Q4 2022 Opendoor Technologies Inc Earnings Call

Speaker 2: We all know that. Transactions are down 40% year on year. If you look across our markets and our buy box, new listings are the lowest they've ever been since 2004. And that just means there are fewer sellers in the market for us to engage with right now. On our end, we're continuing to embed high spreads into our offers. As you know, high spreads for us mean lower offers, lower offers lead to lower conversions.

Speaker 2: that leads to lower contracts. We have to decrease our spread a fair bit since late last year when they were at record levels and I expect we'll continue to do so just given seasonal tailwinds as we come to the new year and also the fact that the housing market's starting to firm up a little bit. But the reality is the housing market remains uncertain and we're going to continue to operate in a fair-

Speaker 2: market and as we've been decreasing squares since last year you know there's a lag in our business between offer to contract and we do expect to see a pickup in volume as we move through the second quarter.

Speaker 2: Seasonality goes on throughout the entire year. We're seeing tailwinds right now. Seasonality shows up in the form of a slower back half, so we're going to see increased spreads in the back half. That's how you think about volumes for the case of the year.

Speaker 4: Don, do you want to talk a little bit about how we're thinking about sizing facilities? Yeah, happy to. I think, I mean, just to highlight it, inventory balance is at the end of the year we're $4.5 billion and we have $12 billion in capacity. So that is more than adequate for the financing and sort of forward view of where we're headed.

Speaker 4: So, and I think the other piece that's important to highlight is lenders like to be utilized. And so, taking down that capacity is something we've done and modulating that capacity for the seven years that I've been here. So, I think it's something we're very comfortable with reducing and feel like we will still have ample capacity to account for any upside to inventory. Great. Thanks, Sigma. Questions? No, you want me to turn the phone on. Go ahead. You have 3 seconds. Yes. Okay. So, how is the pilot going?

Speaker 4: And I think the other piece that's important to highlight is lenders like to be utilized. And so taking down that capacity is something we've done and modulating that capacity for the seven years that I've been here. So I think it's something we're very comfortable with in reducing and feel like we will still have ample capacity to account for any upside to inventory. Great, thanks for taking my questions. Thank you.

Speaker 5: Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is now open. Hey, thanks. This is Chad on for Jason. So you talked about 30% of your 23 transactions going through exclusives and markets where the marketplace is launched. Two questions on that. First, any sense what percent of your total markets you'll be launched in, kind of by the end of the year? And then do you believe that that's driving...

Speaker 5: the return to positive union economics in the back half or is that just, you know, kind of the improvement in the new home cohorts. Thank you.

Speaker 2: local market. We're excited about the signal we're seeing so far. We're seeing sellers being very excited to opt into the program. We have about three percent share of the listings in the market that we're trialing right now. So off to an encouraging start. But we really want to focus on first perfecting the customer experience and then step number two is to build density and liquidity so that we can own that market.

Speaker 2: And we'll do that before we want to kind of spread out further. I don't know the number of markets we'll be at by the end of the year. We haven't given an actual target. It will be a relatively small number right now, but we are also the pace to a higher number by the end of the year.

Speaker 2: It's unrelated to what Christy said as to how contribution margins are going to play out for the rest of the year. That entirely has to do with the mix between our old book as we sell that off and as our new book becomes the vast majority to all of our margins in the second half. Thank you. Our next question comes from the line of Yigal Arunian with Citi. Your line is now open. Hey, good afternoon everyone.

Speaker 4: I want to just go back to the macro for a second. And you're talking about stabilization, and just kind of in the last couple of weeks, we start to see rates go back up a little bit and start to see that impact mortgage demand again. So I just want to get a sense of what you're building into your spreads and what you're thinking on the macro as we move forward and you're bringing your spreads down a little bit. Just want to understand what your expectations are for the housing market as we work our way through the rest of the year. Yeah, happy to answer. So if you look at the where the market is right now, we're continuing to see very low supply in the market, really multi-decade lows. Thanks

Speaker 4: Continue though to be very cautious of the back half of the year to your point around interest rate volatility and how that could flow through to the impact on consumer demand. So our base cases that spread will actually need to increase in the back half of the year, especially if the Fed has to raise rates higher to combat inflation, higher than people are expecting.

Speaker 4: in any of the markets is your overall strategy.

Speaker 4: change, I'm guessing it hasn't really changed, but does the pace of it change? Have you pulled back anywhere? Have you pulled back in your buy box at all? Or is that maybe just on hold in the near term until we get back to a more formalized market? Thanks. And I think the way that we've tackled this today and in the past is through spread dispersion. So we will account for changes or higher risk by market or even by market.

Speaker 4: or adjusting the spread that the starting customers face on their riskiness. I'm going to get rid of that.

Speaker 1: Thanks. Thank you. Our next question comes from the line of Justin Patterson with KeyBank Capital Markets. Your line is now open. Thanks,

Speaker 4: Great, thank you very much and good afternoon. Carrie, I wanted to go back to exclusives to start with. Can you talk about the steps to build density in those markets and just really get the supply you need to succeed with that and perhaps just frame yourselves to the core business? And then just a secondary question on the Zillow relationship.

Speaker 5: I know it's very, very early here, but could you just talk about how we think about the pace of that relationship expanding, moving into new markets? How you think about the conversion quality from that funnel versus some of the other channels you lean on? Thank you.

Speaker 5: Hey Justin, do you mind referring to the first part of your first question? You broke up there a little bit for me. I had a hard time hearing it. Sorry about that. The first question was just around phase two of the exclusives product. Can you talk about just the steps needed to build density and market for that? It's really about aggregating supply and then from...

Speaker 2: We're optimistic and enthusiastic about the prospects for that partnership. We'll expect to launch it in more markets over the course of the year. But for us, we think it's going to be a very interesting and creative marketing channel for us. And this allows us to put our brand and our offer in front of a lot more home sellers.

Speaker 2: optimistic and enthusiastic about the prospects for that partnership. We're you know we'll expect to launch it in more markets over the course of the year but for us we think it's going to be a very interesting and creative marketing channel for us. It just allows us to put our brand and our offer in front of a lot more home sellers. Thank you.

Speaker 2: Thank you. Our next question comes from the line of Curtis Nagel with Bank of America. Your line is now open. Great. Thanks for taking the question. I just wanted to focus for a sec on spreads. So you know, the new cohort, you know, you took up spreads, led to some nice contribution margins. I'll be at a lower volume.

Speaker 6: I'm not sure if I heard this incorrectly, but it sounds like you might be pulling back spreads a little bit as we go further into the year. If that's the case, how does that impact?

Speaker 6: I'm not sure if I heard this incorrectly, but it sounds like you might be pulling back spreads a little bit as we go further into the year. And if that's the case, how does that impact potential contribution margins?

Speaker 2: If that were the case. I think the comment we met is, one, we have been pulling, we've been reducing spreads since late last year when they were at record levels. You know, peak uncertainty, record level spreads. And we were reducing them as we've come into the new year. Two reasons, seasonal tailwinds. And two, we have seen signs of the housing market stabilizing. The comments that John made earlier about where we are in terms of HPA prospects, the underpinning of like an absence of supply, and the restrictions, what have you. We expect to continue to do so for a while. That being said.

Speaker 2: Seasonal tailwinds turn into seasonal headwinds in the second half of the year, every year. So there is some chance that we'll look to raise spreads again in the back half of the year. But we'll see. I mean, this is, I think the beauty of our business is that it's dynamic and we're able to raise spreads in response to what we're seeing in the market. And we'll continue to do so as we get more signal. Okay, got it. And then just a follow up to the one.

Speaker 1: guidance on gas gross margins. You can kind of back into contribution margin using adjusted EVA and adjusted OpEx.

Speaker 1: And you can look at the table for the new book and old book of inventory in our shareholder letter to get an idea of the margins, the gross margins that we're seeing on those two books syphilis can find in our594. And help them to get in each other's investment and keep the price the same.

Speaker 1: There's also a breakout of inventory by new book and old book in the shareholder letter. That would be helpful. Okay, got it. Thank you. Thank you. As a reminder to ask a question at this time, please press star one one on your touchstone telephone. Our next question comes from the line of Ryan Tomasello with the question,

Speaker 7: 3p, OpEx, etc. I guess just running some back of the envelope math, assuming 5% contribution margins.

Speaker 7: implies that you're assuming significant efficiencies on either the financing or OpEx side or maybe baking in higher unit economics altogether. So just trying to understand the moving pieces there. Thanks.

Speaker 2: Yeah, I'm happy to take that one, Ryan. I mean, number one, as Bear's mentioning, we're highly focused on returning our business to adjusted income profitability as quickly as possible.

Speaker 2: For us, the tipping point is $10 billion of annualized revenue to get there. We believe we should get back there by the middle of 2024, assuming, number one assumption, a more normalized home environment. If you go back at 2019 and look at where we were, which is a more good analog for a normal housing market, and you think about the share we had back then, can you adjust it for just where we are today, which is 4x bigger in terms of...

Speaker 2: the combination of additional buy box expansion and new markets. You know, with life for life share, frankly, even a little less than life for life share, get you back to $10 billion in 2024. So that's on the top line. I don't think you have to squint too hard to get to that number. And then, by the way, add on much greater brand awareness than we add in 2019, much cheaper partnership channels, what have you. And then on the margin side, we still think about the one-piece business contributing 4% to 6%.

Speaker 2: But as I said in my earlier comments, we're going after at least 100 basis points of margin throughout the entire system And we'd expect to be back to normalize turns call that you know, three to three and a half turns a year I think you put all that together and you get to a and I positive it does not have large assumptions for mix of capital light or asset like business ie 3p or in this for certainty for example and And again, you are biased our bias is to be conservative and how we kind of put out these markers And so we haven't embedded a lot of new product lines into that number. So we feel good about the $10 billion marker

Speaker 7: Okay, great. And then a quick follow up would be just just trying to understand how you're thinking about the capital requirements for the business. Once you move past the 2Q cohort here. And the business mix transitions to a balance of both the 1P and 3P transactions. Is there a minimum level of cash you are targeting that provides you with a large enough balance sheet to support what will still be a capital intensive 1P business while also providing you with enough flexibility to invest in scaling the 3P business, which I assume you would look to consider some marketing spend there to drive adoption. Thanks.

Speaker 4: Happy to answer that. So, look, I think we're very comfortable executing our business plan with the $2 billion in capital that we have today, $1.3 billion in unrestricted cash. We don't guide beyond the first quarter, but to your point, we do have minimum cash requirements in our financing facilities, but those are substantially below where our current cash balance is. So, I think the plan that we've articulated, the plan that we're going after, we are very comfortable with $2 billion in capital is more than enough to finance the plans we're marching against. Thank you. Our next question comes from the line of...

Speaker 5: Ryan McKevney with Zellman & Associates. Your line is now open. Hi, thank you very much. Just to come back to exclusives, I have a three-part question, so I'll throw it out all at once. So you mentioned in the letter that you began to offer exclusives as an option to sellers in 4Q. So firstly, just any thoughts you can share on the initial reception from home sellers. Second part of the question, more generally, can you just talk about the value proposition to home sellers of exclusives? You know, I think we all understand the value prop around the 1P model with convenience and certainty of the cash offer, et cetera, but maybe you can talk about how you frame that value prop of ultimately descendants of people with distress will come by with a seller, you know,

Speaker 2: windowing it in effect to buyers, if they could come and buy the home on an as is, whereas fixed fee basis. And we have had really good success with that. We've had sell for anywhere from 15 to 20% in the first two weeks on those exclusive listing homes. That was using our inventory and we continue to pursue that model. Step two, I think the second part of your question was around what the value profits to sellers.

Speaker 2: The value pop to them is if they opt into putting in their home in the marketplace, they're still looking at a scenario where they are not enduring more than one showing and they have a limited window of time by which we are going to surface multiple offers for them. One from the institutional network that we have in our relationships, which we've had for years now, we can help monetize those and bring those offers to the fore that they can't otherwise get. And we can bring other offers from other buyers in our network to them. And then they have the option to choose to take that price or not. They obviously also have the backup of our certain all cash offer if that's something they want to avail themselves. So it's a lot less burdensome, less time. There's still certainty in the process. Again, that's the superior to the traditional selling process today. That's the value prop to them.

Speaker 2: As for the economic, I suspect we'll continue to think about what the experiment is over time. Today we charge 85% to the seller and we're sharing some of that with the buyer. How that shakes out every time. I don't know, so I think I'm a little low to commit to this specific beginning economics quite now. That, for example, doesn't include any services attached. There's no title that's going there. All those things to come. But that is where we're at today.

Speaker 5: That's great. Thank you very much, Kerry. One additional question. The comment about list with certainty. I don't believe, I've heard you talked about that before, so maybe you can just expand on what that product is, you know, and how that, how that kind of fits into the, into the broader equation. Yeah, I mean, in this high spread environment, the good news is that we can still convert campers on the sellers because they're indexing on certain week giving you, but there's 90% that we're not addressing in the current high spread environment. We want to make sure that we still give them the option to move. And so we are, we'll expand your list with certainty products. They can list their home on the market with us to maximize market price.

Speaker 2: still retain the certainty of our own cash offer that they can take at any time. And so far we're seeing about 20-25% of customers choose with the certainty we're presented with that option. So we're optimistic that we'll be driving more asset light volume through that product over time in this environment. Got it. Thank you very much. You're welcome. Thank you. Our last question comes from the line of Jay McCandless with Wedbush. Thanks for taking my follow-up. So just, Kerry, I wanted to push a little bit more on if the mortgage market doesn't go down, mortgage rates don't go down, mortgage rates actually go up from here and we see...

Speaker 4: Sellers be even more reluctant to get out of the house they're in now. I guess what's plan B and what does the business look like in that scenario? Do you walk away from higher-priced markets so you're not having to carry as much on the credit facilities? Do you go heavier, I don't know, into whether it's, you know, payments to get listing, things like that? Just maybe walk us through an environment where rates go up instead of down. Yeah, I mean, I'd say at the highest level, you know, I think we've shown helpful you what we've done

Speaker 2: provided and shareholder letter, we can still create attractive unit economics, attractive cohorts, even in this environment of high rates, high mortgage rates, rate volatility, and we expect to continue to do so. You know, mortgage rates been pretty volatile last couple of weeks. We're reflecting that how we adjust for spreads. So we'll continue to do that through the course of the year. If volumes continue to be suppressed for the industry and they continue to be down, and that persists for a long period of time.

Speaker 2: We know that's imperative that we manage our cost structure in our capital Good news is we have a lot of it, but we it's very dear And so it's imperative that we mitigate losses and preserve book value and we're going to manage the business without in mind. So We're not managing it to the absolute point of trough today But if I look we had to 2024 if that's sort of implicit in your comments and learn for a a longer trough period And how the cycle will take a harder look at our cost structure in light of that we'll have to

Speaker 2: that's imperative that we manage our cost structure. Our capital, good news is we have a lot of it, but it's very dear. And so it's imperative that we mitigate losses and preserve book value. And we're gonna manage the business with that in mind. So we're not managing it to the absolute point of the trough today, but if I look at the head of 2024, if that's sort of implicit in your comments and we're in for a longer trough period in the housing cycle, we'll take a harder look at our cost structure in light of that. We'll have to. Okay, great. Thanks for taking my follow up.

Speaker 2: Thank you. I would now like to hand the conference back over to Carrie Willer for closing remarks. I just want to thank everyone for joining and participating today. Hopefully you heard from us. We feel confident with decisions we've made today to navigate what has been a challenging housing environment are enabling us to achieve both our customer goals and our long term financial objectives. So thank you and we look forward to talking to you again soon. This concludes today's conference call. Thank you for participating. You may now disconnect. You

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Good day, and thank you for standing by.

Welcome to the Open Door fourth quarter 2022 earnings conference call.

At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star-one-one on your telephone. You will then hear an automated message advising your hand is phrased. To withdraw your question, please press star-one-one again.

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Elise Wong, Vice President of Investor Relations. Please go ahead. Thank you and good afternoon. Details of our results and additional management commentary are available in our earnings release and shareholder letter, which can be found on the investor relations section of our website.

at investor.opendoor.com. Please note that this call will be simultaneously webcast on the investor relations section of the company's corporate website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the Federal Securities Laws.

All statements other than statements of historical fact are statements that could be deemed forward-looking, including but not limited to statements regarding open-door financial condition, anticipated financial performance, business strategy and plans, market opportunity and expansion, and management objectives for future operations.

These statements are neither promises nor guarantees and undue reliance should not be placed on them. Such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements.

can be found in the risk factor section of OpenDoor's most recent annual report on Form 10-K for the year ended December 31, 2022 as updated by our periodic report filed after that 10-K. Any forward-looking statements made in this conference call, including responses to your questions, are based on management's reasonable current expectations.

in the risk factor section of Open Door's most recent annual report on Form 10K for the year ended December 31st, 2022, as updated by our periodic report filed after that 10K. Any forward-looking statements made in this conference call, including responses to your questions, are based on management's reasonable current expectations and assumptions as of today.

and Open Door assumes no obligation to update or revise them, whether as a result of new information, future events, or otherwise except as required by law. The following discussion contains references to certain non-GAAP financial measures. The company believes these non-GAAP financial measures are useful to investors as supplemental operational measurements to evaluate the company's financial performance. For reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metric, please see our website at investor.opendoor.com.

I will now turn the call over to Kerry Wheeler, Chief Executive Officer of Opendoor. Good afternoon. Also on the call with me today is Christy Schwartz, our interim chief financial officer, and Dodd Frazier, President of Capital Markets and our Enterprise Business.

I'm looking forward to speaking with you today, not only because it's my first earnings call as CEO , but because of our clarity as to the path ahead, which I believe will make Open Doors stronger than before. While navigating a major housing cycle has not been easy, we've never lost sight of our vision. We are building a managed marketplace for residential real estate that will enable consumers to buy, sell, and move at the tap of a button. Challenging times like these have the benefit of increasing urgency, diminishing the cost of managing rents, education, and the ability to

means offline, uncertain, and totally broken. Customers come to us because they craze the certainty and convenience of our cash offer that they cannot get anywhere else.

Even in this moment of high spread, we are able to convert over 10% of real sellers and earn an NPS of nearly 80.

We stand alone in what we're able to offer consumers today. Given our current coverage of almost 30% of all real estate transactions in the US today between our buy box and the markets we're in, we have a significant runway for future growth.

As for right now, we are highly focused on stabilizing our core business and ultimately returning to positive free cash flow.

And we're making solid progress. As of year end, we sold or were in contract to sell two-thirds of the loss-making homes acquired before the housing market reset, also known as our Q2 cohort, and we expect they'll be behind us shortly. The homes we've acquired since the reset are outperforming our expectations and are on track to deliver contribution margins in line with our 46% annual margin target once they're fully sold.

However, we've lowered our acquisition volumes via higher spreads in our offers, coupled with lower marketing spend. We expect to keep relatively high spreads in the near term, giving continued uncertainty into how the housing market will perform.

That said, we have reduced our spreads from last year's record levels based on early indicators of stabilization in the housing market and will continue to do so as we see more consistent positive macro signs.

Ultimately, we would expect lower spreads to translate into higher acquisition volumes. In the meantime, we're going to manage our cost structure in light of how expected volumes are pacing this year and next, with the goal of returning the business to adjusted income profitability in 2024, assuming some normalization in the housing market. In addition to stabilizing our first party business, we are going to be increasing our

We are aligning on three key areas in 2023 to further our progress towards building the managed marketplace for residential real estate.

First, it's to enable more sellers to choose Open Door. No matter the macro backdrop, sellers value the certainty and simplicity that an Open Door offer provides. This year, we're focused on diversifying our demand funnel so that more home sellers start the journey with Open Door. The recent launch of our Zillow partnership is one key example set to...

substantially increase our reach in a scalable and efficient way. We're also expanding our list of certainty products, which give sellers the option of listening on the MLS, while retaining the certainty of an open door offer that they can take at any time. Second is to realize greater operational efficiencies throughout the business by shifting our focus from building for scale and velocity to strengthening our foundational pricing, operations, and customer platforms. This includes continued improvement in pricing capabilities to increase offer competitiveness.

creating a managed marketplace. This will position an open door to have a mix of on and off balance sheet transactional volumes to enable capital efficient market share gain for years to come.

We plan to scale this product in three phases. First, we're focused on perfecting the consumer experience. Second, we will build liquidity and network effects in the individual market. And third, we'll refine our playbook and scale to all markets. Given our highly focused investment approach this year, we expect to be in phases 1 and 2 for 2023.

meaning we'll go deep and selected markets to build a liquidity and selection that's required for a great user experience. While our business remains significant long-term, where we're aligning our near-term goal to 30% of transactions in our marketplace by the end of the year, in those markets where we've launched exclusive. As we look ahead, we're energized about our future. We've set clear goals that will stabilize the business in the short-term, while strengthening our foundation for the long-term. And we believe we have the team, the balance sheet, and plans in place to ensure we-

We delivered $2.9 billion of revenue, down 25% versus prior year due to slower resale clearance rates and our decision to reduce our acquisition pace beginning mid-year during a time of significant market uncertainty.

However, we ended the full year with $15.6 billion in revenue, which was 94% higher than 2021. This growth was driven by our strong first half performance.

our contribution margin was negative 7.2% in the fourth quarter, which reflects our resale mix that is weighted to the Q2 cohort of longer-dated, lower-margin homes, as well as the seasonal softness typically seen in the fourth quarter. Our new book of homes, or homes we offered on starting in July of last year, is performing well above our expectations.

beginning in the second quarter of 2022. Our full year contribution margin was 3.4% compared to our annual contribution margin target of 4 to 6%.

Adjusted EBITDA loss was $351 million and adjusted operating expenses totaled $144 million in the fourth quarter, both consistent with guidance. We ended 2022 with adjusted EBITDA loss of $168 million versus adjusted EBITDA of $58 million in 2021. Turning to our balance sheet, as of the end of the year, we had total capital of $1.5 million.

reduce our committed capacity in 2023. This will lower our required restricted cash levels and associated interest costs. As we enter 2023, we are highly focused on preserving capital and operating with strong cost discipline. Our goal is to return the business to positive adjusted net income upon delivering approximately $10 billion of annualized retail revenue, which we expect to achieve by mid 2024.

Assuming some normalization in the housing market, we expect to be able to return to this pace by resuming the market share we had three years ago, adjusted for the more than doubling of our market footprint. We are continuing to operate with a cautious stance in the near term as we believe the Fed's actions will continue to dictate the outlook for housing. That said, as Kerry mentioned, we have started to see some early signs of housing stabilization, which has in turn allowed us to reduce spreads from the record levels we were embedding for most of the back half of last year. In terms of guidance, we expect our Q1 revenue to be between 2.45 and 2.

to $2.65 billion and adjusted EBITDA loss to be between $350 and $370 million. Adjusted OpEx, which we define as the delta between contribution margin and adjusted EBITDA, is expected to be around $130 million. Consistent with this guidance, we expect our contribution margins will trough in the first quarter before returning to positive levels in the second half of the year as we increase our new book of inventory. 2023 is an important year for Opendoor. We will lean into our core strengths and operate with agility and efficiency across the business to ensure that we exit the year stronger and more resilient.

We will also invest our capital wisely, focusing on the initiatives that best position us for long-term sustainable growth. Our goal remains to be a profitable market leader and generational company. I will now open the call for questions.

We also invest our capital wisely, focusing on the initiatives that best position us for long-term sustainable growth. Our goal remains to be a profitable market leader and generational company. I will now open the call for questions. Thank you.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Nick Jones with JMP Securities. Your line is now open. Great. Thank you for taking the questions if I could ask two. First, just to throw out negative unit margins.

When we think about the full year, it sounds like maybe the first half will still be negative and then still improve in the back half. Is that the right way to think about it? And then I have a follow-up. Hey Nick, I'm going to turn it over to Kristi. There's a new voice on our call today. Just by way of background, Kristi's been with Open Door for six years. She's our chief accounting officer and has very deeply stepped up into the interim CFO role. So I'll hand it over to you, Kristi. Hi Nick, happy to take the question. We expect to return to positive unit margins by the second half of 2023.

Right now our results are reflecting a mix of old book and new book and we've added some transparency on the margins of each book into our shareholder letter. We've been very focused on selling our old book as expeditiously as possible while also preserving margins and we expect 85% to be sold through or in contract by the end of Q1. As soon as we cycle through the Q2 offer cohort, we're into new book inventory and we feel really good about those margins. The new book of inventory delivered 9.7% contribution margin in Q4.

And we expect it to perform in line with our target of 4 to 6 percent contribution margin once fully sold through. So as such, we expect to return to positive unit margins by the second half as the mix of inventory we're selling shifts back to the new book.

Great, thanks. And then maybe just some of the efficiencies, can you maybe unpack where we should look to see those show up as we progress through 2023? Yeah, I mean I'll take that, Nick. It's carry. I mean it's really across the entirety of our business. It'll show up a little bit in the CM line, but it'll also show up in our variable SG&A and our fixed off extra.

It's really a host of initiatives designed to improve margin, reduce cost, increase operator efficiency, what have you. So we'll show up across the board. Great. Thank you both. Thank you. Our next question comes from the line of Jay McCandless with Wedbush. Your line is now open. Hey, thanks for taking my questions. I guess the first one, could you talk again, I missed what you were saying about the

We've been building for years for scale and velocity, and now we want to build for long-term efficiency and really build more durable savings back into the business. Those savings are going to come, as I just said, to Nick, across a whole host of areas. Some of it will show up in the contribution margin line, i.e. in the unit line. Some of them will show up in our variable SG&A, just in the efficiency of our operators, our home ops team, market ops.

It'll show up also in lower fix-off effects over time as we reduce some of our direct spend. Those are initiatives that we are going after through the course of 2023. The full impact of them, we don't expect to realize, though, until 2024. And that's where the 100 basis points will show up next year. And then I guess the second question.

You know you bought 3,400 homes this quarter Is something more along that number or call it sub 5,000 is that a better run rate? I guess for where the business is now

And especially if you're going to be taking down facility capacity in your credit facilities this year, is running at kind of that slower 3,000 to 5,000 pace what we should expect over the next four quarters. Yeah, I'll take the first part of that question. Just comment a little bit about where we're pacing right now in terms of acquisitions and how it's showing up. And then I'll turn it over to Don to talk through.

40% year on year. If you look across our markets and our buy box, new listings are the lowest they've ever been since 2004. And that just means there are fewer sellers in the market for us to engage with right now.

On our end, we're continuing to bid high spreads into our offers. And as you know, high spreads for us means lower offers, lower offers lead to lower conversions, at least the lower contracts. We have to decrease our spreads a fair bit since late last year when they were at record levels. And I expect we'll continue to do so, just given seasonal tailwinds as we come to the new year, and also the fact that the housing market is starting to firm up a little bit.

But the reality is the housing market remains uncertain and we're going to continue to operate with a fair little bit of caution and we'll continue to operate with high spreads for the foreseeable future. So that's on volumes. We don't break out where we're pacing specifically on volumes. I can tell you Super Bowl tends to be a jumping off point for a lot of home sellers to get back in the market. And as we've been decreasing spreads since last year, there's a lag in our business between offer to contract.

And we do expect to see a pick up volume as we move through the second quarter. Seeninality goes on throughout the entire year. We're seeing tailwinds right now. Seeninality shows up in the form of a slower backcast with the AC increase spread in the back cap. But that's how you should think about volumes for the APS in the year. Do you want to talk a little bit about how we keep our signing facility?

Yeah, happy to. I think, I mean, just to highlight it, inventory balance is at the end of the year we're 4.5 billion and we have 12 billion in capacity. So that is more than adequate for the financing and sort of forward view of where we're headed. And I think the other piece that's important to highlight is lenders like to be utilized. And so taking down that capacity is something we've done and modulating that capacity for the seven years that I've been here. So I think it's something we're very comfortable with.

reducing and feel like we will still have ample capacity to account for any upside to inventory. Great. Thanks, Sigma. Questions? Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is now open. Hey, thanks. This is Chad on for Jason. So, you talked about 30% of your 23 transactions going through exclusives and markets where the marketplace is launched. Two questions on that.

First, any sense what percent of your total markets you'll be launched in, kind of by the end of the year? And then, do you believe that that's driving the return to positive union economics in the back half? Or is that just... Again, this could be all of a sudden far- Citadel corrective.

you know, kind of the improvement in the new home cohorts. Thank you. Hey Chad, our focus right now for 3P or for marketplaces is really to refine and test in a local market. We're excited about the signal we're seeing so far. We're seeing sellers being very excited to opt into the program.

We have about 3% share of the listings in the market that we're trialing right now. So off to an encouraging start. But we really want to focus on first perfecting the customer experience. And then step number two is to build density and liquidity so that we can own that market. And we'll do that before we want to kind of spread out further. I don't know the number of markets we'll be at by the end of the year. It's, we haven't given The next

and if your new book becomes a vast majority to all of our margins in the second half. Thank you.

Our next question comes from the line of Yigal Arunian with Citi. Your line is now open. Hey, good afternoon, everyone. I want to just go back to the macro for a second and you're talking about stabilization and just kind of in the last...

we start to see rates go back up a little bit and start to see that impact mortgage demand again. So just want to get a sense of what you're building into your spreads and what you're thinking on the macro as we move forward. And you're bringing your spreads down a little bit, just want to understand what your expectations are for the housing market as we work our way through the rest of the year. Yeah, happy to answer. So I look at the

Where the market is right now, we're continuing to see very low supply on the market really multi decade lows continuing new listings are the lowest in 2004. So that's a good setup for more stable pricing in 2023. I think it's also important to keep in mind how sort of the risks that we're taking from a housing price perspective, we typically own owns for called four months.

So that's the duration of exposure we're taking. And if you look at home price appreciation, we have a fun chart in the back of our shareholder letter that shows month over month home price appreciation. If you look at the first half of the year, almost all of it is going back into the 80s. You see very strong home price appreciation, and then that moderates in the back half of the year. So this is the point of the year where, given the strong leading indicators we've seen in January , we've been able to reduce those spreads. We continue, though, to be very cautious with the back half of the year, to your point around interest rate volatility.

Do you understand where, you know, on risk of mode and not purchasing global homes or purchasing last year? Have you pulled back in any of the markets, the zero-role strategy change? I'm definitely not going to change, but the pace of it change. We pull back anywhere. We pull back in your buy box.

by market or even by price point by charging the different spread. And so you can see that play out both in terms of specific markets as well as within pockets of the market, sort of zip codes or otherwise. And so that's really the lever by which we adjust pricing to account for that risk.

So it's not pulling back on buybacks to be specific, it's more adjusting the spreads that are starting customers based on their riskiness. Got it. Thanks. Thank you. Our next question comes from the line of Justin Patterson with KeyBank Capital Markets. Your line is now open.

Great, thank you very much and good afternoon. Carrie, I wanted to go back to exclusives to start with. Can you talk about the steps to build density in those markets and just really get the supply you need to succeed with that and perhaps just frame yourselves to the core business?

And then just a secondary question on the Zillow relationship. I know it's very very early here But could you just talk about how we think about the pace of that relationship expanding moving at a new market? I think about the conversion quality from that funnel versus some of the other channels you lean on. Thank you Yeah, hey Justin, do you want to bring the first part of your first question? You broke up a little bit for me. I had a hard time hearing this.

Sorry about that. The first question was just around phase two of the exclusive product. Can you talk about just the steps needed to build density and market for that? It's really about aggregating supply and then from there, you know, aggregating fire again. Which, you know, we haven't had started on through our one-piece business, but it's true about buying, bringing more buyers into the system over time. On the Zillow side, as you said, it's good.

It's early, we had a Valentine's Day launch, so far so good. We're optimistic and enthusiastic about the prospects for that partnership. We'll expect to launch it in more markets over the course of the year. But for us, we think it's going to be a very interesting and creative marketing channel for us. It just allows us to put our brand and our offer in front of a lot more home sellers. Thank you. Thank you.

Our next question comes from the line of Curtis Nagel with Bank of America. Your line is now open. Great, thanks for taking the question. I just wanted to focus for a sec on spreads. And so, you know, the new cohort, you know, you took up spreads led to some nice contribution margins. So far, I'll be at a lower volumes. I'm not sure if I heard this incorrectly, but it sounds like you might be pulling back spreads a little bit as we go further into the year. And if that's the case,

How does that impact potential contribution margins, if that were the case? I think the comment we made is one, we have been pulling, we've been reducing spreads since late last year when they were at record levels, peak uncertainty, record level spreads, and we were reducing them as we've come into the new year. Two reasons, seasonal tailwinds, and two, we have seen signs that the housing market is stabilizing.

the comments that John made earlier about where we are in terms of HPA prospects, the underpinning of like an absence of supply and the restrictions, what have you. We expect to continue to do so for a while. That being said, seasonal tailwinds turn into seasonal headwinds in the second half of the year, every year. So there is some chance that we'll look to like raise spreads again in the back half of the year. But we'll see. I mean this is, you know, I think the beauty of our business is that it's dynamic and we're able to raise response to what we're seeing in the market and we'll continue to do so as we get more signal.

Okay, got it. And then just to follow up the 1q guidance, you know, for the, you know, 370 to 390 negatives, how should we think about the GAF gross margins that would be incorporated into that? Hey, Curtis, I'll take that. We don't generally provide guidance on GAF gross margins. You can kind of back into contribution margin using adjusted EBITDA and adjusted OFX.

And you can look at the table for the new book and old book of inventory in our shareholder letter to get an idea of the margins, the gross margins that we're seeing on those two books. There's also a breakout of inventory by new book and old book in the shareholder letter that would be helpful. Okay, got it. Thank you. Thank you. As a reminder, to ask a question at this time, please press star one one on your touch tone telephone. Our next question comes from the line of Ryan Tomasello with KBW. Your line is now open. Hi, everyone. Thanks for taking the questions. Can you maybe provide a bit more...

Detail for how you plan to get to adjusted income profitability at 10 billion of revenue. What assumptions you're baking in there for contribution margins mix of 1 P, 3 P, OpEx, et cetera. I guess just running some back of the envelope math assuming. 5% contribution margins implies that you're assuming significant efficiencies on either the financing or OpEx side, or maybe be.

For us, the tipping point is $10 billion of annualized revenue to get there.

And we believe we should get back there by say the middle of 2024 assuming number one assumption a more normalized home environment If you go back at 2019 and look at where we were which was a more You know good analog for normal housing market and you think about the share we have back then

Can you adjust it for just where we are today, which is 4x bigger in terms of the combination of additional buy box expansion in the market? You know, with like for like share, frankly, even a little less than like for like share, gets you back to $10 billion in 2024. So that's on the top line. I don't think you have to squint too hard to get to that number. And then, by the way, add on, you know, much greater brand awareness than we had in 2019, much cheaper partnership channels, what have you. And then on the margin side, we still think about the 1P business contributing 4 to 6

how we kind of put out these markers. And so we haven't embedded a lot of new product lines into that number. So we feel good about the $10 billion marker.

Okay, great. And then the cook follow up would be just trying to understand how you're thinking about the capital requirements for the business once you move past the two-cute cohort here and the business mix transitions to a balance of both the 1P and 3P transactions. Is there a minimum level of cash you are targeting that provides you with...

A large enough balance sheet to support what will still be a capital intensive 1 P business while also providing you with enough flexibility. To invest in scaling the 3 P business, which I assume you would look to consider some marketing spend there to drive adoption. Thanks

Happy to answer that. So I think we're very comfortable executing our business plan with the two billion in capital that we have today, 1.3 billion in unrestricted cash. We don't guide beyond the first quarter, but to your point, we do have minimum cash requirements in our financing facilities, but those are substantially below where our current cash model is.

So I think the plan that we've articulated, the plan that we're going after, we are very comfortable with two-blading capital. It's more than enough to finance the plans we're marketing against. Thank you. Our next question comes from the line of...

Ryan McKevney with Zellman & Associates. Your line is now open. Thank you very much. Just to come back to exclusives, I have a three part question, so I'll throw it out all at once.

So you mentioned in a letter that you began to offer exclusives as an option to sellers in 4Q. So firstly, just any thoughts you can share on the initial reception from home sellers. Second part of the question more generally, can you just talk about the value proposition of home sellers of exclusives? You know, I think we all understand the value prop.

long question. Lastly, I think last quarter you mentioned a 5% service fee for third-party transactions. Is that still the expectation? And is that 5% service fee, is that specific to what a home seller would pay the list, or is that possibly some combination of kind of the fee charge to the seller, but also a fee charge?

to the home buyer? I'll do my best to remember all of that. Let me start the job. So we started with exclusive listings. That was taking our open door owned inventory and windowing it in effect to buyers that they could come and buy the home on a daily basis.

as is where it's fixed through basis. And we have had really good success with that. We've had sell for anywhere from 15 to 20% in the first two weeks on those exclusive listing homes. That was using our inventory and we continue to pursue that model. Step two, I think it's part, second part of your question was around what's the value profit to sellers.

The value pop to them is if they opt into putting in their home in the marketplace, they're still looking at a scenario where they are not enduring more than one showing and they have a limited window of time by which we are going to surface multiple offers for them.

One from the institutional network that we have in our relationships, which we've had for years now. We can help monetize those and bring those offers to the floor that they can't otherwise get and we can bring other offers from other buyers in our network to them. And then they have the option to choose to take that price or not. The other fields that have the backup of our…

certain all cash offer if that's something they want to bail themselves. So it's a lot less burdensome plus time There's still certainty in the process again vastly superior to the traditional selling process today. That's the value prop to them As for the economics, I suspect we'll continue to tinker with them and experiment over time. Today we charge a 5% fee to the seller and we're sharing some of that with the buyer How that shakes out every time I don't know. I think I'm a little low to commit to this

specific of the unit economics quite now. That for example doesn't include any services attached. There's no title that's going there. All those things to come, but that's that is where we're at today. That's great. Thank you very much, Kerry. One one additional question. The comment about list with certainty.

I don't believe I've heard you talk about that before, so maybe you can just expand on what that product is and how that kind of fits into the broader equation. Yeah, I mean, in this high spread environment, the good news is that we can still convert 10% of sellers because they're indexing on certainty convenience. But there's 90% that we're not addressing in the current high spread environment. We want to make sure that we still give them the option.

to move and so we are um we'll be expanding our list with certainty products they can list their home on the market with us um to maximize market price still retain the certainty of our own cash offer that they can take at any time um and so far we're seeing about 20 25 percent of customers choose with the certainty we're presented with that option so we're optimistic that we'll be driving more asset light volumes through that product over time in this environment.

Thank you very much. You're welcome. Thank you. Our last question comes from the line of Jay McCandless with Wedbush. Your line is now open. Thanks for taking my follow up. So just, Kerry, I wanted to push a little bit more on if the mortgage market doesn't continue on. Yes.

mortgage rates don't go down. Mortgage rates actually go up from here, and we see sellers be even more reluctant to get out of the house they're in now. I guess what's plan B, and what does the business look like in that scenario? Do you walk away from higher-priced markets so you're not having to carry as much on the credit facilities? Do you go heavier into whether it's payments to get listings?

high mortgage rates, rate volatility, and we expect to continue to do so. You know mortgage rates have been pretty volatile the last couple of weeks. We're reflecting that how we adjust for spreads. So we'll continue to do that through the course of the year. If volumes are continue to be compressed for the industry and they continue to be down and that persists for a long period of time, I think we know that it's imperative that we manage our cost structure. You know capital

Good news is we have a lot of it, but we it's very dear and so it's imperative that we mitigate losses and preserve book value And we're going to manage the business without in mind. So We're not managing it to the absolute point of trough today But if I look at the head to 2024 if that's sort of the plus in your comments and learn for a any Longer trough period in the housing cycle will take a harder look at our cost structure in light of that. We'll have to Look at it to determine short term marginal

Thank you. I would now like to hand the conference back over to Carrie Willer for closing remarks. I just want to thank everyone for joining us this morning today. It's hopefully your virtual bus. We feel confident with the decisions we've made today to navigate what has been a challenging housing environment, enabling us to achieve both our customer goals and our long-term financial objectives.