Dream Finders Homes, Inc 8-K/A, filed Dec 14, 2021
Dream Finders Homes, Inc. (DFH)
8-K/A
2021-12-14
For: 2021-10-01
View Original
Added on
April 12, 2026
About this 8-K/A
Dream Finders Homes, Inc filed this 8-K/A on December 14, 2021, reporting on events of October 1, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): October 1, 2021
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation)
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(Commission File Number)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (904 ) 644-7670
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2):
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
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EXPLANATORY NOTE
On October 5, 2021, Dream Finders Homes, Inc. (the “Company”), filed with the U.S. Securities and Exchange Commission a Current Report on Form 8-K
(the “Original Form 8-K”) regarding the completion of the Company’s acquisition, on October 1, 2021, of certain assets, rights and properties, and assumed certain liabilities, comprising the following businesses (the “MHI Acquisition”): MHI
Partnership, Ltd., a Texas limited partnership, MHI Models, Ltd., a Texas limited partnership, McGuyer Homebuilders, Inc., a Texas corporation, and FMR IP, LLC, a Texas limited liability (collectively, “MHI”).
This Current Report on Form 8-K/A amends the Original Form 8-K to include an updated Item 9.01(a) Financial Statements of Business Acquired and Item
9.01(b) Pro Forma Financial information, which the Company indicated would be provided no later than 71 days from the date on which the Original Form 8-K was required to be filed. Item 9.01 of the Original Form 8-K is hereby amended and restated in
its entirety as set forth below.
| Item 9.01 |
Financial Statements and Exhibits.
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(a) Financial Statements of Business Acquired.
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The audited combined balance sheets of MHI as of December 31, 2019 and 2020 and the related combined statements of income, cash flows and changes in equity for the years then ended, the notes related thereto, and the report of the
independent auditors related thereto, are filed as Exhibit 99.1 to this Current Report on Form 8-K/A.
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The unaudited combined balance sheet of MHI as of June 30, 2021 and the related unaudited combined statements of income, cash flows and changes in equity for the six month periods ended June 30, 2020 and 2021, and the notes related
thereto, are filed as Exhibit 99.2 to this Current Report on Form 8-K/A.
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(b) Pro Forma Financial Information.
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The unaudited combined pro forma balance sheet as of June 30, 2021, and the related unaudited pro forma combined statement of income for the six months ended June 30, 2021 and for the year ended December 31, 2020, and the related notes
thereto, of the Company, after giving effect to the MHI Acquisition, are filed as Exhibit 99.3 to this Current Report on Form 8-K/A.
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(d) Exhibits.
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Number
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Description
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Consent of Pannell Kerr Forster of Texas, P.C. (filed herewith).
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The audited combined balance sheets of MHI as of December 31, 2019 and 2020 and the related combined statements of income, cash flows and changes in equity for the years then ended, the notes related thereto
(filed herewith).
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The unaudited combined balance sheet of MHI as of June 30, 2021 and the related unaudited combined statements of income cash flows and changes in equity for the six month periods ended June 30, 2020 and 2021,
and the notes related thereto (filed herewith).
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The unaudited pro forma condensed combined balance sheet as of June 30, 2021, and the related unaudited pro forma condensed combined statement of comprehensive income for the six months ended June 30, 2021 and
for the year ended December 31, 2020, and the related notes thereto, of the Company, after giving effect to the MHI Acquisition (filed herewith).
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104
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Cover Page Interactive Data File (embedded within the inline XBRL document)
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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DREAM FINDERS HOMES, INC.
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By: /s/ Robert E. Riva
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Robert E. Riva
Vice President, General Counsel and Corporate Secretary
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Date: December 14, 2021
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Exhibit 23.1
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-252525) of Dream Finders Homes, Inc., of our report dated December 8,
2021, with respect to the combined financial statements of MHI Partnership, Ltd., MHI Models, Ltd., McGuyer Homebuilders, Inc., and FMR IP, LLC which appear in the accompanying Current Report on Form 8-K/A of Dream Finders Homes, Inc.
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Houston Texas
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Date: December 14, 2021
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Exhibit 99.1
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Combined Financial Statements
December 31, 2020
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
December 31, 2020
Table of Contents
Table of Contents
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Page(s)
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| Independent Auditors’ Report |
1 |
| Combined Balance Sheets |
2 |
| Combined Statements of Income | 3 |
| Combined Statements of Changes in Equity | 4 |
| Combined Statements of Cash Flows | 5 |
| Notes to Combined Financial Statements | 6-19 |
INDEPENDENT AUDITORS’ REPORT
To the Owners of
MHI Partnership, Ltd., MHI Models, Ltd., McGuyer Homebuilders, Inc., and FMR IP, LLC
We have audited the combined financial statements of MHI Partnership, Ltd., MHI Models, Ltd., McGuyer Homebuilders, Inc., and FMR IP, LLC (collectively “MHI”), which comprise the combined balance sheets as of
December 31, 2020 and 2019, and the related combined statements of income, changes in equity, and cash flows for the years then ended and the related notes to the combined financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the combined financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we
express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined
financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of MHI as of December 31, 2020 and 2019, and the results of its operations and its
cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
December 8, 2021
2
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Combined Balance Sheets
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December 31,
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2020
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2019
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ASSETS
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CASH AND CASH EQUIVALENTS (including restricted cash of $570,847 and $570,494 respectively)
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$
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33,318,401
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$
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24,449,807
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NOTES & ADVANCES RECEIVABLE—Affiliates
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4,293,623
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9,186,856
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ACCOUNTS RECEIVABLE—Other
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6,977,279
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4,339,841
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PREPAID EXPENSES AND OTHER ASSETS
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40,839,610
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38,816,177
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RESIDENTIAL HOUSING AND OTHER INVENTORY
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441,871,751
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452,563,606
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FURNITURE, FIXTURES, AND LEASEHOLD IMPROVEMENTS—Net
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4,142,039
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4,256,252
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TRADE NAME—Net
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-
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1,010,732
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INVESTMENTS IN UNCONSOLIDATED ENTITIES
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2,572,935
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1,871,537
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TOTAL ASSETS
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$
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534,015,638
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$
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536,494,808
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LIABILITIES AND EQUITY
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LIABILITIES:
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Trade accounts payable
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$
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35,008,118
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$
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27,916,270
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Accrued and other liabilities
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53,586,192
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36,291,538
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Unsecured debt
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7,849,000
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-
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Secured debt agreements
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220,732,776
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271,882,861
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Total liabilities
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317,176,086
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336,090,669
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COMMITMENTS AND CONTINGENCIES
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EQUITY
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216,839,552
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200,404,139
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Total equity
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216,839,552
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200,404,139
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TOTAL LIABILITIES AND EQUITY
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$
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534,015,638
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$
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536,494,808
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See notes to combined financial statements.
3
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC MHI
Combined Statements of Income
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Year Ended December 31,
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2020
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2019
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HOME SALES REVENUE
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$
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903,784,425
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$
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758,230,559
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COST OF SALES—Homes:
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Direct costs
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683,119,316
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585,766,596
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Indirect, selling, and closing costs
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107,659,406
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89,814,388
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Total cost of sales—homes
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790,778,722
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675,580,984
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GROSS PROFIT FROM HOME SALES
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113,005,703
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82,649,575
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LAND SALES REVENUE
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4,800,055
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3,791,680
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COST OF SALES—Land:
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Direct costs
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3,432,861
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3,772,394
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Indirect, selling, and closing costs
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126,027
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199,757
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Total cost of sales—land
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3,558,888
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3,972,151
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GROSS PROFIT (LOSS) FROM LAND SALES
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1,241,167
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(180,471
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)
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TOTAL GROSS PROFIT
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114,246,870
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82,469,104
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OPERATING AND OTHER INCOME (EXPENSES):
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General and administrative
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(45,677,322
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)
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(36,984,906
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)
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Marketing
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(9,034,825
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)
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(9,479,305
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)
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Interest
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(2,212,735
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)
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(4,863,955
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)
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Inventory valuation adjustment
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(456,044
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)
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(589,843
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)
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Equity in earnings of unconsolidated entities
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563,497
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404,944
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Interest income
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144,217
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84,371
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Other income
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935,721
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784,974
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Total operating and other expenses, net
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(55,737,491
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)
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(50,643,720
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)
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OPERATING INCOME BEFORE INCOME TAXES
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58,509,379
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31,825,384
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INCOME TAX EXPENSE
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(1,065,640
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)
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(788,721
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)
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||||
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NET INCOME
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$
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57,443,739
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$
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31,036,663
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||||
See notes to consolidated financial statements.
4
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Combined Statements of Changes in Equity
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BALANCE—December 31, 2018
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$
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177,103,551
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Cummulative effect of change in accounting principle
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892,968
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|||
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||||
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Distributions
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(8,629,043
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)
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Net income
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31,036,663
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|||
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BALANCE—December 31, 2019
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200,404,139
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|||
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Distributions
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(27,941,706
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)
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||
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||||
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Net income
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20,799,557
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|||
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BALANCE—December 31, 2020
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$
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193,261,990
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5
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Combined Statements of Cash Flows
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Year Ended December 31,
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2020
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2019
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CASH FLOWS FROM OPERATING ACTIVITIES:
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||||||||
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Net income
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$
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57,443,739
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$
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31,036,663
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||||
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Adjustments to reconcile net income to net cash provided by operating activities:
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||||||||
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Depreciation and amortization
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2,732,159
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2,030,532
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||||||
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(Gain)/Loss on disposition of model home furniture and fixtures
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(46,286
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)
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(23,418
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)
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||||
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Net equity in earnings of unconsolidated entities
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(74,296
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)
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(5,918
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)
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||||
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Inventory valuation adjustment
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456,044
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589,843
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||||||
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Amortization of loan acquisition costs
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1,842,004
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1,850,824
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||||||
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Changes in operating assets and liabilities:
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||||||||
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Notes and advances receivable, affiliates
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4,893,233
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6,140,689
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||||||
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Accounts receivable, other
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(2,637,438
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)
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(325,008
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)
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||||
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Prepaid expenses and other assets
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(1,913,225
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)
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(1,013,116
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)
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Residential housing and other inventory, net
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10,235,811
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(20,052,089
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)
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|||||
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Trade accounts payable
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7,091,848
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84,926
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||||||
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Accrued expenses and other liabilities
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17,294,654
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4,147,927
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||||||
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Net cash provided by operating activities
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97,318,247
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24,461,855
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Additions to model home furniture and fixtures
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(1,848,216
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)
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(1,187,018
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)
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Other investing activities, net
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287,288
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(382,386
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)
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|||||
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Contributions to investment in unconsolidated entities
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(627,102
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)
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(1,780,277
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)
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Net cash used in investing activities
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(2,188,030
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)
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(3,349,681
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)
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Debt proceeds
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266,548,851
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198,786,954
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||||||
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Debt payments
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(309,849,936
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)
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(214,697,946
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)
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Debt acquisition costs
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(1,952,212
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)
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(1,689,211
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)
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Cash distributions to partners
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(41,008,326
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)
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(8,629,043
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)
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||||
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Net cash used in financing activities
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(86,261,623
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)
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(26,229,246
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)
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||||
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NET CHANGE IN CASH AND CASH EQUIVALENTS
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8,868,594
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(5,117,072
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)
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|||||
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of year
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24,449,807
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29,566,879
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||||||
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of year
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$
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33,318,401
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$
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24,449,807
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||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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||||||||
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Cash paid for interest—net of amounts capitalized
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$
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2,729,720
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$
|
5,009,343
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||||
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||||||||
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Cash paid for taxes
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$
|
797,000
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$
|
721,840
|
||||
See notes to consolidated financial statements.
6
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
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Note 1
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- Organization and Description of Business
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MHI Partnership, Ltd., MHI Models, Ltd., McGuyer Homebuilders, Inc., and FMR IP, LLC (collectively “MHI”), are commonly owned businesses engaged in constructing and selling single-family
residential homes. MHI’s product lines feature entry-level, move-up, and luxury homes, with a focus on the move-up market. During the years ended December 31, 2020 and 2019, MHI closed 2,046 and 1,741 homes, respectively. MHI’s operations are in
Texas, with principal markets in Houston, Dallas/Fort Worth, Austin, and San Antonio. To the extent there are positive or negative unforeseen economic or regulatory conditions affecting the Texas market, MHI’s operations, cash flows, and financial
position may be similarly affected.
During 2020, MHI consolidated its branding under the trade name Coventry in order to achieve better utilization of marketing and internet resources. It’s other principal trade names, Plantation
and Wilshire, are still owned by MHI, but are not currently active.
The COVID-19 pandemic has had a widespread impact to the Texas economy, but the demand for residential housing strengthened in 2020 for two primary reasons: (1) businesses are requiring or
allowing employees to work from home, and (2) historically low interest rates on mortgage loans. Despite some disruption to operations from March to April 2020, MHI recovered strongly during the remainder of 2020. The U.S. Department of Homeland
Security has classified residential construction as an essential business, and therefore MHI was not subject to shut down, stay-at-home orders or other significant restrictions. MHI was able to conduct normal operations during the remainder of the
COVID-19 pandemic, but experienced shortages in materials and/or labor due to increased demand for residential housing.
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Note 2
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- Capital Structure
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MHI’s equity interests consist of a corporate general partner, McGuyer Homebuilders, Inc. (“INC”), and four limited partners. The following are the classes of ownership and their interest in
earnings:
Class A - The profits
and losses of MHI Partnership, Ltd. (“MHI Ltd.”), Class A excluding Class C profits or losses, are to be allocated 0.50% to the general partner and 99.50% to the limited partners in 2020 and 2019. The profits and losses of MHI Models, Ltd. (“MHI
Models”), are allocated 0.485% to the general partner and 99.515% to the limited partners. INC is the general partner in both MHI Ltd. and MHI Models. The stockholder’s equity of INC is included in Class A and voting interests in the statement of
equity.
Class B – MHI’s Class
B interests were converted to Class A interests during 2013 and are no longer eligible for issuance.
7
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
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Note 2
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- Capital Structure (Continued)
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Class C - The
proceeds, including interest income and potential loss of principal, from 15% of the undivided interest in certain receivables due from related-party affiliates, are allocated to Class C members. Distributions are based solely upon the collection
of principal and interest from these receivables but are subject to certain terms and conditions.
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Note 3
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- Summary of Significant Accounting Policies
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Principles of consolidation
The combined financial statements include the accounts of MHI and MHI Ltd.’s wholly owned subsidiaries, Homeco Purchasing Company, Ltd., MHI (Nevada), LLC, Wilshire Homes, LLC and 2019 Sonoma,
LLC. The combined financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and all material intercompany accounts and transactions have been eliminated upon consolidation.
MHI uses the equity method of accounting for investments in which it has a significant equity interest, but not control of the majority interest. Under the equity method, MHI’s share of earnings
is accrued as additional investment in unconsolidated entities and reported in the combined statements of income under equity in earnings of unconsolidated entities.
MHI assesses the consolidation of entities in which it does not own a majority interest under the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 810 Consolidation. Generally, these entities, referred to as variable interest entities (“VIEs”), are companies in which MHI contracted to purchase lots, but has no equity ownership. ASC 810
requires certain variable interest entities (“VIEs”) to be consolidated by the primary beneficiary of the entity (See Note 8).
Use of estimates
The preparation of combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Financial instruments
Management believes that the carrying amounts reported in the combined balance sheets for cash and cash equivalents, accounts receivables, and trade accounts payable approximate their fair values
based on their short-term maturities. The fair value of secured debt is not believed to be materially different than the carrying value. The interest on secured debt is variable and believed to approximate market rates.
8
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
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Note 3
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- Summary of Significant Accounting Policies (Continued)
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Concentration of credit risk
At December 31, 2020 and 2019, MHI had cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insured levels. Management regularly
monitors the financial stability of these financial institutions and believes that MHI is not exposed to any significant credit risk in cash and cash equivalents. The Federal Deposit Insurance Corporation, or “FDIC,” generally only insures limited
amounts per depositor per insured bank. The standard coverage limit is $250,000 for most deposit categories.
Cash and cash equivalents
Liquid investments with an initial maturity of three months or less are classified as cash equivalents. Amounts in transit from title companies for home closings of approximately $16.3 million
and $19.4 million are included in cash and cash equivalents at December 31, 2020 and 2019, respectively.
Accounts receivable
At December 31, 2020 and 2019, accounts receivable consist of reimbursable costs or accrued income as follows:
|
2020
|
2019
|
|||||||
|
Due under developer reimbursement agreements
|
$
|
2,469,838
|
$
|
773,456
|
||||
|
Vendor rebates receivable
|
2,510,000
|
1,860,027
|
||||||
|
Other receivables
|
1,997,441
|
1,706,358
|
||||||
|
Total accounts receivable, other
|
$
|
6,977,279
|
$
|
4,339,841
|
||||
Residential housing and other inventory
Residential housing and other inventory include completed and under-construction homes, as well as lots, land under development, and unimproved land. Completed homes and lots are stated at the
lower of actual cost or net realizable value, less costs to sell. Capitalized costs include housing construction, land purchases, and development costs, as well as indirect costs, including interest on interim construction and development
financing, allocated overhead, and taxes during the construction or development periods.
Completed homes, under-construction homes, improved residential lots and unimproved land are evaluated for impairment if potential impairment indicators are present. Housing inventory valuations
are determined by comparing expected selling prices in the specific communities and selling prices in comparable surrounding communities, taking into consideration expected sales prices, cancellation rates, construction, and overhead costs.
Residential lots are evaluated by comparing market prices in the specific and surrounding communities, along with calculating the expected profitability of the home constructed.
9
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 3
|
- Summary of Significant Accounting Policies (Continued)
|
Residential housing and other inventory (continued)
When necessary, a valuation adjustment is recorded to reduce the asset to its estimated net realizable value, less costs to sell. For the years ended December 31, 2020 and 2019, MHI recorded a
valuation adjustment on residential housing and other inventory of $456,044 and $589,843, respectively.
Although management believes the valuation estimates reflected in MHI’s combined financial statements are reasonable, there can be no assurances that MHI could ultimately realize these values.
Given the uncertainty and volatility in the current economic environment, MHI may be required to take future impairment charges on its residential housing and other inventory.
Capitalized interest on home-building activities
Interest is capitalized on lots and building activities during the construction period. Such capitalized interest is included in cost of sales when revenue is recognized on the sale. Subsequent
to substantial completion of construction, interest on homes is no longer capitalized, but is charged directly to expense as incurred and reported as interest expense.
A summary of interest capitalized during the years ended December 31, 2020 and 2019, is as follows:
|
2020
|
2019
|
|||||||
|
Capitalized in inventory—beginning of year
|
$
|
11,529,474
|
$
|
10,690,378
|
||||
|
Incurred
|
11,885,918
|
17,769,656
|
||||||
|
Less amounts:
|
||||||||
|
Included in costs of sales
|
(13,055,720
|
)
|
(12,066,605
|
)
|
||||
|
Included in operating expenses
|
(2,212,735
|
)
|
(4,863,955
|
)
|
||||
|
Capitalized in inventory—end of year
|
$
|
8,146,937
|
$
|
11,529,474
|
||||
Furniture and fixtures
Furniture and fixtures are recorded at cost. Depreciation expense for furniture and fixtures is calculated using the straight-line method over the expected useful life of three to five years. MHI
owns its office facility in San Antonio and the building has an expected useful life of thirty-nine years. The costs of maintenance and repairs are charged to expense as incurred. When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is included in operations.
Accumulated depreciation was $7,103,005 and $6,177,413 as of December 31, 2020 and 2019, respectively. Depreciation expense for the years ended December 31, 2020 and 2019, was $1,721,427 and
$1,868,820, respectively, and is included in general and administrative expense in the combined statements of income.
10
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 3
|
- Summary of Significant Accounting Policies (Continued)
|
Warranties
MHI provides a limited warranty to each homebuyer at the time of sale. MHI’s warranty exposure is generally limited to one year for most costs. A third-party limited warranty is also provided to
each homebuyer. The third-party warranty generally provides coverage in the event of major structural defects for a period of up to 10 years. MHI accrues for estimated warranty costs at the time of each home sale based on historical and anticipated
warranty costs. MHI periodically assesses the adequacy of its recorded warranty liability and adjusts the accrued amount as necessary.
The following summarizes MHI’s accrued warranty activity during the years ended December 31, 2020 and 2019:
|
2020
|
2019
|
|||||||
|
Accrued warranty liability—beginning of year
|
$
|
4,501,195
|
$
|
2,100,000
|
||||
|
Warranty accrual for current year home sales
|
7,442,196
|
6,030,181
|
||||||
|
Warranty payments made during the year
|
(4,884,297
|
)
|
(3,628,986
|
)
|
||||
|
Accrued warranty liability—end of year
|
$
|
7,059,094
|
$
|
4,501,195
|
||||
Advertising costs
MHI expenses advertising costs as they are incurred. Advertising costs included in marketing expenses totaled $2,771,860 and $2,739,877 for the years ended December 31, 2020 and 2019,
respectively.
The salaries of commissioned sales employees and commissions paid to outside real estate agents are included in cost of sales. Except for incremental commissions paid in advance of closing that
are recoverable from a specific home sale, sales commissions are expensed as incurred. Prepaid commissions are included in prepaid expenses and other assets on the combined balance sheets.
Income taxes
MHI Ltd. and MHI Models are organized as limited partnerships. FMR IP, LLC is organized as a limited liability company. McGuyer Homebuilders, Inc. is organized as a corporation, but taxed as an
S-Corp. No provision for federal income taxes is included in the accompanying combined financial statements since such liability, if any, is the individual liability of the respective partners or members. MHI does not believe it has any uncertain
tax positions or unrecognized tax benefits requiring disclosure. MHI is subject to a state margin tax. Because the margin tax is based on revenue and expenses of MHI, it is considered an income tax and is accounted for in accordance with the
provisions of FASB ASC 740, Income Taxes. Income tax expense was $1,065,640 and $788,721 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, MHI had no
significant temporary differences, tax credits, or net operating loss carryforwards.
11
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 3
|
- Summary of Significant Accounting Policies (Continued)
|
Trade name
In conjunction with an acquisition during the year ended December 31, 2011, MHI acquired the Wilshire Homes trade name and allocated $2,425,712 of the purchase price to this asset. Accumulated
amortization related to the trade name was $2,425,712 and $1,414,980 as of December 31, 2020 and 2019, respectively. During 2019, MHI recorded annual amortization of $161,712. During 2020, the Wilshire trade name became inactive and was fully
amortized in the amount of $1,010,732.
Revenue recognition
Revenues from homes sales are recognized when MHI has satisfied its performance obligation and control has transferred to the customer. For production homes, this occurs at a point in time, which
is the closing date. On this date, title passes to the new homeowner and MHI is entitled to payment. For homes built on a customer’s lot, referred to as the Build on Your Own Lot program (“BOYL”), MHI’s performance obligation and the transfer of
control occurs over time, as the construction in process has no alternative use to MHI and it’s then entitled to all payments received as well as payments for work completed to date. Therefore, MHI uses the input method in determining the amount of
revenue that is recognizable.
Disaggregated revenues from home sales during the years ended December 31, 2020 and 2019 are as follows:
|
2020
|
2019
|
|||||||
|
Production home sales
|
$
|
881,018,949
|
$
|
737,433,418
|
||||
|
BOYL home sales
|
22,765,476
|
20,797,141
|
||||||
|
Home sales revenue
|
$
|
903,784,425
|
$
|
758,230,559
|
||||
Revenues from sales of land are recognized at a point in time, which is the closing date. On this date, title passes to the customer and MHI is entitled to payment.
Contract liabilities related to production homes are recorded as customer deposits within accrued expenses and other liabilities on the combined balance sheets. See Note 5.
MHI adopted FASB Accounting Standards Update (“ASU”) 2014-09 for revenue recognition on a modified retrospective basis. MHI increased equity for the cumulative effect of net income from BOYL
homes earned in the prior year and previously capitalized sales salaries in the amount of $892,968 as of January 1, 2019. No other changes to the combined financial statements were necessary in order to adopt the standard. MHI used the portfolio
approach as a practical expedient in applying the standard.
12
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 3
|
- Summary of Significant Accounting Policies (Continued)
|
Leases
In February 2016, the FASB issued ASU 2016-02, which changes how leases are reported in financial statements. ASU 2016-02 primarily impacts off-balance sheet operating leases and will require
such leases, with the exception of leases with a term of one year or less, to be recorded on the balance sheet. Under ASU 2016-02, an intangible asset is recorded for the lessee’s right-of-use, and is amortized over the lease term. The lessee will
also record an offsetting lease obligation at the inception of a lease for the present value of future lease payments that will be amortized as lease payments are made. MHI adopted the provisions of ASU 2016-02 effective January 1, 2019 using the
modified retrospective method.
|
Note 4
|
- Residential Housing and Other Inventory, Net
|
Residential housing and other inventory at December 31, 2020 and 2019, consist of the following:
|
2020
|
2019
|
|||||||
|
Under contract:
|
||||||||
|
Homes completed
|
$
|
17,351,826
|
$
|
17,361,365
|
||||
|
Homes under construction
|
164,092,027
|
87,034,268
|
||||||
|
Lots owned
|
49,492,445
|
22,357,428
|
||||||
|
Total inventory under contract
|
230,936,298
|
126,753,061
|
||||||
|
Speculative units:
|
||||||||
|
Homes completed
|
9,997,845
|
38,820,120
|
||||||
|
Homes under construction
|
33,612,822
|
89,962,675
|
||||||
|
Lots owned
|
113,625,589
|
138,386,221
|
||||||
|
Total speculative units
|
157,236,256
|
267,169,016
|
||||||
|
Model homes:
|
||||||||
|
Completed
|
48,832,862
|
48,571,241
|
||||||
|
Under construction
|
2,309,474
|
3,363,137
|
||||||
|
|
||||||||
|
Total model homes
|
51,142,336
|
51,934,378
|
||||||
|
Land:
|
||||||||
|
Unimproved land
|
1,643,199
|
1,568,868
|
||||||
|
Land under development
|
913,662
|
5,138,283
|
||||||
|
|
||||||||
|
Total land
|
2,556,861
|
6,707,151
|
||||||
|
Total residential housing and other inventory
|
$
|
441,871,751
|
$
|
452,563,606
|
||||
13
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 4
|
- Residential Housing and Other Inventory, Net (Continued)
|
Residential housing and other inventory include accumulated valuation adjustments of $1,016,095 and $754,189 at December 31, 2020 and 2019, respectively.
|
Note 5
|
- Accrued Expenses and Other Liabilities
|
Accrued expenses and other liabilities at December 31, 2020 and 2019, consist of the following:
|
2020
|
2019
|
|||||||
|
Warranty and legal
|
$
|
8,378,938
|
$
|
5,410,914
|
||||
|
Property taxes
|
4,501,845
|
4,654,059
|
||||||
|
Salaries, wages, and bonuses—net
|
12,001,178
|
9,010,406
|
||||||
|
Customer deposits
|
20,818,016
|
10,398,536
|
||||||
|
Interest
|
571,159
|
1,088,144
|
||||||
|
Other
|
7,315,056
|
5,729,479
|
||||||
|
Total accrued and other liabilities
|
$
|
53,586,192
|
$
|
36,291,538
|
||||
|
Note 6
|
- Debt Agreements
|
MHI’s debt agreements as of December 31 are summarized as follows:
|
2020
|
2019
|
|||||||
|
Revolving credit
|
$
|
215,732,776
|
$
|
271,882,861
|
||||
|
Unsecured debt
|
7,849,000
|
-
|
||||||
|
Working capital ($5,000,000 maximum)
|
5,000,000
|
-
|
||||||
|
Total outstanding loans
|
$
|
228,581,776
|
$
|
271,882,861
|
||||
|
Revolving credit:
|
||||||||
|
Credit line maximum
|
$
|
630,349,000
|
$
|
635,000,000
|
||||
|
|
||||||||
|
Committed loans
|
$
|
450,676,339
|
$
|
381,782,376
|
||||
|
Revolving credit loan availability
|
$
|
278,189,478
|
$
|
290,655,044
|
||||
|
Outstanding balances:
|
||||||||
|
Loans
|
(215,732,776
|
)
|
(271,882,861
|
)
|
||||
|
Letters-of-credit outstanding & limitations
|
(1,836,025
|
)
|
(1,055,951
|
)
|
||||
|
Revolving credit available borrowing
|
$
|
60,620,677
|
$
|
17,716,232
|
||||
|
Interest rates as of December 31
|
1.00%–4.50
|
%
|
4.50%–5.27
|
%
|
||||
14
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 6
|
- Debt Agreements (Continued)
|
Interest rates on loan facilities are based on the London InterBank Offering Rate (“LIBOR”) or lender-based US “Prime” interest rates, plus an applicable margin.
Revolving credit agreements for residential construction are secured by residential construction units and lots. For each lot or residential unit, MHI may initially borrow the lesser of the
following: 70%-100% of cost or 70%-95% of appraised value. Initial advance rates are subject to 5%-10% annual reduction, depending on the age of inventory. Borrowing availability ends after the lot or residential unit has aged 12-48 months,
depending on the loan facility. MHI’s working capital loan is cross-collateralized with a revolving credit agreement from the same lender. Additionally, certain revolving credit agreements allow for land development construction within the
revolving credit facility, as described below.
Land development construction loans (“Development Loans”) are secured by land, related improvements, and residential lots upon completion. Prospective land development projects must receive
lender pre-approval, and borrowings are limited to an itemized budget for each project. Development Loans are repaid as lots are sold or converted to residential construction loan facilities based on a minimum release price (per lot) as determined
by the lender. As of December 31, 2020, there were no Development Loans outstanding.
Model home loans are secured by completed model homes. Prospective model home loans must receive lender preapproval, and borrowings are generally limited to 75% of the appraised value. The
initial loan is subject to annual reductions of approximately 5%-10% based on the age of the model and subsequent appraisal. Additionally, the model home term loans contain significant financial covenants regarding interest coverage and leverage.
MHI’s loan facilities contain significant restrictive financial covenants. The most rigorous of these covenants are as follows:
|
2020
|
2019
|
|||||||
|
Liquidity test (cash and available borrowing)
|
$
|
20,000,000
|
$
|
15,000,000
|
||||
|
Interest coverage ratio
|
2.00-2.25 to 1.00
|
2.00-2.25 to 1.00
|
||||||
|
Leverage ratio
|
2.75-3.50 to 1.00
|
2.75-3.50 to 1.00
|
||||||
|
Tangible net worth, excluding intercompany
|
$
|
119,000,000
|
$
|
111,687,520
|
||||
|
Maximum investment in land and lots owned
|
$
|
247,394,706
|
$
|
172,964,349
|
||||
To the extent that distributions do not cause the violation of a financial covenant, MHI’s loan agreements allow for unlimited distributions to partners. MHI is also subject to inventory sublimit
covenants as follows: (1) maintain speculative/model home ratio of less than 55% of all homes for the first three calendar quarters and less than 60% for the fourth quarter; and (2) speculative homes over one year old are not allowed to be greater
than 20% of the total number of homes owned by MHI. Loan covenants are tested by all lenders at the end of each calendar quarter. As of December 31, 2020, MHI believes it was in compliance with all covenants.
15
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 6
|
- Debt Agreements (Continued)
|
MHI received a loan from a financial institution in the amount of $7,849,000 under the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economics Security
(“CARES”) Act. The loan was subject to a note dated April 16, 2020. The PPP provides that the loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The interest rate on the
loan is 1%. The loan was fully forgiven in August 2021.
Maturities of MHI’s debt, as revised for subsequent events if applicable, are as follows:
|
Year Ending
December 31, |
||||
|
2021
|
$
|
63,465,546
|
||
|
2022
|
125,184,964
|
|||
|
2023
|
15,085,254
|
|||
|
2024
|
4,471,600
|
|||
|
2025
|
20,374,412
|
|||
|
Total
|
$
|
228,581,776
|
||
During the years ended December 31, 2020 and 2019, MHI incurred debt acquisition costs of $2,144,712 and $1,832,961, respectively. Debt acquisition costs are amortized over the loan term as a
component of interest expense or written off on termination of the related loan facility.
|
Note 7
|
- Investment in Unconsolidated Entities
|
MHI Ltd. owns a 31% interest in WKMM, LLC, a Texas limited liability company, whose sole purpose is the ownership of a 49% interest in Prosperity Title, LLC, located in
Austin, Texas. During 2020, MHI Ltd.’s interest increased to 60%. Additionally, MHI Ltd. owns a 50% interest in Felder MHI-Blackhawk, LLC (“Felder MHI”). Felder MHI is developing land in the Austin market to sell as residential lots back to the
members. Summarized financial information (unaudited) is as follows:
|
2020
|
2019
|
|||||||
|
Assets
|
$
|
12,644,020
|
$
|
9,696,979
|
||||
|
Liabilities
|
7,728,800
|
6,038,039
|
||||||
|
Revenues
|
8,380,969
|
1,308,967
|
||||||
|
Expenses
|
7,116,080
|
2,355
|
||||||
16
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 8
|
- Lot Purchase Contracts and Variable Interest Entities
|
MHI enters into purchase agreements with residential lot developers for lots in the normal course of business as a homebuilder. Typically, these agreements require a
non-refundable earnest money deposit and provide for the quarterly acquisition of lots in quantities that approximate the demand for new homes. Should the lot developer be unable to fulfill its commitment to deliver lots, the earnest money may be
refundable. The lots generally have a fixed purchase price, plus an annual escalation rate, however, a small number of agreements are based on a percentage of MHI’s home selling price.
The provisions of these agreements usually create a VIE with the lot developer under the provisions of ASC 810, Consolidation. If the
Partnership is considered the primary beneficiary of the agreement, the Partnership would consolidate the lot developer. To consolidate a VIE, the Partnership must assess whether it controls the activities of the VIE that most significantly impact
economic performance as well as whether it is expected to absorb losses or receive benefits from the VIE.
In most cases, MHI’s maximum exposure to loss is limited to the non-refundable earnest money, and the VIE’s creditors have no recourse against MHI. As described in Note 10, MHI has irrevocable
standby letters of credit for the benefit of one affiliate, however, this does not create significant additional exposure risk. MHI did not consolidate any VIEs in 2020 or 2019. Except for the portion of the purchase price represented by the
non-refundable earnest money deposit, MHI’s lots under purchase agreements are not recorded in the combined financial statements.
MHI’s lot purchase agreements are summarized as follows for 2020:
|
Lots
|
Purchase Price
|
Earnest Money
|
||||||||||
|
Third parties
|
2,212
|
$
|
192,984,238
|
$
|
23,051,956
|
|||||||
|
Related parties
|
1,225
|
87,884,161
|
10,761,268
|
|||||||||
|
3,437
|
$
|
280,868,399
|
$
|
33,813,224
|
||||||||
MHI’s lot purchase agreements are summarized as follows for 2019:
|
Lots
|
Purchase Price
|
Earnest Money
|
||||||||||
|
Third parties
|
2,577
|
$
|
203,618,368
|
$
|
29,254,633
|
|||||||
|
Related parties
|
957
|
65,385,724
|
7,140,459
|
|||||||||
|
3,534
|
$
|
269,004,092
|
$
|
36,395,092
|
||||||||
Earnest money deposits are included in these combined financial statements under prepaid expenses and other assets.
17
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 9
|
- Related Party Transactions
|
7676 Woodway, Ltd.
MHI leases its administrative offices in Houston from a limited partnership that is commonly owned by the owners in MHI. For the years ended December 31, 2020 and 2019, the
company paid rent of $860,157 each year. The lease agreement requires fixed monthly payments of $71,680 and expires December 31, 2021.
Adam Property & Casualty Company
MHI contracted for insurance coverage through an affiliate (“Adam”) that is commonly owned by the owners of MHI, for which it paid insurance premiums of $325,122 and $325,228
for liability insurance coverage for the years ended December 31, 2020 and 2019, respectively. Additionally, MHI has borrowed $3,220,593 and $3,220,708 for model home loans from Adam and incurred interest expense of $145,206 and $138,369,
respectively, as of and for the years ended December 31, 2020 and 2019 (See Note 6). MHI pays interest on this loan on a monthly basis. Under the terms of the loan agreement, Adam has a second lien on certain model homes owned by MHI. The loan was
paid off in February 2021.
Land Affiliates
MHI purchases lots from various land developers and lot resellers (“Land Affiliates”) which are commonly owned by MHI’s partners. For the years ended December 31, 2020 and
2019, MHI purchased $47,893,911 (643 lots) and $41,071,691 (506 lots), respectively, from Land Affiliates. As of December 31, 2020 and 2019, MHI has outstanding non-refundable earnest money deposits and lot purchase contracts with Land Affiliates
(See Note 8).
MHI receives reimbursement of personnel costs and operating expenses from Land Affiliates that are reported as a reduction of general and administrative expenses. For the
years ended December 31, 2020 and 2019, MHI received reimbursements of $1,300,000 each year.
MHI periodically provides advances to Land Affiliates. As of December 31, 2020 and 2019, balances due from such advances were $4,293,623 and $9,180,991, respectively. For the
years ended December 31, 2020 and 2019, MHI accrued interest income from Land Affiliates of $51,767 and $71,898, respectively. The advances were paid in full by the affiliates as of June 30, 2021.
|
Note 10
|
- Commitments and Contingencies
|
Litigation
MHI is engaged in various claims and litigation arising from ordinary business operations. Uninsured losses, if any, resulting from these matters are not expected to have a material adverse
impact on the combined financial statements of MHI.
18
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 10
|
- Commitments and Contingencies (Continued)
|
Operating leases
MHI leases division office facilities under non-cancelable operating leases that expire through 2026. Total rent expense incurred under office facility operating lease agreements for the years
ended December 31, 2020 and 2019 was approximately $1,316,000 and $1,313,000, respectively.
The following is a summary of future expected minimum payments under non-cancelable lease terms as of December 31, 2020:
|
Year Ending
December 31,
|
||||
|
2021
|
$
|
1,221,266
|
||
|
2022
|
366,123
|
|||
|
2023
|
336,043
|
|||
|
2024
|
271,538
|
|||
|
2024
|
265,624
|
|||
|
Thereafter
|
78,224
|
|||
|
Total
|
$
|
2,538,818
|
||
Guarantees
As of December 31, 2020, MHI has guaranteed up to $945,000 of bank debt owed by an unconsolidated entity, Felder MHI-Blackhawk, LLC (see Note 7). A guarantee liability has not been recorded as
the probability of required performance is remote.
Letters of credit
As of December 31, 2020, MHI has irrevocable standby letters of credit in the amount of $1,836,025 outstanding for the benefit of a land development affiliate that may be used in the event of a
loan default by the affiliate. MHI currently believes that the likelihood of performing under these agreements is remote.
|
Note 11
|
- Employee Benefit Plan
|
MHI participates in a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who meet specified service requirements.
Under the plan, a discretionary match may be made equal to 25% of each participant’s contribution up to a maximum of $1,800 each year. MHI contributed approximately $523,000 and $477,000 related to the plan for each of the years ended December 31,
2020 and 2019, respectively.
19
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
December 31, 2020
|
Note 12
|
- Subsequent Events
|
During February 2021, MHI made a capital contribution of $800,000 to Felder MHI.
MHI distributed $19,897,671 in cash to its partners through September 2021.
In August 2021, MHI received forgiveness of its PPP loan in the amount of $7,849,000 under the terms of the loan.
In June 2021, MHI entered into an agreement with Dream Finders Homes, Inc. (“DFH”) to sell substantially all its assets at cost as recorded in the combined financial statements at the closing
date plus a premium of $50,000,000. Additionally, DFH assumed certain trade payables and accrued liabilities. The sale closed on October 1, 2021. At closing, MHI and DFH also entered into a lot purchase contract in which MHI retained approximately
$109,000,000 of lot inventory that DFH may subsequently purchase. The lot purchase contract has no fixed takedown requirements and allows DFH to purchase lots as needed at MHI’s cost, plus price escalation at the annual rate of ten percent (10%),
computed on a daily basis.
Management has reviewed for subsequent events through December 8, 2021, which was the date the combined financial statements were available to be issued, and determined that no other events have
occurred which require disclosure.
Exhibit 99.2
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Combined Financial Statements
(with Independent Accountants’
Review Report)
June 30, 2021
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
June 30, 2021
Table of Contents
Table of Contents
|
|
Page(s) |
|
|
|
| Independent Accountants’ Review Report |
1 |
|
|
|
| Combined Balance Sheets | 2 |
|
|
|
| Combined Statements of Income |
3 |
| Combined Statements of Changes in Equity | 4 |
| Combined Statements of Cash Flows | 5 |
| Notes to Combined Financial Statements | 6-19 |
INDEPENDENT ACCOUNTANTS’ REVIEW REPORT
To the Owners of
MHI Partnership, Ltd., MHI Models, Ltd., McGuyer Homebuilders, Inc., and FMR IP, LLC
We have reviewed the accompanying combined financial statements of MHI Partnership, Ltd.; MHI Models, Ltd.; McGuyer Homebuilders, Inc.; and FMR IP, LLC; (collectively “MHI”), which comprise the combined balance
sheets as of June 30, 2021 and 2020, and the related combined statements of income, changes in equity and cash flows for each of the six month periods then ended, and the related notes to the combined financial statements. A review includes
primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the combined
financial statements as a whole. Accordingly, we do not express such an opinion.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement whether due to fraud or error.
Accountants’ Responsibility
Our responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those
standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the combined financial statements for them to be in accordance with U.S.
generally accepted accounting principles. We believe that the results of our procedures provide a reasonable basis for our conclusion.
Accountants’ Conclusion
Based on our review, we are not aware of any material modifications that should be made to the accompanying combined financial statements in order for them to be in accordance with U.S. generally accepted accounting
principles.
December 8, 2021
2
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Combined Balance Sheets
|
June 30,
|
||||||||
|
2021
|
2020
|
|||||||
|
ASSETS
|
||||||||
|
CASH AND CASH EQUIVALENTS (including restricted cash of $570,847 and $570,494 respectively)
|
$
|
23,173,973
|
$
|
23,690,385
|
||||
|
NOTES & ADVANCES RECEIVABLE—Affiliates
|
12,637
|
4,329,866
|
||||||
|
ACCOUNTS RECEIVABLE—Other
|
6,342,247
|
3,363,813
|
||||||
|
PREPAID EXPENSES AND OTHER ASSETS
|
45,036,423
|
39,654,756
|
||||||
|
RESIDENTIAL HOUSING AND OTHER INVENTORY
|
548,011,281
|
457,806,059
|
||||||
|
FURNITURE, FIXTURES, AND LEASEHOLD IMPROVEMENTS—Net
|
5,391,742
|
5,675,818
|
||||||
|
TRADE NAME—Net
|
-
|
904,046
|
||||||
|
INVESTMENTS IN UNCONSOLIDATED ENTITIES
|
3,560,185
|
2,741,233
|
||||||
|
TOTAL ASSETS
|
$
|
631,528,488
|
$
|
538,165,976
|
||||
|
LIABILITIES AND EQUITY
|
||||||||
|
LIABILITIES:
|
||||||||
|
Trade accounts payable
|
$
|
35,940,702
|
$
|
29,921,345
|
||||
|
Accrued and other liabilities
|
64,132,384
|
40,709,018
|
||||||
|
Unsecured debt
|
7,849,000
|
7,849,000
|
||||||
|
Secured debt agreements
|
296,219,454
|
266,424,623
|
||||||
|
Total liabilities
|
404,141,540
|
344,903,986
|
||||||
|
COMMITMENTS AND CONTINGENCIES
|
||||||||
|
EQUITY
|
227,386,948
|
193,261,990
|
||||||
|
Total equity
|
227,386,948
|
193,261,990
|
||||||
|
TOTAL LIABILITIES AND EQUITY
|
$
|
631,528,488
|
$
|
538,165,976
|
||||
See notes to consolidated financial statements.
3
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Combined Statements of Income
|
Six Month Period Ended June30,
|
||||||||
|
2021
|
2020
|
|||||||
|
HOME SALES REVENUE
|
$
|
376,182,756
|
$
|
383,116,436
|
||||
|
COST OF SALES—Homes:
|
||||||||
|
Direct costs
|
282,489,032
|
292,332,983
|
||||||
|
Indirect, selling, and closing costs
|
42,883,251
|
44,241,926
|
||||||
|
Total cost of sales—homes
|
325,372,283
|
336,574,909
|
||||||
|
GROSS PROFIT FROM HOME SALES
|
50,810,473
|
46,541,527
|
||||||
|
LAND SALES REVENUE
|
2,768,448
|
110,000
|
||||||
|
COST OF SALES—Land:
|
||||||||
|
Direct costs
|
1,263,779
|
81,317
|
||||||
|
Indirect, selling, and closing costs
|
2,498
|
4,359
|
||||||
|
|
||||||||
|
Total cost of sales—land
|
1,266,277
|
85,676
|
||||||
|
|
||||||||
|
GROSS PROFIT FROM LAND SALES
|
1,502,171
|
24,324
|
||||||
|
TOTAL GROSS PROFIT
|
52,312,644
|
46,565,851
|
||||||
|
OPERATING AND OTHER INCOME (EXPENSES):
|
||||||||
|
General and administrative
|
(22,679,619
|
)
|
(20,244,050
|
)
|
||||
|
Marketing
|
(3,519,701
|
)
|
(4,131,154
|
)
|
||||
|
Interest
|
(532,047
|
)
|
(1,586,666
|
)
|
||||
|
Equity in earnings of unconsolidated entities
|
192,636
|
157,681
|
||||||
|
Interest income
|
66,440
|
61,524
|
||||||
|
Other income
|
724,681
|
411,688
|
||||||
|
Total operating and other expenses, net
|
(25,747,610
|
)
|
(25,330,977
|
)
|
||||
|
OPERATING INCOME BEFORE INCOME TAXES
|
26,565,034
|
21,234,874
|
||||||
|
INCOME TAX EXPENSE
|
(490,436
|
)
|
(435,317
|
)
|
||||
|
NET INCOME
|
$
|
26,074,598
|
$
|
20,799,557
|
||||
See notes to consolidated financial statements.
4
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Combined Statements of Changes in Equity
Six Month Period Ended June 30, 2021
|
BALANCE—December 31, 2020
|
$
|
216,839,552
|
||
|
Distributions
|
(15,527,202
|
)
|
||
|
|
||||
|
Net income
|
26,074,598
|
|||
|
BALANCE—June 30, 2021
|
$
|
227,386,948
|
Six Month Period Ended June 30, 2020
|
BALANCE—December 31, 2019
|
$
|
200,404,139
|
||
|
Distributions
|
(27,941,706
|
)
|
||
|
|
||||
|
Net income
|
20,799,557
|
|||
|
BALANCE—June 30, 2020
|
$
|
196,261,990
|
5
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Combined Statements of Cash Flows
|
Six Month Period Ended June 30,
|
||||||||
|
2021
|
2020
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net income
|
$
|
26,074,598
|
$
|
20,799,557
|
||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
820,485
|
988,195
|
||||||
|
(Gain)/Loss on disposition of model home furniture and fixtures
|
(72,073
|
)
|
(15,099
|
)
|
||||
|
Net equity in earnings of unconsolidated entities
|
111,863
|
56,521
|
||||||
|
Amortization of loan acquisition costs
|
916,363
|
858,765
|
||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Notes and advances receivable, affiliates
|
4,280,985
|
4,856,990
|
||||||
|
Accounts receivable, other
|
635,032
|
976,027
|
||||||
|
Prepaid expenses and other assets
|
(4,684,869
|
)
|
(1,262,962
|
)
|
||||
|
Residential housing and other inventory, net
|
(107,286,141
|
)
|
(6,441,340
|
)
|
||||
|
Trade accounts payable
|
932,583
|
2,005,075
|
||||||
|
Accrued expenses and other liabilities
|
10,546,191
|
4,417,480
|
||||||
|
Net cash provided by (used in) operating activities
|
(67,724,983
|
)
|
27,239,209
|
|||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Additions to model home furniture and fixtures
|
(851,501
|
)
|
(1,087,088
|
)
|
||||
|
Contributions to investment in unconsolidated entities
|
(1,099,113
|
)
|
(926,217
|
)
|
||||
|
Net cash used in investing activities
|
(1,950,614
|
)
|
(2,013,305
|
)
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Debt proceeds
|
180,212,503
|
133,529,620
|
||||||
|
Debt payments
|
(104,725,825
|
)
|
(131,138,858
|
)
|
||||
|
Debt acquisition costs
|
(428,307
|
)
|
(434,382
|
)
|
||||
|
Cash distributions to partners
|
(15,527,202
|
)
|
(27,941,706
|
)
|
||||
|
Net cash provided by (used in) financing activities
|
59,531,169
|
(25,985,326
|
)
|
|||||
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
(10,144,428
|
)
|
(759,422
|
)
|
||||
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —Beginning of period
|
33,318,401
|
24,449,807
|
||||||
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period
|
$
|
23,173,973
|
$
|
23,690,385
|
||||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash paid for interest—net of amounts capitalized
|
$
|
505,055
|
$
|
877,964
|
||||
|
|
||||||||
|
Cash paid for taxes
|
$
|
1,463,366
|
$
|
-
|
||||
See notes to consolidated financial statements.
6
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 1
|
- Organization and Description of Business
|
MHI Partnership, Ltd., MHI Models, Ltd., McGuyer Homebuilders, Inc., and FMR IP, LLC (collectively “MHI”), are commonly owned businesses engaged in constructing and selling single-family
residential homes. MHI’s product lines feature entry-level, move-up, and luxury homes, with a focus on the move-up market. During the six months ended June 30, 2021 and 2020, MHI closed 800 and 861 homes, respectively. MHI’s operations are in
Texas, with principal markets in Houston, Dallas/Fort Worth, Austin, and San Antonio. To the extent there are positive or negative unforeseen economic or regulatory conditions affecting the Texas market, MHI’s operations, cash flows, and financial
position may be similarly affected.
During 2020, MHI consolidated its branding under the trade name Coventry in order to achieve better utilization of marketing and internet resources. It’s other principal trade names, Plantation
and Wilshire, are still owned by MHI, but are not currently active.
The COVID-19 pandemic has had a widespread impact to the Texas economy, but the demand for residential housing strengthened in 2020 for two primary reasons: (1) businesses are requiring or
allowing employees to work from home, and (2) historically low interest rates on mortgage loans. Despite some disruption to operations from March to April 2020, MHI recovered strongly during the remainder of 2020. The U.S. Department of Homeland
Security has classified residential construction as an essential business, and therefore MHI was not subject to shut down, stay-at-home orders or other significant restrictions. MHI was able to conduct normal operations during the remainder of the
COVID-19 pandemic, but experienced shortages in materials and/or labor due to increased demand for residential housing.
|
Note 2
|
- Capital Structure
|
MHI’s equity interests consist of a corporate general partner, McGuyer Homebuilders, Inc. (“INC”), and four limited partners. The following are the classes of ownership and their interest in
earnings:
Class A - The profits
and losses of MHI Partnership, Ltd. (“MHI Ltd.”), Class A excluding Class C profits or losses, are to be allocated 0.50% to the general partner and 99.50% to the limited partners. The profits and losses of MHI Models, Ltd. (“MHI Models”), are
allocated 0.485% to the general partner and 99.515% to the limited partners. INC is the general partner in both MHI Ltd. and MHI Models. The stockholder’s equity of INC is included in Class A and voting interests in the statement of equity.
Class B - MHI’s Class
B interests were converted to Class A interests during 2013 and are no longer eligible for issuance.
Class C - The
proceeds, including interest income and potential loss of principal, from 15% of the undivided interest in certain receivables due from related-party affiliates, are allocated to Class C members. Distributions are based solely upon the collection
of principal and interest from these receivables but are subject to certain terms and conditions.
7
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 3
|
- Summary of Significant Accounting Policies
|
Principles of consolidation
The combined financial statements include the accounts of MHI and MHI Ltd.’s wholly owned subsidiaries, Homeco Purchasing Company, Ltd., MHI (Nevada), LLC, Wilshire Homes, LLC and 2019 Sonoma,
LLC. The combined financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and all material intercompany accounts and transactions have been eliminated upon consolidation.
MHI uses the equity method of accounting for investments in which it has a significant equity interest, but not control of the majority interest. Under the equity method, MHI’s share of earnings
is accrued as additional investment in unconsolidated entities and reported in the combined statements of income under equity in earnings of unconsolidated entities.
MHI assesses the consolidation of entities in which it does not own a majority interest under the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 810 Consolidation. Generally, these entities, referred to as variable interest entities (“VIEs”), are companies in which MHI contracted to purchase lots, but has no equity ownership. ASC 810
requires certain variable interest entities (“VIEs”) to be consolidated by the primary beneficiary of the entity (See Note 8). See further financial information about MHI’s VIEs in Note 8.
Use of estimates
The preparation of combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Financial instruments
Management believes that the carrying amounts reported in the combined balance sheets for cash and cash equivalents, accounts receivables, and trade accounts payable approximate their fair values
based on their short-term maturities. The fair value of secured debt is not believed to be materially different than the carrying value. The interest on secured debt is variable and believed to approximate market rates.
Concentration of credit risk
At June 30, 2021 and 2020, MHI had cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insured levels. Management regularly monitors
the financial stability of these financial institutions and believes that MHI is not exposed to any significant credit risk in cash and cash equivalents. The Federal Deposit Insurance Corporation, or “FDIC,” generally only insures limited amounts
per depositor per insured bank. The standard coverage limit is $250,000 for most deposit categories.
8
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 3
|
- Summary of Significant Accounting Policies (Continued)
|
Cash and cash equivalents
Liquid investments with an initial maturity of three months or less are classified as cash equivalents. Amounts in transit from title companies for home closings of approximately $10.5 million
and $8.9 million are included in cash and cash equivalents at June 30, 2021 and 2020, respectively.
Accounts receivable, other
At June 30, 2021 and 2020, accounts receivable, other consist of reimbursable costs or accrued income as follows:
|
2021
|
2020
|
|||||||
|
Due under developer reimbursement agreements
|
$
|
2,807,327
|
$
|
1,096,354
|
||||
|
Vendor rebates receivable
|
2,059,615
|
838,006
|
||||||
|
Other receivables
|
1,475,305
|
1,429,453
|
||||||
|
Total accounts receivable, other
|
$
|
6,342,247
|
$
|
3,363,813
|
||||
Residential housing and other inventory, net
Residential housing and other inventory include completed and under-construction homes, as well as lots, land under development, and unimproved land. Completed homes and lots are stated at the
lower of actual cost or net realizable value, less costs to sell. Capitalized costs include housing construction, land purchases, and development costs, as well as indirect costs, including interest on interim construction and development
financing, allocated overhead, and taxes during the construction or development periods.
Completed homes, under-construction homes, improved residential lots and unimproved land are evaluated for impairment if potential impairment indicators are present. Housing inventory valuations
are determined by comparing expected selling prices in the specific communities and selling prices in comparable surrounding communities, taking into consideration expected sales prices, cancellation rates, construction, and overhead costs.
Residential lots are evaluated by comparing market prices in the specific and surrounding communities, along with calculating the expected profitability of the home constructed. When necessary, a valuation adjustment is recorded to reduce the asset
to its estimated net realizable value, less costs to sell. For the six months ended June 30, 2021 and 2020, MHI recorded no valuation adjustment on residential housing and other inventory.
Although management believes the valuation estimates reflected in MHI’s combined financial statements are reasonable, there can be no assurances that MHI could ultimately realize these values.
Given the uncertainty and volatility in the current economic environment, MHI may be required to take future impairment charges on its residential housing and other inventory.
9
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 3
|
- Summary of Significant Accounting Policies (Continued)
|
Capitalized interest on home-building activities
Interest is capitalized on lots and building activities during the construction period. Such capitalized interest is included in cost of sales when revenue is recognized on the sale. Subsequent
to substantial completion of construction, interest on homes is no longer capitalized, but is charged directly to expense as incurred and reported as interest expense.
A summary of interest capitalized during the six months ended June 30, 2021 and 2020, is as follows:
|
2021
|
2020
|
|||||||
|
Capitalized in inventory—beginning of period
|
$
|
8,146,925
|
$
|
11,529,473
|
||||
|
Incurred
|
5,040,652
|
6,734,284
|
||||||
|
Less amounts:
|
||||||||
|
Included in costs of sales
|
(4,041,590
|
)
|
(6,086,921
|
)
|
||||
|
Included in operating expenses
|
(532,047
|
)
|
(1,586,666
|
)
|
||||
|
Capitalized in inventory—end of period
|
$
|
8,613,940
|
$
|
10,590,170
|
||||
Furniture and fixtures
Furniture and fixtures are recorded at cost. Depreciation expense for furniture and fixtures is calculated using the straight-line method over the expected useful life of three to five years. MHI
owns its office facility in San Antonio and the building has an expected useful life of thirty-nine years. The costs of maintenance and repairs are charged to expense as incurred. When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is included in operations.
Accumulated depreciation was $6,920,545 and $6,650,803 as of June 30, 2021 and 2020, respectively. Depreciation expense for the six months ended June 30, 2021 and 2020, was $820,485 and $881,509,
respectively, and is included in general and administrative expense in the combined statements of income.
Warranties
MHI provides a limited warranty to each homebuyer at the time of sale. MHI’s warranty exposure is generally limited to one year for most costs. A third-party limited warranty is also provided to
each homebuyer. The third-party warranty generally provides coverage in the event of major structural defects for a period of up to 10 years. MHI accrues for estimated warranty costs at the time of each home sale based on historical and anticipated
warranty costs. MHI periodically assesses the adequacy of its recorded warranty liability and adjusts the accrued amount as necessary.
10
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 3
|
- Summary of Significant Accounting Policies (Continued)
|
Warranties (continued)
The following summarizes MHI’s accrued warranty activity during the six months ended June 30, 2021 and 2020:
|
2021
|
2020
|
|||||||
|
Accrued warranty liability—beginning of period
|
$
|
7,059,094
|
$
|
4,501,195
|
||||
|
Warranty accrual for current year home sales
|
(276,683
|
)
|
2,839,292
|
|||||
|
Warranty payments made during the period
|
(1,192,354
|
)
|
(2,376,398
|
)
|
||||
|
Accrued warranty liability—end of period
|
$
|
5,590,057
|
$
|
4,964,089
|
||||
Advertising costs
MHI expenses advertising costs as they are incurred. Advertising costs included in marketing expenses totaled $928,383 and $1,177,101 for the six months ended June 30, 2021 and 2020,
respectively.
The salaries of commissioned sales employees and commissions paid to outside real estate agents are included in cost of sales. Except for incremental commissions paid in advance of closing that
are recoverable from a specific home sale, sales commissions are expensed as incurred. Prepaid commissions are included in prepaid expenses and other assets on the combined balance sheets.
Income taxes
MHI Ltd. and MHI Models are organized as limited partnerships. FMR IP, LLC is organized as a limited liability company. McGuyer Homebuilders, Inc. is organized as a corporation, but taxed as an
S-Corp. No provision for federal income taxes is included in the accompanying combined financial statements since such liability, if any, is the individual liability of the respective partners or members. MHI does not believe it has any uncertain
tax positions or unrecognized tax benefits requiring disclosure.
MHI is subject to a state margin tax. Because the margin tax is based on revenue and expenses of MHI, it is considered an income tax and is accounted for in accordance with the provisions of FASB
ASC 740, Income Taxes. Income tax expense was $490,436 and $435,317 for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and 2020, MHI had no significant temporary differences,
tax credits, or net operating loss carryforwards.
11
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 3
|
- Summary of Significant Accounting Policies (Continued)
|
Trade name
In conjunction with an acquisition during the year ended December 31, 2011, MHI acquired the Wilshire Homes trade name and allocated $2,425,712 of the purchase price to this asset. Accumulated
amortization related to the trade name was $2,425,712 and $1,521,666 as of June 30, 2021 and 2020, respectively. During the six months ended June 30, 2021 and 2020, MHI recorded amortization of $0 and $106,686, respectively.
Revenue recognition
Revenues from homes sales are recognized when MHI has satisfied its performance obligation and control has transferred to the customer. For production homes, this occurs at a point in time, which
is the closing date. On this date, title passes to the new homeowner and MHI is entitled to payment. For homes built on a customer’s lot, referred to as the Build on Your Own Lot program (“BOYL”), MHI’s performance obligation and the transfer of
control occurs over time, as the construction in process has no alternative use to MHI and it’s then entitled to all payments received as well as payments for work completed to date. Therefore, MHI uses the input method in determining the amount of
revenue that is recognizable.
Disaggregated revenues from home sales during the six months ended June 30, 2021 and 2020 are as follows:
|
2021
|
2020
|
|||||||
|
Production home sales
|
$
|
368,122,564
|
$
|
370,613,648
|
||||
|
BOYL home sales
|
8,060,192
|
12,502,788
|
||||||
|
Home sales revenue
|
$
|
376,182,756
|
$
|
383,116,436
|
||||
Revenues from sales of land are recognized at a point in time, which is the closing date. On this date, title passes to the customer and MHI is entitled to payment.
Contract liabilities related to production homes are recorded as customer deposits within accrued expenses and other liabilities on the combined balance sheets. See Note 5.
Leases
In February 2016, the FASB issued ASU 2016-02, which changes how leases are reported in financial statements. ASU 2016-02 primarily impacts off-balance sheet operating leases and will require
such leases, with the exception of leases with a term of one year or less, to be recorded on the balance sheet. Under ASU 2016-02, an intangible asset is recorded for the lessee’s right-of-use, and is amortized over the lease term. The lessee also
records an offsetting lease obligation at the inception of a lease for the present value of future lease payments that will be amortized as lease payments are made.
12
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 4
|
- Residential Housing and Other Inventory, Net
|
Residential housing and other inventory at June 30, 2021 and 2020, consist of the following:
|
2021
|
2020
|
|||||||
|
Under contract:
|
||||||||
|
Homes completed
|
$
|
11,712,223
|
$
|
37,585,985
|
||||
|
Homes under construction
|
332,215,734
|
135,186,986
|
||||||
|
Lots owned
|
20,409,328
|
25,904,299
|
||||||
|
Total inventory under contract
|
364,337,285
|
198,677,270
|
||||||
|
Speculative units:
|
||||||||
|
Homes completed
|
1,296,991
|
29,931,829
|
||||||
|
Homes under construction
|
33,719,660
|
50,289,679
|
||||||
|
Lots owned
|
97,710,246
|
116,651,592
|
||||||
|
Total speculative units
|
132,726,897
|
196,873,100
|
||||||
|
Model homes:
|
||||||||
|
Completed
|
47,611,692
|
53,226,757
|
||||||
|
Under construction
|
2,375,427
|
881,002
|
||||||
|
|
||||||||
|
Total model homes
|
49,987,119
|
54,107,759
|
||||||
|
Land:
|
||||||||
|
Unimproved land
|
-
|
5,156,718
|
||||||
|
Land under development
|
959,980
|
2,991,212
|
||||||
|
|
||||||||
|
Total land
|
959,980
|
8,147,930
|
||||||
|
Total residential housing and other inventory
|
$
|
548,011,281
|
$
|
457,806,059
|
||||
Residential housing and other inventory include accumulated valuation adjustments of $791,315 and $279,576 at June 30, 2021 and 2020, respectively.
13
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 5
|
- Accrued Expenses and Other Liabilities
|
Accrued expenses and other liabilities at June 30, 2021 and 2020, consist of the following:
|
2021
|
2020
|
|||||||
|
Warranty and legal
|
$
|
6,177,214
|
$
|
5,665,017
|
||||
|
Property taxes
|
695,932
|
971,420
|
||||||
|
Salaries, wages, and bonuses—net
|
11,806,900
|
11,629,096
|
||||||
|
Customer deposits
|
35,912,448
|
14,412,913
|
||||||
|
Interest
|
735,694
|
708,702
|
||||||
|
Other
|
8,804,196
|
7,321,870
|
||||||
|
Total accrued and other liabilities
|
$
|
64,132,384
|
$
|
40,709,018
|
||||
|
Note 6
|
- Debt Agreements
|
MHI’s debt agreements as of June 30 are summarized as follows:
|
2021
|
2020
|
|||||||
|
Revolving credit
|
$
|
291,219,454
|
$
|
261,424,623
|
||||
|
Unsecured debt
|
7,849,000
|
7,849,000
|
||||||
|
Working capital ($5,000,000 maximum)
|
5,000,000
|
5,000,000
|
||||||
|
Total outstanding loans
|
$
|
304,068,454
|
$
|
274,273,623
|
||||
|
Revolving credit:
|
||||||||
|
Credit line maximum
|
$
|
676,849,000
|
$
|
655,349,000
|
||||
|
|
||||||||
|
Committed loans
|
$
|
675,604,133
|
$
|
407,009,071
|
||||
|
Revolving credit loan availability
|
$
|
393,332,868
|
$
|
327,313,689
|
||||
|
Outstanding balances:
|
||||||||
|
Loans
|
(291,219,454
|
)
|
(261,424,623
|
)
|
||||
|
Letters-of-credit outstanding & limitations
|
(1,770,794
|
)
|
(1,055,951
|
)
|
||||
|
Revolving credit available borrowing
|
$
|
100,342,620
|
$
|
64,833,115
|
||||
|
Interest rates as of June 30
|
1.00%–4.25
|
%
|
1.00%–4.77
|
%
|
||||
Interest rates on loan facilities are based on the London InterBank Offering Rate (“LIBOR”) or lender-based US “Prime” interest rates, plus an applicable margin.
14
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 6
|
- Debt Agreements (Continued)
|
Revolving credit agreements for residential construction are secured by residential construction units and lots. For each lot or residential unit, MHI may initially borrow the lesser of the
following: 70%-100% of cost or 70%-95% of appraised value. Initial advance rates are subject to 5%-10% annual reduction, depending on the age of inventory. Borrowing availability ends after the lot or residential unit has aged 12-48 months,
depending on the loan facility. MHI’s working capital loan is cross-collateralized with a revolving credit agreement from the same lender. Additionally, certain revolving credit agreements allow for land development construction within the
revolving credit facility, as described below.
Land development construction loans (“Development Loans”) are secured by land, related improvements, and residential lots upon completion. Prospective land development projects must receive
lender pre-approval, and borrowings are limited to an itemized budget for each project. Development Loans are repaid as lots are sold or converted to residential construction loan facilities based on a minimum release price (per lot) as determined
by the lender. As of June 30, 2021, there were no Development Loans outstanding.
Model home loans are secured by completed model homes. Prospective model home loans must receive lender preapproval, and borrowings are generally limited to 75% of the appraised value. The
initial loan is subject to annual reductions of approximately 5%-10% based on the age of the model and subsequent appraisal. Additionally, the model home term loans contain significant financial covenants regarding interest coverage and leverage.
MHI’s loan facilities contain significant restrictive financial covenants. The most rigorous of these covenants are as follows:
|
2021
|
2020
|
|||||||
|
Liquidity test (cash and available borrowing)
|
$
|
20,000,000
|
$
|
15,000,000
|
||||
|
Interest coverage ratio
|
2.00-2.25 to 1.00
|
2.00-2.25 to 1.00
|
||||||
|
Leverage ratio
|
2.75-3.50 to 1.00
|
2.75-3.50 to 1.00
|
||||||
|
Tangible net worth, excluding intercompany
|
$
|
120,000,000
|
$
|
118,785,596
|
||||
|
Maximum investment in land and lots owned
|
$
|
264,595,876
|
$
|
171,198,793
|
||||
To the extent that distributions do not cause the violation of a financial covenant, MHI’s loan agreements allow for unlimited distributions to partners. MHI is also subject to inventory sublimit
covenants as follows: (1) maintain speculative/model home ratio of less than 55% of all homes for the first three calendar quarters and less than 60% for the fourth quarter; and (2) speculative homes over one year old are not allowed to be greater
than 20% of the total number of homes owned by MHI. Loan covenants are tested by all lenders at the end of each calendar quarter. As of June 30, 2021, MHI believes it was in compliance with all covenants.
15
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 6
|
- Debt Agreements (Continued)
|
MHI received a loan from a financial institution in the amount of $7,849,000 under the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economics Security
(“CARES”) Act. The loan was subject to a note dated April 16, 2020. The PPP provides that the loan may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The interest rate on the
loan is 1%. The loan was fully forgiven in August 2021.
Maturities of MHI’s debt, as revised for subsequent events if applicable, are as follows:
|
Year Ending
December 31, |
||||
|
2021
|
$
|
11,104,478
|
||
|
2022
|
189,627,791
|
|||
|
2023
|
60,970,810
|
|||
|
2024
|
22,746,769
|
|||
|
2025
|
19,618,606
|
|||
|
Total
|
$
|
304,068,454
|
||
During the six months ended June 30, 2021 and 2020, MHI incurred debt acquisition costs of $428,307 and $434,382, respectively. Debt acquisition costs are amortized over the loan term as a
component of interest expense or written off on termination of the related loan facility.
|
Note 7
|
- Investment in Unconsolidated Entities
|
MHI Ltd. owns a 31% interest in WKMM, LLC, a Texas limited liability company, whose sole purpose is the ownership of a 49% interest in Prosperity Title, LLC, located in
Austin, Texas. During 2020, MHI Ltd.’s interest increased to 60%. Additionally, MHI Ltd. owns a 50% interest in Felder MHI-Blackhawk, LLC (“Felder MHI”). Felder MHI is developing land in the Austin market to sell as residential lots back to the
members. Summarized financial information (unaudited) is as follows at June 30,:
|
2021
|
2020
|
|||||||
|
Assets
|
$
|
11,074,831
|
$
|
16,375,047
|
||||
|
Liabilities
|
4,571,188
|
11,448,134
|
||||||
|
Revenues
|
9,175,717
|
512,247
|
||||||
|
Expenses
|
8,854,958
|
3,505
|
||||||
16
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 8
|
- Lot Purchase Contracts and Variable Interest Entities
|
MHI enters into purchase agreements with residential lot developers for lots in the normal course of business as a homebuilder. Typically, these agreements require a
non-refundable earnest money deposit and provide for the quarterly acquisition of lots in quantities that approximate the demand for new homes. Should the lot developer be unable to fulfill its commitment to deliver lots, the earnest money may be
refundable. The lots generally have a fixed purchase price, plus an annual escalation rate, however, a small number of agreements are based on a percentage of MHI’s home selling price.
The provisions of these agreements usually create a VIE with the lot developer under the provisions of ASC 810, Consolidation. If the
Partnership is considered the primary beneficiary of the agreement, the Partnership would consolidate the lot developer. To consolidate a VIE, the Partnership must assess whether it controls the activities of the VIE that most significantly impact
economic performance as well as whether it is expected to absorb losses or receive benefits from the VIE.
In most cases, MHI’s maximum exposure to loss is limited to the non-refundable earnest money, and the VIE’s creditors have no recourse against MHI. As described in Note 10, MHI has irrevocable
standby letters of credit for the benefit of one affiliate, however, this does not create significant additional exposure risk. MHI did not consolidate any VIEs in 2021 or 2020. Except for the portion of the purchase price represented by the
non-refundable earnest money deposit, MHI’s lots under purchase agreements are not recorded in the combined financial statements.
MHI’s lot purchase agreements are summarized as follows for 2021:
|
Lots
|
Purchase Price
|
Earnest Money
|
||||||||||
|
Third parties
|
3,213
|
$
|
268,151,226
|
$
|
29,402,624
|
|||||||
|
Related parties
|
1,323
|
102,001,571
|
11,212,575
|
|||||||||
|
4,536
|
$
|
370,152,797
|
$
|
40,615,199
|
||||||||
MHI’s lot purchase agreements are summarized as follows for 2020:
|
Lots
|
Purchase Price
|
Earnest Money
|
||||||||||
|
Third parties
|
2,231
|
$
|
209,001,918
|
$
|
27,718,541
|
|||||||
|
Related parties
|
1,307
|
81,633,928
|
10,376,583
|
|||||||||
|
3,538
|
$
|
290,635,846
|
$
|
38,095,124
|
||||||||
Earnest money deposits are included in these combined financial statements under prepaid expenses and other assets.
17
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 9
|
- Related Party Transactions
|
7676 Woodway, Ltd.
MHI leases its administrative offices in Houston from a limited partnership that is commonly owned by the owners in MHI. For the six months ended June 30, 2021 and 2020, MHI
paid rent of $430,079 each period. The lease agreement requires fixed monthly payments of $71,680 and expires December 31, 2021.
Adam Property & Casualty Company
MHI contracted for insurance coverage through an affiliate (“Adam”) that is commonly owned by the owners of MHI. The policy with Adam was not renewed in 2021. During the six
months ended June 30, 2020, MHI paid Adam $325,122 for liability insurance coverage. MHI was indebted to Adam for $0 and $3,220,593 as of and for the six months ended June 30, 2021 and 2020 (See Note 6). MHI pays interest on this loan on a monthly
basis. Under the terms of the loan agreement, Adam has a second lien on certain model homes owned by MHI. The loan was paid off in February 2021.
Land affiliates
MHI purchases lots from various land developers and lot resellers (“Land Affiliates”) which are commonly owned by MHI’s partners. For the six months ended June 30, 2021 and
2020, MHI purchased $25,111,125 (329 lots) and $14,141,865 (220 lots), respectively, from Land Affiliates. As of June 30, 2021 and 2020, MHI has outstanding non-refundable earnest money deposits and lot purchase contracts with Land Affiliates (See
Note 8).
MHI receives reimbursement of personnel costs and operating expenses from Land Affiliates that are reported as a reduction of general and administrative expenses. For the six
months ended June 30, 2021 and 2020, MHI received reimbursements of $650,000 each period.
MHI periodically provides advances to Land Affiliates. As of June 30, 2021 and 2020, balances due from such advances were $12,637 and $4,329,866, respectively. For the six
months ended June 30, 2021 and 2020, MHI accrued interest income from Land Affiliates of $23,629 and $27,249, respectively. The advances were paid in full by the affiliates as of September 30, 2021.
|
Note 10
|
- Commitments and Contingencies
|
Litigation
MHI is engaged in various claims and litigation arising from ordinary business operations. Uninsured losses, if any, resulting from these matters are not expected to have a material adverse
impact on the combined financial statements of MHI.
18
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 10
|
- Commitments and Contingencies (Continued)
|
Operating leases
MHI leases division office facilities under non-cancelable operating leases that expire through 2026. Total rent expense incurred under office facility operating lease agreements for the six
months ended June 30, 2021 and 2020 was approximately $685,000 and $656,000, respectively.
The following is a summary of future expected minimum payments under non-cancelable lease terms as of June 30, 2021:
|
Year Ending
December 31, |
||||
|
2021
|
$
|
614,281
|
||
|
2022
|
366,123
|
|||
|
2023
|
336,043
|
|||
|
2024
|
271,538
|
|||
|
2024
|
265,624
|
|||
|
Thereafter
|
78,224
|
|||
|
Total
|
$
|
1,931,833
|
||
Guarantees
As of June 30, 2021, MHI has guaranteed up to $945,000 of bank debt owed by an unconsolidated entity, Felder MHI-Blackhawk, LLC (see Note 7). A guarantee liability has not been recorded as the
probability of required performance is remote.
Letters of credit
As of June 30, 2021, MHI has irrevocable standby letters of credit in the amount of $1,770,794 outstanding for the benefit of a land development affiliate that may be used in the event of a loan
default by the affiliate. MHI currently believes that the likelihood of performing under these agreements is remote.
|
Note 11
|
- Employee Benefit Plan
|
MHI participates in a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who meet specified service requirements.
Under the plan, a discretionary match may be made equal to 25% of each participant’s contribution up to a maximum of $1,800 each year. MHI contributed approximately $499,000 and $449,000 related to the plan for each of the six months ended June 30,
2021 and 2020, respectively.
19
MHI Partnership, Ltd.
MHI Models, Ltd.
McGuyer Homebuilders, Inc.
FMR IP, LLC
Notes to Combined Financial Statements
June 30, 2021
|
Note 12
|
- Subsequent Events
|
In August 2021, MHI received forgiveness of its PPP loan in the amount of $7,849,000 under the terms of the loan.
In June 2021, MHI entered into an agreement with Dream Finders Homes, Inc. (“DFH”) to sell substantially all its assets at cost as recorded in the combined financial statements at the closing
date plus a premium of $50,000,000. Additionally, DFH assumed certain trade payables and accrued liabilities. The sale closed on October 1, 2021. At closing, MHI and DFH also entered into a lot purchase contract in which MHI retained approximately
$109,000,000 of lot inventory that DFH may subsequently purchase. The lot purchase contract has no fixed takedown requirements and allows DFH to purchase lots as needed at MHI’s cost, plus price escalation at the annual rate of ten percent (10%),
computed on a daily basis.
Management has reviewed for subsequent events through December 8, 2021, which was the date the combined financial statements were available to be issued, and determined that no other events have
occurred which require disclosure.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On October 1, 2021, the Company, through its subsidiaries Dream Finders Holdings LLC,
a Florida limited liability company, and DFH Coventry, LLC, a Florida limited liability company, completed the acquisition of certain assets, rights and properties, and assumed certain liabilities, of MHI Partnership, Ltd., a Texas limited
partnership, MHI Models, Ltd., a Texas limited partnership, McGuyer Homebuilders, Inc., a Texas corporation, and FMR IP, LLC, a Texas limited liability company (the “MHI
Acquisition”).
The acquired assets and liabilities primarily include inventory home sites completed and under construction, approximately 5,500 lots under control
in the Houston, Austin, Dallas, and San Antonio, Texas metropolitan areas, trade payables and other accruals. The assets and liabilities not acquired primarily consist of cash and cash equivalents, and debt obligations.
The acquisition transaction will be accounted for by applying the guidance under ASC 805, Business Combinations (ASC 805). In accordance with ASC 805, the acquired assets and liabilities will be recorded by the
Company at estimated fair values as of October 1, 2021, the date the acquisition was completed. The following unaudited pro forma combined financial information and notes present the pro forma impact of the MHI Acquisition on the Company’s historical
financial position and results of operations as of and for the six months ended June 30, 2021 and for the year ended December 31, 2020. The unaudited pro forma financial information has been prepared in accordance with Article 11 of Regulation S-X.
The acquisition method of accounting is dependent upon certain valuations and other procedures that have not been completed; therefore, there is not sufficient information to determine the final measurement. The pro forma adjustments are based on
currently available information and certain estimates and assumptions. 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 adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma combined financial data. Differences between these preliminary
estimates and the final purchase accounting will occur during 2022 and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of
operations and financial position.
We derived the unaudited pro forma combined financial information by applying pro forma adjustments to the audited consolidated financial statements
for the Company and MHI for the year ended December 31, 2020 and the unaudited consolidated financial statements as of and for the six months ended June 30, 2021. The unaudited pro forma condensed combined financial statements do not reflect any
revenue enhancements or any cost savings from operating efficiencies, synergies or other restructurings that could result from the acquisition. The unaudited pro forma combined balance sheet as of June 30, 2021 is presented to reflect the acquisition
as if it had occurred on June 30, 2021. The unaudited pro forma combined statement of operations for the six months ended June 30, 2021 and the year ended December 31, 2020 gives pro forma effect to the MHI Acquisition, as if the acquisition had
been completed on January 1, 2020.
The unaudited pro forma combined financial information is presented for informational purposes only and should not be considered indicative of actual
results of operations that would have been achieved had the acquisition of MHI been consummated on the dates indicated, and do not purport to be indicative of the financial condition or results of operations as of any future date or for any future
period. There were no material transactions between the Company and MHI during the periods presented in the unaudited pro forma combined financial statements that would need to be eliminated. The unaudited pro forma condensed combined financial
statements should be read in conjunction with the accompanying footnotes. In addition, the unaudited pro forma combined financial information was based on and should be read in conjunction with the following historical consolidated financial
statements and accompanying notes of the Company and MHI for the applicable periods:
| - |
historical financial statements of the Company and the related notes included in the Company’s Form 10-K that was filed with the SEC on March 30, 2021;
|
| - |
historical financial statements of the Company as of June 30, 2021 and for the six months ended June 30, 2021 and 2020 and the related notes included in the
Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2021;
|
| - |
historical financial statements of MHI for the year ended December 31, 2020 and 2019 and the related notes included in MHI’s audited combined financial
statements for the year ended December 31, 2020, included as Exhibit 99.1 to this Current Report on Form 8-K/A; and
|
| - |
historical financial statements of MHI for the six months ended June 30, 2021 and the related notes included in MHI’s unaudited combined financial statements
for the six months ended June 30, 2021 and 2020, included as Exhibit 99.2 to this Current Report on Form 8-K/A.
|
The unaudited pro forma condensed combined financial statements reflect the following:
| • |
The MHI Acquisition and the application of purchase accounting, including:
|
| o |
Net tangible assets of MHI, subject to certain assets and liabilities that were on MHI’s balance sheet as of June 30, 2021, but not acquired including net
tangible assets of $118.2 million and liabilities of $313.8. Management estimates MHI’s book value of real estate inventory will be adjusted by a credit of $5.4 million to the June 30, 2021 historical balance. In addition, management
estimates the trade name “Coventry Homes” will be valued at $8.9 million. The amortization of these adjustments was reflected in the unaudited pro forma statements of comprehensive income for the year ended December 31, 2020.
|
| o |
Management estimated the fair value of MHI’s communities using MHI’s historic gross margin and a market participant’s expectation of selling, general and
administrative expense that would be required to complete construction of the homes was applied. The historical performance of each community, as well as current trends in the market, and the potential economic impact were evaluated for each
of the estimates above.
|
| o |
Goodwill of $137.4 million, based on an acquisition price of approximately $618.1 million, including (1) a $463 million payment at closing, (2) $64.1 million due
post close, (3) estimated earn out payments with a fair value of $90.9 million, as well as purchase accounting valuation adjustments.
|
| o |
Income tax adjustments to MHI as if it were a taxable entity as of the beginning of the period assuming 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.
|
| o |
A deposit of $10.8 million for the landbank financing facility provided by the former principal of MHI.
|
| o |
Ownership interests in three joint ventures acquired by DFH from the former principal of MHI.
|
| o |
A payable of $64.1 million to the seller based on the expected true up of the net asset value as of the acquisition date.
|
| o |
A $6.8 million preferred dividend associated with the Convertible Preferred Stock (as defined below) issuance.
|
| • |
The Financing Transactions associated with the MHI Acquisition, including:
|
| o |
Increase of the Company’s credit facility from $450 million to $817.5 million, utilizing $315.0 in proceeds to finance a portion of the acquisition. The rate
and maturity were unchanged with the terms under the Company’s credit facility.
|
| o |
Issuance of 150,000 shares of newly-created Series A Convertible Preferred Stock with an initial
liquidation preference of $1,000 per share and a par value $0.01 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of $150 million. The Company used the net proceeds of $148 million from the sale of the Convertible Preferred Stock to fund a portion of the MHI Acquisition. The dividend rate on this
issuance is 9%.
|
| o |
Deferred contingent consideration of $90.9 million recorded at fair value.
|
The following represents the Company’s preliminary purchase price allocation:
|
Cash and cash equivalents
|
$
|
-
|
||
|
Other assets
|
12,079,607
|
|||
|
Lot deposits
|
51,422,653
|
|||
|
Construction in process and finished homes
|
424,826,476
|
|||
|
Company owned land and lots
|
24,055,497
|
|||
|
Operating lease right-of-use assets
|
1,793,192
|
|||
|
Equity method investments
|
5,802,559
|
|||
|
Property and equipment, net
|
3,238,561
|
|||
|
Intangible assets, net of amortization
|
8,840,000
|
|||
|
Goodwill
|
137,418,036
|
|||
|
Accounts payable
|
(35,940,702
|
)
|
||
|
Accrued expenses
|
(47,356,561
|
)
|
||
|
Customer Deposits
|
(35,912,448
|
)
|
||
|
Contingent consideration
|
(90,920,000
|
)
|
||
|
Operating lease liabilities
|
(1,793,192
|
)
|
DREAM FINDERS HOMES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2021
|
Dream Finders
Homes Inc.
|
MHI
|
Transaction
Accounting Adjustments
|
Financing
Adjustments
|
DFH Inc.
Pro Forma
|
||||||||||||||||||
|
Assets
|
||||||||||||||||||||||
|
Cash and cash equivalents
|
6,154,320
|
23,173,973
|
(23,173,973
|
)
|
(f)
|
6,154,320
|
||||||||||||||||
|
Restricted cash (VIE amounts of $5,946,424 and $8,793,201)
|
46,936,952
|
49,936,952
|
||||||||||||||||||||
|
Accounts receivable
|
51,021,302
|
6,342,247 |
57,363,549
|
|||||||||||||||||||
|
Inventories:
|
-
|
|||||||||||||||||||||
|
Construction in process and finished homes
|
537,758,853
|
428,931,727
|
(4,105,251
|
)
|
(b),(f),(g)
|
962,585,329
|
||||||||||||||||
|
Joint venture owned land and lots
|
-
|
|||||||||||||||||||||
|
(VIE amounts of $18,151,982 and $40,900,552)
|
18,152,136
|
18,152,136
|
||||||||||||||||||||
|
Company owned land and lots
|
75,083,602
|
119,079,554
|
(95,024,057
|
)
|
(f)
|
-
|
99,139,099
|
|||||||||||||||
|
Lot deposits
|
107,717,122
|
51,422,653
|
(d) (g)
|
-
|
159,139,775
|
|||||||||||||||||
|
Equity method investments
|
7,453,783
|
3,560,185
|
2,242,374
|
(e)
|
-
|
13,256,342
|
||||||||||||||||
|
Property and equipment, net
|
4,228,857
|
5,391,742
|
(2,153,181
|
)
|
(g)
|
7,467,418
|
||||||||||||||||
|
Operating lease right-of-use assets
|
12,788,540
|
1,793,192
|
(b)
|
-
|
14,581,732
|
|||||||||||||||||
|
Finance lease right-of-use assets
|
256,612
|
256,612
|
||||||||||||||||||||
|
Intangible assets, net of amortization
|
2,161,250
|
8,840,000
|
(b)
|
-
|
11,001,250
|
|||||||||||||||||
|
Goodwill
|
30,360,997
|
137,418,036
|
(a)
|
-
|
167,779,033
|
|||||||||||||||||
|
Deferred tax asset
|
3,312,736
|
3,111,631
|
(h)
|
6,424,367
|
||||||||||||||||||
|
Other assets (VIE amounts of $2,159,645 and $1,288,359)
|
28,894,891
|
45,049,060
|
(39,311,700
|
)
|
(g)
|
34,632,251
|
||||||||||||||||
|
Total assets
|
932,281,953
|
631,528,488
|
41,059,724
|
-
|
1,604,870,165
|
|||||||||||||||||
|
Liabilities
|
-
|
|||||||||||||||||||||
|
Accounts payable (VIE amounts of $0 and $1,315,582)
|
34,204,013
|
35,940,702
|
70,144,715
|
|||||||||||||||||||
|
Accrued expenses (VIE amounts of $8,571,439 and $9,977,268)
|
65,908,878
|
64,132,384
|
(10,899,260
|
)
|
(a),(f),(h),(g)
|
-
|
119,142,002
|
|||||||||||||||
|
Customer deposits
|
93,275,468
|
35,912,448
|
(g)
|
-
|
129,187,916
|
|||||||||||||||||
|
Construction lines of credit
|
365,000,000
|
304,068,454
|
(304,068,454
|
)
|
(f)
|
321,758,896
|
(a)
|
686,758,896
|
||||||||||||||
|
Notes payable (VIE amounts of $2,992,531 and $8,821,282)
|
4,048,531
|
4,048,531
|
||||||||||||||||||||
|
Operating lease liabilities
|
13,064,645
|
1,793,192
|
(b)
|
-
|
14,857,837
|
|||||||||||||||||
|
Finance lease liabilities
|
267,198
|
267,198
|
||||||||||||||||||||
|
Contingent consideration
|
27,110,480
|
90,920,000
|
(a)
|
-
|
118,030,480
|
|||||||||||||||||
|
Total liabilities
|
602,879,213
|
404,141,540
|
(186,342,074
|
)
|
321,758,896
|
1,142,437,575
|
||||||||||||||||
|
-
|
||||||||||||||||||||||
|
Mezzanine Equity
|
-
|
|||||||||||||||||||||
|
Preferred mezzanine equity
|
6,703,460
|
147,995,200
|
(a)
|
154,698,660
|
||||||||||||||||||
|
Common mezzanine equity
|
-
|
-
|
||||||||||||||||||||
|
Total mezzanine equity
|
6,703,460
|
-
|
-
|
147,995,200
|
154,698,660
|
|||||||||||||||||
|
-
|
||||||||||||||||||||||
|
Members’ Equity
|
-
|
|||||||||||||||||||||
|
Common members’ equity
|
-
|
227,386,948
|
235,617,148
|
(463,004,096
|
)
|
-
|
||||||||||||||||
|
Total members’ equity
|
-
|
227,386,948
|
235,617,148
|
(463,004,096
|
)
|
-
|
||||||||||||||||
|
-
|
||||||||||||||||||||||
|
Stockholders’ Equity - Dream Finders Homes, Inc.
|
-
|
|||||||||||||||||||||
|
Class A common stock, $0.01 per share, 289,000,000
|
-
|
|||||||||||||||||||||
|
authorized, 32,295,329 outstanding
|
322,953
|
-
|
322,953
|
|||||||||||||||||||
|
Class B common stock, $0.01 per share, 61,000,000
|
-
|
|||||||||||||||||||||
|
authorized, 60,226,153 outstanding
|
602,262
|
-
|
602,262
|
|||||||||||||||||||
|
Additional paid-in capital
|
255,289,812
|
-
|
-
|
255,289,812
|
||||||||||||||||||
|
Retained earnings
|
45,610,738
|
-
|
(8,215,349
|
)
|
(c),(h)
|
(6,750,000
|
)
|
(a)
|
30,645,389
|
|||||||||||||
|
Non-controlling interests
|
20,873,515
|
20,873,515
|
||||||||||||||||||||
|
Total stockholders’ and members’ equity
|
329,402,740
|
227,386,948
|
227,401,798
|
(321,758,896
|
)
|
462,432,591
|
||||||||||||||||
|
Total liabilities, mezzanine equity, members’ equity and stockholders’ equity
|
$
|
932,281,953
|
$
|
631,528,488
|
$
|
41,059,724
|
$
|
0
|
$
|
1,604,870,165
|
||||||||||||
| (a) |
Reflects the acquisition of MHI and the related financing transactions associated with the acquisition. The anticipated purchase price is $618 million, which includes $148 million
funded by the issuance of Convertible Preferred Stock, $315 million of funding from the Company’s construction facility, $64.1 million of deferred seller payment and $90.9 million of contingent consideration for the former principal of MHI.
The resulting goodwill after allocating the purchase price to the assets and liabilities acquired is $137.4 million. The contingent consideration estimate is based on the current pre-tax estimates provided by MHI. The former owner of MHI is
entitled to receive deferred payments representing 25% of pre-tax earnings for the four-year period following the acquisition date, subject to meeting certain thresholds in each of the annual periods. The gross cash flow estimates were
discounted back to present value using a weighted average cost of capital. The dividend of $6.8 million related to the Convertible Preferred Stock issued was financed by the line of credit increase. In addition, reflects $148 million in net
proceeds from the Company’s issuance of 150,000 shares of Convertible Preferred Stock for $1,000 per share. This issuance has a 9% preferred dividend, is redeemable at the Company’s option beginning in October of 2025, and is convertible to
common stock by the issuer in the event it has not been redeemed beginning in October of 2027.
|
| (b) |
Reflects a day one adjustment to the book basis of certain of assets and liabilities held by MHI. Net tangible assets of $118.2 million and net liabilities of $313.8 million were
not acquired as of June 30, 2021. This adjustment also includes a $10.9 million increase in real estate inventory to reflect the estimated the fair value of the acquired homes completed and under construction based on their stage of
construction. In order to estimate the fair value of inventory, MHI’s historic gross margin was used and a market participant’s expectation of selling, general and administrative expense that would be required to complete construction of the
homes was applied. An adjustment to the stage of completion for homes under construction was made, including a deduction in the book value of inventory for MHI’s capitalized indirect costs of $16.2 million. The Company’s accounting policy is
to expense these direct costs as incurred. This entry also includes the establishment of an $8.9 million intangible asset related to the trade name “Coventry Homes” that was included in the acquisition. The trade name will be amortized over a
five year period. The Company recorded $1.7 million in operating leases, into both right of use assets and operating lease liabilities.
|
| (c) |
Income tax adjustments to MHI as if it were a taxable entity as of the beginning of the period assuming 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.
|
| (d) |
Reflects a deposit of $10.8 million by DFH for the land bank financing facility provided by the former principal of MHI.
|
| (e) |
Reflects ownership interests in three equity method joint ventures relating to mortgage and title services acquired by DFH from the former principal of MHI.
|
| (f) |
The following line items have been adjusted from MHI’s audited financial statements, as certain assets and liabilities within these financial statement line items were not included
in the acquisition transaction. These items include cash and cash equivalents, undeveloped land assets, and debt obligations of MHI.
|
| (g) |
The following items include re-classifications between MHI’s financial statement line items in order to comply with DFH’s accounting policies, including reclassifications of (1)
$40.6 million of lot deposits from other assets on MHI’s financial statements to lot deposits on DFH’s financial statements, and (2) $35.9 million of customer deposits from accrued expenses on MHI’s Financial Statements to customer deposits
on DFH’s Financial Statements.
|
| (h) |
Reflects the deferred tax asset and liability recorded due to differences arising from the tax and book treatment of Goodwill. These adjustments were booked as if the transaction
had occurred on January 1, 2020.
|
DREAM FINDERS HOMES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2021
|
Dream Finders
Homes Inc.
|
MHI
|
Transaction
Accounting Adjustments
|
DFH Inc.
Pro Forma |
||||||||||||||
|
Revenues
|
$
|
708,836,466
|
$
|
378,951,204
|
$
|
-
|
$
|
1,087,787,670
|
|||||||||
|
Cost of sales
|
594,626,181
|
326,638,560
|
(11,029,691
|
)
|
(f)
|
910,235,050
|
|||||||||||
|
Selling, general and administrative expense
|
55,652,375
|
26,132,880
|
11,913,691
|
(b),(f)
|
93,698,946
|
||||||||||||
|
Income from equity in earnings of unconsolidated entities
|
(2,857,394
|
)
|
(192,636
|
)
|
(2,530,563
|
)
|
(d)
|
(5,580,593
|
)
|
||||||||
|
Gain on sale of assets
|
(17,483
|
)
|
(17,483
|
)
|
|||||||||||||
|
Loss of Extinguishment of Debt
|
697,423
|
697,423
|
|||||||||||||||
|
Other Income
|
-
|
||||||||||||||||
|
Other
|
(2,150,482
|
)
|
(724,681
|
)
|
(2,875,163
|
)
|
|||||||||||
|
Paycheck Protection Program forgiveness
|
(7,219,794
|
)
|
-
|
(7,219,794
|
)
|
||||||||||||
|
Other expense
|
-
|
||||||||||||||||
|
Other
|
5,337,828
|
-
|
5,337,828
|
||||||||||||||
|
Contingent consideration revaluation
|
5,159,725
|
-
|
4,249,570
|
(c)
|
9,409,295
|
||||||||||||
|
Interest expense
|
657,657
|
532,047
|
1,189,704
|
||||||||||||||
|
Income before taxes
|
58,950,430
|
26,565,034
|
(2,603,007
|
)
|
|
82,912,457
|
|||||||||||
|
Income tax expense
|
(9,294,799
|
)
|
(490,436
|
)
|
(7,052,899
|
)
|
(a)
|
(16,838,134
|
)
|
||||||||
|
Net and comprehensive income
|
49,655,631
|
26,074,598
|
(9,655,906
|
)
|
|
66,074,323
|
|||||||||||
|
Net and comprehensive income attributable to non-controlling interests
|
(4,961,107
|
)
|
-
|
-
|
|
(4,961,107
|
)
|
||||||||||
|
Net and comprehensive income attributable to Dream Finders Holdings LLC
|
44,694,524
|
26,074,598
|
(9,655,906
|
)
|
|
61,113,216
|
|||||||||||
|
Earnings per unit
|
|||||||||||||||||
|
Basic
|
$
|
0.49
|
$
|
0.59
|
|||||||||||||
|
Diluted
|
$
|
0.49
|
$
|
0.54
|
|||||||||||||
|
Weighted-average number of units
|
|||||||||||||||||
|
Basic
|
92,521,482
|
92,521,482
|
|||||||||||||||
|
Diluted
|
92,641,222
|
100,814,391
|
|||||||||||||||
| (a) |
Income tax adjustments to MHI as if it were a taxable entity as of the beginning of the period assuming 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.
|
| (b) |
Gives effect to the amortization of intangible asset of $900 thousand related to the trade name “Coventry Homes” included in the acquisition. The trade name is amortized over a five
year period.
|
| (c) |
Represents accretion of $4.2 million of contingent consideration during the year, assuming contingent consideration had been applied as of January 1, 2020.
|
| (d) |
Represents the $2.5 million of additional income associated with ownership interests in three equity method joint ventures relating to mortgage and title services acquired by DFH
from the former principal of MHI.
|
| (e) |
Gives effect of 8.2 million of preferred shares converted into common in the diluted earnings per share calculation using the “If converted” method.
|
| (f) |
Reflects re-classifications between MHI’s financial statement line items in order to comply with DFH’s accounting policies, including $11.0 million of indirect costs capitalized, and
subsequently expensed through cost of sales for MHI’s Financial Statements, reclassified from cost of sales to SG&A expense on DFH’s pro forma Financial Statements.
|
The unaudited pro forma statements of comprehensive income for the six months ended June 30, 2021 do not reflect an increase in the cost of sales
associated with the changes in the value of the real estate inventory, as it will be amortized into the unaudited pro forma statements of comprehensive income for the year ended December 31, 2020.
DREAM FINDERS HOMES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2020
|
Year Ended December 31
2020
|
|||||||||||||||||
|
Dream Finders
Homes Inc.
|
MHI
|
Transaction
Accounting Adjustments
|
DFH Inc.
Pro Forma
|
||||||||||||||
|
Revenues
|
$
|
1,133,806,607
|
$
|
908,584,480
|
$
|
-
|
$
|
2,042,391,087
|
|||||||||
|
Cost of sales
|
962,927,606
|
794,337,610
|
(14,697,238
|
)
|
(e) (f)
|
1,742,567,978
|
|||||||||||
|
Selling, general and administrative expense
|
90,172,850
|
55,168,191
|
31,356,266
|
(b) (f)
|
176,697,307
|
||||||||||||
|
Income from equity in earnings of unconsolidated entities
|
(7,991,764
|
)
|
(563,497
|
)
|
(6,803,466
|
)
|
(d)
|
(15,358,727
|
)
|
||||||||
|
Gain on sale of assets
|
(117,840
|
)
|
(117,840
|
)
|
|||||||||||||
|
Loss of Extinguishment of Debt
|
-
|
-
|
-
|
||||||||||||||
|
Other Income
|
|||||||||||||||||
|
Other
|
(1,630,546
|
)
|
(1,079,938
|
)
|
-
|
(2,710,484
|
) |
||||||||||
|
Paycheck Protection Program forgiveness
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Other expense
|
|||||||||||||||||
|
Other
|
4,522,100
|
-
|
-
|
4,532,100
|
|||||||||||||
|
Contingent consideration revaluation
|
539,905
|
-
|
8,196,956
|
(c)
|
8,736,861
|
||||||||||||
|
Interest expense
|
870,868
|
2,212,735
|
-
|
3,083,603
|
|||||||||||||
|
Income before taxes
|
84,513,428
|
58,509,379
|
(18,052,518
|
)
|
|
124,970,289
|
|||||||||||
|
Income tax expense
|
-
|
(1,065,640
|
)
|
(31,936,818
|
)
|
(a)
|
(33,002,458
|
)
|
|||||||||
|
Net and comprehensive income
|
84,513,428
|
57,443,739
|
(49,989,337
|
)
|
|
91,967,830
|
|||||||||||
|
Net and comprehensive income attributable to non-controlling interests
|
(5,419,972
|
)
|
-
|
-
|
|
(5,419,972
|
)
|
||||||||||
|
Net and comprehensive income attributable to Dream Finders Holdings LLC
|
79,093,456
|
57,443,739
|
(49,989,337
|
)
|
|
86,547,858
|
|||||||||||
|
-
|
|||||||||||||||||
|
Earnings per unit
|
-
|
-
|
-
|
||||||||||||||
|
Basic
|
756.86
|
832.11
|
|||||||||||||||
|
Diluted
|
753.75
|
828.56 |
|||||||||||||||
|
Weighted-average number of units
|
-
|
||||||||||||||||
|
Basic
|
99,065
|
99,065
|
|||||||||||||||
|
Diluted
|
99,647
|
99,647
|
|||||||||||||||
| (a) |
Income tax adjustments to MHI as if it were a taxable entity as of the beginning of the period assuming 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.
|
| (b) |
Gives effect to the amortization of intangible asset of $1.8 million related to the trade name “Coventry Homes” included in the acquisition. The trade name is amortized over a five
year period.
|
| (c) |
Represents accretion of contingent consideration of $8.2 million during the year, assuming contingent consideration had been recorded as of January 1, 2020.
|
| (d) |
Represents $6.8 million of additional income associated with ownership interests in three equity method joint ventures relating to mortgage and title services acquired by DFH from
the former principal of MHI.
|
| (e) |
Gives effect to the results of MHI as of the beginning of the fiscal years presented after adjusting the operating results, reflecting additional amortization of $10.9 million that
would have been recorded assuming the fair value adjustments to the acquired assets had been applied as of January 1, 2020.
|
| (f) |
Reflects re-classifications between MHI’s financial statement line items in order to comply with DFH’s accounting policies, including $25.6 million of indirect costs capitalized, and
subsequently expensed through cost of sales for MHI’s Financial Statements, reclassified to SG&A expense on DFH’s pro forma Financial Statements.
|