What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-02 · 300 added, 304 removed, 195 unchanged (76% of the section changed)

3 unchanged sentences

and its subsidiaries.

Business Overview

We design, build and sell homes in high-growth markets, including Charlotte, Raleigh, Jacksonville, Orlando, Denver, the Washington D.C.

metropolitan area, Austin, Dallas and Houston.

We sell homes under the Dream Finders Homes, DF Luxury, Craft Homes and Coventry Homes brands.

We employ an asset-light land 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 through DF Title and mortgage banking solutions primarily through our mortgage banking joint venture, Jet LLC.

During the third and fourth quarters of 2022, housing demand was negatively impacted as rising mortgage rates created strains on affordability.

In response to the negative effect on housing demand, we have introduced sales incentives primarily focused on mortgage buy down programs and continue to monitor net sales and traffic at the community level and are strategically renegotiating lot option contracts to match the adjusted sales pace.

Our asset-light business model and conservative balance sheet management have allowed us to effectively navigate market volatility.

For the year ended December 31, 2022, we received 6,045 net new orders (new orders for homes less cancellations), a decrease of 763 or 11%, as compared to the 6,808 net new orders received for the year ended December 31, 2021.

For the year ended December 31, 2022, we closed 6,878 homes, an increase of 2,004, or 41%, as compared to the 4,874 homes closed for the year ended December 31, 2021.

As of December 31, 2022, our backlog of sold homes was 5,548.

In addition, as of December 31, 2022, we owned or controlled an aggregate of 43,558 lots.

Key financial results for the year ended December 31, 2022, as compared to the year ended December 31, 2021, were as follows:

The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our business, operations and present business environment and is provided as a supplement to, and should be read together with the sections entitled “Risk Factors,” and the financial statements and the accompanying notes included elsewhere in this Form 10-K.

In addition, the statements in this discussion and analysis regarding outlook, our expectations regarding the performance of our business, anticipated financial results and liquidity are forward-looking statements.

These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Forward-Looking Statements” and in “Risk Factors” above.

Our actual results may differ materially from those contained in or implied by any forward-looking statements."

Business Overview and Outlook

We design, build and sell homes in high-growth markets using our asset-light lot acquisition strategy.

Our primary focus is on constructing and selling single-family homes across entry-level, first-time move-up, second-time move-up, and active adult markets.

To fully serve our homebuyers and capture ancillary business opportunities, we have financial services operations that offer title insurance and mortgage banking solutions.

The easing of mortgage interest rates toward the end of 2023 resulted in accelerated demand for homebuilders heading into the spring selling season.

Although macroeconomic indicators suggest that interest rates will continue to fall moderately in 2024, which, if those indicators come to fruition, should have a consistent positive impact on demand, we remain cautious and committed to our goals to deliver affordability and value to our homebuyers.

We continue to strategically release quick move-in homes in our communities at competitive price points and we offer flexible sales incentives aimed at reducing our homebuyers’ monthly mortgage payments and closings costs.

This strategy has served us well during 2023, and we believe it will continue to effectively generate new sales and faster inventory turnover in 2024.

Inflation in the United States materially increased during the year ended December 31, 2022, and has remained elevated throughout 2023.

Despite this fact, the homebuilding industry has shown consistent growth in 2023, driven by constrained housing supply dynamics that favor new home sales as the resale home market continues to face inventory shortages.

If interest rates start to decline in 2024, increased demand for homes is likely to follow.

Through our close monitoring of net new orders and community-level traffic, we are able to respond promptly to changes in local market conditions.

As needed, we are able to strategically renegotiate lot option takedowns to match sales pace, which exemplifies how advantageous our asset-light strategy can be.

Excluding built-for-rent deals that occurred in 2022 that did not repeat in 2023, the Company had an increase in net new orders of 43% when compared to the prior year.

These focused efforts by management not only drove our strong performance this year, but also showcase our ability to navigate a challenging macroeconomic environment.

Key financial results for the year ended December 31, 2023, as compared to the year ended December 31, 2022 (unless otherwise noted) were as follows:

• Revenues increased 12% to $3.7 billion from $3.3 billion

• Home closings increased 6% to 7,314 from 6,878

• Average sales price of homes (“ASP”) closed increased 7% to $505,764 from $474,292

• Net new orders decreased 5% to 5,744 from 6,045

• Homes closed increased 41% to 6,878 from 4,874.

• Average sales price of homes closed increased 22% to $474,292 from $389,094.

• Gross margin as a percentage of homebuilding revenues increased to 18.4% from 16.0%.

• Adjusted gross margin (non-GAAP) as a percentage of homebuilding revenues increased to 24.6% from 21.7%.

• Net and comprehensive income increased 104% to $274 million from $135 million.

• Net and comprehensive income attributable to Dream Finders Homes, Inc.

increased 117% to $262 million from $121 million.

• EBITDA (non-GAAP) as a percentage of total revenues increased to 12.6% from 10.1%.

• Backlog of sold homes decreased 13% to 5,548 from 6,381.

• Active communities at December 31, 2022 increased to 206 from 205 at December 31, 2021.

• Gross margin as a percentage of homebuilding revenues increased 100 basis points (“bps”) to 19.4% from 18.4%

• Adjusted gross margin (non-GAAP) as a percentage of homebuilding revenues increased 260 bps to 27.2% from 24.6%

• Income before taxes increased 14% to $404 million from $356 million

• Net and comprehensive income attributable to DFH increased 13% to $296 million from $262 million

• Basic earnings per share (“EPS”) was $3.03 and diluted EPS was $2.79, compared to $2.67 and $2.45, respectively

• EBITDA (non-GAAP) as a percentage of total revenues increased 130 bps to 13.9% from 12.6%

• Active community count increased to 221 from 206

• Backlog of sold homes decreased 28% to 3,978 from 5,548, and the value of backlog decreased 25% to $1.9 billion from $2.5 billion

• Return on participating equity was 36.3%, compared to 49.1%

• Basic earnings per share was $2.67 and diluted earnings per share was $2.45, compared to $1.27 and $1.27, respectively.

• Issuance of $300 million in aggregate principal amount of 8.25% senior unsecured notes used to repay a portion of the outstanding balance under the revolving credit facility

• Net debt to net capitalization of 23.3% as of December 31, 2023, compared to 42.9% as of December 31, 2022

• Total liquidity, comprised of cash and cash equivalents, and availability under the revolving credit facility, increased to $828 million as of December 31, 2023, compared to $487 million as of December 31, 2022

For reconciliations of the non-GAAP financial measures, including adjusted gross margin and EBITDA, to the most directly comparable GAAP financial measures, see “— Non-GAAP Financial Measures .”

Recent Developments

On October 10, 2022, the Company transferred the listing of its Class A common stock from the Nasdaq Global Select Market to the New York Stock Exchange.

The Company's Class A common stock continues to trade under the stock symbol "DFH."

Crescent Homes Acquisition

On February 1, 2024, we acquired the majority of the homebuilding assets of Crescent Ventures, LLC (“Crescent Homes”), expanding our operations into the Charleston and Greenville, South Carolina and Nashville, Tennessee markets.

Refer to Note 15, Subsequent Events to our consolidated financial statements for more information.

Expansion in the Southeast Segment

In 2023, we expanded into the Tampa, Florida market.

As of December 31, 2023, we owned 12 lots and controlled 623 lots in Tampa.

We opened for sales in Tampa in January 2024.

Results of Operations

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table sets forth our results of operations for the periods indicated:

For the Year Ended December 31,

The following table sets forth our res ults of operations and balance sheet data (in thousands, except per share and share amounts) for the periods indicated:

Year Ended December 31,

2023 2022 Amount Change

6 unchanged sentences

Contingent consideration revaluation 46,590 11,053 35,537 322 %

Other (income) expense, net (1,963) (1,653) (310) 19 %

Interest expense 32 672 (640) (95) %

Income before income taxes

Other income, net (4,962) (1,931) (3,031) 157 %

Income before taxes

404,425 356,156 48,269 14 %

11 unchanged sentences

Diluted 106,027,548 106,691,248 (663,700) (1) %

Consolidated Balance Sheet Data (at period end):

Consolidated Balance Sheets Data (as of period end):

Cash and cash equivalents $ 494,145 $ 364,531 $ 129,614 36 %

Total assets $ 2,562,439 $ 2,371,137 $ 191,302 8 %

Construction lines of credit $ 966,248 $ 763,292 $ 202,956 27 %

Preferred mezzanine equity $ 156,045 $ 155,220 $ 825 1 %

Common stock - Class A $ 325 $ 323 $ 2 1 %

Common stock - Class B $ 602 $ 602 $ — — %

Additional paid-in capital $ 264,757 $ 257,963 $ 6,794 3 %

Retained earnings $ 365,994 $ 118,194 $ 247,800 210 %

Non-controlling interests $ 12,970 $ 24,081 $ (11,111) (46) %

Other Financial and Operating Data (unaudited)

Active communities at end of period (2)

Total debt $ 824,302 $ 966,248 $ (141,946) (15) %

Total mezzanine and stockholders’ equity $ 1,086,150 $ 800,693 $ 285,457 36 %

Other Financial and Operating Data

Active communities as of period-end (2)

221 206 15 7 %

4 unchanged sentences

Cancellation rate 18.3 % 21.5 % (3.2) % (15) %

Backlog (at period end) - homes 5,548 6,381 (833) (13) %

Backlog (at period end, in thousands) - value $ 2,502,564 $ 2,913,170 $ (410,606) (14) %

Ending backlog - homes 3,978 5,548 (1,570) (28) %

Ending backlog - value (in thousands) $ 1,887,368 $ 2,502,564 $ (615,196) (25) %

Return on participating equity (4)

36.3 % 49.1 % (12.8) % (26) %

Net debt to net capitalization (5)

23.3 % 42.9 % (19.6) % (46) %

Gross margin (in thousands) (6)

2 unchanged sentences

19.4 % 18.4 % 1.0 % 5 %

Net profit margin % 7.9 % 6.3 % 1.5 % 25 %

Adjusted gross margin (in thousands) (8)

10 unchanged sentences

14.3 % 12.8 % 1.5 % 12 %

(1) Refer to Note 14, Earnings per Share to the consolidated financial statements for disclosure related to the calculation of earnings per share (“EPS”) as of December 31, 2021.

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.Since the conversion price of the Company’s Convertible Preferred Stock is based on the average trailing 90 days’ closing price of Class A common stock, changes in the price of the Class A common stock may significantly affect, as it did in 2022, the number of additional assumed common shares outstanding under the if-converted method for diluted earnings per share, even when the number of Convertible Preferred Stock shares outstanding is unchanged.

(2) A community becomes active once a model is open to customers or the community has had five net new orders.

A community becomes inactive when it has fewer than five units remaining to sell.

(3) Average sales price of homes closed is calculated based on homebuilding revenues, excluding the impact of deposit forfeitures, percentage of completion revenues and finished lot sales, over homes closed.

(1) Refer to Note 14, Earnings Per Share to the consolidated financial statements for disclosures related to the calculation of EPS.

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.

(2) A community becomes active once the model is completed or the community has its fifth net sale.

A community becomes inactive when it has fewer than five homesites remaining to sell.

(3) Average sales price of homes closed is calculated based on homebuilding revenues, adjusted for the impact of percentage of completion revenues, and excluding deposit forfeitures and land sales, over homes closed.

(4) Return on participating equity is calculated as net income attributable to DFH, less redeemable preferred stock distributions, dividends and redemptions, divided by average beginning and ending participating equity.

Participating equity is stockholders’ equity excluding noncontrolling interests.

(5) Net debt to net capitalization is defined as the sum of the senior unsecured notes, net, and construction lines of credit, less cash and cash equivalents (“net debt”), divided by the sum of net debt and total mezzanine and stockholders’ equity.

(6) Gross margin is homebuilding revenues less homebuilding cost of sales.

3 unchanged sentences

(9) Calculated as a percentage of total revenues.

The following tables summarize homes closings, and ASP of homes closed by homebuilding segment for the years ended December 31, 2023 and 2022, as well as active communities as of December 31, 2023 and 2022:

Year Ended December 31, 2023 As of December 31, 2023

Segment Home Closings ASP Active Communities

Southeast 3,170 $ 470,405 57

Mid-Atlantic 1,597 396,462 44

Midwest 2,547 618,306 120

Total 7,314 $ 505,764 221

Year Ended December 31, 2022 As of December 31, 2022

Segment Home Closings ASP Active Communities

Southeast 2,722 $ 439,150 57

Mid-Atlantic 1,562 358,548 37

Midwest 2,594 580,865 112

Total 6,878 $ 474,292 206

The following table presents income before taxes (in thousands), and homebuilding gross margin percentage by segment for the years ended December 31, 2023 and 2022:

Year Ended December 31,

Segment Income Before Taxes

Gross Margin % Income Before Taxes

Gross Margin %

Southeast $ 183,537 18.9 % $ 165,367 19.4 %

Mid-Atlantic 54,646 17.9 % 40,028 14.1 %

Midwest 168,115 20.6 % 164,377 19.1 %

Total $ 406,298 19.4 % $ 369,772 18.4 %

Revenues for the year ended December 31, 2023 were $3.7 billion, an increase of $0.4 billion, or 12%, from $3.3 billion for the year ended December 31, 2022 .

The increase in revenues was primarily attributable to an increase in home closings of 2,004 homes, or 41%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Our October 2021 acquisition of MHI contributed 2,229 closings and $1.3 billion in homebuilding revenues for the year ended December 31, 2022 and 689 closings and $361.1 million in homebuilding revenues for the year ended December 31, 2021 .

The average sales price of homes closed was $474,292 for 2022 compared to $389,094 in 2021, an increase of $85,198 or 22%.

The increase was due to a higher average sales price of homes closed within the Texas segment, as well as overall price appreciation, which increased at a higher pace than cost inflation.

The increase in revenues was attributable to home closings of 7,314 for the year ended December 31, 2023, an increase of 436 homes, or 6%, from 6,878 for the year ended December 31, 2022.

Also contributing to the increase was the average sales price of homes closed for the year ended December 31, 2023 was $505,764, an increase of $31,472, or 7%, from $474,292 for the year ended December 31, 2022.

The increase was due to overall price appreciation, as well as product mix.

Homebuilding Cost of Sales and Gross Margin .

Homebuilding cost of sales for the year ended December 31, 2023 was $3.0 billion, an increase of $0.3 billion, or 11%, from $2.7 billion for the year ended December 31, 2022.

The increase in homebuilding cost of sales is primarily due to the increase in home closings in 2022 as compared to 2021.

Homebuilding gross margin for the year ended December 31, 2023 was $727 million, an increase of $115 million, or 19%, from $612 million for the year ended December 31, 2022.

Homebuilding gross margin as a percentage of homebuilding revenues was 18.4% for the year ended December 31, 2022, an increase of 240 basis points (“bps”), or 15%, from 16.0% for the year ended December 31, 2021.

The increase in gross margin was primarily due to overall price appreciation, which increased at a higher pace than cost inflation.

Homebuilding gross margin percentage was 19.4% for the year ended December 31, 2023, an increase of 100 bps, or 5%, from 18.4% for the year ended December 31, 2022.

The increase in gross margin percentage was primarily a result of continued cost management and cycle time improvement efforts.

The increase was partially offset by higher financing and closing costs.

To facilitate home closings, we provided closing cost incentives, which, among other options, could be used by the customer to buy down their mortgage interest rate.

Adjusted Gross Margin.

Adjusted gross margin for the year ended December 31, 2022 was $820 million, an increase of $404 million, or 97%, from $416 million for the year ended December 31, 2021.

Adjusted gross margin as a percentage of homebuilding revenues for the year ended December 31, 2022 was 24.6%, an increase of 290 bps, or 13%, as compared to 21.7%, for the year ended December 31, 2021.

The increase in adjusted gross margin is attributable to overall price appreciation, which increased at a higher pace than cost inflation.

Adjusted gross margin for the year ended December 31, 2023 was $1.0 billion, an increase of $196 million, or 24%, from $820 million for the year ended December 31, 2022.

Adjusted gross margin as a percentage of homebuilding revenues for the year ended December 31, 2023 was 27.2%, an increase of 260 bps, or 11%, from 24.6% for the year ended December 31, 2022.

The adjusted gross margin percentage increased due to effective cost management strategies, partially offset by higher closing costs.

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.”

For the defin ition 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.”

Our Southeast segment total revenues for the year ended December 31, 2023 were $1.5 billion , an increase of $0.3 billion, or 23%, from $1.2 billion for the year ended December 31, 2022.

This revenue growth was primarily driven by an increase in home closings of 448, or 16%.

Additionally, the ASP of homes closed of $470,405 for the year ended 2023, reflected an increase of 7% when compared to 2022, a result of price appreciation and product mix.

Homebuilding gross margin percentage was 18.9% for the year ended December 31, 2023, representing a decrease of 50 bps, or 0.5%, when compared to the year ended December 31, 2022.

The reduction in gross margin percentage was primarily attributed to higher financing and closing costs.

Mid-Atlantic.

Our Mid-Atlantic segment total revenues for the year ended December 31, 2023 were $633 million, an increase of $66 million, or 12%, from $567 million for the year ended December 31, 2022.

This revenue growth was primarily driven by an increase in ASP of homes closed of 11% to $396,462.

The increase in ASP of homes closed was largely influenced by changes in product mix.

Additionally, there was an increase in home closings of 35, or 2%, for the year ended December 31, 2023 compared to 2022.

Homebuilding gross margin percentage was 17.9% for the year ended December 31, 2023, representing an increase of 380 bps, or 3.8%, when compared to the year ended December 31, 2022.

The improvement in gross margin percentage was primarily due to cost management efforts, including cycle time reductions, partially offset by higher financing costs.

Our Midwest segment total revenues for the year ended December 31, 2023 were $1.6 billion, an increase of $0.1 billion, or 4%, from $1.5 billion for the year ended December 31, 2022.

This additional revenue was due to an ASP of homes closed of $618,306 for the year ended 2023, an increase of 6% when compared to 2022, partially offset by a decrease in home closings of 47, or 2%.

Homebuilding gross margin percentage was 20.6% for the year ended December 31, 2023, representing an increase of 150 bps, or 1.5%, when com pared to the year ended December 31, 2022 .

The growth in gross margin percentage year over year is due to effective cost management including impacts from overall cycle time reduction, partially offset by higher financing and closing costs.

Selling, General and Administrative Expense .

Selling, general and administrative expense for the year ended December 31, 2022 was $271 million, an increase of $117 million, or 76%, from $154 million for the year ended December 31, 2021.

The increase in selling, general and administrative expense was primarily due to higher closing volume and the inclusion of $111 million in expenses from the Texas segment for the year ended December 31, 2022 .

Selling, general and administrative expenses as a percentage of homebuilding revenues for the year ended December 31, 2022 was 8%, remaining consistent when compared to 8% for the year ended December 31, 2021 .

Income from Equity in Earnings of Unconsolidated Entities .

Income from equity in earnings of unconsolidated entities for the year ended December 31, 2022 was $16 million, an increase of $7 million, or 71%, as compared to $9 million for the year ended December 31, 2021.

The change in income from equity in earnings of unconsolidated entities was equally attributable to income from mortgage banking and title insurance joint ventures from MHI and distributions of profits from DF Capital funds for the year ended December 31, 2022 .

Selling, general and administrative expense (“SG&A”) for the year ended December 31, 2023 was $309 million, an increase of $38 million, or 14%, from $271 million for the year ended December 31, 2022.

SG&A as a percentage of homebuilding revenues for the year ended December 31, 2023 increased 20 bps to 8.3% compared to 8.1% for the year ended December 31, 2022.

For the year ended December 31, 2023, SG&A included $28 million of costs related to mortgage forward commitment programs, allowing our homebuyers to lock their interest rates on home loans at the point of sale, which were not incurred in 2022.

We expense these costs as incurred.

Income from Unconsolidated Entities .

Income from unconsolidated entities for the year ended December 31, 2023 was $18 million, an increase of $2 million, or 12%, from $16 million for the year ended December 31, 2022 .

The increase in income from unconsolidated entities is primarily attributable to increased income from Jet HomeLoans, partially offset by fewer distributions of profits from DF Capital funds, as Fund I is nearing its final stage, and as Fund II is still in its investment period.

Contingent Consideration Revaluation .

Contingent consideration expense for the year ended December 31, 2022 was $11 million, an increase of $3 million or 47%, as compared to $8 million for the year ended December 31, 2021 .

The increase in contingent consideration expense is primarily due to fair value adjustments of future expected earn-out payments from the acquisitions of MHI and H&H.

Contingent consideration revaluation expense (“contingent consideration expense”) for the year ended December 31, 2023 was $47 million, an increase of $36 million, or 322%, from $11 million for the year ended December 31, 2022 .

The increase in contingent consideration expense was primarily due to actual 2023 pre-tax earnings of previously acquired entities, primarily MHI, being better than projected as well as revised projections for the MHI operations.

Contingent consideration liabilities are impacted by various inputs and estimates in addition to the fair value accretion, including:

(i) updates to the discount rate used quarterly, (ii) changes to current year assumptions based on year to date actual results, (iii) changes to future year’s forecast assumptions, which are affected by macro-economic conditions and local market conditions, as well as management actions including capital allocation, growth plans, and restructuring, and (iv) contractual modifications that may merit additional adjustments to final pre-tax income prior to the calculation of the annual earn out payments.

The change in estimates used to calculate the contingent consideration adjustment could be material at times and could potentially fluctuate from expense or income.

Our policy is to separately disclose the impact of contingent consideration liability adjustments within the Consolidated Statements of Comprehensive Income.

Other (Income) Expense, Net .

Other income for the year ended December 31, 2022 was $(2) million, when compared to $(2) million in other income for the year ended December 31, 2021.

The other income, net remained consistent year over year as the income from the forgiveness of the Company's $7 million Paycheck Protection Program loan included in 2021 was offset by the expense for the settlement of the Silver Meadows Townhome Owners Association, Inc.

lawsuit in 2021, both of which did not repeat in 2022.

(i) updates to the applied discount rate, (ii) changes to current year inputs based on year to date actual results, (iii) changes to future year’s forecast assumptions, which are affected by macro-economic conditions and local market conditions, as well as management actions including capital allocation, growth plans, and restructuring, and (iv) contractual modifications that may merit additional adjustments to final pre-tax income prior to the calculation of the annual earn out payments.

The change in estimates used to calculate the contingent consideration revaluation adjustment could be material at times and could potentially fluctuate between expense and income.

Our policy is to separately disclose the impact of contingent consideration revaluation adjustments within the Consolidated Statements of Comprehensive Income.

Other Income, Net .

Other income, net for the year ended December 31, 2023 was $5 million, an increase of $3 million, or 157%, from $2 million in other income, net for the year ended December 31, 2022.

The additional income was primarily due to increased interest income from our cash deposits with financial institutions.

Net and Comprehensive Income .

1 unchanged sentence

The increase in net and comprehensive income was primarily attributable to an increase in gross margin on homes closed of $115 million, or 19%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

This increase was partially offset by an increase in contingent consideration expense of $36 million, primarily related to the MHI acquisition, and forward commitment program costs, both discussed above.

The net and comprehensive income for the year ended December 31, 2023 includes income tax expense of $96 million, an increase of $14 million, or 18%, from $82 million of income tax expense for the year ended December 31, 2022.

This increase is due to the increase in pre-tax income as well as the effective income tax rate increase of 4.5%.

The change in effective tax rate is primarily attributable to the Florida corporate tax rate increase to 5.5% in 2022 from 3.5% in 2021 and increases in non-deductible executive compensation.

In addition, during 2021, the Company's Paycheck Protection Program loan was forgiven and the related income of $7 million was not taxable.

Net and Comprehensive Income Attributable to Dream Finders Homes, Inc .

Net and comprehensive income attributable to Dream Finders Homes, Inc.

for the year ended December 31, 2022 was $262 million, an increase of $141 million, or 117%, from $121 million for the year ended December 31, 2021.

The increase was primarily attributable to higher home closings and gross margin of 6,878 and 18.4%, respectively .

Backlog at December 31, 2022 was 5,548 homes valued at approximately $2,503 million based on average sales price, a decrease of 833 homes and $411 million in value, or 13% and 14%, respectively, as compared to 6,381 homes valued at approximately $2,913 million at December 31, 2021.

The overall decrease in backlog was primarily attributable to a decrease in net new orders of 763 or 11%, which is reflective of the weakening housing market due to the rapid rise in interest rates, mostly in the latter half of the year.

In addition, approximately 1,070 of the homes in our backlog are expected to be delivered in 2024 and beyond.

This increase is primarily due to the increase in income before taxes and to a lesser extent the effective income tax rate increase of 0.9%.

The changes in net and comprehensive income attributable to Dream Finders Homes, Inc.

were consistent with the changes in net and comprehensive income as there were no significant changes in noncontrolling interests for the period.

Refer to the Form 10-K for the year ended December 31, 2022 filed on March 2, 2023 for the results of operations and related discussion for December 31, 2022 compared to the year ended December 31, 2021.

Financial Services

Income before taxes for the year ended December 31, 2023 for our Financial Services segment, net of reconciling items from equity method investments, was $19 million, an increase of $4 million, or 27%, from $15 million for the year ended December 31, 2022.

The increase in income before taxes for the Financial Services segment was primarily attributed to increased loans originated by Jet HomeLoans.

For the year ended December 31, 2023, Jet HomeLoans originated and funded 3,189 home loans with an aggregate principal amount of approximately $1.3 billion as compared to 2,370 home loans with an aggregate principal amount of approximately $879 million for the year ended December 31, 2022.

For the years ended December 31, 2023 and 2022, respectively, Jet HomeLoans had net income of approximately $20 million and $12 million.

Our interest in Jet HomeLoans is accounted for under the equity method and is not consolidated in our consolidated financial statements, as we do not control and are not deemed the primary beneficiary of the VIE.

Refer to N ote 1, Nature of Business and Significant Accounting Policies, to our consolidated financial statements for a discussion of accounting treatment of VIEs.

For the year ended December 31, 2023, our wholly owned subsidiary, DF Title, had income before taxes of $4 million, an increase of $1 million, or 33%, from $3 million for the year ended December 31, 2022.

The increase in income before taxes was driven by the increase in home closings and ASP of homes closed, as well as effective cost management.

Net Sales, Backlog and Closings

The following table presents information concerning our net new orders (“net sales”), starts and c losings in each of our homebuilding segments for the periods set forth below:

Year Ended December 31, Period Over Period

Percent Change

Segment Net Sales (1)

Starts Closings Net Sales (1)

Starts Closings Net Sales

Southeast 1,822 2,693 3,170 3,113 3,034 2,722 -41 % -11 % 16 %

Mid-Atlantic 1,360 1,627 1,597 1,151 1,224 1,562 18 % 33 % 2 %

Midwest 2,562 2,551 2,547 1,781 2,343 2,594 44 % 9 % -2 %

Total 5,744 6,871 7,314 6,045 6,601 6,878 -5 % 4 % 6 %

(1) Net sales are sales of homes during the period, less cancellations of existing sales contracts during the period.

Excluding net sales under built-for-rent contracts, 2023 net sales in the Southeast segment increased 19% when compared to 2022.

The following table presents information concerning our ending backlog in number of homes, ASP and aggregate value (in thousands) for our homebuilding segments as of the dates set forth below:

As of December 31,

Segment Homes (1)

ASP Value Homes (1)

Southeast 2,234 $ 393,356 $ 878,757 3,582 $ 398,246 $ 1,426,517

Mid-Atlantic 599 427,593 256,128 836 335,642 280,597

Midwest 1,145 657,190 752,483 1,130 703,938 795,450

Total 3,978 $ 474,451 $ 1,887,368 5,548 $ 451,075 $ 2,502,564

(1) Ending backlog represents the number of homes in backlog from the previous period, plus net sales during the period, minus the number of home closings during the current period.

Backlog of sold homes as of December 31, 2023 was 3,978 homes valued at approximately $1.9 billion based on ASP, a decrease of 1,570 homes and $0.6 billion in value, or 28% and 25%, respectively, from 5,548 homes valued at approximately $2.5 billion as of December 31, 2022.

The overall decrease in backlog is reflective of an increase in sales of move-in ready spec homes relative to pre-order sales.

Spec homes typically result in quicker closings and turnover of the backlog.

Approximately 704 of the homes in our backlog are expected to be delivered in 2025 and beyond.

Backlog for the Southeast segment as of December 31, 2023 was 2,234 homes, a decrease of 1,348 from 3,582 homes as of December 31, 2022.

The decrease was primarily attributable to an increase in sales of move-in ready spec homes relative to pre-order sales and to a lesser extent built-for-rent sales in 2022 backlog that did not repeat in 2023.

Mid-Atlantic.

Backlog for the Mid-Atlantic segment as of December 31, 2023 was 599 homes, a decrease of 237 from 836 homes as of December 31, 2022.

The decrease in backlog was attributable to the increase in spec inventory sales relative to pre-order sales and to a lesser extent fewer sales under built-for-rent contracts in 2023 relative to 2022.

Backlog for the Midwest segment as of December 31, 2023 was 1,145 homes, an increase of 15 from 1,130 homes as of December 31, 2022.

The modest increase was primarily attributable to the higher net sales relative to closings in 2023, when compared to 2022.

The following table presents information concerning our cancellation rates for each of our homebuilding segments for the periods set forth below:

Year Ended December 31,

Segment 2023 2022

Southeast 21.5 % 16.0 %

Mid-Atlantic 14.4 % 31.0 %

Midwest 17.8 % 27.0 %

18.3 % 21.5 %

(1) Our cancellation rate for a given period is calculated as the total number of new sales contracts cancelled during the period, divided by the total number of new home sales contracts entered into during the period.

Our cancellation rate for the year ended December 31, 2023 was 18.3%, an improvement of 320 basis points when compared to the 21.5% cancellation rate for the year ended December 31, 2022.

The reduction in the overall cancellation rate was primarily a result of significant improvement in the cancellation rates for the Mid-Atlantic and Midwest segments, driven by improved homebuyer sentiments in 2023 following a sharp spike in interest rates that occurred in the latter half of 2022.

This was partially offset by a higher proportion of 2022 gross sales under built-for-rent contracts for the Southeast segment relative to 2023.

Built-for-rent sales have a lower cancellation rate than retail sales.

The Southeast cancellation rate remained in line with the Company’s historical cancellation rates.

Non-GAAP Financial Measures

1 unchanged sentence

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 homebuilding cost of sales (primarily 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 (primarily purchase accounting adjustments) and commission expense have on gross margin.

We include commission expense in homebuilding cost of sales, not selling, general and administrative expense, and therefore commission expense is taken into account in gross margin.

We define adjusted gross margin as gross margin excluding the effects of capitalized interest, lot option fees, amortization included in homebuilding cost of sales (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 these excluded items have on gross margin.

We include internal and external commission expense in homebuilding 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.

However, because adjusted gross margin information excludes capitalized interest, amortization (primarily 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.

However, because adjusted gross margin information excludes capitalized interest, lot option fees, purchase accounting amortization 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.

In addition, other companies may not calculate adjusted gross margin information in the same manner that we do.

5 unchanged sentences

$ 727,075 $ 612,420 $ 306,969

Interest expense in homebuilding cost of sales 60,595 32,508 32,044

Interest charged to homebuilding cost of sales (2)

122,759 60,595 32,508

Amortization in homebuilding cost of sales (3)

7 unchanged sentences

(1) Gross margin is homebuilding revenues less homebuilding cost of sales.

(2) Includes interest charged to homebuilding cost of sales related to our construction lines of credit and senior unsecured notes, net, as well as lot option fees.

(3) Represents amortization of purchase accounting adjustments from the Company’s prior acquisitions.

(4) Calculated as a percentage of homebuilding revenues.

(3) Primarily represents purchase accounting adjustments.

EBITDA and Adjusted EBITDA

1 unchanged sentence

EBITDA and adjusted EBITDA are supplemental non-GAAP financial measures used by management and external users of our 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 homebuilding 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.

We define EBITDA as net income before (i) interest income, (ii) capitalized interest charged in homebuilding 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.

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 the comparability of financial results from period to period.

2 unchanged sentences

We present EBITDA and adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business.

EBITDA and adjusted EBITDA information should be considered only as a supplement to net income information as a measure of our performance.

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):

4 unchanged sentences

Interest income (4,299) (169) (6)

Interest expensed in cost of sales 60,595 32,508 32,044

Interest charged to homebuilding cost of sales (1)

122,759 60,595 32,508

Interest expense 1 32 672

3 unchanged sentences

EBITDA $ 521,495 $ 422,582 $ 194,967

Stock-based compensation expense 6,796 5,233 947

Stock-based compensation 14,098 6,796 5,233

Adjusted EBITDA $ 535,593 $ 429,378 $ 200,200

3 unchanged sentences

14.3% 12.8% 10.4%

(1) Includes interest charged to homebuilding cost of sales related to our construction lines of credit and senior unsecured notes, net, as well as lot option fees.

(2) Includes amortization of purchase accounting adjustments from prior acquisitions of $7 million and $10 million for the years ended December 31, 2022 and 2021, respectively, which is included in homebuilding cost of sales reported on the Consolidated Statements of Comprehensive Income.

For the year ended December 31, 2023, there was no such amortization of fair value adjustments of inventory.

(3) Calculated as a percentage of total revenues.

(2) Includes the impact of fair value of inventory adjustments from prior acquisitions of $7 million for the year ended December 31, 2022, which is included in homebuilding cost of sales reported on the Consolidated Statements of Comprehensive Income.

Components of Our Operating Results

Below are general definitions of the income statement line items and unaudited other financial and operating data set forth in our period over period changes in results of operations.

Revenues — Homebuilding and Other

Revenues include the proceeds from the closing of homes sold to our customers, as well as fees from our wholly-owned title insurance businesses.

Revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the buyer and there is no significant continuing involvement with the home.

For home sales on a homesite that the customer owns, we recognize revenue based on the percentage of completion of the home.

Proceeds from home sales are generally received within a few days after closing.

Home sales are reported net of sales discounts and incentives granted to homebuyers, which includes seller-paid closing costs.

The pace of closings, average home sales price, the level of incentives provided to the customer and the amount of upgrades or options selected all impact our recorded revenues in a given period.

Homebuilding Cost of Sales

Homebuilding cost of sales includes the lot purchase and carrying costs associated with each lot, construction costs of each home, capitalized interest expensed, lot option fees, building permits, internal and external realtor commissions and warranty costs (both incurred and estimated to be incurred).

Land, development and other allocated costs, including interest, lot option fees and property taxes, incurred during development and home construction are capitalized and expensed to homebuilding cost of sales when the home is closed and revenue is recognized.

We adjust the cost of lots remaining in a community on a pro rata basis, when changes to estimated total development costs occur, including lot option fees and community costs.

Indirect costs such as maintenance of communities, signage and supervision are expensed as incurred.

Selling, General and Administrative Expense

Selling, general and administrative expense consists of corporate and marketing overhead expenses such as payroll, stock compensation expense, insurance, IT, office expenses, advertising, outside professional services and travel expenses.

Selling, general and administrative expense also includes maintaining model homes and sales centers, including the rent associated with any model homes or sales centers that we have sold and lease from a third party.

We recognize these costs in the period they are incurred.

Income from Equity in Earnings of Unconsolidated Entities

Income from equity in earnings of unconsolidated entities consists primarily of income earned from minority interests in our unconsolidated mortgage banking joint venture, Jet LLC, which underwrites and originates home mortgages across our geographic footprint.

Our 49.9% minority interest in Jet LLC is accounted for under the equity investment method and is not consolidated in our consolidated financial statements, as we do not control, and are not deemed the primary beneficiary of, Jet LLC.

Other Income and Expense

Other income includes income from the sale of non-core assets, interest income and management fees we earn from shared services with the former owner of MHI and from managing certain joint ventures.

In general, we earn four to six percent of the sales price of homes built by us on behalf of the joint ventures.

Other expense consists primarily of expenses related to the sale of non-core assets.

For 2021, other income also includes the one-time forgiveness of the Payroll Protection Program loan.

Contingent Consideration Revaluation

Contingent consideration revaluation is related to the valuation changes in existing earn out agreements with former owners of acquired entities.

Net and Comprehensive Income Attributable to Noncontrolling Interests

Net and comprehensive income attributable to noncontrolling interests consists of income attributable to partners in our consolidated joint ventures.

In certain of our joint ventures, we agree to split the profits from home closings with our joint venture partners.

Net and comprehensive income attributable to noncontrolling interests shows our joint venture partners’ share of homebuilding profits, less any community costs shared with our joint venture partners.

In addition, certain of our joint ventures own lots and from time to time we may record impairment charges relating to such lots.

In such cases, we would typically record an impairment charge relating to our proportionate ownership of the joint venture, and the remaining impairment would be reflected through a decrease in income attributable to noncontrolling interests.

Net and Comprehensive Income Attributable to Dream Finders Homes, Inc.

Net and comprehensive income attributable to Dream Finders Homes, Inc.

is total revenues less homebuilding cost of sales, selling, general and administrative expense, income from equity in earnings of unconsolidated entities, other income, other expense, interest expense and net and comprehensive income attributable to noncontrolling interests.

Return on Participating Equity

Return on participating equity is pre-tax net and comprehensive income attributable to Dream Finders Homes, Inc.

tax effected for our federal and state blended tax rate less accrued preferred unit distributions divided by average total participating equity.

Participating equity is all equity that participates in the earnings of the Company, including Series A preferred equity and all common equity.

Following consummation of our initial public offering, we became subject to taxation as a corporation and consequently calculated return on equity as net income attributable to Dream Finders Homes, Inc.

less preferred distributions divided by the average beginning and ending participating equity for the fiscal year.

Net New Orders

Net new orders is a key performance metric for the homebuilding industry and is an indicator of future revenues and cost of sales.

Depending on whether net new orders are associated with a variable interest entity, they can also be an indicator of future net and comprehensive income attributable to noncontrolling interests.

Net new orders for a period are gross sales less any customer cancellations received during the same period.

Sales are recognized when a customer signs a contract and we approve such contract and collect any deposit from the customer required by such contract.

Cancellation Rate

We record a cancellation when a customer notifies us that he or she does not wish to purchase a home.

Increasing cancellations are a negative indicator of future performance and can be an indicator of decreased revenues, homebuilding cost of sales and net income.

When a cancellation occurs, we generally retain the customer deposit and resell the home to a new customer.

Cancellations can occur due to customer credit issues or changes to the customer’s desires.

The cancellation rate is the total number of new sales purchase contracts cancelled during the period divided by the total new gross sales for homes during the period.

Backlog (at period end)

Backlog (at period end) is 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.

Backlog at period end includes homes currently under construction and homes that are sold where construction has not commenced.

Gross margin is homebuilding revenues less homebuilding cost of sales for the reported period.

Adjusted Gross Margin

Adjusted gross margin is gross margin less capitalized interest expensed in homebuilding cost of sales, commission expense, and amortization in homebuilding cost of sales (primarily purchase accounting adjustments).

Liquidity and Capital Resources

We generate cash from the sale of our inventory and we intend to re-deploy a portion of the net cash generated from the sale of inventory to acquire and control land and further grow our operations year over year.

As of December 31, 2022, we had $365 million in cash and cash equivalents (excluding $31 million of restricted cash), an increase of $137 million, or 60%, from $227 million as of December 31, 2021.

We also maintain our Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with a syndicate of lenders providing for a senior unsecured revolving credit facility, which has an aggregate commitment of up to $1.1 billion and matures on June 2, 2025.

Borrowings under this Amended and Restated Credit Agreement are limited to the amount of inventory held on the Consolidated Balance Sheet, subject to unit-specific advance rates and other limitations.

As of December 31, 2022, available liquidity under the Credit Agreement wa s $122 million, resulting in $487 million in total liquidity for the Company.

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.

We continue to evaluate our capital structure and explore options to strengthen our Consolidated Balance Sheet.

Our liquidity comes from a variety of sources, including cash, borrowings under a credit agreement (the “Credit Agreement”), and net proceeds from the senior unsecured notes (“2028 Notes”).

As of December 31, 2023, we had $494 million in cash and cash equivalents, excluding $54 million of restricted cash.

The Credit Agreement had an aggregate commitment of up to $1.2 billion and $1.1 billion, and outstanding borrowings of $530 million and $965 million as of December 31, 2023 and 2022, respectively.

The Company had $334 million of availability under the Credit Agreement with a borrowing base of $1.2 billion as of December 31, 2023 .

On August 22, 2023, the Company issued the 8.25% 2028 Notes with $300 million in aggregate principal amount.

The Company used the net proceeds from the issuance of the 2028 Notes to repay a portion of the then outstanding borrowings under the Credit Agreement.

Total liquidity as of year-end was $828 million, inclusive of reduced availability under the Credit Agreement for the 2028 Notes, which are permitted unsecured indebtedness .

The Credit Agreement will mature on July 17, 2026.

Certain of our subsidiaries guaranteed the Company’s obligations under the Credit Agreement and the 2028 Notes.

As of December 31, 2023 , we were in compliance with the covenants set forth in our Credit Agreement and under the indenture related to the 2028 Notes.

See below and refer to Note 2, Debt to our consolidated financial statements for more information on the Credit Agreement and the 2028 Notes.

We continue to evaluate our capital structure and explore options to strengthen our balance sheet.

We will remain opportunistic while assessing available capital in the debt and equity markets.

Our principal uses of capital are lot deposits and purchases, vertical home construction, operating expenses and the payment of routine liabilities.

Our principal uses of capital are for lot deposits, lot purchases just-in-time for construction, vertical home construction, operating expenses and the payment of routine liabilities.

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.

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, banker 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 lot option 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.

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.

Except for furnishings of model homes, 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 revenues.

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 typically provide lot deposits in the range of 5% to 10% of the land purchase price.

When entering into these contracts, we also agree to purchase finished lots at predetermined time frames and quantities that match our expected selling pace in the community.

We actively enter into finished lot option contracts by placing deposits with land sellers based on the aggregate purchase price of the finished lots.

When entering into these contracts, we also agree to purchase finished lots at predetermined prices, time frames, and quantities that match our expected selling pace in the community.

We also enter into land development arrangements with land sellers, land developers and land bankers.

We provide deposits to develop lots that we will have the option to acquire in the future, along with lot option fees based on 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 not materialize into cash inflows or operating income in the near term.

Furthermore, to satisfy performance-related obligations in connection with certain land option agreements, we enter into surety bonds and letters of credit arrangements.

Refer to “—Off-Balance Sheet Arrangements ” for additional information.

The above cash strategies allow us to maintain adequate lot supply in our existing markets and support ongoing growth and profitability.

Although currently there is economic uncertainty that is impacting the homebuilding industry, we continue to operate in geographic regions with consistent increases in the demand for new homes and constrained lot supply compared to population and job growth trends.

Although currently there is economic uncertainty that is impacting the homebuilding industry, we continue to operate in geographic regions with consistent increases in demand for new homes and constrained lot and inventory supply compared to population and job growth trends.

We intend to continue to reinvest 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.

Credit Facilities, Letters of Credit, Surety Bonds and Financial Guarantees

On June 2, 2022, we entered into an Amended and Restated Credit Agreement to amend and restate our prior credit agreement originally dated as of January 25, 2021.

The Amended and Restated Credit Agreement provides for a senior unsecured revolving credit facility and is with a syndicate of lenders.

The Amended and Restated Credit Agreement provides for aggregate commitments of $1.125 billion and has an accordion feature that allows the aggregate commitments to increase up to $1.625 billion.

The Amended and Restated Credit Agreement matures on June 2, 2025.

Outstanding borrowings under the Amended and Restated Credit Agreement are subject to, among other things, a borrowing base.

The borrowing base includes, among other things, (a) 90% of the net book value of presold housing units, (b) 85% of the net book value of model housing units, (c) 85% of the net book value of speculative housing units and (d) 70% of the net book value of finished lots, in each case subject to certain exceptions and limitations set forth in the Amended and Restated Credit Agreement.

Under the Amended and Restated Credit Agreement, borrowings under the revolving line of credit bear interest, at our option, at (1) a “Base Rate”, which means for any day a fluctuating rate per annum equal to credit spreads of 1.50% to 2.60%, which are determined based on our debt to capitalization ratio, plus the highest of (a) the Federal Funds Rate plus 0.5%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” (c) the Term Secured Overnight Financing Rate (“SOFR”) plus 1.00% and (d) 1.00%, or (2) a “Term SOFR Rate”, which means for any day a fluctuating rate per annum equal to credit spreads of 2.50% to 3.60%, which are determined based on our debt to capitalization ratio, plus the adjusted Term SOFR rate (based on one, three or six-month interest periods).

Interest on each base rate advance borrowed under the Amended and Restated Credit Agreement is payable in arrears on a monthly basis.

Interest on each Term SOFR rate advance borrowed under the Amended and Restated Credit Agreement is payable in arrears at the end of the interest period applicable to such advance, or, if less than such interest period, three months after the beginning of such interest period.

We pay the lenders a commitment fee on the amount of the unused commitments on a quarterly basis at a rate per annum that will vary from 0.20% to 0.30% depending on our debt to capitalization ratio.

We are also obligated to pay other customary closing fees, arrangement fees, administration fees and letter of credit fees for a credit facility of this size and type.

All obligations under the Amended and Restated Credit Agreement are unsecured and unconditionally guaranteed by us and certain of our subsidiaries, excluding financial services subsidiaries, immaterial subsidiaries and variable interest entities.

As of December 31, 2022 and 2021, the outstanding balance under the Amended and Restated Credit Agreement was $965 million and $760 million, respectively.

The Company had capitalized debt issuance costs related to the line of credit and notes payable , net of amortization, of $7 million and $6 million as of December 31, 2022 and 2021, respectively, which are included in other assets on the Consolidated Balance Sheets.

The Company amortized $4 million and $2 million of debt issuance costs for the years ended December 31, 2022 and 2021, respectively.

The Amended and Restated Credit Agreement contains covenants that, among other things, require that we (i) maintain a maximum debt to capitalization ratio, as of the last day of each fiscal quarter, of 62.5% through December 2022 and 60.0% thereafter;

Senior Unsecured Notes

On August 22, 2023, the Company issued $300 million in aggregate principal amount of 8.25% senior unsecured notes due August 15, 2028, which were issued pursuant to an indenture (the “Indenture”).

Interest on the 2028 Notes is payable in arrears semiannually on each February 15 and August 15.

The 2028 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by certain of the Company’s subsidiaries.

The Company received net proceeds from the issuance and sale of the 2028 Notes of $294 million after unamortized debt issuance costs of $7 million, which reduce the carrying value of the 2028 Notes reported on the Consolidated Balance Sheets.

The net proceeds from the 2028 Notes were used to repay a portion of the then outstanding balance under the Company’s Credit Agreement.

The 2028 Notes are redeemable by the Company prior to August 15, 2025 through the payment of the principal amount due, which can be accomplished through the issuance of certain restricted equity offerings for specified portions of principal notes outstanding, plus specified rates and accrued and unpaid interest, and a make-whole premium in the event 100% of the principal amount is redeemed.

On or after August 15, 2025, the 2028 Notes are redeemable at specified rates equal to 104.1% of the principal balance, plus accrued and unpaid interest, and periodically decrease to 100% on August 15, 2027.

Upon the occurrence of a Change of Control (as defined in the Indenture), the holders of the 2028 Notes will have the right to require the Company to repurchase all or a portion of the 2028 Notes at a price equal to 101% of the aggregate principal amount of the 2028 Notes, plus any accrued and unpaid interest.

The Indenture includes customary events of default.

Subject to specified exceptions, the Indenture contains certain restrictive covenants that, among other things, limit our ability to incur or guarantee certain indebtedness, issue certain equity interests or engage in certain capital stock transactions.

In addition, the Indenture contains certain limitations related to mergers, consolidations, and transfers of assets.

Credit Agreement

On July 19, 2023, the Company entered into amendments to its existing credit agreement.

As amended, the Credit Agreement provides for a senior unsecured revolving credit facility with a syndicate of lenders with Bank of America, N.A.

acting as administrative agent.

The Credit Agreement provides for aggregate commitments of $1,240 million, which includes a $25 million letter of credit sublimit, is subject to a borrowing base, and has an accordion feature which allows the facility to expand up to $1,625 million.

The maturity date for lenders with $1,085 million worth of commitments is July 17, 2026.

The remaining lenders have a maturity date of June 2, 2025, but such lenders have the option, with the Company’s consent, to extend their applicable maturity date to July 17, 2026.

Outstanding borrowings under the Credit Agreement are subject to, among other things, a borrowing base.

The borrowing base includes, among other things, (a) 90% of the net book value of presold housing units, (b) 85% of the net book value of model housing units, (c) 85% of the net book value of speculative housing units, (d) 70% of the net book value of finished lots, (e) 85% of the net book value of certain built-for-rent units, and (f) 75% of the net book value of other built-for-rent units, in each case subject to certain exceptions and limitations set forth in the Credit Agreement.

The borrowing base availability is reduced dollar-for-dollar for any outstanding unsecured indebtedness permitted under the Credit Agreement.

Under the Credit Agreement, the Company has the option to draw “Term SOFR Rate Loans” or “Daily Simple SOFR Rate Loans”.

Term SOFR Rate Loans bear interest based on Term SOFR rates for one, three or six-month interest periods, which include SOFR adjustments of 10, 15 and 25 basis points for each interest period, respectively.

Daily Simple SOFR Rate Loans bear interest based on Daily Simple SOFR rates and include a SOFR adjustment of 10 basis points.

Interest under Term SOFR Rate Loans and Daily Simple SOFR Rate Loans also include an “applicable rate margin” determined based on the Company’s net debt to capitalization ratio, equivalent to credit spreads of 2.5% to 3.3%.

The Credit Agreement contains covenants that, among other things, require that we (i) maintain a maximum debt to capitalization ratio, as of the last day of each fiscal quarter, of 60.0%;

(ii) maintain an interest coverage ratio, as of the last day of each fiscal quarter, of not less than 2.0 to 1.0;

(iii) maintain a liquidity ratio, as of the last day of each fiscal quarter, of not less than 1.0 to 1.0;

(iv) maintain tangible net worth of not less than the sum of (A) $385 million, (B) 50.0% of net income earned in each fiscal quarter after December 31, 2021 and (C) 50.0% of the aggregate increases in shareholders’ equity of the consolidated group after December 31, 2021 by reason of the issuance and sale of equity interests of the members of the consolidated group;

(v) maintain a risk assets ratio (defined as (A) the sum of the GAAP net book value for all finished lots, lots under development and land held for future development or disposition to (B) tangible net worth), as of the last day of each fiscal quarter, of no less than 1.0 to 1.0;

(iv) maintain tangible net worth of not less than the sum of (A) $607 million , (B) 50.0% of net income earned in each fiscal quarter after March 31, 3023 and (C) 50.0% of the aggregate increases in shareholders’ equity of the consolidated group after March 31, 2023 by reason of the issuance and sale of equity interests of the members of the consolidated group;

(vi) not allow aggregate investments in unconsolidated affiliates to exceed 15.0% of tangible net worth, as of the last day of any fiscal quarter;

and (vii) not incur indebtedness other than, among other things, (A) the obligations under the Amended and Restated Credit Agreement, (B) non-recourse indebtedness in an amount not to exceed 15.0% of tangible net worth, as of the last day of each fiscal quarter, (C) operating lease liabilities, finance lease liabilities and purchase money obligations for fixed or capital assets not to exceed $5.0 million in the aggregate, (D) indebtedness of financial services subsidiaries and variable interest entities and (E) indebtedness under hedge contracts entered into for purposes other than for speculative purposes.

The Company was in compliance with all debt covenants as of December 31, 2022 and December 31, 2021.

The Company expects to remain in compliance with all debt covenants over the next twelve months.

We enter into surety bonds and letter of credit 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.

As of December 31, 2022, we had outstanding surety bonds and letters of credit totaling $85 million and $1 million, respectively.

and (vii) not incur indebtedness other than, among other things, (A) the obligations under the Credit Agreement, (B) non-recourse indebtedness in an amount not to exceed 15.0% of tangible net worth, as of the last day of each fiscal quarter, (C) operating lease liabilities, finance lease liabilities and purchase money obligations for fixed or capital assets not to exceed $5 million in the aggregate, (D) indebtedness of financial services subsidiaries and variable interest entities, (E) indebtedness under hedge contracts entered into for purposes other than for speculative purposes, and (F) permitted unsecured indebtedness (including the 2028 Notes).

The Company was in compliance with all debt covenants as of December 31, 2023 and 2022.

The Company expects to remain in compliance with all debt covenants over the next 12 months.

The Company had capitalized debt issuance costs, net of amortization, related to construction lines of credit totaling $7 million as of both December 31, 2023 and 2022, which were included in other assets on the Consolidated Balance Sheets.

Debt issuance costs that are recorded to capitalized interest are expensed in cost of sales as the homes close.

Contingent Consideration

Based on the terms of the purchase agreement, at the time of an acquisition, the Company may record a contingent consideration liability based on the expected fair value of any future earn out payments due to the acquiree for a typical period of up to five years post-acquisition.

This liability is remeasured to fair value quarterly and the adjustment is recorded in contingent consideration revaluation in the Consolidated Statements of Comprehensive Income.

As of December 31, 2023, the contingent consideration liability totaled $117 million, with approximately $50 million payable within 12 months.

Further information regarding our contingent consideration liability is provided in Note 1, Nature of Business and Significant Accounting Policies to our consolidated financial statements.

The Company has operating leases primarily associated with office space that is used by divisions outside of the Jacksonville area, model home sale-leasebacks and a corporate office building sale-leaseback.

2 unchanged sentences

Further information regarding our leases is provided in Note 5, Commitments and Contingencies to our consolidated financial statements.

Contingent Consideration

This liability is remeasured to fair value quarterly and the adjustment is recorded in contingent consideration revaluation.

As of December 31, 2022, the contingent consideration liability totaled $115 million, with approximately $43 million payable within 12 months.

Further information regarding our contingent consideration liability is provided in Note 1, Nature of Business and Significant Accounting Policies and Note 2, Business Combinations to our consolidated financial statements.

Series B Preferred Units

Following a corporate reorganization and upon completion of the Company’s initial public offering as described in Note 1, Nature of Business and Significant Accounting Policies to our consolidated financial statements , MOF II DF Home LLC and MCC Investment Holdings LLC (both controlled by Medley Capital Corporation) continue to hold the Series B preferred units of DFH LLC.

As such, they have certain rights and preferences with regard to DFH LLC that holders of our Class A common stock do not have.

The series B preferred units are not convertible into the Company’s common stock.

The Series B preferred units shall automatically be deemed to be cancelled when a holder of a Series B preferred unit receives aggregate distributions from DFH LLC on a Series B preferred unit equal to the sum of (i) $1,000 per unit and (ii) the unreturned capital contributions per unit plus an 8% per annum cumulative preferred return (the “Series B Distribution Amount”).

In the event of a liquidation or dissolution of DFH LLC, the holders of Series B preferred units shall have preference over our membership interest in DFH LLC.

Further, in the event of (i) a sale of substantially all of DFH LLC’s assets or (ii) a merger or reorganization resulting in the members of DFH LLC immediately prior to such transaction no longer beneficially owning at least 50% of the voting power of DFH LLC, the holders of the Series B preferred units may demand redemption of their Series B preferred units at a price equal to the Series B Distribution Amount (less prior distributions on such shares).

Series C Preferred Units

Following a corporate reorganization and upon completion of the Company’s initial public offering as described in Note 1.

Nature of Business and Significant Accounting Policies to our consolidated financial statements , on January 27, 2021 we redeemed all 26,000 outstanding Series C preferred units of DFH LLC at a redemption price of $26 million, including accrued unpaid preferred distributions.

On August 31, 2023, the Company redeemed all of its previously outstanding Series B preferred units .

The Company made an aggregate cash payment to the Series B holders of $11 million, which included $7 million in principal plus cumulative undistributed earnings, less a negotiated discount on that date.

Following the redemption, no Series B preferred units remain outstanding.

Refer to Note 12, Mezzanine and Stockholders’ Equity to the consolidated financial statements for disclosure related to the redemption.

Convertible Preferred Stock

10 unchanged sentences

Subsequent to the fifth anniversary of its issuance, a purchaser can convert the convertible preferred stock into Class A common stock (the “Conversion Right”).

The conversion price will be based on the average of the trailing 90 days’ closing price of Class A common stock, less 20% of the average and subject to a floor conversion price of $4.00 (the “Conversion Discount”).

The conversion price will be based on the average of the ninety trading days for the Class A common stock immediately preceding but not including the date of the optional conversion notice (as defined in the certificate of designations for the convertible preferred stock) , less 20% of the average and subject to a floor conversion price of $4.00 (the “Conversion Discount”).

• Protective Covenants:

12 unchanged sentences

2023 2022 2021

Net cash (used in) provided by operating activities $ (27,623) $ 65,108 $ 96,911

Net cash provided by/(used in) operating activities $ 374,234 $ (27,623) $ 64,972

Net cash used in investing activities (4,484) (5,524) (523,043)

Net cash provided by (used in) financing activities 146,955 645,884 (65,830)

Net cash (used in)/provided by financing activities (216,424) 146,955 646,020

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Net cash used in operating activities was $28 million for the year ended December 31, 2022, as compared to $65 million of net cash provided by operating activities for the year ended December 31, 2021 .

The change in net cash used in operating activities was primarily driven by an increase in inventories, partially offset by the increase in net income generated on home closings and less cash used for lot deposits for the year ended December 31, 2022.

Net cash used in investing activities was $6 million for the year ended December 31, 2022, as compared to $523 million of cash used in investing activities for the year ended December 31, 2021.

The change in net cash used in investing activities was primarily attributable to the Company’s acquisitions of Century Homes and MHI during the first quarter and fourth quarter of 2021, respectively, compared to no acquisitions for the year ended December 31, 2022.

Net cash provided by financing activities was $147 million for the year ended December 31, 2022, as comp ared to $646 million of cash provided by financing activities for the year ended December 31, 2021 .

The change in net cash provided by financing activities was primarily attributable to the Corporate Reorganization, which included IPO net proceeds of $130 million, $148 million net proceeds related to the issuance of convertible preferred stock, and $447 million in net proceeds from construction lines of credit.

No such transaction occurred for the year ended December 31, 2022, except for $203 million of net proceeds from construction lines of credit.

Net cash provided by operating activitie s was $374 million for the year ended December 31, 2023, compared to $28 million of net cash used in operating activities for the year ended December 31, 2022.

The change in net cash provided by operating activities was primarily driven by a lower increase in inventories when compared to the prior year of $250 million, as well as higher net income in 2023, largely driven by an increase in home closings when compared to 2022.

There was also a decrease in lot deposits in 2023, compared to an increase in lot deposits in 2022.

Customer deposits also increased versus a decrease in customer deposits in the prior year.

Net cash used in investing activities was $4 million for the year e nded December 31, 2023, compared to $6 million of cash used in investing activities for the year ended December 31, 2022, primarily attributable to higher purchases of property and equipment during the year ended December 31, 2022 .

Net cash used in financing activities was $216 million for the year ended December 31, 2023, as comp ared to $147 million of cash provided by financing activities for the year ended December 31, 2022.

The change in net cash used in financing activities was primarily attributable to higher net payments on the construction lines of credit of $436 million in 2023 compared to $203 million of net proceeds in 2022, and to a lesser extent, a one-time payment related to the redemption of the Series B preferred units during the year ended December 31, 2023.

The full net proceeds from the issuance of unsecured senior notes of $300 million during the year were used to pay down a portion of the outstanding balance under the Credit Agreement.

Refer to the Form 10-K for the year ended December 31, 2022 filed on March 2, 2023 for the cash flows and related discussion for December 31, 2022 compared to year ended December 31, 2021.

Factors Affecting Our Results of Operations

We believe that our future performance will depend on many factors, including those described below and in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K.

Changes in Price and Availability of Land

Acquiring home sites or finished lots in desirable geographic areas with prices and acquisition terms that drive profitable home delivery is an important component of our business.

Our infrastructure is designed to build a certain number of homes each year and an adequate lot supply is crucial to meeting our business objectives.

Our sourcing of finished lots is affected by changes in the general availability of finished lots in the markets in which we operate, the willingness of land sellers to sell finished lots at competitive prices, competition for available finished lots and other market conditions.

Lot value appreciation or depreciation varies across the markets in which we operate.

Our acquisition costs associated with finished lots have increased in certain of our markets where job and population growth are outpacing lot supply.

If the supply of finished lots is limited because of these or other factors, we may build and sell fewer homes as a result.

To the extent that we are unable to acquire finished lots at competitive prices, or at all, our revenues, margins and other results of operations could be negatively impacted.

Availability of Mortgages;

Applicable Interest Rates

The majority of our homebuyers in 2022 obtained a mortgage to purchase their home.

As a result, the availability of mortgages on terms that make purchases of our homes affordable to a broad base of consumers has a significant impact on our business.

The availability and accessibility of mortgages can depend in part on current interest rates and down payment requirements, which are not within our control.

The majority of our customers that obtain mortgages obtain loans that conform to the terms established by Freddie Mac and Fannie Mae.

During 2022, mortgage interest rates have sharply increased, and continue to rise.

Additionally, interest rates available to homebuyers obtaining conforming loans are driven by Freddie Mac’s and Fannie Mae’s ability to package and sell loans in the secondary market.

Disruptions in this supply chain could impact our business significantly if our homebuyers are unable to obtain mortgages on terms that are acceptable, or at all.

Costs of Building Materials and Labor

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 costs for construction loans, internal and external realtor commissions and other miscellaneous closing costs.

Home site costs range from 20-30% of the average cost of a home.

Building materials range from 40-50% of the average cost to build the home, labor ranges from 25-30% of the average cost to build the home, and interest, commissions and closing costs range from 5-10% 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.

Significant price increases of these materials may negatively impact our cost of sales and, in turn, our net income.

Housing Supply and Demand

When the supply of new homes exceeds new home demand, new home prices may generally be expected to decline.

The COVID-19 pandemic caused a sharp decline in our homebuilding business in March and April 2020 and was followed by a sharp increase in our sales that began in May 2020.

Elevated sales were observed through early 2022 .

As a result of the COVID-19 pandemic, we observed an increase in demand from entry-level homebuyers, our primary customer focus, seeking to move out of apartments and into more spacious homes in anticipation of spending more time at home with remote-working arrangements increasing in prevalence.

During the third and fourth quarters of 2022, housing demand was negatively impacted as rising mortgage rates created strains on affordability, and as a result, has contributed to lower net sales.

We expect housing market conditions in the majority of the markets that we construct homes to remain relatively healthy in 2023 based on the limited supply of resale homes and population growth continuing to outpace new home construction, even in the face of the rising interest rates.

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.

Factors Affecting the Comparability of Our Financial Condition and Results of Operations

Our historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, as a result of our recent acquisitions as well as the following reasons:

Corporate Reorganization

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.

For information regarding the Company’s corporate reorganization, see Note 1, Nature of Business and Significant Accounting Policies to the consolidated financial statements .

Prior to the Company’s initial public offering (“IPO”), we were composed of various pass-through entities that are all treated as partnerships for federal income tax purposes, but are subject to certain minimal taxes and fees;

however, income taxes on taxable income or losses realized by our predecessor, DFH LLC, are generally the obligation of the individual members or partners.

Following the consummation of the IPO, we became a corporation subject to corporate-level taxes, our income taxes became dependent upon our taxable income, and our net income since the IPO reflects such taxes.

We recognize the financial statement impacts of GAAP and tax timing differences on a quarterly basis.

Selling, General and Administrative Expense

Our selling, general and administrative expenses have increased as a result of our acquisitions and the initial and ongoing compliance costs associated with being a public company, including certain provisions of the Sarbanes-Oxley Act and related SEC regulations, and the requirements associated with our Class A common stock listed on the NYSE.

In 2021, we also recognized the acceleration of certain of our predecessor’s, DFH LLC, costs, such as capitalized debt issuance costs and unvested stock compensation, which vested at the date of the Company’s initial public offering.

Equity Incentive Plan

To incentivize individuals providing services to us or our affiliates, the Board of Directors adopted the 2021 Equity Incentive Plan in connection with the IPO.

Our 2021 Equity Incentive Plan provides for the grant, from time to time, at the discretion of our Board of Directors or a committee thereof, of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards, substitute awards and performance awards, which generally results in stock compensation expense.

Any individual who is our officer or employee or an officer or employee of any of our affiliates, and any other person who provides services to us or our affiliates, including our directors, is eligible to receive awards under our 2021 Equity Incentive Plan at the discretion of our Board of Directors or the Compensation Committee of our Board of Directors.

Off-Balance Sheet Arrangements

Asset-Light Lot Acquisition Strategy

We employ an asset-light and cost-effective lot acquisition strategy to achieve our growth goals.

This strategy involves two key approaches:

finished lot option contracts and land bank option contracts.

These contracts grant us the right to purchase finished lots at predetermined fixed prices from various land developers, sellers, and land bank partners.

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 and, in the case of land bank option contracts, our loss is limited to the related lot option fees paid to the land bank partner, any potential performance obligations, management of the land development to completion and any cost overruns relative to the project.

As of December 31, 2023, our lot deposits for finished lot option and land bank option contracts that are within the Consolidated Balance Sheets were $247 million.

As of December 31, 2023, we controlled 29,748 lots under finished lot option and land bank option contracts.

Refer to “Item 1.

Business— Land Acquisition and Development Process” for more information.

Surety Bonds, Letters of Credit and Financial Guarantees

We enter into surety bonds and letters of credit 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.

As of December 31, 2023 , we had outstanding surety bonds and letters of credit totaling $195 million and $1 million, respectively.

We believe we will fulfill our obligations under the related arrangements and do not anticipate any material losses under these surety bonds and letters of credit.

Critical Accounting Policies and Estimates

3 unchanged sentences

In certain circumstances, however, the preparation of 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 consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

While our significant accounting policies are more fully described in Note 1 .

Nature of Business and Significant Accounting Policies to our consolidated financial statements, we believe the following topics reflect our critical accounting policies and our more significant judgment and estimates used in the preparation of our consolidated financial statements.

While our significant accounting policies are more fully described in Note 1, Nature of Business and Significant Accounting Policies to our consolidated financial statements, we believe the following topics reflect our critical accounting policies and our more significant judgment and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in two ways in accordance with Accounting Standards Codification (“ASC”) 606.

This includes revenues from home sales with respect to homes that we construct on homesites to which we own title that are recorded at the time each home sale is closed and title and possession are transferred to the buyer, as well as revenues from home sales in which the buyer retains title to the homesite while we build the home that are recognized based on the percentage of completion of the home construction, which is measured on a quarterly basis.

This includes revenues from home sales with respect to homes that we construct on homesites to which we own title that are recorded at the time each home sale is closed and title and possession are transferred to the buyer, or upon delivery of homes sold to third-party investors intending to lease the homes, as well as revenues from home sales in which the buyer retains title to the homesite while we build the home that are recognized based on the percentage of completion of the home construction, which is measured on a quarterly basis.

We determine the percentage of completion based on the number of days of construction completed to the total estimated number of days to construct the home.

Real Estate Inventory and Homebuilding Cost of Sales

Inventories include the cost of direct land acquisition, land development, construction, capitalized interest, real estate taxes and direct overhead costs incurred related to land acquisition and development and home construction.

Inventories include the cost of direct land acquisition, land development, construction, capitalized interest, lot option fees, real estate taxes and direct overhead costs incurred related to land acquisition and development and home construction.

Indirect overhead costs are charged to selling, general and administrative expense as incurred.

17 unchanged sentences

Recent Accounting Pronouncements

See Note 1, Nature of Business and Significant Accounting Policies, to our consolidated financial statements.

Inflation in the United States materially increased during the year ended December 31, 2022.

To combat these inflationary pressures, the Federal Reserve raised interest rates during 2022 and signaled future interest rate increases.

Our operations may be negatively impacted by inflation due to increasing construction costs, labor, materials as well as land acquisition and financing costs.

Inflation can also result in rising mortgage interest rates, which can, in turn, substantially limit the ability of a typical homebuyer, relying on mortgage financing, to purchase a new home.

During 2022, although there were increases in the cost of labor and materials, these additional costs were outpaced by price increases in homes closed, and as such, did not have a material impact on our gross margins.

Off-Balance Sheet Arrangements

Asset-Light Lot Acquisition Strategy

We operate an asset-light and capital-efficient lot acquisition strategy primarily through finished lot option contracts and land bank option contracts.

These contracts generally allow us 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 and, in the case of land bank option contracts, any related lot option fees paid to the land bank partner, any potential performance obligations, management of the development to completion and any cost overruns relative to the project .

We do not have any financial guarantees or completion obligations, and we do not guarantee lot purchases on a specific performance basis under these agreements.

See “Business—Land Acquisition and Development Process” for further information on these option contracts.

As of December 31, 2022, we controlled 37,615 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 $277 million in lot deposits as of December 31, 2022.

In addition, we have capitalized costs of $184 million relating to our off-balance sheet arrangements and land development due diligence.

Surety Bonds and Letters of Credit

We enter into surety bonds and letters of credit 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.

As of December 31, 2022, we had outstanding surety bonds and letters of credit totaling $85 million and $1 million, respectively.

We believe we will fulfill our obligations under the related arrangements and do not anticipate any material losses under these surety bonds and letters of credit.

Refer to Note 1, Nature of Business and Significant Accounting Policies to our consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis