Dream Finders Homes(DFH) - 2022 Q4 - Annual Report

Part I Business Overview Dream Finders Homes designs, builds, and sells homes primarily in high-growth markets, employing an asset-light land acquisition strategy, and has been profitable since its 2009 inception, also offering title insurance and mortgage services - The company's business model involves designing, building, and selling homes in high-growth markets, utilizing an asset-light land acquisition strategy, and offering title insurance and mortgage solutions[14] - As of December 31, 2022, the company has delivered over 22,200 homes and has been profitable every year since its inception in 2009[15] - Through organic growth and strategic acquisitions, such as the 2021 MHI acquisition, the company has expanded into high-growth markets including Florida, Texas, Colorado, Georgia, the DC Metro area, South Carolina, and North Carolina[16][65] - The asset-light strategy involves controlling a large number of lots with low upfront capital commitments through lot option and land banking option contracts, reducing balance sheet risk and improving inventory turnover and return on equity[20][23][24] Owned and Controlled Lots by Segment (2022 and 2021) | Segment | 2022 Owned | 2022 Controlled | 2022 Total | 2021 Owned | 2021 Controlled | 2021 Total | % Change (Total) | | :-------------- | :--------- | :-------------- | :--------- | :--------- | :-------------- | :--------- | :---------------- | | Jacksonville | 1,083 | 8,893 | 9,976 | 774 | 10,311 | 11,085 | -10 % | | Colorado | 366 | 7,555 | 7,921 | 152 | 4,883 | 5,035 | 57 % | | Orlando | 976 | 4,878 | 5,854 | 537 | 5,487 | 6,024 | -3 % | | The Carolinas | 1,003 | 4,849 | 5,852 | 1,452 | 5,196 | 6,648 | -12 % | | Texas | 1,282 | 6,835 | 8,117 | 1,569 | 6,304 | 7,873 | 3 % | | Other | 1,233 | 4,605 | 5,838 | 861 | 6,314 | 7,175 | -19 % | | Grand Total | 5,943 | 37,615 | 43,558 | 5,345 | 38,495 | 43,840 | -1 % | - The cancellation rate increased from 12.2% in 2021 to 21.5% in 2022, primarily due to rising mortgage rates and deteriorating economic conditions[34][39] Net New Orders, Starts, and Closings by Segment (2022 and 2021) | Segment | 2022 Sales | 2022 Starts | 2022 Closings | 2021 Sales | 2021 Starts | 2021 Closings | Sales % Change | Starts % Change | Closings % Change | | :-------------- | :--------- | :---------- | :---------- | :--------- | :---------- | :---------- | :------------- | :-------------- | :-------------- | | Jacksonville | 1,716 | 1,545 | 1,439 | 1,933 | 1,448 | 1,237 | -11 % | 7 % | 16 % | | Colorado | 191 | 355 | 285 | 296 | 313 | 230 | -35 % | 13 % | 24 % | | Orlando | 610 | 1,110 | 656 | 1,101 | 614 | 604 | -45 % | 81 % | 9 % | | The Carolinas | 951 | 999 | 1,433 | 1,859 | 1,751 | 1,233 | -49 % | -43 % | 16 % | | Texas | 1,566 | 1,884 | 2,229 | 579 | 512 | 689 | 170 % | 268 % | 224 % | | Other | 1,011 | 708 | 836 | 1,040 | 1,133 | 881 | -3 % | -38 % | -5 % | | Grand Total | 6,045 | 6,601 | 6,878 | 6,808 | 5,771 | 4,874 | -11 % | 14 % | 41 % | Backlog of Sold Homes (2022 and 2021) | Metric | 2022 | 2021 | % Change | | :-------------------------- | :--------- | :--------- | :--------- | | Homes | 5,548 | 6,381 | -13 % | | Value (in thousands) | $2,502,564 | $2,913,170 | -14 % | - Jet LLC originated 2,370 home loans in 2022, totaling approximately $879 million, generating a net income of approximately $12 million[48] - In 2022, an ESG assessment was conducted, focusing on home energy efficiency, affordability, employee well-being, diversity, equity, and inclusion, and board ESG oversight[70] - As of December 31, 2022, the company had 1,170 full-time employees and plans to implement a company-wide anti-harassment training program in 2023[74][75] Risk Factors This section details significant risks and uncertainties across industry, economic, operational, strategic, and organizational aspects that could materially impact the company's business, financial condition, operating results, and cash flows - The real estate industry is cyclical and vulnerable to adverse macroeconomic conditions, including rising interest rates, employment levels, mortgage availability, inflation, and natural disasters[79][82][88][102] - The company's operations are concentrated in specific regions like Florida and Texas, where prolonged economic downturns or industry-specific declines (e.g., oil and gas in Texas) could disproportionately impact the company[91][116] - Operational risks include inability to acquire sufficient and affordable land inventory, an increased cancellation rate of 21.5% in 2022, reliance on subcontractor availability and performance, potential warranty and liability claims, and shortages or increased costs of building materials and labor[125][128][129][130][136] - Strategic risks include the potential failure of growth and expansion strategies, including acquisitions, leading to integration challenges, diversion of management resources, and failure to achieve anticipated benefits[151][154][155] - Organizational and structural risks include reliance on key management, restrictive covenants in financing agreements, and founder Patrick Zalupski's control through a dual-class stock structure (85% voting power), potentially leading to conflicts of interest with other shareholders[157][159][162][163] - Failure to maintain effective internal control systems could result in inaccurate financial reporting or fraud, undermining investor confidence[182] - Growing focus on Environmental, Social, and Governance (ESG) matters may impact business and stock price, while information system failures, cyber incidents, or security breaches could adversely affect the company[183][185] Unresolved Staff Comments The company reports no unresolved staff comments as of the filing date of this report - No unresolved staff comments[206] Properties The company leases approximately 45,000 square feet of office space in Jacksonville, Florida, as its corporate headquarters until 2033, and also leases multiple local offices while owning one in San Antonio, Texas - The company's headquarters is a leased office space of approximately 45,000 square feet in Jacksonville, Florida, with a lease term extending to 2033[207] - Local offices are leased in Austin, Bluffton, Chantilly, Charlotte, Dallas, Denver, Fayetteville, Houston, Leland, Myrtle Beach, Orlando, Pooler, and Raleigh[207] - The company owns one local office in San Antonio, Texas[208] Legal Proceedings The company is involved in ongoing legal proceedings in the ordinary course of business, with details on certain pending matters provided in Note 6 to the consolidated financial statements - The company is involved in ongoing legal proceedings in the ordinary course of business[209] - Further details are available in Note 6 to the consolidated financial statements[209] Mine Safety Disclosures The company reports that mine safety disclosures are not applicable - Not applicable[210] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE under 'DFH', with 26 registered shareholders as of February 28, 2023, and no cash dividends declared or paid to date, while a 2021 equity incentive plan is in place - Class A common stock is listed on the New York Stock Exchange (NYSE) under the ticker symbol 'DFH'[213] - As of February 28, 2023, there were 26 registered shareholders[213] - The company has not declared or paid any cash dividends on its Class A common stock, and future dividend payments will be at the discretion of the Board of Directors[214] - The 2021 Equity Incentive Plan authorizes the grant of up to 9.1 million stock-based awards[215] Reserved This item is reserved - This item is reserved[217] Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition and operating results as of December 31, 2022, highlighting a 74% revenue growth to $3.3 billion and a 104% net income increase to $274 million, despite rising mortgage rates impacting housing demand - In Q3 and Q4 2022, rising mortgage rates negatively impacted housing demand due to affordability constraints, which the company addressed through mortgage rate buydown programs and renegotiating lot option contracts[220] Key Financial Performance (2022 and 2021) | Metric | 2022 | 2021 | Amount Change | % Change | | :-------------------------------------------------- | :--------- | :--------- | :------------ | :------- | | Revenues | $3.3B | $1.9B | $1.4B | 74 % | | Net new orders | 6,045 | 6,808 | (763) | -11 % | | Homes closed | 6,878 | 4,874 | 2,004 | 41 % | | Average sales price of homes closed | $474,292 | $389,094 | $85,198 | 22 % | | Gross margin % | 18.4 % | 16.0 % | 2.4 % | 15 % | | Adjusted gross margin % (non-GAAP) | 24.6 % | 21.7 % | 2.9 % | 13 % | | Net and comprehensive income | $274M | $135M | $139M | 104 % | | Net and comprehensive income attributable to DFH, Inc. | $262M | $121M | $141M | 117 % | | EBITDA % (non-GAAP) | 12.6 % | 10.1 % | 2.5 % | 25 % | | Backlog of sold homes | 5,548 | 6,381 | (833) | -13 % | | Active communities | 206 | 205 | 1 | — % | | Return on participating equity | 49.1 % | 44.3 % | 4.8 % | 11 % | | Basic EPS | $2.67 | $1.27 | $1.40 | 110 % | | Diluted EPS | $2.45 | $1.27 | $1.18 | 93 % | - On October 10, 2022, the company's Class A common stock transferred from the Nasdaq Global Select Market to the New York Stock Exchange[223] - Total revenues in 2022 increased by 74% to $3.3 billion, driven by a 41% increase in homes closed and a 22% rise in average sales price[228] - The gross margin increased from 16.0% to 18.4% in 2022, primarily because price increases outpaced cost inflation[229] Reconciliation of Adjusted Gross Margin (Non-GAAP) to Gross Margin (in thousands) | Metric | 2022 | 2021 | 2020 | | :------------------------------------ | :--------- | :--------- | :--------- | | Gross margin | $612,420 | $306,969 | $165,048 | | Interest expense in homebuilding cost of sales | 60,595 | 32,508 | 32,044 | | Amortization in homebuilding cost of sales | 6,701 | 9,873 | 5,070 | | Commission expense | 140,442 | 67,032 | 50,533 | | Adjusted gross margin | $820,158 | $416,382 | $252,695 | | Gross margin % | 18.4 % | 16.0 % | 14.6 % | | Adjusted gross margin % | 24.6 % | 21.7 % | 22.5 % | Reconciliation of EBITDA and Adjusted EBITDA (Non-GAAP) to Net Income (in thousands) | Metric | 2022 | 2021 | 2020 | | :-------------------------------------------------- | :--------- | :--------- | :--------- | | Net and comprehensive income attributable to DFH, Inc. | $262,313 | $121,133 | $79,093 | | Interest income | (169) | (6) | (45) | | Interest expensed in cost of sales | 60,595 | 32,508 | 32,044 | | Interest expense | 32 | 672 | 871 | | Income tax expense | 81,859 | 27,455 | — | | Depreciation and amortization | 17,952 | 13,205 | 8,922 | | EBITDA | $422,582 | $194,967 | $120,885 | | Stock-based compensation expense | 6,796 | 5,233 | 947 | | Adjusted EBITDA | $429,378 | $200,200 | $121,832 | | EBITDA margin % | 12.6 % | 10.1 % | 10.7 % | | Adjusted EBITDA margin % | 12.8 % | 10.4 % | 10.7 % | - As of December 31, 2022, liquidity included $365 million in cash and cash equivalents, $122 million available under the credit agreement, totaling $487 million[263] - In 2022, cash flow from operating activities was an outflow of $27.6 million (compared to an inflow of $65.1 million in 2021), investing activities resulted in an outflow of $6 million (compared to an outflow of $523 million in 2021), and financing activities generated an inflow of $147 million (compared to an inflow of $646 million in 2021)[282][283][284][285] - Off-balance sheet arrangements primarily involve controlling lots through asset-light lot option and land banking option contracts, with the risk of loss limited to approximately $277 million in lot deposits as of December 31, 2022[314][315] Quantitative and Qualitative Disclosures About Market Risk This section discloses the company's market risks, primarily focusing on interest rate sensitivity, where rising rates can impact housing demand and financing costs, affecting both the company's floating-rate credit agreements and its mortgage joint venture, Jet LLC - The company's operations are sensitive to interest rate changes, where rising rates can negatively impact homebuyers' financing ability, consequently affecting revenue, gross margins, and net income[317] - The amended credit agreement features floating interest rates, comprising a 'Base Rate' and a 'Term SOFR Rate,' determined by the company's debt capitalization ratio[319] - Mortgage joint venture Jet LLC faces interest rate risk in its lending activities, as it underwrites and originates mortgages sold into the secondary market via forward delivery contracts[322] Financial Statements and Supplementary Data This section presents the company's consolidated financial statements as of December 31, 2022, including the balance sheets, statements of comprehensive income, equity, and cash flows, along with notes, all audited with an unqualified opinion by PwC - PricewaterhouseCoopers LLP (PwC) issued an unqualified opinion on the company's consolidated financial statements for 2022 and 2021, and on the effectiveness of internal control over financial reporting as of December 31, 2022[329] - Key audit matters include procedures for valuing contingent consideration, given management's significant judgment in estimating fair value, and the auditors' high degree of judgment, subjectivity, and effort in evaluating assumptions like revenue, gross margin, pre-tax income, and risk-adjusted discount rates[336][337] Consolidated Balance Sheet Summary (in thousands) | Metric | 2022 | 2021 | | :------------------------------------ | :--------- | :--------- | | Assets: | | | | Cash and cash equivalents | $364,531 | $227,227 | | Total inventories | $1,378,185 | $1,066,662 | | Lot deposits | $277,258 | $241,406 | | Total assets | $2,371,137 | $1,894,248 | | Liabilities: | | | | Construction lines of credit | $966,248 | $763,292 | | Contingent consideration | $115,128 | $124,056 | | Total liabilities | $1,570,444 | $1,337,865 | | Equity: | | | | Total mezzanine and stockholders' equity | $800,693 | $556,383 | Consolidated Statements of Comprehensive Income Summary (in thousands, except per share amounts) | Metric | 2022 | 2021 | 2020 | | :-------------------------------------------------- | :--------- | :--------- | :--------- | | Total revenues | $3,342,335 | $1,923,910 | $1,133,807 | | Homebuilding cost of sales | $2,722,139 | $1,610,332 | $962,928 | | Selling, general and administrative expense | $271,040 | $154,405 | $90,359 | | Income before income taxes | $356,156 | $162,049 | $84,513 | | Income tax expense | $(81,859) | $(27,455) | — | | Net and comprehensive income | $274,297 | $134,594 | $84,513 | | Net and comprehensive income attributable to DFH, Inc. | $262,313 | $121,133 | $79,093 | | Basic EPS | $2.67 | $1.27 | — | | Diluted EPS | $2.45 | $1.27 | — | Consolidated Statements of Cash Flows Summary (in thousands) | Activity | 2022 | 2021 | 2020 | | :------------------------------------------ | :--------- | :--------- | :--------- | | Net cash (used in) provided by operating activities | $(27,623) | $65,108 | $96,911 | | Net cash used in investing activities | $(5,524) | $(523,043) | $(13,027) | | Net cash provided by (used in) financing activities | $146,955 | $645,884 | $(65,830) | | Net increase in cash, cash equivalents and restricted cash | $113,808 | $187,949 | $18,054 | | Cash, cash equivalents and restricted cash at end of period | $395,130 | $281,322 | $93,373 | Note 1. Nature of Business and Significant Accounting Policies This note outlines the company's formation, reorganization, IPO, and Class A common stock transfer to NYSE, detailing significant accounting policies under U.S. GAAP, including consolidation, revenue recognition, inventory, goodwill, leases, and income taxes - The company was incorporated in Delaware on September 11, 2020, and completed its IPO on January 25, 2021, becoming the controlling entity of Dream Finders Holdings LLC[355] - On October 10, 2022, the company's Class A common stock transferred from the Nasdaq Global Select Market to the New York Stock Exchange[358] - Revenue is primarily recognized upon completion of home sales when title and possession transfer to the buyer; for contracts where customers own the land, revenue is recognized over time based on the percentage of completion of home construction[366][367] - Inventory is measured at the lower of cost or net realizable value, with an inventory impairment charge of $1.8 million recognized in 2022[373] - Goodwill is tested for impairment at least annually, with the most recent test on October 1, 2022, indicating no impairment[378] - Lot deposits incurred an impairment charge of $3 million in 2022[381] - Contingent consideration is measured at fair value on the acquisition date and remeasured at each reporting period end based on future expected earnings and risk-adjusted discount rates[384][385] Note 2. Business Combinations This note details the company's two significant 2021 acquisitions, Century Homes and MHI, which were accounted for using the acquisition method, involving purchase price allocation, goodwill recognition, and subsequent contingent consideration adjustments - The Century Homes acquisition was completed on January 31, 2021, for a total purchase price of $35.6 million, resulting in $1.8 million in goodwill[401][402] - The MHI acquisition, completed on October 1, 2021, had a total consideration of approximately $582.8 million (including $488.2 million in cash and $94.6 million in contingent consideration), recognizing $141.1 million in goodwill, significantly expanding the company's Texas market presence[403][405][406][408] - Contingent consideration liabilities related to the VPH, H&H, and MHI acquisitions are remeasured at fair value each reporting period based on revised pre-tax income projections and discount rates, with the MHI contingent consideration adjustment resulting in a $12.4 million expense in 2022[409][410][411] Note 3. Property and Equipment This note presents the company's property and equipment composition and accumulated depreciation as of December 31, 2022 and 2021, with depreciation expense totaling $5 million in 2022 Property and Equipment Composition (in thousands) | Category | 2022 | 2021 | | :------------------------ | :--------- | :--------- | | Furniture and fixtures | $18,753 | $17,756 | | Buildings | $401 | $401 | | Land | $216 | $216 | | Vehicles | $64 | $21 | | Office equipment and software | $3,733 | $4,384 | | Total property and equipment | $23,167 | $22,778 | | Less: Accumulated depreciation | $(15,830) | $(15,989) | | Property and equipment, net | $7,337 | $6,789 | - Depreciation expense was $5 million in 2022, $3.7 million in 2021, and $3.9 million in 2020[413] Note 4. Construction Lines of Credit This note details the company's amended credit agreement, providing an $1.1 billion senior unsecured revolving credit facility, expandable to $1.6 billion, maturing June 2, 2025, with an outstanding balance of $965 million as of December 31, 2022, and all debt covenants met - The credit agreement, amended and restated on June 2, 2022, increased the total committed facility to $1.1 billion, with an incremental feature expandable to $1.6 billion, extended the maturity to June 2, 2025, and converted to a SOFR-based rate[415] - Outstanding balance as of December 31, 2022, was $965 million (compared to $760 million in 2021)[418] - Available liquidity under the credit agreement was $122 million as of December 31, 2022[418] - The company was in compliance with all debt covenants as of December 31, 2022 and 2021, and expects to remain in compliance for the next 12 months[420] Note 5. Inventories This note describes the company's inventory composition, including finished lots, construction in progress, completed homes, and capitalized interest, with a capitalized interest balance of $94.6 million as of December 31, 2022 - Inventory consists of finished lots, construction in progress (CIP), and completed homes, along with capitalized interest[421] Capitalized Interest Activity (in thousands) | Metric | 2022 | 2021 | | :------------------------------------ | :--------- | :--------- | | Capitalized interest at beginning of period | $33,266 | $21,091 | | Interest incurred | $121,964 | $45,355 | | Interest expensed | $(32) | $(672) | | Interest charged to homebuilding cost of sales | $(60,595) | $(32,508) | | Capitalized interest at end of period | $94,603 | $33,266 | Note 6. Commitments and Contingencies This note discloses the company's legal proceedings and lease commitments, including the $12 million settlement of the Silver Meadows lawsuit in 2022 and the sale-leaseback of 93 model homes - The Colorado Supreme Court dismissed the Weyerhaeuser appeal on September 12, 2022, leading the company to record a $0.9 million legal accrual[423] - The Silver Meadows lawsuit was settled for $12 million in March 2022, with the company paying the amount less $4 million in insurance proceeds and pursuing recovery from subcontractors[424] - Leases primarily consist of operating leases for office space and model home sale-leasebacks; as of December 31, 2022, total future minimum lease payments were $30 million, with $8 million due within 12 months[425][430] - On March 24, 2022, the company sold 93 completed model homes for $55.4 million and simultaneously entered into 93 separate lease agreements, with the transaction accounted for as a sale and classified as an operating lease[428] Note 7. Variable Interest Entities This note explains the company's investments in Variable Interest Entities (VIEs) for land acquisition, development, and mortgage operations, consolidating controlled VIEs while limiting maximum loss risk for unconsolidated entities to the investment amount - The company holds investments in VIEs for land acquisition, development, and its mortgage business (Jet LLC)[434] Assets and Liabilities of Consolidated VIEs (in thousands) | Consolidated | 2022 | 2021 | | :----------- | :--------- | :--------- | | Assets | $13,344 | $30,830 | | Liabilities | $4,787 | $10,203 | Investments in Unconsolidated VIEs (in thousands) | Unconsolidated | 2022 | 2021 | | :--------------- | :--------- | :--------- | | Jet Home Loans | $7,102 | $6,133 | | Other unconsolidated VIEs | $6,906 | $9,834 | | Total investment in unconsolidated VIEs | $14,008 | $15,967 | - The company employs an asset-light land financing strategy, controlling lots through lot option contracts and not consolidating these land banking entities due to lacking the ability to direct their economic performance; as of December 31, 2022, the risk of loss associated with lot option and land banking option deposits was $461.6 million[441][445] Note 8. Income Taxes This note discloses the company's income tax expense as a corporate entity, including federal and state taxes, with a total income tax expense of $81.86 million in 2022 and an effective tax rate of 23.0% - The company became a corporate entity after its 2021 IPO and began paying corporate income taxes[446] Income Tax Expense (in thousands) | Category | 2022 | 2021 | | :-------------------- | :--------- | :--------- | | Current expense | $82,153 | $31,424 | | Deferred (benefit) | $(294) | $(3,969) | | Total income tax expense | $81,859 | $27,455 | - The effective tax rate was 23.0% in 2022 (compared to 18.5% in 2021), influenced by factors such as federal statutory rates, state and local income taxes, federal tax credits, and non-deductible executive compensation[447] - As of December 31, 2022, net deferred income tax assets totaled $4.5 million, with no valuation allowance recorded[447][448] Note 9. Segment Reporting This note summarizes the company's revenue, net comprehensive income, total assets, and goodwill by segment, noting the reclassification of the DC Metro segment to 'Other' in 2022 due to not meeting quantitative thresholds - The DC Metro segment was reclassified to the 'Other' category in 2022 as it no longer met the quantitative thresholds for segment reporting under ASC 280[449] Segment Revenues (in thousands) | Segment | 2022 | 2021 | 2020 | | :-------------- | :--------- | :--------- | :--------- | | Jacksonville | $679,321 | $452,891 | $430,811 | | Colorado | $169,378 | $114,260 | $122,275 | | Orlando | $304,767 | $244,143 | $124,769 | | The Carolinas | $482,646 | $370,477 | $89,324 | | Texas | $1,325,274 | $361,138 | — | | Jet Home Loans | $26,399 | $28,056 | $28,629 | | Other | $380,949 | $381,001 | $366,628 | | Total segment revenues | $3,368,734 | $1,951,966 | $1,162,436 | Segment Net and Comprehensive Income (in thousands) | Segment | 2022 | 2021 | 2020 | | :-------------- | :--------- | :--------- | :--------- | | Jacksonville | $86,872 | $55,578 | $41,380 | | Colorado | $17,740 | $3,971 | $14,052 | | Orlando | $32,070 | $15,937 | $10,680 | | The Carolinas | $25,965 | $14,623 | $6,034 | | Texas | $112,855 | $21,797 | — | | Jet Home Loans | $3,655 | $10,630 | $15,921 | | Other | $1,004 | $18,679 | $4,376 | | Total segment net and comprehensive income | $280,161 | $141,215 | $92,443 | Segment Assets and Goodwill (in thousands) | Segment | 2022 Assets | 2021 Assets | 2022 Goodwill | 2021 Goodwill | | :-------------- | :---------- | :---------- | :------------ | :------------ | | Jacksonville | $300,491 | $207,502 | — | — | | Colorado | $187,813 | $116,121 | — | — | | Orlando | $276,720 | $131,882 | $1,795 | $1,795 | | The Carolinas | $311,469 | $247,250 | $16,853 | $16,853 | | Texas | $793,219 | $743,306 | $141,071 | $141,070 | | Jet Home Loans | $96,108 | $77,074 | — | — | | Other | $494,150 | $441,910 | $12,488 | $12,209 | | Total segments | $2,459,970 | $1,965,045 | $172,207 | $171,927 | Note 10. Fair Value Disclosures This note summarizes changes in the fair value measurement of contingent consideration, the company's sole asset or liability subject to recurring fair value measurement using Level 3 inputs Changes in Fair Value Measurement of Contingent Consideration (in thousands) | Metric | Amount | | :------------------------------------------ | :--------- | | Beginning balance, December 31, 2021 | $124,056 | | Fair value adjustments related to prior year acquisitions | $11,053 | | Contingent consideration payments | $(19,981) | | Ending balance, December 31, 2022 | $115,128 | - Fair value measurements are based on Level 3 inputs (unobservable and significant), utilizing a discounted cash flow method and estimated based on expected cash flows and risk-adjusted discount rates[336][452] Note 11. Related Party Transactions This note discloses related party transactions, primarily involving land acquisition and development through consolidated and unconsolidated VIEs, as well as land banking projects with DF Capital and Rockpoint Group - Company directors, officers, and management invested 23.8% ($8.7 million) of the total committed capital in DF Residential I, LP (Fund I)[456][457] - As of December 31, 2022, company directors, officers, and management invested 41.6% ($133.9 million) of the total committed capital in DF Residential II, LP (Fund II)[461] - As of December 31, 2022, outstanding lot deposits related to DF Capital projects totaled $58.6 million[463] - The company entered into land banking option contracts with Rockpoint Group, LLC or its affiliates, where William H. Walton III, a founding partner of Rockpoint Group, is a company director; Rockpoint provided $100 million in committed capital to Fund II in February 2022[464][465] - The company holds a 49.9% interest in Jet LLC and accounts for it as an affiliate using the equity method[466] Note 12. Equity This note details the company's post-reorganization equity structure, including DFH LLC's Series B Preferred Units and the terms of the company's Series A Convertible Preferred Stock, which holds preference over Class A and B common stock in dividends and liquidation - Post-IPO, DFH LLC's non-voting common units and Series A preferred units converted into the company's Class A common stock, while common units converted into Class B common stock[467] - As of December 31, 2022, 7,143 Series B Preferred Units of DFH LLC were outstanding, with a carrying value of $7.9 million, a $1,000 per unit liquidation preference, and an 8% annual cumulative preferred distribution[468] - The company issued 150,000 shares of Series A Convertible Preferred Stock in September 2021 for a total purchase price of $150 million, which has preference over Class A and B common stock in dividends and liquidation, carries a 9% cumulative dividend, and is convertible into Class A common stock after five years or earlier upon breach of protective covenants[470] Note 13. Equity-Based Compensation This note describes the company's 2021 Equity Incentive Plan, authorizing stock awards, primarily restricted stock, to executives, directors, and management, with equity-based compensation expense totaling $6.8 million in 2022 - The 2021 Equity Incentive Plan authorizes the grant of up to 9.1 million stock awards, primarily restricted stock, to executives, directors, and management, typically vesting over three to five years[474] - Equity-based compensation expense was $6.8 million in 2022 (compared to $5.2 million in 2021)[474] - As of December 31, 2022, total unrecognized compensation expense was $11.3 million, to be recognized over a weighted-average period of approximately two years[475] Note 14. Earnings per Share This note provides the company's basic and diluted earnings per share (EPS) calculations as of December 31, 2022 and 2021, with diluted EPS at $2.45 in 2022 Earnings per Share Calculation (in thousands, except share amounts) | Metric | 2022 | 2021 | | :-------------------------------------------------- | :--------- | :--------- | | Net and comprehensive income attributable to Dream Finders Homes, Inc. | $262,313 | $121,133 | | Less: Preferred dividends | $(14,513) | $(4,845) | | Add: Loss prior to reorganization attributable to DFH LLC members | — | $1,244 | | Net and comprehensive income available to common stockholders | $247,800 | $117,532 | | Weighted-average number of common shares outstanding - basic | 92,745,781 | 92,521,482 | | Add: Common stock equivalent shares | 13,945,467 | 2,792,111 | | Weighted-average number of shares outstanding - diluted | 106,691,248 | 95,313,593 | | Basic EPS | $2.67 | $1.27 | | Diluted EPS | $2.45 | $1.27 | - Diluted shares are calculated using the treasury stock method for restricted stock awards and the if-converted method for convertible preferred stock and its associated preferred stock dividends[478] - The conversion price of convertible preferred stock is based on the 90-day average closing price of Class A common stock, which can significantly impact the assumed number of common shares for diluted EPS[479] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[480] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022, having successfully remediated previously reported material weaknesses in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[481] - The company successfully remediated previously reported material weaknesses in internal control over financial reporting, including strengthening policies, procedures, IT general controls, segregation of duties, and risk assessment[483][484][485] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, and this was audited by PwC[486][487] - No material changes occurred in internal control over financial reporting during the fourth quarter of 2022[488] Other Information The company reports no other information requiring disclosure - No other information[489] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports that disclosure regarding foreign jurisdictions that prevent inspections is not applicable - Not applicable[490] Part III Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders - The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders[492] Executive Compensation The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders - The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders[493] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders - The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders[494] Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders - The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders[495] Principal Accounting Fees and Services The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders - The information required for this item is incorporated by reference into the definitive proxy statement for the 2023 Annual Meeting of Stockholders[496] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and exhibit index filed as part of the annual report, including the audit report, balance sheets, statements of comprehensive income, equity, cash flows, and related notes - The consolidated financial statements included in this report comprise the independent registered public accounting firm's report, consolidated balance sheets, statements of comprehensive income, equity, cash flows, and notes to consolidated financial statements[498] - The exhibit index includes merger agreements, equity purchase agreements, credit agreements, equity incentive plans, employment agreements, and various certification documents[499][500][501][502][503] Form 10-K Summary The company reports no Form 10-K Summary - No Form 10-K Summary[505] Signatures This report is signed by Patrick O. Zalupski, President, CEO, and Chairman of the Board, L. Anabel Fernandez, Senior Vice President and CFO, and other directors - This report was signed on March 2, 2023, by Patrick O. Zalupski, President, Chief Executive Officer, and Chairman of the Board, L. Anabel Fernandez, Senior Vice President and Chief Financial Officer, and other directors[510][511]