Dream Finders Homes, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; year-over-year comparisons are to Q1 2022 unless noted. Dream Finders designs, builds and sells homes in multiple U.S. markets, using an asset-light lot-option strategy. It also has title operations and a mortgage-banking joint venture.
Financial and operating performance
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Total revenue | $769.4 million | Up 16% from $664.1 million |
| Net income | $51.8 million | Up 12% from $46.3 million |
| Net income attributable to Dream Finders | $49.1 million | Up 12% from $43.7 million |
| Basic / diluted EPS | $0.49 / $0.45 | Compared with $0.43 / $0.42 |
| Homebuilding gross margin | $130.1 million; 17.0% | Margin down 1.7 percentage points from 18.7% |
| Adjusted gross margin (non-GAAP) | $186.2 million; 24.3% | Compared with $161.6 million; 24.4% |
| EBITDA margin (non-GAAP) | 11.9% | Up 0.5 percentage points from 11.4% |
| Operating cash flow | $(35.6) million | Cash used narrowed from $(122.5) million |
| Cash and cash equivalents | $266.6 million | $364.5 million at Dec. 31, 2022; restricted cash was $30.9 million |
| Construction-line borrowings | $916.0 million | $966.2 million at Dec. 31, 2022 |
| Total liquidity | $453 million | Cash plus $187 million of facility availability; $487 million at Dec. 31, 2022 |
Closings rose 11% to 1,517 and average closing price rose 4% to $490,553. Net new orders fell 40% to 1,448; backlog fell 26% to 5,479 homes, valued at $2.53 billion. The cancellation rate increased to 20.9% from 13.4%. Active communities increased 7% to 220.
Material changes and management commentary
- Revenue growth reflected more closings and higher average selling prices. Gross margin percentage declined as higher financing and closing costs, including incentives to help buyers close homes in backlog, outpaced the benefit of price appreciation. Adjusted gross margin percentage was broadly stable.
- Management said elevated mortgage rates and economic uncertainty continued to weigh on demand, while constrained inventory and signs of buyer adjustment suggested stabilization. The company used closing-cost incentives, monitored traffic and orders, and renegotiated lot-option contracts to align supply with sales pace.
- Cash used in operations improved year over year, principally because of lower lot-deposit outflows and a smaller increase in inventory; the period still had negative operating cash flow. Financing cash flow was $(60.7) million, mainly reflecting net repayments on the revolving facility.
- The company controlled 33,344 lots through option and land-bank contracts and had $262 million in lot deposits and related investments. It reported $367.4 million of risk of loss on finished-lot and land-bank option deposits and related fees and interest.
Outlook, risks and unusual items
- The filing provides no quantified financial guidance. Management said it believes current liquidity is sufficient for commitments and intends to reinvest in operations; results remain exposed to housing demand, mortgage rates, inflation, construction costs and seasonal fluctuations.
- The $1.1 billion revolving credit facility matures June 2, 2025, has variable-rate pricing, and had $915.0 million outstanding and $187 million of availability at quarter-end. The company reported covenant compliance and expected to remain compliant over the next 12 months.
- Contingent consideration was a $114.0 million liability, including $105.5 million related to the MHI acquisition. Q1 fair-value revaluation expense was $5.3 million. Management stated that maximum potential exposure under the contingent-consideration agreements cannot be estimated from their contractual terms.
- Q1 included $0.6 million of inventory impairment, $0.9 million of lot-deposit impairment and $2 million of SG&A charges for terminated lot-option deposits and due-diligence costs. No inventory or lot-deposit impairment was reported for Q1 2022.
- A previously settled construction-defect lawsuit involved a $12 million settlement, with $4 million paid by insurance; the company was pursuing subcontractor and vendor contributions, with none collected in Q1. The filing says pending proceedings are not expected to have a material adverse effect.
- The company highlighted potential liquidity and financial-performance effects from bank failures or other adverse developments affecting financial institutions, including deposits exceeding FDIC insurance limits. Its disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether orders, cancellations and backlog stabilize as mortgage rates and affordability evolve, and how backlog converts to closings.
- Whether incentives, financing costs and construction expenses continue to pressure reported gross margins.
- Availability under the borrowing base, variable interest costs, covenant compliance and liquidity needs as the company invests in lots and construction.
- Potential payments and valuation changes in MHI-related contingent consideration, and the recoverability of lot deposits and option-related investments.
- How related-party land-bank arrangements and the company’s exposure to deposits at financial institutions affect risk and liquidity.