Dream Finders Homes(DFH) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. DREAM FINDERS HOMES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS This section presents Dream Finders Homes, Inc.'s unaudited condensed consolidated financial statements as of June 30, 2022, including balance sheets, comprehensive income statements, equity statements, and cash flow statements, along with related notes detailing business nature, accounting policies, acquisitions, debt, contingencies, and related party transactions CONDENSED CONSOLIDATED BALANCE SHEETS This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of specific reporting dates - As of June 30, 2022, total assets increased to $2,112,786 thousand, an 11.5% increase from December 31, 2021, while total liabilities rose to $1,465,631 thousand, a 9.6% increase[11] Condensed Consolidated Balance Sheets Key Data (Unit: Thousand US Dollars) | Indicator | June 30, 2022 | December 31, 2021 | | :------------------- | :------------ | :------------- | | Assets | | | | Cash and cash equivalents | 84,097 | 227,227 | | Restricted cash | 45,296 | 54,095 | | Total inventory | 1,356,017 | 1,066,662 | | Total assets | 2,112,786 | 1,894,248 | | Liabilities | | | | Accounts payable | 130,115 | 113,498 | | Customer deposits | 190,945 | 177,685 | | Construction revolving credit | 875,000 | 760,000 | | Total liabilities | 1,465,631 | 1,337,865 | | Shareholders' Equity | | | | Preferred mezzanine equity | 155,621 | 155,220 | | Retained earnings | 217,346 | 118,194 | | Total mezzanine and shareholders' equity | 647,155 | 556,383 | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME This section presents the company's financial performance over specific periods, detailing revenues, costs, and net income - In Q2 2022, total revenue increased by 117% to $793 million year-over-year, with net income attributable to Dream Finders Homes, Inc. growing by 119% to $62.624 million; for the first half of 2022, total revenue increased by 106% to $1.457 billion, and net income attributable to Dream Finders Homes, Inc. grew by 138% to $106 million[14] Condensed Consolidated Statements of Comprehensive Income Key Data (Unit: Thousand US Dollars) | Indicator | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------- | :------- | :------- | :----------- | :----------- | | Total revenue | 793,134 | 365,276 | 1,457,200 | 708,836 | | Cost of homebuilding sales | 635,422 | 303,589 | 1,174,290 | 594,626 | | Selling, general and administrative expenses | 66,015 | 30,137 | 127,725 | 59,452 | | Earnings before interest and taxes | 89,698 | 36,538 | 152,910 | 58,950 | | Income tax expense | (23,327) | (4,479) | (40,205) | (9,295) | | Net income attributable to Dream Finders Homes, Inc. | 62,624 | 28,573 | 106,340 | 44,694 | | Basic earnings per share | 0.64 | 0.31 | 1.07 | 0.49 | | Diluted earnings per share | 0.60 | 0.31 | 1.02 | 0.49 | CONDENSED CONSOLIDATED STATEMENTS OF EQUITY This section outlines changes in the company's equity, including preferred mezzanine equity, additional paid-in capital, retained earnings, and non-controlling interests - As of June 30, 2022, total equity increased to $647 million, a 16.3% increase from December 31, 2021, driven by a significant rise in retained earnings from $118 million to $217 million, reflecting improved profitability[20] Condensed Consolidated Statements of Equity Key Data (Unit: Thousand US Dollars) | Indicator | June 30, 2022 | December 31, 2021 | | :------------------- | :------------ | :------------- | | Preferred mezzanine equity | 155,621 | 155,220 | | Additional paid-in capital | 261,207 | 257,963 | | Retained earnings | 217,346 | 118,194 | | Non-controlling interests | 12,056 | 24,081 | | Total equity | 647,155 | 556,383 | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS This section details the company's cash inflows and outflows from operating, investing, and financing activities over specific periods - In the first half of 2022, net cash outflow from operating activities significantly increased to $223 million from $93.432 million in the prior year, primarily due to a $289 million increase in inventory[25][207][208] - Net cash outflow from investing activities significantly decreased from $23.485 million to $1.474 million, mainly due to the acquisition of Century Homes in 2021[25][208] Condensed Consolidated Statements of Cash Flows Key Data (Unit: Thousand US Dollars) | Indicator | H1 2022 | H1 2021 | | :------------------- | :----------- | :----------- | | Net cash outflow from operating activities | (222,538) | (93,432) | | Net cash outflow from investing activities | (1,474) | (23,485) | | Net cash inflow from financing activities | 72,083 | 112,652 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | (151,929) | (4,265) | | Cash, cash equivalents, and restricted cash at period end | 129,393 | 80,946 | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Nature of Business and Significant Accounting Policies This section outlines the company's formation, IPO, and subsequent reorganization, detailing the basis of financial statement preparation, consolidation principles, contingent consideration accounting, and a retrospective change in cash and cash equivalents accounting policy - The company completed its IPO and corporate reorganization on January 25, 2021, becoming the controlling entity of DFH LLC and its subsidiaries[27][28][29] - Contingent consideration liabilities are measured based on the acquired entity's estimated pre-tax net income for future periods and re-measured at fair value at each reporting period end[34] - The company changed its accounting policy on December 31, 2021, to reclassify cash proceeds typically held for less than five days in escrow accounts to cash and cash equivalents, to more accurately reflect liquidity[40] Contingent Consideration Liability Adjustments (Unit: Thousand US Dollars) | Acquisition Project | Liability as of June 30, 2022 | Liability as of Dec 31, 2021 | Q2 2022 Expense | Q2 2021 Expense | H1 2022 Expense | H1 2021 Expense | | :---------------- | :-------------------------- | :------------------------- | :-------------- | :-------------- | :-------------- | :-------------- | | Village Park Homes, LLC | 3,400 | 7,600 | 2,400 | 100 | 2,800 | 500 | | H&H Constructors of Fayetteville, LLC | 17,800 | 19,800 | 700 | 3,900 | 2,500 | 4,700 | | MHI | 94,400 | 96,700 | 1,900 | - | 3,900 | - | 2. Business Acquisitions This section details the company's two significant business acquisitions in 2021: Century Homes Florida, LLC and McGuyer Homebuilders, Inc. (MHI), which expanded the company's market presence in Florida and Texas and resulted in goodwill and contingent consideration liabilities - On January 31, 2021, the company acquired Century Homes Florida, LLC for $35.6 million, recognizing $1.795 million in goodwill[44][45] - On October 1, 2021, the company acquired Texas homebuilder MHI for a total consideration of $583 million, including $488 million in cash and $94.573 million in contingent consideration, aiming to expand its Texas market share[46][47][49] - The MHI acquisition generated $141 million in goodwill, primarily from business combination synergies, the acquired workforce, and growth opportunities[50][52] MHI Acquisition Consideration Allocation (As of June 30, 2022, Unit: Thousand US Dollars) | Indicator | Amount | | :------------------- | :------- | | Cash consideration | 488,178 | | Contingent consideration based on future earnings | 94,573 | | Total consideration | 582,751 | 3. Construction Lines of Credit On June 2, 2022, the company amended and restated its revolving credit agreement, increasing the total committed facility from $817.5 million to $1.1 billion, with an accordion feature to expand to $1.6 billion, extending the maturity to June 2, 2025, and converting the applicable interest rate from Eurodollar to SOFR - The amended credit agreement increased the total committed facility from $817.5 million to $1.1 billion, with an accordion feature allowing expansion up to $1.6 billion[56] - The credit agreement's maturity date was extended from January 25, 2024, to June 2, 2025, and transitioned to a SOFR-based interest rate[56] - As of June 30, 2022, the company was in compliance with all debt covenants[61] Construction Revolving Credit Balance and Effective Interest Rate (Unit: Thousand US Dollars) | Indicator | June 30, 2022 | December 31, 2021 | | :----------- | :------------ | :------------- | | Loan balance | 875,000 | 760,000 | | Effective interest rate | 4.1% | 3.8% | 4. Inventories This section describes the composition of the company's inventory, including finished lots, homes under construction, and completed homes, and details capitalized interest activity - Inventory includes finished lots, homes under construction, completed homes, and capitalized interest[63] Capitalized Interest Activity (Unit: Thousand US Dollars) | Indicator | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------- | :------- | :------- | :----------- | :----------- | | Capitalized interest at beginning of period | 49,392 | 18,842 | 33,266 | 21,091 | | Interest incurred | 25,447 | 7,329 | 50,433 | 13,997 | | Interest charged to cost of homebuilding sales | (12,790) | (7,365) | (21,637) | (15,640) | | Capitalized interest at end of period | 62,036 | 18,791 | 62,036 | 18,791 | 5. Commitments and Contingencies The company is currently involved in an appeal stage civil lawsuit related to defective products from Weyerhaeuser Company and a construction defect lawsuit with Silver Meadows Townhome Owners Association, Inc., which was settled in April 2022 - The company's defective product lawsuit with Weyerhaeuser NR Company is still on appeal at the Colorado Supreme Court, with the company bearing all related costs but not recognizing damage recovery[65] - The construction defect lawsuit with Silver Meadows Townhome Owners Association, Inc. was settled for $12 million in March 2022, with the company's insurer paying $4 million, and the company seeking recovery from subcontractors[66][68] 6. Equity This section details the company's authorized Class A and Class B common stock following the corporate reorganization, and the Series A convertible preferred stock issued on September 29, 2021, which is classified as mezzanine equity due to its redeemability outside the company's control - The company is authorized to issue 350 million shares of common stock, including 289 million shares of Class A common stock and 61 million shares of Class B common stock[69] - On September 29, 2021, the company issued 150 thousand shares of Series A convertible preferred stock with a liquidation preference of $1,000 per share, for a total purchase price of $150 million, used for the MHI acquisition and general corporate purposes[70][217] - All issued preferred stock is classified as mezzanine equity because it can be considered redeemable outside the company's control upon liquidation[71] 7. Variable Interest Entities The company holds investments in certain limited partnerships and similar entities engaged in land acquisition, development, and homebuilding activities, which are considered Variable Interest Entities (VIEs); the company's exposure to these VIEs is limited to its initial capital investment, and creditors have no recourse to the company's general credit - The company's maximum exposure to loss from VIEs is limited to its initial capital investment, and VIE creditors have no recourse to the company's general credit[73][78] - As of June 30, 2022, the company controls a significant number of lots through lot option contracts, with related deposit and fee risk totaling $355.2 million[87] Assets and Liabilities of Consolidated VIEs (Unit: Thousand US Dollars) | Indicator | June 30, 2022 | December 31, 2021 | | :----- | :------------ | :------------- | | Assets | 15,796 | 30,830 | | Liabilities | 6,881 | 10,203 | Investments in Unconsolidated VIEs (Unit: Thousand US Dollars) | Indicator | June 30, 2022 | December 31, 2021 | | :------------------- | :------------ | :------------- | | Jet Home Loans | 6,331 | 6,133 | | Other unconsolidated VIEs | 7,857 | 9,834 | | Total investment in unconsolidated VIEs | 14,188 | 15,967 | 8. Income Taxes The company's effective tax rate for the first half of 2022 increased to 27.4%, primarily due to the exclusion of the Section 45L energy-efficient home tax credit, non-deductible executive compensation, and an increase in Florida's corporate tax rate - The effective tax rate increased by 10.4 percentage points, primarily due to the exclusion of the Section 45L energy-efficient home tax credit, non-deductible executive compensation, and an increase in Florida's corporate tax rate from 3.5% in 2021 to 5.5% in 2022[88] Effective Tax Rate Changes | Period | Effective Tax Rate | | :----------- | :------- | | H1 2022 | 27.4% | | H1 2021 | 17.0% | 9. Segment Reporting The company primarily engages in homebuilding and is organized and reported across eight reportable segments: Jacksonville, Colorado, Orlando, Washington D.C., Carolinas, Texas, Jet LLC (mortgage business), and other segments, with MHI's operations constituting the Texas segment - The company operates with eight reportable segments: Jacksonville, Colorado, Orlando, Washington D.C., Carolinas, Texas, Jet LLC, and "Other," with MHI's operations included in the Texas segment[89] Segment Revenue (Unit: Thousand US Dollars) | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :----------- | :------- | :------- | :----------- | :----------- | | Jacksonville | 180,853 | 93,937 | 315,684 | 190,518 | | Texas | 305,068 | — | 580,492 | — | | Jet Home Loans | 6,695 | 5,826 | 13,653 | 12,845 | | Total Segment Revenue | 799,829 | 371,102 | 1,470,853 | 721,681 | Segment Net Income (Unit: Thousand US Dollars) | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :----------- | :------- | :------- | :----------- | :----------- | | Jacksonville | 27,548 | 11,277 | 45,007 | 19,486 | | Texas | 23,183 | — | 40,607 | — | | Jet Home Loans | 2,037 | 2,216 | 4,326 | 5,048 | | Total Segment Net Income | 67,828 | 33,230 | 115,791 | 52,629 | Segment Assets and Goodwill (Unit: Thousand US Dollars) | Segment | Assets as of June 30, 2022 | Assets as of Dec 31, 2021 | Goodwill as of June 30, 2022 | Goodwill as of Dec 31, 2021 | | :----------- | :----------------------- | :---------------------- | :----------------------- | :---------------------- | | Jacksonville | 283,657 | 207,502 | — | — | | Texas | 770,383 | 743,306 | 141,071 | 141,071 | | Jet Home Loans | 68,966 | 77,074 | — | — | | Total Segment Assets | 2,175,241 | 1,965,045 | 171,927 | 171,927 | 10. Fair Value Disclosures This section discloses the fair value measurement of the company's contingent consideration, which is based on Level 3 inputs, and details its beginning balance, fair value adjustments, and payments - Contingent consideration is the company's only asset or liability measured at fair value on a recurring basis, with its measurement based on Level 3 inputs[95] Contingent Consideration Fair Value Changes (Unit: Thousand US Dollars) | Indicator | Amount | | :--------------- | :------- | | Balance as of Dec 31, 2021 | 124,056 | | Fair value adjustments | 9,234 | | Contingent consideration payments | (17,735) | | Balance as of June 30, 2022 | 115,555 | 11. Related Party Transactions The company engages in various transactions with related parties, primarily involving the acquisition of finished lots through joint ventures and land banking arrangements, including funds invested by company directors, executives, and management, as well as Rockpoint Group, LLC - The company engaged in six joint venture projects and ten land banking projects with DF Residential I, LP (Fund I), where company directors, executives, and management invested $8.7 million in Fund I[98][99] - DF Residential II, LP (Fund II) raised $322.1 million in total capital commitments, with the company indirectly owning a 72% interest in its general partner and committing to invest $3 million[100][101] - As of June 30, 2022, the company's outstanding lot deposits related to DF Capital projects totaled $68.1 million[106] - The company entered into a right of first offer memorandum with Rockpoint Group, LLC (whose founding partner is a company director), with Rockpoint committing to invest $100 million in Fund II[107][109] - Jet Home Loans LLC is the company's mortgage joint venture, in which the company holds a 49.9% interest and accounts for using the equity method[110] 12. Earnings per Share This section details the calculation of the company's basic and diluted earnings per share, including the weighted-average common shares and common share equivalents used in the computation - Basic earnings per share is calculated by dividing net income attributable to DFH, Inc. by the weighted-average number of Class A and Class B common shares outstanding; diluted earnings per share considers the impact of potentially dilutive restricted stock grants and convertible preferred stock[113] Earnings per Share Calculation (Unit: Thousand US Dollars, Thousand Shares) | Indicator | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------- | :------- | :------- | :----------- | :----------- | | Net income attributable to Dream Finders Homes, Inc. | 62,624 | 28,573 | 106,340 | 44,694 | | Less: Preferred stock dividends | 3,616 | 188 | 7,195 | 1,003 | | Net income attributable to common shareholders | 59,008 | 28,385 | 99,145 | 44,935 | | Basic weighted-average common shares | 92,759 | 92,521 | 92,759 | 92,521 | | Diluted weighted-average shares | 104,566 | 92,671 | 103,532 | 92,641 | 13. Subsequent Events The company has evaluated subsequent events up to the financial statement issuance date and found no other matters requiring recognition or disclosure, except for those described in Note 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's detailed discussion and analysis of the company's financial condition and operating results as of June 30, 2022, covering business overview, recent developments, key financial and operational results, land acquisition strategy, mortgage business, building material costs, seasonality, and liquidity and capital resources Business Overview The company designs, builds, and sells homes in high-growth markets, employing an asset-light lot acquisition strategy focused on entry-level, first-move-up, and second-move-up single-family homes, and provides mortgage and title insurance solutions through its mortgage joint venture, Jet Home Loans - The company designs, builds, and sells homes in high-growth markets such as Charlotte, Raleigh, Jacksonville, Orlando, Denver, the Washington D.C. metropolitan area, Austin, Dallas, and Houston[117] - The company employs an asset-light lot acquisition strategy to reduce upfront capital commitments and improve inventory turnover and return on equity[118] Key Operating Data (As of June 30, 2022) | Indicator | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :----------- | :------- | :------- | :----------- | :----------- | | Net new orders | 1,426 | 1,521 | 3,828 | 3,531 | | Home closings | 1,649 | 996 | 3,020 | 1,998 | | Backlog homes | 7,190 | 4,137 | 7,190 | 4,137 | | Backlog value (Thousand US Dollars) | 3,334,945 | 1,646,725 | 3,334,945 | 1,646,725 | Recent Developments On June 2, 2022, the company amended and restated its credit agreement, increasing the total committed facility to $1.1 billion, with an accordion feature to expand to $1.6 billion, extending the maturity to June 2, 2025, and converting the applicable interest rate from Eurodollar to SOFR - On June 2, 2022, the company amended and restated its credit agreement, increasing the total committed facility from $818 million to $1.1 billion, with an accordion feature to expand up to $1.6 billion[120] - The credit agreement's maturity date was extended from January 25, 2024, to June 2, 2025, and the applicable interest rate was converted from Eurodollar to SOFR[120] Key Results The company achieved significant financial and operational growth in Q2 and H1 2022, with substantial increases in revenue and net income, strong average selling prices and gross margins, and continued growth in active communities and backlog value Key Financial Results for Q2 2022 (Year-over-Year) | Indicator | Q2 2022 | Q2 2021 | Change Rate | | :------------------- | :------- | :------- | :----- | | Revenue | $793 million | $365 million | +117% | | Net new orders | 1,426 | 1,521 | -6% | | Home closings | 1,649 | 996 | +66% | | Backlog homes | 7,190 | 4,137 | +74% | | Average selling price of homes closed | $463,447 | $358,604 | +29% | | Homebuilding gross margin | 19.7% | 16.5% | +3.2pp | | Net income attributable to Dream Finders Homes, Inc. | $63 million | $29 million | +119% | | Basic earnings per share | $0.64 | $0.31 | +106% | | Diluted earnings per share | $0.60 | $0.31 | +94% | | Number of active communities | 203 | 117 | +74% | Key Financial Results for H1 2022 (Year-over-Year) | Indicator | H1 2022 | H1 2021 | Change Rate | | :------------------- | :----------- | :----------- | :----- | | Revenue | $1.457 billion | $709 million | +106% | | Net new orders | 3,828 | 3,531 | +8% | | Home closings | 3,020 | 1,998 | +51% | | Backlog homes | 7,190 | 4,137 | +74% | | Average selling price of homes closed | $463,318 | $347,261 | +33% | | Homebuilding gross margin | 19.2% | 15.8% | +3.4pp | | Net income attributable to Dream Finders Homes, Inc. | $106 million | $45 million | +138% | | Basic earnings per share | $1.07 | $0.49 | +118% | | Diluted earnings per share | $1.02 | $0.49 | +108% | | Number of active communities | 203 | 117 | +74% | Results of Operations (Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021) In Q2 2022, the company achieved substantial growth in both revenue and net income, primarily driven by increased home closings and higher average selling prices; gross margin improved due to price increases outpacing cost inflation, but selling, general, and administrative expenses also rose significantly due to increased closings and the MHI acquisition - Revenue growth was primarily attributed to a 66% increase in home closings (653 units) and a 29% increase in average selling price (to $463,447), with the MHI acquisition contributing 527 home closings and $305 million in revenue[152] - Homebuilding gross margin increased from 16.5% to 19.7% (a 320 basis point increase), mainly due to price increases outpacing cost inflation[153] - Selling, general, and administrative expenses increased by 119% to $66 million, primarily due to increased closings and MHI contributing $27 million in expenses, though remaining at 8% of homebuilding revenue[154] - Other (income) expense, net, decreased by 104% ($8 million), primarily due to the inclusion of PPP loan forgiveness income in the prior year period[158] Q2 2022 Operating Results (Unit: Thousand US Dollars) | Indicator | Q2 2022 | Q2 2021 | Change Amount | Change Rate | | :------------------- | :------- | :------- | :------- | :----- | | Total revenue | 793,134 | 365,276 | 427,858 | 117% | | Cost of homebuilding sales | 635,422 | 303,589 | 331,833 | 109% | | Selling, general and administrative expenses | 66,015 | 30,137 | 35,878 | 119% | | Net income attributable to Dream Finders Homes, Inc. | 62,624 | 28,573 | 34,051 | 119% | | Basic earnings per share | 0.64 | 0.31 | 0.33 | 106% | | Diluted earnings per share | 0.60 | 0.31 | 0.29 | 94% | Results of Operations (Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021) In the first half of 2022, the company achieved strong growth in both revenue and net income, primarily driven by increased home closings and higher average selling prices, with significant contributions from the MHI acquisition; gross margin improved due to price increases outpacing cost inflation, but selling, general, and administrative expenses also rose significantly due to increased closings and the MHI acquisition - Revenue growth was primarily attributed to a 51% increase in home closings (1,022 units) and a 33% increase in average selling price (to $463,318), with the MHI acquisition contributing 1,010 home closings and $580.5 million in revenue[165] - Homebuilding gross margin increased from 15.8% to 19.2% (a 340 basis point increase), mainly due to price increases outpacing cost inflation[166] - Selling, general, and administrative expenses increased by 115% to $128 million, primarily due to increased closings and MHI contributing $52 million in expenses, with the ratio to homebuilding revenue increasing from 8% to 9%[167] - Other (income) expense, net, decreased by 90% ($6 million), primarily due to the inclusion of PPP loan forgiveness income in the prior year period[171] H1 2022 Operating Results (Unit: Thousand US Dollars) | Indicator | H1 2022 | H1 2021 | Change Amount | Change Rate | | :------------------- | :----------- | :----------- | :------- | :----- | | Total revenue | 1,457,200 | 708,836 | 748,364 | 106% | | Cost of homebuilding sales | 1,174,290 | 594,626 | 579,664 | 97% | | Selling, general and administrative expenses | 127,725 | 59,452 | 68,273 | 115% | | Net income attributable to Dream Finders Homes, Inc. | 106,340 | 44,694 | 61,646 | 138% | | Basic earnings per share | 1.07 | 0.49 | 0.58 | 118% | | Diluted earnings per share | 1.02 | 0.49 | 0.53 | 108% | Non-GAAP Financial Measures This section provides definitions and reconciliation tables for non-GAAP financial measures such as Adjusted Gross Margin, EBITDA, and Adjusted EBITDA, which management uses to evaluate operating performance - Adjusted Gross Margin is defined as gross margin less capitalized interest, amortization included in cost of homebuilding sales (including acquisition-related purchase accounting adjustments), and commission expenses[174] - EBITDA is defined as net income less interest income, capitalized interest expense in cost of homebuilding sales, interest expense, income tax expense, and depreciation and amortization; Adjusted EBITDA further deducts stock-based compensation expense from EBITDA[178] Adjusted Gross Margin Reconciliation (Unit: Thousand US Dollars) | Indicator | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------- | :------- | :------- | :----------- | :----------- | | Gross margin | 155,808 | 60,154 | 279,413 | 111,284 | | Interest expense in cost of homebuilding sales | 12,790 | 7,365 | 21,637 | 15,640 | | Amortization in cost of homebuilding sales | 1,991 | 2,072 | 5,821 | 1,624 | | Commission expenses | 33,142 | 15,861 | 58,416 | 31,135 | | Adjusted Gross Margin | 203,731 | 85,452 | 365,287 | 159,683 | EBITDA and Adjusted EBITDA Reconciliation (Unit: Thousand US Dollars) | Indicator | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------- | :------- | :------- | :----------- | :----------- | | Net income attributable to Dream Finders Homes, Inc. | 62,624 | 28,573 | 106,340 | 44,694 | | Interest income | (32) | — | (73) | (4) | | Interest expense in cost of homebuilding sales | 12,790 | 7,365 | 21,637 | 15,640 | | Interest expense | 13 | 16 | 26 | 658 | | Income tax expense | 23,327 | 4,479 | 40,205 | 9,295 | | Depreciation and amortization | 6,251 | 1,988 | 11,024 | 4,337 | | EBITDA | 104,974 | 42,421 | 179,160 | 74,621 | | Stock-based compensation expense | 1,792 | 1,452 | 3,244 | 3,800 | | Adjusted EBITDA | 106,766 | 43,873 | 182,404 | 78,421 | Backlog, Sales and Closings In Q2 2022, the company's net new orders decreased by 6% year-over-year, but home closings and backlog value significantly increased; cancellation rates rose, reflecting market changes, with backlog orders being a key indicator of future revenue but subject to cancellation rates - In Q2 2022, net new orders were 1,426 units, a 6% decrease year-over-year, while home closings were 1,649 units, a 66% increase year-over-year[184] - In H1 2022, net new orders were 3,828 units, an 8% increase year-over-year, while home closings were 3,020 units, a 51% increase year-over-year[185] - The cancellation rate increased to 21.0% in Q2 2022, a 660 basis point increase from 14.4% in the prior year period; the H1 cancellation rate increased to 16.4%, a 550 basis point increase from 10.9% in the prior year period[182] Net New Orders, Cancellation Rate, and Period-End Backlog | Indicator | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------- | :------- | :------- | :----------- | :----------- | | Net new orders | 1,426 | 1,521 | 3,828 | 3,531 | | Cancellation rate | 21.0% | 14.4% | 16.4% | 10.9% | | Period-end backlog (homes) | 7,190 | 4,137 | 7,190 | 4,137 | | Period-end backlog (value, Thousand US Dollars) | 3,334,945 | 1,646,725 | 3,334,945 | 1,646,725 | Land Acquisition Strategy and Development Process The company employs an asset-light and capital-efficient land acquisition strategy, primarily controlling a large number of lots through finished lot option contracts and land banking option contracts, to avoid direct land ownership and the associated capital commitments and risks of land development - The company employs an asset-light and capital-efficient land acquisition strategy, controlling lots through lot option contracts and land banking option contracts to reduce upfront capital commitments and risks[189] - As of June 30, 2022, the company had lot deposits of $288 million in finished lot option and land banking option contracts[190] - As of June 30, 2022, the company controlled 37,983 lots through lot option and land banking option contracts[190] Owned and Controlled Lots As of June 30, 2022, the company's total owned and controlled lots reached 44,248, a slight increase from December 31, 2021, with Texas and Jacksonville being the regions with the highest number of lots - As of June 30, 2022, the company owned 6,265 lots and controlled 37,983 lots, totaling 44,248 lots, a 1% increase from December 31, 2021[191] Owned and Controlled Lot Count (As of June 30, 2022 and December 31, 2021) | Segment | 2022 Owned | 2022 Controlled | 2022 Total | 2021 Owned | 2021 Controlled | 2021 Total | Change Rate | | :----------- | :--------- | :-------------- | :--------- | :--------- | :-------------- | :--------- | :---------- | | Jacksonville | 1,177 | 9,613 | 10,790 | 774 | 10,311 | 11,085 | -3% | | Texas | 1,624 | 5,701 | 7,325 | 1,569 | 6,304 | 7,873 | -7% | | Total | 6,265 | 37,983 | 44,248 | 5,345 | 38,495 | 43,840 | 1% | Owned Real Estate Inventory Status As of June 30, 2022, homes under construction and completed homes accounted for 93% of the company's owned real estate inventory, with company-owned land and lots making up 7%, indicating a focus on a fast-turnover construction model - As of June 30, 2022, 5,277 of the company's owned lots were either completed or under construction, with the remaining lots ready for construction[191] Owned Real Estate Inventory Status (As of June 30, 2022 and December 31, 2021) | Inventory Category | Percentage as of June 30, 2022 | Percentage as of Dec 31, 2021 | | :------------------- | :----------------------------- | :---------------------------- | | Homes under construction and completed homes | 93% | 92% | | Company-owned land and lots | 7% | 8% | | Total | 100% | 100% | Our Active Communities As of June 30, 2022, the company had 203 active communities, a 74% increase year-over-year, with 24 active communities dedicated to rental home contracts, accounting for approximately 26% of the company's backlog homes - As of June 30, 2022, the company had 203 active communities, a 74% increase from 117 on June 30, 2021[194] - An active community is defined as one with five net new orders recorded or a model home open[194] - As of June 30, 2022, the company had 24 active communities dedicated to rental home contracts, with rental homes accounting for approximately 26% of the company's backlog homes[194] Our Mortgage Banking Business The company's mortgage joint venture, Jet LLC, achieved growth in loan originations and net income in both Q2 and H1 2022, providing mortgage services to both company and non-company customers - The investment in Jet LLC is accounted for using the equity method and is not consolidated in the company's condensed consolidated financial statements[195] Jet LLC Mortgage Banking Business Performance (Unit: Thousand US Dollars) | Indicator | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------- | :------- | :------- | :----------- | :----------- | | Number of loans originated | 622 | 540 | 1,149 | 1,011 | | Total loans originated | 228,000 | 173,000 | 415,000 | 319,000 | | Net income | 3,000 | 2,000 | 6,000 | 6,000 | Costs of Building Materials and Labor The company's cost of sales includes lot acquisition and financing costs, municipal fees, building permits, material and labor costs, construction loan interest, real estate agent commissions, and other miscellaneous closing costs; building material costs fluctuate with raw material prices, and price increases may erode gross margins - Cost of sales components include lot costs (20-25%), building materials (40-50%), labor (30-40%), and interest, commissions, and closing costs (4-10%)[196] - Building material costs fluctuate with raw material prices, especially lumber and petroleum-based products; rising material costs may reduce gross margins if market conditions do not permit offsetting price increases[197][199] Seasonality The company's operating results and capital requirements are subject to seasonal fluctuations, typically selling more homes in the first and second quarters and closing more homes in the third and fourth quarters, leading to quarterly revenue and capital demand variations - The company typically sells more homes in the first and second quarters and closes more homes in the third and fourth quarters[200] - Seasonal activities lead to fluctuations in quarterly operating results and financial condition, a pattern expected to continue long-term[200] Liquidity and Capital Resources The company generates cash from inventory sales and plans to reinvest net cash into land acquisition and business growth; as of June 30, 2022, the company had $84 million in cash and cash equivalents and $250 million in credit facility availability, totaling $334 million in liquidity - The company primarily generates cash from inventory sales and plans to reinvest net cash into land acquisition and business growth[201] - As of June 30, 2022, the company had $84 million in cash and cash equivalents (excluding $45 million in restricted cash) and $250 million in available capacity under its amended and restated credit agreement, totaling $334 million in liquidity[201] - The company's primary capital uses include lot deposits and purchases, vertical home construction, operating expenses, and payment of routine liabilities[202] - The company actively enters into finished lot option contracts and land development agreements, controlling lot supply by paying lot deposits (typically 10% or less of the total purchase price) to support continued growth and profitability[204][206] Cash Flows In the first half of 2022, net cash outflow from operating activities significantly increased, primarily due to inventory growth; net cash outflow from investing activities substantially decreased, while net cash inflow from financing activities decreased due to the absence of 2021 IPO-related activities - Net cash outflow from operating activities increased by $223 million, driven primarily by a $289 million increase in inventory, partially offset by increased customer deposits and net income from home closings[207] - Net cash outflow from investing activities decreased to $1.474 million, primarily due to the absence of the Century Homes acquisition in Q1 2022 compared to Q1 2021[208] - Net cash inflow from financing activities decreased to $72.083 million, primarily due to non-recurring activities in Q1 2021, including $130 million in net IPO proceeds and $26 million in Series C preferred unit redemptions[209] Cash Flow Summary (Unit: Thousand US Dollars) | Indicator | H1 2022 | H1 2021 | | :------------------- | :----------- | :----------- | | Net cash outflow from operating activities | (222,538) | (93,432) | | Net cash outflow from investing activities | (1,474) | (23,485) | | Net cash inflow from financing activities | 72,083 | 112,652 | Credit Facilities, Letters of Credit, Surety Bonds and Financial Guarantees As of June 30, 2022, the company had a maximum available capacity of $1.1 billion under its amended and restated credit agreement, with $875 million borrowed and $250 million remaining available; the company also held $1 million in letters of credit and $77 million in surety bonds - As of June 30, 2022, the company had a maximum available capacity of $1.1 billion under its amended and restated credit agreement, with $875 million borrowed and $250 million remaining available for borrowing[210] - As of June 30, 2022, the company held $1 million in letters of credit and $77 million in surety bonds[211] - The company was in compliance with all covenants in its amended and restated credit agreement[210] Series B Preferred Units MOF II DF Home LLC and MCC Investment Holdings LLC hold Series B preferred units of DFH LLC, which have preference upon liquidation or dissolution of DFH LLC, and DFH LLC has the right to redeem some or all Series B preferred units on or before September 30, 2022 - Series B preferred unit holders have preference upon liquidation or dissolution of DFH LLC[215] - DFH LLC has the right to redeem some or all Series B preferred units on or before September 30, 2022[214] Series C Preferred Units On January 27, 2021, the company redeemed all 26,000 outstanding Series C preferred units of DFH LLC for $26 million, including accrued and unpaid preferred distributions - On January 27, 2021, the company redeemed all 26,000 outstanding Series C preferred units of DFH LLC for $26 million[216] Convertible Preferred Stock On September 29, 2021, the company issued 150 thousand shares of newly designated convertible preferred stock for a total purchase price of $150 million, used for the MHI acquisition and general corporate purposes; this convertible preferred stock has preference over Class A and Class B common stock regarding dividends and liquidation distributions - On September 29, 2021, the company issued 150 thousand shares of convertible preferred stock for a total purchase price of $150 million, used for the MHI acquisition and general corporate purposes[217] - Convertible preferred stock has preference over Class A and Class B common stock regarding dividends and distributions upon liquidation, dissolution, or winding up[217] Off-Balance Sheet Arrangements The company employs an asset-light lot acquisition strategy, controlling lots through finished lot option contracts and land banking option contracts; as of June 30, 2022, the related lot deposit risk was $288 million, and the company also held $1 million in letters of credit and $77 million in surety bonds, totaling $78 million - The company controls lots through finished lot option contracts and land banking option contracts; as of June 30, 2022, the related lot deposit risk was $288 million[218][219] - As of June 30, 2022, the company held $1 million in letters of credit and $77 million in surety bonds[221] Contractual Obligations As of June 30, 2022, the company's contractual obligations have not significantly changed and remain consistent with those disclosed in the annual report for December 31, 2021 Critical Accounting Policies For the six months ended June 30, 2022, the company's critical accounting policies have not significantly changed compared to those disclosed in the annual report for December 31, 2021 Cautionary Statement about Forward-Looking Statements This report contains forward-looking statements regarding the company's expectations for future events, performance, and potential risks; these statements are inherently subject to various business, economic, competitive, regulatory, and other risks and uncertainties, and actual results may differ materially from expectations - Forward-looking statements involve the company's expectations regarding market opportunities, interest rate trends, COVID-19 impact, strategy, profitability, liquidity, and acquisition integration[226] - Forward-looking statements are subject to significant business, economic, competitive, regulatory, and other risks and uncertainties that are difficult to predict and beyond the company's control[228] COVID-19 Impact The extent and duration of business disruptions from the COVID-19 pandemic and its variants remain uncertain, as do the impacts on the U.S. economy, employment, consumer confidence, housing demand, and the mortgage market - The extent and duration of business disruptions from the COVID-19 pandemic and its variants remain uncertain[232] - The company cannot predict the pandemic's impact on its operations and financial performance, including effects on employees, customers, trade partners, and supply chains[232] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discloses the market risks faced by the company, primarily focusing on interest rate risk, as changes in interest rates can affect housing demand, mortgage financing availability, and the company's revenue, gross margin, and net income; the company does not use derivative financial instruments for speculation or hedging interest rate fluctuations Quantitative and Qualitative Disclosures About Interest Rate Risk The company's operations are sensitive to interest rates, and rising rates may negatively impact homebuyers' ability to obtain financing, thereby affecting the company's revenue, gross margin, and net income; the amended credit agreement specifies SOFR-based floating rates, and the mortgage business, Jet LLC, also faces interest rate risk - The company's operations are sensitive to interest rates, and rising rates may negatively impact homebuyers' ability to obtain financing, thereby affecting the company's revenue, gross margin, and net income[234][235] - The amended credit agreement specifies SOFR-based floating interest rates, with credit spreads determined by the company's debt-to-capital ratio[237] - The mortgage joint venture, Jet LLC, faces interest rate risk, as its loan portfolio is held for sale and subject to forward sale commitments[239] ITEM 4. CONTROLS AND PROCEDURES The company's management assessed the effectiveness of disclosure controls and procedures as of June 30, 2022, and identified three material weaknesses in internal control over financial reporting, including control environment, segregation of duties, and IT general control deficiencies; the company has developed and implemented remediation plans to address these weaknesses Disclosure Controls and Procedures The company's management identified three material weaknesses in internal control over financial reporting, including the failure to establish an effective control environment commensurate with SEC registrant financial reporting requirements, insufficient segregation of duties within the financial reporting function, and IT general control deficiencies - The company identified three material weaknesses in internal control over financial reporting[240] - Deficiencies include failure to establish an effective control environment (lack of formal policies and procedures, insufficient segregation of duties, inadequate journal entry preparation and review controls) and IT general control deficiencies[240] Remediation Plan for Material Weaknesses The company has developed and implemented remediation plans, including establishing corporate governance and accounting policies, IT general control policies, enhancing internal audit and SEC reporting teams, designing and implementing segregation of duties controls, and conducting financial statement risk assessments and control testing - The company has developed and implemented remediation plans, including establishing corporate governance and accounting policies and IT general control policies[243][244] - The company has enhanced its internal audit and SEC reporting teams and designed and implemented segregation of duties controls for financial reporting and journal entry review[245][246] - As of June 30, 2022, management has designed and implemented entity-level and financial reporting risk controls and initiated procedures for testing the design and operating effectiveness of key internal controls[246][247] Changes in Internal Controls Except for the material weaknesses and remediation measures disclosed above, there were no other changes in the company's internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control over financial reporting during the three months ended June 30, 2022 PART II. OTHER INFORMATION ITEM 1.LEGAL PROCEEDINGS This section refers to the description of significant legal proceedings in Note 5 to the financial statements; the company does not believe that currently ongoing litigation, either individually or in aggregate, will have a material adverse effect on its business, financial condition, results of operations, or liquidity ITEM 1A. RISK FACTORS This section refers to the material risk factors disclosed in the company's annual report on Form 10-K for December 31, 2021; no significant changes to risk factors have occurred since the issuance of that report ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During this reporting period, there were no unregistered sales of equity securities or use of proceeds by the company ITEM 6. EXHIBITS This section lists the exhibits filed with this quarterly report, including the amended and restated credit agreement, CEO and CFO Sarbanes-Oxley Act certifications, and XBRL files SIGNATURES This quarterly report was signed by Patrick O. Zalupski, President, Chief Executive Officer, and Chairman of the Board, and L. Anabel Fernandez, Senior Vice President and Chief Financial Officer of Dream Finders Homes, Inc. on August 4, 2022