Dream Finders Homes, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. The company completed its IPO and corporate reorganization in January 2021, so 2020 earnings per share are not comparable. Amounts below are in U.S. dollars.
Business context
Dream Finders designs, builds and sells single-family homes in several U.S. markets, using an asset-light strategy that relies substantially on lot-option and land-bank arrangements. Its operations also include a mortgage joint venture and title services. The company reported 107 active communities and 34,894 owned or controlled lots at quarter-end.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $363.0 million | $284.2 million | $1,071.8 million | $672.7 million |
| Net income | $23.6 million | $24.1 million | $73.2 million | $44.3 million |
| Net income attributable to Dream Finders | $19.1 million | $22.6 million | $63.8 million | $40.9 million |
| Gross margin on home sales | 16.0% | 14.8% | 15.9% | 13.9% |
| Adjusted gross margin (non-GAAP) | 21.8% | 22.0% | 22.3% | 21.3% |
| EBITDA margin (non-GAAP) | 8.2% | 11.5% | 9.7% | 9.8% |
| Homes closed | 916 | 780 | 2,914 | 1,817 |
| Net new orders | 1,301 | 1,159 | 4,830 | 2,799 |
Q3 diluted EPS was $0.20; nine-month diluted EPS was $0.69. Q3 average closing price was $375,693, up 4%; the nine-month average was $354,222, down 2%, primarily reflecting the lower-price H&H business. The filing reports Q3 gross margin improvement alongside lower adjusted gross margin percentage and lower EBITDA margin.
Operating cash flow was negative $123.1 million for the first nine months, versus positive $3.2 million a year earlier. The company attributed the outflow chiefly to increased inventory ($153 million) and lot deposits ($90 million), partly offset by higher customer deposits and earnings. Investing cash outflow was $24.5 million, including the Century Homes acquisition. Financing cash inflow was $329.8 million, supported by IPO, preferred-stock and credit-facility proceeds.
Financial position and material changes
At September 30, 2021, cash and cash equivalents were $85.5 million and restricted cash was $181.9 million. Total assets were $1.233 billion. Construction lines of credit were $440.0 million and notes payable were $3.9 million; the credit facility’s reported outstanding balance was $449 million including $9 million of letters-of-credit obligations. The company reported $817.5 million of facility commitments and compliance with debt covenants. Debt increased substantially versus December 2020, when construction lines totaled $289.9 million and notes payable were $29.7 million.
Backlog grew to 4,520 homes valued at approximately $1.819 billion, versus 1,836 homes and $684 million a year earlier. The Q3 cancellation rate rose to 13.9% from 9.9%; for the nine-month period it declined to 11.8% from 12.9%. Revenue growth reflected higher closings and the H&H acquisition, which contributed 907 closings and $270 million of homebuilding revenue in the nine-month period. Century Homes was acquired in January 2021.
Outlook, commentary and risks
The filing provides no specific numerical earnings or revenue guidance. Management said it intended to reinvest in the business and expand operations, and described the backlog as expected to convert generally within one to six months, while noting that cancellations may occur. It cited price appreciation outpacing cost inflation and lower cost of funds as contributors to nine-month gross-margin improvement. It also warned that material, labor and land-cost increases may pressure margins if not offset by home prices.
On October 1, 2021, after quarter-end, the company completed the MHI acquisition for $471 million cash, assumed approximately $97 million of liabilities and agreed to potential additional earn-out payments. Funding included $150 million from newly issued 9% cumulative convertible preferred stock, $300 million of credit-facility borrowings and $20 million of cash. After the acquisition, the company reported $69 million of facility availability. The preferred shares rank senior to common stock, carry conversion and change-of-control provisions, and may dilute common shareholders.
Management identified three material weaknesses in internal control over financial reporting, including weaknesses in control documentation and segregation of duties, financial reporting controls and IT general controls. Disclosure controls were concluded to be ineffective as of September 30, 2021; remediation was underway but not yet complete. Other stated risks include housing and mortgage-rate sensitivity, COVID-19 and supply-chain uncertainty, labor and material inflation, acquisition integration, lot availability, and seasonal cash-flow variation. The company reported no material changes to previously disclosed legal proceedings.
Important facts for investors to verify
- Review the MHI acquisition’s final purchase-price allocation, earn-out exposure, integration progress and impact on debt and liquidity; its accounting evaluation was incomplete at filing.
- Track facility availability and borrowing-base capacity after the acquisition, as well as compliance with credit and preferred-stock protective covenants.
- Assess whether backlog converts to closings at expected prices and margins, particularly given the higher Q3 cancellation rate and cost inflation risks.
- Monitor cash usage, inventory and lot-deposit growth, including the proportion of deposits that may be forfeited under option contracts.
- Follow remediation of the material weaknesses and confirm whether controls operate effectively for a sufficient period.
- Consider preferred-stock dividends, senior liquidation rights and potential common-stock dilution when evaluating common-shareholder economics.