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Dream Finders Homes(DFH) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements Presents unaudited condensed consolidated financial statements for Dream Finders Homes, Inc., detailing financial position, performance, and cash flows for Q1 2023 Condensed Consolidated Balance Sheets Total assets decreased slightly to $2.31 billion as of March 31, 2023, while total liabilities decreased to $1.46 billion Condensed Consolidated Balance Sheet Data (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $266,569 | $364,531 | | Total inventories | $1,434,860 | $1,378,185 | | Total assets | $2,308,797 | $2,371,137 | | Liabilities | | | | Construction lines of credit | $915,992 | $966,248 | | Total liabilities | $1,458,322 | $1,570,444 | | Total stockholders' equity | $694,216 | $644,648 | Condensed Consolidated Statements of Comprehensive Income Total revenues increased 16% to $769.4 million in Q1 2023, with net income growing 12% to $49.1 million and diluted EPS rising to $0.45 Q1 2023 vs Q1 2022 Income Statement (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total revenues | $769,420 | $664,066 | | Homebuilding cost of sales | $637,344 | $538,868 | | Income before income taxes | $69,387 | $63,212 | | Net income attributable to DFH | $49,089 | $43,716 | | Diluted EPS | $0.45 | $0.42 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities significantly improved to $35.6 million in Q1 2023, while financing activities used $60.7 million Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(35,589) | $(122,498) | | Net cash used in investing activities | $(1,360) | $(930) | | Net cash (used in)/provided by financing activities | $(60,730) | $3,121 | | Net decrease in cash | $(97,679) | $(120,307) | Notes to the Condensed Consolidated Financial Statements Details significant accounting policies, credit facilities, inventory, variable interest entities, segment reporting, and related party transactions - The company's $1.1 billion Amended and Restated Credit Agreement had an outstanding balance of $915.0 million as of March 31, 20232729 - In Q1 2023, the company recorded $0.6 million in inventory impairment charges and $0.9 million in lot deposit impairment charges, compared to none in Q1 202233 - The company utilizes an asset-light strategy through lot option contracts. The maximum risk of loss related to these off-balance sheet arrangements was $367.4 million as of March 31, 20234448 - The effective tax rate for Q1 2023 was 25.4%, down from 27.9% in Q1 2022, primarily due to the timing of estimating the 45L tax credit49 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 2023 performance, emphasizing revenue growth, the asset-light model, and declines in net new orders and backlog amid market challenges - The company believes there are indicators of market stabilization as homebuyers adjust to higher interest rates and inventory remains constrained. Sales incentives are being used to support demand71 Key Results Comparison (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Revenues | $769M | $664M | +16% | | Home closings | 1,517 | 1,371 | +11% | | Net new orders | 1,448 | 2,402 | -40% | | Backlog of sold homes | 5,479 | 7,413 | -26% | | Gross margin % | 17.0% | 18.7% | -170 bps | | Adjusted gross margin % | 24.3% | 24.4% | -10 bps | | Diluted EPS | $0.45 | $0.42 | +7% | - The company's asset-light strategy is central to its operations, controlling 33,344 lots through option contracts with only $262 million in lot deposits as of March 31, 20238284 - Total liquidity was $453 million as of March 31, 2023, comprising $267 million in cash and $187 million available under the revolving credit facility109 Results of Operations Q1 2023 revenues increased 16% to $769 million, driven by higher home closings and average sales prices, while gross margin percentage decreased to 17.0% - The increase in revenues was primarily attributable to 1,517 home closings, up from 1,371 in Q1 2022, and a 4% increase in the average sales price of homes closed75 - The decrease in gross margin percentage to 17.0% from 18.7% was mainly due to increased costs of funds and proactive measures like sales incentives to assist homebuyers76 - Adjusted gross margin (non-GAAP) remained consistent at 24.3% compared to 24.4% in the prior year, as price appreciation was offset by increased closing costs77 Backlog, Sales and Closings Net new orders decreased 40% to 1,448 in Q1 2023, with the cancellation rate increasing and quarter-end backlog declining 26% in units and value Sales and Backlog Metrics | Metric | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Net New Orders | 1,448 | 2,402 | -40% | | Cancellation Rate | 20.9% | 13.4% | +7.5% | | Ending Backlog (Homes) | 5,479 | 7,413 | -26% | | Ending Backlog (Value) | $2.53B | $3.44B | -26% | - The decline in net new orders is compared against an unprecedented level of sales in Q1 2022, which also included built-for-rent contracts that did not repeat in Q1 202394 Non-GAAP Financial Measures Provides reconciliations for non-GAAP Adjusted Gross Margin and Adjusted EBITDA, which were 24.3% and $94.1 million respectively in Q1 2023 Reconciliation of Adjusted Gross Margin (in thousands) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Gross margin (GAAP) | $130,132 | $123,605 | | Interest expense in cost of sales | $22,419 | $8,847 | | Commission expense | $33,642 | $25,274 | | Adjusted gross margin (Non-GAAP) | $186,193 | $161,556 | Reconciliation of Adjusted EBITDA (in thousands) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income (GAAP) | $49,089 | $43,716 | | Adjustments (Interest, Taxes, D&A) | $42,590 | $32,151 | | EBITDA (Non-GAAP) | $91,679 | $75,867 | | Stock-based compensation expense | $2,430 | $1,365 | | Adjusted EBITDA (Non-GAAP) | $94,109 | $77,232 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity, impacting homebuyer affordability and financing costs, especially for its variable-rate credit facility - The company's operations are sensitive to interest rate changes, as higher rates can negatively impact housing demand and the ability of homebuyers to secure financing137 - The company's credit facility loans bear interest at variable rates based on SOFR plus a credit spread, making financing costs subject to market rate changes139 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2023143 - No material changes to the company's internal control over financial reporting occurred during the first quarter of 2023144 PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, but management does not anticipate a material adverse effect on its financial condition or operations - The company does not expect current legal proceedings to have a material adverse effect on its business or financial condition146 Risk Factors A new risk factor was added concerning potential adverse effects of developments affecting financial institutions on the company's liquidity and financial performance - A new risk factor was disclosed regarding adverse developments affecting financial institutions, including bank failures, which could negatively impact the company's liquidity and financial performance, particularly concerning undrawn credit lines and cash deposits exceeding FDIC limits148 Unregistered Sales of Equity Securities and Use of Proceeds The company did not have any unregistered sales of equity securities during the reporting period - None149 Exhibits Lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents for financial reporting - Filed exhibits include CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and Inline XBRL data files (Exhibits 101 and 104)151 Signatures - The report was duly signed on May 4, 2023, by Patrick O. Zalupski, President, CEO, and Chairman, and L. Anabel Fernandez, Senior Vice President and CFO157