10-Q 1 brhc10037294_10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2022
 
OR

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to _________.
 
Commission file number 001-39916



DREAM FINDERS HOMES, INC.

(Exact name of registrant as specified in its charter)

Delaware
 
85-2983036
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

14701 Philips Highway, Suite 300, Jacksonville, FL
 
32256
(Address of principal executive offices)

(Zip code)

(904) 644-7670
(Registrants Telephone Number, Including Area Code)


 
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading symbol(s)
Name of each exchange on which registered
     
Class A Common Stock, par value $0.01 per share
DFH
NASDAQ Global Select Market


 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒    No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company

   
Emerging growth company


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

As of May 10, 2022, there were 32,379,417 shares of the registrant’s Class A common stock, par value $0.01 per share, issued and outstanding and 60,379,999 shares of the registrant’s Class B common stock, par value $0.01 per share, issued and outstanding.



TABLE OF CONTENTS

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38

PART I. FINANCIAL INFORMATION

ITEM 1.
DREAM FINDERS HOMES, INC CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
DREAM FINDERS HOMES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)

   
March 31,
   
December 31,
 
    2022      2021  
Assets
           
Cash and cash equivalents
 
$
100,140
   
$
227,227
 
Restricted cash (VIE amounts of $3,759 and $4,275)
   
60,875
     
54,095
 
Accounts receivable (VIE amounts of $3,621 and $2,684)
    33,534       33,482  
Inventories:
               
Construction in process and finished homes
   
1,112,085
     
961,779
 
Company owned land and lots
   
104,407
     
83,197
 
VIE owned land and lots
    15,564       21,686  
Total inventories
    1,232,056       1,066,662  
Lot deposits
   
275,354
     
241,406
 
Other assets (VIE amounts of $1,965 and $2,185)
    57,401       43,962  
Equity method investments
   
14,480
     
15,967
 
Property and equipment, net
   
6,620
     
6,789
 
Operating lease right-of-use assets
   
26,581
     
19,359
 
Deferred tax asset
    5,386       4,232  
Intangible assets, net of amortization
   
8,112
     
9,140
 
Goodwill
   
171,927
     
171,927
 
Total assets
 
$
1,992,466
   
$
1,894,248
 
Liabilities
               
Accounts payable (VIE amounts of $1,429 and $1,309)
 
$
136,665
   
$
113,498
 
Accrued expenses (VIE amounts of $6,062 and $6,915)
   
126,906
     
139,508
 
Customer deposits
   
206,065
     
177,685
 
Construction lines of credit
   
770,000
     
760,000
 
Notes payable (VIE amounts of $125 and $1,979)
   
1,725
     
3,292
 
Operating lease liabilities
   
27,065
     
19,826
 
Contingent consideration
   
128,248
     
124,056
 
Total liabilities
 
$
1,396,674
   
$
1,337,865
 
Commitments and contingencies (Note 5)
   
       
Mezzanine Equity
               
Preferred mezzanine equity
   
155,417
     
155,220
 
                 
Stockholders’ Equity
               
Class A common stock, $0.01 per share, 289,000,000 authorized, 32,295,329 outstanding
   
323
     
323
 
Class B common stock, $0.01 per share, 61,000,000 authorized, 60,226,153 outstanding
   
602
     
602
 
Additional paid-in capital
   
259,328
     
257,963
 
Retained earnings
   
158,611
     
118,194
 
Non-controlling interests
   
21,511
     
24,081
 
Total mezzanine and stockholders’ equity
   
595,792
     
556,383
 
Total liabilities, mezzanine equity, and stockholders’ equity
 
$
1,992,466
   
$
1,894,248
 

The accompanying notes are an integral part of these condensed consolidated financial statements.


DREAM FINDERS HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (In thousands, except share and per share amounts)
(Unaudited)

   
Three Months Ended March 31,
 
   
2022
   
2021
 
Revenues:            
Homebuilding
  $
662,473     $
342,167  
Other
    1,593       1,393  
Total revenues
    664,066       343,560  
Homebuilding cost of sales    
538,868
     
291,037
 
Selling, general and administrative expense
   
61,710
     
29,315
 
Income from equity in earnings of unconsolidated entities
   
(2,960
)
   
(1,732
)
Contingent consideration revaluation     4,192       1,183  
Other (income) expense, net    
(969
)
    703  
Interest expense
   
13
     
642
 
Income before taxes
   
63,212
     
22,412
 
Income tax expense     (16,878 )     (4,816 )
Net and comprehensive income
 

46,334
   

17,596
 
Net and comprehensive income attributable to non-controlling interests
   
(2,618
)
   
(1,475
)
Net and comprehensive income attributable to Dream Finders Homes, Inc.
 
$
43,716
   
$
16,121
 
Earnings per share(1)
               
Basic
  $ 0.43     $ 0.18  
Diluted
  $ 0.42     $ 0.18  
Weighted-average number of shares
               
Basic
   
92,758,939
      92,521,482
 
Diluted
   
102,496,876
      92,596,960
 


(1) The Company calculated earnings per share (“EPS”) based on net income attributable to common stockholders for the period January 21, 2021 through March 31, 2021 over the weighted average diluted shares outstanding for the same period. EPS was calculated prospectively for the period subsequent to the Company’s initial public offering and corporate reorganization as described in Note 1, Nature of Business and Significant Accounting Policies, resulting in 92,521,482 shares of common stock outstanding as of the closing of the initial public offering. The total outstanding shares of common stock are made up of Class A common stock and Class B common stock, which participate equally in their ratable ownership share of the Company. Diluted shares were calculated by using the treasury stock method for stock grants and the if-converted method for the convertible preferred stock and the associated preferred dividends.

The accompanying notes are an integral part of these condensed consolidated financial statements.

DREAM FINDERS HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share amounts)
(Unaudited)

   
Redeemable Preferred
Units
Mezzanine
   
Redeemable Common
Units
Mezzanine
   
Common Units Members’
   
Common Stock - Class A
   
Common Stock - Class B
   
Additional
Paid-in
Capital
   
Retained Earnings
   
Total
Non-
Controlling
Interests
   
Total Equity
 
   
Units
   
Amount
   
Units
   
Amount
   
Units
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
                         
Balance at December 31, 2020
   
48,543
   
$
55,638
     
7,010
   
$
20,593
     
76,655
   
$
103,853
     
-
     
-
     
-
     
-
     
-
     
-
   
$
31,939
   
$
212,023
 
Distributions
   
-
     
(3,617
)
   
-
     
(1,275
)
   
-
     
(18,384
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(3,476
)
   
(26,752
)
Net income (loss)
   
-
     
(157
)
   
-
     
(91
)
   
-
     
(996
)
   
-
     
-
     
-
     
-
     
-
     
-
     
210
     
(1,034
)
Balance at January 20, 2021, pre-IPO/Reorganization
   
48,543
   
$
51,864
     
7,010
   
$
19,227
     
76,655
   
$
84,473
     
-
     
-
     
-
     
-
     
-
     
-
   
$
28,673
   
$
184,237
 
Reorganization transactions
   
(15,400
)
   
(19,958
)
   
(7,010
)
   
(19,227
)
   
(76,655
)
   
(84,473
)
   
21,255,329
     
213
     
60,226,153
     
602
     
122,843
     
-
     
-
     
-
 
Issuance of common stock in IPO, net
   
-
     
-
     
-
     
-
     
-
     
-
     
11,040,000
     
110
     
-
     
-
     
129,887
     
-
     
-
     
129,997
 
Equity-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
1,108
     
-
     
-
     
1,108
 
Redemptions
   
(26,000
)
   
(25,531
)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(25,531
)
Distributions
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(8,242
)
   
(8,242
)
Net income
   
-
     
140
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
17,225
     
1,265
     
18,630
 
Balance at March 31, 2021
   
7,143
   
$
6,515
     
-
     
-
     
-
     
-
     
32,295,329
   
$
323
     
60,226,153
   
$
602
   
$
253,838
   
$
17,225
   
$
21,696
   
$
300,199
 

   
Redeemable Preferred
Units/Stock
Mezzanine
   
Redeemable Common
Units
Mezzanine
   
Common Units
Members’
   
Common Stock -
Class A
   
Common Stock -
Class B
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Total
Non-
Controlling
Interests
   
Total Equity
 
   
Units/Shares
   
Amount
     Units 
     Amount 
     Units 
     Amount 
   
Shares
   
Amount
   
Shares
   
Amount
                         
Balance at December 31, 2021
   
157,143
   
$
155,220
     
-
     
-
     
-
     
-
     
32,295,329
   
$
323
     
60,226,153
   
$
602
   
$
257,963
   
$
118,194
   
$
24,081
   
$
556,383
 
Equity-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
1,365
     
-
     
-
     
1,365
 
Distributions
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(5,188
)
   
(5,188
)
Preferred dividends declared
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(3,102
)
   
-
     
(3,102
)
Net income
   
-
     
197
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
43,519
     
2,618
     
46,334
 
Balance at March 31, 2022
   
157,143
   
$
155,417
     
-
     
-
     
-
     
-
     
32,295,329
   
$
323
     
60,226,153
   
$
602
   
$
259,328
   
$
158,611
   
$
21,511
   
$
595,792
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

DREAM FINDERS HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Three Months Ended
March 31,
 
   
2022
   
2021
 
Cash Flows from Operating Activities
           
Net income
 
$
46,334
   
$
17,596
 
Adjustments to Reconcile Net Income to Net cash used in operating activities
               
Depreciation and amortization
   
2,144
     
973
 
Gain on sale of property and equipment
   
(9
)
   
(66
)
Amortization of debt issuance costs
   
724
     
911
 
Amortization of right-of-use operating lease
   
947
     
760
 
Stock compensation expense
   
1,364
     
1,108
 
Deferred tax expense
   
16,878
     
4,245
 
Income from equity method investments, net of distributions received
   
1,482
     
(1,732
)
Remeasurement of contingent consideration
   
4,192
     
1,183
 
Changes in Operating Assets and Liabilities
               
Inventories
   
(165,394
)
   
(36,695
)
Lot deposits
   
(33,948
)
   
(24,975
)
Other assets
   
(14,091
)
   
(6,484
)
Accounts payable and accrued expenses
   
(10,570
)
   
8,412
 
Customer deposits
   
28,380
     
13,071
 
Operating lease ROU assets     (8,170 )     -  
Operating lease liabilities
   
7,239
     
(730
)
Net cash used in operating activities
   
(122,498
)
   
(22,423
)
                 
Cash Flows from Investing Activities
               
Purchase of property and equipment
   
(950
)
   
(710
)
Proceeds from disposal of property and equipment
   
15
     
330
 
Returns on investment from equity method investments
   
5
     
81
 
Business combinations, net of cash acquired
   
-
     
(22,617
)
Net cash used in investing activities
   
(930
)
   
(22,916
)
                 
Cash Flows from Financing Activities
               
Proceeds from construction lines of credit
   
50,000
     
976,317
 
Principal payments on construction lines of credit
   
(40,000
)
   
(946,703
)
Proceeds from notes payable
   
320
     
1,159
 
Principal payments on notes payable
   
(1,886
)
   
(23,285
)
Payment of debt issuance costs
   
(125
)
   
-
 
Payment of equity issuance costs
    -       (12,572 )
Payments on financing leases
   
-
     
(38
)
Distributions to non-controlling interests
   
(5,188
)
   
(11,718
)
Proceeds from stock issuance
    -       142,569  
Distributions
   
-
     
(23,276
)
Redemptions
   
-
     
(25,531
)
Contribution from conversion of converted LLC units
   
-
     
123,658
 
Conversion of LLC units
   
-
     
(123,658
)
Net cash provided by financing activities
   
3,121
     
76,922
 
                 
Net increase (decrease) in cash, cash equivalents and restricted cash
   
(120,307
)
   
31,583
 
Cash, cash equivalents and restricted cash at beginning of period
   
281,322
     
87,414
 
Cash, cash equivalents and restricted cash at end of period
  $
161,015
    $
118,997
 
                 
Non-cash Financing Activities
               
Financed land payments to seller
  $
-     $
8,916  
Leased assets obtained in exchange for new operating lease liabilities
   
8,170
     
-
 
Equity issuance costs incurred
    -       906  
Accrued distributions
   
(3,102
)
   
-
 
Non-cash Investing Activities
               
Investment capital reallocation
    -       (3,468 )
Total non-cash financing and investing activities
  $
5,068     $
6,354  
                 
Reconciliation of Cash, cash equivalents and Restricted cash                
Cash and cash equivalents
  $
100,140
    $
69,565
 
Restricted cash
   
60,875
     
49,432
 
Total Cash, cash equivalents and Restricted cash shown on the Consolidated Statements of Cash Flows
 
$
161,015
   
$
118,997
 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

DREAM FINDERS HOMES, INC. 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
Nature of Business and Significant Accounting Policies
 
Nature of Business

Dream Finders Homes, Inc. (the “Company”, “DFH, Inc.” or “we”) was incorporated in the State of Delaware on September 11, 2020. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its common stock and related transactions in order to carry on the business of Dream Finders Holdings LLC, a Florida limited liability company (“DFH LLC”), as a publicly-traded entity. Pursuant to a corporate reorganization and completion of its IPO on January 25, 2021, the Company became a holding company for DFH LLC and its subsidiaries.

In connection with the IPO, and pursuant to the terms of the Agreement and Plan of Merger by and among DFH, Inc., DFH LLC and DFH Merger Sub LLC, a Delaware limited liability company and a direct, wholly-owned subsidiary of DFH, Inc., DFH Merger Sub LLC merged with and into DFH LLC with DFH LLC as the surviving entity (the “Merger”). As a result of the Merger, all of the outstanding non-voting common units and Series A Preferred Units of DFH LLC converted into 21,255,329 shares of Class A common stock of DFH, Inc., all of the outstanding common units of DFH LLC converted into 60,226,153 shares of Class B common stock of DFH, Inc. and all of the outstanding Series B Preferred Units and Series C Preferred Units of DFH LLC remained outstanding. We refer to this and certain other related events and transactions, as the “Corporate Reorganization”. Following the Corporate Reorganization, the Company owns all of the voting membership interest of DFH LLC.

The Company successfully completed its IPO of 11,040,000 shares of Class A common stock (which included full exercise of the over-allotment option) at an IPO price of $13.00 per share. Shares of the Company’s Class A common stock began trading on the NASDAQ Global Select Market under the ticker symbol “DFH” on January 21, 2021, and the IPO closed on January 25, 2021. On January 27, 2021, the Company redeemed all of the outstanding Series C Preferred Units for $26.0 million, including $0.5 million of discounted costs, plus accrued unpaid preferred distributions of $0.2 million.

Principles of Presentation and Consolidation



The accompanying unaudited, condensed consolidated financial statements include the accounts of DFH Inc, its wholly-owned subsidiaries and its investments that qualify for consolidation treatment (see Note 7). The accompanying statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for a complete set of financial statements. As such, the accompanying statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.  The accompanying statements include all adjustments that are of a normal recurring nature and necessary for the fair presentation of our results for the interim periods presented, which are not necessarily indicative of results to be expected for the full year.  All intercompany accounts and transactions have been eliminated in consolidation. There are no other components of comprehensive income not already reflected in net and comprehensive income on our Condensed Consolidated Statements of Comprehensive Income.


As a result of the reorganization transactions in connection with the IPO, for accounting purposes, our historical results included herein present the combined assets, liabilities and results of operations of DFH, Inc. and DFH LLC and its direct and indirect subsidiaries for the period January 1 to January 21, 2021.


Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the remeasurement of contingent consideration, valuation and impairment of goodwill, impairment of inventories and business combination estimates. Actual results could differ materially from those estimates.

Contingent Consideration

In connection with applicable acquisitions, the Company records the fair value of contingent consideration as a liability on the acquisition date, based on estimated pre-tax net income of the acquiree for future periods prescribed by the underlying agreement. The initial measurement of contingent consideration is based on projected cash flows such as revenues, gross margin, overhead expenses and pre-tax income and is discounted to present value using the discounted cash flow method. The remaining estimated earn-out payments are subsequently remeasured to fair value at each reporting date based on the estimated future earnings of the acquired entities and the re-assessment of risk-adjusted discount rates that reflect current market conditions. Maximum potential exposure for contingent consideration is not estimable based on the contractual terms of the contingent consideration agreements, which allow for a percentage payout based on a potentially unlimited range of pre-tax net income.

As of March 31, 2022, and December 31, 2021, the Company remeasured contingent consideration related to the acquisition of Village Park Homes, LLC and adjusted the liability to $7.9 million and $7.6 million respectively. The Company recorded contingent consideration adjustments resulting in $0.3 million of expense and $0.4 million of income for the three months ended March 31, 2022, and 2021, respectively.

As of March 31, 2022, and December 31, 2021, the Company remeasured contingent consideration related to the acquisition of H&H Constructors of Fayetteville, LLC (“H&H”) and adjusted the liability to $21.6 million and $19.7 million, respectively. The Company recorded contingent consideration adjustments resulting in $1.9 million and $0.8 million of expense for the three months ended March 31, 2022, and 2021, respectively.

The Company measured contingent consideration related to the acquisition of MHI on October 1, 2021 (see Note 2), and recorded a liability in the opening balance sheet of $94.6 million. As of March 31, 2022 and December 31, 2021, the Company remeasured contingent consideration related to the MHI acquisition and adjusted the liability to $98.8 million and $96.7 million, respectively. The Company recorded contingent consideration adjustments resulting in $2.0 million of expense for the three months ended March 31, 2022.

The contingent consideration re-measurement adjustments are included in contingent consideration revaluation on the Condensed Consolidated Statements of Comprehensive Income. The payment of the H&H and MHI earn-outs are also subject to certain minimum earnings thresholds which must be met by H&H and MHI, respectively, before an earn-out payment occurs.  In April 2022 and 2021, the Company made contingent consideration payments of $10.6 million and $1.2 million, respectively. There were no other payments of contingent consideration for the three months ended March 31, 2022 and 2021, respectively. See Note 10, Fair Value Disclosures, for additional discussion on fair value measurement inputs related to contingent consideration.

Change in Accounting Principle – Cash and cash equivalents



On December 31, 2021, the Company elected to change its accounting policy for the presentation of cash proceeds that are in transit from or held within title company escrow accounts for the benefit of the Company, typically for less than five days. Under the new principle, these proceeds are included in cash and cash equivalents, whereas previously, they were considered accounts receivable and included in other assets. The Company believes this reclassification to be preferable because it is a more accurate reflection of its liquidity at period end and the predominant method used in the industry. This change in accounting principle has been applied retrospectively. This reclassification had no impact on the Condensed Consolidated Statements of Comprehensive Income or Condensed Consolidated Statements of Equity.


The impact of the retrospective presentation change on the Condensed Consolidated Statement of Cash Flows for the three month period ended March 31, 2021, is shown below (in thousands):

   
As previously
reported
   
As adjusted
   
Effect of change
 
Net cash used in operating activities
 
$
(47,482
)
 
$
(22,423
)
 
$
25,059
 

Reclassifications

Certain other reclassifications have been made in the 2021 condensed consolidated financial statements to conform to the classifications used in 2022.

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides practical expedients and exceptions for applying GAAP when modifying contracts and hedging relationships that use LIBOR as a reference rate. In addition, these amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. We do not anticipate a material increase in interest rates from our creditors as a result of the shift away from LIBOR as a reference rate, and we are currently evaluating the impact of the shift and this guidance on our financial statements and disclosures.

2.
Business Acquisitions

Century Homes


On January 31, 2021, the Company completed the acquisition of Century Homes Florida, LLC (“Century Homes”) from Tavistock Development Company for a total purchase price of $35.6 million.  The acquisition was accounted for as a business combination under FASB Topic 805, Business Combinations (Topic 805). We recorded an allocation of the purchase price to Century Homes’ tangible assets acquired and liabilities assumed based on their estimated fair values as of January 31, 2021. There were no identifiable intangible assets. Goodwill was recorded as the residual amount by which the purchase price exceeded the provisional fair value of the net assets acquired and is expected to be fully deductible for tax purposes. Goodwill consists primarily of expected synergies of combining operations, the acquired workforce, and growth opportunities, none of which qualify as separately identifiable intangible assets. As of January 31, 2022, the Company has completed its allocation of the purchase price and no measurement period adjustments were identified.



The final purchase price allocation as of January 31, 2022 was as follows (in thousands):


Cash acquired
 
$
3,993
 
Other assets
   
754
 
Goodwill
   
1,795
 
Inventories
   
34,324
 
Property and equipment, net
   
549
 
Liabilities
   
(5,831
)
Total purchase price
 
$
35,584
 



MHI



On October 1, 2021, we completed the acquisition of certain assets, rights and properties, and assumed certain liabilities of privately held Texas homebuilder McGuyer Homebuilders, Inc. and related affiliates (“MHI”), including: (i) single-family residential home-building; (ii) owning model homes; (iii) acquisition, ownership and licensing of intellectual property (including architectural plans); (iv) purchasing and reselling homebuilding supplies; (v) development, construction and sale of condominium units in Austin, Texas; (vi) mortgage origination through a mortgage company; and (vii) title insurance, escrow and closing services through a title company. The acquisition allows the Company to expand its existing footprint in the Texas market.



Total cash paid at closing of approximately $471.0 million included $463.0 million in purchase price based on preliminary value of purchased net assets and a 10.0% deposit on a separate land bank facility. On December 3, 2021, the Company paid an additional $25.2 million in cash for customary post-closing adjustments based on final value of the net assets acquired as of September 30, 2021.  Additionally, the Company agreed to the future payment of additional consideration of up to 25.0% of pre-tax net income for up to five periods, the last of which ends 48 months after the closing subject to certain minimum pre-tax income thresholds and certain overhead expenses, estimated at approximately $94.6 million as of the acquisition date.



The total purchase price was as follows (in thousands):


Cash consideration
 
$
488,178
 
Contingent consideration based on future earnings
   
94,573
 
Total consideration
 
$
582,751
 


The Company used $20.0 million of cash on hand and proceeds from the sale of the Convertible Preferred Stock (see Note 6) and from unsecured debt incurred under the Credit Agreement, to fund the MHI acquisition. On October 1, 2021, the Company borrowed approximately $300.0 million under the Credit Agreement and paid off MHI’s vertical lines of credit in connection with the closing of the acquisition (see Note 3).


The acquisition was accounted for as a business combination under Topic 805. We recorded an allocation of the purchase price to MHI tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of October 1, 2021. The amounts for intangible assets were based on third-party valuations performed. Goodwill was recorded as the residual amount by which the purchase price exceeded the provisional fair value of the net assets acquired and is expected to be fully deductible for tax purposes. Goodwill consists primarily of expected synergies of combining operations, the acquired workforce, and growth opportunities, none of which qualify as separately identifiable intangible assets. As of March 31, 2022, the Company has substantially completed its allocation of the purchase price. The principal open items relate to the valuation of certain contingencies as management is awaiting additional information to complete its assessment. Estimates have been recorded as of the acquisition date and updates to these estimates may increase or decrease goodwill.


Pursuant to Topic 805, the financial statements will not be retrospectively adjusted for any provisional amount changes that occur in subsequent periods. Rather, we will recognize any provisional adjustments during the reporting period in which the adjustments are determined. We will also be required to record, in the same period’s financial statements, the effect on earnings, if any, as a result of any change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.


The purchase price allocation as of March 31, 2022, was as follows (in thousands):


Cash acquired
 
$
297
 
Inventories
   
473,037
 
Lot deposits
   
40,452
 
Other assets
   
14,722
 
Property and equipment, net
   
3,163
 
Equity method investments
   
6,192
 
Intangible assets, net of amortization
   
8,840
 
Goodwill
   
141,071
 
Operating lease right-of-use assets
   
1,508
 
Accounts payable
   
(41,466
)
Accrued expenses
   
(25,801
)
Customer deposits
   
(37,756
)
Operating lease liabilities
   
(1,508
)
Total purchase price
 
$
582,751
 



On January 31, 2022, the Company made a cash payment of $34.9 million for model homes from MHI Models, Ltd., a Texas limited partnership (“the MHI Model Homes”). The post-close consideration payment completed the asset purchase transaction, which was considered to be economically separate from the acquisition of MHI and related purchase price allocation above.



On March 24, 2022, the Company sold 93 completed model homes for $55.4 million, including the MHI Model Homes. The Company simultaneously entered into 93 individual lease agreements. The Company is responsible for paying the operating expenses associated with the homes while under lease. The Company considered the terms of the sale and leaseback arrangement and based on applicable GAAP guidance, concluded the transaction qualifies for sale treatment and that the leases should be classified as operating leases.

3.
Construction Lines of Credit

On January 25, 2021, the Company entered into a $450.0 million syndicated senior credit facility with Bank of America, N.A. (the “Credit Agreement”), and subsequently repaid $340.0 million in outstanding debt and terminated all then-existing construction lines of credit. Under the Credit Agreement, the Company has the option to enter into Base Rate or LIBOR Rate contracts. The interest is payable based on the contract terms and is variable dependent on the Company’s debt to capitalization ratio and applicable interest rates in the market (LIBOR Rate, Prime Rate, etc.).

Through subsequent amendments in September 2021 (“the Amendments”), additional lenders were added as well as provisions for any existing lender, at the Company’s request, to increase its revolving commitment under the Credit Agreement, add new revolving loan tranches under the Credit Agreement or add new term loan tranches under the Credit Agreement, in all cases not to exceed an aggregate of $1.1 billion. In addition, the Amendments clarified and modified certain definitions and covenants as more fully set forth therein, including modifications of certain financial covenants. On October 1, 2021, we borrowed $300.0 million in revolving loans under the Credit Agreement and paid off vertical lines of credit in connection with the MHI acquisition. Certain of our subsidiaries guaranteed the Company’s obligations under the Credit Agreement.  As of March 31, 2022, the Credit Agreement has an aggregate commitment of up to $817.5 million and matures on January 25, 2024.

As of March 31, 2022 and December 31, 2021, the outstanding balance under the Credit Agreement was $770.0 million and $760.0 million, respectively, and the effective interest rate was 3.5% and 3.8% respectively. Under the Credit Agreement, the funds available are unsecured and availability under the borrowing base is calculated based on finished lots, construction in process, and finished homes inventory on the Condensed Consolidated Balance Sheets.

The Company capitalized $5.7 million and $7.5 million as of March 31, 2022 and December 31, 2021, respectively, and amortized $0.7 million and $0.9 million of debt issuance costs for the three months ended March 31, 2022 and 2021, respectively. Debt issuance costs related to the Company’s line of credit and notes payable, net of amortization, were $5.0 million and $5.5 million as of March 31, 2022 and December 31, 2021, respectively, which were included in other assets on the Condensed Consolidated Balance Sheets.

The Credit Agreement contains restrictive covenants and financial covenants. The Company was in compliance with all debt covenants as of March 31, 2022 and December 31, 2021. The Company expects to remain in compliance with all debt covenants over the next twelve months.

4.
Inventories

 
Inventories consist of finished lots, construction in process (“CIP”) and finished homes, including capitalized interest. In addition, lot option fees related to off-balance sheet arrangements and due diligence costs related to land development are also capitalized into inventories – finished lots and land. Finished lots are purchased with the intent of building and selling a home, and are generally purchased just-in-time for construction. CIP represents the homebuilding activity associated with both homes to be sold and speculative homes. CIP includes the cost of the finished lot as well as all of the direct costs incurred to build the home. The cost of the home is expensed on a specific identification basis.

 
Interest is capitalized and included within each inventory category above. Capitalized interest activity is summarized in the table below for the three months ended March 31, 2022 and 2021 (in thousands):

 
   
For the Three Months Ended
March 31,
 

 
2022
   
2021
 
Capitalized interest at the beginning of the period
 
$
33,266
    $ 21,091  
Interest incurred
   
24,986
     
6,669
 
Interest expensed
   
(13
)
   
(642
)
Interest charged to homebuilding cost of sales
   
(8,847
)
   
(8,276
)
Capitalized interest at the end of the period
 
$
49,392
   
$
18,842
 

5.
Commitments and Contingencies
 
The Company is currently involved in the appeals phase of civil litigation related to defective products provided by Weyerhaeuser NR Company (“Weyerhaeuser”) (NYSE: WY), one of our lumber suppliers. Our Colorado division builds a number of floor plans that include basements using specialized fir lumber. On July 18, 2017, Weyerhaeuser issued a press release indicating a recall and potential solution for TJI Joists with Flak Jacket Protection manufactured after December 1, 2016. The press release indicated the TJI Joists used a Flak Jacket coating that included a formaldehyde-based resin that could be harmful to consumers and produced an odor in certain newly constructed homes. We had 38 homes impacted by the potentially harmful and odorous Flak Jacket coating and incurred significant costs directly related to Weyerhaeuser’s defective TJI Joists. Accordingly, we sought remediation and damages from Weyerhaeuser. The press release by Weyerhaeuser had a pronounced impact on our sales and cancellation rates in Colorado. We filed suit on December 27, 2017—Dream Finders Homes LLC and DFH Mandarin, LLC v. Weyerhaeuser NR Company, No. 17CV34801 (District Court, City and County of Denver, State of Colorado)—and included claims against Weyerhaeuser for manufacturer’s liability based on negligence, negligent misrepresentation causing financial loss in a business transaction and fraudulent concealment. Weyerhaeuser asserted a counterclaim asserting an equitable claim for unjust enrichment. After completion of a jury trial on November 18, 2019, the District Court issued a verdict in our favor on our claims, awarding Dream Finders Homes LLC $3.0 million in damages and DFH Mandarin, LLC $11.7 million in damages. On February 21, 2020, the District Court dismissed Weyerhaeuser’s counterclaim. Weyerhaeuser appealed the Colorado District Court’s jury verdict and on December 2, 2021, the Colorado Court of Appeals reversed the judgment entered against Weyerhaeuser for negligence, negligent misrepresentation and fraudulent concealment. As a result, Dream Finders Homes LLC and DFH Mandarin, LLC filed a petition for writ of certiorari to the Colorado Supreme Court on January 13, 2022 to appeal the Colorado Court of Appeals ruling —Dream Finders Homes LLC and DFH Mandarin, LLC v. Weyerhaeuser NR Company, Case No. 2022SC24 (Colorado Supreme Court)—and that appeal is currently pending. We are awaiting the Colorado Supreme Court’s decision on whether it will grant our petition for writ of certiorari. We have incurred all costs to date related to the Weyerhaeuser matter and have recognized no gain on the damages awarded to us by the District Court.

On October 9, 2019, Silver Meadows Townhome Owners Association, Inc. filed a lawsuit in Boulder County Colorado District Court against DFH Mandarin, LLC (“Mandarin”) and Dream Finders Homes, LLC (collectively with Mandarin, “DFH”), both wholly-owned subsidiaries of the Company, as well as other named defendants.  The lawsuit alleges certain construction and development defects.  Mandarin successfully compelled arbitration.  On March 2, 2022 during arbitration proceedings, the parties settled the matter for $12.0 million subject to the execution of a mutually acceptable settlement agreement, including a denial of any admission of liability on behalf of DFH.  DFH’s insurance carrier agreed to pay the policy limit of $4.0 million toward the settlement.  In April 2022, the parties executed a mutually acceptable settlement agreement and DFH paid the settlement amount, net of the insurance proceeds received. In April 2022, DFH also commenced the formal legal process to seek contribution toward DFH’s portion of the settlement amount from responsible subcontractors and vendors who performed work on the project.

6.
Equity
 

Pursuant to the Corporate Reorganization effective January 25, 2021, the Company is authorized to issue 350,000,000 shares of common stock, par value of $0.01 per share, consisting of 289,000,000 shares of Class A common stock and 61,000,000 shares of Class B common stock. The Board of Directors of the Company (the “Board of Directors”) has the authority to issue one or more series of preferred stock, par value $0.01 per share, without stockholder approval.   As a result of the Corporate Reorganization, all of the outstanding non-voting common units and Series A Preferred Units of DFH LLC converted into 21,255,329 shares of the Company’s Class A common stock and all of the outstanding common units of DFH LLC converted into 60,226,153 shares of the Company’s Class B common stock.
 

On September 29, 2021, the Company filed a Certificate of Designations with the State of Delaware establishing 150,000 shares of Series A Convertible Preferred Stock with an initial liquidation preference of $1,000 per share and a par value $0.01 per share (the “Convertible Preferred Stock”) and sold 150,000 shares of Convertible Preferred Stock for an aggregate purchase price of $150.0 million. The Company used the proceeds from the sale of the Convertible Preferred Stock to fund a portion of the MHI acquisition (See Note 2).



All of the Company’s outstanding preferred shares are classified in mezzanine equity as they can be redeemed in a deemed liquidation of the Company outside of the Company’s control.

7.
Variable Interest Entities

The Company holds investments in certain limited partnerships and similar entities that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located, which are considered variable interests. The Company also has an interest in Jet Home Loans LLC (“Jet Home Loans” or “Jet LLC”), where the primary activities include underwriting, originating and selling home mortgages. The Company’s investments in these joint ventures create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. Additionally, the Company, in the ordinary course of business, enters into option contracts with third parties and unconsolidated entities for the ability to acquire rights to land for the construction of homes. Under these contracts, the Company typically makes a specified earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price.

The VIEs are funded by initial capital contributions from the Company, as well as its other partners and generally do not have significant debt. In some cases, an unrelated third party is the general partner or managing member and in others, the general partner or managing member is a related party. The primary risk of loss associated with the Company’s involvement in these VIEs is limited to the Company’s initial capital contributions due to bankruptcy or insolvency of the VIE; however, management has deemed the likelihood of this as remote. The maximum exposure to loss related to the VIEs is disclosed below for both consolidated and unconsolidated VIEs, which equals the Company’s capital investment in each entity.

Management analyzes the Company’s investments first under the variable interest model to determine if they are VIEs and, if so, whether the Company is the primary beneficiary.  Management determines whether the Company is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion if changes to the Company’s involvement arise. To make this determination, management considers factors such as whether the Company could direct finance, determine or limit the scope of the entity, sell or transfer property, direct development or direct other operating decisions.  Management consolidates the entity if the Company is the primary beneficiary or if a standalone primary beneficiary does not exist and the Company and its related parties collectively meet the definition of a primary beneficiary. If the joint venture does not qualify as a VIE under the variable interest model, management then evaluates the entity under the voting interest model to assess if consolidation is appropriate.
Joint ventures for which the Company is not identified as the primary beneficiary are typically accounted for as equity method investments based on the voting interest model. The Company and its unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to each party’s respective equity interests. The option to make capital contributions is governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents. Partners in these unconsolidated joint ventures are unrelated homebuilders, land developers or other real estate entities.

For distributions received from these unconsolidated joint ventures, the Company has elected to use the cumulative earnings approach for the Condensed Consolidated Statements of Cash Flows. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized are treated as returns on investment within operating cash flows and those in excess of that amount are treated as returns of investment within investing cash flows.

The assets of a VIE can only be used to satisfy the obligations of that specific VIE, even for assets that are consolidated. The Company and its partners do not have an obligation to make capital contributions to the VIEs and there are no liquidity arrangements or other agreements that could require the Company to provide financial support to the VIEs. Furthermore, the creditors of the VIEs have no recourse to the Company’s general credit.

Consolidated VIEs

For VIEs that the Company does consolidate, management has the power to direct the activities that most significantly impact the VIE’s economic performance. The Company typically serves as the party with homebuilding expertise in the VIE. The Company does not guarantee the debts of the VIEs, and creditors of the VIEs have no recourse against the Company. There were no new consolidated VIEs during the three months ended March 31, 2022 or 2021.The table below displays the carrying amounts of the assets and liabilities related to the consolidated VIEs (in thousands):

    As of
    As of
 
    March 31,     December 31,  
Consolidated
 
2022
   
2021
 
Assets
 
$
24,909
   
$
30,830
 
Liabilities
 
$
7,616
   
$
10,203
 

Unconsolidated VIEs

For VIEs that the Company does not consolidate, the power to direct the activities that most significantly impact the VIE’s economic performance is held by a third party. These entities are accounted for as equity method investments. The Company’s maximum exposure to loss is limited to its investment in the entities because the Company is not obligated to provide any additional capital to or guarantee any of the unconsolidated VIEs’ debt.

The table below shows the Company’s investment in the unconsolidated VIEs (in thousands):

    As of     As of
 
    March 31,     December 31,  
Unconsolidated
 
2022
   
2021
 
Jet Home Loans
  $
6,003
    $
6,133
 
Other unconsolidated VIEs
    8,477
      9,834
 
Total investment in unconsolidated VIEs
 
$
14,480
   
$
15,967
 

Lot Option Contracts

None of the creditors of any of the land bank entities with which we enter into lot option contracts have recourse to our general credit. We generally do not have any specific performance obligations to purchase a certain number or any of the lots or guarantee any of the land bankers’ financial or other liabilities. We are not involved in the design or creation of the land bank entities from which we purchase lots under lot option contracts. The land bankers’ equity holders have the power to direct 100.0% of the operating activities of the land bank entity. We have no voting rights in any of the land bank entities. The sole purpose of the land bank entity’s activities is to generate positive cash flow returns for such entity’s equity holders. Further, we do not share in any of the profit or loss generated by the project’s development. The profits and losses are passed directly to the land bankers’ equity holders.

The deposit placed by us pursuant to the lot option contracts is deemed to be a variable interest in the respective land bank entities. Certain of those land bank entities are deemed to be VIEs. Therefore, the land bank entities with which we enter into lot option contracts are evaluated for possible consolidation by the Company.

We believe the activities that most significantly impact a land bank entity’s economic performance are the operating activities of the land bank entity. In the case of development projects, unless and until a land bank entity delivers finished lots for sale, the land bank entity’s equity investors bear the risk of land ownership and do not earn any revenues. The operating development activities are managed by the land bank entity’s equity investors.

We possess no more than limited protective legal rights through the lot option contracts in the specific finished lots that we are purchasing, and we possess no participative rights in the land bank entities. Accordingly, we do not have the power to direct the activities of a land bank entity that most significantly impact its economic performance. For the aforementioned reasons, the Company concluded that it is not the primary beneficiary of the land bank entities with which it enters into lot option contracts, and therefore the Company does not consolidate any of these VIEs. These option contracts generally allow us, at our option, to forfeit our right to purchase the lots controlled by these option contracts for any reason, and our sole legal obligation and economic loss as a result of such forfeitures is limited to the amount of the deposits paid pursuant to such option contracts including accrued interest, any related fees paid to the land bank partner, management of the development to completion and any cost overruns related to the project. The Company’s risk of loss related to finished lot option and land bank option contract deposits and related fees and interest was $331.3 million and $274.9 million as of March 31, 2022 and December 31, 2021, respectively. Any potential cost overruns relative to the project cannot be quantified as the Company has not experienced any historically.

8.
Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2022 and 2021 is estimated to be 27.9% and 23.0%, respectively. The effective tax rate includes state income tax expense and non-deductible executive compensation. The rate increase relative to the first quarter of 2021 is mostly due to the 45L tax credit not being estimated in the rate for the first quarter of 2022, as it has yet to be passed by the U.S Government as well as the increase in the Florida tax rate from 3.5% in 2021 to 5.5% in 2022. 

9.
Segment Reporting
 
The Company primarily operates in the homebuilding business and is organized and reported by division. There are eight reportable segments: (i) Jacksonville, (ii) Colorado, (iii) Orlando, (iv) Washington DC (“DC Metro”), (v) The Carolinas, (vi) Texas, (vii) Jet LLC, the Company’s mortgage operations, and (viii) Other. The Company includes the Century Homes operations within the Orlando segment and the MHI operations comprise the Texas segment. The remaining operating segments are combined into the “Other” category, along with the corporate component, which is not considered an operating segment.
 
The following tables summarize revenues and net and comprehensive income by segment for the three months ended March 31, 2022 and 2021 as well as total assets and goodwill by segment as of March 31, 2022 and December 31, 2021 (in thousands):


 
For the Three Months Ended
March 31,
 
Revenues:
 
2022
   
2021
 
Jacksonville
  $
134,831
    $
96,581
 
Colorado
   
38,153
     
15,210
 
Orlando
   
46,843
     
64,436
 
DC Metro
   
11,880
     
13,948
 
The Carolinas
    83,583       98,503  
Texas
    275,424       -  
Jet Home Loans
   
6,958
     
7,019
 
Other (1)
   
73,352
     
54,882
 
Total segment revenues
 

671,024
   

350,579
 
               
Reconciling items from equity method investments
   
(6,958
)
   
(7,019
)
               
Consolidated revenues
 
$
664,066
   
$
343,560
 

 
 
For the Three Months Ended
March 31,
 
Net and comprehensive income:
 
2022
   
2021
 
Jacksonville
  $
17,459
    $
8,209
 
Colorado
   
4,521
     
455
 
Orlando
   
2,914
     
5,328
 
DC Metro
   
672
     
390
 
The Carolinas     2,180       4,150  
Texas     17,424       -  
Jet Home Loans
   
2,289
     
2,832
 
Other (1)
   
504
     
(1,965
)
Total segment net and comprehensive income
 

47,963
   

19,399
 
                 
Reconciling items from equity method investments
   
(1,629
)
   
(1,803
)
                 
Consolidated net and comprehensive income
 
$
46,334
   
$
17,596
 

   
Assets:
   
Goodwill:
 

 
As of
March 31,
   
As of
December 31,
   
As of
March 31,
   
As of
December 31,
 

 
2022
   
2021
   
2022
   
2021
 
Jacksonville
 
$
242,624
   
$
207,502
   
$
-
   
$
-
 
Colorado
   
139,557
     
116,121
     
-
     
-
 
Orlando
   
161,920
     
131,882
     
1,795
     
1,795
 
DC Metro
   
79,928
     
62,051
     
-
     
-
 
The Carolinas
   
269,050
     
247,250
     
16,853
     
16,853
 
Texas
   
761,620
     
743,306
     
141,071
     
141,071
 
Jet Home Loans
   
73,992
     
77,074
     
-
     
-
 
Other (1)
   
331,567
     
379,859
     
12,209