Dream Finders Homes, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company builds and sells homes across several U.S. markets and also offers mortgage and title services. Results include McGuyer Homebuilders (MHI), acquired in October 2021; comparisons with 2021 therefore reflect a different business mix and do not include MHI in the prior-year period.
Financial and operating performance
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Total revenue | $793.1 million, up 117% year over year | $1.457 billion, up 106% |
| Net income | $66.4 million, up 107% | $112.7 million, up 127% |
| Net income attributable to DFH | $62.6 million, up 119% | $106.3 million, up 138% |
| EPS | Basic $0.64; diluted $0.60 | Basic $1.07; diluted $1.02 |
| Homebuilding gross margin | 19.7%, versus 16.5% | 19.2%, versus 15.8% |
| Adjusted gross margin (non-GAAP) | 25.7%, versus 23.5% | 25.1%, versus 22.6% |
| Operating cash flow | Not reported separately for the quarter | $(222.5) million, versus $(93.4) million |
Q2 closings rose 66% to 1,649, while net new orders declined 6% to 1,426. For the first half, closings increased 51% to 3,020 and net orders increased 8% to 3,828. Average selling price was $463,447 in Q2 and $463,318 for the six months, up 29% and 33%, respectively. At June 30, backlog was 7,190 homes valued at $3.335 billion; 26% of backlog homes were built-for-rent. The company reported 203 active communities and 44,248 owned or controlled lots.
Management attributed higher revenue and gross margins to more closings, the MHI acquisition, and home-price appreciation outpacing cost inflation. MHI contributed 527 Q2 closings and $305 million of homebuilding revenue, and 1,010 first-half closings and $580.5 million of homebuilding revenue. Q2 cancellation rate increased to 21.0% from 14.4%; the first-half rate rose to 16.4% from 10.9%.
Balance sheet, debt and liquidity
At June 30, 2022, cash and cash equivalents were $84.1 million, with $45.3 million of restricted cash. Inventory was $1.356 billion and lot deposits were $288.4 million. Total assets were $2.113 billion and total liabilities were $1.466 billion. Construction-line borrowings were $875 million, up from $760 million at December 31, 2021; the effective interest rate was 4.1%, versus 3.8%. The company reported $250 million of additional borrowing availability and total liquidity of $334 million, including cash and cash equivalents. It stated it was in compliance with credit covenants and expected to remain compliant over the next 12 months.
The June 2022 amended credit facility increased commitments to $1.1 billion, permits expansion to a borrowing base of up to $1.6 billion, and extends maturity to June 2, 2025. Rates transitioned from Eurodollar-based to SOFR-based pricing. Six-month financing cash flow was $72.1 million; cash, cash equivalents and restricted cash declined by $151.9 million. The operating cash outflow primarily reflected a $289.4 million increase in inventory.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified earnings, revenue or margin guidance. Management said it intends to reinvest earnings and continue expanding, while emphasizing uncertainty in the economy and housing market.
- Demand and costs: Management identified interest-rate increases as a risk to buyer financing and housing demand, potentially affecting revenue, margins and earnings. Building-material and labor costs, including lumber, may pressure margins if selling prices cannot offset inflation. COVID-19 and supply-chain effects remain uncertain.
- Acquisition and contingent payments: MHI integration and provisional purchase accounting remain relevant. Contingent consideration liability was $115.6 million at quarter end; the company recorded $9.2 million of revaluation expense in the first half and paid $17.7 million of contingent consideration.
- Land and liquidity exposure: Deposits and related fees for finished-lot and land-bank options represented $355.2 million of stated maximum exposure to loss at June 30. The strategy limits direct land ownership but requires significant cash outlays before home closings.
- Legal matters: A $12 million construction-defect settlement was paid in April 2022; insurance covered $4 million, and the company is pursuing subcontractor and vendor contributions. A separate appeal seeking recovery of damages awarded in a lumber-defect case remains pending; no gain has been recognized.
- Controls: Management identified three material weaknesses in internal control over financial reporting, involving the control environment and documentation, control activities and IT general controls. Remediation work is underway, but the weaknesses were not yet considered remediated.
- Tax and comparison items: The first-half effective tax rate rose to 27.4% from 17.0%, reflecting, among other factors, the absence of the Section 45L tax credit and higher Florida corporate tax rates. Prior-year results included $7.2 million of nontaxable PPP loan-forgiveness income.
Most important facts for investors to verify
- How much of reported growth and backlog reflects MHI, and how backlog converts to closings amid higher cancellation rates.
- Whether pricing continues to offset materials, labor and financing-cost inflation, and whether gross margins hold as market conditions change.
- Borrowing availability under the borrowing-base facility, the effect of SOFR and higher rates, and covenant headroom.
- The scale and terms of preferred equity, including potential dilution from convertible preferred stock and associated dividends.
- Progress in remediating the three material weaknesses, and developments in the pending litigation and recovery of settlement contributions.