Dream Finders Homes, Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed March 16, 2022. This is an annual report, not a standalone fourth-quarter report. The company completed its IPO and corporate reorganization in January 2021, so historical results reflect its predecessor before that date; corporate income taxes and EPS are not directly comparable with 2020.
Business context
Dream Finders designs, builds and sells single-family homes, principally to entry-level and move-up buyers, across markets in the Southeast, Mid-Atlantic, Colorado and Texas. Its asset-light strategy relies primarily on options and land-bank arrangements to control lots rather than owning and developing most land. It also operates a title business and holds a 49.9% interest in mortgage joint venture Jet Home Loans.
Financial and operating performance
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Revenue | $1,923.9 million | $1,133.8 million | Up 69.7%; growth included acquisitions and higher closings and prices |
| Net income | $134.6 million | $84.5 million | Up 59.3% |
| Income attributable to Dream Finders | $121.1 million | $79.1 million | Up 53.2% |
| EPS | $1.27 basic and diluted | No comparable EPS reported | Calculated only for the post-reorganization period beginning January 21, 2021 |
| Gross margin | $307.0 million; 16.0% | $165.0 million; 14.6% | Margin improved 140 basis points |
| Adjusted gross margin | $416.4 million; 21.7% | $252.7 million; 22.5% | Non-GAAP margin declined 80 basis points |
| Adjusted EBITDA | $201.5 million; 10.5% of revenue | $121.8 million; 10.7% | Non-GAAP margin declined 20 basis points |
| Cash from operating activities | $65.1 million | $96.9 million | Lower mainly from increased lot deposits and inventory investment |
| Cash used in investing activities | $523.0 million | $13.0 million | Primarily acquisitions |
| Cash from financing activities | $645.9 million | Cash used: $65.8 million | IPO, preferred-stock proceeds and increased borrowing |
Home closings rose 54.5% to 4,874; average closing price increased 8.8% to $389,094. Net new orders increased 62.5% to 6,804, while the cancellation rate declined to 12.2% from 12.8%. Year-end backlog grew 163.2% to 6,381 homes, valued at approximately $2.91 billion. Active communities increased to 205 from 126, and owned and controlled lots totaled 43,840, up from 22,407.
At year-end, cash and cash equivalents were $227.2 million, excluding $54.1 million of restricted cash. The company reported total liquidity of $276.6 million, including $49.4 million available under its revolving credit agreement. Borrowings under the facility were $760.0 million at a 3.75% effective rate; the balance-sheet amount for long-term debt, net, was $763.3 million. The facility matures January 25, 2024, and the company reported compliance with its covenants. Total assets were $1.89 billion.
Material changes and notable items
- The October 2021 MHI acquisition expanded the company across Austin, Dallas, Houston and San Antonio. Consideration comprised approximately $488.2 million of cash consideration after adjustments and $94.6 million of estimated contingent consideration; total recorded consideration was approximately $582.8 million. MHI contributed 689 fourth-quarter closings and 1,734 homes to year-end backlog.
- The January 2021 Century Homes acquisition expanded Orlando operations for approximately $35.6 million. H&H, acquired in October 2020, contributed a full year of results in 2021 versus a partial year in 2020.
- IPO proceeds were used with cash and borrowings to repay the company’s former secured construction facilities and the H&H bridge loan. The company also issued $150 million of convertible preferred stock to help fund MHI. The preferred stock carries cumulative 9% annual dividends and may create dilution if converted under specified terms.
- Operating cash flow declined despite higher earnings as the company invested in lot deposits and inventory. Lot deposits reached $241.4 million; the company said option arrangements generally limit its loss on forfeiture to deposits and related fees.
- FY2021 includes $7.2 million of PPP loan forgiveness income, $7.5 million of contingent-consideration revaluation expense, and $0.7 million of debt-extinguishment loss. Net income also reflects $27.5 million of income tax expense after the company became subject to corporate taxation.
- Jet Home Loans originated 2,256 loans totaling about $729 million, versus 1,961 loans totaling about $564 million in 2020. Jet’s total net income was $12.9 million, down from $15.9 million; it is an equity-method investment, not consolidated.
Outlook, risks and contingencies
Management said it expected housing conditions to remain relatively healthy in 2022, citing limited resale supply, population growth and then-low interest rates. This is qualitative commentary, not formal financial guidance. Management also described ongoing labor and material shortages, construction delays, supply-chain disruption and inflation; costs had risen, although 2021 home-price increases outpaced those costs. Higher mortgage rates, weaker affordability, reduced lot availability, acquisition integration, and adverse conditions in concentrated regional markets could pressure sales, costs and margins.
The company’s disclosure controls and internal control over financial reporting were ineffective at December 31, 2021 due to material weaknesses in control documentation, segregation of duties, journal-entry review, control design and IT general controls. Management had begun remediation; the weaknesses were not yet considered remediated. The auditor gave an unqualified opinion on the financial statements but did not attest to internal control effectiveness.
In March 2022, after year-end, the company agreed to a $12 million settlement in the Silver Meadows construction-defect matter; insurance was to pay $4 million, with the balance due by May 1, 2022, and the company intended to seek contributions from vendors and subcontractors. Separately, a Colorado appeals court reversed a prior $14.65 million jury award against Weyerhaeuser; Dream Finders petitioned the state supreme court for review and had recognized no gain. The filing reports no reserve for these matters because potential losses were not then considered probable and reasonably estimable.
Other important risks include warranty and construction-defect exposure, weather and environmental regulation, financing and covenant constraints, and conflicts involving related-party land-bank arrangements. A significant portion of the company’s voting power is controlled by its founder through Class B shares. The company stated it did not intend to pay cash dividends in the foreseeable future. The filing also notes that the federal energy-efficient-home tax credit was available through 2021 but had not been extended at the time of the report; $8.8 million was estimated in FY2021 tax credits.
Investor verification priorities
- Review the MHI purchase-price allocation, acquired operations’ margins and performance, and the assumptions behind the $124.1 million total contingent-consideration liability.
- Assess debt service, variable-rate exposure, covenant headroom and refinancing needs against the $760 million revolver balance and January 2024 maturity.
- Track whether backlog converts to closings on schedule, and monitor cancellations, construction delays, incentives and customer satisfaction.
- Evaluate cash conversion and capital requirements, including lot deposits, inventory growth, and the distinction between unrestricted cash and restricted escrow cash.
- Monitor progress in remediating the reported material weaknesses and the status and financial impact of litigation, including Silver Meadows and Weyerhaeuser.