Dream Finders Homes, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Dream Finders designs, builds and sells homes in several U.S. markets, using an asset-light lot strategy; it also holds a 49% interest in mortgage joint venture Jet Home Loans. The company completed its IPO and corporate reorganization in January 2021, so reported EPS covers only the post-reorganization period beginning January 21, 2021; the prior-year comparison is the predecessor business.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $343.6 million | $188.7 million; up 82.0% |
| Net income | $17.6 million | $7.8 million; up 126.4% |
| Net income attributable to Dream Finders | $16.1 million | $6.6 million; up 145.0% |
| EPS | $0.18 basic and diluted | Not comparable; no predecessor-company EPS reported |
| Gross margin | $51.1 million; 14.9% of home sales revenue | $24.0 million; 12.8% |
| Adjusted gross margin (non-GAAP) | $75.9 million; 22.2% | $39.0 million; 20.8% |
| Cash from operations | Use of $47.5 million | Use of $21.3 million |
| Cash and liquidity | $42.3 million cash plus $49.4 million restricted cash | Cash and equivalents were $35.5 million at December 31, 2020 |
| Debt | $320.0 million drawn under revolving facility; $3.9 million notes payable | $289.9 million construction-line borrowings and $29.7 million notes payable, net, at year-end 2020 |
At March 31, the $450 million senior unsecured revolving facility had cumulative maximum availability of $442.5 million and $320.0 million outstanding. The filing reports $319.99995 million construction-line debt on the balance sheet; notes payable were $3.9 million. Management said the company was in covenant compliance and expected to remain compliant over the next 12 months.
Operating indicators strengthened: net new orders rose 137.0% to 2,010; closings increased 94.6% to 1,002; ending backlog rose 212.7% to 3,612 homes, valued at approximately $1.36 billion. Active communities increased to 120 from 83. Average closing price fell 7.3% to $335,986, primarily reflecting H&H Homes’ lower average selling price. Cash from operations was pressured by increased inventory and lot deposits; investing cash use of $22.9 million included the Century Homes acquisition. Financing provided $76.9 million, including IPO proceeds and credit-facility activity.
Material changes and unusual items
- The January IPO issued 11.04 million Class A shares at $13.00 each and generated $133.5 million net proceeds. Proceeds, cash and new facility borrowings funded repayment of prior construction facilities and a $20 million H&H bridge loan.
- Dream Finders acquired Century Homes effective January 31 for $35.5 million, adding 134 homes under construction and 229 finished lots. H&H, acquired in October 2020, contributed $98.5 million of Q1 revenue and 343 closings.
- The company redeemed Series C preferred units for $26.0 million plus accrued distributions and fees. IPO-related reorganization also changed the equity structure and introduced corporate income taxes; Q1 income tax expense was $4.8 million, with a 23% effective rate.
- Reported SG&A increased 60.7% to $28.1 million, reflecting acquired operations, contingent-consideration remeasurement and public-company/reorganization costs. A $0.7 million loss on extinguishment of debt was recorded.
Outlook, commentary and risks
The filing provides no formal numerical earnings or revenue guidance. Management cited strong orders through April 2021 but cautioned that demand and conversion of orders to closings could be affected by COVID-19 developments. It expects seasonal patterns to continue, with more sales generally in the first half and more closings in the second half; Q1 may not indicate full-year results.
- Costs and supply: Management warned that lumber-price increases and supply-chain disruptions could raise construction costs and reduce margins if home prices do not offset them. Labor, land and other material availability and costs are additional risks.
- Demand and financing: Higher mortgage rates could constrain buyers, demand, revenue and margins. COVID-19, employment, consumer confidence and mortgage-market conditions remain uncertain.
- Liquidity and execution: Growth requires cash investment in inventory and lot deposits before homes close. The company had $91.7 million in lot deposits at quarter-end, including $3.6 million refundable, and controlled 22,591 lots under option contracts. The company’s asset-light option arrangements generally limit loss on forfeiture to deposits and related fees.
- Contingencies: Contingent acquisition consideration totaled $24.3 million; maximum exposure is not estimable under the agreements. Surety bonds of $31.9 million and letters of credit of $2.1 million were outstanding; management did not anticipate material losses. The filing also describes related-party joint ventures and guarantees, while stating default was considered unlikely.
- Financial reporting controls: Management reported three material weaknesses in internal control over financial reporting and said disclosure controls were not effective as of March 31, 2021. Remediation was underway but not complete.
Key facts investors should verify
- Track whether backlog converts into closings and whether the unusually strong order growth persists; backlog can be canceled and customer deposits are relatively small.
- Monitor lumber, labor and other construction costs against selling-price increases and reported gross-margin improvement.
- Review cash consumption, inventory and lot-deposit growth, facility availability, borrowing costs and covenant compliance as the business expands.
- Assess integration and performance of H&H and Century Homes, and the effect of acquisitions on growth and margins.
- Follow remediation of the three material weaknesses and review future filings for changes in controls or reporting reliability.
- Reconcile non-GAAP measures, including adjusted gross margin, to GAAP results; these measures exclude costs with real economic effects and may not be comparable across companies.