Q4 2022 Offerpad Solutions Inc Earnings Call

Speaker 1: Good afternoon. Thank you for attending today's Offerpad 4th quarter 2022 earnings call. My name is Hannah and I will be your moderator for today's call.

Speaker 1: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad.

Speaker 1: I'll now turn the call over to Stephanie Layton, Vice President of Investor Relations and ESG at Offerpad. Stephanie? Thank you and good afternoon everyone. Welcome to Offerpad Solutions' fourth quarter and full year 2022 earnings call. Our Chairman and Chief Executive Officer, Brian Baer, and Chief Financial Officer, Mike Burnett, are here with me today. During the call today, management will make forward-looking statements as defined in the provided 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, describing our findings with the U.S. Securities and Exchange Commission. Except it's required by applicable law, Offerpad does not intend to update or alter forward-looking statements, whether as a result of new information, future events, or otherwise. On today's call, management will refer to certain non-GAAP financial measures. These metrics exclude certain items discussed in our earnings release under the heading non-GAAP financial measures. The reconciliation of Offerpad's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the fourth quarter and full year 2022 earnings release on Offerpad's website. I'll now turn the call over to Brian . Thanks Stephanie. Hey everyone. I appreciate you joining us today. I'll cover some company highlights, operational updates, market trends, and our 2023 strategy. Mike will share our fourth quarter 2022 financial results and our first quarter expectations. Last year was truly a table of two halves.

Speaker 1: with the striking difference in market conditions from the first to the second half of the year. Remarkable accomplishments in 2022. Last year we sold over 10,000 homes in the year for the first time in Offerpet History. Completed 9,985 renovation projects. Increased our cash offer request from the agent partnership program by 90% year over year. And increased our asset life's less transactions, including listing, buying, and mortgages by 90% year over year. However, the historic interest rate increases in decline in affordability left us with two significant challenges in the fourth quarter. First was stolen inventory acquired prior to the market shift. Second was secured additional capital to strengthen our balance sheet. I'm happy to report on the significant progress on both. We reduced our inventory of homes acquired prior to September 1st. From a peak of nearly 4,000 to less than 225 legacy homes active on the market. This brings us near the end of our legacy inventory disposition process. And puts us in a strong position to sell through the fast majority of the remaining inventory acquired during the first half of the year by our target completion date of March 31st, 2023. In addition, homes acquired after September 1st, 2022 that have sold are recorded positive returns. Early results from these homes are consistent with our expectation for returns in more of a normalized market. I don't believe any amount of experience, technology or data could have predicted the rapid rise in mortgage rates.

Speaker 1: but navigating the climate provided valuable earnings we can use going forward. For example, with homes purchased in the fourth quarter, we adjusted the risk premium for factors like proximity to new builds and outlying areas, where price reductions have been more significant. The return to positive performance on homes purchased late last year reflects our underwriting adjustments, updated assumptions, and increased spreads as we continuously adapt. Second, on February 1st we announced receipt of an additional $90 million through a private placement. We received participation from early investors including Roberta Osella, an Offerpad board member, and First American Financial, more recent existing investors and new investors. I increased my personal investment in the company by participating as well. Their mere ability to raise capital in today's challenging macro environment is notable. In addition, participation by current shareholders demonstrates continued confidence in our strategy and our ability to drive long-term value for our customers and shareholders. With these two challenges largely behind us, we are ready to move forward and capitalize on future opportunities. The good news is the opportunities are near. We are starting to see signs of improving and stabilizing real estate market conditions. In addition to a significant amount of publicly available data, we review our internal data including sentiment on a weekly basis. For the past four weeks, our internal data has improved in all major categories.

Speaker 1: For example, the number of homes with no offers has been steadily decreasing and showing activity has been increasing. Many of our market experts are now labeling their market condition as improving or stable instead of slowing. Most of our market experts are citing positive shift in the active to pending ratio as well as a decrease in depreciation in accurately priced homes that are not directly competing with new builds. While markets are seeing price drops slowly, concessions are rising. There are few markets still indicating declining prices including Atlanta, Charlotte, and Phoenix. Notably, townhomes and condos are currently attracting more interest than single-family homes in Columbia, Columbus, Dallas, Orlando, and Raleigh, likely due to affordability.

Speaker 1: Also, a number of markets indicated that homes priced below $350,000 have the best overall velocity. Denver and Dallas have shown considerable improvement in sentiment. Overall, we are hearing more optimism from our market experts, although it is still early and durability of this trend is unclear. Before I talk about what's new with our 2023 plan, I want to review what's not. Our vision to provide a comprehensive platform for all things home has not changed. We have said from the beginning, we are more than just an eye buyer. Our mission is to be a one-stop solution center where people can address all of their real estate needs. We continue to believe that owning the entirety of the transaction is the best way to achieve our goal of simplifying the home ownership experience for customers. By providing one customer-centric source to buy, sell, finance, and renovate a home, we can continue to grow our company and our ability to increase the value of our platform.

Speaker 1: Our ultimate goal and long-term vision remain unchanged, but we are constantly evolving our strategy to keep pace with changing conditions and shifting customer needs. In 2023, this means we plan to retain and build our foundational cash offer, listing service, and mortgage business. We responsibly grow our footprint with an increased focus on market penetration, and expand our business-to-business partnerships and services, allowing OfferPad to grow our asset-like offerings.

Speaker 1: Seamlessly assisting customers from start to finish, finding a new home, selling their current home, financing the purchase and providing a free local move removes friction from a home ownership experience. It also improves our financial health by increasing the number of transactions per customer and reduces our customer acquisition costs. While cash offers are a cornerstone of our foundation, it is truly the combination of our cash offers, listing service, and mortgage business that provides the simplicity and control customers want. Our access to top of funnel, sophisticated renovation department, real estate expertise, and customer solution center approach differentiate our model. In 2023, we will focus on increasing our engagement with each customer to enhance our value proposition and support our financial goals. Turning to our growth strategy, in 2023 we expect to accelerate our acquisition volume with a focus on increasing penetration in more affordable markets. In response to the broader real estate market slowdown, we reduced the pace of our acquisition and the size of our team. Mike will provide more details regarding our cost reduction efforts and right sizing. As part of the reset, we will not be acquiring homes in California at this time. Our engagement in California will be limited to renovation projects, allowing us to focus our resources on more affordable and established markets. We will look to build our acquisition volume on a market by market basis, targeting homes with price points near and immediate.

Speaker 1: Finally, a key pillar of our 2023 strategy will be developing our business-to-business partnerships and services. In December 2022, we extended our renovation services to other businesses. Now more homeowners and companies can utilize OperaPad's renovation department to update their portfolio of homes for rent or to sell. We have already completed over 200 projects under our renovations as a service business model. Our Asset Light service leverages our existing logistics, operation, and skill sets. We are also expanding our relationship with other home buyers. Our new Direct Plus program allows other cash buyers and single-family rental companies to purchase homes directly from the homeowner, seamlessly matching cash buyers with sellers. We expect this program will allow OperaPad to help more homeowners sell, even if the home is outside our existing markets. The service fee for this program presents another Asset Light revenue stream.

Speaker 1: while the program itself can expand our ability to reach more customers. I expect 2023 will be an exciting year as we dive into the next evolution of our business. While change and innovation are a given, we commit to moving forward in a manner that stays true to our guiding principles. That means balancing our goals to attain growth and sustainable profitability, striving for the best-in-class operational execution, and building upon our foundation of real estate expertise with innovative technology fueling scale. No matter what market cycle we are in or how fast we transition, we will look to the heart of who we are, our mission, our vision, and our strengths to propel us forward. I'll now turn the call over to Mike.

Speaker 2: Thanks, Brian . Last quarter, we talked about the challenging residential real estate environment that we are all too familiar with by now and our expectations for continuation of these conditions in the near term. We also laid out our operational approach to dealing with these challenges, which included one, a heightened focus on our legacy inventory, to optimize the trade-off between price and time to sale, knowing that we'd be accepting losses, and to slowing down the acquisition side of the business to ensure that homes that we do acquire produce positive returns. Throughout the fourth quarter and into the first quarter, we have successfully executed against this plan. As Brian noted, we have reduced our inventory of homes acquired prior to September from a peak of nearly 4,000 to our current position in February , where we have less than 6% of those homes remain to be sold or put under contract. With this progress, and consistent with our outlook from last quarter, we expect to have this cohort of homes largely sold or under contract by the end of the first quarter. On the acquisition side, we have and continue to be very conservative in our underwriting and discipline in our acquisition pace. We acquired over 500 homes in the fourth quarter.

Speaker 2: and have reduced our overall inventory count to approximately 1,800 homes at year end. In the short term, we are trading off volume for ensuring that we are acquiring homes at the right price to generate positive returns during this period of market dislocation. The homes we acquired after August that we have sold have produced returns in line with our expectations during a more normalized market, further validating our approach. Executing against this plan is enabling us to navigate the challenging climate and is positioning us to capitalize on our strategy for rebuilding and growing into more stable market conditions and re-engaging our path to profitability. Turning to the fourth quarter results, we generated $677 million of revenue, exceeding the top end of our Q4 guidance range. Our revenue was supported by the sale of 1,865 homes, which also exceeded the top end of our guidance range, at an average selling price of $363,000. Our adjusted EBITDA for the quarter was negative 103.7 million. This amount includes a $44 million inventory impairment charge. Absent this charge, adjusted EBITDA for the quarter would have been 59.

Speaker 2: We expect this to peak in Q1 and then to decline back to normalized levels in the second half of the year.

Speaker 2: On the cost side of the business, we have taken action commensurate with the slowdown in our volumes. Since our peak headcount in August last year, we have reduced our overall workforce in the aggregate by approximately 50%, including a recent reduction in February , resulting in a combined total annual savings of approximately $40 million.

Speaker 2: With the business now right-sized and more in line with our expectations for 2023, we are positioned to efficiently and effectively execute against our operating plan. From a balance sheet perspective, we reduced our debt balance by nearly half a billion dollars in the quarter, primarily through the sale of homes as our inventory balance decreased to $665 million at year-end. Our unrestricted cash balance was $97 million, driven by the net loss in the quarter as well as net debt reductions. Importantly, this past month we successfully completed a $90 million private placement of prepaid warrants, which are convertible in a common stock. This capital raise not only reflects the continued support from our early investors, but also included more recent existing investors and new investors as well. This capital will position the company to continue to execute our strategy.

Speaker 2: as we begin to rebuild and capitalize on the opportunities ahead of us. As we move towards a stabilizing market, we expect Q4 will represent the low point of the transition period, and our Q1 results will reflect sequential bottom-line improvement. Specifically, in the first quarter of 2023, we expect to sell between 1,300 and 1,450 homes, generating revenue of between $480 million and $540 million. We also expect adjusted EBITDA to be between negative $35 million and negative $55 million, which represents a significant sequential improvement and the first step back toward achieving positive adjusted EBITDA again.

Speaker 2: The sequential lower top-line revenue range for the first quarter of 2023 reflects the purposeful decrease in homes acquired during the latter half of 2022. In the fourth quarter, we acquired 539 homes, and we again expect to have a lower acquisition volume in Q1 before increasing our acquisition pace in the second quarter and into the second half of the year. The expected improvement in our adjusted EBITDA is also supported by the previously mentioned changes we have made to right-size the organization and reduce costs. We anticipate these reductions in addition to other spending cuts will appropriately position the company to leverage our cost structure into the second half growth.

Speaker 2: Our continuous focus on cost management, the infusion of incremental capital, our nearing completion of the disposition of the legacy inventory, along with the positive performance of homes purchased during the fourth quarter, all support our expectations that Q4 results represented the low point of our reported net income, and we expect to see sequential bottom line improvements beginning in Q1 2023. With our measured approach to growth and responsible cost management, OfferPad has demonstrated its ability to execute on a strategy that can adapt in response to changing conditions and capitalize on new opportunities. The combination of building upon our foundational services, cash offers, and our listing service, is introducing new asset length services.

Speaker 1: moves us closer to the true vision of a holistic, simplified solution that meets the unique needs of each customer. I'll now turn the call over to the operator to begin the question and answer session. Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. We kindly ask participants to limit themselves to one question today and then one follow-up. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Dae Lee with JP Morgan. You may proceed. Great. Thanks for kicking the question back to us.

Speaker 2: For our first one, Brian , given the greater push towards the S&I revenue stream, I'm curious to hear your thoughts around the long-term potential of the cash offer model and how you expect the mix of your business to change over time. And then secondly, Mike, I think you alluded to this in your recovery remarks. How should we think about, I'll just say the data as we progress through the year, and when do you expect to be able to put it in the top profit again? Hey, Day. As far as the cash, that's always going to be core of what we do, is the cash offer, as we've talked about a lot, is that we've never looked at this as we're an eye-buyer. We've looked at it as a solution center, specifically for transactions for the customer. And so, as we will continue to roll out more products that are more, quote-unquote, asset light.

Speaker 2: We still have a focus on the cash offer. Now, potentially that doesn't mean that it will be our cash as we look at direct plus and some of the other things that we do, but the cash offers are all the core of what we do. Dei, could I ask you to repeat the question and bring up a little bit there for me? Yeah, so for you, Mike, I think you're alluded to this in your profound remarks. But I'll show you just a little bit thought to progress as the move truly here. And when do you expect to be adjusted if it's our personal booking?

Speaker 2: What I think and obviously we've got a lot of volatility in terms of the backdrop, interest rates, etc. But the way we see it today is we will successfully get through the legacy piece of the inventory largely by the end of the first quarter. So I think that's certainly where we see our trough from an EBITDA standpoint for the year. And then we'll see some gradual build into the latter three quarters. I think because we've slowed down acquisition pays, I think we'll see some moderate improvement going from quarter one to quarter two. And then we'll see where we get into how much we can restart the growth engine again to rebuild in the second half. So I won't really put a timeline on when we get back to EBITDA positive at this point. I think we still need to see how we shake out in terms of our ability to really re-engage on the acquisition side. But we are seeing good signs of...

Speaker 2: improvement and stability in the markets. And so I think it's really just a matter of time. Obviously, we've shown that we've been able to do that consistently in the past under various conditions. So I'm confident that we'll get there. It's just a matter of the timeframe. Got it, thank you. Thank you, Mr. Lee. The next question is from the line of Nick Jones with JMP Securities, please proceed. Great, thanks for taking the questions. On the first one, just how do you feel your algorithm has adjusted to kind of deal with more volatile interest rates? It sounds like the homes you're acquiring now are performing how you expect. So is that really just stabilization of the market or is kind of your buying patterns or the way you're charging fees kind of structurally different and maybe prepared to manage kind of ongoing volatility in interest rates? Yeah, great question. You know, the market always helps. You know, when the market's more consistent, that we have a more consistent way we can underwrite the homes. And so that always helps. But as far as the algorithm and how we underwrite, that's always key to everything that we do.

Speaker 2: And so the adjustments we make, you build in more risk, and that's from time to cash, how long you're gonna own the home, to the type of homes that we're buying. Like for example, derisking ourselves with more median home price homes is really important. Where we're buying, we're more focused on affordability right now as we look through segmentation and property scoring. So all of that is key to underwriting. So right now, we still are underwriting a lot of risk into the homes. But we are seeing, as Mike said, we are seeing a lot more stability in some of these markets, all with the big question mark of what interest rates are gonna do, because there's still affordability in all markets. But in general, we're seeing more consistency in those markets and all that. But it starts and stops with underwriting and the risk that we build in, and we definitely are seeing strong performance of the homes that we're underwriting now under these new conditions. Great, and then that's great. And a follow up on some of the B2B services is you kind of offer repair type services.

Speaker 2: Does that potentially leave you spread too thin as you want to ramp back into high buying, particularly as you kind of right-sized the cost structure? How should we think about that and its impact on the overall high buying business as things stabilize? Thank you. Yeah, great. Over the last six years we have built a really strong machine to do transaction volume and that's from renovation. That's from customer experience. That's from a call center, really across the board. And so as we outsource and do business to business with other companies, we're built to do that. A lot of variable costs, just like opening a market ourselves, we can grow into that volume as well. So the machine that we've built here is ready and able to do that. And our performance, especially on the renovation side speaks for itself. Like we mentioned, we did over 10,000 renovations last year just for OperaPad. So a lot of that we have built internally with the great teams that we have there.

Speaker 3: Thank you, Mr. Jones. The next question is from the line of Ryan Tomasello with Stifle. Please proceed. Hi, everyone. Thanks for taking the questions. I just wanted to touch on the expense piece first. Using these headcount reductions you called out, if you feel like the current expense structure of the company is properly aligned with this go-forward business model that incorporates asset-light fee streams and presumably a lower volume pace at least over the near term.

Speaker 2: And Mike, it would be helpful if you could talk about where run rate OPEX is here heading into next quarter, however you prefer to define it. Yeah, Ryan, we have unfortunately gone through a couple, two or three reductions in force over the past few months, really getting to the point where we do feel like we've right-sized the business for where we're at and where we're going over the next few quarters here. Even with the addition of some of the asset light components of the business, I think we're appropriately structured now from a head count, both on the front end and the back office as well. So I think we've landed in a good place there. In terms of run rate going forward on the OPEX, so much of it is going to be really as a percent of revenue based on where the top line goes.

Speaker 2: And again, I think we're going to see definitely the impact of slower buying and the ramping up of the other businesses in the first part of the year. So I'm hesitant to give you kind of a number here but in terms of the annualized savings of the headcount reductions, we mentioned that it's about $40 million of annual impact. We did the last component of that in February so you can't exactly straight line that but benefiting certainly Q2, Q3, Q4 at the clip of $10 million a quarter I think is reasonable to assume. Got it. Thanks for that. And then similarly on the capital position, congrats on getting the raise done in February . Since it sounds like the cash offer product will continue to be a core piece of the platform, if you can just talk about your comfort level with the current capital position if you feel like the $90 million raise puts you on a good footing to scale the business from here. Yeah, you know, right with the steps we've taken in the business.

Speaker 3: Hey, good afternoon. Thank you for the question. First, I just wanted to ask about the cohort of homes that were acquired after August that you said have produced returns as expected. I was just wondering if you might be able to give us a little bit more detail there, whether that's measured by contribution profit per home or adjusted gross margin percentage. Then similarly, what are the biggest changes in purchase strategy today relative to…

Speaker 2: prior to September . I know you talked about California, so any incremental detail around geographies or changing on the writing process would be helpful. Thank you. Michael, I'll start with your first question. Generally, when we're looking at kind of normalized profitability levels, we've always spoken to the unit economics in terms of contribution margin after interest. Our range has always been a range of 3 to 6 percent there. And so that's generally where we see things. And of course, as we're coming back online and moving into a more stabilized period, you'll see a start at the bottom of that range. And then hopefully continue to be able to maintain within that. But that's so far what we're seeing.

Speaker 3: And then as far as the assumptions in underwriting, again, as you know, we're right now, you know, I'll just give you a couple examples. Outline areas have been, you know, affected more than most, you know, most areas. So the outline areas were being cautious next to new home builders. But as you're underwriting, just like you do it to an accelerating market, to a decelerating market, you can underwrite those risks in there as well. You know, there still is a supply issue of homes. Affordability is still there, but there's still supply issues of homes. And so we're definitely focused more on the median home price, allowing some more time to sell that home once we acquire that home. And then building in other assumptions, like for closing cost contributions for when we go to sell the home to help the buyer on that end. That's something that, you know, when the market's on the uptick, you don't have to underwrite in, but we're underwriting that in there as well. And so, you know, there's a lot of different levers that we pull there to really de-risk. And a lot of it is just really the buy boxes. The median home price, the more affordable the home, the more people that can afford it. And so as we're really, you know, hyper-focused on that, you know, that second and third tier home, you know, the seven to $900,000 home right now that, that, that, that, that, that

Speaker 3: We're not as focused on that inventory right now just because of the affordability. The other thing that I'll just try and highlight one other point on that is that what we're seeing when we talk about work consistency in the market, if you remember the last time we talked, they said there's so much equity that homeowners have in their home, the price reductions they were doing were very inconsistent. They were inconsistent with what we've seen before because there was so much equity homeowners had. Well, those, you know, I think I also said those can't last forever from massive price reductions. And so we're seeing more consistent there and as people are reducing prices or as we look at inventory, we're not seeing the mass price reductions we were seeing early on last year as people are trying to free up their liquidity. Excellent. Thanks for the thoughts, Brian . I'd like to appreciate it. Thanks. Thank you, Mr. Eand. The next question is from the line of Jay McCannless with Wedbush. Please proceed. Hey, good afternoon. I wanted to ask first about the disclosure. I think it was February 1st, 8K, but the B class shares would be converted to A class shares after the upcoming shareholder meeting. Did you talk about that disclosure as well as the timing and some of the reasons behind it? Yeah, you know, as we mature as a company. What I have learned over the last several months of being public is.

Speaker 2: of what we're buying, making sure it's around there. But, so that's how we're looking at it. And then I guess the other question I had, just this mid 300s ASP, is that sort of a reasonable number to assume that the buy box is gonna fall in as the year progresses?

Speaker 2: Yeah, Jay, I think that's probably a pretty good place to be that. And what we're seeing now is a little bit underneath that. But I think as you see the market continue to normalize a little bit as we go month by month here, you'll see more activity around there. So I think by and large, that's a decent place to be. More of our activity more recently has been a little bit below that, but it's the right zip code. Okay. Thanks. Two more questions.

Speaker 2: Yeah, Jay, I think that's probably a pretty good place to be that. And what we're seeing now is a little bit underneath that. But I think as you see the market continue to normalize a little bit as we go month by month here, you'll see more activity around there. So I think by and large, that's a decent place to be. More of our activity more recently has been a little bit below that, but it's the right zip code. Okay, thanks. Any more questions? Thank you. Thank you, Mr. McCandless.

Speaker 3: The next question is a follow-up question from the line of Ryan Tomasello with Steeple. Please proceed. Yeah thanks for taking the follow-up. Just with respect to the $44 million impairment, just trying to tie that together with your comments about the pre-September homes and the more recent homes that you said are within your target economics. I guess the $44 million I guess must have related to more than just the 225 homes you have left on the books from August given the size and I assume that those 225 homes probably have a caring value sub $100 million. So just any color on what the drivers were of the impairment you took this quarter would be helpful. Yeah Ryan I think we got a couple things you know to sort out there. One is that the 225 is more of a real-time marker so that is the number of homes in the Legacy cohort you know around now in February here that have not been sold or are not under contract. The impairment pertains to everything that we had on the books as of 12-31 so a much larger number there. We had over 1,100 homes in that cohort that were still...

Speaker 3: on the books at your end. So that's the difference there. I think that trues your math up a little bit hopefully. Michael One more I'll sneak in here just with respect to the B2B partnerships. Specifically on the Direct Plus platform, any color you can provide around parameters for scaling that business, how meaningful of an opportunity you think that is, any color around the number of institutional buyers you currently have plugged into that platform, and any plans for scaling that, targeting specific markets sooner that are more prone to scaling that platform. I'm actually really excited about Direct Plus. Just as a reminder, Direct is something we've had since we began is once we put a house under contract, we have a site that investors can go to and they can bid on that home before it hits the market. So that's been Direct. The difference between Direct and now what Direct Plus is, is Direct Plus is giving other investors top of funnel access so they're able to bid on the home at the same time that we can bid on the home. What I really like about that is it's a win-win-win for everybody involved as far as what we want to do is be a solution center to every customer and have an option for them as they exchange their home.

Speaker 3: We are focused a lot on that right now, and we expect some good things to happen there over the next year. Thanks. Appreciate that, Adi Keller. Thanks, Ryan. Thank you, Mr. Tomasello. That concludes the question and answer session. Thank you for your participation. You may now disconnect your line.