Offerpad Solutions Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 3, 2023

There are 6 speakers on the call.

Operator

Afternoon. Thank you for attending today's Offerpad First Quarter 2023 Earnings Call. My name is Bethany, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Stephanie Layton, Senior Vice President of Investor Relations and ESG at Offerpad.

Operator

Stephanie?

Speaker 1

Thank you, and good afternoon, everyone. Welcome to Offerpad Solutions' Q1 2023 earnings Our Chairman and Chief Executive Officer, Brian Baer and Chief Financial Officer, Mike Burnett are here with me today. During the call today, management will make forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward looking statements are inherently uncertain and events could differ significantly from management's expectations. Please refer to the risks, uncertainties and other factors relating to the company's business described in our filings with the U.

Speaker 1

S. Securities and Exchange Commission. Except as required by applicable law, Overpad does not intend to update or alter forward looking statements, whether as a result of new information, future events or otherwise. On today's call, management will refer to certain non GAAP financial measures. These metrics exclude certain items discussed in our earnings release under the heading Non GAAP Financial Measures.

Speaker 1

The reconciliation of Offerpad's non GAAP measures to the comparable GAAP measures are available in the financial tables of the Q1 earnings release on Offerpad's website. I'll now turn the call over to Brian.

Speaker 2

Thanks, Stephanie. Hey, everyone. Appreciate you joining us today. I'll cover our priorities, a Q1 summary, market trends and operational updates. Mike will share our Q1 2023 financial results and our 2nd quarter outlook.

Speaker 2

The extraordinary increase in interest rates last year and the resulting impact on home values and sales volume required us to adjust our plans, We advise near term objectives and execute decisively. In the Q4 2022 and the Q1 2023, We have focused on the following top priorities. 1st, renovating and selling homes acquired prior to September of last year. As of last week, 99% of those homes have sold or under contract to sell. This allows us to focus entirely on our go forward plans.

Speaker 2

2nd, acquire new homes at a cautious pace to test markets and prove our ability to achieve positive returns on new acquisitions in this uncertain market. In fact, we have largely achieved and or exceeded our normalized return targets on homes acquired after September 1, Even as many markets have been under stress. 3rd, reducing cost to adjust to today's market dynamics. Cumulative headcount and other cost reductions are expected to decrease our annual operating costs by $40,000,000 in 2023 compared to last year. 4th, raising equity capital to strengthen our balance sheet.

Speaker 2

Now in the Q2 of 2023 and looking forward to the Q3, We are executing a plan that we expect to produce positive adjusted EBITDA by year end. Importantly, we believe that our ability to execute and achieve profitability is not dependent on home price appreciation. We are prepared to perform through this period of depressed residential resale transaction volumes. There is plenty of upside if this broader market accelerates. However, our plan is not dependent on market acceleration.

Speaker 2

Our plan targets the following top three priorities. 1st, optimizing our market footprint with targeted cost reductions while doubling down on higher performing markets. 2nd, increasing acquisitions to approximately 500 per month with a targeted time from acquisition to close of 100 days or less. 3rd, leveraging our deep market knowledge and operational capabilities to precisely execute our core cash offer business, while also innovating and expanding our fee based service offerings to increase the number of ways that we can serve customers and partners. We are an agile organization.

Speaker 2

We know what we need to do And we remain focused on continuing to execute and innovate with enthusiasm. Turning to our Q1 results, We exceeded our top line goals and met our bottom line expectations. On our Q4 call, we anticipated that Q4 2022 would represent the low point of our reported net income and Q1 would reflect quarter over quarter bottom line improvement. In Q1, our adjusted EBITDA loss was half of the prior quarter. Reduced costs and positive margins on the sale of new inventory helped us offset losses associated with the sale of legacy inventory, which was still 2 thirds of our Q1 sales.

Speaker 2

With affordability challenges and many consumers choosing to stay in their current home with lower mortgage rates, general expectations are that transaction volumes in the broader real estate will remain substantially lower this year compared to 2022. Accordingly, we initiated additional cost reductions this month to right size the business for current and anticipated market volumes. This reduction includes recalibrating our internal resources and marketing spend to support our higher performing and more affordable markets. These changes support our plan to achieve positive adjusted EBITDA at approximately 500 acquisitions per month through a combination of express cash offers and direct plus sales by year end. Our progress in Q1 was supported by improving conditions and sentiment across many In most markets, we are no longer seeing significant price cuts on listed homes, particularly more affordable homes And multiple offers are reappearing in certain areas.

Speaker 2

As price volatility has normalized to more historic ranges, It has allowed us to price more competitively on targeted homes. Our pricing model does not require home price appreciation to succeed, Whether it is rapid changes in home prices in either direction that caused the most challenges. We believe that more competitive pricing will help us accelerate The trend of increasing acquisition volume. In addition, we continue to utilize our in house renovation expertise to create value, reduce risk and position our inventory to sell. Our strong established brand and core express cash offer business create a powerful and efficient top of funnel source of leads.

Speaker 2

Add this to our deep operational capabilities and we have a lot of opportunity to further help customers and generate additional revenue outside of our core business. Turning to operations, I will update you on the following three products and services that are in addition to our core Express Cash Offer business: Renovate, Direct Plus, which is acquiring homes for our investor partners and our Flex Listing Service. Last quarter, we shared our plans to expand our fee based business to business services with our new renovate and direct plus offerings. We believe these offerings provide a great value proposition for single family rental companies, but our plan does not rely on significant volumes this year as many of these investors We're on the sidelines for now. Nonetheless, we believe lease services can be an important part of our business over time.

Speaker 2

Through Renovate, we are providing renovation services on non Offerpad single and multifamily homes. During the Q1, multiple new businesses started using our renovation services and we completed approximately 2 25 projects under this business model. Our direct plus program that connects investors with sellers is taking shape. In the Q1, we onboarded several new investor partners with diverse buy boxes in target markets. In addition, we expanded this offering from 2 to 8 Offerpad markets.

Speaker 2

Importantly, many of the current and potential direct plus partners such as single family and short term rental companies can also benefit from utilizing our renovate services. Growing our Flex listing service and agent referral network also supports our goal to provide a solution for every customer. With a team of more than 100 agents, our local experts provide an alternative to those looking for a cash offer. For customers in markets we don't currently serve, we have an agent referral network where we connect customers with an agent in that market. Offerpad receives a percentage of the commission for any transaction that closes through our referral program.

Speaker 2

Customers we otherwise could not be able to assist are connected solution by working with a local real estate professional. This is another way we are meeting the needs of more individuals and capitalizing on our top of funnel request volume. To manage our expanding services and partners, our data and analytics team enhanced Offerpad's technology to automatically match each customer with a solution that best fits their needs. A cash offer on behalf of Offerpad for our direct plus partners, flex listing of agent partner services. Our goal is to deliver each person who contacts Offerpad with the best solution for their needs.

Speaker 2

This software and analytics update helps maintain one of our primary value propositions, a simpler, less stressful real estate experience. As we navigated through the abrupt market shift last year, we used this time and experience to build an even better, more diverse business. We've thrived in the hot buyers market during 2021. We adapted during the market shift in 2022 and we are demonstrating our ability to Under the current market conditions with improving operational and financial results. For our core Express Cash Offer business, It is more important than ever to leverage our deep data, technology and local market expertise to be laser focused on buying the right homes in the right submarkets at the right price and applying our expert operational capabilities to target, underwrite, renovate and sell homes while maintaining a great customer experience.

Speaker 2

In closing, I remain excited about our opportunity to change the way real estate transacts. We believe we have the right cost structure, right financing And write products to succeed in any environment by offering our customers their best way to buy and sell a home, period. I'll now turn the call over to Mike.

Speaker 3

Thanks, Brian. We had an encouraging start to the year with macro conditions beginning to stabilize and quarter over quarter improvement in our bottom line financial results. Importantly, we accomplished our stated goal to sell or have under contract Substantially all our homes purchased prior to the market shift. This was critical to support continued improvement in our financial performance this year, and we accomplished this on schedule and in line with our financial expectations. During the Q1, we generated Reported by the sale of 1609 homes, which also exceeded the top end of our guidance range at an average selling price of $379,000 The $59,400,000 net loss in the Q1 reflects a 51% improvement over Q4 2022.

Speaker 3

Our adjusted EBITDA for the quarter was negative $44,800,000 compared to negative $103,700,000 in the 4th quarter last year. This reflects a 57% improvement in adjusted EBITDA quarter over quarter. The sequential quarterly improvement was supported by a $52,000,000 Our gross margin improved 780 basis points from the 4th quarter loss to 1.2% in Q1. This is consistent with the disposition of inventory acquired prior to the market shift, partially offset by the positive performance of homes underwritten after September of 2022. Of the 1600 homes sold in the Q1, nearly 2 thirds of the homes were acquired before September.

Speaker 3

Early results for the homes underwritten during the Q4 last year and Q1 of this year continue to show returns at or above our target range, and we expect gross margins and contribution margins to trend upward in the coming quarters. Total operating expenses decreased 9% from the prior quarter due to previously announced headcount reductions and other general cost reduction measures. As Brian mentioned, we also initiated additional cost reductions in early May and expect those actions to result in approximately $9,000,000 of additional annualized savings. All told, the cost reduction measures that we've implemented over Last 9 months are expected to reduce costs by approximately $40,000,000 in 2023. Turning to our operational metrics, Time to cash or our holding period peaked at 185 days in Q1 compared to 142 days in Q4 of 2022.

Speaker 3

This was consistent with our expectation for a longer holding period in Q1 given the seasonality of our business as well as selling A significant number of homes acquired prior to the market shift. Here again, homes sold in Q1 that were acquired after last September had an average time to cash of 106 days, demonstrating the performance of our more recent cohorts of homes. We have already seen an improvement in our holding time through the end of April and we expect the time to cash will decline in Q2 and normalize around 100 days in Q3 of this year. As part of our risk mitigation strategy in the second half of last year, We significantly reduced the pace of home acquisitions. We hit our lowest level of monthly acquisitions in January of this year and have been prudently increasing each month since.

Speaker 3

We expect acquisition volumes in the 2nd quarter to nearly double the 3 64 homes that we acquired in the 1st quarter. From a balance sheet perspective, our unrestricted cash balance increased to $108,000,000 at the end of Q1 from $97,000,000 at year end. Inventory declined to $173,000,000 from year end and we repaid over $500,000,000 of debt in the Q1 as we continue to derisk the balance sheet. Our March 31 debt balance was $155,000,000 And as of the end of Q1, we had $1,500,000,000 of total borrowing capacity, dollars 600,000,000 of which was committed. We have a blue chip base of diversified lenders and our strong relationships with them along with the structure of our credit facilities has enabled us to work collectively through one of the most sudden and significant real estate dislocations in decades.

Speaker 3

Importantly, we continue to have the debt capacity and terms in place to rebuild our inventory levels consistent with achieving our 2023 business plan. At a run rate of 500 acquisitions per month, we would only utilize about 70% of our committed warehouse lines with an additional $900,000,000 uncommitted, leaving ample capacity to ramp up acquisitions should more favorable market conditions materialize. Additionally, from a liquidity perspective, at the end of Q1, our inventory included approximately $50,000,000 of embedded equity, which is higher than usual due to temporary reductions in our leverage levels. In the Q2, those leverage metrics revert to their prior levels And therefore, we expect a reversal of this use of cash as homes that are sold in Q2 release more cash back to our balance sheet. With this positive cash flow, we anticipate our cash balance at the end of the second quarter to be only slightly less than the cash balance at the end of Q1 despite growing our inventory.

Speaker 3

Continuing our thoughts on the Q2, we expect Q2 leading key performance metrics to continue the trend of sequential improvements for gross margin, net loss and adjusted EBITDA that began in Q1. We also expect Q2 to reflect the 1st quarter over quarter improvements in time to cash as well as increases in acquisitions, inventory and contribution margin after interest. Revenue is more of a lagging metric for us due to the holding period between acquisition and sale, creating a 1 to 2 quarter delay between increases in acquisition volume, translating into higher revenue. Accordingly, We anticipate our 2nd quarter revenue to represent the low point in the cycle and to increase quarter over quarter from there. Specifically in the Q2 of 2023, we expect to sell between 40550 Homes, generating revenue of between $140,000,000 $200,000,000 We also expect adjusted EBITDA be between negative $25,000,000 and negative $40,000,000 which represents another significant sequential improvement bringing us closer to meeting our expectation of achieving Positive adjusted EBITDA in the Q4 of this year.

Speaker 3

Our results in the Q1 reflect the first step in our expectation that momentum will accelerate throughout this year, positioning us for sequential improvements in our quarter over quarter results. We have a clear 2023 business plan that builds upon our foundational expertise to deliver more solutions and increase the number of customers we serve. Our expansion into business to business facing services is yet another diversified revenue stream and customer base supporting our ability to grow. We are on a more unified path than ever before and optimistic about what is ahead for Offerpad. I'll now turn the call over to the operator to begin the question and answer session.

Operator

We ask all participants to limit yourself to one question and one follow-up. We will pause here briefly as questions are registered. Our first question comes from the line of Nick Jones with JMP. Please go ahead.

Speaker 4

Maybe a finer Point on some of the outlook that was provided here. As you kind of progress through the year and increase acquisition sequentially, I mean, can this Kind of accelerate throughout the year, is it going to be more linear? And I guess how does this kind of tie to your 4Q comments around higher velocity markets? Should we really be expecting to kind of hit this $500 a month cadence kind of just like November, December or is there Room to kind of hit that early, just any additional color there would be great and then a quick follow-up.

Speaker 3

Sure. Hey Nick, it's Mike. Thanks for the question. We've already seen good progress as we've gone month by month through the current year. And so I think it's reasonable for us to be able to get to that from an acquisition standpoint, that 500 pays ahead of year end.

Speaker 3

I wouldn't put a completely fine point on it to give a month at this point, but We've made good progress there. We're seeing good request volume. We're getting good offer levels out there in the market currently. So I think we'll hit that earlier and that will then in turn help enable the expectation of achieving Positive adjusted EBITDA at the year end. Yes.

Speaker 3

One thing

Speaker 2

I would just say, hey Nick, it's Brian. But one thing I would just add there is, Last year we saw a lot of volatility in the market and that makes it really hard to underwrite. And we've seen definitely that volatility Change in most every one of our markets. And so we can underwrite and buy homes under any market conditions where the markets are going up or going down or even staying steady. The volatility is what it's really hard and so we're seeing that and so we have a much clearer picture when we're underwriting homes in these markets and So we're able to start acquiring homes again at decent volumes.

Speaker 4

Great. And then maybe a follow-up on just kind of the EBITDA profitability by the end of the year. Should we take that as kind of Full quarter EBITDA profitability or maybe it shows up in November, December and 4Q maybe as a whole isn't positive?

Speaker 3

Yes. Nick, it will be tough to tell. I mean, I think if we execute against Our plan that we've got out there for us, we could see reported EBITDA for the quarter positive. It's a little bit of a fine point on that. I certainly think we'll be at that run rate.

Speaker 3

But the way that we've got things positioned here, again, you asked a little bit from Focusing on the market standpoint too, we've got 25 markets that we're active in out there right now. So It's getting up to 500 with our current footprint. I don't think there's a huge lift. Obviously, there are A number of headwinds out there that we deal with, but that's what we do day in and day out. So our goal is to be able to get Get to the Q4 and report positive EBITDA.

Speaker 2

And we want to take a very realistic approach to this year because of the macro environment that's out there. That's why we again took significant cost reductions as a company, and put realistic as far as the end of year what we can do from a volume standpoint. And To Mike's point, we're in 25 markets. And so what that means in some of even our core markets that we've been in a long time that we And in different times, we're used to buying hundreds of homes a month in those markets. We're down to buying 40 or 50 homes a month in those markets.

Speaker 2

And so Very realistic with expectations in this market and listen if the market accelerates or changes, we can definitely take advantage of that. But right now, it's the focus is getting EBITDA profit by end of year and by cutting costs and hitting the numbers by the end of the year.

Speaker 4

Great. Thanks, Brian. Thanks, Mike.

Speaker 2

Appreciate it.

Operator

Thank you. Our next question comes from the line of Ryan Tomasello with KBW. Please go ahead.

Speaker 5

Hey guys, thanks for taking the questions. Just hoping for you to walk through how the unit economics differ between the Express and Direct Plus products. Does the mix at all matter in terms of your EBITDA breakeven at 500 homes per month between those two products? And how much more volume do you think you need to be at in order to be cash flow breakeven inclusive of financing costs From the Express product that's still capital intensive.

Speaker 3

Sure. Hey, Ryan, It's Mike. First on the unit economics, they contribute similar amounts of gross margin. They come through obviously 1, on a gross basis, which is more of our Express model. So the full sales price of the home comes through revenue, but then you've got the full Position cost offsetting that.

Speaker 3

On the direct plus model, it's more of a fee based service. And so there it's It's coming through on a net basis. So your revenue is going to look different there, but by the time you get to your gross margin line, Those economics are pretty similar between the 2. So from that standpoint, it doesn't make a huge amount of difference there. And then to your second question on becoming profitable, we don't have a lot of Cash items between net income and adjusted EBITDA, it really comes down to our financing costs or interest there.

Speaker 3

Yes, what you've seen in the past when we were had a path to profitability and achieved profitability, it was shortly thereafter from us getting Moreover, breakeven from an adjusted EBITDA standpoint. So those 2 are pretty tightly correlated And so the expectation would be similar to what we've achieved in the past that shortly thereafter I think we should be in that position.

Speaker 5

Got it. And then in terms of the financing capacity, does the $600,000,000 of committed funding reflect What you think is true capacity here relative to where the company's equity base is today and where it will probably go by year end. I guess just trying to judge, Mike, the risk that the capacity could come down a bit as your facilities come up for renewal or if you feel like the relationship with your lending partners is such that this capacity here is intact?

Speaker 3

Yes, Brian, I feel really good about where we are from a financing capacity. Over the last 4 years, we've really built up A strong partnership, if you will, with our lenders. We have 3 of the largest, most reliable Lenders out there from a banking standpoint, we've got strong partners in other lenders that we utilize within the facility. And candidly, it was the last 6 plus months have been challenging on that front. But we've worked together.

Speaker 3

They've been supportive of the company. And I think on our side, we've taken a very approach of recognizing where their risks are and working with them through this and obviously nobody was out a dime one way or another. And so the 600 committed, we feel very good about. And even from a historical perspective, the way that we've got the Facility setup split between committed and uncommitted, we've got a good track record there of going back to the And moving the uncommitted into a committed position on a pretty timely basis. So fair amount of time working with Both the teams and the credit teams over there, but we've got a solid Relationship there and I feel good about where we're at.

Speaker 2

Yes. And the one thing I'll just push down on there too, Ryan, is that getting through 99% of this inventory the way we have And the way we did it and the communication with our lenders has been key. And again, they have been great partners. And we're excited to look forward with them now. Now we can We've done, I think, a great job with the lenders and they've been great partners.

Speaker 5

Great. Thanks for the color.

Speaker 3

Thanks, Ryan.

Operator

Thank you. The question and answer session has concluded. I will now turn the call over to Brian Baer, Chairman and CEO, for closing remarks.

Speaker 2

I'm really proud of our team's focus, determination and execution and managing our way through some really challenging times. Going forward, we have a realistic and achievable plan to hit our operational and financial goals. I'm confident in our team's ability to perform,

Operator

That concludes today's conference call. I hope you all have a great rest of your day. You may now disconnect your line.

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Offerpad Solutions Q1 2023
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