Q2 2022 Offerpad Solutions Inc Earnings Call
Good afternoon, and welcome to the offer pads second quarter 2022 earnings call. My name is Sam and I'll be your moderator today, all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
You'd like to ask a question at this time, Please press star one on your telephone keypad.
I'll now turn the call over to Stefanie Layton, Vice President of Investor Relations and ESG. It off a pad Stephanie. Thank you and good afternoon, everyone. Welcome to offer Constellation's second quarter 2020 to your earnings call, Our Chairman and Chief Executive Officer, Brian Bird 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 filing.
With the U S Securities and Exchange Commission.
Except as required by applicable law offered Pat does not intend to update or alter our forward looking statement, whether as a result of new information future events or otherwise.
This 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. The reconciliations of <unk> non-GAAP measures to the comparable GAAP measures are available in the financial tables of the second quarter earnings release on <unk> website.
Now I'll turn the call over to Brian .
Thanks, Stephanie Hey, everyone. Appreciate you joining us today.
There were some company highlights market trends and our focus for the remainder of the year.
Mike will share our second quarter 2022 financial results and our third quarter 2022 expectations.
Highlights for the first half of the year include we generated nearly $2 $5 billion in revenue and $52 million of negative.
We sold more homes in the first half of 2022 than we did during all of 2021, we completed more than 6500 renovation projects with an average timeline of 21 days. We maintained an average time from home acquisition to sell below 100 days and we launched six new markets.
We also continue to see increasing customer interest in our solutions.
More people visited our website during the second quarter than ever before.
Request for an express cash offer also hit an all time high.
The interest validates the increasing level of awareness around our services and the value we provide to customers for our flex listing service transactions increased 47% quarter over quarter and 123% year over year in.
In the first half of the year alone we signed more listing agreements than we did during all of 2021.
We've made great progress fairly flat and we expect it will be an increasingly important solution at the real estate market adjusts.
The choice between our express cash offer and our flex listing service not only provides customers and more individual experience based on their preferences.
Also provides the company diversified revenue streams with different advantages in either a buyer or sellers market.
Our ancillary service offerings also grew in the second quarter offered that home loans reached more customers and more states with load volume increasing 37% over quarter. One. In addition, <unk> has a new mobile app and consumer portal makes it easier to shop this solution.
The new App will deliver a completely digital mortgage experience from start to finish utilizing powerful communications self service tools. The app unites borrowers loan officers in our prepared real estate experts to provide a streamlined home buying experience enhancing our alphabet home loans product is another step two.
<unk>, becoming a one stop solution for homeowners.
Our 94% customer satisfaction rating in the second quarter remains a key indicator that our services continue to resonate with customers.
A great example comes from our HOS in Arizona.
Rachel bundled by buying a new home cylinder existing home and using our offer pad home loans mortgage service cheaper.
<unk> posted I highly suggest they're bundling packages I received discounts for using their realtor and lender Rachel shared I was so nervous by my first preexisting home I learned so much I will definitely use offer Pat again.
This is why we do what we do because there is a way to make buying and selling a home easier.
Turning to the broader real estate market. The softening we have been expecting this year.
Over the last 18 years in real estate I have learned wind markets adjust especially this quickly it's very important to be decisive and get proactive without inventory.
You want to sell your current inventory quickly and replace it with new inventory underwritten for today's climate keep in mind most homes. We own currently in homes that are just closing today were underwritten back in March and April under completely different market conditions. For example, the Holy Underwrote then potentially had no other homes in the mall.
Within a mile now today when the whole hits the market. It has seven to 10 comparable homes.
I've been a top through several dynamics, we are seeing nationally and then walk through how we are proactively adjusting to the unique market conditions.
Housing supply increased rapidly from a low of one six months January to more than two and a half months supply.
The fed increased interest rates quickly and mortgage rates increase from the historic lows the over 6% at the high point.
In general when mortgage rates increased 75 basis points in just four business days.
The pace of change in rates on top of the home price depreciation is added to consumer affordability challenges and has caused some buyers to wait on the sidelines for things to settle.
Not all markets are seeing the same magnitude of change in general the markets that have seen the greatest rates of price depreciation are being impacted the most for example, the Midwest and southeast including markets in Georgia, North Carolina, and Florida are currently showing active buyer demand.
The southwest moved faster with visible softening in our Phoenix, Denver, Austin, and Las Vegas markets.
This is a good example of how our geographic diversity mitigates risk during the transition between market cycles.
The diversification we have today has been thoughtfully and intentionally established over the last six years supporting the resiliency of our business.
Our teams extensive real estate experience is another straight supporting our ability to execute through different market cycles. Our regional general managers have an average of 22 years of real estate experience and our local general managers have an average of 17 years.
So how do we put this expertise to us.
We have a sophisticated underwriting model with various levers we can pull in different market conditions.
Because the markets have been so hot for so long we built in some cushion for each home in case the market slowed.
We saw this happen, but that's pushing it allows us to price our inventory to sell after a swift deceleration of home price appreciation with that happy to take a larger impairment than we are.
To adjust we revised our overall buy box by putting a cap on our purchase price in several markets conducting real time market by market reviews of our inventory.
We are prioritizing acquisitions closer to each market's medium price points and we are offering our flex listing service to customers with higher priced homes.
We reduced the length of time available for customers to select their closing date, reducing the 90 day closing time they had in the past.
Our acquisition teams update our underwriting assumptions to account for additional risks by incorporating wider spreads adjusting for increased active inventory on the market increase our estimated holding times increased our service fee and interest expense among other items.
One other important adjustment we have made is with our renovations. Our team has increased the amount of upgrades on certain properties to ensure our homes have the inviting look and feel buyers want with inventory increases and multiple competing homes are available to choose from we want our homes. So first this helps limit our exposure to extended holding types.
Our exposure to extended holding times will be increasingly important during the second half of the year.
The efficiency and effectiveness of our renovations can mitigate the risk by reducing extended time to cash and aged inventory.
In the second quarter, our team completed over 3500 renovation projects with an average investment of $17000 per home.
The average duration and renovation improved to 20 days in the second quarter compared to 23 days in the first quarter. The sophistication of our renovations operation is unique and it will be an important near term strength as always we are closely watching and managing inventory owned over 180 days.
Cause of some of the proactive measures I mentioned above as of June 30th owned inventory over 180 days was less than 2% well below our target of less than 10%.
We know the real estate market is fluid and short term results can fluctuate.
But we believe this disruption is temporary as one of the country's largest homebuyers. We believe offer pads will have great opportunities as the market stabilizes into what we expect will be a stronger buyer's market.
When it takes sellers weeks or months to sell their home the traditional way with no certainty and no control, we believe more and more consumers will come to offer Pat.
Looking forward I have complete confidence that we are well equipped to deliver on our long term goals of supporting our customers and delivering sustainable shareholder value.
On that note I will turn the call over to Mike.
Thanks, Brian today, I will cover our second quarter 2022 financial results review, a few key data points and provide an outlook for the third quarter.
As Brian mentioned, our Q2 results capped off a strong first half performance revenue in the second quarter increased 185% year over year to $1 1 billion.
With approximately 70% of the growth driven by higher volumes from increased market penetration within our existing markets and new market expansions and approximately 30% due to the increase in average sales price.
We sold 2888 homes in the second quarter of 129% increase year over year with an average sales price of $372000 compared to 298000 in Q2 of the prior year.
Our acquisition of 3792 homes in the second quarter was consistent with the typical seasonal first and second quarter increase.
And as of June 30, we owned 3561 homes across our 27 active markets.
We reported second quarter gross profit of $93 million or eight 6% gross margin.
Net income of $11 6 million.
Adjusted net loss of $1 million and adjusted EBITDA of $13 $7 million.
Each of these amounts includes a $21 2 million inventory impairment charge, which I will discuss in more detail momentarily.
Absent this charge each of these metrics would have been $21 million higher including adjusted EBITDA, which would have come in at $34 9 million.
Fully diluted earnings per share on a GAAP basis was <unk> <unk> per share and includes a <unk> <unk> benefit from marking to market the warrant value and an <unk> <unk> charge from the inventory impairment.
To the extent the net proceeds do not cover the carrying value we recorded charge for that expected loss in the current period.
Quarterly charges have range from $63000 to $1 8 million over the last three years, but generally well below 1% of total inventory.
At the end of June when we perform this assessment some markets such as Denver, Austin, and Phoenix had experienced a slowdown in demand for residential housing as a result of the combination of the rapid rise in mortgage rates and robust home price appreciation in that market.
While we had been making adjustments in the quarter to underwrite new acquisitions to incorporate wider spreads and lower sales price assumptions the homes already in inventory were underwritten under very different market conditions.
As such we calculated the value given our current assessment with the best available information and recorded a charge of $21 million in the quarter.
Over the next couple of quarters as we sell our inventory that was acquired under previous market conditions and replace it with homes that we acquired in the current environment, we expect to return to more normalized levels of returns.
Returning to the discussion of our Q2 results contribution margin after interest for the quarter came in at $28500 per home or seven 6% of revenue and has been between five and 10% over the past eight quarters.
In periods of price appreciation like we've experienced over the past two years, we have been able to absorb the increased input cost of acquiring homes at higher rates through higher sales prices on the backend.
And more of a buyers market or attributes of convenience certainty and control or even more highly valued by prospective sellers. So we don't need to lean on the home price depreciation to increase returns.
Adjusting the variables in our underwriting process through the combination of our asset valuation models and end market real estate teams, we remain consistent with our expectation of generating annual contribution margin after interest of 3% to 6% and to increase that margin over the longer term.
From an operating cost perspective, we continue to demonstrate the ability to leverage top line growth and increased efficiencies with scale across the organization.
For the quarter sales marketing and operating costs improved 230 basis points year over year to 6% of revenue, while technology and development costs improved 40 basis points year over year.
G&A had a slight increase of 14 basis points year over year to one 5% of revenue.
The prior year period costs for G&A do not include the public company costs, which began in our Q3 2020 public company combination in.
We have previously shared that our goal is to keep our average times cash below 100 days.
In stronger markets that metric has dropped down into the mid sixty's and with slower conditions, we would expect to be at or slightly above that mark.
In the second quarter, our time to cash was 83 days, which improved from a seasonally higher 96 days that we saw in Q1.
This marks our eighth consecutive quarter with time to cash flow of 100 days.
Another important metric is our inventory aged over 180 days.
As Brian mentioned as of June 30, we were less than 2%, aged well below our target of being under 10%.
This is a strong inventory position as we enter this period of changing market conditions.
With the softening of the market, we do expect our aged inventory to increase from the exceptionally low current levels inventory turnover will continue to be a key focus of the company in the second half of the year.
From a capital structure perspective, we continue to make positive strides in June we added $200 million of borrowing capacity under one of our credit facilities and extended the maturity date to June of 2024.
In July we increased the borrowing capacity of one of our mezzanine debt facilities by over $30 million and also extended the maturity to June of 'twenty. Four we now have access to $1 $9 billion of inventory financing capacity across eight different facilities.
Lastly, our cash balance at June 30 was $155 million.
We are proactively adjusting our operations to reflect the changing needs of our customers and our company as the real estate market shifts.
Over the next couple of quarters as we work through the process and selling inventory homes that we expect to produce lower margins due to the change in market conditions, we expect to rebuild that inventory with homes acquired at values more reflective of the current environment.
With continued strong request volume and an established track record in our markets. We believe we are well positioned.
Specifically for the third quarter, we expect to sell between 700, 2200 homes generating revenue of between $600 million and $800 million.
We also expect adjusted EBITDA will reflect the variability in market conditions and will trend down in the short term between negative $20 million and negative $40 million.
Our guidance ranges are wider than our norm this quarter given the current market conditions.
As we built out the technology scale and expertise and offer pattern for the past seven years. We entered this turned from a solid position.
The geographic diversification of our inventory low levels of aged inventory differentiation of our renovations model.
Minimal supply chain constraints, and an improved balance sheet, all support our ability to manage through the transition period.
Fundamentally our investment thesis remains the same with a large addressable market focused business model competitive differentiation and an attractive growth profile.
We are confident in our ability to adjust in the short term and to deliver long term value to our customers and our shareholders.
I'll now turn the call back to Brian for some concluding remarks.
Thanks, Mike.
Providing guidance at turning point of the real estate cycle is a difficult business over the first half of the year mortgage rates have increased nearly 3% from roughly 3% to 6%.
$430000 home, assuming a 20% downpayment that moves that mortgage payment from just under $500 to just over $2000, a 40 plus percent increase.
Moves like this over a short period of time are rare and obviously create issues for buyers some of their affordability point of view.
With the fast and significant move in mortgage interest rates buyers likely pause to reassess what they can afford.
While there is still a medium term structural shortage in housing supply in the short term, we believe markets that have enjoyed the most home price appreciation may see the most significant home price declines.
There'll be extended the decline will likely be market dependent.
Lowering home price expectations as prudent and otherwise the reasoning behind our impairment charge in Q2, and our Q3 guidance.
We expect price adjustments to impact our earnings in the near term, but as the market shifts from sellers to buyers market, we expect our margins will improve.
At <unk>, we believe there is an opportunity in both sellers and buyers markets. We saw great success over the past year, the heavy sellers market.
Now when it takes sellers longer to sell their home homeowners can gain more certainty and control over the transaction by coming to offer pad.
As the market settles, we expect our value proposition and strategy to produce improving margins in Q4 and volume should likely begin to return to normal levels in Q1, setting <unk> up for a great 2023.
I'll now turn the call over to the operator to begin the questions and answer session.
Thank you we will now begin the Q&A session.
If you'd like to ask a question. Please press star one on your telephone keypad. As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question, we would like to ask that you limit your comments to one question and one follow up before returning to the queue. Thank you.
We will now take our first question from the line of daily with Jpmorgan.
Your line is open.
Great. Thanks for taking the question two the first one.
You guys have talked about this being a short term volatility and I think Brian just.
Okay.
Four trends could start to improve a little in Q2.
What gives you the confidence.
This is more short term.
And are you seeing any signs of stability right now.
Yes, So hey, David.
It's very market market specific right now, we're seeing some markets much more impacted than others and so the short term goes into the buyer demand.
The affordability in buyer demand, where buyers sitting on their hands for a little bit how quick it happened was definitely different.
We are starting to see that like for example, adjusting some of our price points that we're talking about that I. Just mentioned, we're starting to see buyer demand pick up a little bit mortgage rates have been fluctuating a little bit back and forth, which is which has been helpful.
But one of the things that we're doing is definitely building in wider spreads right now.
As it is a little bit more uncertain.
And so yes, it's <unk>.
We're depending on.
Weeks.
We're watching it very very closely and get very market specific.
Okay got it.
So come on maybe.
This one is for you Mike I think you guys talked about <unk> being around 3500 homes in inventory right now.
How should we think about or is there any way to think about.
Relative to the homes Bob.
Okay.
Back in March and April versus the current environment.
On the call.
Yes, thanks des on the inventory, we've got Youre right, we've got a little over 3500 homes at the end of June .
If you recall, we were Q1 seasonally is a little bit lower of an acquisition period for us. So we were building inventory.
Inventory throughout Q2, so there there is a decent normalized stratification there when you take a look at when we were going through.
Some of the work that we're doing on the impairment we assessed the entire portfolio there were about 1000 homes.
That were impacted and most of those tended to be earlier acquisitions under the.
The earlier.
Greater change market conditions, if you will.
So I think it's something that Youll see us work through here over the next.
A couple of quarters getting those out.
In the normal course.
I think at the same time as Brian mentioned.
James the underwriting criteria and we've been doing that as we've gone through the months here and adapting year, but the demand really tended to slow things down at the end of June as we moved on so.
That's our current outlook.
Understood. Thank you.
Thank you Jay.
The next question comes from the line of Ryan Thomas Halo with K VW, It's Brian Your line is open.
Hi, Brian Thanks for taking the questions can.
Can you provide some color on how gross margins trended through the quarter and perhaps three Q to date, if you have data to share, particularly within some of your larger markets for example.
I think Phoenix and parts in particular has seen.
HPA decelerated by over 10% from recent peaks.
And I guess looking back at your inventory management heading into this slowdown.
What lessons are you taking from that performance heading into what's likely to be an even more volatile period in the second half. Thanks.
Yes, I'll take the first part of that Ryan just on the gross margins as you would expect throughout the quarter.
<unk> started to trend down and so we had been seeing very good returns HBA environments.
Frankly continued longer than I would tell you that we have even expected.
As you know we've been talking for six to nine months now about the market normalizing.
From the higher HBA environment that we've been seeing for quite some time now we've been preparing for that.
So we did start to see some of those.
<unk> come down through <unk>.
Again, it really is dependent market by market, our Midwest operations that we've opened up within the past year have been.
A good sign of stability within the portfolio. The southeast has been also held in there pretty well, but as you mentioned Phoenix has seen some pretty dramatic movement as as Austin and Denver was another market that we pointed out earlier, so as we get into.
Into Q3, obviously, we've got the some of the charge from the from the impairment that we're taking this quarter.
But we would expect those to come down and then bottom out and as we're able to put more.
Accretive margin homes to work in the third and the fourth quarter to begin to balance and bring that back up again.
And I'll just add that Phoenix has always been a super strong market for us and you're spot on the the home price appreciation.
What you are seeing that home prices in Phoenix, and how quickly it's happening from a lot of inventory hitting the market rapidly and affordability issues.
So back to your question what are we learning obviously, we're underwriting that market much differently as you can see where we're slowing acquisitions temporarily in a market like Phoenix.
Our market declined.
As is actually not bad as long as we get a good feeling and it's consistent of understanding what we can do there is opportunity there for US right now its just really volatile still you have a lot of inventory hitting the market really quickly.
And prices are really inconsistent as well and so markets like that you want that you wanted to be able to slow your acquisitions in a market like that and focus on markets that are healthy Mike mentioned, the Midwest or some of the Florida markets or is there still.
Recent buyer demand, there and theres opportunity there.
Thanks for that and.
Are you expecting additional large impairments for the third quarter or is that something that is reasonable to model and regarding the guidance can you say what level of gross and contribution margins those ranges contemplate and how to think about.
I guess that cadence of.
Bottoming in improving margins into the end of the year.
Yeah right in terms of our expectation important impairments in Q3, we're not currently expecting to see that in magnitude again, if you take a look at.
That the impairment charge of $21 million this quarter and our guidance for Q3.
What you end up with as you can obviously see it's pulled back a bit that is a result of the homes that we've impaired selling through some of those those will essentially come through the P&L.
Breakeven type margin.
Theres other homes in the portfolio as we go through the evaluation that we've reduced prices on some selling prices on but we're still going to make a profit on those so there is no impairment associated with those but those to come.
Come through Q3 Q4 at lower margins.
Than the norm and then mixed in there are the homes that we're acquiring and turning over that we've underwritten with increased spreads. So we don't really give out forward looking gross margin and contribution margin guide.
Guidance. So I think we'll just tend to leave the EBITDA ranges that we have for Q3.
And really see where we're at and looking at Q4 from their Orion One thing I'll add there is that a majority of the impairments came from from.
The Phoenix Denver as the Austin.
And we tried to get really smart and we don't want it dumped inventory we wanted to make the best real estate decision, we can make with that inventory.
We want to price it.
Where we can move that inventory quickly.
But more of that to.
To your point earlier, some of those inventory or some of those markets have dropped 8%, 9%, 10%. So so we wanted to take a healthy drop on those properties to move through those.
So we wouldn't have in the whole the whole point of the exercise is to get aggressive and move through some of the inventory now.
As quickly as possible with making the best real estate decision. So it wouldn't have issues in the future.
And just to clarify quickly.
The impairment in the quarter related to about 1000 homes and Youre expecting about a breakeven gross margin on those homes when they sell in the third and fourth quarter.
That's correct yes.
Okay. Thanks for that.
Thank you Ryan.
The next question comes from the line of Jason Weaver with Compass point LLC, Jason Your line is open.
Hey, good evening, Thanks for taking my question given.
Given your comment on transitioning into a buyer's market and also the record number of monthly average users can.
Can you give any context around the growth in express offer request <unk> conversion rates within your existing markets versus where we were last year.
Sorry.
Express sorry, I missed the first part of the question.
First of all for the question I am sorry, Brett also request and conversion rate.
Yes.
We've seen which is which is not a surprise as the market has transitioned.
And a lot of these markets, we could buy as many homes as we want right now we're just uncertain about we want to make sure theres more certainty in the market. So as the market slows and sellers have more more.
Issue selling their home the traditional way more and more people are coming to offer pad. So as as we saw in second quarter. Our conversion was very strong in especially towards the end of the second quarter. When you start to see the market changed rapidly.
And we continue to see that today is as the market starts to slow for sellers, we're seeing more and more people start to start their experience with <unk>.
Okay. Thank you.
And the follow up can you give some more color around the <unk> guide on homes sold how much of that is the overall macro environment versus the changes youre, making to your buy box our acquisition criteria.
Yes.
I'd really say, it's a lot of it's driven by the macro environment, because really what has been challenging as the speed at which we've seen the buyer demand pull back in again.
Primarily due to affordability issues driven by a rapid increase in mortgage rates and with the backdrop and some of the markets, where we're seeing the greatest impact of that home price appreciation, which has been very strong in the markets that we had listed so it's really trying to get our footing on how quickly does that.
Buyer demand come back we've got good strong positions good strong homes on the market.
I think you just have buyers out there that are paused in a little bit and wait and see mode right now and trying to understand where they think mortgage rates are going to go and where.
Where home prices are going to go and if you track mortgage rates recently.
Youll see how volatile the mortgage rates were I think yesterday there were they were below $5 for a first time in a long time and they've they've increased way above five gist gist.
Within 24 hours and so the normal buyer is not tracking mortgage rates everyday and so those are things and thats, where the volatility a lot of things like that are happening in and.
And so thats, where again as the best real estate decision is is to slowdown acquisitions, especially in some of the markets that are.
That are being affected more.
And then and then being able to wait for things to settle and inventory to settle a bit and then there is.
There is a lot of opportunity moving forward in those markets.
Thank you.
Thank you Jason.
The next question comes from the line of Nick Jones with JMP Securities Nick.
Thanks for taking the questions two if I can.
Can I get one.
You talked about.
Varying dynamics by market.
Are there markets that perhaps you're not in that you could potentially get more aggressively or you can more gradually enter where the dynamics are either more resilient or further ahead.
Are you kind of have better clarity I guess is there any change in how youre thinking about market expansion.
As kind of a dynamic unfolds.
Yes.
Question. So so we're definitely if you look at the tracking of affordability in markets and you look at affordability in the Midwest markets that haven't been impacted by by the amount of.
Price decreases in some of the things that you are seeing the affordability is much stronger in those markets, but if you look at the west or the west coast market southwest.
Southwest markets that we've mentioned the affordability is really off the charts and so as we look at expanding more markets. We're definitely have an eye on affordability because as mortgage rates reached a high in a long time and up into the high fives or sixes and then you had the median home price reached over 400000 to bad combo.
Asian for buyers and so that obviously that thats, what slowed and slowed the market. So rapidly. So that is definitely something we're exploring and affordability is becoming a.
A very hot topic around here is looking at new markets.
And Nick I would add a couple of other things that are too if you take a look at our our footprint and our market expansion that we grew out this year in 2022.
We're very intentional about going into California early in the year to establish ourselves in those markets. Those have been coming online. We don't have a big presence there as we're moving into it and that has proven to work out to our benefit right now.
But it has us positioned well as you move through the cycle for those to be really good markets for us moving forward.
The other market build out we really focused on a combination of Midwest markets and satellite markets for us.
And we were doing that with an eye to risk management because we.
We've had a lot of discussions about how the agent HBA environment has been very strong for a long time, its going to slowdown it sometimes so.
Satellite markets are much more efficient for us to get into the generally smaller markets that are <unk>.
Close to some of our hub markets that we can leverage our management teams there from a cost perspective, but there are also more affordable markets and those are really showing.
To be prudent moves for us during this year and during this particular cycle move.
Got it and then.
That makes sense and then I guess.
Question on.
Yeah.
Acquiring homes.
Pretty large capacity.
So is this kind of reflective I guess, the <unk> guide and the commentary on the back half is that reflective of this kind of being a little bit longer term or is there a scenario where you can use your capacity kind of change your algorithm a little bit are your fees to kind of just.
Kind of buy through this pressure I think kind of longer term a lot of economists are expecting rates to actually pull back by 224. So I mean is there a scenario where you can just kind of grow through we'll call them kind of miss purchases.
To kind of make up for any.
Impairments I am not sure if that question makes sense, but ultimately can you can you kind of buy faster to make up for a more challenged environment given the borrowing capacity.
Yeah, no. It's a great question and the answer to that is absolutely.
And when the opportunity is there do you want to buy in and how you make up to two either misses or market changes and some of the inventory you have now is buying better product with wider spreads it's more consistent.
And Thats exactly what that is exactly what we're what we're focused on right now and so it's interesting I think what are the things that.
And maybe one of the biggest misunderstanding about real estate is that it goes from sellers to buyers markets overnight, that's not and so I think probably the question I have been asked more than anything else in the history of offer pad is what happens in the downturn and the answer I've always given there is a downturn doesn't bother me the downturn is actually opportunity to be a buyer of it.
<unk> market is a good place to be.
The hardest place to be when it transitions from our sellers to buyers market in that transition period at the very top that's when it gets more savvy than ever before and that's exactly where we're at in the cycle right now.
That's where we're watching closely and so as soon as we see more consistency in our markets.
There is there is a great opportunity is and I will tell you. The one thing also we're seeing the sellers are not as patient as they used to be in a normal real estate market sellers have been on the market.
I would say a balanced market quote unquote six months of what it takes to sell their home.
And that Hasnt been the market over the last two years and so when when sellers just sitting on their home for a month or two they are very impatient. They don't have access to the liquidity.
And so as that they are that's why I keep mentioning the opportunity there they can come to us and close on their schedule and that's where that's where we get really excited but but right. Now we wanted to be really smart investment to make the best real estate decisions through the cycle and like I said.
Most of these.
<unk> take long for people to find where they are at but obviously, we're watching that closely.
Thank you Nick.
The next question comes from the line of Justin Ages, with Ferring Berg capital markets Justin.
Alright, thanks for taking the question.
First one given the highlight that you gave around.
And kind of the new products is there any.
Information you can give us on attach rates and kind of the ancillary services and how.
How we should think about those products going forward.
I don't know I don't know if were given attach rates, but what I will tell you.
If you can get a good good question Justin is what has been nice about having our flex product as we have widened widened our buy box and right now temporarily.
<unk> got a little more conservative about what we are buying.
As far as risk management have in our flex product has been fantastic because instead of having to buy their home when with all the uncertainty we can have sellers use our flex product, which they can list a home with us and that has been a really awesome product, we've had especially over the last 60 to 90 days as more and more people are using that product. So.
We're seeing increased volume there, but I don't think we are talking about conversion, yet Mike or no not specifically, but what we can say is we're building up both obviously flex has been part of the product portfolio for some time now were just seeing consistent growth quarter over quarter, there as we move through that and again that.
That will continue to further enable some of these other ancillary products like mortgage and again there is similarly had a bit of a lesser level just because we're starting out.
More soon in that particular area.
It's not material for us, but we're having more opportunities and again that our mortgage count quarter to quarter has been growing.
Throughout since inception.
That's been.
The positive transition.
You've heard me mentioned before one of the challenges. We have is the education of being a one stop solution centers not just a quote unquote buyer that will pay and right now we're seeing more and more opportunity of people look at us as a solution centers.
Our bundling service of using mortgages using.
One of our solution experts to help them find their next house, which is really important right now and then being able to sell us their home cash or use our listing service. So that has been that's been something that has that has been getting more and more <unk>.
All of them, especially lately.
Alright, that's helpful. Thanks, and then switching gears to the renovation side given your comments that youre adjusting that started to speak to homes more appealing to that kind of stands out given the rising inventory.
Is that going to be reflected in maybe higher average cost of the renovations are seeing the number of days per project kind of tick up.
Yes, so yes, and just just to highlight that renovation right now is going to be key I mentioned, a little bit in the comments, but now as there is more inventory you want your house to be the nicest home that people want to buy and we have the ability to know with what else is on the market of how to upgrade our homes.
We've seen over the last couple of years, you Havent had to put in all the bells and whistles on some of these homes because just a lack of supply now as people are choosing <unk> and aspire demand picks up and we wanted to make sure that we could add different upgrades in there. The one thing with our and I think the most important to your question with our renovation teams at <unk>.
Should that it shouldnt add a lot of time on that it'll add some costs obviously.
Throw in and granted maybe we didnt before maybe were throwing in more stainless appliances or are doing more at the cabinets at that will add a little bit, but but it shouldn't really affect our I mean, those back some but maybe.
Few days of our of our renovation times, but one of the things that I will shout from the rooftops as the strength of our renovation.
The adversity of these guys have been through over the last couple of years with supply issues and everything else they've done a phenomenal job and so putting a little bit and with the sophistication. We have there now having him do a little bit more renovation to these homes, they're geared and ready for it.
Alright, I appreciate the color thanks for taking my question.
Thanks.
Thank you Justin.
The next question is from Mike <unk> with Goldman Sachs. Mike Your line is open.
Hey, good afternoon. Thank you for the question I just have two.
First could you talk a little bit about how youre thinking about inventory balances.
Purchases into the third quarter.
Are you.
I know, Brian you mentioned that you are.
Slowing acquisitions in certain markets I was just wondering how we should think about that.
Line exiting <unk>.
And then second I was just wondering if.
Mike you could talk a little bit more.
Funding.
Has the volatility in the real estate market.
Changed anything as it relates to the <unk>.
Terms of your funding facilities have the advance rates come down is there.
More cash that you have to commit to support any of those facilities or anything like that thank you very much.
Great. Thanks, Mike for the questions.
So in terms of two three acquisitions versus our expectations on sales what I would tell you is.
I would anticipate acquisitions and sales being probably in about in the same range. So.
We are temporarily slowing the acquisition pace a bit here as we go month to month or just week to week pardon me in terms of.
Finding where we can reengage.
Accurately in each market.
So I think for Q3, you probably can see levels of acquisitions and in sales given the.
The demand characteristics right now to be pretty comparable and therefore inventory levels looking pretty similar as we exit Q3.
In terms of financing backdrop, we really haven't seen any detrimental effect or anything like that we've got excellent relationships with our existing lender base.
We've been we keep in constant contact with them.
Ironically, the shorter duration of the facilities at two year facilities causes us to be back active with them.
On a pretty regular basis and as we've gone through each of those renewal processes and over the past year, putting some new facilities in place. What we've seen is that we've been able to maintain terms and in certain instances improve them and even from the standpoint of borrowing base requirements.
Things like that and these are these kind of disruptive times, when you're speeding up or slowing down a little bit.
We test through some of the provisions in there and thus far we've been in pretty good shape and I haven't really seen any detrimental effects to that theres, no cash calls or reductions or anything along those lines.
Just to add on that and obviously, Mike lives in the credit facility world, but but I will tell you like I just had dinner with one of our lenders in New York, not very long ago, and I think each one would tell you that they have confidence in us because we're going to make the best real estate decisions.
And sometimes they are hard decisions to make the best decisions.
For the company for our investors, but also the best real estate decisions that are out there. So.
I think that our lenders have a lot of confidence that we're going to make the right decisions and moving through our inventory.
Great that's excellent to hear thanks for the thoughts Brian and Mike.
Thanks.
Thank you Mike.
Our last question comes from the line of Jay Mccanless with Wedbush.
Your line is open.
Yes.
Hey, guys. Thanks for taking my question.
The first one I had.
Because when you think about the inventory that you are seeing in your markets.
Inventory at median price below median price what are people.
Right now and I guess I jumped on late but if you could kind of frame that in the comments of what youre doing the buy box right now.
Yes.
So here so.
Great question.
A couple a couple of things there so what we're seeing and this is where when I mentioned the volatility what happens in these markets are you seeing more inventory and more importantly, you're seeing sellers that have had more equity in their home. Some of these markets have appreciated 50, 60% within just two years. So they have a lot of <unk>.
Equity in their homes and so different than whether it was I have seen in other cycles, we're making a 25% to 30000 price adjustment was a big deal because maybe they have $50000 of equity in their home.
Some of these sellers have 203 $800000 equity in their home if they think they can make pretty quickly so where the edge consistency is coming from from pricing as youre, having sellers reduce prices.
And I don't want say chase to the bottom, but but there's more inventory hitting they want their sell first and so they're being more aggressive in the pricing. So what we wanted to do is watch that for that to get to a more consistent the way that we the way that we underwrite now just like we underwrote when the market was accelerate we would write more in the <unk>.
Pop up where the comps are so we would take some of the higher comps and justified for home price appreciation. It's exactly the opposite now now you want to you want to go low to mid where the market is.
And put inventory out there if you know what is going to move it's going to move quickly and so you are.
What youre doing is youre watching active inventory more than youre watching pending unsold inventory and I've said for a long time active inventory is really where is the best key metric of real estate and so we're watching after them towards really closely and pricing at.
Accordingly.
Okay, and then I guess for the EBITDA guidance for <unk>, I mean I'm assuming.
And apologies if you've already addressed this but I'm, assuming you guys are pushing a little harder wanting to take a little bit less margin on each home is that the reason you're thinking EBITDA is going to be negative for the quarter.
Yes, I mean, what we wanted to do and especially just because you missed the first to call some of the markets.
That have declined quicker than others that in some of these markets we've reduced some of our list prices.
10% defined where the buyers are.
And the good part about that it's working.
We've reduced some of the prices and we're finding buyers at those price points.
It's really important to that.
Kind of distinct too, though just trying to blow out inventory and so whatever to get.
To get out of the inventory, it's much much different than the approach that we're taking will have to make the best real estate decision. How can we reduce the price to sell in 21 days with the information we have now and.
And that's what we've been doing and we've made those adjustments were starting to see more more activity, there, which is which has been a positive.
Okay. That's great. Thank you appreciate it.
Thank you.
Thanks Jay.
We have no further questions waiting at this time that concludes the offer pads second quarter 2022 earnings call.
Thank you all for your participation you may now disconnect your lines.
Yeah.
Okay.
Okay.
Yes.
Sure.