Dream Finders Homes, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless stated otherwise. The company builds and sells homes across U.S. markets and also offers title and mortgage services. It uses an asset-light lot strategy, primarily controlling lots through option contracts.
Financial and operating results
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Total revenue | $945.3 million; up 19% | $1,714.8 million; up 18% |
| Net income | $71.6 million; up 8% | $123.4 million; up 9% |
| Net income attributable to DFH | $68.8 million; up 10% | $117.9 million; up 11% |
| Basic / diluted EPS | $0.70 / $0.65 | $1.19 / $1.09 |
| Homebuilding gross margin | 19.1%, down 0.6 percentage points | 18.1%, down 1.1 percentage points |
| Adjusted gross margin (non-GAAP) | 27.1%, up 1.4 percentage points | 25.8%, up 0.7 percentage points |
| EBITDA margin (non-GAAP) | 13.5%, up 0.3 percentage points | 12.8%, up 0.5 percentage points |
| Home closings | 1,846; up 12% | 3,363; up 11% |
| Net new orders | 1,655; up 16% | 3,103; down 19% |
Q2 average sales price of closed homes was $504,683, up 9%; the six-month average was $498,309, up 8%. Q2 backlog fell 26% year over year to 5,288 homes, valued at $2.49 billion. The Q2 cancellation rate improved to 15.6% from 21.0%; the six-month rate rose to 18.1% from 16.4%.
Cash flow and liquidity: Six-month operating cash flow was $67.8 million, versus cash used of $215.8 million in 2022. Investing used $3.0 million and financing used $134.4 million. Cash and cash equivalents were $292.5 million at June 30, plus $33.1 million restricted cash. The company reported total liquidity of $511 million, including $218 million available under its revolving credit facility.
Debt and balance sheet: Construction-line borrowings were approximately $875 million at June 30, down from $965 million at December 31, 2022. Total assets were $2.29 billion and total liabilities $1.37 billion. The company reported compliance with debt covenants at quarter-end.
Material changes and management commentary
- Revenue and closings increased, while six-month net orders declined. Management attributed the revenue increase to more closings and higher average selling prices, including product mix.
- GAAP gross margin percentage declined, primarily due to higher financing and closing costs, including buyer mortgage-rate buydown incentives. Cost management and shorter cycle times partly offset the pressure. Adjusted gross margin improved, but is a non-GAAP measure.
- Contingent-consideration revaluation expense rose to $18.3 million in Q2 and $23.6 million for the first half, largely reflecting stronger-than-projected performance and higher expected earnout payments from the MHI acquisition.
- Management said housing demand showed signs of stabilization as buyers adjusted to higher mortgage rates and market inventory remained constrained. It described first-half revenue, orders and closings as better than expected, and said it continued to monitor community-level traffic and orders, offer mortgage buydowns, and adjust lot options to sales pace.
- On July 19, after quarter-end, the company amended its credit agreement: commitments increased from $1.1 billion to $1.2 billion, with $1.1 billion of commitments extended to July 2026. The amendment also changed pricing and increased the base component of the minimum tangible net worth covenant.
- The board authorized up to $25 million of Class A share repurchases through June 30, 2026; none had been made as of the filing. Repurchases are discretionary and could reduce liquidity.
Outlook, risks and contingencies
The filing provides no specific numeric earnings or revenue guidance. Management expects seasonal patterns to continue, with typically more sales in the first half and more closings in the second half, and notes quarterly results may not represent full-year performance. Principal risks discussed include mortgage-rate and affordability pressures, inflation and construction costs, sales cancellations, and interest-rate exposure on borrowings. The company cautions that actual results may differ materially from forward-looking statements.
Lot deposits and investments related to finished-lot and land-bank options totaled approximately $248 million; the company controlled 31,783 optioned lots. It disclosed $79 million of surety bonds and $1 million of letters of credit, and did not anticipate material losses on them. A construction-defect settlement was paid in 2022; proceedings to seek subcontractor and vendor contributions remained ongoing, with a final arbitration hearing scheduled for October 2024. Management stated pending proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether order trends, backlog conversion and cancellation rates remain resilient, particularly given lower six-month net orders and the smaller year-over-year backlog.
- Whether mortgage buydowns, financing costs and other closing incentives continue to pressure GAAP gross margins and cash generation.
- The cash, covenant and borrowing-base effects of the amended credit agreement, including variable-rate exposure and the higher tangible-net-worth covenant.
- Future MHI earnout revaluations and payments, which contributed materially to period expense and are based on estimates.
- Potential cash commitments or recoveries tied to lot options, surety arrangements, legal proceedings and any future share repurchases.
- How non-GAAP adjusted gross margin and EBITDA reconcile to GAAP results; these supplemental measures are not directly comparable across companies.