Dream Finders Homes, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company designs, builds and sells homes across markets in Florida, Colorado, the Washington, D.C. area, the Carolinas and Texas, with mortgage and title-related businesses. The October 2021 acquisition of MHI expanded its Texas operations and materially increased the scale of reported results.
Financial and operating results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $785.7 million | $363.0 million | $2,242.9 million | $1,071.8 million |
| Net income | $71.6 million | $23.6 million | $184.3 million | $73.2 million |
| Net income attributable to Dream Finders Homes, Inc. | $69.6 million | $19.1 million | $176.0 million | $63.8 million |
| Basic / diluted EPS | $0.71 / $0.64 | $0.20 / $0.20 | $1.78 / $1.67 | $0.69 / $0.69 |
| Homebuilding gross margin | 18.6% | 16.0% | 19.0% | 15.9% |
| Adjusted gross margin (non-GAAP) | 24.9% | 21.8% | 25.0% | 22.3% |
| EBITDA margin (non-GAAP) | 12.5% | 8.2% | 12.4% | 9.7% |
| Net new orders | 1,110 | 1,301 | 4,938 | 4,830 |
| Homes closed | 1,542 | 916 | 4,562 | 2,914 |
Q3 average sales price was $487,852, up 30% year over year; the nine-month average was $471,621, up 33%. Management attributed stronger margins to home-price appreciation outpacing cost inflation. MHI contributed 550 Q3 closings and $330 million of homebuilding revenue; for the nine-month period it contributed 1,560 closings and $910 million of homebuilding revenue.
Cash flow, debt and liquidity
- For the first nine months of 2022, operating cash flow was negative $276.3 million, compared with negative $118.5 million in 2021. The principal driver was a $446.2 million increase in inventories, partly offset by higher earnings.
- Investing cash flow was negative $4.0 million; financing cash flow was positive $160.8 million. Cash, cash equivalents and restricted cash totaled $161.7 million at period-end, including $123.7 million of unrestricted cash.
- Construction lines of credit were $975.0 million outstanding; including $1.4 million of notes payable, reported debt was approximately $976.4 million. The credit facility’s effective interest rate was 5.7%, versus 3.8% at December 31, 2021.
- The amended revolving facility has $1.1 billion of commitments, matures June 2, 2025, and may expand to a borrowing base of up to $1.6 billion under its accordion feature. The company reported $150 million of additional availability and total liquidity of $274 million, including cash and cash equivalents. It was in compliance with debt covenants.
- Lot deposits were $291.3 million, up from $241.4 million at year-end 2021. The company controlled 38,585 lots through option and land-bank arrangements and owned 6,189 lots.
Material changes, outlook and risks
- Revenue and earnings rose sharply year over year, reflecting increased closings, higher average selling prices and MHI. Q3 closings rose 68%, but net new orders fell 15%; the cancellation rate rose to 25.5% from 13.9%. For the nine months, orders increased 2% and cancellations rose to 18.6% from 11.8%.
- Backlog at September 30 was 6,758 homes valued at $3.14 billion, up 50% in units and 72% in value from a year earlier. Management noted that backlog can be affected by cancellations and that supply-chain challenges may lengthen completion cycles.
- Management said rising mortgage rates strained affordability and weakened housing demand. The company introduced sales incentives, particularly mortgage-rate buydowns, and said it would monitor community-level traffic. No specific earnings or revenue guidance was provided.
- Key sensitivities include mortgage rates and buyers’ access to financing, inflation and building-material and labor costs, supply-chain conditions, and the company’s ability to convert backlog and control land. Management cited its asset-light model and balance-sheet management as tools for navigating volatility.
- Contingent consideration liabilities totaled $118.2 million, including $100.3 million related to MHI. Fair-value remeasurement is estimate-sensitive and may fluctuate between expense and income.
- Legal matters include a $12.0 million construction-defect settlement, with $4.0 million paid by insurance; the company paid the net settlement amount and is pursuing subcontractor and vendor contributions. In a separate Weyerhaeuser case, the Colorado Supreme Court denied review; potential exposure for the company was limited to costs, which it did not consider material.
- Management identified three material weaknesses in internal control over financial reporting. Remediation work was underway, but controls had not operated for a sufficient period to conclude the weaknesses were remediated.
Important facts for investors to verify
- Whether order trends, cancellations and backlog conversion deteriorate further as mortgage rates and affordability pressures change.
- Whether reported margins hold up as incentives, construction costs and home prices adjust; consider that adjusted gross margin and EBITDA are non-GAAP measures.
- How inventory investment, lot deposits and borrowing affect operating cash flow, liquidity and leverage.
- Progress integrating MHI and the future amount and timing of its contingent earn-out payments.
- Whether the company completes remediation of the disclosed material weaknesses and sustains effective financial reporting controls.