Dream Finders Homes, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company designs, builds and sells homes in multiple U.S. markets and operates a mortgage joint venture. Its IPO and corporate reorganization closed in January 2021; comparisons with 2020 reflect the predecessor business before the public-company structure and are not fully like-for-like. H&H, acquired in October 2020, and Century Homes, acquired in January 2021, contributed to reported growth.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $365.3 million | $199.8 million | $708.8 million | $388.5 million |
| Net income | $32.1 million | $12.5 million | $49.7 million | $20.3 million |
| Net income attributable to Dream Finders Homes, Inc. | $28.6 million | $11.7 million | $44.7 million | $18.3 million |
| EPS | $0.31 | Not applicable | $0.49 | Not applicable |
| GAAP gross margin on home sales | 16.5% | 13.8% | 15.8% | 13.3% |
| Adjusted gross margin (non-GAAP) | 23.5% | 21.6% | 22.6% | 21.2% |
| EBITDA margin (non-GAAP) | 11.6% | 9.7% | 10.5% | 8.6% |
Margins are reported as percentages of home sales revenue where applicable; EBITDA and adjusted gross margin are non-GAAP measures and should be considered alongside GAAP results.
- Growth and operations: Q2 revenue rose 83%, homes closed increased 91% to 996, and net new orders rose 92% to 1,521. For the first half, closings increased 93% to 1,998 and orders increased 115% to 3,531. H&H contributed 315 Q2 closings and 658 first-half closings.
- Backlog: 4,137 homes valued at approximately $1.647 billion at June 30, versus 1,457 homes and $540 million a year earlier. Active communities increased to 117 from 86.
- Pricing and margins: Average closing price declined 2% in Q2 to $358,604 and 5% for the first half to $347,261, largely reflecting H&H’s lower average price. Management attributed higher gross margins to price appreciation outpacing cost inflation and lower cost of funds.
- Cash flow: Operating cash used was $121.3 million in the first half, compared with $28.0 million used in 2020, driven mainly by a $117.3 million inventory increase and $41.0 million increase in lot deposits. Investing cash used was $23.5 million, including the Century acquisition; financing cash provided was $112.7 million, including IPO and credit-facility activity.
- Debt and liquidity: At June 30, cash and cash equivalents were $6.2 million and restricted cash was $46.9 million. The $450 million unsecured revolving facility had $365 million outstanding, at a 3.97% effective rate, with $76 million of stated availability. Notes payable were $4.0 million. Management reported total liquidity of approximately $114 million, including availability and $32 million of closing proceeds in transit. The company reported compliance with debt covenants and expected to remain compliant over the next 12 months.
- Balance sheet: Total assets were $932.3 million, versus $733.7 million at year-end 2020. Inventories were $631.0 million and lot deposits were $107.7 million at June 30.
Material changes, outlook and risks
- The January IPO generated $134 million in net proceeds. Proceeds, cash and borrowings were used to repay prior construction lines and a $20 million H&H acquisition bridge loan; the company replaced multiple facilities with a $450 million revolving credit agreement.
- The SBA forgave approximately $7.2 million of PPP proceeds in Q2, recognized as other income. This increased reported earnings and is not a recurring operating source. Contingent-consideration revaluation expense was $4.0 million in Q2 and $5.2 million in the first half, primarily reflecting higher expected H&H earn-outs.
- No specific numerical full-year guidance is provided. Management said available liquidity should meet current commitments and described plans to reinvest cash in lot supply and growth. It also stated that it expects to remain in compliance with debt covenants.
- Management identified uncertainty from COVID-19, mortgage rates and housing demand, as well as material and labor costs, land availability, construction delays, acquisitions and integration, seasonal cash requirements, and access to capital. Higher interest rates could affect buyer financing and company results.
- Lot-option strategy limits purchase obligations generally to deposits, but lot deposits and investments at risk were $107.7 million, of which $5 million was refundable at the company’s option. Outstanding letters of credit were $12 million and surety bonds were $37 million. The filing also describes limited guarantees related to certain joint-venture borrowing.
- Disclosure controls were not effective as of June 30, 2021. Management reported three material weaknesses in internal control over financial reporting, including deficiencies in documentation and segregation of duties, control design and precision, and IT general controls. Remediation was underway but not complete.
- The filing reports no material changes to previously disclosed legal proceedings and no additional subsequent events requiring disclosure through August 10, 2021.
Investor verification points
- Assess how much reported earnings growth reflects higher closings and margins versus acquisitions, PPP forgiveness, tax changes after the IPO, and contingent-consideration remeasurement.
- Review cash conversion and funding needs: operating cash use, inventory and lot-deposit growth, restricted cash, and the basis for management’s stated $114 million liquidity.
- Monitor gross-margin sustainability against building-material and labor inflation, mortgage-rate changes, and the lower average selling price mix.
- Verify backlog conversion, cancellations, closing timing, and the pace at which the expanded lot supply and active communities produce sales.
- Track revolving-facility borrowing, borrowing-base availability, covenant compliance, earn-out exposure, and performance of H&H and Century Homes.
- Follow remediation of the three material weaknesses and evaluate the related-party and joint-venture arrangements described in the filing.