# Dream Finders Homes, Inc. (DFH) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Dream Finders Homes, Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1825088/000182508825000014/dfh-20241231.htm
Accession: 0001825088-25-000014
Filing date: 2025-02-25
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/DFH/
All MD&A years: /company/DFH/mda/
Previous year: /company/DFH/mda/fy2023/ (FY 2023)
Next year: /company/DFH/mda/fy2025/ (FY 2025)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes thereto. Unless the context otherwise requires, the terms “Dream Finders,” “DFH,” “the Company,” “we,” “us” and “our” refer to Dream Finders Homes, Inc. and its subsidiaries.

The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our business, operations and present business environment and is provided as a supplement to, and should be read together with the sections entitled “Risk Factors,” and the financial statements and the accompanying notes included elsewhere in this Form 10-K. In addition, the statements in this discussion and analysis regarding outlook, our expectations regarding the performance of our business, anticipated financial results and liquidity are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Forward-Looking Statements” and in “Risk Factors” above. Our actual results may differ materially from those contained in or implied by any forward-looking statements."

Business Overview and Outlook

We design, build and sell homes primarily in high-growth markets using our asset-light lot acquisition strategy. Our primary focus is on constructing and selling single-family homes across entry-level, first-time move-up, second-time move-up, and active adult markets as well as homes under built-for-rent contracts. To fully serve our homebuyers and capture ancillary business opportunities, we have financial services operations that offer title insurance and mortgage banking solutions.

Our markets have experienced sustained home affordability challenges and significant competition and although our net sales have increased from the prior year, the increase was below our expectations. Despite ticking down since last year, mortgage interest rates and inflationary pressures remain elevated. We believe uncertainty and interest rate volatility are keeping homebuyers on the sidelines. We have consistently used incentives, such as mortgage buydowns, to sustain demand, and we have continued to build affordable speculative inventory at higher than historical levels. Our asset-light strategy has allowed us to remain agile in these market conditions by strategically renegotiating lot option takedowns that align with our sales pace.

We continue to see the positive effects of our commitment to future growth, whether through organic efforts, acquisitions, or a combination of both, all while keeping an asset-light approach. This strategy is reflected in our homebuilding revenues and closings, which grew by 18% and 17%, respectively, when comparing 2024 to 2023. Notably, our acquisition of Crescent Homes played a significant role in these achievements. We believe this success, coupled with our increased investments in our lot pipeline, inventories and construction starts, positions us well for the future.

We are optimistic based on the limited supply of homes, both new and existing resales, at affordable price points and demographic trends that continue to support favorable demand dynamics in our markets. We believe that the current environment will continue to support faster inventory turnover and reinforce our shift towards spec sales for the foreseeable future. Our strategy has also allowed us to continue to pursue opportunities that contribute to our long-term outlook, including acquiring Jet HomeLoans in July 2024 and Liberty Communities, LLC (“Liberty Communities”) in January 2025. We anticipate future organic and acquisitive growth in the years ahead across our homebuilding and financial services operations.

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Recent Developments

Liberty Communities Acquisition

On January 23, 2025, we acquired the majority of the homebuilding assets of Liberty Communities, allowing us to enter the Atlanta, Georgia market and further expand our operations in Greenville, South Carolina. Assets acquired include over 750 lots and home sites in different stages of construction. Additionally, the Company expects to control approximately 5,000 lots as a result of the transaction. The operations of Liberty Communities will be included in our Southeast segment as of the date of acquisition. Refer to Note 15, Subsequent Events to our consolidated financial statements for more information.

Expansion in the Southeast Segment

In the fourth quarter of 2024, we expanded organically into southwest Florida. As of December 31, 2024, we controlled 42 lots in this market.

Alliant Title Acquisition

On October 18, 2024, the Company entered into a definitive agreement to acquire Colorado-based title insurance underwriter, Alliant National Title Insurance Company, Inc. and a related affiliate. The closing of this transaction is subject to customary closing conditions, including insurance regulatory approvals, which are currently ongoing.

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Results of Consolidated Operations

The following table summarizes our results of operations and other financial data (in thousands, except per share amounts) for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["Income before taxes:"],["Homebuilding","$","434,308","","","$","406,298"],["Financial services","31,959","","","19,741"],["Other(1)","(28,413)","","","(21,614)"],["Income before taxes","437,854","","","404,425"],["Income tax expense","(97,272)","","","(96,483)"],["Net and comprehensive income","340,582","","","307,942"],["Net and comprehensive income attributable to noncontrolling interests","(5,241)","","","(12,042)"],["Net and comprehensive income attributable to Dream Finders Homes, Inc.","$","335,341","","","$","295,900"],["Other Financial Data:"],["Basic EPS(2)","$","3.44","","","$","3.03"],["Diluted EPS(2)","$","3.34","","","$","2.79"],["EBITDA (in thousands)(3)","$","629,750","","","$","521,495"],["EBITDA margin %(3)(4)","14.1","%","","13.9","%"],["Return on participating equity(5)","29.7","%","","36.3","%"],["Consolidated Balance Sheets Data (as of period end):"],["Cash and cash equivalents","$","274,384","","","$","494,145"],["Construction lines of credit","701,386","","","530,384"],["Senior unsecured notes, net","295,049","","","293,918"],["Mortgage warehouse facilities","289,617","","","\u2014"],["Total mezzanine equity","169,951","","","148,500"],["Total Dream Finders Homes, Inc. stockholders\u2019 equity","1,244,922","","","924,584"],["Total equity","1,250,409","","","937,650"]]
[[/GREPCENT_TABLE]]

(1)Represents amounts within our corporate component (“Corporate”).

(2)Refer to Note 14, Earnings Per Share to the consolidated financial statements for disclosures related to the calculation of EPS. Diluted shares were calculated by using the treasury stock method for stock grants and the if-converted method for the redeemable preferred stock and the associated preferred dividends.

(3)EBITDA is a non-GAAP financial measure. For a definition of this non-GAAP financial measure and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”

(4)Calculated as a percentage of total revenues.

(5)Return on participating equity is calculated as net and comprehensive income attributable to DFH, less redeemable preferred stock distributions, divided by average beginning and ending total Dream Finders Homes, Inc. stockholders’ equity (“participating equity”) for the trailing twelve months.

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Results of Homebuilding Operations

The following table sets forth our results of homebuilding operations (in thousands) for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year EndedDecember 31,"],["","2024","","2023","","Change","","% Change"],["Homebuilding revenues","$","4,397,877","","","$","3,738,888","","","$","658,989","","","18","%"],["Homebuilding cost of sales","3,591,483","","","3,011,813","","","579,670","","","19","%"],["Selling, general and administrative expense(1)","395,751","","","303,068","","","92,683","","","31","%"],["(Income) loss from unconsolidated entities","(433)","","","12","","","(445)","","","(3708)","%"],["Contingent consideration revaluation(2)","13,939","","","46,590","","","(32,651)","","","(70)","%"],["Other income, net","(1,443)","","","(635)","","","(808)","","","127","%"],["Total income before taxes related to homebuilding operations(1)(2)","$","398,580","","","$","378,040","","","$","20,540","","","5","%"],["Other Financial and Operating Data:"],["Home closings","8,583","","","7,314","","","1,269","","","17","%"],["Average sales price of homes closed(3)","$","509,249","","","$","505,764","","","$","3,485","","","1","%"],["Net sales","6,727","","","5,744","","","983","","","17","%"],["Cancellation rate","16.6","%","","18.3","%","","(1.7)","%","","(9)","%"],["Homebuilding gross margin (in thousands)(4)","$","806,394","","","$","727,075","","","$","79,319","","","11","%"],["Homebuilding gross margin %(4)(5)","18.3","%","","19.4","%","","(1.1)","%","","(6)","%"],["Adjusted homebuilding gross margin (in thousands)(6)","$","1,186,019","","","$","1,015,624","","","$","170,395","","","17","%"],["Adjusted homebuilding gross margin %(5)(6)","27.0","%","","27.2","%","","(0.2)","%","","(1)","%"],["Active communities as of period end(7)","242","","","221","","","21","","","10","%"],["Backlog - units","2,599","","","3,978","","","(1,379)","","","(35)","%"],["Backlog - value (in thousands)","$","1,304,463","","","$","1,887,368","","","$","(582,905)","","","(31)","%"],["Net homebuilding debt to net capitalization(6)","33.7","%","","23.3","%","","10.4","%","","45","%"]]
[[/GREPCENT_TABLE]]

(1)Selling, general and administrative expense, which is comprised of homebuilding segments and Corporate expense (“SG&A”), includes $33 million and $19 million of Corporate SG&A for the year ended December 31, 2024 and 2023, respectively. Corporate amounts are included as they primarily relate to our homebuilding business.

(2)Contingent consideration revaluation, which is comprised of amounts from the homebuilding segments and Corporate, (“contingent consideration”) includes $3 million and $9 million of Corporate contingent consideration expense for the year ended December 31, 2024 and 2023, respectively. Corporate amounts are included as they represent contingent consideration relating to our homebuilding business that the Company does not charge to the segments.

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

(4)Homebuilding gross margin is homebuilding revenues less homebuilding cost of sales.

(5)Calculated as a percentage of homebuilding revenues.

(6)Adjusted homebuilding gross margin and net homebuilding debt to net capitalization are non-GAAP financial measures. For definitions of these non-GAAP financial measures and reconciliations to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”

(7)A community becomes active once the model is completed or the community has its fifth net sale. A community becomes inactive when it has fewer than five homesites remaining to sell.

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The following tables summarize home closings and average sales price (“ASP”) of homes closed by homebuilding segment for the year ended December 31, 2024 and 2023, as well as active communities as of December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2024","","As of December 31, 2024"],["Segment","","Home Closings","","ASP","","Active Communities"],["Southeast","","2,838","","","$","484,345","","","67"],["Mid-Atlantic","","2,594","","","446,667","","","59"],["Midwest","","3,151","","","583,198","","","116"],["Total","","8,583","","","$","509,249","","","242"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023","","As of December 31, 2023"],["Segment","","Home Closings","","ASP","","Active Communities"],["Southeast","","3,170","","","$","470,405","","","57"],["Mid-Atlantic","","1,597","","","396,462","","","44"],["Midwest","","2,547","","","618,306","","","120"],["Total","","7,314","","","$","505,764","","","221"]]
[[/GREPCENT_TABLE]]

The following tables present income before taxes (in thousands) and homebuilding gross margin (or “gross margin”) percentage by segment for the year ended December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2024","","2023"],["Segment","","Income Before Taxes","","Gross Margin %","","Income Before Taxes","","Gross Margin %"],["Southeast","","$","141,465","","","19.1","%","","$","183,537","","","18.9","%"],["Mid-Atlantic","","130,067","","","19.6","%","","54,646","","","17.9","%"],["Midwest","","162,776","","","17.0","%","","168,115","","","20.6","%"],["Total(1)","","$","434,308","","","18.3","%","","$","406,298","","","19.4","%"]]
[[/GREPCENT_TABLE]]

(1)Total income before taxes by segment does not include $33 million and $19 million of Corporate SG&A, and $3 million and $9 million of Corporate contingent consideration expense for the years ended December 31, 2024 and 2023, respectively. These amounts are included within total income before taxes related to homebuilding operations, which is presented in the Results of Homebuilding Operations table above. Refer to footnotes (1) and (2) above for more information.

Homebuilding Revenues. The increase in homebuilding revenues was primarily attributable to 8,583 home closings for the year ended December 31, 2024, an increase of 1,269 homes, or 17%, from 7,314 home closings for the year ended December 31, 2023. In 2024, 877 home closings with an ASP of $534,617 were contributed by the Crescent Homes acquisition. The consolidated ASP of homes closed increased 1% when comparing the year ended December 31, 2024 to the year ended December 31, 2023. Excluding Crescent Homes, 41% of our closings were in the Midwest segment with an ASP of $583,198, which is the highest ASP of our homebuilding segments.

Homebuilding Cost of Sales and Homebuilding Gross Margin. The higher homebuilding cost of sales and homebuilding gross margin were primarily due to the increase in home closings for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The decrease in homebuilding gross margin as a percentage of homebuilding revenues when comparing the years ended December 31, 2024 and 2023 was primarily attributable to higher land and financing costs, partially offset by direct cost reductions and changes in product mix. Additionally, amortization of purchase accounting adjustments associated with home closings from the Crescent Homes acquisition negatively impacted the year ended December 31, 2024 homebuilding gross margin percentage by approximately 12 bps.

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Southeast. Our Southeast segment homebuilding revenues for the year ended December 31, 2024 were $1.4 billion, a decrease of $135 million, or 9%, from $1.5 billion for the year ended December 31, 2023. This decline in revenue was driven by a decrease in home closings of 332, or 10%, partially offset by a 3% increase in the ASP of homes closed. Homebuilding gross margin percentage was 19.1% for the year ended December 31, 2024, representing an increase of 20 bps, or 1%, when compared to the year ended December 31, 2023. The increase in homebuilding gross margin percentage was mostly the result of direct cost reductions and, to a lesser extent, cycle time improvements, partially offset by higher land and financing costs.

Mid-Atlantic. Our Mid-Atlantic segment homebuilding revenues for the year ended December 31, 2024 were $1.2 billion, an increase of $530 million, or 84%, from $633 million for the year ended December 31, 2023. This revenue growth was primarily driven by an increase in home closings of 997, or 62%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. Crescent Homes contributed $470 million in homebuilding revenues and 877 home closings with an ASP of $534,617 for the year ended December 31, 2024.

Excluding Crescent, homebuilding revenues in the Mid-Atlantic segment increased by 9% when comparing the year ended December 31, 2024 and 2023, primarily due to more home closings and, to a lesser degree, a higher ASP of $401,744, an increase of $5,282, or 1%, when compared to the year ended December 31, 2023. Without Crescent, homebuilding gross margin percentage was 18.5% for the year ended December 31, 2024, representing an increase of 60 bps, or 3%, when compared to the year ended December 31, 2023. The improvement in this homebuilding gross margin percentage was primarily a result of direct cost reductions and, to a lesser extent, cycle time improvements, partially offset by higher land and financing costs.

Midwest. Our Midwest segment homebuilding revenues for the year ended December 31, 2024 were $1.8 billion, an increase of $264 million, or 17%, from $1.6 billion for the year ended December 31, 2023. This increase was due to higher home closings of 604, or 24%, partially offset by a decrease of 6% in the ASP of homes closed. The decrease in ASP of homes closed was due to changes in the geographic mix of closings within the segment. Homebuilding gross margin percentage was 17.0% for the year ended December 31, 2024, representing a decrease of 360 bps, or 17%, when compared to year ended December 31, 2023. The reduction in homebuilding gross margin percentage was due to an increase in land costs and, to a lesser extent, higher financing costs, partially offset by direct cost reductions.

Selling, General and Administrative Expense. SG&A as a percentage of homebuilding revenues was 9.0% for the year ended December 31, 2024, a slight increase of 90 bps from 8.1% for the year ended December 31, 2023. The dollar increase in SG&A was primarily attributable to higher compensation costs of $51 million due to our growth from continued expansion, including the February 2024 acquisition of Crescent Homes and our operational expansions in Florida and Arizona. Additionally, for the year ended December 31, 2024, SG&A included $50 million of spend on forward commitment programs to allow our homebuyers to access lower mortgage interest rates on home loans at the point of sale, representing a $22 million increase when compared to the year ended December 31, 2023.

Contingent Consideration Revaluation. $30 million of the decrease in contingent consideration expense for the year ended December 31, 2024 was attributable to lower fair value adjustments of future expected earnout payments related to the MHI acquisition, as actual results remained in line with forecasts when compared to the year ended December 31, 2023. As the earnout period for the MHI acquisition is nearing its completion in the third quarter of 2025, it is less susceptible to changes in long-term underlying projections. Additionally, the earnout period related to the 2020 acquisition of H&H Constructors of Fayetteville, LLC concluded in the third quarter of 2024 and the final payment for the contingent consideration agreement was made in the fourth quarter of 2024.

Income Before Taxes Related to Homebuilding Operations. The increase in income before taxes related to homebuilding operations during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily attributable to the increase in home closing volume and the reduction in contingent consideration expense, partially offset by the increase in SG&A, all explained above.

Refer to the Form 10-K for the year ended December 31, 2023 filed on February 29, 2024 for the results of operations and related discussion for December 31, 2023 compared to the year ended December 31, 2022.

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Net Sales, Backlog and Closings

The following table presents information concerning our net sales, starts and closings in each of our homebuilding segments for the periods set forth below:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Period Over Period Percent Change"],["","2024","","2023"],["Segment","Net Sales","Starts","Closings","","Net Sales","Starts","Closings","","Net Sales","Starts","Closings"],["Southeast(1)(2)","1,754","","2,868","","2,838","","","1,822","","2,693","","3,170","","","-4","%","6","%","-10","%"],["Mid-Atlantic","2,196","","2,623","","2,594","","","1,360","","1,627","","1,597","","","61","%","61","%","62","%"],["Midwest","2,777","","3,252","","3,151","","","2,562","","2,551","","2,547","","","8","%","27","%","24","%"],["Total","6,727","","8,743","","8,583","","","5,744","","6,871","","7,314","","","17","%","27","%","17","%"]]
[[/GREPCENT_TABLE]]

(1)Excluding net sales under built-for-rent contracts, 2024 net sales in the Southeast segment increased 9% when compared to 2023. The year ended December 31, 2024 also included a built-for-rent contract termination discussed further below.

(2)Closings under built-for-rent contracts decreased 18% when comparing the year ended December 31, 2024 to the year ended December 31, 2023.

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

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2024","","2023"],["Segment","Homes(1)","ASP","Value","","Homes(1)","ASP","Value"],["Southeast","1,150","","$","406,246","","$","467,183","","","2,234","","$","393,356","","$","878,757"],["Mid-Atlantic(2)","678","","464,798","","315,133","","","599","","427,593","","256,128"],["Midwest","771","","677,234","","522,147","","","1,145","","657,190","","752,483"],["Total","2,599","","$","501,910","","$","1,304,463","","","3,978","","$","474,451","","$","1,887,368"]]
[[/GREPCENT_TABLE]]

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

(2)On February, 1 2024, backlog increased by 477 due to our Crescent Homes acquisition on that date. 235 of the homes in backlog as of December 31, 2024 are from Crescent Homes.

Backlog of sold homes as of December 31, 2024 was 2,599 homes valued at approximately $1.3 billion based on ASP, a decrease of 1,379 homes and $583 million in value, or 35% and 31%, respectively, from 3,978 homes valued at approximately $1.9 billion as of December 31, 2023. The overall decrease in backlog was mostly reflective of a continued trend toward move-in ready spec homes relative to pre-order sales, and to a lesser extent, a reduction in built-for-rent contracts in backlog. Spec homes typically result in quicker closings and turnover of the backlog within the same reporting period. Approximately 187 of the homes in our backlog are expected to be delivered in 2026 and beyond.

Southeast. Backlog for the Southeast segment as of December 31, 2024 was 1,150 homes, a decrease of 1,084 from 2,234 homes as of December 31, 2023. The decrease from prior year was primarily attributable to a continued trend toward move-in ready spec homes relative to pre-order sales and a reduction in net sales under built-for-rent contracts.

Mid-Atlantic. Backlog for the Mid-Atlantic segment as of December 31, 2024 was 678 homes, an increase of 79 from 599 homes as of December 31, 2023. The increase in backlog from prior year was attributable to the Crescent Homes acquisition and, to a lesser extent, higher net sales relative to closings, partially offset by lower net sales relative to closings under built-for-rent contracts.

Midwest. Backlog for the Midwest segment as of December 31, 2024 was 771 homes, a decrease of 374 from 1,145 homes as of December 31, 2023. The decrease from prior year was mostly a result of higher closings relative to net sales, as well as the continued trend toward more sales of move-in-ready spec homes relative to pre-order sales.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["Segment","2024","","2023"],["Southeast","23.7","%","","21.5","%"],["Mid-Atlantic","12.9","%","","14.4","%"],["Midwest","14.4","%","","17.8","%"],["Total(1)","16.6","%","","18.3","%"]]
[[/GREPCENT_TABLE]]

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

Our cancellation rate for the year ended December 31, 2024 was 16.6%, an improvement of 170 basis points when compared to the 18.3% cancellation rate for the year ended December 31, 2023. The overall improvement in cancellation rate was mostly a result of the trend toward higher spec sales relative to pre-order sales. The higher cancellation rate in the Southeast segment for the year ended December 31, 2024 was primarily attributable to a built-for-rent contract of 229 units that was terminated during the first quarter of 2024 based on a strategic decision to convert the controlled lots underlying the deal into future retail sales. The total cancellation rate and the Southeast cancellation rate excluding built-for-rent activity were 14.1% and 13.4%, respectively, for the year ended December 31, 2024.

Financial Services

Our Financial Services segment provides mortgage financing and title services primarily through our wholly owned subsidiaries, Jet HomeLoans and DF Title, respectively. The following table presents selected financial information and supplemental data for our Financial Services segment for the year ended December 31, 2024 and 2023 (dollars in thousands, unless otherwise indicated):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023"],["Mortgage revenues","$","34,786","","","$","\u2014"],["Title services revenues","18,943","","","9,698"],["Total financial services revenues","53,729","","","9,698"],["Financial services expense","31,540","","","5,727"],["Income from unconsolidated entities","9,770","","","15,770"],["Financial services income before taxes","$","31,959","","","$","19,741"],["Supplemental data(1):"],["Total originations:"],["Number of loans","4,977","","","3,189"],["Principal (in millions)","$","2,196","","","$","1,318"],["Capture rate","71.9","%","","65.5","%"],["Average FICO score","744","","","741"],["Funded origination breakdown:"],["Government (FHA, VA, USDA)","40","%","","41","%"],["Non-agency","60","%","","59","%"]]
[[/GREPCENT_TABLE]]

(1)Supplemental data reflects operations of Jet HomeLoans prior to its consolidation in the Company’s financial statements beginning on July 1, 2024. Refer to Note 2, Acquisitions to the consolidated financial statements for additional information.

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The $35 million, or 100%, increase in mortgage revenues, $21 million of the increase in financial services expense and $11 million of the increase in the financial services income before taxes for the year ended December 31, 2024 as compared to the year ended December 31, 2023, respectively, were all primarily due to the consolidation of Jet HomeLoans beginning July 1, 2024. The income before taxes of Jet HomeLoans prior to July 1, 2024 was included in income from unconsolidated entities in the Consolidated Statements of Comprehensive Income.

The $9 million, or 95%, increase in title services revenues, $5 million of the increase in financial services expense and $4 million of the increase in the financial services income before taxes for the year ended December 31, 2024 as compared to the year ended December 31, 2023, were primarily the result of DF Title’s expansion of operations into the Texas market. Our Texas market was previously serviced by our unconsolidated title joint ventures, which resulted in a partially offsetting impact to financial services income before taxes of $2 million.

Non-GAAP Financial Measures

Management utilizes specific non-GAAP financial measures as supplementary tools to evaluate operating performance. These include adjusted homebuilding gross margin, EBITDA, and net homebuilding debt to net capitalization. Other companies may not calculate non-GAAP financial measures in the same manner that we do. Accordingly, these non-GAAP financial measures should be considered only as a supplement to relevant GAAP information, as reconciled for each measure below. In the future, we may incorporate additional adjustments to these non-GAAP financial measures as we find them relevant and beneficial for both management and investors.

Adjusted Homebuilding Gross Margin

We define adjusted homebuilding gross margin as homebuilding gross margin excluding the effects of capitalized interest, lot option fees, amortization included in homebuilding cost of sales (adjustments resulting from the application of purchase accounting in connection with acquisitions) and commission expense. Our management believes this information is meaningful because it isolates the impact that these excluded items have on homebuilding gross margin. We include internal and external commission expense in homebuilding cost of sales, not selling, general and administrative expense, and therefore commission expense is taken into account in homebuilding gross margin.

As a result, in order to provide a meaningful comparison to the public company homebuilders that include commission expense below the homebuilding gross margin line in selling, general and administrative expense, we have excluded commission expense from adjusted homebuilding gross margin. However, because adjusted homebuilding gross margin information excludes capitalized interest, lot option fees, purchase accounting amortization and commission expense, which have real economic effects and could impact our results of operations, the utility of adjusted homebuilding gross margin information as a measure of our operating performance may be limited.

The following table presents a reconciliation of adjusted homebuilding gross margin to the GAAP financial measure of homebuilding gross margin for each of the periods indicated (unaudited and in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","2022"],["Homebuilding gross margin(1)","$","806,394","","","$","727,075","","","$","612,420"],["Interest expense in homebuilding cost of sales(2)","187,324","","","122,759","","","60,595"],["Amortization in homebuilding cost of sales(3)","5,087","","","\u2014","","","6,701"],["Commission expense","187,214","","","165,790","","","140,442"],["Adjusted homebuilding gross margin","$","1,186,019","","","$","1,015,624","","","$","820,158"],["Homebuilding gross margin %(4)","18.3","%","","19.4","%","","18.4","%"],["Adjusted homebuilding gross margin %(4)","27.0","%","","27.2","%","","24.6","%"]]
[[/GREPCENT_TABLE]]

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

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

(3)Represents amortization of purchase accounting adjustments from our acquisitions.

(4)Calculated as a percentage of homebuilding revenues.

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EBITDA

EBITDA is not a measure of net income as determined by GAAP. EBITDA is a supplemental non-GAAP financial measure used by management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies. We define EBITDA as net income before (i) interest income, (ii) capitalized interest charged in homebuilding cost of sales, (iii) interest expense, (iv) income tax expense and (v) depreciation and amortization. Management believes EBITDA is useful because it allows management to more effectively evaluate our operating performance and compare our results of operations from period to period without regard to our financing methods or capital structure or other items that impact the comparability of financial results from period to period. EBITDA should not be considered as an alternative to, or more meaningful than, net income or any other measure as determined in accordance with GAAP. Our computations of EBITDA may not be comparable to EBITDA of other companies.

The following table presents a reconciliation of EBITDA to the GAAP financial measure of net income for each of the periods indicated (unaudited and in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2024","","2023","","2022"],["Net and comprehensive income attributable to Dream Finders Homes, Inc.","$","335,341","","$","295,900","","$","262,313"],["Interest income","(5,501)","","(4,299)","","(169)"],["Interest charged to homebuilding cost of sales(1)","187,324","","122,759","","60,595"],["Interest expense","\u2014","","1","","32"],["Income tax expense","97,272","","96,483","","81,859"],["Depreciation and amortization(2)","15,314","","10,651","","17,952"],["EBITDA","$","629,750","","$","521,495","","$","422,582"],["EBITDA margin %(3)","14.1%","","13.9%","","12.6%"]]
[[/GREPCENT_TABLE]]

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

(2)Includes amortization of purchase accounting adjustments from our acquisitions.

(3)Calculated as a percentage of total revenues.

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Net Homebuilding Debt to Net Capitalization

Net homebuilding debt to net capitalization is a non-GAAP financial measure that is the sum of construction lines of credit and senior unsecured notes, net less cash and cash equivalents (“net homebuilding debt”), divided by the sum of net homebuilding debt, total mezzanine equity and total equity (“net capitalization”). Net homebuilding debt excludes borrowings under our mortgage warehouse facilities. Management believes the ratio of net homebuilding debt to net capitalization is meaningful as it is used to assess the performance of our homebuilding segments, as well as to establish targets for performance-based compensation. We also use this ratio as a measure of overall leverage.

The following table presents a reconciliation of net homebuilding debt to net capitalization to the GAAP financial measure of total debt to total capitalization for each of the periods indicated (unaudited and in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2024","","2023"],["Total debt","$","1,286,052","","","$","824,302"],["Total mezzanine equity","169,951","","","148,500"],["Total equity","1,250,409","","","937,650"],["Total capitalization","$","2,706,412","","","$","1,910,452"],["Total debt to total capitalization","47.5","%","","43.1","%"],["Total debt","$","1,286,052","","","$","824,302"],["Less: Mortgage warehouse facilities","289,617","","","\u2014"],["Less: Cash and cash equivalents","274,384","","","494,145"],["Net homebuilding debt","$","722,051","","","$","330,157"],["Total mezzanine equity","169,951","","","148,500"],["Total equity","1,250,409","","","937,650"],["Net capitalization","$","2,142,411","","","$","1,416,307"],["Net homebuilding debt to net capitalization","33.7","%","","23.3","%"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Overview

We generate cash from the sale of our homes and from providing ancillary financial services. We intend to re-deploy our generated net cash to acquire and control land and further grow our operations year over year. We believe that our sources of liquidity are sufficient to satisfy our current commitments. We finance our operations through a variety of sources, including cash, borrowings under a revolving credit facility (the “Credit Agreement”), net proceeds from the senior unsecured notes (“2028 Notes”) and mortgage warehouse facilities used in our mortgage banking operations.

Our principal uses of capital are for lot deposits, lot purchases just-in-time for construction, vertical home construction, operating expenses, the payment of routine liabilities, business acquisitions and the origination of mortgage loans. Cash allocated to 2024 business acquisitions was approximately $220 million as of December 31, 2024 and none as of December 31, 2023. There was no acquisition activity in 2023. Refer to Note 2, Acquisitions to the consolidated financial statements for more information.

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As of December 31, 2024 and 2023, our cash and total liquidity were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2024","","2023"],["Borrowing base(1)","$","1,254,094","","","$","864,272"],["Outstanding balance under Credit Agreement","(700,000)","","","(530,000)"],["Letters of credit outstanding(2)","(12,449)","","","\u2014"],["Availability under Credit Agreement","$","541,645","","","$","334,272"],["Cash and cash equivalents(3)","274,384","","","494,145"],["Total liquidity","$","816,029","","","$","828,417"]]
[[/GREPCENT_TABLE]]

(1)As of December 31, 2024 and 2023, the borrowing base under the Credit Agreement was reduced by the principal amount of the senior unsecured notes of $300 million.

(2)The availability under the Credit Agreement is reduced by outstanding letters of credit that are not fully cash collateralized.

(3)Includes cash and cash equivalents reported on the Consolidated Balance Sheets related to financial services operations, which are not subject to restrictions and are regularly remitted to Corporate.

As of December 31, 2024, the Credit Agreement had an aggregate commitment of up to $1.4 billion. The Credit Agreement will mature on June 4, 2027. Certain of our subsidiaries guaranteed the Company’s obligations under the Credit Agreement and the 2028 Notes. As of December 31, 2024, we were in compliance with the covenants set forth for all of our debt obligations. Refer to Note 3, Debt, to the consolidated financial statements for more information on the Credit Agreement, 2028 Notes and the mortgage warehouse facilities.

Cash flows generated by our homebuilding projects can differ materially from our results of operations, as these depend upon the stage in the life cycle of each project. The majority of our projects begin at the land acquisition and development stage when we enter into finished lot option and land bank option contracts by placing a deposit with a land seller, developer or land banker. Our lot deposits are an asset on our Consolidated Balance Sheets. Early stages in our communities require material cash outflows relating to finished lot purchases from option contracts, entitlements and permitting, construction and furnishing of model homes, roads, utilities, general landscaping and other amenities, as well as ongoing association fees and property taxes. Except for furnishings of model homes, these costs are capitalized within our inventories and are not recognized as an expense until a home sale closes. As such, we incur significant cash outflows prior to the recognition of revenues and the related cost of sales.

In later stages of the life cycle of a community, cash inflows could significantly exceed our results of operations, as the cash outflows associated with land purchase and home construction and other expenses were previously incurred.

We actively enter into finished lot option contracts by placing deposits with land sellers or land bankers based on the aggregate purchase price of the finished lots. When entering into these contracts, we also agree to purchase finished lots at predetermined prices, time frames, and quantities that match our expected selling pace in the communities. We also enter into land development arrangements with land sellers, land developers and land bankers. Furthermore, to satisfy performance-related obligations in connection with certain land option agreements, we enter into surety bonds and letters of credit arrangements. Refer to “—Off-Balance Sheet Arrangements” for additional information.

Our lot deposits are generally 100% applicable to the lot purchase price. In these transactions, we also incur lot option fees on the outstanding capital balance held by the land banker. The initial investment and lot option fees require us to have the ability to allocate liquidity resources to projects that will not generate cash inflows or operating income in the near term.

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The above cash and land-light strategies allow us to maintain an adequate lot supply in our existing markets and support ongoing growth and profitability. We continue to operate in geographic regions with consistent increases in demand for new homes and constrained lot and inventory supply compared to population and job growth trends. We intend to continue to reinvest our earnings into our business and focus on expanding our operations. In addition, as the opportunity to purchase finished lots in desired locations becomes increasingly more limited and competitive, we are committed to allocating additional liquidity to land bank deposits on land development projects, as this strategy mitigates the risks associated with holding undeveloped land on our balance sheet, while allowing us to control adequate lot supply in our key markets to support forecasted growth. As of December 31, 2024 and 2023, our lot deposits related to finished lot option contracts and land bank option contracts were $458 million and $247 million, respectively.

We continue to evaluate our overall capital structure and explore options to strengthen our balance sheet. We will remain opportunistic while assessing available capital in the debt and equity markets.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2024","","2023","","2022"],["Net cash (used in)/provided by operating activities","","$","(256,648)","","","$","374,234","","","$","(27,623)"],["Net cash used in investing activities","","(221,672)","","","(4,484)","","","(5,524)"],["Net cash provided by/(used in) financing activities","","269,689","","","(216,424)","","","146,955"]]
[[/GREPCENT_TABLE]]

Net cash used in operating activities was $257 million for the year ended December 31, 2024, compared to $374 million of net cash provided by operating activities for the year ended December 31, 2023. The change in net cash (used in)/provided by operating activities was primarily driven by higher lot deposits of $240 million, the $189 million increase of mortgage loans held for sale resulting from the Jet HomeLoans acquisition on July 1, 2024, higher increases in inventories in 2024 of $86 million as a result of higher construction starts and lot purchases and lower customer deposit activity in 2024. All of these changes are inclusive of the impact of acquisitions related to Crescent Homes and Jet HomeLoans.

Net cash used in investing activities was $222 million for the year ended December 31, 2024, compared to $4 million of net cash used in investing activities for the year ended December 31, 2023, primarily attributable to the acquisition of Crescent Homes on February 1, 2024 for a purchase price of $210 million, of which $188 million was paid during the year ended December 31, 2024, partially offset by net cash acquired of $10 million from the Jet HomeLoans acquisition, which was in excess of $9 million of cash consideration paid for the transaction. To a lesser extent, the change was also driven by $14 million in cash paid for the purchase of an aircraft for corporate use and $11 million in deposits placed for our pending acquisitions.

Net cash provided by financing activities was $270 million for the year ended December 31, 2024, as compared to $216 million of net cash used in financing activities for the year ended December 31, 2023. The change in net cash provided by/(used in) financing activities was primarily attributable to net proceeds from our homebuilding debt of $171 million during the year ended December 31, 2024 used to release housing starts and purchase lots for our homebuilding operations, compared to $136 million of net homebuilding debt repayments during the year ended December 31, 2023. Additionally, there were $180 million of net proceeds from the mortgage warehouse facilities during the year ended December 31, 2024 resulting from the Jet HomeLoans acquisition.

Refer to the Form 10-K for the year ended December 31, 2023 filed on February 29, 2024 for the cash flows and related discussion for December 31, 2023 compared to year ended December 31, 2022.

Senior Unsecured Notes

On August 22, 2023, the Company issued $300 million in aggregate principal amount of 8.25% senior unsecured notes due August 15, 2028, which were issued pursuant to an indenture (the “Indenture”). Interest on the 2028 Notes is payable in arrears semiannually on each February 15 and August 15. The 2028 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by certain of the Company’s subsidiaries.

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The Company received net proceeds from the issuance and sale of the 2028 Notes of $294 million after unamortized debt issuance costs of $7 million, which reduce the carrying value of the 2028 Notes reported on the Consolidated Balance Sheets. The net proceeds from the 2028 Notes were used to repay a portion of the then outstanding balance under the Company’s Credit Agreement.

The 2028 Notes are redeemable by the Company prior to August 15, 2025 through the payment of the principal amount due, which can be accomplished through the issuance of certain restricted equity offerings for specified portions of principal notes outstanding, plus specified rates and accrued and unpaid interest, and a make-whole premium in the event 100% of the principal amount is redeemed. On or after August 15, 2025, the 2028 Notes are redeemable at specified rates equal to 104.1% of the principal balance, plus accrued and unpaid interest, and periodically decrease to 100% on August 15, 2027. Upon the occurrence of a Change of Control (as defined in the Indenture), the holders of the 2028 Notes will have the right to require the Company to repurchase all or a portion of the 2028 Notes at a price equal to 101% of the aggregate principal amount of the 2028 Notes, plus any accrued and unpaid interest.

The Indenture includes customary events of default. Subject to specified exceptions, the Indenture contains certain restrictive covenants that, among other things, limit our ability to incur or guarantee certain indebtedness, issue certain equity interests or engage in certain capital stock transactions. In addition, the Indenture contains certain limitations related to mergers, consolidations, and transfers of assets.

Credit Agreement

On June 6, 2024, the Company entered into an amendment to its existing revolving credit facility (as amended, the “Credit Agreement”). The amendment, among other things, (i) provides for an increase in the aggregate commitments under the revolving credit facility to $1.4 billion, subject to a borrowing base; (ii) extends the maturity date from July 17, 2026 to June 4, 2027 for certain new and existing lenders comprising $1.3 billion of the $1.4 billion of aggregate commitments under the Credit Agreement; and (iii) provides the Company with the ability to incur certain additional unsecured debt. Certain of our subsidiaries guaranteed the Company’s obligations under the Credit Agreement. The Credit Agreement includes an accordion feature that allows the aggregate commitments to increase to up to $2.0 billion, subject to a borrowing base.

Under the Credit Agreement, the Company has the ability to draw “Term SOFR Rate Loans” or “Daily Simple SOFR Rate Loans”. Term SOFR Rate Loans bear interest based on Term SOFR rates for one or three-month interest periods and include a SOFR adjustment of 10 basis points for each interest period. Daily Simple SOFR Rate Loans bear interest based on Daily Simple SOFR rates and include a SOFR adjustment of 10 basis points. Interest under Term SOFR Rate Loans and Daily Simple SOFR Rate Loans also include an “applicable rate margin” determined based on the Company’s net debt to capitalization ratio, equivalent to credit spreads of 2.00% to 2.95%.

As of December 31, 2024 and 2023, the outstanding balance under the Credit Agreement was $700 million and $530 million, respectively. Under the Credit Agreement, the funds available are unsecured and availability under the borrowing base is calculated based on specific advance rates for each of finished lots, construction in process homes, and finished homes inventory on the Consolidated Balance Sheets, and reduced for any outstanding unsecured indebtedness permitted under the Credit Agreement, including the 2028 Notes.

The Company had capitalized debt issuance costs related to construction lines of credit, net of amortization, of $10 million and $7 million as of December 31, 2024 and 2023, respectively, which were included in other assets on the Consolidated Balance Sheets.

Debt issuance costs related to the 2028 Notes and the Credit Agreement that are recorded to capitalized interest are expensed in cost of sales as the homes close.

The Company was in compliance with all debt covenants as of December 31, 2024 and 2023. The Company expects to remain in compliance with all debt covenants over the next 12 months. Refer to Note 3, Debt, to the consolidated financial statements for more information on covenants in the Credit Agreement.

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Contingent Consideration

Based on the terms of the purchase agreement, at the time of an acquisition, the Company may record a contingent consideration liability based on the expected fair value of any future earn out payments due to the acquiree for a typical period of up to five years post-acquisition. This liability is remeasured to fair value quarterly and the adjustment is recorded in contingent consideration revaluation in the Consolidated Statements of Comprehensive Income. As of December 31, 2024, the contingent consideration liability totaled $68 million, with the entire amount expected to be payable within 12 months. Further information regarding our contingent consideration liability is provided in Note 1, Nature of Business and Significant Accounting Policies to our consolidated financial statements.

Leases

The Company has operating leases primarily associated with office space that is used by divisions outside of the Jacksonville area, model home sale-leasebacks and a corporate office building sale-leaseback. The Company also has finance leases for corporate office furniture. As of December 31, 2024, the future minimum lease payments required under these leases totaled $21 million, with $6 million payable within 12 months. Further information regarding our leases is provided in Note 7, Commitments and Contingencies to our consolidated financial statements.

Series B Preferred Units

On August 31, 2023, the Company redeemed all of its previously outstanding Series B preferred units. The Company made an aggregate cash payment to the Series B holders of $11 million, which included $7 million in principal plus cumulative undistributed earnings, less a negotiated discount on that date. Following the redemption, no Series B preferred units remain outstanding. Refer to Note 12, Equity to the consolidated financial statements for disclosure related to the redemption.

Redeemable Noncontrolling Interest

Based on the terms of the purchase agreement, at the time of an acquisition, we may issue redeemable noncontrolling interest. Redeemable noncontrolling interest is reported within mezzanine equity on the Company’s Consolidated Balance Sheets at the greater of the initial carrying amount (its fair value on the acquisition date) adjusted for the noncontrolling interest’s share of net income (loss) or its redemption value. After achieving the minimum earnings threshold, the amount of net and comprehensive income that is attributable to the redeemable noncontrolling interest will be presented within net and comprehensive income attributable to noncontrolling interests on the Consolidated Statements of Comprehensive Income. As of December 31, 2024, the redeemable noncontrolling interest totaled $21 million, of which no amount was redeemable within 12 months. Refer to Note 1, Nature of Business and Significant Accounting Policies to our consolidated financial statements for more information.

Redeemable Preferred Stock

On September 29, 2021, we sold 150,000 shares of newly-created redeemable preferred stock with an initial liquidation preference of $1,000 per share and a par value $0.01 per share, for an aggregate purchase price of $150 million. We used the proceeds from the sale of the redeemable preferred stock to partially fund the MHI acquisition and for general corporate purposes. Pursuant to the Certificate of Designations, the redeemable preferred stock ranks senior to the Class A and B common stock with respect to dividends and distributions on liquidation, winding-up and dissolution. Accordingly, upon a liquidation, dissolution or winding up of the Company, each share of redeemable preferred stock is entitled to receive the initial liquidation preference of $1,000 per share, subject to adjustment, plus all accrued and unpaid dividends thereon.

Refer to Note 12, Equity to the consolidated financial statements for additional terms of the redeemable preferred stock.

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Off-Balance Sheet Arrangements

Asset-Light Lot Acquisition Strategy

We operate an asset-light and capital-efficient lot acquisition strategy primarily through finished lot option contracts and land bank option contracts. Refer to “Item 1. Business—Land Acquisition and Development Process” for more information.

Surety Bonds, Letters of Credit and Financial Guarantees

We enter into surety bonds and letters of credit arrangements with local municipalities, government agencies and land developers. These arrangements relate to certain performance-related obligations and serve as security for certain land option agreements.

As of December 31, 2024 and 2023, we had outstanding surety bonds of $298 million and $195 million, respectively, and outstanding letters of credit of $21 million and $1 million, respectively. We believe we will fulfill our obligations under the related arrangements and do not anticipate any material losses under these surety bonds and letters of credit.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with GAAP. Our critical accounting policies are those that we believe have the most significant impact to the presentation of our financial position and results of operations and that require the most difficult, subjective or complex judgments. In many cases, the accounting treatment of a transaction is specifically dictated by GAAP without the need for the application of judgment.

In certain circumstances, however, the preparation of consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

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

Revenue Recognition

We recognize homebuilding revenue in two ways in accordance with Accounting Standards Codification (“ASC”) Topic 606. This includes revenues from home sales with respect to homes that we construct on homesites to which we own title that are recorded at the time each home sale is closed and title and possession are transferred to the buyer, or upon delivery of homes sold to third-party investors intending to lease the homes, as well as revenues from home sales in which the buyer or third-party investor retains title to the homesites while we build the homes that are recognized based on the percentage of completion of the home construction, which is measured on a quarterly basis. We determine the percentage of completion based on the number of days of construction completed to the total estimated number of days to construct the home.

Inventories and Homebuilding Cost of Sales

Inventories include the cost of direct land acquisition, land development, construction, capitalized interest, lot option fees, real estate taxes and direct overhead costs incurred related to land acquisition and development and home construction. Indirect overhead costs are charged to selling, general and administrative expense as incurred.

Land and development costs are typically allocated to individual residential lots on a pro rata basis based on the number of lots in the development, and the costs of residential lots are transferred to construction work in progress when home construction begins. The carry cost for land and development, recognized in homebuilding cost of sales as homes close, is impacted by our ability to estimate the timing to completion for land development deals and expected sales pace.

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Sold units are expensed on a specific identification basis as homebuilding cost of sales. Homebuilding cost of sales for homes closed includes the specific construction costs of each home and all applicable land acquisition, land development and related costs allocated to each residential lot.

Inventories are carried at the lower of accumulated cost or net realizable value. We periodically review the performance and outlook of our inventories for indicators of potential impairment.

Business Combinations and Valuation of Contingent Consideration

The Company accounts for business combinations using the acquisition method. Under ASC Topic 805 a business combination occurs when an entity obtains control of a “business.” The Company determines whether or not the gross assets acquired meet the definition of a business. If they meet this criteria, the Company accounts for the transaction as a stock purchase. If they do not meet this criteria the transaction is accounted for as an asset purchase. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issuance of debt or equity securities. Any contingent consideration is measured at fair value at the date of acquisition and is based on expected cash flows of the acquisition target discounted over time using an observable market discount rate. The Company generally utilizes outside valuation experts to determine the amount of contingent consideration. Contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognized in other income or other expense in the Consolidated Statements of Comprehensive Income.

Recent Accounting Pronouncements

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