million of indebtedness outstanding under our Credit Facility. On October 1, 2021, we borrowed $300 million in revolving loans under the Credit Agreement and paid off the vertical lines of credit in connection with the MHI Acquisition. Following the MHI Acquisition, on October 1, 2021, we had $69 million of availability under the Credit Agreement. The Credit Agreement includes provisions for any existing lender to, at the Company’s request, increase its revolving commitment under the Credit Agreement, add new revolving loan tranches under the Credit Agreement or add new term loan tranches under the Credit Agreement, in all cases not to exceed an aggregate of $232.5 million.
The Credit Agreement provides for interest rate options on advances at rates equal to either: (a) in the case of base rate advances, the highest of (1) Bank of America, N.A.’s announced “prime rate”, (2) the federal funds rate plus 0.5%, and (3) the one-month LIBOR plus 1.0%, in each case not to be less than 1.5%; or (b) in the case of Eurodollar rate advances, the reserve adjusted LIBOR, not to be less than 0.5%. Borrowings under the Credit Agreement bear interest, at the interestCompany’s option, at (1) a “Base Rate”, which means for any day a fluctuating rate option plus an applicable margin ranging from (i) 2.00% to 2.75% per annum for base rate advances and (ii) 3.00%equal to 3.75% per annum for Eurodollar rate advances. The applicable margin will vary dependingcredit spreads of 1.50% to 2.60%, which are determined based on the Company’s debt to capitalization ratio.ratio, plus the highest of (a) the Federal Funds Rate plus 0.5%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” (c) Term SOFR plus 1.00% and (d) 1.00%, or (2) a “Term SOFR/Letter of Credit Rate”, which means for any day a fluctuating rate per annum equal to credit spreads of 2.50% to 3.60%, which are determined based on the Company’s debt to capitalization ratio, plus the adjusted term SOFR rate (based on one, three or six-month interest periods).
Interest on base rate advances borrowed under the Amended and Restated Credit Agreement is payable in arrears on a monthly basis. Interest on each Eurodollar rate advance borrowed under the Amended and Restated Credit Agreement is payable in arrears at the end of the interest period applicable to such advance, or, if less than such interest period, three months after the beginning of such interest period. The Company pays the lenders a commitment fee on the amount of the unused commitments on a quarterly basis at a rate per annum that will vary from 0.20% to 0.30% depending on the Company’s net debt to net capitalization ratio.
Outstanding borrowings under the Amended and Restated Credit Agreement are subject to, among other things, a borrowing base. The borrowing base includes, among other things, (a) 90% of the net book value of presold housing units, (b) 85% of the net book value of model housing units, (c) 85% of the net book value of speculative housing units and (d) 70% of the net book value of finished lots, in each case subject to certain exceptions and limitations set forth in the Amended and Restated Credit Agreement.
Our mortgage banking joint venture, Jet LLC, is exposed to interest rate risk as it relates to its lending activities. Jet LLC underwrites and originates mortgage loans, which are sold through either optional or mandatory forward delivery contracts into the secondary markets. All of the mortgage banking segment’s loan portfolio is held for sale and subject to forward sale commitments. Jet LLC also sells all of its mortgages held for sale on a servicing released basis.
ITEM 4. | ITEM 4. CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and interim Chief Financial Officer, management evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of SeptemberJune 30, 2021.2022. Based upon that evaluation, our Chief Executive Officer and interim Chief Financial Officer identified three material weaknesses in our internal control over financial reporting. We did not document the design or operation of an effective control environment commensurate with the financial reporting requirements of an SEC registrant. Specifically, we did not design and maintain adequate formal documentation of certain policies and procedures, controls over the segregation andof duties within our financial reporting function and the preparation and review of journal entries. In addition, we did not design or maintain effective control activities that contributed to the following additional material weaknesses; we did not design control activities to adequately address identified risks, evidence of performance, or operate at a sufficient level of precision that would identify material misstatements to our financial statements and we did not design and maintain effective controls over certain IT general controls for information systems that are relevant to the preparation of our financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. See “Risk Factors—We have identified material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal control, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our Class A common stock” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Each of the material weaknesses described above involve control deficiencies that could result in a misstatement of one or more account balances or disclosures that would result in a material misstatement to our annual or interim condensed consolidated financial statements that would not be prevented or detected, and, accordingly, we determined that these control deficiencies constitute material weaknesses.
We are currentlyRemediation Plan for Material Weaknesses
Since identifying these material weaknesses and reporting them in the process of implementingour 2020 Annual Report on 10-K, we have developed a remediation plan and implemented measures and taking steps to address the underlying causes of theseeach material weaknesses.weakness. Our efforts to date have included the following:
We have begun to execute our remediation plan to fully address the individual control deficiencies and segregation of duties issues.
Developed formal policies specific to corporate governance and accounting.
•Developed formal policies for IT general controls; executed IT controls focused training; and designed and implemented controls within user access, program change management, and computer operations and program development domains.
•Designed and implemented segregation of duties controls over financial reporting and review of journal entries.
•Performed a financial statement risk assessment and designed and implemented or identified existing controls designed to prevent or detect a material misstatement in our financial statements.
Further augmented leadership•As of June 30, 2022, management has implemented a formal testing program to evaluate the design and staff responsibleoperating effectiveness of key internal controls. The newly implemented controls are currently being assessed for internal control over financial reporting.
While we believe these efforts will improve our internal control over financial reporting and address the underlying causes of the material weaknesses, such material weaknesses will not be remediated until our remediation plan has been fully implemented, and we have concluded that our controls are operating effectively for a sufficient period of time. As a result of the material weaknesses, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2021.
We cannot be certain that the steps we are taking will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or prevent future material weaknesses or control deficiencies from occurring. In addition, we cannot be certain that we have identified all material weaknesses in our internal control over financial reporting or that in the future we will not have additional material weaknesses in our internal control over financial reporting.
Changes in Internal Controls
Except as set forth above, there was no change in our internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f) occurred during the three months ended SeptemberJune 30, 20212022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. | LEGALITEM 1.LEGAL PROCEEDINGS |
There have been noSee Note 5, Commitments and Contingencies, in our unaudited financial statements included herein for a description of material changes to the Company’s legal proceedings. You should carefully read and consider theFrom time to time, we are a party to ongoing legal proceedings set forth in the ordinary course of business. We do not believe the results of currently pending proceedings, individually or in the aggregate, will have a material adverse effect on our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which contains descriptionsbusiness, financial condition, results of significant legal proceedings that may affect our business.operations or liquidity.
ITEM 1A. | ITEM 1A. RISK FACTORS |
There are numerous factors that affect our business and results of operations, many of which are beyond our control. You should carefully read and consider the risk factors set forthRefer to Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, which contains descriptions of significant risks that have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. There have been no material changes to risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, except2021 as set forth below:
Our Class A and B common stock ranks junior to our Convertible Preferred Stock with respect to dividends and amounts payableupdated by the risk factor disclosed in the eventPart II - Item 1A of our liquidation, dissolution or winding-up of our affairs.
Our Class A and B common stock ranks junior to our Convertible Preferred Stock, with respect to the payment of dividends and amounts payable in the event of our liquidation, dissolution or winding-up of our affairs. Upon our liquidation, dissolution or winding up, each share of Convertible Preferred Stock will be entitled to receive an amount per share equal to the initial liquidation preference of $1,000 per share, subject to adjustment, plus all accrued and unpaid dividends thereon, which dividends accrue at a rate equal to 9.00% per annum. No distribution of our assets may be made to holders of our Class A and B common stock until we have paid to holders of our Convertible Preferred Stock such liquidation preference.
Shares of our Convertible Preferred Stock are convertible into shares of our Class A common stock in certain circumstances and, upon conversion, will dilute your percentage of ownership.
Subsequent to the fifth anniversary of its issuance (or earlier in the event of non-compliance with a protective covenant), a holder can convert the Convertible Preferred Stock into shares Class A common stock at a conversion price that will be based on the average of the trailing 90 days’ closing price of the Class A common stock, less 20% of the average (increasing to 25% in the event of non-compliance with a protective covenant) and subject to a floor conversion price of $4.00. Although we intend to call the shares of Convertible Preferred Stock for redemption prior to their conversion, in the event the shares of Convertible Preferred Stock are converted into shares of Class A common stock, such issuance will cause substantial dilution to the holders of our common stock.
Certain rights of the holders of the Convertible Preferred Stock could delay or prevent an otherwise beneficial takeover or takeover attempt of us.
Certain rights of the holders of the Convertible Preferred Stock could make it more difficult or more expensive for a third party to acquire us. If we undergo a Change of Control (as defined in the certificate of designationsQuarterly Report for the Convertible Preferred Stock), we must redeem all of shares of Convertible Preferred Stock for cash consideration equal to the initial liquidation preference of $1,000 per share, subject to adjustment, plus all accrued and unpaid dividends thereon, plus of the Change of Control occurs before the fourth anniversary of the date of issuance, a premium equal to the dividends that would have accumulated on such share from and after the date of the Change of Control and through the fourth anniversary of the date of issuance of the Convertible Preferred Stock.quarter ended March 31, 2022.
ITEM 2. | ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On September 8, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain accredited investors (collectively, the “Purchasers”). Pursuant to the Subscription Agreement, on September 29, 2021, the Company sold to the Purchasers 150,000 shares of newly-created Convertible Preferred Stock with an initial liquidation preference of $1,000 per share and a par value $0.01 per share for an aggregate purchase price of $150 million. We used the proceeds from the sale of the Convertible Preferred Stock to fund the MHI Acquisition and for general corporate purposes. The offer and sale of the shares of Convertible Preferred Stock through the Subscription Agreement were made in reliance on an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) thereof.None.
ITEM 6. EXHIBITS
Exhibit
No. | Description |
| PurchaseAmended and SaleRestated Credit Agreement, dated as of June 17, 2021, among Dream Finders Holdings LLC, MHI Partnership, Ltd., MHI Models, Ltd., McGuyer Homebuilders, Inc., FMR IP, LLC, HomeCo Purchasing Company, Ltd., 2019 Sonoma, LLC, Frank B. McGuyer and McGuyer Interests, Ltd. (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-39916) of Dream Finders Homes, Inc. filed with the SEC on September 13, 2021).
|
2.2+
| First Amendment to Purchase and Sale Agreement, dated as of August 31, 2021, among Dream Finders Holdings LLC, MHI Partnership, Ltd., MHI Models, Ltd., McGuyer Homebuilders, Inc., FMR IP, LLC, HomeCo Purchasing Company, Ltd., 2019 Sonoma, LLC, Frank B. McGuyer and McGuyer Interests, Ltd. (incorporated herein by reference to Exhibit 2.2 to the Current Report on Form 8-K (File No. 001-39916) of Dream Finders Homes, Inc. filed with the SEC on September 13, 2021). |
2.3+
| Second Amendment to Purchase and Sale Agreement, dated as of September 7, 2021, among Dream Finders Holdings LLC, DFH Coventry, LLC, MHI Partnership, Ltd., MHI Models, Ltd., McGuyer Homebuilders, Inc., FMR IP, LLC, HomeCo Purchasing Company, Ltd., 2019 Sonoma, LLC, Frank B. McGuyer and McGuyer Interests, Ltd. (incorporated herein by reference to Exhibit 2.3 to the Current Report on Form 8-K (File No. 001-39916) of Dream Finders Homes, Inc. filed with the SEC on September 13, 2021). |
3.1
| |
10.1+
| First Amendment and Commitment Increase Agreement, dated as of September 8, 2021,2, 2022, among Dream Finders Homes, Inc., Bank of America, N.A., as administrative agent, collateral agent and issuing bank, and the lenders named therein as parties thereto (incorporated herein by reference to Exhibit 10.1 to the Current Report onfrom Form 8-K (File No. 001-39916) of Dream Finders Homes, Inc. filed with the SEC on October 5, 2021)June 8, 2022). |
| Joinder, Commitment Increase, and Reallocation Agreement, dated as of September 29, 2021, among Dream Finders Homes, Inc., Bank of America, N.A., as administrative agent, collateral agent and issuing bank, and the lenders named therein as parties thereto (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-39916) of Dream Finders Homes, Inc. filed with the SEC on October 5, 2021). |
10.3
| |
10.4
| |
10.5†
| |
| CEO Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Interim CFO Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS∞ | Inline XBRL Instance Document.Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
101.SCH∞ | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL∞ | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF∞ | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB∞ | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE∞ | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
101.PRE∞104
| Cover Page Interactive Data File (formatted as inline XBRL Taxonomy Extension Presentation Linkbase Document. and contained in Exhibit 101). |
* | *Filed herewith. + Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. Filed herewith.
|
† | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
|
+ | Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC.
|
∞ | XBRL information is deemed not filed or a part of a registration statement or Annual Report for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under such sections. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | Dream Finders Homes, Inc. |
| | |
Date: | November 10, 2021
August 4, 2022 | /s/ Patrick O. Zalupski |
|
| Patrick O. Zalupski President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)Officer) |
| | |
| November 10, 2021
August 4, 2022 | /s/ Lorena A.L. Anabel Fernandez |
|
| Lorena A.L. Anabel Fernandez
Senior Vice President and Interim Chief Financial Officer (Principal Financial Officer)Officer) |
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