Dream Finders Homes, Inc. 2020 Form 10-K Summary
Business Context and Reporting Period
Dream Finders designs, builds and sells single-family homes in high-growth markets including Florida, Colorado, Texas, the Washington, D.C. metropolitan area, Georgia, South Carolina and North Carolina. The company uses an asset-light land strategy based primarily on finished-lot and land-bank option contracts and also provides title insurance and mortgage services.
The filing covers the year ended December 31, 2020. Historical consolidated results primarily represent Dream Finders Holdings LLC, the predecessor to Dream Finders Homes, Inc. Dream Finders Homes, Inc. was formed in September 2020 and became the public holding company following the January 2021 IPO and corporate reorganization.
Key Financial and Operating Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1,133.8 million | $744.3 million | Up 52.3% |
| Net and comprehensive income | $84.5 million | $44.9 million | Up 88.2% |
| Income attributable to DFH LLC | $79.1 million | $39.2 million | Up 101.8% |
| Gross margin | $165.0 million; 14.6% | $98.4 million; 13.3% | Margin up 130 basis points |
| Adjusted gross margin | $252.7 million; 22.5% | $156.3 million; 21.1% | Non-GAAP margin up 140 basis points |
| EBITDA | $120.9 million; 10.7% | $70.5 million; 9.5% | Up 71.4% |
| Adjusted EBITDA | $121.8 million; 10.7% | $71.4 million; 9.6% | Up 70.6% |
| Net cash from operating activities | $95.3 million | $23.8 million | Up $71.5 million |
| Cash and cash equivalents | $35.5 million | $44.0 million | Down 19.3% |
| Restricted cash | $49.7 million | $24.7 million | Up $25.0 million |
| Long-term debt, net | $319.5 million | $232.0 million | Up 37.7% |
Operationally, net new orders increased 95.7% to 4,186, homes closed increased 54.0% to 3,154, and active communities increased 48.2% to 126. Ending backlog rose 183.8% to 2,424 homes valued at approximately $865.1 million. Average selling price declined 1.4% to $357,633, while the cancellation rate improved to 12.8% from 15.6%.
Jet Home Loans, the 49%-owned mortgage joint venture, originated 1,961 loans totaling approximately $564.0 million and generated approximately $16.0 million of net income in 2020, compared with $4.5 million in 2019. Its results are accounted for under the equity method and are not consolidated.
Liquidity, Debt and Capital Resources
Operating cash flow was $95.3 million, investing cash flow was negative $13.0 million and financing cash flow was negative $65.8 million. The company invested heavily in lot deposits, with lot deposits and investments in lot-option and land-bank contracts totaling $66.7 million at year-end, including $1.1 million that remained refundable.
At December 31, 2020, the predecessor had $289.9 million outstanding under 34 secured vertical construction lines with cumulative maximum availability of approximately $763.0 million, plus $29.7 million of notes payable, including a $20.0 million bridge loan used for the H&H acquisition. Letters of credit and surety bonds totaled $0.9 million and $28.0 million, respectively.
After year-end, the IPO generated net proceeds of $133.5 million. On January 25, 2021, the company used IPO proceeds, cash and borrowings under a new $450.0 million unsecured revolving credit facility to repay approximately $319.0 million of construction-line borrowings and the $20.0 million bridge loan. The facility includes an accordion feature permitting borrowing-base expansion to up to $750.0 million, subject to conditions.
Material Changes Versus the Prior Comparable Period
- Revenue, home closings, orders and backlog grew substantially, supported by 41 additional active communities, the October 2020 H&H acquisition and strong demand beginning in May 2020.
- Gross margin, net profit margin and non-GAAP profitability improved, primarily due to higher operating efficiencies, shorter build times and improved construction costs.
- Total owned and controlled lots increased 137.6% to 22,407, including 19,276 lots controlled through option and land-bank contracts.
- The H&H acquisition expanded the company into North Carolina and South Carolina markets and contributed $89.3 million of fourth-quarter homebuilding revenue from 312 closings.
- Debt increased to support growth and acquisitions, while cash and cash equivalents declined. The debt structure was substantially refinanced after year-end in connection with the IPO.
- Equity in earnings of unconsolidated entities increased to $8.0 million, largely due to stronger Jet Home Loans performance.
Outlook, Commentary, Risks and Unusual Items
Management stated that housing conditions were expected to remain relatively healthy in 2021, supported by low mortgage rates, suburban migration and demand from entry-level buyers seeking more space. The filing does not provide formal quantitative revenue or earnings guidance.
COVID-19 caused a significant slowdown in March and April 2020, followed by a strong rebound in orders from May through December. Management cautioned that the continuation of this trend and the conversion of orders into closings remained uncertain.
- Key operating risks include higher lumber, labor and other construction costs, shortages of materials and subcontractors, rising mortgage rates, tighter lending standards, land scarcity and potential inventory impairments.
- The company is concentrated in a limited number of regional housing markets, particularly Florida, making it sensitive to local economic conditions, insurance availability, severe weather and population trends.
- H&H and Village Park acquisition earn-outs are remeasured based on projected performance. Contingent consideration was $23.2 million at December 31, 2020, and the maximum potential exposure was not estimable from the contractual terms.
- The company received a $7.2 million Paycheck Protection Program loan and believes it qualifies for forgiveness, but stated that forgiveness was not assured. No related income had been recognized at year-end.
- The company is appealing a Weyerhaeuser litigation matter involving 38 homes. A Colorado court awarded the company $14.65 million, but no gain was recognized because the appeal remained pending.
- Management identified three material weaknesses in internal control over financial reporting involving the control environment, financial reporting controls and information technology general controls. Disclosure controls were not effective at December 31, 2020, and remediation was ongoing.
- The company had no recorded income tax expense historically because the predecessor was generally treated as a pass-through entity. Following the IPO, the public holding company became subject to corporate income taxes, reducing comparability with historical results.
- The company does not intend to pay cash dividends on Class A common stock in the foreseeable future.
Most Important Facts for Investors to Verify
- Confirm the post-IPO capital structure, including Class A and Class B voting rights and the founder’s approximately 84.8% combined voting power.
- Verify the January 2021 refinancing, current borrowings, borrowing-base availability, covenant compliance and variable-rate exposure under the new credit facility.
- Assess whether the substantial backlog and controlled-lot pipeline can be converted into closings without margin erosion from construction-cost inflation or supply constraints.
- Review the final accounting and integration progress for H&H and the subsequent Century Homes acquisition, including earn-out liabilities and goodwill.
- Monitor COVID-19 effects, mortgage availability, interest rates, regional housing demand and cancellation rates.
- Track remediation of the identified material weaknesses and the company’s ability to produce timely, reliable SEC financial reporting.
- Follow the Weyerhaeuser appeal, warranty and construction-defect claims, PPP loan forgiveness and other contingencies.