S-1/A 1 nt10015422x5_s1a.htm S1/A

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 2021
Registration No. 333-251612
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Dream Finders Homes, Inc.
(Exact name of registrant as specified in its charter)
Delaware
1531
85-2983036
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(IRS Employer
Identification No.)
14701 Philips Highway, Suite 300
Jacksonville, FL 32256
(904) 644-7670
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Robert E. Riva
Vice President, General Counsel and Corporate Secretary
14701 Philips Highway, Suite 300
Jacksonville, FL 32256
(904) 644-7670
(Address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Timothy S. Taylor
Carina L. Antweil
Baker Botts L.L.P.
910 Louisiana Street
Houston, Texas
(713) 229-1234
Michael Kaplan
Yasin Keshvargar
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Approximate date of commencement of proposed sale of the securities to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer ☒
Smaller reporting company
 
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
CALCULATION OF REGISTRATION FEE
Title of each Class of
Securities to be Registered
Shares to be
Registered(1)
Proposed Maximum
Aggregate
Offering Price
Per Share(2)
Maximum
Aggregate
Offering Price(1)(2)
Amount of
Registration Fee(3)
Class A common stock, par value $0.01 per share
11,040,000
$15.00
$165,600,000
$18,066.96
(1)
Includes an additional 1,440,000 shares of Class A common stock that the underwriters have the option to purchase.
(2)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3)
Of this amount, $10,910 has previously been paid.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated January 11, 2021
P R O S P E C T U S
9,600,000 Shares

Dream Finders Homes, Inc.
Class A Common Stock
This is Dream Finders Homes, Inc.’s initial public offering. We are selling 9,600,000 shares of Class A common stock.
Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price of the Class A common stock is expected to be between $12.00 and $15.00 per share. We have applied to list our Class A common stock on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “DFH.”
Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting, transfer and conversion. Each share of Class A common stock is entitled to one vote per share and is not convertible into any other shares of our capital stock. Each share of Class B common stock is entitled to three votes per share and is convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately 85.4% of the voting power of our outstanding Class A common stock and Class B common stock immediately following this offering, assuming no exercise of the underwriters’ option to purchase additional shares of Class A common stock, with our directors, executive officers and principal stockholders representing approximately 94.4% of such voting power.
Immediately after this offering, we expect to be a “controlled company” within the meaning of the Nasdaq corporate governance standards. See “Management—Controlled Company Status” in this prospectus for additional information.
We are an “emerging growth company,” as that term is defined under federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company” in this prospectus for additional information.
Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” beginning on page 24 of this prospectus.
 
Per Share
Total
Initial public offering price
$
$
Underwriting discount and commissions(1)
$
$
Proceeds, before expenses(1)
$
$
(1)
The underwriters will also be reimbursed for certain expenses incurred in the offering. See “Underwriting” for additional information regarding underwriting compensation.
The underwriters may also exercise their option to purchase up to an additional 1,440,000 shares of Class A common stock from us, at the initial public offering price, less the underwriting discount, for 30 days after the date of this prospectus.
Certain entities affiliated with BOC DFH, LLC, a holder of more than 5% of our Class A common stock and a wholly owned subsidiary of Boston Omaha Corporation (Nasdaq: BOMN), have indicated an interest in purchasing an aggregate of at least 1,851,850 shares of our Class A common stock (based on the midpoint of the price range set forth above) in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, such entities may elect to purchase fewer or no shares of our Class A common stock in this offering, or the underwriters may elect to sell fewer or no shares of our Class A common stock in this offering to such entities. The underwriters will receive the same discount from any shares of Class A common stock sold to such entities as they will from any other shares of Class A common stock sold to the public in this offering.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The shares of Class A common stock are expected to be delivered on or about    , 2021.
BofA Securities
RBC Capital Markets
BTIG
Builder Advisor Group, LLC
 
Zelman Partners LLC
TCB Capital Markets
 
Wedbush Securities
The date of this prospectus is    , 2021

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We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give to you. This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of the date hereof, regardless of the time of delivery of this prospectus or of any sale of the shares of Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
We and the underwriters have not done anything that would permit this offering or the possession or distribution of this prospectus in any jurisdiction where action for those purposes is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States.
This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in this prospectus for additional information.
Industry and Market Data
We use market data and industry forecasts and projections throughout this prospectus, and in particular in the sections entitled “Prospectus Summary,” “Market Opportunity” and “Business.” We have obtained substantially all of this information from a market study prepared for us by John Burns Real Estate Consulting, LLC (“JBREC”), an independent research provider and consulting firm, based on the most recent data available as of June 30, 2020. We have paid JBREC a fee of $37,500 for its services, plus an amount charged at an hourly
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rate for additional information we may require from JBREC from time to time in connection with its services. Such information is included in this prospectus in reliance on JBREC’s authority as an expert on such matters. Any forecasts prepared by JBREC are based on data (including third-party data), models and the experience of various professionals and on various assumptions (including the completeness and accuracy of third-party data), all of which are subject to change without notice See “Market Opportunity” and “Experts” in this prospectus for additional information.
In addition, certain other market and industry data has been obtained from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable but that the accuracy and completeness of the information are not guaranteed. We have not independently verified the data obtained from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus.
The Corporate Reorganization
Dream Finders Homes, Inc., a recently formed Delaware corporation, or DFH Inc., is currently a direct, wholly owned subsidiary of Dream Finders Holdings LLC, a Florida limited liability company, or DFH LLC. Immediately prior to or concurrently with the closing of this initial public offering, pursuant to the terms of the Agreement and Plan of Merger filed as an exhibit to the Registration Statement of which this prospectus forms a part, DFH Merger Sub LLC, a Delaware limited liability company and direct, wholly owned subsidiary of DFH Inc., will merge with and into DFH LLC with DFH LLC as the surviving entity. As a result of the merger, all of the outstanding non-voting common units and Series A preferred units of DFH LLC will be converted into shares of Class A common stock of DFH Inc., all of the outstanding common units of DFH LLC will be converted into shares of Class B common stock of DFH Inc. and all of the outstanding Series B preferred units and Series C preferred units of DFH LLC will remain outstanding as Series B preferred units and Series C preferred units of DFH LLC, as the surviving entity in the merger. We refer to this and certain other related events and transactions, as more fully described under “Corporate Reorganization” in this prospectus, as the “Corporate Reorganization.”
Immediately following the Corporate Reorganization, (1) DFH Inc. will be a holding company and the sole manager of DFH LLC, with no material assets other than 100% of the voting membership interest in DFH LLC, (2) the holders of common units, non-voting common units and Series A preferred units of DFH LLC will become stockholders of DFH Inc., (3) the holders of the Series B preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization will hold all 7,143 of the outstanding Series B preferred units of DFH LLC, and (4) the holders of the Series C preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization will hold all 26,000 of the outstanding Series C preferred units of DFH LLC.
Prior to the Corporate Reorganization, DFH Inc. has not conducted any activities other than in connection with its incorporation and in preparation for this offering and has no material assets other than a 100% membership interest in DFH Merger Sub LLC. See “Corporate Reorganization” in this prospectus for additional information.
Certain Terms Used in this Prospectus
Unless we otherwise indicate, or unless the context requires otherwise, any reference in this prospectus to:
“adjusted gross margin” refers to gross margin excluding the effects of capitalized interest, amortization included in the cost of sales (including adjustments resulting from the application of purchase accounting in connection with acquisitions) and commission expense;
“our board of directors” or “our board” when used in the present tense or prospectively refers to the board of directors of DFH Inc., and when used in the historical context refers to the board of managers of DFH LLC;
the “common units” refers to the common units of DFH LLC outstanding immediately prior to the Corporate Reorganization;
the “Corporate Reorganization” refers collectively to the events and transactions described under “Corporate Reorganization” in this prospectus;
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“DFH Inc.” refers to Dream Finders Homes, Inc., and not any of its subsidiaries;
“DFH LLC” refers to Dream Finders Holdings LLC, and not any of its subsidiaries;
“DF Homes LLC” refers to Dream Finders Homes, LLC, our primary operating subsidiary, and not any of its subsidiaries;
“our directors” or “our director” when used in the present tense or prospectively refers to members of the board of directors of DFH Inc., and when used in the historical context refers to members of the board of managers of DFH LLC;
“Dream Finders,” “DFH,” the “Company,” “us,” “we,” “our” or “ours” or like terms when used in the present tense or prospectively refers to DFH Inc. and its subsidiaries, including DFH LLC and DF Homes LLC; when used in the historical context refer to (i) DFH LLC and its subsidiaries, including DF Homes LLC, following the formation of DFH LLC on December 10, 2014 and (ii) DF Homes LLC and its subsidiaries prior to the formation of DFH LLC on December 10, 2014. See “Corporate Reorganization” in this prospectus for additional information;
the “Existing Owners” refers collectively to (i) Patrick Zalupski, our founder, President, Chief Executive Officer and Chairman of our board of directors, and POZ Holdings, Inc., an entity he controls, (ii) the various holders of the non-voting common units, (iii) the Series A Investors, (iv) the Series B Investors and (v) the Series C Investors;
“gross margin” refers to home sales revenue less cost of sales;
“H&H Acquisition” refers to our acquisition of 100% of the issued and outstanding membership interests in H&H Homes, which closed on October 5, 2020. See “Prospectus Summary—Recent Developments—H&H Acquisition” in this prospectus for additional information;
“H&H Homes” refers to the H&H Constructors of Fayetteville, LLC’s homebuilding business we acquired on October 5, 2020. See “Prospectus Summary—Recent Developments—H&H Acquisition” in this prospectus for additional information;
“Nasdaq” or “the Nasdaq” refer to The Nasdaq Global Select Market;
the “non-voting common units” refers to the non-voting common units of DFH LLC outstanding immediately prior to the Corporate Reorganization;
“participating equity” refers to the Series A preferred units of DFH LLC, common units of DFH LLC and non-voting common units of DFH LLC prior to the Corporate Reorganization;
“public company homebuilders” refers to Lennar Corporation, D.R. Horton, Inc., PulteGroup, Inc., NVR, Inc., Toll Brothers, Inc., Meritage Homes Corporation, KB Home, TRI Pointe Group, Inc. M.D.C. Holdings, Inc., LGI Homes, Inc., M/I Homes, Inc., Taylor Morrison Home Corporation, Century Communities, Inc., Beazer Homes USA, Inc. and The New Home Company Inc.;
“returns on equity” refers, for us, to pre-tax net and comprehensive income attributable to DFH LLC tax effected for our anticipated 25% federal and state blended tax rate less accrued preferred unit distributions divided by average total participating equity and, for the public company homebuilders, to net income divided by average total equity;
the “Series A Investors” refers to DFH Investors, LLC, the holder of all of the Series A preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization;
the “Series A preferred units” refers to the Series A preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization;
the “Series B Investors” refers collectively to MOF II DF Home LLC and MCC Investment Holdings LLC (both controlled by Medley Capital Corporation), the holders of all of the Series B preferred units of DFH LLC;
the “Series B preferred units” refers to the Series B preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization;
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the “Series C Investors” refers to The Värde Private Debt Opportunities Fund (Onshore), L.P., the holder of all of the Series C preferred units of DFH LLC;
the “Series C preferred units” refers to the Series C preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization;
“unreturned capital contribution” means, with respect to a series of preferred units of DFH LLC, an amount equal to the excess, if any, of (a) the aggregate amount of capital contributions made by a holder in respect of such units, over (b) the aggregate amount of prior distributions made to such holder; and
“Village Park Homes” refers to the homebuilding business we acquired on May 31, 2019 pursuant to our purchase of 100% of the membership interests of Village Park Homes, LLC.
Presentation of Certain Data
When we present data about our controlled lots, we include lots owned by our consolidated and non-consolidated joint ventures, if, and to the extent that we have option contracts to acquire such lots, but otherwise do not include lots owned by them in such data.
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the information under the headings “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical and pro forma financial statements and the notes related to those financial statements appearing elsewhere in this prospectus. Except as otherwise noted, the information presented in this prospectus assumes (i) an initial public offering price of $13.50 per share of Class A common stock (the midpoint of the price range set forth on the cover of this prospectus) and (ii) unless otherwise indicated, that the underwriters do not exercise their option to purchase additional shares of our Class A common stock.
Our Company
We are one of the nation’s fastest growing private homebuilders by revenue and home closings since 2014. We design, build and sell homes in high growth markets, including Jacksonville, Orlando, Denver, the Washington D.C. metropolitan area and Austin, and, with the acquisition of H&H Homes in October 2020, Charlotte and Raleigh. We employ an asset-light lot acquisition strategy with a focus on the design, construction and sale of single-family entry-level, first-time move-up and second-time move-up homes. To fully serve our homebuyer customers and capture ancillary business opportunities, we also offer title insurance and mortgage banking solutions.
Our asset-light lot acquisition strategy enables us to generally purchase land in a “just-in-time” manner with reduced up-front capital commitments, which in turn has increased our inventory turnover rate, enhanced our strong returns on equity and contributed to our impressive growth. In addition, we believe our asset-light model reduces our balance sheet risk relative to other homebuilders that own a higher percentage of their land supply. As of September 30, 2020, 99% of our owned and controlled lots were controlled through finished lot option contracts and land bank option contracts compared to the average among the public company homebuilders of 46%. We believe that our asset-light model has been instrumental in our generation of attractive returns on equity of 41% for the twelve months ended September 30, 2020 and 34% for the year ended December 31, 2019, substantially exceeding the average returns on equity among the public company homebuilders of 15% and 13%, respectively, for the same periods.
We have received numerous industry awards for architectural and customer service excellence, and we believe our commitment to high quality design and customer satisfaction has contributed to our successful track record. Since breaking ground on our first home on January 1, 2009 during an unprecedented downturn in the U.S. homebuilding industry, we have closed over 9,100 home sales through September 30, 2020, have been profitable every year since inception and have never taken an inventory impairment. Pro forma for the H&H Acquisition, we would have been the 11th largest private homebuilder on the Professional Builder’s 2020 Housing Giants list based on 2019 revenues.
We select the geographic markets in which we operate our homebuilding business through a rigorous selection process based on our evaluation of positive population and employment growth trends, favorable migration patterns, attractive housing affordability, low state and local income taxes and desirable lifestyle and weather characteristics. Recently, we believe these favorable factors have been amplified by a general migration from urban areas to nearby suburbs in which we build homes, a trend that has increased further as a result of the COVID-19 pandemic. Over 70% of all U.S. migration from 2010 through 2018 was into states in which we currently operate. For example, according to the LinkedIn Workforce Report, between April and August 2020, Jacksonville recorded an 11% increase in net population migration, the largest increase among the top 20 metropolitan areas tracked by LinkedIn. In addition, we have experienced an increase in entry-level homebuyers, who we believe are motivated to move out of their apartments or confined living areas and into more spacious homes in anticipation of spending more time at home with the increasing prevalence of remote-working arrangements as a result of the COVID-19 pandemic. Our nine most successful months since our inception, as measured by volume of net new orders, were recorded in February, May, June, July, August, September, October, November and December 2020, with net new orders totaling 3,520 for these nine months as compared to net new orders of 1,576 for the same nine months in 2019, representing an increase of 123%.
Our operations are currently organized into six geographical divisions: Jacksonville, Orlando, Capital (consisting primarily of our homebuilding operations in the Washington D.C. metropolitan area), Colorado, Other (consisting primarily of our title operations and our homebuilding operations in Austin, Savannah and Village
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Park Homes markets) and Jet Home Loans (consisting of our mortgage banking joint venture). See “Note 14. Segment Reporting” to our consolidated financial statements included elsewhere in this prospectus. Pro forma for the H&H Acquisition, which we intend to organize under a new geographical division, our existing geographical divisions accounted for 32%, 9%, 10%, 10%, 17% and 3%, respectively, of our consolidated total revenues, plus revenue from our equity method investment under our Jet Home Loans segment, for the nine months ended September 30, 2020, respectively, and the H&H Homes segment accounted for the remaining 20% of our consolidated total revenues for the nine months ended September 30, 2020. See “—Recent Developments—H&H Acquisition” in this prospectus for additional information.
We increased our revenues from $490.9 million for the nine months ended September 30, 2019 to $672.7 million for the nine months ended September 30, 2020, and, pro forma for the H&H Acquisition, $843.6 million for the nine months ended September 30, 2020. We increased our revenues from $522.3 million for the year ended December 31, 2018 to $744.3 million for the year ended December 31, 2019, and, pro forma for the H&H Acquisition, $976.6 million for the year ended December 31, 2019.
Our History
We broke ground on our first home on January 1, 2009 in Jacksonville, Florida following the formation of DF Homes LLC in 2008 by Patrick Zalupski, our founder, President, Chief Executive Officer and Chairman of our board of directors. Mr. Zalupski led the Company in achieving substantial growth in its early years, despite the backdrop of an unprecedented economic downturn. Since our inception, we have grown both organically and through targeted acquisitions to establish a presence in core growth markets. We were ranked as the third fastest growing private building company in the United States in 2012 by Inc. 500; we ranked as the second fastest growing private homebuilder in the United States in 2016 by Professional Builder; and, pro forma for the H&H Acquisition, we would have been the 11th largest private homebuilder on the Professional Builder’s 2020 Housing Giants list based on 2019 revenues.
We surpassed 1,000 cumulative home closings in 2013 and began to establish our national presence in the homebuilding industry with our organic expansion into the Savannah, Georgia market in the same year, followed just one year later in 2014 by our entry into the Denver, Colorado market. Our expansion into new markets continued in 2015 with the launch of our homebuilding operations in Austin, Texas and the increase of our presence in Florida with our entrance into the Orlando market. Throughout this period of opportunistically expanding our geographic footprint, we continued our rapid growth in our home market of Jacksonville, where the Jacksonville Business Journal has ranked us as a top-three homebuilder by volume each year since 2015. In 2016, we were awarded the title of Builder of the Year by the Northeast Florida Builders Association for our distinguished homebuilding operations in the Jacksonville market, and our rapid growth was recognized on the national stage as Professional Builder awarded us the title of the second fastest growing private homebuilder in the United States. In 2017, we entered the greater Washington D.C. metropolitan area, with a particular focus on the Northern Virginia and Maryland markets. In addition to our proven track record of effective organic expansion, we have demonstrated our ability to identify and execute targeted acquisitions. In May 2019, we acquired Village Park Homes, a homebuilder with operations primarily in the Hilton Head and Bluffton, South Carolina markets, for an aggregate consideration of $14.5 million, net of contingent consideration. The acquisition significantly expanded our existing presence in South Carolina, adding to our homebuilding business Village Park Homes’ leading market share in the Hilton Head, South Carolina market of 22% during 2018 according to Smart Real Estate Data. Additionally, in 2019, we expanded into the active adult sector of the homebuilding industry. The active adult sector of the population consists of consumers that are at least 55 years old and are, or will soon be, “empty nesters.” This group generates high sales per community, and, based on demographic trends, as “baby boomers” age into this sector, we expect it to continue to grow. We believe that our markets are, and will continue to be, popular destinations for this segment of the population.
In 2019, just six years after closing our 1,000th home sale, Jacksonville became our first market to account for over 1,000 home closings in a calendar year, with 1,054 home closings, a 23% increase year over year. In addition, our homebuilding operations in our markets outside of Jacksonville have developed further efficiencies in recent years and have matured beyond the initial period of significant financial and time investment required to effectively expand organically into a new market. As a result, our homebuilding operations in these markets have recorded impressive growth in revenues and pre-tax profits, particularly since 2017, and we believe these operations are scalable and that additional near-term future growth is not expected to require considerable additional overhead. We are confident that these results across our established markets are a reflection of our
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ability to realize operational efficiencies and economies of scale in both our existing markets and those that we may enter in the future, including those in the Carolinas where we expect to begin operating later this year.
On October 5, 2020, we acquired H&H Homes. See “—Recent Developments—H&H Acquisition” in this prospectus for additional information. H&H Homes is a leading builder of single-family homes, townhomes and mixed-use condominium buildings in Charlotte, Fayetteville, Raleigh, the Triad (consisting of Greensboro, High Point and Winston-Salem, North Carolina) and Wilmington, North Carolina and Myrtle Beach, South Carolina. Founded over 30 years ago, H&H Homes has an established presence in the Carolinas and a focus on utilizing an efficient, asset-light strategy that is strongly aligned with our own asset-light strategy. As of September 30, 2020, H&H Homes owned or controlled 4,936 lots. H&H Homes targets entry-level and first-time move-up homebuyers, with a proven dedication to providing high-levels of livability, sustainability and value to its customers. We believe H&H Homes’ asset-light strategy, principles and customer focuses align well with our operational philosophy, culture and core customer focuses and allows us to enter the North Carolina market with momentum to achieve significant scale with greater efficiency.
Moving forward, we intend to capitalize on our demonstrated operational experience to grow our market share within our existing markets and to opportunistically expand into new markets where we identify strong economic and demographic trends that provide opportunities to build homes that meet our profit and return objectives.
Market Opportunity
We believe the U.S. housing market is well positioned to prosper despite the COVID-19 pandemic, driven by favorable fundamentals of low housing inventory supply and strong homebuyer demand. JBREC predicts that mortgage rates below 3% will continue for the next few years, the high unemployment rate will gradually recede over many years and government assistance will continue with modest economic repercussions. According to the U.S. Census Bureau, the number of single-family home permits issued totaled 834,000 for the twelve months ended June 30, 2020, which is 10.4% below the 1980-2019 average, and sales of new single-family houses in June 2020 were 6.9% above such sales in June 2019. For the existing home market, the 4.8 average months of supply of existing homes for sale for the twelve months ended May 31, 2020 was 28% below the 1983-2019 average of 6.7 months and close to record-low levels. These favorable supply and demand characteristics have contributed to continued home price appreciation since 2012. In May 2020, the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index reported a 4.5% annual gain in home price appreciation.
Our markets and metropolitan areas include Jacksonville, Orlando, Austin, Washington D.C., Denver, Myrtle Beach, Charlotte, Raleigh-Durham and Fayetteville.
Jacksonville, Florida
Jacksonville has a diversified economy and is a leading regional center of banking and financial services, media, technology, and military and defense. Jacksonville’s sizeable deep-water port has also been instrumental in making Jacksonville a leading center of the logistic and shipping industry. Tourism is a major economic driver for Jacksonville, with visitors contributing billions of dollars to businesses in the area. The Jacksonville market is the 48th-largest metropolitan area in the United States by population. Jacksonville has experienced strong annual population growth of 1.9% since 2015, which is more than triple the national average of 0.6% for the same period. As of May 2020, the number of households increased 1.7% from May 2019 to reach about 615,000 total households in the Jacksonville metropolitan area. According to the Census Bureau’s 2018 American Community Survey (“ACS”), there were about 320,150 owner occupied single-family homes in Jacksonville, accounting for 48.8% of the total housing stock. From 2012 to 2019, new home sales volume experienced strong annual growth by an average of 13.0%. In 2019, the median new home price was $307,600, up 2.2% from 2018. The median resale price for a detached home was $238,100 as of May 2020, up 1.7% from May 2019, following continued growth since 2013.
Orlando, Florida
Orlando’s growing economy, driven largely by tourists attracted to the warm weather and world-renowned amusement parks, has been expanding rapidly, becoming the top tourist destination in the United States with 75 million visitors in 2018. The Orlando market is the 24th-largest metropolitan area in the United States by population. Orlando has experienced strong annual population growth of 2.3% since 2015, significantly higher
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than the national average of 0.6% for the same period. According to the 2018 ACS, there were approximately 475,000 owner occupied single-family homes in Orlando, accounting for 45% of the total housing stock. New home sales increased by an annual average of 15.8% and the median new home price appreciated by an annual average of 6.9% from 2011 to 2019. As of May 2020, the median new home price was $341,400, up 8.7% from the median new home price as of May 2019. From 2012 to 2019, existing home values experienced an annual average increase of 9.1%. As of May 2020, Orlando existing home values increased 6.6% from May 2019.
Austin, Texas
Austin’s economy is fueled by its technology sector, which led to the region’s nickname, “Silicon Hills.” Software development, hardware manufacturing and research are the primary technology sectors found in Austin. The Austin market is the 33rd-largest metropolitan area in the United States by population. Austin has experienced strong annual population growth of 2.8% since 2015, which is more than four times the national average of 0.6% for the same period. According to the 2018 ACS, there were approximately 417,000 owner occupied single-family homes in Austin, accounting for 49% of the total housing stock. From 2012 to 2019, new home sales volume experienced strong annual growth by an average of 13%. The median price of new homes within Austin experienced strong appreciation from 2012 to 2019 with an annual average increase in median price of 5.1%. As of May 2020, the median new home price was $321,900, up 3.1% from the median new home price as of May 2019. Existing home values in Austin grew 93.9% from 2005 to 2019. As of May 2020, Austin existing home values increased 4.7% from May 2019.
Washington D.C.
Washington D.C.’s diverse economy is comprised of government, professional and business services, life sciences and biotechnology, cybersecurity and technology, education, health care and tourism. The Washington D.C. market is the fifth-largest metro area in the United States by population. The household growth rate for the twelve months ended to May 2020 was 1.0%. According to the 2018 ACS, there were approximately 1.27 million owner occupied single-family homes in Washington D.C., accounting for 54% of the total housing stock. From 2012 to 2019, new home sales averaged 10,000 to 13,000 sales per year. The median price of new homes within Washington D.C. experienced moderately strong appreciation from 2010 to 2018 with an annual average increase in median price of 3.3%. As of May 2020, the median new home price was $543,700, up 3.4% from the median new homes price as of May 2019. Existing home values in Washington D.C. increased 5.3% from 2005 to 2019. Washington D.C. existing home values in May 2020 increased 3.8% from May 2019.
Denver, Colorado
Denver’s economy is diversified and attracts industries such as aerospace, aviation, energy, financial services, healthcare and information technology (“IT”). The Denver market is the 17th-largest metropolitan area in the United States by population. Denver has experienced strong annual population growth of 1.5% since 2015, which is more than double the national average of 0.6% for the same period. According to the 2018 ACS, there were approximately 643,000 owner occupied single-family homes in Denver, accounting for 54% of the total housing stock. As of May 2020, the number of households increased 1.6% from May 2019. From 2011 to 2019, both new home sales volume and the median price of new homes within Denver experienced strong growth. New home sales increased by an annual average of 15.8% and the median new home price appreciated by an annual average of 6.3% from 2011 to 2019. As of May 2020, the median new home price was $513,200, up 1.5% from the median new homes price as of May 2019. Existing home values increased annually by an average of 8.1% since 2010. Denver existing home values as of May 2020 increased 3.8% from May 2019.
Myrtle Beach, South Carolina
Myrtle Beach’s economy is dominated by the tourist industry. Its warm subtropical climate and extensive beaches attract an estimated 20 million visitors a year. The Myrtle Beach market has grown by an average of 12,900 people each year since 2005 and grew at even higher rates in recent years. Myrtle Beach has experienced strong annual population growth of 3.6% since 2015, significantly higher than the national average of 0.6% for the same period. According to the 2018 ACS, there were approximately 104,000 owner occupied single-family homes in Myrtle Beach, accounting for 38% of the total housing stock. As of May 2020, the number of households increased 2.4% from May 2019. New home sales volume experienced strong annual growth by an
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average of 16% from 2012 to 2015. The median price of new homes within Myrtle Beach experienced strong appreciation from 2017 to 2019, increasing by an average rate of 7.2%. Since 2012, existing home values have increased annually by an average of 4.3%. Myrtle Beach existing home values as of May 2020 increased 4.7% from May 2019.
Charlotte, North Carolina
In 2019, there were 14 Fortune 1,000 companies and six Fortune 500 companies with headquarters in the Charlotte metropolitan area. 200 Fortune 500 companies have one or more facilities within the Charlotte metropolitan area. The Charlotte market is the 23rd-largest metropolitan area in the United States by population. Charlotte has experienced strong annual population growth of 1.9% since 2015, which is more than triple the national average of 0.6% for the same period. According to the 2018 ACS, there were approximately 580,000 owner occupied single-family homes in Charlotte, accounting for 55% of the total housing stock. As of May 2020, the total number of households increased 2.0% from May 2019. From 2012 to 2019, both new home sales volume and the median price of new homes within Charlotte experienced strong growth. New home sales increased by an annual average of 10.7% and the median new home price appreciated by an annual average of 5.7% from 2011 to 2019. Since 2011, existing home values have increased annually by an average of 6.4%. As of May 2020, Charlotte existing home values increased 7.4% from May 2019.
Raleigh-Durham, North Carolina
The Raleigh-Durham metropolitan area is home to a highly educated population, with over 40% holding a bachelor’s degree or higher, well above both the North Carolina and national levels. This educated population facilitates strong employment in the “Research Triangle,” one of the country’s largest and most successful business parks with an estimated 300 companies. The Raleigh-Durham market is the 40th-largest metropolitan area in the United States by population. Raleigh-Durham has experienced strong annual population growth of 2.1% since 2015, which is more than triple the national average of 0.6% for the same period. According to the 2018 ACS, there were approximately 421,000 owner occupied single-family homes in Raleigh-Durham, accounting for 54% of the total housing stock. As of May 2020, the number of households increased 2.2% from May 2019. From 2012 to 2019, new home sales volume experienced strong annual growth by an average of 11%. New homes within Raleigh-Durham experienced strong appreciation from 2012 to 2019 with an annual average increase in median price of 4.1%. Since 2011, existing home values have increased annually by an average of 5.2%. Raleigh-Durham existing home values as of May 2020 increased 4.0% from May 2019.
Fayetteville, North Carolina
Fayetteville is located 65 miles south of Raleigh and along a major north-south corridor that links large east coast cities. Fayetteville’s economy is diverse with major employers in health care, social assistance, retail trade, public administration, educational services, accommodation and food services and manufacturing. Fort Bragg and Pope Army Airfield are within the Fayetteville metropolitan area, contributing significantly to the economy. According to the 2018 ACS, there were approximately 68,000 owner occupied single-family homes in Fayetteville, accounting for 40% of the total housing stock. New homes within Fayetteville experienced appreciation from 2010 to 2019 with an annual average increase in median price of 3.2%. Among existing homes, the Fayetteville market was much more resilient during the previous recession than other markets. Fayetteville’s existing home values declined only 7.6% from 2010 to 2012. Over the past 15 years, existing home values increased 19%. Fayetteville existing home values as of May 2020 increased 3.5% from May 2019.
For a more detailed review of each of our markets, see “Market Opportunity.”
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Our Competitive Strengths
Our primary business objective is to create long-term, above industry average, risk adjusted returns for our stockholders through our commitment to utilizing an asset-light operating model and to building high quality homes at affordable prices for our customers. We believe that the following strengths differentiate us from the public company homebuilders and position us well to execute our business strategy and capitalize on opportunities across our footprint:
Proven Ability to Generate Market-Leading Returns on Equity. Enabled by our asset-light land financing strategy and our disciplined operating model, we have demonstrated a proven ability to generate market-leading returns on equity. Returns on equity is a financial metric that we prioritize throughout our business and it serves as a key factor in our land acquisition process, our capitalization strategy and is an important component of our incentive compensation plans for executive management. We generated returns on equity of 41% for the twelve months ended September 30, 2020 and 34% for the year ended December 31, 2019, substantially exceeding the average returns on equity among the public company homebuilders of 15% and 13%, respectively, for the same periods. We believe that our strong relationships with local land owners, officials, subcontractors and suppliers in our core operating markets position us to achieve economies of scale and continue our proven ability to deliver significant returns on equity, which we believe best aligns the interests of our executive management team with performance for our shareholders.
Asset-light and Capital Efficient Operating Platform. We employ an asset-light land financing strategy, providing us optionality to purchase lots on a “just-in-time” for construction basis and affording us flexibility to acquire lots at a rate that matches the expected sales pace in a given community. We typically execute this strategy through the purchase of finished lot option contracts and land bank option contracts. These option contracts allow us to optimize our allocation of capital by minimizing up-front acquisition costs while maximizing long-term risk adjusted returns relative to conventional acquisition strategies utilized by many of the public company homebuilders. Pro forma for the H&H Acquisition, as of September 30, 2020, we owned and controlled 15,330 lots through finished lot option contracts and land bank option contracts, representing 99% of our total owned and controlled lots. As a result of these capital efficient arrangements, we have been able to operate at high inventory turnover multiples. Our inventory turnover was 2.0x for the nine months ended September 30, 2020 and 2.0x for the year ended December 31, 2019, compared to the average inventory turnover of 1.2x and 1.3x, respectively, among the public company homebuilders for the same periods.
Strong Revenue Growth. Since breaking ground on our first home on January 1, 2009, we have become one of the nation’s fastest growing homebuilders by revenue. Ranked as the 80th largest private homebuilder in our inaugural appearance on Professional Builder’s Housing Giants list in 2015 based on 2014 revenues, we continued to rapidly ascend that publication’s annual list of U.S. homebuilders ranked by revenue, ranking as the 18th largest private homebuilder on the 2020 Housing Giants list based on 2019 revenues and, pro forma for the H&H Acquisition, we would have been the 11th largest private homebuilder based on 2019 revenues. Our revenue increase over this period represents a compound annual growth rate of approximately 43%.
Established Presence in High-Growth Markets. We target markets in regions that are generally characterized by high job growth, increasing populations and favorable tax policies and cost of living relative to other regions in the country, which create strong demand for new housing, particularly among our core customer base: entry-level and first-time move-up homebuyers. Pro forma for the H&H Acquisition, the markets in which we operate include Jacksonville, Orlando, Austin, Denver, the greater Washington D.C. metropolitan area, Savannah, Hilton Head, Myrtle Beach, Charlotte, Raleigh-Durham and Fayetteville, each of which is generally benefiting from positive population trends, favorable migration patterns, attractive housing affordability and/or desirable lifestyle and weather characteristics. We believe these prevailing trends align with the interests of our customers of primary focus, entry-level and first-time move-up homebuyers, and position us to take advantage of the favorable supply and demand dynamics in the markets in which we operate. Recently, we have seen substantial migration from urban areas to nearby suburbs in which we design, build and sell our homes, which has further increased as a result of the COVID-19 pandemic.
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Expertise in Sourcing Land and Partnering with Land Developers. Our ability to identify, acquire and, if necessary, manage or arrange for the development of land in desirable locations and on favorable terms is one of the hallmarks of our success and is driven by our company-wide emphasis on continually developing new and existing relationships with land sellers and developers, an approach that we believe differentiates us from other homebuilders. When we identify an attractive land acquisition opportunity, we move decisively to enter into option contracts to control the lots in order to maintain an adequate pipeline for our expected construction needs. We believe our experience and company-wide emphasis on relationship-building with land market participants enable us to efficiently source land and secure options to control and close acquisitions of lots to meet our growth needs. In addition, we have a 49% ownership interest in DF Capital Management, LLC (“DF Capital”), an investment manager focused on investments in land banks and land development joint ventures to deliver finished lots to us and other homebuilders for the construction of new homes. We believe our relationship with DF Capital allows us to act quickly as lot acquisition opportunities are presented because DF Capital generally provides for faster closings and is not subject to the time delays that we historically have experienced when seeking financing for each project.
Demonstrated Ability to Grow Through Organic Expansion and Targeted Acquisitions. We select the geographic markets in which we operate our homebuilding business through a rigorous selection process overseen by our applicable regional management and approved by our executive land management committee. Since we began operations, we have organically expanded from Jacksonville, Florida to Savannah, Georgia; Denver, Colorado; Austin, Texas; Orlando, Florida; and the greater Washington D.C. metropolitan area. We have also demonstrated our ability to grow externally through our expansion into Hilton Head, South Carolina with our 2019 acquisition and successful integration of Village Park Homes. As we evaluate corporate acquisition opportunities in the future, we expect to continue to place significant importance on specific acquisition criteria including: (i) markets that we believe to have the most opportune long-term housing fundamentals and that can accommodate our asset-light operating model; (ii) established businesses with strong leadership who may be interested in staying with the business post-transaction; (iii) companies with attractive lot pipelines that we believe can grow larger and faster with the benefit of our significant capital resources; and (iv) situations where our purchasing power, back-office administration and our disciplined land acquisition process can capture cost synergy benefits for future margin expansion. We have experienced consistent growth in each of the markets into which we have expanded, including a trend of increasing revenues and profitability after reaching a critical mass of operating leverage through our development of relationships with developers, suppliers and local authorities and our familiarization with local operating dynamics. We believe these successes demonstrate our team’s efficacy at identifying and capitalizing on new market opportunities, which we expect to build upon with our entrance into North Carolina following the H&H Acquisition.
Focus on Modern, Well-Designed, Energy-Efficient and Technology-Enabled Homes. We build high quality homes at affordable prices with an emphasis on unique, open floor plan designs, and many popular technology features including wireless internet throughout the home, mobile controls for areas such as lights, door locks, garage access and temperature, and other new technologies popular with the emerging 72 million person Millennial demographic, the largest demographic in U.S. history. Our architectural design team monitors customer buying trends in each of our markets and works with our land team to secure lots that permit the building of floor plans that we believe will appeal to our target customers. We empower our customers with the flexibility to personalize their homes at our design studios in collaboration with our dedicated design consultants. We engineer our homes for energy-efficiency, which is aimed at reducing the impact on the environment and lowering energy costs to our homebuyers. Our dedication to superior product design has earned us numerous accolades and honors, including over 30 Parade of Homes awards, the MAME Award for Architectural Design of an Attached Home in 2015 and Northeast Florida’s Builder Association’s Builder of the Year Award in 2016. By providing a more customized product mix of floor plans, amenities and design options in our homes and focusing on our target customers’ priorities, we believe we can continue growing, increasing profitability and earning attractive returns for our stockholders.
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Strong Balance Sheet Flexibility and Liquidity. We are well-positioned with a strong balance sheet and ample liquidity with which to support our ongoing operations, expand our market share in our existing markets and, on an opportunistic basis, explore expansion into new markets through organic growth or acquisition, and service our debt obligations. We believe our asset-light lot acquisition strategy reduces our balance sheet risk relative to other homebuilders that own a higher percentage of their land supply. As of September 30, 2020, 93% of our outstanding debt was in fully collateralized vertical construction lines of credit facilities. In connection with this offering, or shortly thereafter, we intend to replace all of our secured vertical construction lines of credit facilities with a syndicated, unsecured revolving credit facility, with an expected borrowing base of $450.0 million and an accordion feature that allows the facility to expand to a borrowing base of up to $750.0 million. Pro forma for this offering and entry into the new revolving credit facility, we expect to have $25.0 million of cash and $375.0 million of borrowing availability under our new revolving credit facility. We believe that the consolidation of our indebtedness into a single credit facility and the expected terms of the facility will reduce our financing costs, create operating efficiencies and enhance returns.
Highly Experienced, Aligned and Proven Management Team. We benefit from a highly experienced management team that has demonstrated the ability to adapt to constantly changing market conditions while generating sustained growth and positive financial results and achieving profitability every year since our inception despite commencing operations in an unprecedented economic downturn. Our executive officers and key employees have over 100 years of cumulative experience in the homebuilding industry. To further incentivize our management team, we employ an executive compensation structure designed to align our executive officers’ financial interests with our own interests. Upon the completion of this offering, our management team as a group will beneficially own approximately 9.3% of our outstanding shares of Class A common stock, without giving effect to any purchases that certain of these holders may make through the reserved share program, and Mr. Zalupski will beneficially own 100% of our outstanding Class B common stock. We believe our management team’s extensive industry experience, combined with our incentivized executive compensation structure, have been critical to our track-record of sustained profitability and returns on equity and will allow us to continue this success moving forward.
Our Strategy
We intend to achieve our primary business objectives through successful execution of the following strategies:
Continued Execution of Asset-light Capital Efficient Structure. We are focused on controlling a capital efficient land pipeline sufficient to meet our growth objectives. We believe our asset-light land financing strategy represents a capital efficient platform that allows us to effectively capitalize on growth opportunities in both new and existing markets. Our culture of building and developing external relationships with land sellers, developers and land finance partners enhances our success in both sourcing and executing finished lot and land bank option contracts that are fundamental to this strategy. We believe these arrangements reduce our exposure to economic downcycles and risks associated with direct land ownership and land development and increase optionality to effectively manage our pipeline of finished lots. We intend to continue to emphasize the development of strong external relationships and execute on our asset-light land financing strategy to take advantage of the proven capital efficiencies this strategy provides.
Capture Market Share in Our High-Growth Markets. Despite our rapid growth since our inception, we believe that there are significant opportunities to profitably expand our market share in our existing high-growth markets, and we are keenly focused on efficiently capturing this potential. In addition, our demonstrated expertise in effectively building homes across product offerings from entry-level through first- and second-time move-up housing provides us with a balanced mix of customers, allowing us to opportunistically tailor our product-focus within each of our markets to target the customer-base that we believe provides the most growth potential. For example, in 2019, we expanded into the growing active adult sector to target consumers that are at least 55 years old and are, or will soon be, “empty nesters.” While we have generally sought to grow organically within our established markets, we also
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closely monitor the results and growth potential of competing homebuilders and, from time to time, may opportunistically pursue targeted acquisitions within our established markets. We intend to leverage our familiarity with our existing markets to optimize our resources to capture additional market share.
Opportunistically Enter New Markets. Since our first geographic expansion into Savannah, Georgia in 2013, we have been and remain diligent in evaluating and capitalizing on attractive prospects for geographic expansion. This focus led to our successful entry into high-growth markets across the United States, organically expanding our geographic footprint to include Denver, Colorado; Austin, Texas; the greater Washington D.C. metropolitan area and an increased presence in Florida with our entry into Orlando. In addition to our proven ability to organically establish operations in new markets, both our 2019 acquisition of Village Park Homes, one of the leading builders in Beaufort County, South Carolina, which retained a market share of approximately 22% in 2018 according to Smart Real Estate Data, and our acquisition of H&H Homes, demonstrate our ability to source and execute expansions into new, high-growth markets through targeted acquisitions. We continually evaluate expansion opportunities in markets that align with our profit and return objectives, and we expect to use the expertise gained from our recent new market acquisitions to effectuate opportunistic expansion into additional new metropolitan areas, whether organically or through targeted acquisitions of established homebuilders.
Drive Improvements in Margins. We believe we benefit from having highly scalable operations in each of our markets. We strive to quickly develop familiarity with the dynamics of each new market that we enter in order to effectively react to the local trends and identify the leading supply and demand drivers. This has generally allowed us to reduce costs in new markets, and our historical results reflect a realization of positive inflection points for our net margins in newly-entered markets once we achieve economies of scale. For example, we entered the Denver, Colorado market in 2015 and recorded nine home closings with a gross margin of 10.3%. In 2019, we recorded 217 home closings in Denver with a gross margin of 16.8%. For the nine months ended September 30, 2020, we recorded 183 home closings in Denver and our gross margin increased to 19.4%. We pursue opportunities more aggressively in our markets that are generating the greatest returns and act more cautiously in divisions where operational efficiency has yet to be reached, and we intend to continue this strategy in order to maximize our profitability.
Deliver an Exceptional Customer Experience. We are focused on customer satisfaction and ensuring that each customer’s experience exceeds his or her expectations. We seek to maximize customer satisfaction by providing attentive one-on-one customer service throughout the home buying process, empowering our customers with flexibility to personalize their homes and actively soliciting feedback from all of our customers. Our emphasis on adapting to meet potential homebuyer needs led to increased use of our virtual home tours beginning in April 2020, which has become an increasingly popular and effective marketing strategy following the outbreak of the COVID-19 pandemic in March 2020. In addition, we launched our “Stay Home & Buy a Home” program in April 2020 as another means for customers to safely and efficiently purchase a new home without leaving their current home. We believe these efforts have been crucial to our ability to sell homes during the COVID-19 pandemic, and we have recorded increasing monthly net new orders totals since April 2020, relative to our historical results.
Maximize Capture and Profitability with our Mortgage Banking Joint Venture. Our mortgage banking joint venture, Jet HomeLoans, LLC (“Jet LLC”), offers financing to our homebuyers and helps us more effectively convert backlog into home closings. We believe Jet LLC provides a distinct competitive advantage relative to homebuilders without holistic mortgage solutions for clients, as many of our homebuyers seek an integrated home buying experience. Jet LLC allows us to use mortgage finance as an additional sales tool, it helps ensure and enhance our customer experience, it allows us to prequalify buyers early in the home buying process and it provides us better visibility in converting our sales backlog into closings. For the year ended December 31, 2019, Jet LLC originated and funded 1,606 home loans with an aggregate principal amount of approximately $436 million and generated net income of approximately $4.5 million. We believe that Jet LLC will continue to be a meaningful source of incremental revenues and profitability for us, and we have the ability to acquire our partner’s 51% interest in Jet LLC in the future at our option.
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Maintaining a Prudent Capital Structure. We carefully manage our liquidity by continuously monitoring cash flow, capital spending and debt capacity. Our focus on maintaining our financial strength and flexibility provides us with the ability to execute our strategies through economic downcycles and other potential headwinds. In furtherance of this focus, in connection with this offering, or shortly thereafter, we intend to replace all of our vertical construction lines of credit facilities with a syndicated, unsecured revolving credit facility. We intend to maintain a conservative approach to managing our balance sheet, which, together with our asset-light land acquisition strategy, we believe will preserve our operational and strategic flexibility.
Recent Developments
Fourth Quarter 2020 Performance
For the three months ended December 31, 2020, we received 1,386 net new orders, an increase of 906 net new orders, or 188.8%, as compared to the 480 net new orders received for the three months ended December 31, 2019. Our net new orders for the three months ended December 31, 2020 includes 378 net new orders in the H&H Homes segment.
For the three months ended December 31, 2020, we closed 1,336 homes, an increase of 585 homes closed, or 77.9%, as compared to the 751 homes closed for the three months ended December 31, 2019. Our homes closed for the three months ended December 31, 2020 includes 312 homes in the H&H Homes segment.
For the twelve months ended December 31, 2020, we received 4,185 net new orders, an increase of 2,046, or 95.7%, as compared to the 2,139 net new orders received for the twelve months ended December 31, 2019.
For the twelve months ended December 31, 2020, we closed 3,153 homes, an increase of 1,105, or 54.0%, as compared to the 2,048 homes closed for the twelve months ended December 31, 2019.
As of December 31, 2020, our backlog of sold homes was 2,447. In addition, as of December 31, 2020, we owned or controlled over 21,000 lots.
H&H Acquisition
On January 29, 2020, DFH LLC entered into a membership interest purchase agreement, which was subsequently amended (as amended to date, the “H&H Purchase Agreement”), with H&H Constructors, Inc., a North Carolina corporation (“H&H Seller”), to purchase 100% of the issued and outstanding membership interests in H&H Constructors of Fayetteville, LLC, a North Carolina limited liability company (“H&H LLC”), thereby acquiring H&H Homes. Pursuant to the H&H Purchase Agreement, we paid $29.5 million in cash at the closing of the transaction (which was equal to 110% of book equity shown on H&H LLC’s most recent balance sheet), subject to customary purchase price adjustments, and we will pay contingent consideration, if any, payable pursuant to an “earn out” arrangement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Condition and Results of Operations—H&H Acquisition” in this prospectus for additional information. We consummated the H&H Acquisition on October 5, 2020.
Impact of COVID-19
The COVID-19 pandemic has adversely impacted our business and may adversely impact our business in the future. After a strong start to 2020 during which we recorded 597 net home sales in the first two months of the year, the World Health Organization (“WHO”) declared the global spread of the COVID-19 virus a global pandemic on March 11, 2020. Following this announcement, our homebuilding business began to decline in March 2020, and, in April 2020, we recorded 136 net new orders, a 36% decrease year over year and our lowest number of net new orders during a calendar month since January 2019. However, we have seen a strong resurgence in net new orders of 293, 363, 368, 448 and 343 homes in May, June, July, August and September 2020, respectively, representing increases over the prior year periods of 68%, 86%, 35%, 182% and 123%, respectively. These net new orders totals for May, June, July, August and September 2020 rank as the fifth, third, second, first and fourth highest single-month net new orders totals in our history as of September 30, 2020. As a result of the COVID-19 pandemic, we have observed an amplification of migration from urban centers to the suburban areas in which we build our homes, and an increase in entry-level homebuyers, one of our primary
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customer focuses, seeking to move out of apartments and into more spacious homes, as people are generally spending more time at home with remote-working arrangements increasing in prevalence. In addition, the U.S. Federal Reserve’s (the “Federal Reserve”) efforts to address the sharp economic downturn that resulted from the COVID-19 pandemic has contributed to mortgage interest rates reaching historic lows. According to the Federal Home Loan Mortgage Corporation’s (“Freddie Mac”) nationwide survey of mortgage rates released on July 16, 2020, the average rate on a 30-year fixed mortgage has fallen below 3.0% for the first time since the mortgage-backed finance firm began publishing data in 1971. We believe such low interest rates, particularly if sustained through broader economic recovery and job creation, are likely to serve as a powerful incentive for some potential homebuyers to expedite their next home purchase in order to secure these favorable mortgage terms, therefore driving home sales.
Our primary focus remains doing everything we can to ensure the safety and well-being of our employees, customers and trade partners. While COVID-19 infection rates, hospitalizations and deaths declined in certain parts of the country since the initial surge in April and May 2020, infection rates increased significantly in other parts of the country, including in Florida and Texas during June and July 2020, two states that account for a significant portion of our homebuilding business. Residential construction has been deemed an essential business in each of our markets throughout the COVID-19 pandemic. In addition, state and/or local governments in each of our markets have instituted social distancing measures and other restrictions, which have resulted in significant changes to the way we conduct business. In all markets where we are permitted to operate, we are operating in accordance with the guidelines issued by the Centers for Disease Control and Prevention, as well as state and local guidelines.
Despite the encouraging rebound in our net new orders since April 2020, we cannot be certain that these positive trends will continue if COVID-19 infections and related hospitalizations and deaths continue to grow in our core markets or that we will be able to convert net new orders into home closings. There is uncertainty regarding the extent and timing of the disruption to our business that may result from the COVID-19 pandemic and any related governmental actions. There is also uncertainty as to the effects of the COVID-19 pandemic and related economic relief efforts on the U.S. economy, unemployment, consumer confidence, demand for our homes and the mortgage market, including lending standards, interest rates and secondary mortgage markets. We are unable to predict the extent to which this will impact our operational and financial performance, including the impact of future developments such as the duration and spread of the COVID-19 virus, corresponding governmental actions and the impact of such on our employees, customers and trade partners.
For more information, see “Risk Factors—Our business could be materially and adversely disrupted by an epidemic or pandemic (such as the current COVID-19 pandemic), or similar public threat, or fear of such an event, and the measures that federal, state and local governments and other authorities implement to address it.”
Agreement to Acquire Regional Orlando Homebuilder
On November 3, 2020, DFH LLC entered into a membership interest purchase agreement (as amended to date, the “Century Purchase Agreement”) with Four Seventeen, LLC (“Century Seller”), to purchase all of the outstanding membership interests in Century Homes Florida, LLC (“Century LLC”). Century LLC is a leading builder of single-family homes in Orlando, Florida and targets entry-level and first-time homebuyers. Pursuant to the Century Purchase Agreement, we will pay an amount in cash at the closing of the acquisition equal to the net assets of Century LLC (excluding developed and undeveloped lots that we expect to transfer to a land bank), which is comprised primarily of work in progress, subject to customary purchase price adjustments. In addition, DFH LLC has agreed to pay Century Seller contingent consideration payable upon the sale of homes by Century LLC in the future. We have made a $1.5 million nonrefundable deposit (except in the case of a default under the Century Purchase Agreement by Century Seller) that will be applied to the purchase price. We expect to enter into a land bank financing arrangement at the closing of the acquisition with respect to the developed and undeveloped lots owned by Century LLC. We currently expect that the closing purchase price will be approximately $28.9 million with approximately 150 homes under construction and that the land bank financing arrangement will be approximately $30 million and cover 570 lots. We expect to fund the portion of the closing purchase price relating to the work in progress by borrowings under our vertical construction lines of credit facilities. Century Seller has agreed to provide us with an option to purchase an additional 500 lots and has provided us with a five year right of first refusal with respect to an additional 1,000 lots. We expect to close the
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acquisition in the first quarter of 2021, subject to the satisfaction or waiver of customary closing conditions. Based on the diligence that we have completed to date, we have concluded that the proposed acquisition will not be significant under the significance thresholds in Rule 3-05 of Regulation S-X.
Corporate Reorganization and Ownership Structure
Dream Finders Homes, Inc., a recently formed Delaware corporation, or DFH Inc., is currently a direct, wholly owned subsidiary of Dream Finders Holdings LLC, a Florida limited liability company, or DFH LLC. Immediately prior to or concurrently with the closing of this offering, pursuant to the terms of the Agreement and Plan of Merger filed as an exhibit to the Registration Statement of which this prospectus forms a part, DFH Merger Sub LLC, a Delaware limited liability company and direct, wholly owned subsidiary of DFH Inc., will merge with and into DFH LLC with DFH LLC as the surviving entity. As a result of the merger, all of the outstanding non-voting common units and Series A preferred units of DFH LLC will be converted into 8,590,623 shares of Class A common stock of DFH Inc., all of the outstanding common units of DFH LLC will be converted into 60,226,153 shares of Class B common stock of DFH Inc. and all of the outstanding Series B preferred units and Series C preferred units of DFH LLC will remain outstanding as Series B preferred units and Series C preferred units of DFH LLC, as the surviving entity in the merger. We refer to this and certain other related events and transactions, as more fully described under “Corporate Reorganization” in this prospectus, as the “Corporate Reorganization.” In connection with the Corporate Reorganization, we made distributions to the owners of the entities comprising our predecessor for estimated federal income taxes of approximately $5.4 million on earnings of our predecessor (which was a pass-through entity for tax purposes) for the period from January 1, 2020 through June 30, 2020. We intend to make further distributions to the owners of the entities comprising our predecessor for estimated federal income taxes for the period July 1, 2020 through the effective date of the Corporate Reorganization based on earnings of our predecessor.
Immediately following the Corporate Reorganization, (1) DFH Inc. will be a holding company and the sole manager of DFH LLC, with no material assets other than 100% of the voting membership interests in DFH LLC, (2) the holders of common units, non-voting common units and Series A preferred units of DFH LLC will become stockholders of DFH Inc., (3) the holders of the Series B preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization will hold all 7,143 of the outstanding Series B preferred units of DFH LLC, and (4) the holders of the Series C preferred units of DFH LLC outstanding immediately prior to the Corporate Reorganization will hold all 26,000 of the outstanding Series C preferred units of DFH LLC.
Following the Corporate Reorganization, the Series B preferred units and the Series C preferred units of DFH LLC will have the rights noted below:
Distributions on the Series B preferred units equal to an 8% per annum cumulative preferred return on any outstanding and unreturned capital contribution attributable to such Series B preferred units (the “Series B Preferred Return”), and thereafter up to $1,000 per unit as a return of capital contribution, which distributions are subordinated to distributions on the Series C preferred units but are prior to distributions on the membership interests in DFH LLC that we own.
Quarterly distributions (the “Required Quarterly Series C Payments”) on the Series C preferred units equal to the sum of (i) an 11% per annum cumulative preferred return on any outstanding and unreturned capital contribution attributable to such Series C preferred units (the “Series C Preferred Return”) and (ii) all proceeds not previously distributed to the Series C Investors from lot sales by certain of our joint ventures, and thereafter up to $1,000 per unit as a return of capital contribution, which distributions are prior to distributions on the membership interests in DFH LLC that we own.
Upon the occurrence of certain events, including certain events of default, bankruptcies, events of fraud by DFH LLC or if the Series C preferred units have not been redeemed by December 31, 2021 (which date can be extended by us to June 30, 2022), each holder of the Series C preferred units has the right to convert all of such holder’s Series C preferred units to an amount of Class A common stock equal to the quotient obtained by dividing (x) the sum of the unpaid Series C Preferred Return and the unreturned Series C preferred unit capital contribution with respect to the Series C preferred units to be converted by (y) our book value per share of common stock as of the most recent quarter end prior to such conversion.
The Series B preferred units are redeemable at our option at any time on or prior to September 30, 2022.
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The Series C preferred units are redeemable at our option at any time on or prior to December 31, 2021 (which date can be extended by us to June 30, 2022).
The Series C Investors may force DFH LLC to redeem all outstanding Series C preferred units (i) after December 31, 2021 (which date can be extended by us to June 30, 2022) if DFH LLC does not redeem the Series C preferred units by such date or (ii) at any time in the event of certain defaults, bankruptcies or events of fraud by DFH LLC.
If the Series B preferred units have not been redeemed by September 30, 2022, each holder of the Series B preferred units has the right to convert all of such holder’s Series B preferred units to an aggregate amount of Class A common stock equal to the quotient obtained by dividing (x) the sum of the unpaid Series B Preferred Return and the unreturned Series B preferred unit capital contribution with respect to the Series B preferred units to be converted by (y) the “fair market value” of the Class A common stock, where the “fair market value” is the average reported last sale price of the Class A common stock for the thirty trading days ending on the trading day immediately prior to the date the holder of such Series B preferred units elects to convert such Series B preferred units into shares of Class A common stock.
The holders of the Series B preferred units have certain voting and approval rights, including with respect to the right of DFH LLC to issue or sell equity securities ranking senior to or pari passu with their Series B preferred units.
The holders of the Series C preferred units have certain approval rights, including with respect to a sale of substantially all of certain of our subsidiaries’ assets, the right to make adverse modifications to DFH LLC’s operating agreement, the right of DFH LLC to issue or sell equity securities ranking senior to or pari passu with their Series C preferred units and the right to enforce certain financial covenants on DFH LLC.
Both the Series B preferred units and the Series C preferred units have a liquidation preference over the membership interests in DFH LLC that we own.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Series B Preferred Units” and “—Series C Preferred Units” for a description of the Series B preferred units and the Series C preferred units.
Prior to the Corporate Reorganization, DFH Inc. has not conducted any activities other than in connection with its incorporation and in preparation for this offering and has no material assets other than a 100% membership interest in DFH Merger Sub LLC.
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The following diagram indicates our simplified ownership structure immediately following this offering and the transactions related thereto (assuming that the underwriters’ option to purchase additional shares of our Class A common stock is not exercised).

(1)
See “Corporate Reorganization—Existing Owners’ Ownership” for a discussion of the interests held by the Existing Owners.
(2)
See “Note 11. Variable Interest Entities and Investments in Other Entities” to our consolidated financial statements included elsewhere in this prospectus for a description of our joint ventures, including those that were determined to be variable interest entities (“VIE”), and the related accounting treatment.
Risk Factors
Investing in our Class A common stock involves risks associated with our business, our industry, environmental, health, safety and other regulations and other material factors. You should carefully read the sections of this prospectus entitled “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements” for an explanation of these risks before investing in our Class A common stock. These risks include, among others, the following:
our inability to successfully identify, secure and control an adequate inventory of lots at reasonable prices;
the tightening of mortgage lending standards and mortgage financing requirements;
the housing market may not continue to grow at the same rate, or may decline;
a shortage of building materials or labor, or increases in materials or labor costs, could delay or increase the cost of home construction;
the effect of the COVID-19 pandemic on our business, suppliers and trade partners;
the seasonal and cyclical nature of our business;
volatility in the credit and capital markets may impact our cost of capital and our ability to access necessary financing and the difficulty in obtaining sufficient capital could prevent us from acquiring lots for our development or increase our costs and delays in the completion of our homebuilding expenditures;
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we are a holding company, and we are accordingly dependent upon distributions from our subsidiaries to pay dividends, if any, taxes and other expenses;
we have identified material weaknesses in our internal control over financial reporting;
there is currently no public market for shares of our Class A common stock, a trading market for our Class A common stock may never develop following this offering and our Class A common stock price may be volatile and could decline substantially following this offering;
the initial public offering of our Class A common stock may not be indicative of the market price of our Class A common stock after this offering, and an active, liquid and orderly trading market for our Class A common stock may not develop or be maintained, and our stock price may be volatile;
the Series C preferred units of DFH LLC have certain protective covenants, which could limit our ability to engage in certain business combinations, recapitalizations or other fundamental changes; and
Mr. Zalupski will have the ability to direct the voting of a majority of the voting power of our common stock, and his interests may conflict with those of our other stockholders.
Implications of Being an Emerging Growth Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include:
we are required to have only two years of audited financial statements and only two years of related selected financial data in Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;
we are exempt from the requirement that critical audit matters be discussed in our independent auditor’s reports on our audited financial statements or any other requirements that may be adopted by the Public Company Accounting Oversight Board (the “PCAOB”) unless the U.S. Securities and Exchange Commission (the “SEC”) determines that the application of such requirements to emerging growth companies is in the public interest;
we are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;
we are exempt from the “say on pay,” “say on frequency,” and “say on golden parachute” advisory vote requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); and
we are exempt from certain disclosure requirements of the Dodd-Frank Act relating to compensation of our executive officers and are permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iii) the date on which we are deemed to be a “large accelerated filer,” which will occur as of the end of any fiscal year in which we have (x) an aggregate market value of our common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (y) been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (z) filed at least one annual report pursuant to the Exchange Act.
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In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards, but we intend to irrevocably opt out of the extended transition period and, as a result, will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for other public companies. For a description of the qualifications and other requirements applicable to emerging growth companies and certain elections that we have made due to our status as an emerging growth company, see “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock—For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.”
Our Offices
Our principal executive offices are currently located at 14701 Philips Highway, Suite 300, Jacksonville, Florida 32256, and our telephone number at that address is (904) 644-7670. Our website address is www.dreamfindershomes.com. Our website and the information contained in our website or connected to our website are not and will not be deemed to be incorporated into this prospectus or the Registration Statement of which this prospectus forms a part, and you should not consider such information part of this prospectus or rely on any such information in making your decision whether to purchase our Class A common stock.
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THE OFFERING
Class A common stock offered by us
9,600,000 shares (11,040,000 shares if the underwriters’ option to purchase additional shares of our Class A common stock is exercised in full).
Option to purchase additional shares
We have granted the underwriters a 30-day option to purchase up to an aggregate of 1,440,000 additional shares of our Class A common stock.
Class A common stock to be outstanding immediately after completion of this offering
30,855,329 shares (32,295,329 shares if the underwriters’ option to purchase additional shares of our Class A common stock is exercised in full).
Class B common stock to be outstanding immediately after completion of this offering
60,226,153 shares.
Voting rights
After completion of this offering, our common stock will consist of two classes: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting, transfer and conversion rights. The holders of Class A common stock are entitled to one vote per share, and the holders of Class B common stock are entitled to three votes per share, on all matters that are subject to stockholder vote.
The shares of Class A common stock and Class B common stock issued and outstanding after this offering will represent approximately 33.9% and 66.1%, respectively, of the total number of our shares of Class A common stock and Class B common stock and approximately 14.6% and 85.4%, respectively, of the combined voting power of our Class A common stock and Class B common stock issued and outstanding after this offering. As a result of Mr. Zalupski’s ownership of shares of Class B common stock, he will be able to control matters requiring stockholder approval, including the election and removal of directors, changes to our organizational documents and significant corporate transactions, including any merger, consolidation or sale of all or substantially all of our assets.
Following this offering, each share of Class B common stock may be converted into one share of Class A common stock at the option of the holder thereof and will be converted into one share of Class A common stock upon transfer thereof, subject to certain exceptions. Further, all of the shares of our Class B common stock will automatically convert into shares of Class A common stock upon the date when Mr. Zalupski and permitted transferees of our Class B common stock cease to hold shares of Class B common stock representing, in the aggregate, at least 10% or more of the total number of shares of Class A common stock and Class B common stock issued and
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outstanding. Shares of our Class A common stock are not convertible into any other shares of our capital stock. See “Principal Stockholders” and “Description of Capital Stock—Class A Common Stock and Class B Common Stock” in this prospectus for additional information.
Use of proceeds
We expect the net proceeds from this offering to be approximately $117.5 million, assuming an initial public offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) (or approximately $135.6 million if the underwriters’ option to purchase additional shares of our Class A common stock is exercised in full) and after deducting estimated underwriting discounts and commissions and the estimated offering expenses payable by us.
We intend to use the net proceeds from this offering, cash on hand and borrowings under our syndicated, unsecured revolving credit facility that we intend to enter into in connection with this offering, or shortly thereafter, to repay all borrowings under our existing secured vertical construction lines of credit facilities and upon such repayment terminate such facilities. See “Use of Proceeds” in this prospectus for additional information.
Indication of interest
Certain entities affiliated with BOC DFH, LLC, a holder of more than 5% of our Class A common stock and a wholly owned subsidiary of Boston Omaha Corporation (Nasdaq: BOMN), have indicated an interest in purchasing an aggregate of at least 1,851,850 shares of our Class A common stock (based on the midpoint of the price range set forth on the cover page of this prospectus) in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, such entities may elect to purchase fewer or no shares of our Class A common stock in this offering, or the underwriters may elect to sell fewer or no shares of our Class A common stock in this offering to such entities.
Dividend policy
We do not anticipate paying any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant in its discretion. See “Dividend Policy” in this prospectus for additional information.
Controlled company
Upon completion of this offering, our founder, President, Chief Executive Officer and Chairman of our board of directors will control more than 50% of
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the voting power of our outstanding common stock. As a result, we intend to avail ourselves of the “controlled company” exemptions under Nasdaq rules, including exemptions from certain of the corporate governance standards. See “Management—Controlled Company Status.”
Listing and trading symbol
We have applied to list our Class A common stock on the Nasdaq Global Select Market under the symbol “DFH.”
Risk factors
You should carefully read and consider the information beginning on page 24 of this prospectus set forth under the heading “Risk Factors” and all other information set forth in this prospectus before deciding to invest in our Class A common stock.
Reserved shares
At our request, Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of BofA Securities, Inc. (the “Reserved Share Underwriter”) have reserved for sale, at the initial public offering price, up to 1,440,000 shares of Class A common stock, or up to 15.0% of the shares of Class A common stock offered by this prospectus, for sale to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved shares, this will reduce the number of shares of Class A common stock available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of Class A common stock offered by this prospectus. Shares purchased by our directors and officers in the reserved share program will be subject to lock-up restrictions described in this prospectus. We have agreed to indemnify the Reserved Share Underwriter against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the reserved shares. See “Underwriting—Reserved Shares” in this prospectus for additional information.
The number of shares of Class A common stock and Class B common stock to be outstanding after this offering is based on 21,255,329 shares of Class A common stock and 60,226,153 shares of Class B common stock outstanding as of September 30, 2020, after giving effect to the Corporate Reorganization, and excludes:
60,226,153 shares of our Class A common stock issuable upon the conversion of the outstanding shares of our Class B common stock;
9,100,000 shares of Class A common stock reserved for issuance pursuant to our equity incentive plan, which we plan to adopt in connection with this offering (our “2021 Equity Incentive Plan”); and
shares of Class A common stock that could be issued in the future upon conversion of Series B preferred units of DFH LLC or Series C preferred units of DFH LLC under certain circumstances.
Except as otherwise noted, all information in this prospectus assumes or gives effect to:
the Corporate Reorganization, including (i) the conversion of all outstanding common units of DFH LLC into an aggregate of 60,226,153 shares of Class B common stock of DFH Inc. upon the consummation of the Corporate Reorganization; (ii) the conversion of all outstanding non-voting common units of DFH LLC into an aggregate of 8,590,623 shares of Class A common stock of DFH
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Inc. upon the consummation of the Corporate Reorganization; and (iii) the conversion of all outstanding Series A preferred units of DFH LLC into an aggregate of 12,664,706 shares of Class A common stock of DFH Inc. upon the consummation of the Corporate Reorganization;
no exercise by the underwriters of their option to purchase additional shares of our Class A common stock;
the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws upon the consummation of the Corporate Reorganization;
no purchase of our Class A common stock by executive officers, directors or stockholders through the reserved share program;
444,444 shares of Class B common stock assuming an initial offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus, with the actual amount equal to $6.0 million divided by the initial public offering price) to be issued to Mr. Zalupski, our founder, President, Chief Executive Officer and Chairman of our board of directors; and
37,037 shares of Class A common stock assuming an initial offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus, with the actual amount equal to $0.5 million divided by the initial public offering price) to be issued to Mr. Moyer, our Chief Financial Officer.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
Historically, our business has been operated through DFH LLC. DFH Inc. was incorporated in September 2020 and does not have historical financial operating results. The following table shows summary historical and pro forma consolidated financial and operating data for the periods and as of the dates indicated. The summary historical consolidated financial data of our predecessor, DFH LLC, as of and for the years ended December 31, 2019 and 2018 was derived from the audited historical consolidated financial statements of our predecessor included elsewhere in this prospectus. The summary historical unaudited condensed consolidated financial data of our predecessor as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019 was derived from the unaudited condensed consolidated financial statements of our predecessor included elsewhere in this prospectus. The summary historical unaudited condensed consolidated financial data of our predecessor has been prepared on a consistent basis with the audited historical consolidated financial statements of our predecessor. In the opinion of management, such summary historical unaudited condensed consolidated financial data reflects all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state our financial position for the periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.
The summary unaudited pro forma condensed consolidated financial data has been derived from our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The summary unaudited pro forma condensed statements of comprehensive income for the nine months ended September 30, 2020 and the year ended December 31, 2019 have been prepared to give pro forma effect to (i) the Corporate Reorganization described under “Corporate Reorganization,” (ii) the H&H Acquisition, (iii) this offering and the receipt of net proceeds therefrom, and (iv) the replacement of all of our vertical construction lines of credit facilities with a syndicated, unsecured revolving credit facility, as if each of the foregoing transactions had been completed as of September 30, 2020 with respect to the unaudited pro forma balance sheet as of September 30, 2020, and as of January 1, 2019 with respect to the unaudited pro forma statements of comprehensive income for the nine months ended September 30, 2020 and the year ended December 31, 2019 (such transactions collectively, the “Transaction Accounting Adjustments”). The summary unaudited pro forma condensed consolidated financial data is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Transaction Accounting Adjustments been consummated on the dates indicated and do not purport to be indicative of statements of financial position or results of operations as of any future date or for any future period.
Our historical results are not necessarily indicative of future operating results. You should read the following table in conjunction with “Unaudited Pro Forma Financial Information,” “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Corporate Reorganization” and the historical consolidated financial statements of our predecessor and accompanying notes included elsewhere in this prospectus.
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DFH Inc. Pro Forma
Predecessor Historical
 
Nine Months
Ended
September 30,
2020
Year Ended
December 31,
2019
Nine Months
Ended
September 30,
Year Ended
December 31,
 
2020
2019
2019
2018
 
(unaudited)
(unaudited)
 
 
 
(in thousands, except per share data and average sales price of homes closed)
Consolidated Statements of Comprehensive Income Data:
 
 
 
 
 
 
Revenues
$843,638
$976,561
$672,706
$490,900
$744,292
$522,258
Cost of sales
720,341
844,381
575,683
425,016
641,340
454,403
Selling, general and administrative expense(1)
74,670
83,003
54,959
40,391
58,734
43,545
Income from equity in earnings of unconsolidated entities
(4,844)
(2,208)
(4,844)
(1,426)
(2,208)
(1,271)
Gain on sale of assets
(53)
(29)
(53)
(29)
(29)
(3,293)
Other income
(1,233)
(2,471)
(1,172)
(1,731)
(2,448)
(3,016)
Other expense
3,669
5,373
3,669
2,132
3,784
7,948
Interest expense
124
1,446
124
144
221
682
Income tax expense
11,873
10,340
Net and comprehensive income
$39,092
$36,726
$44,339
$26,402
$44,898
$23,261
Net and comprehensive income attributable to noncontrolling interests
$(3,474)
$(5,707)
$(3,474)
$(3,580)
$(5,707)
$(5,939)
Net and comprehensive income attributable to Dream Finders
$35,618
$31,019
$40,865
$22,822
$39,191
$17,322
Earnings per share (unit for predecessor):
 
 
 
 
 
 
Basic
$0.35
$0.29
$377.86
$199.57
$353.40
$170.92
Diluted
0.35
0.29
376.79
199.57
353.40
170.92
Weighted average number of shares (units for predecessor):
 
 
 
 
 
 
Basic
91,081
90,065
99
98
98
98
Diluted
91,081
90,065
100
98
98
98
Consolidated Balance Sheets Data (at period end):
 
 
 
 
 
 
Cash and cash equivalents
$25,000
 
$42,082
$12,989
$44,007
$19,809
Total assets
732,320
 
572,481
507,991
514,919
375,446
Long-term debt, net
264,715
 
262,188
253,555
232,013
175,876
Total stockholders’ (members’ for predecessor) equity
285,484
 
177,329
147,489
161,491
91,434
Other Financial and Operating Data (unaudited):
 
 
 
 
 
 
Active communities at end of period(2)
121
140
79
70
85
53
Home closings(3)
2,419
2,851
1,817
1,297
2,048
1,408
Average sales price of homes closed
$347,190
$344,394
$365,843
$352,872
$362,728
$361,860
Net new orders
3,712
2,955
2,799
1,659
2,139
1,349
Cancellation rate
13.1%
15.4%
12.9%
13.9%
15.6%
15.8%
Backlog (at period end) - homes
2,374
1,082
1,836
1,123
854
636
Backlog (at period end) - value
$841,930
$405,703
$683,743
$389,629
$334,783
$249,672
Gross margin(4)
$111,573
$114,520
$93,293
$62,718
$98,405
$64,650
Gross margin %(5)
13.3%
11.8%
14.0%
12.9%
13.3%
12.5%
Adjusted gross margin(6)
$176,619
$192,091
$145,367
$99,252
$156,344
$103,974
Adjusted gross margin %(5)(6)
21.1%
19.8%
21.7%
20.4%
21.1%
20.0%
EBITDA(6)
$78,181
$84,025
$66,001
$41,691
$70,522
$37,179
EBITDA margin %(6)(7)
9.3%
8.6%
9.8%
8.5%
9.5%
7.1%
Adjusted EBITDA(6)
$78,878
$86,873
$66,698
$42,287
$71,417
$38,075
Adjusted EBITDA margin %(6)(7)
9.3%
8.9%
9.9%
8.6%
9.6%
7.3%
(1)
When compared to the DFH Inc. Pro Forma Consolidated Statements of Comprehensive Income Data for the nine months ended September 30, 2020 and December 31, 2019, our Adjusted Gross Margin calculation includes a reclassification of $7.9 million and $13.1 million from selling, general and administrative expense to cost of sales for each period presented. These expenses relate to commissions and interest, which H&H Homes historically classified as selling, general and administrative expense; we classify these expenses in cost of sales.
(2)
A community becomes active once the model is completed or the community has its fifth sale. A community becomes inactive when it has fewer than five units remaining to sell.
(3)
Home closings for the twelve months ended December 31, 2019 do not include the 131 home closings of Village Park Homes between January and May of 2019 prior to the closing of our acquisition of Village Park Homes on May 31, 2019.
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(4)
Gross margin is home sales revenue less cost of sales.
(5)
Calculated as a percentage of home sales revenues.
(6)
Adjusted gross margin, EBITDA and adjusted EBITDA are non-GAAP financial measures. For definitions of adjusted gross margin, EBITDA and adjusted EBITDA and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”
(7)
Calculated as a percentage of revenues.
Non-GAAP Financial Measures
Adjusted Gross Margin
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin excluding the effects of capitalized interest, amortization included in the cost of sales (including adjustments resulting from the application of purchase accounting in connection with acquisitions) and commission expense. Our management believes this information is meaningful because it isolates the impact that capitalized interest, amortization (including purchase accounting adjustments) and commission expense have on gross margin. However, because adjusted gross margin information excludes capitalized interest, amortization (including purchase accounting adjustments) and commission expense, which have real economic effects and could impact our results of operations, the utility of adjusted gross margin information as a measure of our operating performance may be limited. We include commission expense in cost of sales, not selling, general and administrative expense, and therefore commission expense is taken into account in gross margin. As a result, in order to provide a meaningful comparison to the public company homebuilders that include commission expense below the gross margin line in selling, general and administrative expense, we have excluded commission expense from adjusted gross margin. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.
The following table presents a reconciliation of adjusted gross margin to the GAAP financial measure of gross margin for each of the periods indicated (unaudited and in thousands, except percentages).
 
DFH Inc. Pro Forma
Predecessor Historical
 
Nine Months
Ended
September 30,
2020
Year Ended
December 31,
2019
Nine Months
Ended
September 30,
Year Ended
December 31,
 
2020
2019
2019
2018
Revenues
$843,638
$976,561
$672,706
$490,900
$744,292
$522,258
Other revenue
4,810
4,547
3,730
3,166
4,547
3,205
Home sales revenues
$838,828
$972,014
$668,976
$487,734
$739,745
$519,053
Cost of sales
727,255
857,494
575,683
425,016
641,340
454,403
Gross margin(1)
$111,573
$114,520
$93,293
$62,718
$98,405
$64,650
Interest expensed in cost of sales
24,659
28,154
19,562
12,051
21,055
16,364
Amortization in cost of sales(2)
3,054
9,247
3,054
4,600
7,119
550
Commission expense
37,333
40,170
29,458
19,883
29,765
22,410
Adjusted gross margin
$176,619
$192,091
$145,367
$99,252
$156,344
$103,974
Gross margin %(3)
13.3%
11.8%
14.0%
12.9%
13.3%
12.5%
Adjusted gross margin %(3)
21.1%
19.8%
21.7%
20.4%
21.1%
20.0%
(1)
Gross margin is home sales revenue less cost of sales.
(2)
Includes purchase accounting adjustment, as applicable.
(3)
Calculated as a percentage of home sales revenues.
EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA are not measures of net income as determined by GAAP. EBITDA and adjusted EBITDA are supplemental non-GAAP financial measures used by management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies. We define EBITDA as net income before (i) interest income, (ii) capitalized interest expensed in cost of sales, (iii) interest expense, (iv) income tax expense and (v) depreciation and amortization. We define adjusted EBITDA as EBITDA before stock-based compensation expense.
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Management believes EBITDA and adjusted EBITDA are useful because they allow management to more effectively evaluate our operating performance and compare our results of operations from period to period without regard to our financing methods or capital structure or other items that impact comparability of financial results from period to period. EBITDA and adjusted EBITDA should not be considered as alternatives to, or more meaningful than, net income or any other measure as determined in accordance with GAAP. Our computations of EBITDA and adjusted EBITDA may not be comparable to EBITDA or adjusted EBITDA of other companies. We present EBITDA and adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business.
The following table presents a reconciliation of EBITDA and adjusted EBITDA to the GAAP financial measure of net income for each of the periods indicated (unaudited and in thousands, except percentages).
 
DFH Inc. Pro Forma
Predecessor Historical
 
Nine Months
Ended
September 30,
2020
Year Ended
December 31,
2019
Nine Months
Ended
September 30,
Year Ended
December 31,
 
2020
2019
2019
2018
Net income
$35,618
$31,019
$40,865
$22,822
$39,191
$17,322
Interest income
(38)
(105)
(38)
(55)
(99)
(9)
Interest expense in cost of sales
24,659
25,446
19,562
12,051
21,055
16,364
Interest expense
124
4,155
124
144
221
682
Income tax expense
11,873
10,340
Depreciation and amortization
5,945
13,171
5,488
6,729
10,154
2,820
EBITDA
$78,181
$84,025
$66,001
$41,691
$70,522
$37,179
Stock-based compensation expense
697
2,848
697
597
895
896
Adjusted EBITDA
$78,878
$86,873
$66,698
$42,287
$71,417
$38,075
EBITDA margin %(1)
9.3%
8.6%
9.8%
8.5%
9.5%
7.1%
Adjusted EBITDA margin %(1)
9.3%
8.9%
9.9%
8.6%
9.6%
7.3%
(1)
Calculated as a percentage of revenues.
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RISK FACTORS
An investment in our Class A common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the specific risk factors set forth below, together with the other information included elsewhere in this prospectus. If any of the risks discussed in this prospectus occur, our business, prospects, liquidity, financial condition and results of operations could be materially impaired, in which case the trading price of our Class A common stock could decline significantly and you could lose all or part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.”
Operational Risks Related to Our Business
Our inability to successfully identify, secure and control an adequate inventory of lots at reasonable prices could adversely impact our operations.
The results of our homebuilding operations depend in part upon our continuing ability to successfully identify, control and acquire an adequate number of homebuilding lots in desirable locations. There can be no assurance that an adequate supply of homebuilding lots will continue to be available to us on terms similar to those available in the past, or that we will not be required to devote a greater amount of capital to controlling homebuilding lots than we have historically. In addition, because we employ an asset-light business model, we may have access to fewer and less attractive homebuilding lots than if we owned lots outright, like some of our competitors who do not operate under an asset-light model. An insufficient supply of homebuilding lots in one or more of our markets, an inability of our developers to deliver finished lots in a timely fashion due to their inability to secure financing to fund development activities, delays in recording deeds conveying controlled lots as a result of government shut downs or stay-at-home orders, or for other reasons, or our inability to purchase or finance homebuilding lots on reasonable terms could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows. Any land shortages or any decrease in the supply of suitable land at reasonable prices could limit our ability to develop new communities or result in increased lot deposit requirements or land costs. We may not be able to pass through to our customers any increased land costs, which could adversely impact our revenues, earnings and margins.
Our business and results of operations are dependent on the availability, skill and performance of subcontractors.
We engage subcontractors to perform the construction of our homes and, in many cases, to select and obtain the raw materials used in constructing our homes. Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. While we anticipate being able to obtain sufficient materials and reliable subcontractors and believe that our relationships with subcontractors are good, we do not have long-term contractual commitments with any subcontractors, and we can provide no assurance that skilled subcontractors will continue to be available at reasonable rates and in our markets. In addition, as we expand into new markets, we typically must develop new relationships with subcontractors in such markets, and there can be no assurance that we will be able to do so in a cost-effective and timely manner, or at all. The inability to contract with skilled subcontractors at reasonable rates on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Despite our quality control efforts, we may discover from time to time that our subcontractors have engaged in improper construction practices or have installed defective materials in our homes. When we discover these issues, we utilize our subcontractors to repair the homes in accordance with our new home warranty and as required by law. The adverse costs of satisfying our warranty and other legal obligations in these instances may be significant, and we may be unable to recover the costs of warranty-related repairs from subcontractors, suppliers and insurers, which could have a material adverse impact on our business, prospects, liquidity, financial condition and results of operations. We may also suffer reputational damage from the actions of subcontractors, which are beyond our control.
A shortage of building materials or labor, or increases in materials or labor costs, could delay or increase the cost of home construction, which could materially and adversely affect us.
The residential construction industry experiences labor and raw material shortages from time to time, including shortages in qualified subcontractors, tradespeople and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material shortages can be more severe during periods of strong demand for
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housing, during periods following natural disasters that have a significant impact on existing residential and commercial structures or a result of broader economic disruptions, such as the COVID-19 pandemic. It is uncertain whether these shortages will continue as is, improve or worsen. Further, pricing for labor and raw materials can be affected by the factors discussed above and various other national, regional, local, economic and political factors, including changes in immigration laws, trends in labor migration and tariffs. For example, we import many of our appliances from China and a substantial amount of our lumber originates from Canada, both of which have been the subject of U.S. tariffs in recent years. The cost of lumber has been impacted by these government-imposed tariffs as well as supply-chain disruptions caused by the closing of lumber mills due to the COVID-19 pandemic. Lumber commodity prices fell sharply in early 2020 due to the onset of the COVID-19 pandemic to their lowest levels since early 2016 but have since increased over 150% from this low to reach all-time highs in August 2020. Because we lock-in rates with our lumber suppliers on a quarterly basis, our business has not yet been adversely affected by this price volatility. However, the recent increases in lumber commodity prices may result in our renewal of our lumber contracts at more expensive rates, which may significantly impact the cost to construct our homes and to operate our business. Further, our success in recently-entered markets or those we may choose to enter in the future depends substantially on our ability to source labor and local materials on terms that are favorable to us. Our markets may exhibit a reduced level of skilled labor relative to increased homebuilding demand in these markets. In the event of shortages in labor or raw materials in such markets, local subcontractors, tradespeople and suppliers may choose to allocate their resources to homebuilders with an established presence in the market and with whom they have longer-standing relationships with. Labor and raw material shortages and price increases for labor and raw materials could cause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Increases in our home cancellation rate could have a negative impact on our home sales revenue and gross margins.
Our backlog reflects sales contracts with homebuyers for homes that have not yet been delivered. We have received a deposit from a homebuyer for most homes reflected in our backlog, and, generally, we have the right to retain the deposit if the homebuyer fails to comply with his or her obligations under the sales contract, subject to certain exceptions, including as a result of state and local law, the homebuyer’s inability to sell his or her current home or, in certain circumstances, the homebuyer’s inability to obtain suitable financing. Home order cancellations negatively impact the number of closed homes, net new home orders, home sales revenue and results of operations, as well as the number of homes in backlog. Home order cancellations can result from a number of factors, including declines or slow appreciation in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, homebuyers’ inability to sell their existing homes, homebuyers’ inability to obtain suitable financing, including providing sufficient down payments, and adverse changes in economic conditions. An increase in the level of our home order cancellations could have a negative impact on our business, prospects, liquidity, financial condition and results of operations.
Our business could be materially and adversely disrupted by an epidemic or pandemic (such as the current COVID-19 pandemic), or similar public threat, or fear of such an event, and the measures that federal, state and local governments and other authorities implement to address it.
An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, along with any associated economic and social instability or distress, have a material adverse impact on our business, prospects, liquidity, financial condition and results of operations.
On March 11, 2020, the WHO declared the current outbreak of the COVID-19 virus to be a global pandemic, and, on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of the COVID-19 virus, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain the COVID-19 pandemic, including social distancing, quarantine and “stay-at-home” or “shelter-in-place” orders in certain of our markets. We have experienced resulting disruptions to our business operations, which have resulted in significant changes to the way we conduct business, including expanding our digital marketing products and virtual home tours to provide our customers additional ways to safely visit our communities and tour our homes. Although we continue to
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build and sell homes in all of our markets, net new orders of our homes slowed significantly during March and April 2020. Though we experienced a resurgence in net new orders during May, June and July 2020, COVID-19 infections, hospitalizations and deaths increased significantly in certain parts of the country, including in Florida and Texas during June and July 2020, two states that account for a significant portion of our homebuilding business. If such trends continue, particularly in our core markets, there can be no assurance that this resurgence in net new orders will continue, and federal, state and local governments could impose additional, or extend existing, restrictions on business and social activities, and we could experience additional disruptions to, or suspension of, certain of our business operations as a result.
The economic impact of the COVID-19 pandemic may be reduced by financial assistance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “CARES Act”) or other similar COVID-19 related federal and state programs. However, we cannot assure you that such programs will offset all or any of the adverse impacts that the COVID-19 pandemic may have on our business. For example, in April 2020, we applied for and received a Paycheck Protection Program loan (our “PPP Loan”) from the U.S. Small Business Administration (the “SBA”) in the amount of $7.2 million. Under the terms of the PPP, certain amounts of a PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act, which include payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities and interest on other debt obligations incurred in the period beginning on February 15, 2020 and ending on December 31, 2020. As of July 31, 2020, we utilized 100% of our PPP Loan proceeds to retain staff and pay salaries and rent. We believe that our uses of our PPP Loan are qualifying expenses as described in the CARES Act, making us eligible for forgiveness of certain amounts received pursuant to our PPP Loan. On April 23, 2020, the Secretary of the U.S. Department of the Treasury (“Treasury”) stated that the SBA will perform a full review of any PPP loan over $2.0 million before forgiving such loan and, notwithstanding any such review, we cannot provide any assurance that we will be deemed eligible for loan forgiveness or that any amount of our PPP Loan will ultimately be forgiven by the SBA.
While we continue to assess the COVID-19 pandemic, at this time we cannot estimate with any degree of certainty the full impact of the COVID-19 pandemic on our financial condition and future results of operations, and the COVID-19 pandemic could adversely impact future financial performance for the remainder of the year ending December 31, 2020 and beyond. The ultimate impacts of the COVID-19 pandemic and related mitigation efforts will depend on future developments, including, among others, the ultimate geographic spread of the COVID-19 pandemic, the consequences of governmental and other measures designed to prevent the spread of the COVID-19 pandemic, the development of effective treatments for the COVID-19 virus, the duration of the COVID-19 pandemic, actions taken by governmental authorities, customers, subcontractors, suppliers and other third parties in response to the COVID-19 pandemic, workforce availability and the timing and extent to which normal economic and operating conditions resume. To the extent that the COVID-19 pandemic adversely impacts our business, results of operations, liquidity or financial condition, it may also have the effect of increasing many of the other risks described in this “Risk Factors” section.
The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. There is uncertainty regarding the extent and timing of disruption to our business that may result from the COVID-19 pandemic and related governmental actions. There is also uncertainty as to the effects of economic relief efforts on the U.S. economy, unemployment, consumer confidence, demand for our homes and the mortgage market, including lending standards and secondary mortgage markets. Our business could also be negatively impacted over the long term, as the disruptions related to the COVID-19 pandemic could impact customer behavior, lower demand for our products, impair our ability to sell and/or build homes in our normal manner and generate revenues and cash flows or increase our losses on land deposits. We are unable to predict the extent to which this will impact our operational and financial performance, including the impact of future developments such as the duration and spread of the COVID-19 pandemic, corresponding governmental actions and the impact of such on our employees, customers and trade partners.
The impact of the COVID-19 pandemic continues to evolve, and we will continue to monitor the situation closely. The full extent to which the COVID-19 pandemic will affect the U.S. economy and our operations remains highly uncertain and will ultimately depend on future developments that cannot be predicted at this time, including, but not limited to, the duration and severity of the COVID-19 pandemic, governmental reactions and policies and the length of time required for normal economic and operating conditions to resume. While the
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spread of the COVID-19 pandemic may eventually be mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics or pandemics will not occur, or that the U.S. economy will fully recover, either of which could materially and adversely affect our business.
We are subject to warranty and liability claims arising in the ordinary course of business that can be significant.
As a homebuilder and developer, we are subject to construction defect, product liability and home and other warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business, such as witnessed in Dream Finders Homes, LLC and DFH Mandarin, LLC v. Weyerhaeuser NR Company. See “Business—Legal Proceedings” in this prospectus for additional information. These claims are common to the homebuilding industry and can be costly. For example, in recent years, we and certain of our subcontractors have received a growing number of claims from attorneys on behalf of individual owners of our homes, primarily in the Jacksonville market, that allege, pursuant to Chapter 558 of the Florida Statutes, various construction defects, with most relating to stucco and water-intrusion issues. There can be no assurance that any developments we undertake will be free from defects once completed, and any defects attributable to us may lead to significant contractual or other liabilities. We rely on subcontractors to perform the construction of our homes and, in some cases, to select and obtain building materials. Although we provide subcontractors with detailed specifications and perform quality control procedures, subcontractors may, in some cases, use improper construction processes or defective materials. Defective products used in the construction of our homes can result in the need to perform extensive repairs. The cost of performing such repairs, or litigation arising out of such issues, may be significant if we are unable to recover the costs from subcontractors, suppliers and/or insurers. Warranty and construction defect matters can also result in negative publicity, including on social media outlets, which could damage our reputation and negatively affect our ability to sell homes.
We maintain, and require our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance and generally seek to require our subcontractors to indemnify us for liabilities arising from their work. While these insurance policies, subject to deductibles and other coverage limits, and indemnities protect us against a portion of our risk of loss from claims related to our land development and homebuilding activities, we cannot provide assurance that these insurance policies and indemnities will be adequate to address all our home and other warranty, product liability and construction defect claims in the future, or that any potential inadequacies will not have an adverse effect on our business, financial condition or results of operations. Further, the coverage offered by, and the availability of, general liability insurance for completed operations and construction defects are currently limited and costly. We cannot provide assurance that coverage will not be further restricted, increasing our risks and financial exposure to claims, and/or become costlier.
If we are unable to develop our communities successfully or within expected time-frames, our results of operations could be adversely affected.
Although our preference is to acquire finished lots, from time to time, we may also acquire property that requires further development before we can begin building homes. When a community requires additional developments, we devote substantial time and capital in order to obtain development approvals, acquire land and construct significant portions of project infrastructure and amenities before the community generates any revenue. In addition, our land bank option contracts often include interest provisions under which delays caused by development cause us to incur additional cost. It can take several years from the time we acquire control of an undeveloped property to the time we make our first home sale on the site. Delays in the development of communities, including delays associated with subcontractors performing the development activities or entitlements, expose us to the risk of changes in market conditions for homes. A decline in our ability to develop and market one of our new undeveloped communities successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements. In addition, higher than expected absorption rates in existing communities may result in lower than expected inventory levels until the development for replacement communities is completed.
We may be unable to obtain suitable bonding for the development of our housing projects.
We are often required to provide bonds, letters of credit or guarantees to governmental authorities and others to ensure the completion of our projects. As a result of market conditions, some municipalities and governmental
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authorities have been reluctant to accept surety bonds and instead require credit enhancements, such as cash deposits or letters of credit, in order to maintain existing bonds or to issue new bonds. If we are unable to obtain required bonds in the future for our projects, or if we are required to provide credit enhancements with respect to our current or future bonds or in place of bonds, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.
We may suffer significant financial harm and loss of reputation if we do not comply, cannot comply or are alleged to have not complied with applicable laws, rules and regulations concerning our classification and compensation practices for independent contractors.
Each of our divisions retain various independent contractors, either directly or indirectly through third-party entities formed by these independent contractors for their business purposes, including, without limitation, some of our sales agents. With respect to these independent contractors, we are subject to the Internal Revenue Service (the “IRS”) regulations and applicable state law guidelines regarding independent contractor classification. These regulations and guidelines are subject to judicial and agency interpretation, and it might be determined that the independent contractor classification is inapplicable to any sales agents, vendors or any other entity characterized as an independent contractor. Further, if legal standards for the classification of independent contractors change or appear to be changing, we may need to modify our compensation and benefits structure for such independent contractors, including by paying additional compensation or reimbursing expenses.
There can be no assurance that legislative, judicial, administrative or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the independent contractor classification of any individual or vendor currently characterized as independent contractors doing business with us. Although management believes that there are no proposals currently pending that would significantly change the independent contractor classification, potential changes, if any, with respect to such classification could have a significant effect on our operating model. Further, the costs associated with any such potential changes could have a significant effect on our results of operations and financial condition if we were unable to pass through to our customers an increase in price corresponding to such increased costs. Additionally, we could incur substantial costs, penalties and damages, including back pay, unpaid benefits, taxes, expense reimbursement and attorneys’ fees, in defending future challenges to our employment classification or compensation practices.
Poor relations with the residents of our communities could negatively impact sales, which could cause our revenues or results of operations to decline.
Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with the operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the affected residents, and subsequent actions by these residents could adversely affect our sales or our reputation. In addition, we could be required to make material expenditures related to the settlement of such issues or disputes or to modify our community development plans, which could adversely affect our results of operations.
Our joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of our joint venture partners and disputes between us and our joint venture partners.
We have in the past and may in the future co-invest with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in, or sharing responsibility for managing the affairs of, a land acquisition and/or a development. In this event, we would not be in a position to exercise sole decision-making authority regarding the acquisition and/or development, and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that our joint venture partners might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay necessary decisions. Our joint venture partners may have economic or other business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor our joint venture partners would have full control over the land acquisition or development. Disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. In addition, we may in certain circumstances be liable for the actions of our joint venture partners.
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We could be adversely affected by efforts to impose joint employer liability on us for labor law violations committed by our subcontractors.
Our homes are constructed by employees of subcontractors and other third parties. We do not have the ability to control what these parties pay their employees or the rules they impose on their employees. However, various governmental agencies have taken actions to hold parties like us responsible for violations of wage and hour laws and other labor laws by subcontractors. Governmental rulings that hold us responsible for labor practices by our subcontractors could create substantial exposures for us under our subcontractor relationships, which could have a material adverse impact on our business, prospects, liquidity, financial condition and results of operations.
There are various potential conflicts of interest in our relationship with DF Capital and certain of its managed funds, including with certain of our executive officers and director nominees who are investors in certain funds managed by DF Capital, which could result in decisions that are not in the best interest of our stockholders.
Conflicts of interest may exist or could arise in the future with DF Capital and certain of its managed funds, including with certain of our executive officers and director nominees who are also investors in certain funds managed by DF Capital. Once a potential lot acquisition is approved by our land acquisition committee that requires a significant upfront commitment of capital, we will seek a land bank partner. Historically, we have provided, and we expect to continue to provide, DF Capital with the opportunity to have one of its managed funds participate in transactions that require additional funding. Such transactions may not be on terms that are as attractive as those we might be able to achieve if we sought other partners. If DF Capital does not wish to participate in, and finance, the transaction, we turn to other potential financing sources. Conflicts with DF Capital and certain of its managed funds may include, without limitation: conflicts arising from the enforcement of agreements between us and DF Capital and/or certain of its managed funds; conflicts in determining whether to offer DF Capital the opportunity to participate in a potential lot acquisition financing and, if DF Capital does participate, the terms of the financing; and conflicts in future transactions that we may pursue with DF Capital and/or one of its managed funds. For additional discussion of our executive officers’ and director nominees’ business affiliations and the potential conflicts of interest of which our stockholders should be aware, see “Certain Relationships and Related Party Transactions.”
The estimates, forecasts and projections relating to our markets prepared by JBREC are based upon numerous assumptions and have not been independently verified by us.
This prospectus contains estimates, forecasts and projections relating to our markets that were prepared for us for use in connection with this offering by JBREC, an independent research provider and consulting firm focused on the housing industry. See “Market Opportunity” in this prospectus for additional information. The estimates, forecasts and projections relate to, among other things, employment, demographics, household income, home sales prices and affordability. These estimates, forecasts and projections are based on data (including third-party data), significant assumptions, proprietary methodologies and the experience and judgment of JBREC, and we have not independently verified this information.
The estimates, forecasts and projections are forward-looking statements and involve risks and uncertainties that may cause actual results to be materially different from the projections. JBREC has made these estimates, forecasts and projections based on studying the historical and current performance of the residential housing market and applying JBREC’s qualitative knowledge about the residential housing market. The future is difficult to predict, particularly given that the economy and housing markets can be cyclical and are subject to changing consumer and market psychology and governmental policies related to mortgage regulations and interest rates. There will usually be differences between projected and actual outcomes because events and circumstances frequently do not occur as expected, and such differences may be material. In addition, the COVID-19 pandemic has caused an unexpected market disruption that has had, and could continue to have, major impacts on the world and U.S. economies, as well as local economies and housing markets. Accordingly, the estimates, forecasts and projections included in this prospectus might not occur or might occur to a different extent or at a different time.
For the foregoing reasons, JBREC cannot provide any assurance that the estimates, forecasts and projections contained in this prospectus are accurate, actual outcomes may vary significantly from those contained or implied by the estimates, forecasts and projections and you should not place undue reliance on these estimates, forecasts
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and projections. We have not independently verified these estimates, forecasts and projections. Except as required by law, we are not obligated to, and do not intend to, update the statements in this prospectus to conform to actual outcomes or changes in our or JBREC’s expectations.
Our future success depends upon our ability to successfully adapt our business strategy to changing home buying patterns and trends.
Future home buying patterns and trends could reduce the demand for our homes and, as a result, could have a material adverse effect on our business and results of operations. Part of our business strategy is to offer homes that appeal to a broad range of entry-level and move-up homebuyers based on each local market in which we operate. However, given the significant increases in average home sales prices across our markets and the anticipated increased demand for more affordable homes due to generational shifts, changing demographics and other factors, we have increased our focus on offering more affordable housing options in our markets. We believe that, due to anticipated generational shifts, changing demographics and other factors, the demand for more affordable homes will increase.
Industry and Economic Risks
Tightening of mortgage lending standards and mortgage financing requirements, untimely or incomplete mortgage loan originations for our homebuyers and rising mortgage interest rates could adversely affect the availability of mortgage loans for potential purchasers of our homes and thereby materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
Almost all of our customers finance their purchases through lenders that provide mortgage financing. Mortgage interest rates have generally trended downward for the last several decades and reached historic lows in the summer of 2020, which has made the homes we sell more affordable. However, we cannot predict whether mortgage interest rates will continue to fall, remain low or rise. If mortgage interest rates increase, the ability of prospective homebuyers to finance home purchases may be adversely affected, and, as a result, our operating results may be significantly negatively impacted. Our homebuilding activities are dependent upon the availability of mortgage financing to homebuyers, which is expected to be impacted by continued regulatory changes and fluctuations in the risk appetites of lenders. The financial documentation, down payment amounts and income to debt ratio requirements are subject to change and could become more restrictive.
The federal government has a significant role in supporting mortgage lending through its conservatorship of Federal National Mortgage Association (“Fannie Mae”) and Freddie Mac, both of which purchase or insure mortgage loans and mortgage loan-backed securities, and its insurance of mortgage loans through or in connection with the Federal Housing Administration (“FHA”), the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). FHA and VA backing of mortgage loans has been particularly important to the mortgage finance industry and to our business. Increased lending volume and losses insured by the FHA have resulted in a reduction of the FHA insurance fund. If either the FHA or VA raised their down payment requirements or lowered maximum loan amounts, our business could be materially affected. In addition, changes in governmental regulation with respect to mortgage lenders could adversely affect demand for housing.
The availability and affordability of mortgage loans, including mortgage interest rates for such loans, could also be adversely affected by a scaling back or termination of the federal government’s mortgage loan-related programs or policies. Fannie Mae, Freddie Mac, FHA, USDA and VA backed mortgage loans have been an important factor in marketing and selling many of our homes. Given that a majority of our customers’ mortgages conform with terms established by Freddie Mac and Fannie Mae and FHA, USDA and VA-backed mortgaged collectively represent approximately 30% of our homebuyers’ mortgages in the year ended December 31, 2019 and approximately 38% of our homebuyers’ mortgages in the nine months ended September 30, 2020, any limitations or restrictions in the availability of, or higher consumer costs for, such government-backed financing could adversely affect our business, prospects, liquidity, financial condition and results of operations. The elimination or curtailment of state bonds to assist homebuyers could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
In addition, certain current regulations impose, and future regulations may strengthen or impose new, standards and requirements relating to the origination, securitization and servicing of residential consumer mortgage loans, which could further restrict the availability and affordability of mortgage loans and the demand for such loans by financial intermediaries and, as a result, adversely affect our home sales, financial condition
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and results of operations. Further, if, due to credit or consumer lending market conditions, reduced liquidity, increased risk retention or minimum capital level obligations and/or regulatory restrictions related to certain regulations, laws or other factors or business decisions, these lenders refuse or are unable to provide mortgage loans to our homebuyers, or increase the costs to borrowers to obtain such loans, the number of homes we close and our business, prospects, liquidity, financial condition and results of operations may be materially adversely affected.
Entry-level and first-time move-up homebuyers are the primary sources of demand for our new homes. Entry-level homebuyers are generally more affected by the availability of mortgage financing than other potential homebuyers and many of our potential move-up homebuyers must sell their existing homes in order to buy a home from us. A limited availability of suitable mortgage financing could prevent customers from buying our homes and could prevent buyers of our customers’ homes from obtaining mortgages they need to complete such purchase, either of which could result in potential customers’ inability to buy a home from us. If potential customers or the buyers of our customers’ current homes are not able to obtain suitable financing, the result could have a material adverse effect on our sales, profitability, ability to service our debt obligations and future cash flows.
Interest rate changes, and the failure to hedge against them, may adversely affect us.
We have in the past and may in the future borrow money to finance acquisitions related to land, lots, home inventories or other companies. The borrowings may bear interest at variable rates. Interest rate changes could affect our interest payments, and our future earnings, results of operations and cash flows may be adversely affected, assuming other factors are held constant.
We currently do not hedge against interest rate fluctuations. We may in the future obtain one or more forms of interest rate protection in the form of swap agreements, interest rate cap contracts or similar agreements to hedge against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations thereunder. In addition, we may be subject to risks of default by hedging counterparties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our assets at times which may not permit us to receive an attractive return on our assets in order to meet our debt service obligations.
The housing market may not continue to grow at the same rate, or may decline, and any decline in our markets or for the homebuilding industry generally may materially and adversely affect our business and financial condition.
We cannot predict whether and to what extent the housing markets in the geographic areas in which we operate will continue to grow, particularly if interest rates for mortgage loans, land costs and construction costs rise. Other factors that might impact growth in the homebuilding industry include uncertainty in domestic and international financial, credit and consumer lending markets amid slow economic growth or recessionary conditions in various regions or industries around the world, including as a result of the COVID-19 pandemic, tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, higher home prices, more conservative appraisals, changing consumer preferences, higher loan-to-value ratios and extensive buyer income and asset documentation requirements, changes to mortgage regulations, population decline or slower rates of population growth in our markets or Federal Reserve policy changes. Given these factors, we can provide no assurance that the present housing market will continue to be strong, whether overall or in our markets. Because we depend on a limited number of markets for substantially all of our home sales, if these markets experience downturns in the housing market, our business, prospects and results of operations would be adversely impacted even if conditions in the broader economy or housing market did not suffer such a decline.
If there is limited economic growth, declines in employment and consumer income, changes in consumer behavior, including as a result of the COVID-19 pandemic, and/or tightening of mortgage lending standards, practices and regulation in the geographic areas in which we operate, or if interest rates for mortgage loans or
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home prices rise, there could likely be a corresponding adverse effect on our business, prospects, liquidity, financial condition and results of operations, including, but not limited to, the number of homes we sell, our average sales price of homes closed and the amount of revenues or profits we generate, and such effect may be material.
Regional factors affecting the homebuilding industry in our current markets could materially and adversely affect us.
Our business strategy is focused on the acquisition of suitable land and the design, construction and sale of primarily single-family homes in residential subdivisions, including planned communities, in Florida, Texas, Colorado, Georgia, the Washington D.C. metropolitan area, South Carolina and, following the consummation of the H&H Acquisition, North Carolina. In addition, we have land purchase contracts for the right to purchase land or lots at a future point in time in all of these areas. A prolonged economic downturn in the future in one or more of these areas, or a particular industry that is fundamental to one or more of these areas, particularly within Florida, our largest market, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. To the extent the oil and gas industry, which can be very volatile, is negatively impacted by declining commodity prices, climate change, legislation or other factors, a result could be a reduction in employment or other negative economic consequences, which in turn could adversely impact our home sales and activities in Austin, Texas and Denver, Colorado.
Moreover, certain insurance companies doing business in Florida and Texas have restricted, curtailed or suspended the issuance of homeowners’ insurance policies on single-family homes. This has both reduced the availability of hurricane and other types of natural disaster insurance in Florida and Texas, in general, and increased the cost of such insurance to prospective purchasers of homes in Florida and Texas. Mortgage financing for a new home is conditioned, among other things, on the availability of adequate homeowners’ insurance. There can be no assurance that homeowners’ insurance will be available or affordable to prospective purchasers of our homes offered for sale in the Florida and Texas markets. Long-term restrictions on, or unavailability of, homeowners’ insurance in the Florida and Texas markets could have an adverse effect on the homebuilding industry in such markets in general, and on our business within such markets in particular. Additionally, the availability of permits for new homes in new and existing developments has been adversely affected by the significantly limited capacity of the schools, roads and other infrastructure in such markets.
If adverse conditions in these markets develop in the future, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. Furthermore, if buyer demand for new homes in these markets decreases, home prices could decline, which would have a material adverse effect on our business.
The homebuilding industry is highly competitive and, if our competitors are more successful or offer better value to our customers, our business could decline.
We operate in a very competitive environment that is characterized by competition from a number of other homebuilders and land developers in each market in which we operate. Additionally, there are relatively low barriers to entry into our business. We compete with large national and regional homebuilding companies, some of which have greater financial and operational resources than us, and with smaller local homebuilders and land developers, some of which may have lower administrative costs than us. We may be at a competitive disadvantage with regard to certain of our large national and regional homebuilding competitors whose operations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional downturns in the housing market. Furthermore, our market share in certain of our markets may be lower as compared to some of our competitors. Many of our competitors also have longer operating histories and longstanding relationships with subcontractors and suppliers in the markets in which we operate or to which we may expand. This may give our competitors an advantage in marketing their products, securing materials and labor at lower prices and allowing their homes to be delivered to customers more quickly and at more favorable prices. We compete for, among other things, homebuyers, desirable land parcels, financing, raw materials and skilled management and labor resources. Our competitors may independently develop land and construct homes that are substantially similar to our products.
Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion and
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cause us to increase our selling incentives and reduce our prices. An oversupply of homes available for sale or discounting of home prices could periodically adversely affect demand for our homes in certain markets and could adversely affect pricing for homes in the markets in which we operate.
If we are unable to compete effectively in our markets, our business could decline disproportionately to our competitors, and our results of operations and financial condition could be adversely affected. We can provide no assurance that we will be able to continue to compete successfully in any of our markets. Our inability to continue to compete successfully in any of our markets could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Any limitation on, or reduction or elimination of, tax benefits associated with homeownership would have an adverse effect upon the demand for homes, which could be material to our business.
While tax laws generally permit significant expenses associated with homeownership, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual’s federal and, in many cases, state taxable income, the ability to deduct mortgage interest expense and real estate taxes for federal income tax purposes is limited. The federal government or a state government may change its income tax laws by eliminating, limiting or substantially reducing these income tax benefits without offsetting provisions, which may increase the after-tax cost of owning a new home for many of our potential homebuyers. For example, the Tax Cuts and Jobs Act, which became effective January 1, 2018, contained substantial changes to the Internal Revenue Code of 1986, as amended (the “Code”), including (i) limitations on the ability of our homebuyers to deduct property taxes, (ii) limitations on the ability of our homebuyers to deduct mortgage interest and (iii) limitations on the ability of our homebuyers to deduct state and local income taxes. Any further future changes may have an adverse effect on the homebuilding industry in general. For example, the further loss or reduction of homeowner tax deductions could decrease the demand for new homes. Any such future changes could also have a material adverse impact on our business, prospects, liquidity, financial condition and results of operations.
Federal income tax credits currently available to certain builders of energy-efficient new homes may not be extended by future legislation.
On December 21, 2020, the U.S. Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which President Trump signed into law on December 27, 2020. Such act extended the availability of Code Section 45L credit for energy-efficient new homes (the “Federal Energy Credits”), which provides a tax credit of $2,000 per qualifying home to eligible homebuilders, and made the Federal Energy Credits available for homes delivered through December 31, 2021. Legislation to extend the Federal Energy Credits beyond December 31, 2021 has not been adopted, and it is uncertain whether an extension or similar tax credit will be adopted in the future. For the year ended December 31, 2019, we claimed $3.5 million of Federal Energy Credits. If legislation to extend the Federal Energy Credits for periods after December 31, 2021 is not adopted, our effective income tax rates in future periods may increase, potentially materially.
Fluctuations in real estate values may require us to write-down the book value of our real estate assets.
The homebuilding and land development industries are subject to significant variability and fluctuations in real estate values. As a result, we may be required to write-down the book value of our real estate assets in accordance with GAAP, and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Any future government shutdowns or slowdowns may materially adversely affect our business or financial results.
Any future government shutdowns or slowdowns may materially adversely affect our business or financial results. We can make no assurances that potential home closings affected by any such shutdown or slowdown will occur after the shutdown or slowdown has ended.
Natural disasters, severe weather and adverse geologic conditions may increase costs, cause project delays and reduce consumer demand for housing, all of which could materially and adversely affect us.
Our homebuilding operations are located in many areas that are subject to natural disasters, severe weather or adverse geologic conditions. These include, but are not limited to, hurricanes, tornadoes, droughts, floods, brushfires, wildfires, prolonged periods of precipitation, landslides, soil subsidence, earthquakes and other natural
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disasters. For example, we operate in a number of locations in the Mid-Atlantic and Southeast that were adversely impacted by severe weather conditions and hurricanes in 2017 and 2018. As a result, our operations in certain areas of Florida, Georgia and South Carolina experienced temporary disruptions and delays. Additionally, our corporate headquarters are located in Jacksonville, Florida, an area that is often impacted by severe weather events, and our operations may be substantially disrupted if our corporate headquarters are forced to close. The occurrence of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer demand for housing and cause shortages and price increases in labor or raw materials, any of which could affect our sales and profitability. In addition to directly damaging our land or projects, many of these natural events could damage roads and highways providing access to our assets or affect the desirability of our land or projects, thereby adversely affecting our ability to market homes or sell land in those areas and possibly increasing the costs of homebuilding completion. Furthermore, the occurrence of natural disasters, severe weather and other adverse geologic conditions has increased in recent years due to climate change and may continue to increase in the future. Climate change may have the effect of making the risks described above occur more frequently and more severely, which could amplify the adverse impact on our business, prospects, liquidity, financial condition and results of operations.
There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with hurricanes, landslides, prolonged periods of precipitation, earthquakes and other weather-related and geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
New and existing laws and regulations or other governmental actions may increase our expenses, limit the number of homes that we can build or delay completion of our projects.
We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction, accessibility, anti-discrimination and other matters, which, among other things, impose restrictive zoning and density requirements, the result of which is to limit the number of homes that can be built within the boundaries of a particular area. We may encounter issues with entitlement, not identify all entitlement requirements during the pre-development review of a project site or encounter zoning changes that impact our operations. Projects for which we have not received land use and development entitlements or approvals may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or zoning changes. Such moratoriums generally relate to insufficient water supplies, sewage facilities, delays in utility hook-ups or inadequate road capacity within specific market areas or subdivisions. Local governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their development. As a result of any of these statutes, ordinances, rules or regulations, the timing of our home sales could be delayed, the number of our home sales could decline and/or our costs could increase, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We and our subcontractors are subject to environmental, health and safety laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can build homes and delay completion of our projects.
We and our subcontractors are subject to a variety of local, state, federal and other environmental, health and safety laws, statutes, ordinances, rules and regulations, including those governing storm water and surface water management, discharge and releases of pollutants and hazardous materials into the environment, including air, groundwater, subsurface and soil, remediation activities, handling of hazardous materials such as asbestos, lead paint and mold, protection of wetlands, endangered plants and species and sensitive habitats and human health and safety. The particular environmental requirements that apply to any given site vary according to multiple factors, including the site’s location and current and former uses, its environmental conditions, the presence or absence of endangered plants or species or sensitive habitats and environmental conditions at nearby
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properties. There is no guarantee that we will be able to identify all of these considerations during any pre-acquisition or pre-development review of project sites or that such factors will not develop during our development and homebuilding activities. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance, remediation and other costs and can prohibit or severely restrict development and homebuilding activity in certain areas, including environmentally sensitive regions or areas contaminated by others before we commenced development. In addition, in those cases where an endangered or threatened plant or species is involved and agency rulemaking and litigation are ongoing, the outcome of such rulemaking and litigation can be unpredictable and, at any time, can result in unplanned or unforeseeable restrictions on, or the prohibition of development in, identified environmentally sensitive areas. In some instances, regulators from different governmental agencies do not concur on development, remedial standards or property use restrictions for a project, and the resulting delays or additional costs can be material for a given project.
Certain environmental laws and regulations also impose strict joint and several liability on former and current owners and operators of real property and in connection with third-party sites where parties have sent wastes. As a result, we may be held liable for environmental conditions we did not create on properties we currently or formerly owned or operated, including properties we have developed, or where we sent wastes. In addition, due to our wide range of historic and current ownership, operation, development, homebuilding and construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous materials, including building materials or fixtures known or suspected to contain hazardous materials, such as asbestos, lead paint and mold. A mitigation plan may be implemented during the construction of a home if a cleanup does not remove all contaminants of concern or to address a naturally occurring condition such as methane or radon. Some homebuyers may not want to purchase a home that is, or that may have been, subjected to a mitigation plan. In addition, we do not maintain separate insurance policies for claims related to hazardous materials, and insurance coverage for such claims under our general commercial liability insurance may be limited or nonexistent.
Pursuant to such environmental, health and safety laws, statutes, ordinances, rules and regulations, we are generally required to obtain permits and other approvals from applicable authorities to commence and conduct our development and homebuilding activities. These permits and other approvals may contain restrictions that are costly or difficult to comply with, or may be opposed or challenged by local governments, environmental advocacy groups, neighboring property owners or other interested parties, which, in turn, may result in delays, additional costs and risks of non-approval of our activities.
From time to time, the U.S. Environmental Protection Agency (the “EPA”) and similar federal, state or local agencies review land developers’ and homebuilders’ compliance with environmental, health and safety laws, statutes, ordinance, rules and regulations, including those relating to the control of storm water discharges during construction. Failure to comply with such laws, statutes, ordinances, rules and regulations may result in civil and criminal fines and penalties, injunctions, suspension of our activities, remedial obligations, costs or liabilities, third-party claims for property or natural resource damages or personal injury, enforcement actions or other sanctions or in additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and result in project delays. We expect that increasingly stringent requirements will be imposed on land developers and homebuilders in the future. We cannot assure you that environmental, health and safety laws will not change or become more stringent in the future in a manner that would not have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We have provided environmental indemnities to certain lenders and other parties. These indemnities obligate us to reimburse the indemnified parties for damages related to environmental matters, and, generally, there is no term or damage limitations on these indemnities.
Environmental laws and regulations relating to climate change and energy can have an adverse impact on our activities, operations and profitability and on the availability and price of certain raw materials, such as lumber, steel and concrete.
There is a growing concern from advocacy groups and the general public that the emissions of greenhouse gases and other human activities have caused, and will continue to cause, significant changes in weather patterns and temperatures and the frequency and severity of natural disasters. Government mandates, standards and regulations enacted in response to these projected climate change impacts and concerns could result in
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restrictions on land development in certain areas or increased energy, transportation and raw material costs. A variety of new legislation has been and may, in the future, be enacted or considered for enactment at the federal, state and local levels relating to climate change and energy. This legislation could relate to, for example, matters such as greenhouse gas emissions control and building and other codes that impose energy efficiency standards or require energy saving construction materials. New building or other code requirements that impose stricter energy efficiency standards or requirements for building materials could significantly increase our cost to construct homes. As climate change concerns continue to grow, legislation, regulations, mandates, standards and other requirements of this nature are expected to continue to be enacted and become costlier for us to comply with. Similarly, energy-related initiatives affect a wide variety of companies throughout the United States, and, because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel and concrete, these initiatives could have an adverse impact on our operations and profitability to the extent the manufacturers and suppliers of our materials are burdened with expensive cap and trade or similar energy-related regulations or requirements.
Because of the seasonal nature of our business, our quarterly operating results fluctuate.
As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Seasonality,” we have historically experienced, and in the future expect to continue to experience, variability in our results of operations from quarter to quarter due to the seasonal nature of the homebuilding industry. We generally close more homes in our second, third and fourth quarters. Thus, our revenues 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. Accordingly, there is a risk that we will invest significant amounts of capital in the acquisition and development of land and construction of homes that we do not sell at anticipated pricing levels or within anticipated time frames. If, due to market conditions, construction delays or other causes, we do not complete home sales at anticipated pricing levels or within anticipated time frames, our business, prospects, liquidity, financial condition and results of operations would be adversely affected. We expect this seasonal pattern to continue over the long term, but we can make no assurances as to the degree to which our historical seasonal patterns will occur in the future.
Changes to population growth rates in certain of the markets in which we operate or plan to operate could affect the demand for homes in these regions.
Slower rates of population growth or population declines in our markets in Jacksonville, Orlando, Colorado and Austin, or other key markets in the United States that we may decide to enter in the future, especially as compared to the high population growth rates in prior years, could affect the demand for housing, cause home prices in these markets to fall and adversely affect our plans for growth, business, financial condition and operating results. Furthermore, while we have recently observed an increase in our business as a result of people moving to the suburbs during the COVID-19 pandemic, we cannot assure you that this trend will continue or not reverse.
Volatility in the credit and capital markets may impact our cost of capital and our ability to access necessary financing and the difficulty in obtaining sufficient capital could prevent us from acquiring lots for our development or increase costs and delays in the completion of our homebuilding expenditures.
If we require working capital greater than that provided by our operations and our credit facilities, we may be required to seek to increase the amount available under the facilities or to seek alternative financing, which might not be available on terms that are favorable or acceptable. If we are required to seek financing to fund our working capital requirements, volatility in credit or capital markets may restrict our flexibility to successfully obtain additional financing on terms acceptable to us, or at all. If we are at any time unsuccessful in obtaining sufficient capital to fund our planned homebuilding expenditures, we may experience a substantial delay in the completion of homes then under construction, or we may be unable to control or purchase finished building lots. Any delay could result in cost increases and could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows. Historically, we have supported our ongoing operations through the use of secured debt financing. In connection with this offering, we expect to pursue new lending arrangements, including a new syndicated, unsecured revolving credit facility. Another source of liquidity includes our ability to use letters of credit and surety bonds that are generally issued. These letters of credit and surety bonds relate to certain performance-related obligations and serve as security for certain land
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option contracts. The majority of these letters of credit and surety bonds are in support of our land development and construction obligations to various municipalities, other government agencies and utility companies related to the construction of roads, sewers and other infrastructure. At September 30, 2020, we had outstanding letters of credit and surety bonds totaling $0.5 million and $19.0 million, respectively. These letters of credit and surety bonds are generally subject to certain financial covenants and other limitations. If we are unable to obtain letters of credit or surety bonds when required, or the conditions imposed by issuers increase significantly, our liquidity and results of operations could be adversely affected.
Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.
Our business can be substantially affected by adverse changes in general economic or business conditions that are outside of our control, including changes in short-term and long-term interest rates; employment levels and job and personal income growth; housing demand from population growth, household formation and other demographic changes, among other factors; availability and pricing of mortgage financing for homebuyers; consumer confidence generally and the confidence of potential homebuyers in particular; consumer spending; financial system and credit market stability; private party and government mortgage loan programs (including changes in FHA, USDA, VA, Fannie Mae and Freddie Mac conforming mortgage loan limits, credit risk/mortgage loan insurance premiums and/or other fees, down payment requirements and underwriting standards), and federal and state regulation, oversight and legal action regarding lending, appraisal, foreclosure and short sale practices; federal and state personal income tax rates and provisions, including provisions for the deduction of mortgage loan interest payments, real estate taxes and other expenses; supply of and prices for available new or resale homes (including lender-owned homes) and other housing alternatives, such as apartments, single-family rentals and other rental housing; homebuyer interest in our current or new product designs and new home community locations; general consumer interest in purchasing a home compared to choosing other housing alternatives; interest of financial institutions or other businesses in purchasing wholesale homes; and real estate taxes. Adverse changes in these conditions may affect our business nationally or may be more prevalent or concentrated in particular submarkets in which we operate. Inclement weather, natural disasters (such as earthquakes, hurricanes, tornadoes, floods, prolonged periods of precipitation, droughts and fires), other calamities and other environmental conditions can delay the delivery of our homes and/or increase our costs. Civil unrest or acts of terrorism can also have a negative effect on our business. If the homebuilding industry experiences another significant or sustained downturn, it would materially adversely affect our business and results of operations in future years.
The potential difficulties described above can cause demand and prices for our homes to fall or cause us to take longer and incur more costs to develop the land and build our homes. We may not be able to recover these increased costs by raising prices because of market conditions. The potential difficulties described above could also lead some homebuyers to cancel or refuse to honor their home purchase contracts altogether.
Inflation could adversely affect our business and financial results.
Inflation could adversely affect our business and financial results by increasing the costs of land, raw materials and labor needed to operate our business. If our markets have an oversupply of homes relative to demand, we may be unable to offset any such increases in costs with corresponding higher sales prices for our homes. Inflation may also accompany higher interest rates, which could adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease. Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.
Difficulties with appraisal valuations in relation to the proposed sales price of our homes could force us to reduce the price of our homes for sale.
Each of our home sales may require an appraisal of the home value before closing. These appraisals are professional judgments of the market value of the property and are based on a variety of market factors. If our internal valuations of the market and pricing do not line up with the appraisal valuations, and appraisals are not at or near the agreed upon sales price, we may be forced to reduce the sales price of the home to complete the sale. These appraisal issues could have a material adverse effect on our business and results of operations.
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If the market value of our inventory or controlled lot position declines, our profits could decrease and we may incur losses.
Inventory risk can be substantial for homebuilders. The market value of building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing community or market. We must continuously seek and make acquisitions of lots for expansion into new markets, as well as for replacement and expansion within our current markets, which we generally accomplish by entering into finished lot option contracts or land bank option contracts. In the event of adverse changes in economic, market or community conditions, we may cease further building activities in certain communities, restructure existing land purchase option contracts or elect not to exercise our land purchase options. Such actions would result in our forfeiture of some or all of any deposits, fees or investments paid or made in respect of such arrangements. The forfeiture of land contract deposits or inventory impairments may result in a loss that could have a material adverse effect on our profitability, stock performance, ability to service our debt obligations and future cash flows.
A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.
Building sites are inherently dangerous, and operating in the homebuilding and land development industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business.
Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation and our relationships with relevant regulatory agencies, governmental authorities and local communities, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Strategic Risks Related to Our Business
We cannot make any assurances that our growth or expansion strategies will be successful, and we may incur a variety of costs to engage in such strategies, including through targeted acquisitions, and the anticipated benefits may never be realized.
We have expanded our business through selected investments in new geographic markets and by diversifying our products in certain markets. Investments in land, developed lots and home inventories can expose us to risks of economic loss and inventory impairments if housing conditions weaken or we are unsuccessful in implementing our growth strategies. Our long-term success and growth strategies depend in part upon continued availability of suitable land at acceptable prices. The availability of land, lots and home inventories for purchase at favorable prices depends on a number of factors outside of our control. We may compete for available land with entities that possess significantly greater financial, marketing and other resources. In addition, some state and local governments in markets where we operate have approved, and others may approve, slow-growth or no-growth initiatives and other ballot measures that could negatively impact the availability of land and building opportunities within those areas. Approval of these initiatives could adversely affect our ability to build and sell homes in the affected markets and/or could require the satisfaction of additional administrative and regulatory requirements, which could result in slowing the progress or increasing the costs of our homebuilding operations in these markets. Finally, our ability to begin new projects could be negatively impacted if we elect not to purchase land under our land banking option contracts.
We intend to grow our operations in existing markets, and we may expand into new markets or pursue opportunistic purchases of other homebuilders on attractive terms as, and if, such opportunities arise. We may be unable to achieve the anticipated benefits of any such growth or expansion, including through targeted acquisitions or through efficiencies that we may be unable to achieve, the anticipated benefits may take longer to realize than expected, or we may incur greater costs than expected in attempting to achieve the anticipated benefits. In such cases, we will likely need to employ additional personnel or consultants that are knowledgeable about such markets. There can be no assurance that we will be able to employ or retain the necessary personnel
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to successfully implement a disciplined management process and culture with local management, that our expansion operations will be successful or that we will be able to successfully integrate any acquired homebuilder. This could disrupt our ongoing operations and divert management resources that would otherwise focus on developing our existing business.
We may develop communities in which we build townhomes in addition to single-family homes or sell homes to investors or portfolio management companies. We can give no assurance that we will be able to successfully identify, acquire or implement these new strategies in the future. Accordingly, any such expansion, including through acquisitions, could expose us to significant risks beyond those associated with operating our existing business and may adversely affect our business, prospects, liquidity, financial condition and results of operations.
We may not be able to complete or successfully integrate our recent acquisitions or any potential future acquisitions.
From time-to-time, we may evaluate possible acquisitions, some of which may be material. For example, in May 2019, we acquired Village Park Homes, in October 2020, we acquired H&H Homes, and, in November 2020, we entered into the Century Purchase Agreement, in each case to significantly expand our presence in new and existing geographic markets. See “Prospectus Summary—Recent Developments—H&H Acquisition” and “Prospectus Summary—Recent Developments—Agreement to Acquire Regional Orlando Homebuilder” in this prospectus for additional information. These and potential future acquisitions may pose significant risks to our existing operations if they cannot be successfully integrated. These acquisitions would place additional demands on our managerial, operational, financial and other resources and create operational complexity requiring additional personnel and other resources. In addition, we may not be able to successfully finance or integrate H&H Homes or any businesses that we acquire. Furthermore, the integration of any acquisition may divert management’s time and resources from our core business and disrupt our operations. Moreover, even if we were successful in integrating newly acquired businesses or assets, expected synergies or cost savings may not materialize, resulting in lower than expected benefits to us from such transactions. We may spend time and money on projects that do not increase our revenue. Additionally, when making acquisitions, it may not be possible for us to conduct a detailed investigation of the nature of the business or assets being acquired due to, for instance, time constraints in making the decision and other factors. We may become responsible for additional liabilities or obligations not foreseen at the time of an acquisition. To the extent we pay the purchase price of an acquisition in cash, such an acquisition would reduce our cash reserves, and, to the extent the purchase price of an acquisition is paid with our stock, such an acquisition could be dilutive to our stockholders. To the extent we pay the purchase price of an acquisition with proceeds from the incurrence of debt, such an acquisition would increase our level of indebtedness and could negatively affect our liquidity and restrict our operations. Further, to the extent that purchase price of an acquisition is paid in the form of an earn out on future financial results, the success of such an acquisition will not be fully realized by us for a period of time as it is shared with the sellers. All of the above risks could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We may not consummate the acquisition of Century LLC, which could negatively affect the trading price of our Class A common stock and our future business and financial results.
In November 2020, we entered into the Century Purchase Agreement. See “Prospectus Summary—Recent Developments—Agreement to Acquire Regional Orlando Homebuilder.” Completion of the acquisition of Century LLC is subject to a number of risks and uncertainties, and we can provide no assurance that the various closing conditions to the Century Purchase Agreement will be satisfied or waived. In addition, satisfying the closing conditions to the Century Purchase Agreement may take longer than we expect. The occurrence of any of these events individually or in combination could negatively affect the trading price of our Class A common stock and our future business and financial results.
We may experience difficulties in integrating the operations of H&H Homes into our business and in realizing the expected benefits of the H&H Acquisition.
The success of the H&H Acquisition will depend in part on our ability to realize the anticipated business opportunities from combining the operations of H&H Homes with our business in an efficient and effective manner. The integration process could take longer than anticipated and could result in the loss of key employees,
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the disruption of each company’s ongoing businesses, tax costs or inefficiencies or inconsistencies in standards, controls, IT systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the H&H Acquisition, and could harm our financial performance. If we are unable to successfully or timely integrate the operations of H&H Homes with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the H&H Acquisition, and our business, results of operations and financial condition could be materially and adversely affected.
We have incurred significant costs in connection with the H&H Acquisition. The substantial majority of these costs are non-recurring expenses related to the H&H Acquisition. These non-recurring costs and expenses are not reflected in the unaudited pro forma consolidated financial data included in this prospectus. We may incur additional costs in the integration of H&H Homes and may not achieve cost synergies and other benefits sufficient to offset the incremental costs of the H&H Acquisition.
Risks Related to Our Organization and Structure
We are a holding company, and we are accordingly dependent upon distributions from our subsidiaries to pay dividends, if any, taxes and other expenses.
We are a holding company and will have no material assets other than our ownership of equity interests in our subsidiaries. We have no independent means of generating revenue. Substantially all of our assets are held through subsidiaries of our predecessor, DFH LLC. DFH LLC’s cash flow is dependent on cash distributions from its subsidiaries, and, in turn, substantially all of our cash flow is dependent on cash distributions from DFH LLC. The creditors of each of our direct and indirect subsidiaries are entitled to payment of that subsidiary’s obligations to them, when due and payable, before distributions may be made by that subsidiary to its equity holders.
Therefore, DFH LLC’s ability to make distributions to us and to the holders of the Series B preferred units and the Series C preferred units of DFH LLC depends on its subsidiaries’ ability first to satisfy their obligations to their creditors and then to make distributions to DFH LLC. We intend to cause DFH LLC to make distributions to us in an amount sufficient to cover our expenses, all applicable taxes payable and dividends, if any, declared by us. The holders of the Series B preferred units and the Series C preferred units of DFH LLC are entitled to receive preferred distributions from DFH LLC before payment of distributions to us. Thus, our ability to cover our expenses, all applicable taxes payable and dividends, if any, declared by us depends on DFH LLC’s ability first to satisfy its obligations to its creditors and make distributions to holders of the Series B preferred units and the Series C preferred units of DFH LLC and then to us.
In addition, our participation in any distribution of the assets of any of our direct or indirect subsidiaries upon any liquidation, reorganization or insolvency is only after the claims of such subsidiaries’ creditors, including trade creditors and preferred unitholders, are satisfied. As of September 30, 2020, the aggregate liquidation preference of the Series B preferred units and the Series C preferred units of DFH LLC is $36.0 million.
Furthermore, our future financing arrangements may contain negative covenants, limiting the ability of our subsidiaries to declare or pay dividends or make distributions. To the extent that we need funds, and our subsidiaries are restricted from declaring or paying such dividends or making such distributions under applicable law or regulations, or otherwise unable to provide such funds, for example, due to restrictions in future financing arrangements that limit the ability of our operating subsidiaries to distribute funds, our liquidity and financial condition could be materially harmed.
We depend on key management personnel and other experienced employees.
Our success depends to a significant degree upon the contributions of certain key management personnel, including, but not limited to, Patrick Zalupski, our founder, President, Chief Executive Officer and Chairman of our board of directors. Although we have entered into an employment agreement with Mr. Zalupski, there is no guarantee that Mr. Zalupski will remain employed by us. Our ability to retain our key management personnel or to attract suitable replacements should any members of our management team leave is dependent on the competitive nature of the employment market. The loss of services from key management personnel or a limitation in their availability could materially and adversely impact our business, prospects, liquidity, financial
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condition and results of operations. Further, such a loss could be negatively perceived in the capital markets. We have not obtained key man life insurance that would provide us with proceeds in the event of the death or disability of any of our key management personnel.
Experienced employees in the homebuilding, land acquisition, development and construction industries are fundamental to our ability to generate, obtain and manage opportunities. In particular, local knowledge and relationships are critical to our ability to source attractive land acquisition opportunities. Experienced employees working in the homebuilding, development and construction industries are highly sought after. Failure to attract and retain such personnel or to ensure that their experience and knowledge is not lost when they leave the business through retirement, redundancy or otherwise may adversely affect the standards of our service and may have an adverse impact on our business, prospects, liquidity, financial condition and results of operations.
Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive covenants.
Our current financing agreements contain, and the financing arrangements we enter into in the future likely will contain, covenants that limit our ability to do certain things. Our existing vertical construction lines of credit facilities contain covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. In connection with this offering, or shortly thereafter, we intend to replace all of our vertical construction lines of credit facilities with a syndicated, unsecured revolving credit facility, which we expect will contain covenants that, among other things, require that we (i) maintain a maximum debt ratio of 65.0% in the first year, 62.5% in the second year and 60.0% thereafter; (ii) maintain an interest coverage ratio of 2.0 to 1.0; (iii) maintain a minimum liquidity equal to the ratio of (A) the sum of (1) unrestricted cash and (2) the amount immediately available but not yet drawn on the new credit facility and (B) interest incurred by us, of not less than 1.0 to 1.0; (iv) maintain a minimum tangible net worth equal to the sum of (A) 75% of the tangible net worth as of the last fiscal quarter prior to the closing date of the new credit facility, (B) 50% of net income from the last fiscal quarter prior to the closing date of the new credit facility and (C) 50% of net proceeds received from all equity issuances after the closing date of the new credit facility; (v) maintain a maximum risks assets ratio of (A) the sum of the GAAP net book value for all finished lots, lots under development, unentitled land and land held for future development to (B) tangible net worth, of no greater than 1.0 to 1.0; (vi) not allow aggregate investments in unconsolidated affiliates to exceed 15% of tangible net worth, as of the last day of any fiscal quarter; and (vii) may not incur indebtedness other than (A) the obligations under the new credit facility, (B) non-recourse indebtedness in an amount not to exceed 15% of tangible net worth, (C) our PPP Loan, (D) operating lease liabilities, finance lease liabilities and purchase money obligations for fixed or capital assets not to exceed $5.0 million in the aggregate, (E) indebtedness of financial services subsidiaries and variable interest entities and (F) indebtedness under hedge contracts entered into for purposes other than for speculative purposes. The actual terms of our new credit facility may vary from those described above.
If we fail to meet or satisfy any of these provisions, we would be in default under such financing agreement and our lenders could elect to declare outstanding amounts due and payable and terminate their commitments. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. In addition, future indebtedness we obtain may contain financial covenants limiting our ability to, for example, incur additional indebtedness, make certain investments, reduce liquidity below certain levels and pay dividends to our stockholders and otherwise affect our operating policies. If we default on one or more of our debt agreements, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt.
Borrowings under our existing vertical construction lines of credit facilities bear interest at the London Interbank Offered Rate (“LIBOR”) plus an applicable margin. On July 27, 2017, the Financial Conduct Authority in the United Kingdom, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. Our existing vertical construction lines of credit facilities, which, at the present time, have terms that extends beyond 2021, provide for a mechanism to amend such financing agreements to reflect the establishment of an alternate rate of interest upon the occurrence of certain events
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related to the phase-out of any applicable interest rate. However, we have not yet pursued any amendments or other contractual alternatives to address this matter and are currently evaluating the potential impact of the eventual replacement of LIBOR on our existing vertical construction lines of credit facilities. In addition, the overall financial markets may be disrupted as a result of the phase-out or replacement of LIBOR. Uncertainty as to the nature of such potential phase-out and alternative reference rates or disruption in the financial market could have a material adverse effect on our cost of capital, financial condition, cash flows and results of operations.
Interest expense on debt we incur may limit our cash available to fund our growth strategies.
As of September 30, 2020, we had total outstanding borrowings of $251.2 million under our existing vertical construction lines of credit facilities, and we could borrow an additional $249.0 million under such financing arrangements. As of September 30, 2020, borrowings under the various financing agreements bore interest at rates ranging from 3.0% plus 30-day LIBOR to 9.5% per annum. In connection with this offering, or shortly thereafter, we intend to replace all of our vertical construction lines of credit facilities with a syndicated, unsecured revolving credit facility, with an expected borrowing base of $450.0 million and an accordion feature that allows the facility to expand to a borrowing base of up to $750.0 million. The new facility is expected to bear interest at rates ranging from 3.50% to 4.50%, depending upon our debt to capitalization ratio. In addition, as of September 30, 2020, we had outstanding $11.0 million aggregate principal amount of non-recourse notes payable in relation to projects in our joint venture arrangements, which bear interest at rates ranging from 5.0% to 12.5%, and $7.2 million Paycheck Protection Program loan. If our operations do not generate sufficient cash from operations at levels currently anticipated, we may seek additional capital in the form of debt financing. Our current indebtedness includes, and any additional indebtedness we subsequently incur may have, a floating rate of interest. Higher interest rates could increase debt service requirements on our current floating rate indebtedness, and on any floating rate indebtedness we subsequently incur, and could reduce funds available for operations, future business opportunities or other purposes. If we need to repay existing indebtedness during periods of rising interest rates, we could be required to refinance our then-existing indebtedness on unfavorable terms or liquidate one or more of our assets to repay such indebtedness at times that may not permit realization of the maximum return on such assets and could result in a loss. The occurrence of either such event or both could materially and adversely affect our cash flows and results of operations.
We have identified material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our Class A common stock.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2019, our management has determined that the following control deficiencies constitute material weaknesses.
We did not document the design or operation of an effective control environment commensurate with the financial reporting requirements of an SEC registrant. Specifically, we did not design and maintain adequate formal documentation of certain policies and procedures, controls over the segregation and duties within our financial reporting function and the preparation and review of journal entries. In addition, we did not design or maintain effective control activities that contributed to the following additional material weaknesses:
We did not design control activities to adequately address identified risks, evidence of performance, or operate at a sufficient level of precision that would identify material misstatements to our financial statements.
We did not design and maintain effective controls over certain IT general controls for information systems that are relevant to the preparation of our consolidated financial statements. Specifically, we did not design and maintain:
program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately;
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user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel;
computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored; and
testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.
These IT deficiencies did not result in a material misstatement in our financial statements; however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, management has determined that these deficiencies in the aggregate constitute a material weakness.
Each of the above material weaknesses did not result in material misstatements in our financial statements; however, they could result in misstatements of our account balances or disclosures that would result in material misstatements of our annual or interim financial statements that would not be prevented or detected.
We are in the process of taking steps intended to address the underlying causes of the control deficiencies in order to remediate the material weaknesses. Our efforts to date have included: (i) formalization of our remediation plan and timelines to fully address the control deficiencies and segregation of duties controls and (ii) development of formal policies around general computer controls, including scheduled formal trainings prior to implementation of an IT general controls framework that addresses risks associated with user access and security, application change management and IT operations to help sustain effective control operations and comprehensive remediation efforts relating to strengthen user access controls and security.
While we believe these efforts will improve our internal controls and address the underlying causes of the material weaknesses, such material weaknesses will not be remediated until our remediation plan has been fully implemented, and we have concluded that our controls are operating effectively for a sufficient period of time.
We cannot be certain that the steps we are taking will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or prevent future material weaknesses or control deficiencies from occurring. In addition, we cannot be certain that we have identified all material weaknesses in our internal control over financial reporting or that in the future we will not have additional material weaknesses in our internal control over financial reporting.
In addition, neither our management nor an independent registered public accounting firm has performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified. If we fail to effectively remediate the material weaknesses in our internal control over financial reporting, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls when required to do so in the future, we may be unable to accurately or timely report our financial condition or results of operations. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets and our stock price could be adversely affected.
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Risks Related to this Offering and Ownership of Our Class A Common Stock
There is currently no public market for shares of our Class A common stock, a trading market for our Class A common stock may never develop following this offering and our Class A common stock price may be volatile and could decline substantially following this offering.
Prior to this offering, there has been no market for shares of our Class A common stock. Although we have applied to list the shares of our Class A common stock on the Nasdaq Global Select Market, an active trading market for the shares of our Class A common stock may never develop, or if one develops, it may not be sustained following this offering. Accordingly, no assurance can be given as to the following:
the likelihood that an active trading market for shares of our Class A common stock will develop or be sustained,
the liquidity of any such market,
the ability of our stockholders to sell their shares of Class A common stock or
the price that our stockholders may obtain for their Class A common stock.
If an active market does not develop or is not maintained, the market price of our Class A common stock may decline, and you may not be able to sell your shares of our Class A common stock. Even if an active trading market develops for our Class A common stock subsequent to this offering, the market price of our Class A common stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our Class A common stock.
Furthermore, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our Class A common stock could fluctuate based upon factors that have little or nothing to do with our operations, and these fluctuations could materially reduce the price of our Class A common stock and materially affect the value of your investment in our Class A common stock.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we will need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC, including filing quarterly and annual financial statements, and the requirements of the Nasdaq, with which we are not required to comply as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management and will significantly increase our costs and expenses. We will need to:
institute a more comprehensive compliance function, including for financial reporting and disclosures;
continue to prepare and distribute periodic public reports in compliance with our obligations under federal securities laws;
comply with rules promulgated by Nasdaq;
continue to prepare and distribute periodic public reports in compliance with our obligations under federal securities laws;
enhance our investor relations function;
establish new internal policies, such as those relating to insider trading; and
involve and retain to a greater degree outside counsel and accountants in the above activities.
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The changes necessitated by becoming a public company require a significant commitment of resources and management oversight that has increased, and may continue to increase, our costs and might place a strain on our systems and resources. Such costs could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, while we generally must comply with Section 404 of the Sarbanes-Oxley Act for our fiscal year ending December 31, 2020, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of Section 2(a)(19) of the Securities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting until as late as our annual report for the fiscal year ending December 31, 2025. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, operated or reviewed. Compliance with these requirements may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
In addition, we expect that being a public company subject to these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
The initial public offering price of our Class A common stock may not be indicative of the market price of our Class A common stock after this offering. In addition, an active, liquid and orderly trading market for our Class A common stock may not develop or be maintained, and our stock price may be volatile.
Prior to this offering, our Class A common stock was not traded on any market. An active, liquid and orderly trading market for our Class A common stock may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of our Class A common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our Class A common stock, you could lose a substantial part or all of your investment in our Class A common stock. The initial public offering price will be negotiated between us and representatives of the underwriters, based on numerous factors and may not be indicative of the market price of our Class A common stock after this offering. See “Underwriting” in this prospectus for additional information. Consequently, you may not be able to sell shares of our Class A common stock at prices equal to or greater than the price paid by you in this offering.
The following factors could affect our stock price:
the impact of the COVID-19 pandemic on us and the national and global economies;
our operating and financial performance;
quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues;
the public reaction to our press releases, our other public announcements and our filings with the SEC;
strategic actions by our competitors;
changes in revenue or earnings estimates, or changes in recommendations or withdrawals of research coverage, by equity research analysts;
market and industry perception of our success, or lack thereof, in pursuing our growth strategies;
introductions or announcements of new products offered by us or significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors and the timing of such introductions or announcements;
our ability to effectively manage our growth;
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speculation in the press or investment community;
the failure of research analysts to cover our Class A common stock;
whether investors or securities analysts view our stock structure unfavorably, particularly our dual-class structure and the significant voting control of our executive officers, directors and their affiliates;
our ability or inability to raise additional capital through the issuance of equity or debt or other arrangements and the terms on which we raise it;
additional shares of our Class A common stock being sold into the market by us or our existing stockholders, or the anticipation of such sales, including if existing stockholders sell shares into the market when applicable “lock-up” periods end;
changes in accounting principles, policies, guidance, interpretations or standards;
additions or departures of key management personnel;
actions by our stockholders;
changes in operating performance and stock market valuations of companies in our industry, including our vendors and competitors;
trading volume of our Class A common stock;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole and those resulting from natural disasters, severe weather events, terrorist attacks and responses to such events;
lawsuits threatened or filed against us;
domestic and international economic, legal and regulatory factors unrelated to our performance; and
the realization of any risks described under this “Risk Factors” section.
The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.
Investors in this offering will experience immediate and substantial dilution of $10.77 per share.
Based on an assumed initial public offering price of $13.50 per share (the midpoint of the price range set forth on the cover of this prospectus), purchasers of our Class A common stock in this offering will experience an immediate and substantial dilution of $10.77 per share in the as adjusted net tangible book value per share of Class A common stock from the initial public offering price, and our adjusted pro forma net tangible book value as of September 30, 2020 after giving effect to this offering would have been $2.73 per share. This dilution is due in large part to earlier investors having paid less than the initial public offering price when they purchased their shares. See “Dilution” in this prospectus for additional information.
Mr. Zalupski will have the ability to direct the voting of a majority of the voting power of our common stock, and his interests may conflict with those of our other stockholders.
Upon consummation of this offering, our common stock will consist of two classes: Class A and Class B. Holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to three votes per share. Holders of Class A common stock and Class B common stock will vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or our certificate of incorporation. Upon completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares of our Class A common stock and after the transactions described herein under “Corporate Reorganization”), Mr. Zalupski, our founder, President, Chief Executive Officer and Chairman of our board of directors, will own, through personal holdings and an entity that he controls, 100% of our Class B common stock (representing 85.4% of the total combined voting power of our Class A common stock and Class B common stock).
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As a result, Mr. Zalupski will be able to control matters requiring stockholder approval, including the election and removal of directors, changes to our organizational documents and significant corporate transactions, including any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership makes it unlikely that any holder or group of holders of our Class A common stock will be able to affect the way we are managed or the direction of our business. The interests of Mr. Zalupski with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other stockholders. Mr. Zalupski would have to approve any potential acquisition of us. The existence of significant stockholders may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management or limiting the ability of our other stockholders to approve transactions that they may deem to be in our best interests. Mr. Zalupski’s concentration of stock ownership may also adversely affect the trading price of our Class A common stock to the extent investors perceive a disadvantage in owning stock of a company with significant stockholders.
Participation in this offering by entities affiliated with BOC DFH, LLC could reduce the public float for our Class A common stock.
Certain entities affiliated with BOC DFH, LLC, a holder of more than 5% of our Class A common stock and a wholly owned subsidiary of Boston Omaha Corporation (Nasdaq: BOMN), have indicated an interest in purchasing an aggregate of at least 1,851,850 shares of our Class A common stock (based on the midpoint of the price range set forth on the cover page of this prospectus) in this offering at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, such entities may elect to purchase fewer or no shares of our Class A common stock in this offering, or the underwriters may elect to sell fewer or no shares of our Class A common stock in this offering to such entities.
If these entities purchase all or a portion of the shares of our Class A common stock in which they have indicated an interest in this offering, such purchase could reduce the available public float for our Class A common stock if such entities hold these shares long-term.
Certain of our directors have significant duties with, and spend significant time serving, entities that may compete with us in seeking acquisitions and business opportunities and, accordingly, may have conflicts of interest in pursuing business opportunities.
Certain of our directors hold positions of responsibility with other entities whose businesses are involved in certain aspects of the real estate industry, including in DF Capital, with which we partner for certain land banking opportunities. These directors may become aware of business opportunities that may be appropriate for presentation to us, as well as to the other entities with which they are or may become affiliated. Due to these existing and potential future affiliations, they may present potential business opportunities to other entities prior to presenting them to us, which could cause additional conflicts of interest. They may also decide that certain opportunities are more appropriate for other entities with which they are affiliated, and, as a result, they may elect not to present those opportunities to us. These conflicts of interest may not be resolved in our favor. For additional discussion of our directors’ business affiliations and the potential conflicts of interest of which our stockholders should be aware, see “Management” and “Certain Relationships and Related Party Transactions.”
Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our amended and restated certificate of incorporation or our bylaws or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in
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shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholders’ ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
We do not intend to pay cash dividends on our Class A common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment is if the price of our Class A common stock appreciates.
We do not plan to declare cash dividends on shares of our Class A common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in us will be if you sell your Class A common stock at a price greater than you paid for it. There is no guarantee that the price of our Class A common stock that will prevail in the market will ever exceed the price that you pay in this offering.
Sales of substantial amounts of our Class A common stock in the public markets, or the perception that they might occur, could reduce the price that our Class A common stock might otherwise attain and may dilute your voting power and your ownership interest in us.
Sales of a substantial number of shares of our Class A common stock in the public market after this offering, particularly sales by our directors, executive officers and significant stockholders, or the perception that these sales could occur, could adversely affect the market price of our Class A common stock and may make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate. Upon completion of this offering, we will have 30,855,329 shares of Class A common stock outstanding and 60,226,153 shares of Class B common stock outstanding, assuming no exercise by the underwriters of their option to purchase additional shares of our Class A common stock.
All of the shares of Class A common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act (“Rule 144”).
We are offering 9,600,000 shares of our Class A common stock as described in this prospectus (excluding the underwriters’ option to purchase up to 1,440,000 additional shares of our Class A common stock). Upon the completion of this offering, certain members of our management team will be granted equity awards covering an aggregate of 37,037 shares of Class A common stock and 444,444 shares of Class B common stock (based upon the midpoint of the price range set forth on the cover page of this prospectus) pursuant to our 2021 Equity Incentive Plan. The actual number of equity awards will be based upon the price at which the shares are sold to the public in this offering. In connection with this offering, we intend to file a registration statement on Form S-8 to register the total number of shares of our Class A common stock that may be issued under our 2021 Equity Incentive Plan, including the equity awards to be granted to certain members of our management team described above upon the completion of this offering pursuant to our 2021 Equity Incentive Plan.
Subject to certain exceptions, we, our officers and directors and record holders of substantially all of our Class A common stock and Class B common stock have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of capital stock without the permission of BofA Securities, Inc. on behalf of the underwriters, for a period of 180 days from the date of this prospectus. See “Underwriting” for more information on these agreements. When such lock-up period expires, we and our securityholders will be able to sell our Class A common stock, subject to the limitations set forth in the lock-up agreements, in the public market. In addition, BofA Securities, Inc. may, in its sole discretion, release all or some portion of the shares subject to the lock-up agreements prior to the expiration of the lock-up period. See “Shares Eligible for Future Sale” for more information. Sales of a substantial number of our Class A common stock upon expiration of the lock-up agreements, or the perception that such sales may occur, or early release of the lock-up agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.
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We may also issue our shares of Class A common stock or securities convertible into shares of our Class A common stock from time to time in connection with a financing, acquisition, investment or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the market price of our Class A common stock to decline.
The underwriters of this offering may waive or release parties to the lock-up agreements entered into in connection with this offering, which could adversely affect the price of our Class A common stock.
We, our officers and directors and holders of substantially all our Class A common stock have entered or will enter into lock-up agreements pursuant to which we and they will be subject to certain restrictions with respect to the sale or other disposition of our Class A common stock for a period of 180 days following the date of this prospectus. The representative of the underwriters, at any time and without notice, may release all or any portion of the Class A common stock subject to the foregoing lock-up agreements. See “Underwriting” for more information on these agreements. If the restrictions under the lock-up agreements are waived, then the Class A common stock, subject to compliance with the Securities Act or exceptions therefrom, will be available for sale into the public markets, which could cause the market price of our Class A common stock to decline and impair our ability to raise capital.
Provisions in our charter documents or Delaware law, as well as Mr. Zalupski’s beneficial ownership of all of our outstanding Class B common stock, could discourage acquisition bids or merger proposals, which may adversely affect the market price of our Class A common stock.
Some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including:
providing that the board of directors is expressly authorized to determine the size of our board of directors;
limiting the ability of our stockholders to call special meetings;
establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders;
providing that the board of directors is expressly authorized to adopt, or to alter or repeal, our bylaws; and
establishing advance notice and certain information requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
Upon consummation of this offering, Mr. Zalupski, through his beneficial ownership of all of our outstanding Class B common stock, will control approximately 85.4% of the total combined voting power of our outstanding Class A common stock and Class B common stock, which will give him the ability to prevent a potential takeover of our company. If a change of control or change in management is delayed or prevented, the market price of our Class A common stock could decline.
In addition, some of the restrictive covenants contained in our various financing agreement may delay or prevent a change in control.
Under certain circumstances, the Series B preferred units of DFH LLC and the Series C preferred units of DFH LLC may be converted into shares of our Class A common stock, which could dilute your voting power and your ownership interest in us, and such a conversion or the perceived possibility of such a conversion could reduce the price that our Class A common stock might otherwise attain.
Under certain circumstances, the Series B preferred units of DFH LLC and the Series C preferred units of DFH LLC may be converted into shares of our Class A common stock. Any such conversion could result in substantial dilution to our existing stockholders and cause the market price of our Class A common stock to decline. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Series B Preferred Units’’ and “—Series C Preferred Units” for a description of the Series B preferred units and the Series C preferred units of DFH LLC.
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The Series C preferred units of DFH LLC have certain protective covenants, which could limit our ability to engage in certain business combinations, recapitalizations or other fundamental changes.
The Series C preferred units of DFH LLC have certain protective covenants. DFH LLC may not engage in a fundamental change, including a recapitalization, a merger and a sale of all or substantially all of its assets, without the consent of holders of the Series C preferred units of DFH LLC. These provisions could increase the cost of any such fundamental change transaction, which may discourage a merger, combination or change in control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests. In addition, so long as the Series C preferred units of DFH LLC remain outstanding, DFH LLC must comply with certain financial covenants. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Series C Preferred Units” for a description of the Series C preferred units of DFH LLC.
Even though we may want to redeem the Series B preferred units and/or the Series C preferred units of DFH LLC, we may not have the ability to redeem the Series B preferred units and/or the Series C preferred units of DFH LLC, as the case may be.
DFH LLC has the right to redeem the Series B preferred units and the Series C preferred units from time to time on or prior to September 30, 2022 and December 31, 2021 (which can be extended to June 30, 2022 at the option of DFH LLC), respectively. As of September 30, 2020, the redemption price for all of the outstanding Series B preferred units of DFH LLC was $9.1 million and for all of the outstanding Series C preferred units of DFH LLC was $26.9 million. Any decision we may make at any time regarding whether to redeem the Series B preferred units and/or the Series C preferred units of DFH LLC will depend upon a wide variety of factors, including our evaluation of our capital position, our capital requirements, the potential convertibility of the Series C preferred units of DFH LLC and general market conditions at that time. Even though we may want to redeem the Series B preferred units and/or the Series C preferred units of DFH LLC, we may be restricted from doing so by our debt agreements or we might not have sufficient cash available to redeem such preferred units.
Non-U.S. holders may be subject to U.S. federal income tax on gain realized on the sale or disposition of shares of our Class A common stock.
Because of our anticipated holdings in U.S. real property interests following the completion of the Corporate Reorganization and this offering, we believe we will be and will remain a “United States real property holding corporation” for U.S. federal income tax purposes. As a result, a non-U.S. holder (as defined in “Material U.S. Federal Income Tax Consequences to Non-U.S. Holders”) generally will be subject to U.S. federal income tax on any gain realized on a sale or disposition of shares of our Class A common stock unless our Class A common stock is regularly traded on an established securities market and such non-U.S. holder did not actually or constructively hold more than 5% of our Class A common stock at any time during the shorter of (a) the five-year period preceding the date of the sale or disposition and (b) the non-U.S. holder’s holding period in such stock. In addition, if our Class A common stock is not regularly traded on an established securities market, a purchaser of the stock generally will be required to withhold and remit to the IRS 15% of the purchase price. A non-U.S. holder also will be required to file a U.S. federal income tax return for any taxable year in which it realizes a gain from the disposition of our Class A common stock that is subject to U.S. federal income tax. We anticipate that our Class A common stock will be regularly traded on an established securities market following this offering. However, no assurance can be given in this regard, and no assurance can be given that our Class A common stock will remain regularly traded in the future. Non-U.S. holders should consult their tax advisors concerning the consequences of disposing of shares of our Class A common stock.
We expect to be a “controlled company” within the meaning of the Nasdaq Global Select Market rules and, as a result, will qualify for, and intend to rely on exemptions from certain corporate governance requirements.
Upon completion of this offering, Mr. Zalupski will beneficially own a majority of our outstanding voting interests. As a result, we expect to be a “controlled company” within the meaning of the Nasdaq corporate governance standards. Under the Nasdaq rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with certain Nasdaq corporate governance requirements, including the requirements that:
a majority of such company’s board of directors consist of independent directors;
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such company have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing such committee’s purpose and responsibilities;
such company have a compensation committee that is composed entirely of independent directors with a written charter addressing such committee’s purpose and responsibilities; and
such company conduct an annual performance evaluation of the nominating and governance and compensation committees.
These requirements will not apply to us as long as we remain a controlled company. For at least some period following this offering, we intend to utilize certain of these exemptions. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements. See “Management” in this prospectus for additional information.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
We are classified as an “emerging growth company” under the JOBS Act. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things: (i) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; (ii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; (iii) provide certain disclosure regarding executive compensation required of larger public companies; or (iv) hold nonbinding advisory votes on executive compensation. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, have more than $700.0 million in market value of our Class A common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.
To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our Class A common stock to be less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
The dual class structure of our common stock may adversely affect the trading market for our Class A common stock.
In July 2017, S&P Dow Jones Indices and FTSE International Limited announced changes to their eligibility criteria for the inclusion of shares of public companies on certain indices, including the Russell 2000, the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, to exclude companies with multiple classes of shares of common stock from being added to these indices. As a result, our dual class capital structure would make us ineligible for inclusion in any of these indices, and mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not be investing in our stock. Furthermore, we cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors, and, as a result, the market price of our Class A common stock could be adversely affected.
The historical and pro forma financial information in this prospectus may make it difficult to accurately predict our costs of operations in the future.
The historical financial information in this prospectus does not reflect the added costs we expect to incur as a public company or the resulting changes that will occur in our capital structure and operations. In preparing our pro forma financial information we have given effect to, among other items, the H&H Acquisition. The estimates we used in our pro forma financial information may not be similar to our actual experience as a public company. For more information on our historical financial information and pro forma financial information, see “Unaudited Pro Forma Financial Information,” “Selected Historical and Pro Forma Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Corporate Reorganization” and our consolidated financial statements included elsewhere in this prospectus.
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Mr. Zalupski and Mr. Moyer will have personal interests in the completion of this offering, which may conflict with those of our other stockholders.
Mr. Zalupski, our founder, President, Chief Executive Officer and Chairman of our board of directors, and Mr. Moyer, our Senior Vice President and Chief Financial Officer, are expected to receive special bonuses payable upon the completion of this offering. See “Executive Compensation—Special Bonuses” in this prospectus for more information. The payment of each such bonus will have an impact on our results of operations, cash flow and funds available for business operations. Consequently, the special bonuses could cause the market price of our Class A common stock to decline. Mr. Zalupski is expected to receive a special bonus in the form of an equity award in or related to a number of shares of our Class B common stock with an aggregate value of $6.0 million. Mr. Moyer is expected to receive a special bonus in the form of an equity award in or related to a number of shares of our Class A common stock with an aggregate value of $0.5 million. Both Mr. Zalupski’s and Mr. Moyer’s special bonuses will vest in three equal annual installments over a three-year period commencing on the completion of this offering. Each such vesting of Mr. Zalupski’s and Mr. Moyer’s special bonuses will cause dilution of our existing stockholders and could cause the market price of our Class A common stock to decline. We will record a greater amount of compensation expense in conjunction with the payment of these special bonuses, which could cause the market price of our Class A common stock to decline. Mr. Zalupski is also expected to receive a cash bonus equal to $4.0 million, which will be paid in cash in recognition of DF Homes LLC’s 2020 performance. In light of the bonuses described herein, Mr. Zalupski and Mr. Moyer have an incentive to complete this offering.
General Risk Factors
We are subject to litigation, arbitration or other claims which could materially and adversely affect us.
We are subject to litigation and we may in the future be subject to enforcement actions, such as claims relating to our operations, securities offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. Although we have established warranty, claim and litigation reserves that we believe are adequate, we cannot be certain of the ultimate outcomes of any claims that may arise in the future, and legal proceedings may result in the award of substantial damages against us beyond our reserves. Resolution of these types of matters against us may result in our having to pay significant fines, judgments or settlements, which, if uninsured or in excess of insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Furthermore, plaintiffs may in certain of these legal proceedings seek class action status with potential class sizes that vary from case to case. Class action lawsuits can be costly to defend, and if we were to lose any certified class action suit, it could result in substantial liability for us. Certain litigation or the resolution thereof may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.
Failure to comply with laws and regulations may adversely affect us.
We and our subcontractors are required to comply with laws and regulations governing many aspects of our business, such as land acquisition and development, home construction and sales and employment practices. Despite our oversight, contractual protections and other mitigation efforts, our employees or subcontractors could violate some of these laws or regulations, as a result of which we may incur fines, penalties or other liabilities, and our reputation with governmental agencies, customers, vendors or suppliers could be damaged.
We may suffer uninsured losses or material losses in excess of insurance limits.
We could suffer physical damage to property and liabilities resulting in losses that may not be fully recoverable by insurance. Insurance against certain types of risks, such as terrorism, earthquakes, floods or personal injury claims, may be unavailable, available in amounts that are less than the full market value or replacement cost of investment or underlying assets or subject to a large deductible or self-insurance retention amount. In addition, there can be no assurance that certain types of risks that are currently insurable will continue to be insurable on an economically feasible basis. Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles or self-insurance retention, we could sustain financial loss or lose capital invested in the affected property, as well as anticipated future income from that property. Furthermore, we could be liable to repair damage or meet liabilities caused by risks that are uninsured or subject to deductibles. We may also be liable for any debt or other financial obligations related to affected property.
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Information system failures, cyber incidents or breaches in security could adversely affect us.
We rely on accounting, financial, operational, management and other information systems to conduct our operations. Our information systems are subject to damage or interruption from power outages, computer and telecommunication failures, computer viruses, security breaches, including malware and phishing, cyberattacks, natural disasters, usage errors by our employees and other related risks. Any cyber incident or attack or other disruption or failure in these information systems, or other systems or infrastructure upon which they rely, could adversely affect our ability to conduct our business and could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. Furthermore, any failure or security breach of information systems or data could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation or a loss of confidence in our security measures, which could harm our business and could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. Although we have implemented systems and processes intended to secure our information systems, there can be no assurance that our efforts to maintain the security and integrity of our information systems will be effective or that future attempted security breaches or disruptions would not be successful or damaging.
Our business is subject to complex and evolving U.S. laws and regulations regarding privacy and data protection.
As part of our normal business activities, we collect and store certain information, including information specific to homebuyers, customers, employees, vendors and suppliers. We may share some of this information with third parties who assist us with certain aspects of our business. The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant change. Laws and regulations governing data privacy and the unauthorized disclosure of confidential information pose increasingly complex compliance challenges and potentially elevate our costs. Any failure, or perceived failure, by us to comply with applicable data protection laws could result in proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance and adversely affect our business. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws. Additionally, if we acquire a company that has violated or is not in compliance with applicable data protection laws, we may incur significant liabilities and penalties as a result.
Acts of war or terrorism may seriously harm our business.
Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power or acts of terrorism may cause disruption to the U.S. economy, or the local economies of the markets in which we operate, cause shortages of building materials, increase costs associated with obtaining building materials, result in building code changes that could increase costs of construction, result in uninsured losses, affect job growth and consumer confidence or cause economic changes that we cannot anticipate, all of which could reduce demand for our homes and adversely impact our business, prospects, liquidity, financial condition and results of operations.
Negative publicity could adversely affect our reputation as well as our business, financial results and stock price.
Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance or prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at which negative publicity can be disseminated has increased dramatically with the capabilities of electronic communication, including social media outlets, websites, blogs, newsletters and other digital platforms. Our success in maintaining, extending and expanding our brand image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity or negative commentary from any media outlets could damage our reputation and reduce the demand for our homes, which would adversely affect our business.
Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.
Accounting rules and interpretations for certain aspects of our financial reporting are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our
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accounting assumptions and/or judgments, such as those related to asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations
Access to financing sources may not be available on favorable terms, or at all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns.
Our access to additional third-party sources of financing will depend, in part, on:
general market conditions;
the duration and effects of the COVID-19 pandemic;
the market’s perception of our growth potential;
with respect to acquisition and/or development financing, the market’s perception of the value of the land parcels to be acquired and/or developed;
our current debt levels;
our current and expected future earnings;
our cash flow; and
the market price per share of our common stock.
The global credit and equity markets and the overall economy can be extremely volatile, which could have a number of adverse effects on our operations and capital requirements. For the past decade, the domestic financial markets have experienced a high degree of volatility, uncertainty and, during certain periods, tightening of liquidity in both the high yield debt and equity capital markets, resulting in certain periods when new capital has been both more difficult and more expensive to access. If we are unable to access the credit markets, we could be required to defer or eliminate important business strategies and growth opportunities in the future. In addition, if there is prolonged volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may increase collateral requirements or may charge us prohibitively high fees in order to obtain financing. Consequently, our ability to access the credit market in order to attract financing on reasonable terms may be adversely affected. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all.
Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.
We may change our operational policies, investment guidelines and our business and growth strategies without stockholder consent, which may subject us to different and more significant risks in the future.
Our board of directors will determine our operational policies, investment guidelines and our business and growth strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this prospectus. Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We have broad discretion to use the proceeds from this offering, and our investment of those proceeds may not yield a favorable return.
Our management has broad discretion to spend the proceeds from this offering in ways with which you may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns. This could harm our business and could cause the price of our common stock to decline.
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Future offerings of debt securities, which would rank senior to our Class A common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our Class A common stock for the purposes of dividend and liquidation distributions, may adversely affect the market price of our Class A common stock.
In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our Class A common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our Class A common stock, or both. Our preferred stock will have a preference on liquidating distributions and dividend payments, which could limit our ability to make a dividend distribution to the holders of our Class A common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our Class A common stock in this offering bear the risk of our future offerings reducing the market price of our Class A common stock and diluting their ownership interest in our company.
If securities or industry analysts do not publish research or reports about our business, they adversely change their recommendations regarding our Class A common stock or our operating results do not meet their expectations, our stock price could decline.
The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our Class A common stock, or if our operating results do not meet their expectations, our stock price could decline.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this prospectus includes “forward-looking statements.” Many statements included in this prospectus are not statements of historical fact, including statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions. Actual results may differ materially from those expressed or implied by these statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “projection,” “should” or “will” or the negative thereof or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
our market opportunity and the potential growth of that market;
the expected impact of the COVID-19 pandemic;
our strategy, expected outcomes and growth prospects;
trends in our operations, industry and markets;
our future profitability, indebtedness, liquidity, access to capital and financial condition;
our integration of H&H Homes’ operations; and
the acquisition of Century LLC upon the closing of the transactions contemplated by the Century Purchase Agreement.
We have based these forward-looking statements on our current expectations and assumptions about future events based on information available to our management at the time the statements were made, including those set forth in the JBREC market study. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. The following factors, among others, may cause actual results to differ materially from those expressed or implied in our forward-looking statements:
adverse effects of the COVID-19 pandemic on our business, financial conditions and results of operations and our suppliers and trade partners;
adverse effects of the COVID-19 pandemic and other economic changes either nationally or in the markets in which we operate, including, among other things, increases in unemployment, volatility of mortgage interest rates and inflation and decreases in housing prices;
a slowdown in the homebuilding industry or changes in population growth rates in our markets;
volatility and uncertainty in the credit markets and broader financial markets;
the cyclical and seasonal nature of our business;
our future operating results and financial condition;
our business operations;
changes in our business and investment strategy;
the success of our operations in recently opened new markets and our ability to expand into additional new markets;
our ability to continue to leverage our asset-light and capital efficient lot acquisition strategy;
our ability to develop our projects successfully or within expected timeframes;
our ability to identify potential acquisition targets and close such acquisitions;
our ability to successfully integrate H&H Homes and any future acquired businesses with our existing operations;
availability of land to acquire and our ability to acquire such land on favorable terms, or at all;
availability, terms and deployment of capital and ability to meet our ongoing liquidity needs;
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restrictions in our debt agreements that limit our flexibility in operating our business;
disruption in the terms or availability of mortgage financing or an increase in the number of foreclosures in our markets;
decline in the market value of our inventory or controlled lot positions;
shortages of, or increased prices for, labor, land or raw materials used in land development and housing construction, including due to changes in trade policies;
delays in land development or home construction resulting from natural disasters, adverse weather conditions or other events outside our control;
uninsured losses in excess of insurance limits;
the cost and availability of insurance and surety bonds;
changes in, liabilities under, or the failure or inability to comply with, governmental laws and regulations, including environmental laws and regulations;
the timing of receipt of regulatory approvals and the opening of projects;
the degree and nature of our competition;
decline in the financial performance of our joint ventures, our lack of sole decision-making authority thereof and maintenance of relationships with our joint venture partners;
negative publicity or poor relations with the residents of our projects;
existing and future warranty and liability claims;
existing and future litigation, arbitration or other claims;
availability of qualified personnel and third-party contractors and subcontractors;
information system failures, cyber incidents or breaches in security;
our ability to retain our key personnel;
our ability to maintain an effective system of internal control and produce timely and accurate financial statements or comply with applicable regulations;
our leverage and future debt service obligations;
the impact on our business of any future government shutdown;
the impact on our business of acts of war or terrorism;
our reliance on dividends, distributions and other payments from our subsidiaries to meet our obligations;
our status as an emerging growth company;
other risks and uncertainties inherent in our business; and
other factors we discuss under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the operation of our business. These risks include, but are not limited to, the risks described under “Risk Factors” in this prospectus. Should one or more of the risks or uncertainties described in this prospectus occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this prospectus are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this prospectus.
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USE OF PROCEEDS
We expect the net proceeds from this offering to be approximately $117.5 million, assuming an initial public offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) (or approximately $135.6 million if the underwriters’ option to purchase additional shares of our Class A common stock is exercised in full) and after deducting estimated underwriting discounts and commissions and estimated offering expenses of approximately $3.0 million, in the aggregate, which are payable by us.
We intend to use the net proceeds from this offering, cash on hand and borrowings under our syndicated, unsecured revolving credit facility that we intend to enter into in connection with this offering, or shortly thereafter, to repay all borrowings under our existing secured vertical construction lines of credit facilities and upon such repayment terminate such facilities. As of September 30, 2020, we had 17 vertical construction lines of credit facilities with cumulative maximum availability of $504.0 million, and an aggregate outstanding balance of approximately $251.2 million. As of September 30, 2020, borrowings under our vertical construction lines of credit facilities bore interest at rates ranging from 3.85% to 10.47% per annum. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities, Letters of Credit, Surety Bonds and Financial Guarantees” in this prospectus for additional information. We intend to use our cash on hand and borrowings under our syndicated, unsecured revolving credit facility to fund deposits to control finished lots and for other general corporate purposes, including home construction and other related purposes.
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DIVIDEND POLICY
We do not anticipate declaring or paying any cash dividends on shares of our common stock for the foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business. Any determination to declare or pay dividends on shares of our common stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant in its discretion.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2020:
on an actual basis;
on an as adjusted basis to give effect to (i) the Corporate Reorganization and (ii) the H&H Acquisition; and
on an as further adjusted basis to give effect to (i) our receipt of estimated net proceeds from the sale of shares of our Class A common stock in this offering at an assumed initial offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses, (ii) planned distributions to the owners of the entities comprising our predecessor for estimated federal income taxes on earnings of our predecessor (which was a pass-through entity for tax purposes) for the period from July 1, 2020 through the effective date of Corporate Reorganization and (iii) the replacement of all of our vertical construction lines of credit facilities with a syndicated, unsecured revolving credit facility
You should read the following table in conjunction with “Unaudited Pro Forma Financial Information,” “Selected Historical and Pro Forma Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Corporate Reorganization” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
 
As of September 30, 2020
 
Actual
As adjusted
As further
adjusted
 
(In thousands, except unit/share and per share data)
Cash and Cash Equivalents
$42,082
$41,839
$25,000
Total Debt:
 
 
 
Construction lines of credit, net
$251,235
$368,129
New syndicated, unsecured revolving credit facility(1)
$233,762
Notes payable
10,953
30,953
30,953
Total debt
$262,187
$399,082
$264,716
Member’s Equity:
 
 
 
Common units – 73,123 units authorized and issued, actual; 73,123 units outstanding, actual; no units authorized, issued or outstanding, pro forma and pro forma as adjusted
$72,027
$72,027
Non-voting common units – 100,000 units authorized, actual; 10,543 units issued and outstanding, actual; no units authorized, issued or outstanding, pro forma and pro forma as adjusted
22,582
22,582
Series A preferred units – 15,400 units authorized and issued, actual; 15,400 units outstanding, actual; no units authorized, issued or outstanding, pro forma and pro forma as adjusted
18,677
18,677
Series B preferred units – 7,143 units authorized and issued, actual; 7,143 units outstanding, actual; no units authorized, issued or outstanding, pro forma and pro forma as adjusted
6,150
6,150
$6,150
Series C preferred units – 27,000 units authorized and issued, actual; 26,000 units outstanding, actual; no units authorized, issued or outstanding, pro forma and pro forma as adjusted
25,531
25,531
25,531
Non-controlling interests
32,361
32,361
32,361
Total members’ equity(2)
$177,329
$177,329
$64,042
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As of September 30, 2020
 
Actual
As adjusted
As further
adjusted
 
(In thousands, except unit/share and per share data)
Stockholders’ Equity:
 
 
 
Preferred stock, par value $0.01 per share – no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized and no shares issued or outstanding, pro forma and pro forma as adjusted
Class A common stock, par value $0.01 per share – no shares authorized, issued or outstanding, actual; 289,000,000 shares authorized, 30,855,329 shares issued and outstanding, pro forma; 289,000,000 shares authorized, 30,855,329 shares issued and outstanding, pro forma as adjusted
309
Class B common stock, par value $0.01 per share – no shares authorized, issued or outstanding, actual; 61,000,000 shares authorized, 60,226,153 shares issued and outstanding, pro forma; 61,000,000 shares authorized, 60,226,153 shares issued and outstanding, pro forma as adjusted
602
Additional paid-in capital
220,532
Total stockholders’ equity
$285,484
Total Capitalization
$439,516
$576,411
$550,200
(1)
In connection with this offering, or shortly thereafter, we intend to replace all of our vertical construction lines of credit facilities with a syndicated, unsecured revolving credit facility with an expected borrowing base of $450.0 million and an accordion feature that allows the facility to expand to a borrowing base of up to $750.0 million.
(2)
In connection with the Corporate Reorganization, the equity in DFH LLC will be recapitalized. See “Corporate Reorganization” in this prospectus for additional information.
The information presented above assumes no exercise of the underwriters’ option to purchase additional shares of our Class A common stock.
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DILUTION
If you invest in our Class A common stock, your ownership interest in us will be diluted to the extent of the difference between the initial public offering price in this offering per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our common stock upon consummation of this offering. Pro forma net tangible book value per share represents the book value of our total tangible assets less the book value of our total liabilities divided by the total number of shares of common stock then issued and outstanding, on a pro forma basis after giving effect to the Corporate Reorganization and the H&H Acquisition.
Pro forma net tangible book value as of September 30, 2020 was $141.0 million, or $1.73 per share based on 81,481,482 shares of our common stock outstanding. After giving effect to our sale of 9,600,000 shares of Class A common stock in this offering, at an assumed initial public offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2020 would have been $249.1 million, or $2.73 per share (assuming no exercise of the underwriters’ option to purchase additional shares of our Class A common stock) after accounting for the $9.4 million increase in taxes payable assuming treatment as a C corporation. This amount represents an immediate increase in pro forma net tangible book value of $1.00 per share of Class A common stock to our existing investors before this offering and an immediate dilution of $10.77 per share to new investors purchasing Class A common stock in this offering. The following table illustrates this dilution per share:
Assumed initial public offering price per share
 
$13.50
Pro forma net tangible book value per share as of September 30, 2020
$1.73
 
Increase in pro forma net tangible book value per share attributable to this offering
$1.00
 
Pro forma as adjusted net tangible book value per share after giving effect to this offering
 
$2.73
Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering
 
$10.77
If the underwriters exercise in full their option to purchase 1,440,000 additional shares of our Class A common stock in this offering, our pro forma as adjusted net tangible book value per share after this offering would be $2.88, and the dilution in pro forma as adjusted net tangible book value per share to new investors purchasing Class A common stock in this offering would be $1.88, assuming no change in the initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The following table summarizes, on a pro forma as adjusted basis as of September 30, 2020, the differences between the number of shares of Class A common stock purchased from us, the total consideration paid and the average price per share paid by existing investors and to be paid by the new investors purchasing shares of Class A common stock in this offering, at an assumed initial public offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus), before deducting the underwriting discounts and commissions and offering expenses payable by us in connection with this offering.
 
 
 
Total
Consideration
 
 
Shares Purchased
Amount
(in millions)
Percent
Average Price
Per Share
 
Number
Percent
Existing investors(1)
81,481,482
89.5%
$27.2
17.4%
$0.33
New investors
9,600,000
10.5%
129.6
82.6%
13.50
Total
91,081,482
100.0%
$156.8
100.0%
$1.70
(1)
Does not include 9,100,000 shares of Class A common stock reserved for issuance pursuant to our 2021 Equity Incentive Plan.
The data in the table excludes 9,100,000 shares of Class A common stock initially reserved for issuance under our 2021 Equity Incentive Plan.
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A $1.00 increase (decrease) in the assumed initial public offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the total consideration paid by new investors in this offering by $9.6 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by 7.4% and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by 7.4%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting the underwriting discounts and commissions and offering expenses payable by us in connection with this offering. An increase (decrease) of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors by $13.5 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by 10.4% and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by 9.7%, assuming no change in the assumed initial public offering price per share and before deducting the underwriting discounts and commissions and offering expenses payable by us in connection with this offering.
The table above assumes no exercise of the underwriters’ option to purchase additional shares of our Class A common stock in this offering. If the underwriters’ option to purchase additional shares of our Class A common stock is fully exercised, the number of shares of our common stock held by existing investors would be reduced to 88.1% of the total number of shares of our common stock outstanding after this offering, and the number of shares of Class A common stock held by new investors purchasing common stock in this offering would be increased to 11.9% of the total number of shares of our common stock outstanding after this offering.
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheets as of September 30, 2020 and the unaudited pro forma statements of comprehensive income for the nine months ended September 30, 2020 and for the year ended December 31, 2019 present our financial position and results of operations after giving pro forma effect to (i) the Corporate Reorganization described under “Corporate Reorganization,” (ii) the H&H Acquisition, (iii) this offering and the receipt of net proceeds therefrom, and (iv)  the replacement of all of our vertical construction lines of credit facilities with a syndicated, unsecured revolving credit facility (such transactions collectively, the “Transaction Accounting Adjustments”), as if each of the Transaction Accounting Adjustments had been completed as of September 30, 2020 with respect to the unaudited pro forma consolidated balance sheets as of September 30, 2020 and as of January 1, 2019 with respect to the unaudited pro forma statements of comprehensive income for the nine months ended September 30, 2020 and the year ended December 31, 2019.
The unaudited pro forma consolidated financial statements reflect the following:
The H&H Acquisition and the application of purchase accounting, including:
Recording the net tangible assets of H&H Homes, subject to certain assets and liabilities that were on the H&H LLC balance sheet as of September 30, 2020 but not acquired in the H&H Acquisition. Net tangible assets of $7.6 million were not acquired. We estimate we will adjust H&H Homes’ book value of real estate inventory by a credit of $1.0 million to the September 30, 2020 historical balance. The amortization of this adjustment was reflected in the unaudited pro forma statements of comprehensive income for the year ended December 31, 2019. We estimated the book value of H&H Homes’ construction lines of credit to approximate fair value, as the interest rates are variable and the duration is short term;
Recording goodwill of $24.2 million, based on an acquisition price of approximately $49.9 million, including a $29.5 million payment at the closing of the H&H Acquisition and estimated earn out payments with a fair value of $20.4 million, and considering assets and liabilities not acquired and purchase accounting valuation adjustments;
Recording adjustments to the historical financial statements of H&H Homes to conform its accounting policies with our accounting policies; and
Recording a short-term bridge note of $20.0 million (the “H&H Acquisition Note”) to fund a portion of the purchase price of the H&H Acquisition. The H&H Acquisition Note has a term of seven months beginning on October 1, 2020 and bears a fixed interest rate of 14%. We are required to pay interest on the H&H Acquisition Note on the first business day of every month and repay the H&H Acquisition Note on May 1, 2021. The interest on the H&H Acquisition Note is shown in the unaudited pro forma statements of comprehensive income for the year ended December 31, 2019. There were no material issuance costs associated with the H&H Acquisition Note.
This offering and related transactions, including:
The Corporate Reorganization;
The previously unrecognized compensation expense of $1.6 million associated with membership units granted to certain members of our management team. Based on the terms of the grants, these DFH LLC membership units will immediately vest upon the closing of this offering and the Corporate Reorganization;
The issuance of 444,444 shares of Class B common stock assuming an initial offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus, with the actual amount equal to $6.0 million divided by the initial public offering price) to be issued to Mr. Zalupski, our founder, President, Chief Executive Officer and Chairman of our board of directors;
The issuance of 37,037 shares of Class A common stock assuming an initial offering price of $13.50 per share (the midpoint of the price range set forth on the cover page of this prospectus, with the actual amount equal to $0.5 million divided by the initial public offering price per share) to be issued to Mr. Moyer, our Chief Financial Officer;
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The recognition of income taxes related to the Corporate Reorganization, including:
Recording deferred income taxes related to our reorganization into a taxable entity;
Our taxation as a corporate entity. We estimated our effective tax rate as 25.0%, which is the 21% Federal tax rate applicable to C Corporations partially offset by a 1.5% 45L New Energy Efficient Home Tax Credit, plus a 5.5% state tax rate;
Adjustments to account for the difference in cost of funds between our existing vertical construction lines of credit facilities and our new syndicated, unsecured revolving credit facility;
Distributions to the owners of the entities comprising our predecessor for estimated federal income taxes of approximately $5.4 million on earnings of our predecessor (which was a pass-through entity for tax purposes) for the period from January 1, 2020 through June 30, 2020. We intend to make further distributions to the owners of the entities comprising our predecessor for estimated federal income taxes for the period July 1, 2020 through the effective date of the Corporate Reorganization based on earnings of our predecessor;
The issuance and sale of shares of our Class A common stock to the public in this offering;
Reserving 9,100,000 shares of Class A common stock for issuance pursuant to our 2021 Equity Incentive Plan, which we plan to adopt in connection with this offering; and
The use of the proceeds from this offering and cash on hand to (i) pay underwriting discounts and commissions and other expenses of this offering and (iirepay borrowings under our existing secured vertical construction lines of credit facilites.
The unaudited pro forma statements of comprehensive income and the unaudited pro forma consolidated balance sheet were derived by adjusting the historical consolidated financial statements of our predecessor, DFH LLC, and the financial statements of H&H LLC.
The pro forma adjustments are based on currently available information and certain estimates and assumptions. Our management believes that the assumptions provide a reasonable basis for presenting the significant effects of the Transaction Accounting Adjustments, as contemplated, and the pro forma adjustments give appropriate effect to those assumptions. The pro forma statements of comprehensive income do not include an adjustment for the estimated additional selling, general and administrative expense that we anticipate we will incur as a result of being a public company. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma consolidated balance sheets and our unaudited pro forma statements of comprehensive income. The purchase accounting related to the H&H Acquisition is not complete at this time and the final recorded amounts could differ from the amounts shown below. While no intangible assets have been identified to date, we may allocate purchase price to identifiable intangible assets when we complete our purchase accounting, which we expect to finalize during the second quarter of 2021.
We estimate the fair value of H&H LLC’s communities using expected gross margin of the unit less other costs to be incurred to sell the units. The historical performance of each community, as well as current trends in the market and economy impacting, the community are evaluated for each of the estimates above.
The following unaudited pro forma financial information is included for illustrative purposes only and does not purport to reflect our results of operations or financial position that would have occurred had the Transaction Accounting Adjustments been consummated during the periods presented or to project our results of operations or financial position for any future period. The unaudited pro forma financial information has been prepared in accordance with Article 11 of Regulation S-X, as amended by the SEC during 2020, and should be read in conjunction with the sections of this prospectus captioned “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited and unaudited consolidated financial statements of our predecessor, DFH LLC, and related notes, and the audited and unaudited financial statements of H&H LLC, and related notes, each included elsewhere in this prospectus.
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DREAM FINDERS HOMES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2020
 
Dream Finders
Holdings LLC
(Predecessor)
H&H
Constructors
of Fayetteville,
LLC
Transaction
Accounting
Adjustments
 
DFH LLC Pro
Forma for H&H
and Transaction
Accounting
Adjustments
Adjustments
New
Company
Offering
 
Dream Finders
Homes, Inc. Pro
Forma
ASSETS
 
 
 
 
 
 
 
 
Cash and cash equivalents
$42,081,890
$9,253,903
$(9,496,723)
(a)
$41,839,070
$(16,839,070)
 
$25,000,000
Restricted cash
33,244,211
 
 
33,244,211
 
 
33,244,211
Inventories: