Q3 2021 Offerpad Solutions Inc Earnings Call
Hello, and welcome to the overpass that cool to 2021 Conference School My name is <unk> and I'll be today's cool operator.
Following the presentation today, who have a Q&A session. If you would like to register a question. Please press star followed by the number one on your telephone keypads.
Oh, no technical luggage, Stephanie Leighton senior director of Investor Relations alphabet. Stephanie. Please go ahead.
Thank you and good afternoon, everyone welcome to occupy solutions third quarter of 2021 earnings call, our chairman and Chief Executive Officer, Brian Baehr, and Chief Financial Officer, Mike Burnett are here with me today during the call today and 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 expectation. Please refer to the risks uncertainties and other factors relating to the company's business described in our quarterly report on Form 10-Q for the three months ended September 30th 2021 to be filed with the US Securities and Exchange Commission.
On or about November 10th 2021, and subsequent filings offered had mixed with the Securities and Exchange Commission, except as required by applicable law offer pad does not intend to update or alter forward looking statements, whether as a result of new information future events or are otherwise on today's call management will refer to certain non-GAAP fine.
The actual measures, including adjusted net loss contribution profit margin contribution profit margin after interest as well as adjusted EBITDA. These metrics exclude certain items discussed in our earnings release under the heading non-GAAP financial measures the.
The reconciliation of offer pads non-GAAP measures to the comparable GAAP measures are available in the financial tables of the third quarter of 2021 quarterly report on Form 10-Q and earnings release on <unk> Web site at Investor Dot <unk> Dot Com I will now turn the call over to Brian.
Thank you Stephanie it's great to be speaking with you all today I am excited to share details about the exceptional progress we made during our first quarter as a public company I will also share more about our strategy going forward and I will speak to some of the market dynamics were seen in the industry micro cover our third quarter financial results in full year 2021 with expectations.
Our business model strategy and experience of this apart from others in the industry. It offer pad, we've created a flexible business model designed to adapted any real estate cycle. Our business model seeks to provide a full service solution center for homeowners.
This customer centric solution set of approach extends beyond the buying and selling transaction to provide easy access to other services such as mortgage title and bundle rewards. It also provides options for individuals to create customizable solutions are expressed cash offer and our flex listing services are great examples where customers can.
Choose which solution is best for their needs.
The end to end solution. So their approach to address the variety of homeowner needs creates a diversified platform. This in turn can increase or growth or opportunity for multiple engagement engagement with each customer and expand our margins are.
Our strategy is to grow our platform by expanding into new markets, increasing our penetration in existing markets and building. The park ancillary services. We currently offer our focus is are growing rapidly in a responsible and disciplined manner. The balance our goal of increasing market share with achieving long term sustainable profitability.
Our teams deep realistic knowledge and local real estate expertise sets us apart we combine this expertise with data analytics and technology to better anticipate an account for changing market conditions. This approach has led to a rigorous underwriting and a strong track record for accurately estimating what our homes will ultimately so four I'm very proud.
That from the time, we launched offer patent 2015 through the first half of this year, we've achieved less than 1% variance between our aggregate estimated prices and actual sales prices. We believe are proven ability to anticipate and adapt to changing market conditions and to account for those changes in our underwriting is supported by our vast real.
Estate depth in each local market.
We are continuously assessing data such as interest and mortgage rates and household income fluctuations. In addition to settlement to ensure our underwriting is appropriate we projecting and adjusting for anticipated changes in market conditions.
A great example of our proprietary insight comes from an automated weekly market report summarizing real time information from our local teams regarding individual market dynamics. This data is then reviewed by our leadership and analytics team and is used to adjust our underwriting algorithm and process to address increasing or decreasing risk.
Are differentiated approach include are diversified solution southern model, our strategy for discipline growth and our deep real estate expertise is transforming the residential real estate experience for customers provide an easier and more efficient way to buy and sell a home.
Financial results this quarter speak to the success, we are already seen from our team's ability to execute.
During the third quarter, we loves for new markets Indianapolis, Saint Louis, Kansas City, and Columbia with Columbus, Ohio launched in October as of today, we have lost seven new markets in 2021, allowing us to operate in 21 markets and nearly 1500 cities and towns across the country between 2002.
One and 2022 combined we expect to add a total of approximately 15 new markets.
We also expanded our mix of ancillary services in particular markets to include the customer rewards program offer pad bundle rewards allows customers to receive multiple discounts when both buying and selling a home with offer pad and by obtaining the home loan through offer Pat home loans.
Since launching this in the third quarter customers and turned out of our 21 markets of utilize this product offering by bundling services customers save money and we increase our engagement with those customers.
While the first three quarters of this year or exceeded expectations driven in part by whether the hottest real estate markets. In recent history. We recognize there are lingering challenges caused by the adjustments society is made to address the pandemic.
In particular like maybe we've experienced supply chain constraints.
To mitigate our exposure we have adjusted our renovation plans at home by home market by market basis. This cat for example, prevent a particular backward or to plants from impacted our ability to finished renovating and lifting the home for sale. We have also adjusted our acquisition strategy to limit purchasing homes, where particular supplies are key to ensure a timely sale of the home.
<unk> by adjusting our acquisition strategy in the scope of our reservations, we have been able to limit the time delays from supply chain constraints to about five to 10 additional pays on average depending on the market even with this extension as of September 30th 2021 are average time from acquisition to sell remained below our 100 day target and our <unk>.
Inventory owed more than 180 days remained low at less than 1%.
We are also aware of the Labour challenge is present in the broader market and offer pad. We have been successful in attracting new talent across nearly all of our markets and functions with recruiting challenges largely limited to our renovation cruise or.
Our strategy to employ our renovation team members continues to be an advantage even at the top pool for new members Titans.
Our year to year turnover rate within our renovation teams is less than half of 2020 average turnover rate in the construction industry demonstrating the strength of our culture companywide, our ability to attract new talent remains strong in August alone, we hired more than 100 new team members.
In the third quarter of 2021, we increase the size of our team by 25%, bringing our total team to more than 800 employees.
Well, we're not immune to the challenges many are facing our flexibility adapt adaptability and differentiated approach have proven invaluable in mitigating the uncertainties currently present in the macro environment.
Looking forward, we expect the broader real estate market, including home price appreciation will continue to normalize through the remainder of this year and in 2022.
What are the benefits of the <unk> platform is be advantages of a cash offer with no showings in the control over the timing of the transaction become more apparent in a cooler market, where the traditional model can take 90 plus days to sell a whole our team has experienced navigating all types of market cycles, and we are confident in our ability to adapt going forward.
In summary, our solution center model disciplined growth strategy and deep real estate expertise differentiated our tech enabled platform and we believe are key to achieving long term sustainable profitability and delivering shareholder value.
Our distinctive qualities an exceptional team have already proven effective in meeting our goals.
Confident we will continue to execute and grow rapidly as we bring simpler way to buy and sell a home dubord customers I will now turn the call over to Mike.
Thanks, Brian.
I will cover our third quarter of 2021 financial and operating results provide additional information regarding our unit economics and underwriting process sure details regarding our approach to renovations and also provide an update to our full year of 2021 financial guidance.
During our exceptionally strong third quarter, we produced record revenue on a record number of homes sold record gross profit and a record number of acquisitions.
We exceeded the high end of our third quarter revenue guidance by $20 million as we generated $540 million of revenue.
And are $6 $1 million of adjusted EBITDA exceeded the high end of our third quarter guidance range by $14.6 million.
This marks our fourth consecutive quarter and positive adjusted EBITDA and year to date, we've generated adjusted EBITDA of $22 $2 million the.
The reported that lost this quarter of $15.3 million includes a $13 $2 million non-cash charge to mark to market the value of the warrant liability assumed in the business combination with supernova.
We will continue to record this non-cash valuation adjustment each quarter that the warrants are outstanding.
Excluding those non-cash charge are adjusted net loss was $2.1 million, an improvement of nearly $1 million compared to the third quarter of 2020.
Are strong results for the third quarter were supported by our continued growth in homes acquired in homes sold as well as continued strength in our unit economics as evidenced by 48% year over year increase in contribution profit after interest per home sold.
This quarter, we acquired 2753 homes of 36% sequential increase from Q2, and a 258% increase over Q3 of 2020, which was negatively impacted by the acquisition slowdown caused by the pandemic conditions.
Request volume in demand for our offers is increasing in part due to the seven new geographic markets. We opened this year. In addition to expanding market penetration driven by increased investments in marketing and greater consumer awareness to our value proposition.
The accuracy of our acquisitions in our underwriting process are key components to maintaining positive contribution margins.
Our underwriting process combines a unique mix of leading technology supporting our advanced asset valuation models and perspective from our in house local real estate experts we.
<unk> segment homes based on the individual risk assessments, and we underwrite to a specific return on investment based on the level of risk.
The components of our unit economics are incorporated into our underwriting process. In addition to market dynamics and ancillary service offerings.
The process is comprehensive and allows us to maintain a high level of underwriting accuracy, even though all navigating ships and market dynamics, such as moderating home price appreciation.
We believe our underwriting process is flexible enough to account for the geographic diversity of our markets and to proactively incorporate projected changes in each of those markets.
This technology power to approach, which drives efficiencies automation and improved accuracy is designed to allow for light touch real estate expertise that mitigates underwriting risks and a highly scalable manner.
Another critical element in our business model is the renovations process.
Our internal talent and nearly exclusive relationships with numerous specialty contractors across the country has a louder renovations teams to continue executing despite the industry wide supply chain and labor constraints, Brian addressed our logistics systems and processes allow our internal teams to move between jobs managing multiple projects <unk>.
<unk> sizes simultaneously with maximum efficiency.
The combination of in house talent, and an appetite to take on different types and sizes of renovation projects also directly impacts our financial performance by creating a larger buybacks opportunity.
We have been able to undertake a broader scope of renovation projects because our internal team structure paired with our robust relationships with many specialty contractors provides additional control consistency and predictability, allowing us to confidently navigate larger or less traditional renovation projects.
Are proven ability to manage renovations efficiently creates an additional value stream to the overall transaction supporting increased margins.
And our model the service fee increase renovation value home price appreciation and ancillary services all contribute to a return on investment and support our long term goal of sustainable profitability.
This quarter, we sold a record 1673 homes, representing a 123% increase over the third quarter of 2020, and a 33% sequential increase over the second quarter or.
Our track record for buying homes at the right price efficiently renovating and selling homes profitably was reinforced by this quarter's financial results.
Turning to our efficiency and profitability metrics gross profit in the third quarter increased 169% to $53 million as compared to Q3 of 2020.
Gross margin in the current quarter came in at 9.8% compared to 10.6% in the prior year quarter. When we were underwriting homes more conservatively and and fewer numbers to account for the increased uncertainty due to the pandemic conditions.
Contribution profit after interest for home is the metric we use for calculating unit economics.
In the third quarter this metric increased 48% to $22700 per home compared to Q3 of the prior year.
Our unit economics through the first three quarters of 2021, where augmented by strong market tailwinds in the form of unusually high levels of home price appreciation.
As we discussed on our second quarter call and incorporated into our Q3 and Q4 guidance the level of home price appreciation has begun to moderate and is expected to normalize as we close out 2021 and headed into 2022.
Consistent with this prior assumption both gross profit and contribution margin metrics declined sequentially from the second quarter in line with our expectations.
We continuously adjust our operating assumptions to adapt to the constantly changing real estate environment as we navigate the business across each or geographic markets.
We continue.
To exercise strong discipline with our cost structure, while making prudent investments to support our growth initiatives because of this approach. Once again this quarter, we have demonstrated our ability to leverage our operating cost base as we grow our revenue.
Total operating costs as a percent of revenue improved 240 basis points to nine 2% year over year, showing the value of our overall growth strategy.
Turning towards that capital structure, we completed the third senior secured credit facility in September diversifying our lender base, while increasing our aggregate senior borrowing capacity to over $1 billion in our mezzanine capacity to a total of 125 million.
Through the sources alone are total borrowing capacity has increased by over $650 million since the beginning of this year.
While we are growing rapidly or access to competitively priced capital has improved substantially as we continue to effectively execute against our business plan.
We remain confident that the precision and efficiency of our operational execution thoughtful and proactive financial management and our focus on discipline growth will position us to further expand and improve our capital structure and deliver long term shareholder value.
Lastly, as we update our full year outlook I am pleased to share that we are increasing our 2021 guidance once again.
Specifically, we increase the midpoint of our range for the number of homes sold by about 100 to 5900 units.
This along with an increase in average selling prices is driving an increase of $100 million to the midpoint of our revenue range.
Additionally, demonstrating our execution of profitable top line growth, we increase the midpoint of the range of our gross profit by $5 million an increase the mid point of our adjusted EBITDA range by 15 $5 million setting the expectation of generating positive adjusted EBITDA for the full year.
We expect the strength of our operational execution through the first three quarters of this year to continue while partially offsetting the impact from higher operating costs in the fourth quarter, reflecting our first full quarter, a public company expenses and the normalization of the HPA environment.
In conclusion, our third quarter results highlight the success of our differentiated business model and position as well to capitalize on the growth potential in the nearly two trillion dollars residential real estate market.
I will now turn the call over to the operator to begin the question and answer session.
Thank you.
The question not session is now lighting.
If you wish to ask a question. Please press star followed by the number one when you kind of think he pumps.
You change your mind anytime Please press star T to meet the question.
As a reminder, a star one to ask any questions.
The first question on the same line comes from.
Jeffrey site.
Please go ahead.
Thank you Brian.
Brian May be for you just to talk a little bit about the overall dynamics in your market in in obviously zeros decision to leave can you just walk through kind of your your view the overall industry.
Dynamics.
Follow up for Mike really good profitability.
And maybe if you can kind of walk through the lovers there.
Why you continue to see such good upside on the bottom line.
Yeah, Hey, right I'll jump in first but.
Inc up for it.
Up until about a week ago I would tell you there has been kind of a pendulum change and what we've seen in the I buy any more and more people starting their journey coming to in Ibuyer and so I think the news that came out was was shocking to a lot of people, but what I keep saying and I've tried to chop his from the rooftop for years as it comes down to execution.
And operations and logistics is this is as much as the logistics business as it is a real estate technology company and so.
Like any like any business.
Execution is going to be key overall from a market side.
What we've seen daschle is the last six to eight months with massive home price appreciation, which which we've talked about and we're starting to see that normalize in most markets.
Still seen a lack of supply most of our markets less than two months supply. So if you price of home right.
On the market and good quality home, it's going to it's going to sell it is going to sell fairly quickly and so instead of getting 10 offers you might get get one or two offers on that home. So overall the the strength of the market has been strong.
I think as far as this model, we're seeing more and more customers reach out to us.
Every day every month wanting this and I don't think anyone can argue this is the best option for the consumer.
That control uncertainty so.
Very bullish on on the industry and where we're going.
Yes, and then this is Mike in terms of the levers on profitability I would say that we've done a nice job of creating and managing.
A solid portfolio of inventory as we've acquired over the last three months. We spent a lot of time on the underwrite side, we knew going into the latter part of this year that we were going to see some cooling and conditions.
We suspected that an underground accordingly.
And we also spent a lot of time, managing what we call her tail properties and keeping an eye on the aged inventory and doing a good job of keeping that in line as well in terms of the opex side of the business. The one thing that I'm pleased with as well as we have been able to contain costs from an operating expense standpoint very well.
As we've gone through the quarters. So the top line revenue increases that we're getting are we're showing better metrics as a percent of revenue on each of those operating lines, except for sales and marketing, where we continue to invest in.
Definitely on a year over year basis weaving increase the investment in marketing and I think it's really paid off for us.
Great. Thank you.
Thank you brands. We know has been next question on the nine from and even some JMP security 70. Please go ahead when you're ready.
Hi, guys. Thanks for taking my questions to please the first I'd love to hear any response that you're seeing from consumers is I think you guys moved to Ah kind.
Kind of a 5% Steve this summer and so just what are you guys seeing on consumer adoption and then just number two.
If you think about the labor market and just challenged it's been in terms of hiring and everything else can you just talk about your plans in terms of combating that and whether you are seeing any headwinds there. Thanks so much.
Yeah.
And I'll take the second one first.
As far as what we're seeing in the markets supply labor those those kind of things. This is it's been very very helpful that we internalize a lot of those operations are renovation teams from a renovation director project managers, forming their employees are offer pads. So that's very much.
Very helpful. In a lot of the market's people downswing in the hamburgers or employees of offer pad. So that that's been helpful. And we're also getting smart with what we're buying for example, there's a window shortage in a certain market. They were having trouble with windows were getting smart and through through data and technology and get ourselves smart like that's not by that if we'd like it's going to be home.
Longer hold time, or it's going to slow down our process. Because obviously what were highly focused on is buying renovating and selling in 100 days.
We want to make sure that we're executed on every one of those those those metrics.
So that's that's that on the the fee.
We have seen good adoption to the fee.
Obviously, we're testing testing different things variations to that C. A lot.
Right now, it's still a little too early to tell because we're trying to balance that with home price appreciation in the low risk of offers that we had during the during.
During the home price appreciation.
Tailwind.
We got compared to what the fees are now so I think overall adoption has been good like I said, we are seeing more and more people that are coming in.
And we're seeing a lot of.
Lot of signed contracts and people executing as well which is great.
Great. Thank you.
Thank you Angie.
I have a question from then Shannon, It's Cantor Fitzgerald sorry. Please go ahead I made in Germany.
Hey, guys. This is keloid patent from Cantor Unter den sherlund, congrats on the great print.
We were impressed that at the speed of turnaround at 99% of homes around lunch, then 180 days could.
Could you speak to you from your perspective, what's really driving the speed and that turnaround and as a follow up how do you think that timeline might change as the housing market stabilizes. Thank you yes.
Yeah. So so that that's something we've had our ion since the very beginning that offer patterns. I mean, that's really the secret sauce of this entire model is is making sure.
I've said this.
Times, but the easiest thing to do is buy homes, if you're buying you overpay Yo you owned that home for a long time and and it's not going to be a profitable home for you. So it really comes out we have dedicated through our data and analytics, but also with our ground game with our teams in there we have directors of asset management and every one of our markets that they are.
Highly focused on making sure that those markets are hitting that those houses are hitting our turned times that we want and we're anticipating and so we also the way we underwrite homes with different segmentations willing to raise some that we expect to hold a little longer and some a little bit shorter so really the core of everything we do is based upon what we call TPC time to cash for.
The minute, we owned that home to the minute, we sell that home, making sure that home performs and we're executing and the right time and so.
The challenges that we've seen recently with with.
Some of the supply issues out there.
Even with that they give a lot of credit to our team I think on average for portfolio standpoint, we're only up five days from from where we have been I'll know each market.
That's across our entire portfolio each market will have its own maybe challenges of certain supplies or.
Of the renovation times, but in general we're still hitting that 100 days with a very very low.
Supply of homes over 180 days and again, that's what we were focused on we meet on that weekly.
As we know that's where the success and the cord. This business is going to come from.
Okay, Great. That's really helpful. Thanks for taking my questions.
Sure.
Awesome well. Thank you for everyone for joining the call today, it's great Sheridan the positive results with everyone and we look forward to seeing you. All soon thank you very much.
Thank you. Please does complete today's cool. Thank you again for joining you may now disconnect your lines.
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