Offerpad Solutions Inc. (NYSE:OPAD) Q2 2023 Earnings Call Transcript

Offerpad Solutions Inc. (NYSE:OPAD) Q2 2023 Earnings Call Transcript August 2, 2023

Offerpad Solutions Inc. misses on earnings expectations. Reported EPS is $0.6 EPS, expectations were $1.36.

Operator: Good afternoon. Thank you for attending the Offerpad Second Quarter 2023 Earnings Call. My name is Bethany, and I’ll be the moderator for today’s call. [Operator Instructions]. I’ll now turn the call over to Stefanie Layton, Senior Vice President of Investor Relations and ESG at Offerpad. Stefanie?

Stefanie Layton : Thank you, and good afternoon, everyone. Welcome to Offerpad Solutions Second Quarter 2023 Earnings Call. Our Chairman and Chief Executive Officer, Brian Bair; Chief Financial Officer, Jawad Ahsan; and Senior Vice President, Finance, James Grout, are here with me today. During the call today, management will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain, and events could differ significantly from management’s expectations. Please refer to the risks, uncertainties and other factors relating to the company’s business described in our filings with the U.S. Securities and Exchange Commission. Except as 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 reconciliations of Offerpad non-GAAP measures to the comparable GAAP measures are available in the financial tables of the second quarter earnings release on Offerpad’s website. I’ll now turn the call over to Brian.

Brian Bair : Thanks, Stefanie. Hey, everyone, I appreciate you joining us. Today, I’ll cover Q2 highlights, market trends and operational updates. Before we dig in, I would like to introduce Jawad Ahsan, our new Chief Financial Officer. Jawad is a highly regarded CFO with extensive experience in an accomplished career. He previously served as CFO at Axon and spent 13 years in various roles at GE, including serving as CFO for their health record and enterprise software businesses. I believe his strength and expertise will add significant value to Offerpad by helping drive profitable growth and improving our operational excellence. We are excited to have Jawad as part of our senior leadership team. Turning to our second quarter results.

We beat our financial expectations across the board. Our homes sold revenue and adjusted EBITDA all exceeded the top end of our second quarter guidance ranges. This outperformance reflects the improvements we have made to our business processes and our elevated focus on profitability. Other highlights for the quarter include reporting our highest gross margin since quarter 3 2021 at 9.7%, achieving 9.5% contribution margin after interest per home sold on homes acquired after September 1, 2022, which is above our target range of 3% to 6% and surpassing 31,000 lifetime renovations. We emphasized last quarter that our plan to produce positive adjusted EBITDA by year-end is not dependent on market acceleration. We were prepared to perform through a period of depressed residential transaction volume, and that is exactly what we did in the second quarter.

We remain confident in our ability to execute our 2023 plan. As we move into the second half of the year, the economy and housing market continue to show resilience. Despite mortgage rates reaching 7%, low supply continues to support stabilizing resale prices as buyers outnumber sellers in many markets. However, the elevated mortgage rates are also contributing to the lower transaction volume and adding to the affordability challenge for many potential homeowners. Our forecasted 2023 acquisition volume reflects our expectation that current market conditions will continue throughout the remainder of the year. Given our acquisition volume increased by 131% from quarter 1 to quarter 2, we have demonstrated our ability to increase our pace in this present environment.

On the operations side, our renovation service is more important than ever. The average age of homes in our markets is over 30 years old. This plays to our strength of buying a home and adding value. Our ability to renovate is a key differentiator and competitive advantage. Our culture of continuous improvement has been a key driver supporting our ability to meet our goals this year. As an example, we recently made tech advances with our customer-facing app and enhancements in our ability to leverage forward-looking data in underwriting homes. Our commitment to providing a seamless real estate transaction experience for our customers is evident in the significant enhancements made to our mobile and online applications. We’ve incorporated upgraded features that deliver meaningful and relevant information to sellers, granting them full visibility from request to closing.

New features will include video tutorials, seller push notifications, the ability to upload and sign documents and direct messaging with the seller’s dedicated Offerpad team members, further providing transparency and control for our customers. Additionally, we expect these changes can help boost overall efficiency and reduce costs for Offerpad. We’ve also integrated new tools to incorporate forward-looking data to better predict market trends. The goal is to use this data to make more competitive offers on desirable properties and increase our acquisition volume. At the same time, we can reduce risk exposure by not pursuing homes that are likely to be low-performing properties. Upgrading our data-driven systems facilitates intelligent growth, but our experienced local real estate professionals remain critical to our success.

We believe combining human and artificial intelligence is key to making the best decisions possible. While on the note of technology, I’m very excited about the tremendous potential to harness the power of artificial intelligence. Since the beginning, machine learning has added valuable insights, helping us become smarter with every home we buy. And now with the rapid advancements of AI, like NLP and computer vision, the possibilities are endless. From the way we find and communicate with likely customers, underwrite and price a home and sell our homes, there are amazing possibilities with AI. I’m enthusiastic about the potential for thoughtfully incorporating AI across our company’s operations. With the right strategic integration, we can unlock incredible innovations that propel us forward.

Coming back to the operational front, I want to provide an exciting update on our FLEX Sell program. As a reminder, the program gives customers even more flexibility. They can accept our instant cash offer or test the open market with an offer pet agent while retaining the cash offer as a backup. Given the major shift in market conditions last year, we paused FLEX Sell. However, I’m thrilled to announce we plan to relaunch this program in all Offerpad markets in quarter 3. From the very beginning, our vision has evolved around being a comprehensive real estate solutions center for everyone. In addition to serving the needs of home buyers and sellers, our reach extends to business-to-business partners and real estate agents across the nation.

Our Direct Plus program that connects investors with sellers continues to build as we onboard new investor partners. Our renovation team continues to expand its impact by renovating non-Offerpad single and multifamily homes. To further pursue our real estate solution center goals, we are committing even more resources to strengthen and expand our homebuilder alliance and agent partnership programs. With around 100 homebuilder brands, our homebuilder program provides customers with a cash offer on their current home and the flexibility to select a closing date. Homebuilders benefit as Offerpad removes the contingency hurdle with the current home. Additionally, our agent partnership program has proven to be a desirable offering, generating over 130,000 agent initiated offer requests.

This valuable lead generation channel for Offerpad is also a simple solution for home sellers while their agent receives a referral fee upon a successful close, a win for all. In conclusion, the achievement of surpassing our second quarter goals instill even greater confidence in the success of our 2023 strategy. Simply put, our product offerings are strong, led by our cash offer. More and more customers start their real estate journey with us first and have consistently raised us over 90% in customer satisfaction. With proven ability to scale even in a challenging macro environment and a commitment to continuous improvement, we are well prepared to seize the opportunity once again. As we evolve our processes and products, they become even more efficient and add increased value to our customers.

We set out to change the way real estate transacts forever, and that’s exactly what we are doing. I’ll now turn the call over to Jawad.

Jawad Ahsan : Thanks, Brian. I’m very excited to be at Offerpad and work with this incredibly talented group of individuals. I’d also like to acknowledge Mike for helping make my transition a smooth one and for building a world-class finance team. I’m also excited to share our strong financial results this quarter. Our expectation that momentum will accelerate throughout 2023 is reflected in our top and bottom-line results. There are 3 things in particular that I wanted to highlight. First, the key leading indicators of our business model are trending in the right direction. Second, we’ve made substantial progress towards reaching profitability. And third, our balance sheet continues to strengthen. I’d like to start by highlighting the positive trends in our key leading indicators.

We’ve reduced our inventory of homes aged greater than 180 days down to less than 2%, well below our previously stated target of 10%. Our acquisition of Homes grew month-over-month in the quarter. Time to cash or our holding period reflected a 47-day sequential improvement at 138 days in Q2 compared to 185 days in Q1. In fact, for the month of June, time to cash was 94 days, solidly below our 100-day target. We expect holding times to continue to trend down this year and will likely remain below our 100-day average target in Q3, which lowers our holding costs and reduces our exposure to market volatility. And finally, we’re seeing a marked improvement in the contribution margin for the cohort of homes acquired on or after September of 2022 as opposed to those acquired prior to this time frame.

In the second quarter, we saw contribution margins of 9.5% or $31,000 per home for homes acquired after September of 2022. This is an important measure of our unit economics and speaks to the strengthening performance of homes in our inventory. Moving to the P&L. We generated $230 million of revenue, exceeding the top end of our guidance range by 15%. Our revenue was driven by the sale of 650 homes, which also exceeded the top end of our guidance range at an average selling price of $348,000. The lower average selling price in the second quarter is the result of our intentional focus on acquiring homes near the median in each market. This is where we see the strongest demand at highest transaction volume. The $22.3 million net loss in the second quarter reflects a 62% improvement over Q1, and our adjusted EBITDA for the quarter improved to negative $17.3 million compared to negative $44.8 million in the first quarter.

This reflects a 61% increase in adjusted EBITDA quarter-over-quarter. The sequential quarterly improvement in adjusted EBITDA was driven by significant increases in gross profit and disciplined cost reductions. Gross profit increased over 200%, primarily due to improved margins on more recently acquired homes and a lower number of legacy cohort sales. Our 9.7% gross margin reflects both a quarter-over-quarter and year-over-year improvement from the 1.2% gross margin in Q1 2023 and the 8.6% gross margin in Q2 last year. This is consistent with our expectation that gross margins and contribution margins would trend upward this year as the last of our inventory acquired prior to September 1, 2022, is sold and the positive performance of inventory acquired in recent periods is recognized.

On the cost side, total operating expenses decreased 25% from $59 million in Q1 to $44 million in Q2 due to previously announced headcount reductions and other general cost reduction measures. Year-over-year, operating costs have decreased 48%. This is the fifth consecutive quarter of operating expense reductions, demonstrating our rigorous commitment to disciplined cost management. At our current level, we are well positioned to realize improving margins in the second half of the year. From a balance sheet perspective, our unrestricted cash balance increased to $115 million at the end of Q2, up from $108 million at the end of Q1. Inventory increased to $211 million from $173 million in the first quarter. This reflects an increase from 557 homes in inventory at the end of Q1 to 747 homes in inventory at the end of Q2.

This increase in inventory was driven by the 840 homes we acquired in the second quarter, which exceeded our expectations and was more than double the 364 homes we acquired in the first quarter. Our inventory build, coupled with the aforementioned reduction in inventory aged over 180 days to less than 2%, highlights the quality of our current inventory. Our June 30 debt balance was $191 million. During the second quarter, we successfully extended the maturity date for our largest credit facility to June 2025, while maintaining our favorable terms and conditions, including interest rate spread and advance rates. We continue to have a blue-chip roster of lending partners that provide a strong foundation to our debt capital structure. Looking forward to the second half of the year, we expect Q3 to reflect the second quarter-over-quarter improvement in time to cash as well as increases in acquisitions, inventory and contribution margin after interest.

We also expect Q3 to continue the trend of sequential improvement for gross margin, net loss and adjusted EBITDA that began in Q1. Specifically, in the third quarter of 2023, we expect to sell between 600 and 700 homes, generating revenue of between $200 million and $240 million. We also expect adjusted EBITDA to be between negative $17 million and negative $9 million, which represents another significant sequential improvement, bringing us closer to meeting our expectation of achieving positive adjusted EBITDA in the fourth quarter of this year. Our results in the first half of this year are a reflection of this team’s rigorous commitment to adapting to changing market and economic conditions. Our revenue streams will continue to diversify beyond our cash offering, and we are excited to share more updates on these areas in the coming months.

Our business has never been more resilient than it is today and has never been better positioned to capitalize on the tremendous opportunity in front of us. I joined Offerpad to help this team forever change the way real estate transacts, making it more efficient and driving more value. Given the volatility, uncertainty and ambiguity facing home sellers and buyers today, there has perhaps never been a more pressing time for our mission. We were built for this moment, and we can’t wait to continue sharing our progress with you. And with that, I’ll turn the call over to the operator to begin the question-and-answer session.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Dae Lee with JP Morgan.

Dae Lee : Great. I have 2. So first, you talked about home acquisition fees for month-over-month. I was curious, revised that today from a home acquisition per month perspective. And is 500 per month, 500 a year still the right number to think about? And secondarily, on your unit economics and margins, I understand that it should improve from 2Q due to next year. But when you compare the contribution margin and gross margins relative to home after September of last year, we expect those margins to step up or stay stable or should it come up as you accelerate your home acquisition fees?

James Grout: Thanks, Dave. This is James. On your first question around our acquisition pace overall. So kind of like what Brian mentioned, we have been seeing improvement month over month. That overall target of 500 per home — or excuse me, 500 per month, one thing that’s important to keep in mind there is as we’re on our path here to profitability, acquisition volume is only one of the levers that’s out there, right? So the returns on those homes, also our cost-saving efforts and the mix shift with those other product lines is important. We’re continuing to work on that and seeing that improvement month-over-month, but what we’ll always be focused on is maximizing that return versus volume expectation for the business. And to your second question there in terms of that new cohort of performance and how contribution margin and margin should proceed going forward, I think the important thing there is — and when you look at how we’ve been underwriting over the past 3 or so quarters, really the largest spreads that we were underwriting to were that Q4, Q1 time frame.

And then as the conditions have been improving and we’ve been more comfortable in certain markets, we’ve been releasing some of that conservatism there, all while making sure that we’re buying the right homes that are performing. So now that when you look forward into Q3 and Q4, you’ll see less of the drag on gross margin and contribution margin from the legacy stuff, but you will see those returns start to normalize for those cohorts going forward. So we should see those new cohorts start to come down more in line with our expectations for our long-term contribution margin.

Operator: Our next question comes from the line of Nick Jones with JMP Securities.

Nick Jones : Great. The first one, I guess, can you maybe touch on how the kind of an iBuyer solution or Offerpad solution is being received in the marketplace today? Some of the questions we get is around with prices being pretty stable, the market having little supply, how does an iBuyer come in and provide value in this kind of environment. Is there any kind of clarity on like how things have changed over the last, I guess, 12 months and what kind of homeowners and buyer — sellers and buyers and how they’re receiving the iBuying solutions?

Brian Bair: Yes. Nick, it’s Brian. It’s important to note, request volume has been consistent all year. We’re seeing very similar to what we saw in the uptick in the last couple of years. Cash offers, I would say, are more important than ever. A lot of the customers that are coming to us for a cash offer. Number one reason is certainty in control. But also, it allows them because of the limited supply to buy their next home under there without contingencies in their time frame. And so similar to what we saw before when the market low supply, and we saw really increased home price appreciation, now we’re seeing the lack of supply. So if a potential seller finds a home that they want, we’re able to close on their schedule to make sure that they can get that home.