Dream Finders Homes, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company designs, builds and sells homes, and offers mortgage and title services. It reported four segments: Southeast, Mid-Atlantic, Midwest and Financial Services.
Financial and operating results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $895.8 million | $785.7 million | $2,610.6 million | $2,242.9 million |
| Net income attributable to DFH | $76.1 million | $69.6 million | $194.0 million | $176.0 million |
| Diluted EPS | $0.75 | $0.64 | $1.83 | $1.67 |
| GAAP homebuilding gross margin | 20.6% | 18.6% | 19.0% | 19.0% |
| Adjusted gross margin (non-GAAP) | 28.4% | 24.9% | 26.7% | 25.0% |
| EBITDA margin (non-GAAP) | 14.7% | 12.5% | 13.4% | 12.4% |
Q3 closings increased 17% to 1,798 and average closing price rose 3% to $501,536. Net new orders increased 38% to 1,535; the cancellation rate fell to 14.9% from 25.5%. At quarter-end, backlog declined 26% year over year to 5,025 homes, valued at $2.41 billion. For the nine months, closings rose 13% to 5,161, while net new orders fell 6% to 4,638.
SG&A was $80.0 million in Q3 and $214.4 million for the nine months. Income tax expense was $24.2 million and $66.0 million, respectively; the nine-month effective tax rate increased to 24.5% from 21.5%, primarily due to changes affecting the 45L tax credit.
Cash flow, debt and liquidity
- Cash and cash equivalents were $330.1 million at September 30, 2023, versus $364.5 million at December 31, 2022; restricted cash was $33.2 million.
- For the first nine months, operating cash flow was positive $154.8 million, compared with cash use of $280.4 million in 2022. Investing cash use was $4.0 million; financing cash use was $182.6 million. Cash, cash equivalents and restricted cash decreased $31.8 million to $363.3 million.
- Construction-line borrowings were $555.5 million, down from $966.2 million at year-end 2022. The company issued $300 million of 8.25% senior unsecured notes due August 2028 and used net proceeds to repay credit-facility borrowings. Total reported debt was approximately $849.1 million, excluding other liabilities.
- The amended revolving credit facility has commitments of up to $1.2 billion, subject to a borrowing base, and matures July 17, 2026 for most commitments. Reported availability was $234 million; total liquidity, including cash and cash equivalents, was $564 million. The company said it was in compliance with debt covenants and expected to remain compliant over the next 12 months.
- Lot deposits were $241.3 million. The company controlled 30,614 lots through option and land-bank arrangements; disclosed loss exposure for deposits, fees and interest under these arrangements was $298.2 million.
Material changes, outlook and risks
- Management described homebuilding market conditions as optimistic despite elevated mortgage rates, citing constrained housing supply. It uses closing-cost assistance and mortgage buydowns to address affordability and adjusts lot takedowns to sales absorption. No formal numerical earnings or revenue guidance was provided.
- Q3 margin improvement reflected cost management, cycle-time improvements and modest price appreciation; higher financing and closing costs, including buyer incentives, partly offset gains. Nine-month GAAP gross margin was unchanged as a percentage of homebuilding revenue.
- Contingent-consideration revaluation expense was $9.0 million in Q3 and $32.6 million for the first nine months, primarily reflecting improved results and revised earnout expectations for the MHI acquisition. The liability was $102.8 million at quarter-end.
- Q3 SG&A included $9 million for forward mortgage-rate commitment programs and $3 million of write-offs related to terminated lot options; nine-month amounts were $17 million and $5 million, respectively. Inventory impairment charges were $2.0 million and lot-deposit impairment charges were $3.1 million for the nine months.
- Management cited interest-rate sensitivity, affordability, inflation and potential construction, labor, material, land-development and financing cost increases as risks. Higher rates could reduce buyer qualification and adversely affect sales, margins and earnings. The company also warned that credit-rating downgrades could restrict financing access or raise borrowing costs.
- Outstanding surety bonds were $173 million and letters of credit were $1 million. Management did not anticipate material losses under them and did not expect pending legal matters to have a material adverse effect.
Important facts for investors to verify
- Whether order growth and lower cancellations continue, and whether the smaller backlog converts to closings at expected prices and margins.
- How elevated mortgage rates and buyer incentives affect demand, affordability, closing costs and gross margins.
- The assumptions behind MHI contingent consideration remeasurement and the potential future cash payments.
- Borrowing-base availability, floating-rate exposure, covenant headroom and the company’s ability to service the 8.25% notes.
- Potential forfeitures or other costs associated with the $241.3 million of lot deposits and the $298.2 million disclosed option-related exposure.
- Dilution and preferred-stock claims: $148.5 million of preferred mezzanine equity remained outstanding; diluted EPS includes assumed conversion effects. The Series B preferred units were fully redeemed for $11.1 million in August.
- The company authorized up to $25 million of share repurchases through June 2026 and reported no repurchases through September 30. The filing also disclosed Rule 10b5-1 sale plans for three executives; verify subsequent transactions and any later repurchases.