DREAM FINDERS HOMES, INC. Unless otherwise indicated or the context requires, "DFH," "Dream Finders," the "Company," "we," "our" and "us" refer collectively toDream Finders Homes, Inc. and its subsidiaries. OnJanuary 25, 2021 , we completed an initial public offering (the "IPO") of 11,040,000 shares of our Class A common stock. 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 ofDream Finders Homes, Inc. since the date of its formation andDream Finders Holdings LLC , aFlorida limited liability company ("DFH LLC ") and its direct and indirect subsidiaries prior to the IPO. Business Overview We design, build and sell homes in high growth markets, includingCharlotte ,Raleigh ,Jacksonville ,Orlando ,Denver , theWashington D.C. metropolitan area andAustin . We employ an asset-light lot acquisition strategy with a focus on the design, construction and sale of single-family entry-level, first-time move-up and second-time move-up homes. To fully serve our homebuyer customers and capture ancillary business opportunities, we also offer title insurance and mortgage banking solutions (our Jet Home Loans segment) through our mortgage banking joint venture,Jet Home Loans, LLC ("Jet LLC "). Our asset-light lot acquisition strategy enables us to generally purchase land in a "just-in-time" manner with reduced up-front capital commitments, which in turn has increased our inventory turnover rate, enhanced our strong returns on equity and contributed to our impressive growth.
We are engaged in the design, construction and sale of new homes in the following markets:
•
and
•Jacksonville, FL •Orlando, FL •Denver, CO
•
•
Since breaking ground on our first home onJanuary 1, 2009 during an unprecedented downturn in theU.S. homebuilding industry, we have closed over 12,000 home sales throughJune 30, 2021 and have been profitable every year since inception. During the three months endedJune 30, 2021 , we received 1,521 net new orders, an increase of 729, or 92%, as compared to the 792 net new orders received for the three months endedJune 30, 2020 . For the three months endedJune 30, 2021 , we closed 996 homes, an increase of 474, or 91%, as compared to the 522 homes closed for the three months endedJune 30, 2020 . During the six months endedJune 30, 2021 , we received 3,531 net new orders, an increase of 1,890, or 115%, as compared to the 1,641 net new orders received for the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 , we closed 1,998 homes, an increase of 961, or 93%, as compared to the 1,037 homes closed for the six months endedJune 30, 2020 . As ofJune 30, 2021 , our backlog of sold homes was 4,137. In addition, as ofJune 30, 2021 , we owned and controlled over 27,000 lots. Our owned and controlled lot supply is a critical input to the future revenue of our business. We sell homes under theDream Finders Homes , DF Luxury,H&H Homes ,Village Park Homes and Century Homes brands. 24 -------------------------------------------------------------------------------- Table of Contents COVID-19 Impact There is uncertainty regarding the extent and timing of the disruption to our business that may result from the COVID-19 pandemic and any related governmental actions. There is also uncertainty as to the effects of the COVID-19 pandemic and related economic relief efforts on theU.S. economy, unemployment, consumer confidence, demand for our homes and the mortgage market, including lending standards, interest rates and secondary mortgage markets. We are unable to predict the extent to which this will impact our operational and financial performance, including the impact of future developments such as the duration and spread of the COVID-19 virus, corresponding governmental actions and the impact of such developments and actions on our employees, customers and trade partners. Our primary focus remains on doing everything we can to ensure the safety and well-being of our employees, customers and trade partners. In all markets where we are permitted to operate, we are operating in accordance with the guidelines issued by theCenters for Disease Control and Prevention , as well as state and local guidelines.
For more information, see Item 1A. Risk Factors in Part I of our Annual Report
on Form 10-K for the fiscal year ended
Recent Developments
Initial Public Offering
OnJanuary 25, 2021 , we completed the IPO of 11,040,000 shares of our Class A common stock at a price to the public of$13.00 per share, which was conducted pursuant to our Registration Statement on Form S-1 (File No. 333-251612), as amended, that was declared effective onJanuary 20, 2021 . The IPO provided us with net proceeds of$134 million . OnJanuary 25, 2021 , we used the net proceeds from the IPO, cash on hand and borrowings under our Credit Agreement to repay (i) all borrowings under our then-existing 34 separate secured vertical construction lines of credit facilities totaling$320 million and upon such repayment terminated such facilities and (ii) the bridge loan from Boston Omaha Corporation, LLC (the "BOMN Bridge Loan") that was used to finance the acquisition ofH&H Homes , totaling$20 million , plus contractual interest of$0.6 million . Corporate Reorganization In connection with the IPO and pursuant to the terms of the Agreement and Plan of Merger by and among theCompany, DFH LLC andDFH Merger Sub LLC , aDelaware limited liability company and direct, wholly owned subsidiary of the Company,DFH Merger Sub LLC merged with and intoDFH LLC withDFH 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 ofDFH LLC converted into 21,255,329 shares of Class A common stock of the Company, all of the outstanding common units ofDFH LLC converted into 60,226,153 shares of Class B common stock of the Company and all of the outstanding Series B preferred units and Series C preferred units ofDFH LLC remained outstanding as Series B preferred units and Series C preferred units ofDFH LLC , as the surviving entity in the Merger. We refer to this and certain other related events and transactions, as the "Corporate Reorganization". In connection with the Corporate Reorganization, we made distributions to the members ofDFH LLC for estimated federal income taxes of approximately$28.0 million on earnings of our predecessor,DFH LLC (which was a pass-through entity for tax purposes), for the period fromJanuary 1, 2020 throughJanuary 21, 2021 (the date of the Corporate Reorganization). 25 -------------------------------------------------------------------------------- Table of Contents Immediately following the Corporate Reorganization, (1) the Company became a holding company and the sole manager ofDFH LLC , with no material assets other than 100% of the voting membership interests inDFH LLC , (2) the holders of common units, non-voting common units and Series A preferred units ofDFH LLC became stockholders of the Company, (3) the holders of the Series B preferred units ofDFH LLC outstanding immediately prior to the Corporate Reorganization continued to hold all 7,143 of the outstanding Series B Preferred Units ofDFH LLC , and (4) the holders of the Series C preferred units ofDFH LLC outstanding immediately prior to the Corporate Reorganization continued to hold all 26,000 of the outstanding Series C preferred units ofDFH LLC . OnJanuary 27, 2021 , we redeemed all 26,000 outstanding Series C preferred units ofDFH LLC at a redemption price of$26 million , plus accrued distributions and fees of$0.2 million . Century Acquisition During the six months endedJune 30, 2021 , we increased our market presence in theOrlando, Florida market with our acquisition (the "Century Acquisition") ofCentury Homes Florida, LLC ("Century Homes "). Effective as ofJanuary 31, 2021 , we consummated the first phase of the Century Acquisition ofOrlando -based homebuilderCentury Homes fromTavistock Development Company ("Tavistock"). We paid$36 million to acquire 134 units under construction and 229 finished lots on which we expect to begin construction during 2021 and 2022. The Company funded the entire purchase price of the Century Acquisition with cash on hand and borrowings under our Credit Agreement.
Key Results
Key financial results as of and for the three months ended
• Revenues increased 83% to
• Net new orders increased 92% to 1,521 net new orders from 792 net new orders.
• Homes closed increased 91% to 996 homes from 522 homes.
• Backlog of sold homes increased 184% to 4,137 homes from 1,457 homes.
• Average sales price of homes closed decreased 2% to
• Gross margin as a percentage of home sales revenues increased to 16.5% from
13.8%.
• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues
increased to 23.5% from 21.6%.
• Net and comprehensive income increased 157% to
• Net and comprehensive income attributable to
increased 144% to
• EBITDA (non-GAAP) as a percentage of revenues increased to 11.6% from 9.7%.
• Active communities at
• Return on equity was 44.3% for the trailing twelve months ended
compared to 33.7% for the same period in the prior year.
26--------------------------------------------------------------------------------
Table of Contents
Key financial results as of and for the six months ended
• Revenues increased 82% to
• Net new orders increased 115% to 3,531 net new orders from 1,641 net new
orders.
• Homes closed increased 93% to 1,998 homes from 1,037 homes.
• Backlog of sold homes increased 184% to 4,137 homes from 1,457 homes.
• Average sales price of homes closed decreased 5% to
• Gross margin as a percentage of home sales revenues increased to 15.8% from
13.3%.
• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues
increased to 22.6% from 21.2%.
• Net and comprehensive income increased 145% to
• Net and comprehensive income attributable to
increased 144% to
• EBITDA (non-GAAP) as a percentage of revenues increased to 10.5% from 8.6%.
For reconciliations of the non-GAAP financial measures, adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see "-Non-GAAP Financial Measures."
27
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Table of Contents
Results of Operations
Three Months Ended
The following table sets forth our results of operations for the periods
indicated:
For the Three Months Ended
June 30,
(unaudited)
2021 2020 Amount Change % Change
Revenues $ 365,276,101 $ 199,801,128 $ 165,474,973 83 %
Cost of sales 303,589,420 171,236,637 132,352,783 77 %
Selling, general and administrative expense 28,686,162 17,062,297 11,623,865 68 %
Income from equity in earnings of unconsolidated entities (1,125,001 ) (1,926,702 ) 801,701 -42 %
Loss/(Gain) on sale of assets 48,034 (200 ) 48,234 -24117 %
Loss on extinguishment of debt - - - 100 %
Other Income
Other (1,668,263 ) (785,153 ) (883,109 ) 100 % Paycheck Protection Program forgiveness
(7,219,794 ) - (7,219,794 ) 100 %
Other Expense
Other 2,434,780 1,360,526 1,074,253 79 %
Contingent consideration revaluation 3,976,980 316,772 3,660,208 100 %
Interest expense 15,796 45,948 (30,152 ) -66 %
Income before taxes $ 36,537,987 $ 12,491,003 $ 24,046,984 193 %
Income tax expense (4,478,317 ) - (4,478,317 ) 100 %
Net and comprehensive income $ 32,059,670 $ 12,491,003 $ 19,568,667 157 %
Net and comprehensive income attributable to non-controlling interests (3,485,789 ) (766,902 ) (2,718,887 ) 355 %
Net and comprehensive income attributable to Dream Finders Homes, Inc. 28,573,881 11,724,101 16,849,780 144 %
Earnings per share(6)
Basic $ 0.31 $ - $ 0.31 100 %
Diluted $ 0.31 $ - $ 0.31 100 %
Weighted-average number of shares
Basic 92,521,482 - 92,521,482 100 %
Diluted 92,670,727 - 92,670,727 100 %
Consolidated Balance Sheets Data (at period end):
Cash and cash equivalents $
6,154,320
$ 932,281,953 $ 546,819,564 $ 385,462,389 70 % Short-term debt, net$ 369,048,531 $ 258,834,551 $ 110,213,980 43 % Finance lease liabilities $
267,198
$
6,703,460
$
-
$
-
$ 322,953 $ -$ 322,953 100 % Common stock - Class B$ 602,262 $ -$ 602,262 100 % Additional paid-in capital$ 255,289,812 $ -$ 255,289,812 100 % Retained earnings$ 45,610,738 $ -$ 45,610,738 100 % Non-controlling interests $
20,873,515
Other Financial and Operating Data Active communities at end of period(1) 117 86 31 36 % Home closings 996 522 474 91 % Average sales price of homes closed(7) $
358,604
1,521 792 729 92 %
Cancellation rate 14.4 % 18.0 % -3.6 % -20 %
Backlog (at period end) - homes 4,137 1,457 2,680 184 %
Backlog (at period end, in thousands) - value $ 1,646,725 $ 539,856 $ 1,106,869 205 %
Gross margin (in thousands)(2) $ 60,154 $ 27,384 $ 32,770 120 %
Gross margin %(3) 16.5 % 13.8 % 2.7 % 20 %
Net profit margin 7.8 % 5.9 % 1.9 % 32 %
Adjusted gross margin (in thousands)(2)(4) $ 85,452 $ 42,836 $ 42,616 99 %
Adjusted gross margin %(3) 23.5 % 21.6 % 1.9 % 9 %
EBITDA (in thousands)(4) $ 42,421 $ 19,331 $ 23,090 119 %
EBITDA margin %(3)(5) 11.6 % 9.7 % 1.9 % 20 %
(1) A community becomes active once the model is completed or the community has
its fifth sale. A community becomes inactive when it has fewer than five
units remaining to sell. (2) Gross margin is home sales revenue less cost of sales. (3) Calculated as a percentage of home sales revenue. (4) Adjusted gross margin and EBITDA are non-GAAP financial measures. For
definitions of adjusted gross margin and EBITDA and a reconciliation to our
most directly comparable financial measures calculated and presented in
accordance with GAAP, see "-Non-GAAP Financial Measures." (5) Calculated as a percentage of revenues. (6) The Company calculated earnings per share ("EPS") based on net income
attributable to common stockholders for the period
same period. 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. For the three months ended
92,670,727.
(7) Average selling price of homes closed is calculated based on home sales
revenue, excluding the impact of deposit forfeitures and percentage of
completion revenues, over homes closed.
28-------------------------------------------------------------------------------- Table of Contents Revenues. Revenues for the three months endedJune 30, 2021 were$365 million , an increase of$165 million , or 83%, from$200 million for the three months endedJune 30, 2020 . The increase in revenues was primarily attributable to an increase in home closings of 474 homes, or 91%, during the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 . OurOctober 2020 acquisition of the homebuilding business ofH&H Constructors ofFayetteville, LLC ("H&H Homes "), aNorth Carolina limited liability company, contributed 315 home closings and$87 million in homebuilding revenues for the three months endedJune 30, 2021 . The average sales price of homes closed for the three months endedJune 30, 2021 was$358,604 , a decrease of$8,100 or 2%, over an average sales price of homes closed$366,704 for the three months endedJune 30, 2020 , primarily due to the lower average sales price of homes closed within theH&H Homes segment partially offset by price appreciation across the Company's remaining segments. Cost of Sales and Gross Margin. Cost of sales for the three months endedJune 30, 2021 was$304 million , an increase of$133 million , or 77%, from$171 million for the three months endedJune 30, 2020 . The increase in the cost of sales is primarily due to the increase in home closings for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 . Gross margin for the three months endedJune 30, 2021 was$60 million , an increase of$33 million , or 120%, from$27 million for the three months endedJune 30, 2020 . Gross margin as a percentage of home sales revenue was 16.5% for the three months endedJune 30, 2021 , an increase of 270 basis points, or 20%, from 13.8% for the three months endedJune 30, 2020 . The increase in gross margin percentage is largely attributable to price appreciation outpacing cost inflation as well as lower cost of funds. Adjusted Gross Margin. Adjusted gross margin for the three months endedJune 30, 2021 was$85 million , an increase of$42 million , or 99%, from$43 million for the three months endedJune 30, 2020 . Adjusted gross margin as a percentage of home sales revenue for the three months endedJune 30, 2021 was 23.5%, an increase of 190 basis points, or 9%, as compared to 21.6% for the three months endedJune 30, 2020 . The increases in adjusted gross margin and adjusted gross margin percentage is attributable to price appreciation outpacing cost inflation as well as lower cost of funds. Adjusted gross margin is a non-GAAP financial measure. For the definition of adjusted gross margin and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, see "-Non-GAAP Financial Measures." Selling, General and Administrative Expense. Selling, general and administrative expense for the three months endedJune 30, 2021 was$29 million , an increase of$12 million , or 65%, from$17 million for the three months endedJune 30, 2020 . The increase in selling, general and administrative expense was primarily due to the inclusion of$8 million in expenses for the operations ofH&H Homes for the three months endedJune 30, 2021 . Selling, general and administrative expense as a percentage of revenue was 7.9% for the three months endedJune 30, 2021 , compared to 8.5% for the three months endedJune 30, 2020 . The decrease of 60 basis points is attributable to the Company achieving improved scale in certain segments. 29 -------------------------------------------------------------------------------- Table of Contents Other Income - Paycheck Protection Program Forgiveness. Other income related to the forgiveness of the PPP grant for the three months endedJune 30, 2021 was$7 million as compared to$0 for the three months endedJune 30, 2020 . The increase is attributable to the SBA forgiving the Company's PPP grant in full, during the second quarter of 2021. Other Expense - Contingent Consideration. Contingent consideration expense for the three months endedJune 30, 2021 was$4 million , as compared to$0 for the three months endedJune 30, 2020 . The increase in contingent consideration expense is due to fair value adjustments of future expected earnout payments from the acquisition ofH&H Homes . Based on our current projections, we expect the H&H segment to earn higher pre-tax income for the remainder of the earnout period, when compared to our initial estimates. Net and Comprehensive Income. Net and comprehensive income for the three months endedJune 30, 2021 was$32 million , an increase of$20 million , or 174%, from$12 million for the three months endedJune 30, 2020 . The increase in net and comprehensive income was primarily attributable to an increase in gross margin on homes closed of$33 million , or 120%, for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 . Net and Comprehensive Income Attributable toDream Finders Homes, Inc. Net and comprehensive income attributable to Dream Finders for the three months endedJune 30, 2021 was$29 million , an increase of$17 million , or 144%, from$12 million for the three months endedJune 30, 2020 . The increase was primarily attributable to a significant increase in home closings and gross margin. The change in net and comprehensive income attributable toDream Finders Homes, Inc. is reduced by$5 million in income tax expense for the three months endedJune 30, 2021 , which was not applicable toDFH LLC . 30 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 The following table sets forth our results of operations for the periods indicated: For the Six Months Ended June 30, (unaudited) 2021 2020 Amount Change % Change Revenues$ 708,836,466 $ 388,539,561 $ 320,296,905 82 % Cost of sales 594,626,181 334,982,320 259,643,861 78 % Selling, general and administrative expense 55,652,375 34,581,082 21,071,293 61 % Income from equity in earnings of unconsolidated entities (2,857,394 ) (3,286,090 ) 428,696 -13 % Loss/(Gain) on sale of assets (17,483 ) (34,295 ) 16,812 -49 % Loss on extinguishment of debt 697,423 - 697,423 100 % Other Income Other
(2,150,482 ) (919,214 ) (1,231,268 ) 134 % Paycheck Protection Program forgiveness
(7,219,794 ) - (7,219,794 ) 100 %
Other Expense
Other 5,337,828 2,555,837 2,781,991 109 %
Contingent consideration revaluation 5,159,725 316,772 4,842,953 1529 %
Interest expense 657,657 81,653 576,004 705 %
Income before taxes $ 58,950,430 $ 20,261,496 $ 38,688,934 191 %
Income tax expense (9,294,799 ) - (9,294,799 ) 100 %
Net and comprehensive income $ 49,655,631 $ 20,261,496 $ 29,394,135 145 %
Net and comprehensive income attributable to non-controlling interests (4,961,107 ) (1,957,361 ) (3,003,746 ) 153 %
Net and comprehensive income attributable to Dream Finders Homes, Inc. 44,694,524 18,304,135 26,390,389 144 %
Earnings per share(6)
Basic $ 0.49 $ - $ 0.49 100 %
Diluted $ 0.49 $ - $ 0.49 100 %
Weighted-average number of shares
Basic 92,521,482 - 92,521,482 100 %
Diluted 92,641,222 - 92,641,222 100 %
Consolidated Balance Sheets Data (at period end):
Cash and cash equivalents $
6,154,320
$ 932,281,953 $ 546,819,564 $ 385,462,389 70 % Short-term debt, net$ 369,048,531 $ 258,834,551 $ 110,213,980 43 % Finance lease liabilities $
267,198
$
6,703,460
$
-
$
-
$ 322,953 $ -$ 322,953 100 % Common stock - Class B$ 602,262 $ -$ 602,262 100 % Additional paid-in capital$ 255,289,812 $ -$ 255,289,812 100 % Retained earnings$ 45,610,738 $ -$ 45,610,738 100 % Non-controlling interests $
20,873,515
Other Financial and Operating Data Active communities at end of period(1) 117 86 31 36 % Home closings 1,998 1,037 961 93 % Average sales price of homes closed(7)$ 347,261 $ 366,604 $ (19,343 ) -5 % Net new orders 3,531 1,641 1,890 115 % Cancellation rate 10.9 % 14.9 % -4.0 % -27 % Backlog (at period end) - homes 4,137 1,457 2,680 184 % Backlog (at period end, in thousands) - value$ 1,646,725 $ 539,856 $ 1,106,869 205 % Gross margin (in thousands)(2)$ 111,284 $ 51,413 $ 59,871 116 % Gross margin %(3) 15.8 % 13.3 % 2.5 % 18 % Net profit margin 6.3 % 4.7 % 1.6 % 34 % Adjusted gross margin (in thousands)(2)(4)$ 159,683 $ 81,842 $ 77,841 95 % Adjusted gross margin %(3) 22.6 % 21.2 % 1.4 % 7 % EBITDA (in thousands)(4)$ 74,621 $ 33,454 $ 41,167 123 % EBITDA margin %(3)(5) 10.5 % 8.6 % 1.9 % 22 %
(1) A community becomes active once the model is completed or the community has
its fifth sale. A community becomes inactive when it has fewer than five
units remaining to sell. (2) Gross margin is home sales revenue less cost of sales. (3) Calculated as a percentage of home sales revenue. (4) Adjusted gross margin and EBITDA are non-GAAP financial measures. For
definitions of adjusted gross margin and EBITDA and a reconciliation to our
most directly comparable financial measures calculated and presented in
accordance with GAAP, see "-Non-GAAP Financial Measures." (5) Calculated as a percentage of revenues. (6) The Company calculated earnings per share ("EPS") based on net income
attributable to common stockholders for the period
same period. EPS was calculated prospectively for the period subsequent to
the IPO 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 IPO. For the six months
ended
92,641,222. 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.
(7) Average selling price of homes closed is calculated based on home sales
revenue, excluding the impact of deposit forfeitures and percentage of
completion revenues, over homes closed.
31-------------------------------------------------------------------------------- Table of Contents Revenues. Revenues for the six months endedJune 30, 2021 were$709 million , an increase of$320 million , or 82%, from$389 million for the six months endedJune 30, 2020 . The increase in revenues was primarily attributable to an increase in home closings of 961 homes, or 93%, during the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 . OurOctober 2020 acquisition of the homebuilding business ofH&H Homes , contributed 658 home closings and$180 million in homebuilding revenues for the six months endedJune 30, 2021 . The average sales price of homes closed for the six months endedJune 30, 2021 was$347,261 , a decrease of$19,343 or 5%, over the average sales price of homes closed of$366,604 for the six months endedJune 30, 2020 , primarily due to the lower average sales price of homes closed within theH&H Homes segment. Cost of Sales and Gross Margin. Cost of sales for the six months endedJune 30, 2021 was$595 million , an increase of$260 million , or 78%, from$335 million for the six months endedJune 30, 2020 . The increase in the cost of sales is primarily due to the increase in home closings for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 . Gross margin for the six months endedJune 30, 2021 was$111 million , an increase of$60 million , or 116%, from$51 million for the six months endedJune 30, 2020 . Gross margin as a percentage of home sales revenue was 15.8% for the six months endedJune 30, 2021 , an increase of 250 basis points, or 18%, from 13.3% for the six months endedJune 30, 2020 . The increase in gross margin percentage is largely attributable to price appreciation outpacing cost inflation as well as lower cost of funds. Adjusted Gross Margin. Adjusted gross margin for the six months endedJune 30, 2021 was$160 million , an increase of$78 million , or 95%, from$82 million for the six months endedJune 30, 2020 . Adjusted gross margin as a percentage of home sales revenue for the six months endedJune 30, 2021 was 22.6%, an increase of 140 basis points, or 7%, as compared to 21.2% for the six months endedJune 30, 2020 . The increases in adjusted gross margin and adjusted gross margin percentage is attributable to price appreciation outpacing cost inflation as well as lower cost of funds. Adjusted gross margin is a non-GAAP financial measure. For the definition of adjusted gross margin and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, see "-Non-GAAP Financial Measures." Selling, General and Administrative Expense. Selling, general and administrative expense for the six months endedJune 30, 2021 was$56 million , an increase of$21 million , or 61%, from$35 million for the six months endedJune 30, 2020 . The increase in selling, general and administrative expense was primarily due to the inclusion of$15 million in expenses for the operations ofH&H Homes for the six months endedJune 30, 2021 . Selling, general and administrative expense as a percentage of revenue was 7.9% for the six months endedJune 30, 2021 , compared to 8.9% for the six months endedJune 30, 2020 . The decrease of 100 basis points is attributable to the Company achieving improved scale in certain segments. Other Income - Paycheck Protection Program Forgiveness. Other income related to the forgiveness of the PPP grant for the six months endedJune 30, 2021 was$7 million , as compared to$0 for the six months endedJune 30, 2020 . The increase is attributable to the SBA forgiving the Company's PPP grant in full, during the second quarter of 2021. 32 -------------------------------------------------------------------------------- Table of Contents Other Expense. Other expense for the six months endedJune 30, 2021 was$5 million , an increase of$2 million , or 109%, as compared to$3 million for the six months endedJune 30, 2020 . The increase in other expenses is primarily attributable to the acceleration of stock compensation expense as a result of the Corporate Reorganization. Other Expense - Contingent Consideration. Contingent consideration expense for the six months endedJune 30, 2021 was$5 million , an increase of$5 million , as compared to$0 for the six months endedJune 30, 2020 . The increase in contingent consideration expense is due to fair value adjustments of future expected earnout payments from the acquisition ofH&H Homes . The increase in contingent consideration was due toH&H Homes exceeding initial projections Net and Comprehensive Income . Net and comprehensive income for the six months endedJune 30, 2021 was$50 million , an increase of$30 million , or 145%, from$20 million for the six months endedJune 30, 2020 . The increase in net and comprehensive income was primarily attributable to an increase in gross margin on homes closed of$60 million , or 116%, for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 . Net and Comprehensive Income Attributable toDream Finders Homes, Inc. Net and comprehensive income attributable to Dream Finders for the six months endedJune 30, 2021 was$45 million , an increase of$27 million , or 144%, from$18 million for the six months endedJune 30, 2020 . The increase was primarily attributable to a significant increase in home closings and gross margin. The change in net and comprehensive income attributable toDream Finders Homes, Inc. is reduced by$9 million in income tax expense for the six months endedJune 30, 2021 , which was not applicable toDFH LLC . Backlog. Backlog atJune 30, 2021 was 4,137 homes valued at approximately$1,647 million , an increase of 2,680 homes and$1,107 million , respectively, or 184% and 205%, respectively, as compared to 1,457 homes valued at approximately$540 million atJune 30, 2020 . The increase in backlog was primarily attributable to an increase in active communities to 117 for the six months endedJune 30, 2021 , an increase of 31 communities or 36%, as compared to 86 for the six months endedJune 30, 2020 . The average monthly sales per community for the six months endedJune 30, 2021 were 4.3, an increase of 1.2, or 39%, from 3.1 average monthly sales per community during the six months endedJune 30, 2020 .
Non-GAAP Financial Measures
Adjusted Gross Margin
Adjusted gross margin is a non-GAAP financial measure used by management as a
supplemental measure in evaluating operating performance. We define adjusted
gross margin as gross margin excluding the effects of capitalized interest,
amortization included in the cost of sales (including adjustments resulting from
the application of purchase accounting in connection with acquisitions) and
commission expense. Our management believes this information is meaningful
because it isolates the impact that capitalized interest, amortization
(including purchase accounting adjustments) and commission expense have on gross
margin. However, because adjusted gross margin information excludes capitalized
interest, amortization (including purchase accounting adjustments) and
commission expense, which have real economic effects and could impact our
results of operations, the utility of adjusted gross margin information as a
measure of our operating performance may be limited. We include commission
expense in cost of sales, not selling, general and administrative expense, and
therefore commission expense is taken into account in gross margin. As a result,
in order to provide a meaningful comparison to the public company homebuilders
that include commission expense below the gross margin line in selling, general
and administrative expense, we have excluded commission expense from adjusted
gross margin. In addition, other companies may not calculate adjusted gross
margin information in the same manner that we do. Accordingly, adjusted gross
margin information should be considered only as a supplement to gross margin
information as a measure of our performance.
33
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Table of Contents
The following table presents a reconciliation of adjusted gross margin to the
GAAP financial measure of gross margin for each of the periods indicated
(unaudited and in thousands, except percentages).
For the Three Months Ended
June 30,
Column1 2021 As a % of Home 2020 As a % of Home
Sales Revenue Sales Revenue .
Revenues $ 365,276 $ 199,801
Other revenue 1,533 1,180
Home sales revenue 363,743 198,621
Cost of sales 303,589 83.5 % 171,237 86.2 %
Gross Margin(1) 60,154 16.5 % 27,384 13.8 %
Interest expense in cost of sales 7,365 2.0 % 5,807 2.9 %
Amortization in cost of sales(3) 2,072 0.6 % 1,065 0.5 %
Commission expense 15,861 4.4 % 8,580 4.3 %
Adjusted gross margin 85,452 23.5 % 42,836 21.6 %
Gross margin %(2) 16.5% 13.8%
Adjusted gross margin %(2) 23.5% 21.6%
For the Six Months Ended
June 30,
Column1 2021 As a % of Home 2020 As a % of Home
Sales Revenue Sales Revenue .
Revenues $ 708,836 $ 388,540
Other revenue 2,926 2,145
Home sales revenue 705,910 386,395
Cost of sales 594,626 84.2 % 334,982 86.7 %
Gross Margin(1) 111,284 15.8 % 51,413 13.3 %
Interest expense in cost of sales 15,640 2.2 % 11,799 3.1 %
Amortization in cost of sales(3) 1,624 0.2 % 1,658 0.4 %
Commission expense 31,135 4.4 % 16,972 4.4 %
Adjusted gross margin 159,683 22.6 % 81,842 21.2 %
Gross margin %(2) 15.8% 13.3%
Adjusted gross margin %(2) 22.6% 21.2%
(1) Gross margin is home sales revenue less cost of sales. (2) Calculated as a percentage of home sales revenues. (3) Includes purchase accounting adjustment, as applicable.
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EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA are not measures of net income as determined by GAAP.
EBITDA and adjusted EBITDA are supplemental non-GAAP financial measures used by
management and external users of our condensed consolidated financial
statements, such as industry analysts, investors, lenders and rating agencies.
We define EBITDA as net income before (i) interest income, (ii) capitalized
interest expensed in cost of sales, (iii) interest expense, (iv) income tax
expense and (v) depreciation and amortization. We define adjusted EBITDA as
EBITDA before stock-based compensation expense.
Management believes EBITDA and adjusted EBITDA are useful because they allow
management to more effectively evaluate our operating performance and compare
our results of operations from period to period without regard to our financing
methods or capital structure or other items that impact comparability of
financial results from period to period. EBITDA and adjusted EBITDA should not
be considered as alternatives to, or more meaningful than, net income or any
other measure as determined in accordance with GAAP. Our computations of EBITDA
and adjusted EBITDA may not be comparable to EBITDA or adjusted EBITDA of other
companies. We present EBITDA and adjusted EBITDA because we believe they provide
useful information regarding the factors and trends affecting our business.
The following table presents a reconciliation of EBITDA and adjusted EBITDA to the GAAP financial measure of net income for each of the periods indicated (unaudited and in thousands, except percentages).
For the Three Months Ended For the Six Months Ended
June 30, June 30,
Column1 2021 2020 2021 . 2020 .
Net income $ 28,574 $ 11,724 $ 44,695 $ 18,304
Interest income - (2 ) (4 ) (34 )
Interest expensed in cost of sales 7,365 5,807 15,640 11,799
Interest expense 16 46 658 82
Income tax expense 4,478 - 9,295 -
Depreciation and amortization 1,988 1,756 4,337 3,303
EBITDA $ 42,421 $ 19,331 $ 74,621 $ 33,454
Stock-based compensation expense 1,452 - 3,800 224
Adjusted EBITDA $ 43,873 $ 19,331 $ 78,421 $ 33,678
EBITDA margin %(1) 11.6 % 9.7 % 10.5 % 8.6 %
Adjusted EBITDA margin %(1) 12.0 % 9.7 % 10.8 % 8.7 %
(1) Calculated as a percentage of revenues.
Backlog, Sales and Closings
A new order (or new sale) is reported when a customer has received preliminary
mortgage approval and the sales contract has been signed by the customer,
approved by us and secured by a deposit, typically approximately 1-3% of the
purchase price of the home. These deposits are typically not refundable, but
each customer situation is evaluated individually.
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Net new orders are new orders or sales (gross) for the purchase of homes during
the period, less cancellations of existing purchase contracts during the period.
Sales to investors that intend to lease the homes are recognized when the
Company has received a nonrefundable deposit. Our cancellation rate for a given
period is calculated as the total number of new (gross) sales purchase contracts
canceled during the period divided by the total number of new (gross) sales
contracts entered into during the period. Our cancellation rate for the three
months ended June 30, 2021 was 14.4%, a decrease of 360 basis points when
compared to the 18.0% cancellation rate for the three months ended June 30 ,
2020.Our cancellation rate for the six months ended June 30, 2021 was 10.9% a
decrease of 400 basis points when compared to the 14.9% cancellation rate for
the six months ended June 30, 2020 .
The following tables present information concerning our new home sales, starts
and closings in each of our markets for the three and six months ended June 30,
2021 and 2020.
For the Three Months Ended Period Over Period
June 30, Percent Change
2021(1) 2020
Market Sales Starts Closings Sales 2 Starts 2 Closings 2 Sales 3 Starts 3 Closings 3
The Carolinas (H&H Homes) 499 584 315 N/A N/A N/A N/A N/A N/A
Jacksonville 307 379 265 388 361 247 -21 % 5 % 7 %
Orlando(1) 328 166 147 105 102 72 212 % 63 % 104 %
Colorado 27 108 47 50 56 50 -46 % 93 % -6 %
DC Metro 20 49 35 45 60 37 -56 % -18 % -5 %
Other(2) 340 297 187 204 116 116 67 % 156 % 61 %
Grand Total 1,521 1,583 996 792 695 522 92 % 128 % 91 %
For the Six Months Ended Period Over Period
June 30, Percent Change
2021(1) 2020
Market Sales Starts Closings Sales 2 Starts 2 Closings 2 Sales 3 Starts 3 Closings 3
The Carolinas (H&H Homes) 1,146 997 658 N/A N/A N/A N/A N/A N/A
Jacksonville 867 783 560 802 646 513 8 % 21 % 9 %
Orlando(1) 609 338 308 233 199 98 161 % 70 % 214 %
Colorado 166 182 81 144 129 97 15 % 41 % -16 %
DC Metro 72 81 59 112 108 88 -36 % -25 % -33 %
Other(2) 671 586 332 350 262 241 92 % 124 % 38 %
Grand Total 3,531 2,967 1,998 1,641 1,344 1,037 115 % 121 % 93 %
(1) Includes sales, starts and closings for
date of January 31, 2021 .
(2) Austin , Savannah , Village Park Homes , Active Adult and Custom Homes .
Our "backlog" consists of homes under a purchase contract that are signed by
homebuyers who have met the preliminary criteria to obtain mortgage financing
but such home sales to end buyers have not yet closed. Ending backlog represents
the number of homes in backlog from the previous period plus the number of net
new orders generated during the current period minus the number of homes closed
during the current period. Our backlog at any given time will be affected by
cancellations and the number of our active communities. Homes in backlog are
generally closed within one to six months, although we may experience
cancellations of purchase contracts at any time prior to such home closings.
Certain sales to investors that intend to lease the homes may be delivered over
a longer duration. It is important to note that net new orders, backlog and
cancellation metrics are operational, rather than accounting, data and should be
used only as a general gauge to evaluate performance. Backlog may be impacted by
customer cancellations for various reasons that are beyond our control, and, in
light of our minimal required deposit, there is little negative impact to the
potential homebuyer from the cancellation of the purchase contract.
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The following table presents information concerning our new orders, cancellation
rate and ending backlog for the periods (and at the end of the period) set forth
below.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
12 2021 2020 2021 2 2020 2
Net New Orders 1,521 792 3,531 1,641
Cancellation Rate 14.4% 18.0% 10.9% 14.9%
June 30,
12 2021 2020
Ending Backlog - Homes 4,137 1,457
Ending Backlog - Value (in thousands)
Land Acquisition Strategy and Development Process
We operate an asset-light and capital efficient lot acquisition strategy and, in contrast to many other homebuilders, generally seek to avoid engaging in land development, which requires significant capital expenditures and can take several years to realize returns on the investment. Our strategy is intended to avoid the financial commitments and risks associated with direct land ownership and land development by allowing us to control a significant number of lots for a relatively low capital cost. We primarily employ two variations of our asset-light land financing strategy, finished lot option contracts and land bank option contracts, pursuant to which we secure the right to purchase finished lots at market prices, by paying deposits based on the aggregate purchase price of the finished lots (typically 10% or less in the case of finished lot option contracts and 15% or less in the case of land bank option contracts) and, in the case of land bank option contracts, any related fees paid to the land bank partner. As ofJune 30, 2021 , our lot deposits and investments in finished lot option and land bank contracts were$108 million , of which$5 million was refundable at our option. As ofJune 30, 2021 , we controlled 22,923 lots under lot option and land bank option contracts. 37 -------------------------------------------------------------------------------- Table of Contents Owned and Controlled Lots
The following table presents our owned or controlled lots by market and active
adult and custom home divisions as of
As of As of
June 30, December 31,
2021 2020 % Change of
Division Owned Controlled Total Owned 1 Controlled 1 Total 1 Total .The Carolinas (H&H Homes) 1,431 4,945 6,376 1,348 4,107 5,455 17 % Jacksonville 1,135 5,125 6,260 715 4,445 5,160 21 % Orlando 520 3,413 3,933 256 2,504 2,760 43 % Colorado 166 5,107 5,273 106 4,145 4,251 24 % DC Metro 124 719 843 77 566 643 31 % Other(1) 904 3,614 4,518 629 3,509 4,138 9 % Grand Total 4,280 22,923 27,203 3,131 19,276 22,407 21 %
(1) Includes owned and controlled lots for Century Homes from the
acquisition date of January 31, 2021 .
(2)
Owned Real Estate Inventory Status
The following table presents our owned real estate inventory status as ofJune 30, 2021 and 2020. As of As ofJune 30, 2021 December 31, 2020 Owned Real Estate Inventory Status (1) % ofOwned Real Estate
Inventory % of Owned Real Estate Inventory 1 Construction in progress and finished homes
87.7 % 88.8 %
Finished lots and land under development 12.3 % 11.2 %
Total 100 % 100 %
(1) Represents our owned homes under construction, finished lots and
capitalized costs related to land under development. Land and lots from
consolidated joint ventures are excluded.
Our Active Communities
We define an active community as a community where we have recorded five net new orders or a model home is currently open to customers. A community is no longer active when we have less than five home sites to sell to customers. Active community count is an important metric to forecast future net new orders for our business. As ofJune 30, 2021 , we had 117 active communities, an increase of 31 communities, or 36%, when compared to our 86 active communities atJune 30, 2020 . Our active community count excludes communities under the Company's build for rent contracts, as all sales to investors occur at one point in time and these communities would have no home sites remaining to sell. As ofJune 30, 2021 , the Company had five communities under construction for build for rent contacts. 38 -------------------------------------------------------------------------------- Table of Contents Our Mortgage Banking Business For the three months endedJune 30, 2021 , our mortgage banking joint venture,Jet LLC , originated and funded 540 home loans with an aggregate principal amount of approximately$173 million as compared to 563 home loans with an aggregate principal amount of approximately$157 million for the three months endedJune 30, 2020 . For the six months endedJune 30, 2021 , our mortgage banking joint venture,Jet LLC , originated and funded 1,011 home loans with an aggregate principal amount of approximately$319 million as compared to 993 home loans with an aggregate principal amount of approximately$279 million for the six months endedJune 30, 2020 . For the three months endedJune 30, 2021 and 2020, respectively,Jet LLC had net income of approximately$2 million and$4 million . For the six months endedJune 30, 2021 and 2020, respectively,Jet LLC had net income of approximately$6 million and$7 million . Our interest inJet LLC is accounted for under the equity investment method and is not consolidated in our condensed consolidated financial statements, as we do not control, and are not deemed the primary beneficiary of, the variable interest entity ("VIE"). See "Note 9. Variable Interest Entities and Investments in Other Entities" to our condensed consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 for a description of our joint ventures, including those that were determined to be VIEs, and the related accounting treatment.
Costs of
Our cost of sales includes the acquisition and finance costs of home sites or lots, municipality fees, the costs associated with obtaining building permits, materials and labor to construct the home, interest rates for construction loans, internal and external realtor commissions and other miscellaneous closing costs. Home site costs range from 20-25% of the average cost of a home. Building materials range from 40-50% of the average cost to build the home, labor ranges from 30-40% of the average cost to build the home and interest, commissions and closing costs range from 4-10% of the average cost to build the home. In general, the cost of building materials fluctuates with overall trends in the underlying prices of raw materials. The cost of certain of our building materials, such as lumber and oil-based products, fluctuates with market-based pricing curves. We often obtain volume discounts and/or rebates with certain suppliers of our building materials, which in turn reduces our cost of sales. However, increases in the cost of building materials may reduce gross margin to the extent that market conditions prevent the recovery of increased costs through higher home sales prices. The price changes that most significantly influence our operations are price increases in commodities, including lumber. Significant price increases of these materials may negatively impact our cost of sales and, in turn, our net income.
Seasonality
In all of our markets, we have historically experienced similar variability in
our results of operations and capital requirements from quarter to quarter due
to the seasonal nature of the homebuilding industry. We generally sell more
homes in the first and second quarters and close more homes in our third and
fourth quarters. As a result, our revenue may fluctuate on a quarterly basis and
we may have higher capital requirements in our second, third and fourth quarters
in order to maintain our inventory levels. As a result of seasonal activity, our
quarterly results of operations and financial position at the end of a
particular quarter, especially our first quarter, are not necessarily
representative of the results we expect at year end. We expect this seasonal
pattern to continue in the long term.
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Liquidity and Capital Resources
Overview
As ofJune 30, 2021 , we had$6 million in cash and cash equivalents (excluding$47 million of restricted cash), a decrease of$29 million , or 83%, from$36 million as ofDecember 31, 2020 . Additionally, the Company has$76 million of availability under the Credit Agreement and$32 million of closing proceeds in transit, for a total of$114 million in liquidity. We generate cash from the sale of our inventory and we intend to re-deploy the net cash generated from the sale of inventory to acquire and control land and further grow our operations year over year. We believe that our sources of liquidity are sufficient to satisfy our current commitments. Immediately following the closing of our IPO, we replaced all of our secured vertical construction lines of credit facilities with our credit agreement (the "Credit Agreement") with a syndicate of lenders andBank of America, N.A , as administrative agent, providing for a senior unsecured revolving credit facility which has an initial aggregate commitment of up to$450 million and an accordion feature that allows the facility to expand to a borrowing base of up to$750 million (our "Credit Facility"). We believe that the consolidation of our indebtedness into a single credit facility will reduce our financing costs, create operating efficiencies and enhance returns.
Our principal uses of capital are lot deposits and purchases, vertical home
construction, operating expenses and the payment of routine liabilities. During
the six months ended
Cash flows generated by our projects can differ materially from our results of operations, as these depend upon the stage in the life cycle of each project. The majority of our projects begin at the land acquisition stage when we enter into finished lot option contracts by placing a deposit with a land seller or developer. Our lot deposits are an asset on our balance sheets, and these cash outflows are not recognized in our results of operations. Early stages in our communities require material cash outflows relating to finished rolling option lot purchases, entitlements and permitting, construction and furnishing of model homes, roads, utilities, general landscaping and other amenities, as well as ongoing association fees and property taxes. These costs are capitalized within our real estate inventory and are not recognized in our operating income until a home sale closes. As such, we incur significant cash outflows prior to the recognition of earnings. In later stages of the life cycle of a community, cash inflows could significantly exceed our results of operations, as the cash outflows associated with land purchase and home construction and other expenses were previously incurred. We actively enter into finished lot option contracts by placing deposits with land sellers of typically 10% or less of the aggregate purchase price of the finished lots. When entering into these contracts, we also agree to purchase finished lots at pre-determined time frames and quantities that match our expected selling pace in the community. For the three months endedJune 30, 2021 , the majority of these future lot purchases were financed by the Credit Agreement. From time to time, we also enter into land development arrangements with land sellers, land developers and land bankers. We typically provide a lot deposit of 10% or less, or 15% or less in the case of land bank option contracts, of the total investment required to develop lots that we will have the option to acquire in the future. In these transactions, we also incur lot option fees that have historically been 15% or less of the outstanding capital balance held by the land banker. The initial investment and lot option fees require our ability to allocate liquidity resources to projects that will be not materialize into cash inflows or operating income in the near term. The above cash strategies are designed to allow us to maintain adequate lot supply in our existing markets and support ongoing growth and profitability. As we continue to operate in a low interest rate environment, with consistent increase in the demand for new homes and constrained lot supply compared to population and job growth trends, we intend to continue to re-invest our earnings into our business and focus on expanding our operations. In addition, as the opportunity to purchase finished lots in desired locations becomes increasingly more limited and competitive, we are committed to allocating additional liquidity to land-bank deposits on land development projects, as this strategy mitigates the risks associated with holding undeveloped land on our balance sheet, while allowing us to control adequate lot supply in our key markets to support forecasted growth. As ofJune 30, 2021 , our lot deposits and investments related to finished lot option contracts and land bank option contracts were$108 million , including$5 million of refundable lot deposits. For the six months endedJune 30, 2021 , we closed 1,998 homes, acquired 3,025 lots and started construction on 2,967 homes. 40 -------------------------------------------------------------------------------- Table of Contents Cash Flows
The following table summarizes our cash flows for the periods indicated:
For the Six Months Ended
June 30,
2021 2020
Net cash provided by (used in) operating activities
842
Net cash provided by (used in) financing activities 112,652
15,486
Net cash used in operating activities was$121 million for the six months endedJune 30, 2021 , an increase of$93 million , as compared to$28 million of net cash used in operating activities for the six months endedJune 30, 2020 . The increase in net cash used in operating activities was driven by an increase of$117 million in inventories and an increase in lot deposits of$41 million as the Company deploys its available cash from the Credit Agreement into future growth, partially offset by higher deposits of$29 million received from customers and the increase in net income generated on home closings. Net cash used in investing activities was$23 million for the six months endedJune 30, 2021 , an increase of$24 million , as compared to$1 million of cash provided by investing activities for the six months endedJune 30, 2020 . The increase in net cash used in investing activities was primarily attributable to the acquisition ofCentury Homes during the first quarter of 2021. Net cash provided by financing activities was$113 million for the six months endedJune 30, 2021 , an increase of$97 million , as compared to$15 million of cash provided by financing activities for the six months endedJune 30, 2020 . The increase in net cash provided in financing activities was primarily attributable to the Corporate Reorganization, which was partially offset by the redemption of the Series C preferred units ofDFH LLC of$26 million , and payments to terminate the Company's historical vertical construction lines of credit and notes payable, including the$20 million bridge loan utilized in funding the H&H Acquisition, in connection with the new unsecured Credit Agreement.
Credit Facilities and Financial Guarantees
As ofJune 30, 2021 , under our Credit Facility we had a maximum availability of$450 million and an outstanding balance of$365 million . As ofDecember 31, 2020 , we had 34 vertical construction lines of credit facilities with a cumulative maximum availability of$763 million and an aggregate outstanding balance of$290 million . Historically, our vertical construction lines of credit facilities were fully collateralized by finished lots and homes under construction. 41 -------------------------------------------------------------------------------- Table of Contents Series C Preferred Units OnJanuary 27, 2021 , we redeemed all 26,000 outstanding Series C preferred units ofDFH LLC at a redemption price of$26 million , plus accrued distributions and fees of$0.2 million .
Off-Balance Sheet Arrangements
Asset-Light Lot Acquisition Strategy
We operate an asset-light and capital efficient lot acquisition strategy and generally seek to avoid engaging in land development. We primarily employ two variations of our asset-light land financing strategy, finished lot option contracts and land bank option contracts, pursuant to which we secure the right to purchase finished lots at market prices from various land sellers and land bank partners, by paying deposits based on the aggregate purchase price of the finished lots. The deposits required are typically 10% or less in the case of finished lot option contracts and 15% or less in the case of land bank option contracts. As ofJune 30, 2021 , we owned and controlled 27,203 lots through finished lot option contracts and land bank option contracts. Our entire risk of loss pertaining to the aggregate purchase price of contractual commitments resulting from our non-performance under our finished lot option contracts and land bank option contracts is limited to approximately$108 million in deposits and investments made as ofJune 30 , 2021-$108 million of lot deposits, including$5 million of refundable lot deposits pertaining to deals that are still in the due diligence inspection period.
Surety Bonds and Letters of Credit
We enter into letter of credit and surety bond arrangements with local municipalities, government agencies and land developers. These arrangements relate to certain performance-related obligations and serve as security for certain land option agreements. AtJune 30, 2021 , we had outstanding letters of credit and surety bonds totaling$12 million and$37 million , respectively. We believe we will fulfill our obligations under the related arrangements and do not anticipate any material losses under these letters of credit or surety bonds.
Contractual Obligations
As of
Critical Accounting Policies
We prepare our condensed consolidated financial statements in accordance with
GAAP. Our critical accounting policies are those that we believe have the most
significant impact to the presentation of our financial position and results of
operations and that require the most difficult, subjective or complex judgments.
In many cases, the accounting treatment of a transaction is specifically
dictated by GAAP without the need for the application of judgment.
In certain circumstances, however, the preparation of condensed consolidated
financial statements in conformity with GAAP requires us to make certain
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
date of the condensed consolidated financial statements, as well as the reported
amounts of revenues and expenses during the reporting period.
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We believe that there have been no significant changes to our critical
accounting policies during the six months ended June 30, 2021 as compared to
those disclosed in Management's Discussion and Analysis of Financial Condition
and Results of Operations included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2020 .
Cautionary Statement about Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q includes "forward-looking statements." Many statements included in this Quarterly Report on Form 10-Q are not statements of historical fact, including statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "goal," "intend," "may," "objective," "plan," "predict," "projection," "should" or "will" or the negative thereof or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
• our market opportunity and the potential growth of that market;
• the expected impact of the COVID-19 pandemic;
• our strategy, expected outcomes and growth prospects;
• trends in our operations, industry and markets;
• our future profitability, indebtedness, liquidity, access to capital and
financial condition; and
• our integration of
We have based these forward-looking statements on our current expectations and assumptions about future events based on information available to our management at the time the statements were made. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. The following factors, among others, may cause actual results to differ materially from those expressed or implied in our forward-looking statements:
• adverse effects of the COVID-19 pandemic on our business, financial conditions
and results of operations and our suppliers and trade partners;
• adverse effects of the COVID-19 pandemic and other economic changes either
nationally or in the markets in which we operate, including, among other
things, increases in unemployment, volatility of mortgage interest rates and
inflation and decreases in housing prices;
• a slowdown in the homebuilding industry or changes in population growth rates
in our markets;
• volatility and uncertainty in the credit markets and broader financial markets;
• the cyclical and seasonal nature of our business;
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• our future operating results and financial condition;
• our business operations;
• changes in our business and investment strategy;
• the success of our operations in recently opened new markets and our ability to
expand into additional new markets;
• our ability to continue to leverage our asset-light and capital efficient lot
acquisition strategy;
• our ability to develop our projects successfully or within expected timeframes;
• our ability to identify potential acquisition targets and close such
acquisitions;
• our ability to successfully integrate
acquired businesses with our existing operations;
• availability of land to acquire and our ability to acquire such land on
favorable terms, or at all;
• availability, terms and deployment of capital and ability to meet our ongoing
liquidity needs;
• restrictions in our debt agreements that limit our flexibility in operating our
business;
• disruption in the terms or availability of mortgage financing or an increase in
the number of foreclosures in our markets;
• decline in the market value of our inventory or controlled lot positions;
• shortages of, or increased prices for, labor, land or raw materials used in
land development and housing construction, including due to changes in trade
policies;
• delays in land development or home construction resulting from natural
disasters, adverse weather conditions or other events outside our control;
• uninsured losses in excess of insurance limits;
• the cost and availability of insurance and surety bonds;
• changes in (including as a result of the change in the
administration), liabilities under, or the failure or inability to comply with,
governmental laws and regulations, including environmental laws and regulations;
• the timing of receipt of regulatory approvals and the opening of projects;
• the degree and nature of our competition;
• decline in the financial performance of our joint ventures, our lack of sole
decision-making authority thereof and maintenance of relationships with our
joint venture partners;
• negative publicity or poor relations with the residents of our projects;
• existing and future warranty and liability claims;
• existing and future litigation, arbitration or other claims;
• availability of qualified personnel and third-party contractors and
subcontractors;
• information system failures, cyber incidents or breaches in security;
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• our ability to retain our key personnel;
• our ability to maintain an effective system of internal control and produce
timely and accurate financial statements or comply with applicable regulations;
• our leverage and future debt service obligations;
• the impact on our business of any future government shutdown;
• the impact on our business of acts of war or terrorism;
• our reliance on dividends, distributions and other payments from our
subsidiaries to meet our obligations;
• other risks and uncertainties inherent in our business;
• other factors we discuss under the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations;" and
• the risk factors set forth in our Annual Report on Form 10-K for the fiscal
year ended
We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the operation of our business. These risks include, but are not limited to, the risks described under "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Should one or more of the risks or uncertainties described in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
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