Dream Finders Homes, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results. Dream Finders designs, builds and sells homes across several U.S. markets and also has mortgage and title operations. The prior-year comparison is affected by the October 2021 MHI acquisition and by the IPO and reorganization in January 2021.
Key financial and operating metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $664.1 million | $343.6 million |
| Net income | $46.3 million | $17.6 million |
| Net income attributable to Dream Finders | $43.7 million | $16.1 million |
| Diluted EPS | $0.42 | $0.18 |
| Homebuilding gross margin | 18.7% | 14.9% |
| Adjusted gross margin (non-GAAP) | 24.4% | 22.2% |
| EBITDA margin (non-GAAP) | 11.4% | 9.4% |
| Net cash used in operating activities | $122.5 million | $22.4 million |
At March 31, 2022, cash and cash equivalents were $100.1 million, with a further $60.9 million in restricted cash. The company reported $47.5 million available under its revolving credit facility, or $147.6 million in stated total liquidity. Construction-line borrowings were $770.0 million; notes payable were $1.7 million. The facility’s aggregate commitment was $817.5 million and it matures January 25, 2024. The company reported covenant compliance.
Total assets were $2.0 billion and total liabilities were $1.4 billion. Inventory was $1.23 billion and lot deposits were $275.4 million. Operating cash outflow reflected, among other items, a $165.4 million increase in inventory and a $33.9 million increase in lot deposits, partly offset by higher customer deposits and earnings. Financing cash flow was $3.1 million provided; investing cash flow was $0.9 million used.
Home closings rose 36.8% to 1,371 and net new orders increased 19.5% to 2,402. Average selling price of closed homes increased 40.0% to $470,218. Backlog reached 7,413 homes valued at $3.44 billion, versus 3,612 homes and $1.36 billion a year earlier. The cancellation rate increased to 13.4% from 8.1%.
Material changes versus the prior period
- Revenue increased 93.3%, with MHI contributing 483 closings and $275.4 million of homebuilding revenue in the quarter. Management also cited higher average selling prices and increased closings.
- Gross margin improved by 3.8 percentage points. Management attributed the improvement to MHI’s higher average selling price and price appreciation ahead of cost inflation.
- SG&A increased 111% to $61.7 million, including $25.0 million of MHI expenses and costs associated with higher closing volume. Contingent-consideration revaluation expense rose to $4.2 million.
- The MHI acquisition’s contingent consideration liability was $98.8 million at quarter-end; total contingent consideration liabilities were $128.2 million.
- Cash and cash equivalents decreased from $227.2 million at December 31, 2021 to $100.1 million at March 31, 2022, alongside continued investment in inventory and lot positions.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management said it believes available liquidity is sufficient for current commitments and intends to reinvest in operations and maintain lot supply. It cautioned that homebuilding is seasonal: sales generally are stronger in the first and second quarters, while closings and capital needs tend to be higher later in the year. Quarterly results, particularly first-quarter results, may not indicate full-year performance.
Risks discussed include higher interest rates reducing homebuyer demand or access to financing, building-material and labor inflation, supply-chain disruption, and uncertainty related to COVID-19 and geopolitical events, including the Russia-Ukraine conflict. The company’s revolving debt bears variable interest rates.
Legal matters include a $12.0 million settlement in the Silver Meadows construction-defect dispute, with insurance covering $4.0 million; the company paid the net amount in April 2022 and is seeking contributions from subcontractors and vendors. The company has recognized no gain on its prior jury award against Weyerhaeuser; its petition for review by the Colorado Supreme Court was pending. The filing also identifies three material weaknesses in internal control over financial reporting. Remediation work is underway, but the weaknesses were not yet considered remediated.
Important facts for investors to verify
- How much of revenue, backlog and earnings growth reflects MHI, and the acquisition’s ongoing integration costs and performance.
- Whether backlog converts to closings as expected, particularly given the higher cancellation rate and rising mortgage rates.
- Whether gross-margin gains persist as material, labor and financing costs change.
- Cash needs and borrowing capacity relative to inventory growth, $275.4 million in lot deposits, and $770.0 million in facility borrowings.
- Potential future MHI earn-out payments, other contingent consideration, and progress in remediating the disclosed control weaknesses.
- Resolution and financial effects of the Weyerhaeuser appeal and construction-defect matters.