Offerpad Solutions Inc. (NYSE:OPAD) Q4 2023 Earnings Call Transcript

Offerpad Solutions Inc. (NYSE:OPAD) Q4 2023 Earnings Call Transcript February 26, 2024

Offerpad Solutions Inc. misses on earnings expectations. Reported EPS is $-0.57 EPS, expectations were $-0.42. OPAD isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. Thank you for attending the Offerpad Fourth Quarter 2023 Earnings Call. My name is Matt, and I’ll be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Taylor Giles with Offerpad. Taylor, please go ahead.

Taylor Giles: Good afternoon, and welcome to Offerpad’s fourth quarter and fiscal 2023 earnings call. I’m joined today by Offerpad’s Chairman and Chief Executive Officer, Brian Bair; and Interim Principal Financial Officer and Senior Vice President of Finance, James Grout. 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 reconciliation of Offerpad non-GAAP measures to the comparable GAAP measures are available in the financial tables of the fourth quarter earnings release on Offerpad’s website. With that, I’ll turn the call over to Brian.

Brian Bair: Thank you, Taylor, and thank you all for joining our fourth quarter 2023 call. The past year represented a pivotal moment for the company in terms of our operational advancement and execution capabilities, despite enduring a volatile and challenging macroeconomic landscape. Even with the market difficulties, we cleared through virtually all of our legacy inventory obtained prior to the market transition by the end of the second quarter last year and have seen meaningful improvements in contribution margin in the second half of the year. Our focus is strong in our commitment to our core vision and strengths, which start with the foundation of our cash offer. Our renovate product line, alongside our ability to involve agents to be part of our solutions, is prospering and our ability to manage our expenses has never been better.

By doubling down on the things we can control, we delivered a solid fourth quarter. Our revenue of $240 million, adjusted EBITDA of negative $7 million as well as our 712 homes sold were all within guidance. So we are back to our desired growth trajectory, 2023 brought its share of wins. We demonstrated a clear path towards sustained profitability, with adjusted EBITDA up over 1,200 basis points year-over-year. We grew our partnership in ecosystem networks, especially within our agent partnership programs greatly expanding our coverage. And we continue to grow our asset-light revenue streams, which accounted for more than 35% of our contribution margin, after interest, in the second half of 2023. I will discuss these accomplishments, then review our three strategic imperatives before transitioning the call to James for an in-depth discussion of the numbers and guidance.

During 2023, we improved adjusted EBITDA in each consecutive quarter, while also delivering revenue growth in the last three quarters of the year. We plan to continue these trends and exit 2024 with sustainable adjusted EBITDA profitability and a direct line of sight to positive free cash flow. To do this, we have better defined the scope and deliverables of roles across Offerpad’s workforce, continue to enhance our tech stack, expand our partnership programs, and we are improving our customer acquisition cost and marketing reach through more efficient spend and partner engagement. For instance, we are focusing activities and capital in markets yielding the highest returns within our buy box, while optimizing our product lines in our other markets.

Offerpad’s mission to take the friction out of real estate has always included serving our customers with buying and selling solutions, and through additional services that include our asset-light revenue streams from listings to Direct Plus to Offerpad-Renovate. Combined, these accounted for 43% of our unit transactions in 2023 versus 24% in 2022. In fact, we grew revenue in our renovation business by nearly 70% and saw a 148% increase in closed renovation projects compared to the previous quarter. All together, these other services delivered an exceptional incremental contribution margin of nearly $5,000 per home sold in 2023, a significant leap from previous years at less than $1,000 per home. Our momentum with our B2B clients continues to grow as they rely on our capacity to efficiently deliver top-notch renovations, thereby enhancing their own profitability and customer satisfaction.

We’re now working with national, regional and local clients across the country, including single-family and multifamily operators. By allowing our renovation clients to plug into our operations, they gain access to Offerpad’s extensive experience, cost savings and commitment to delivering high-quality work. As a case point, one of our larger renovate clients in 2023 came to Offerpad because they were dissatisfied with the quality and turnaround time of their home renovations. We executed a pilot program of 30 homes to show them the quality and value we could help them create. Over 300 homes later, we are their preferred renovation partner. It’s this dedication to quality and efficiency that enabled us to generate over $12 million in renovate revenue during our first year operating in this product line.

Our partner network is a key lever in our growth strategy. It encompasses our homebuilder services, our agent partnership program and our agent referral network. By incentivizing partners to leverage Offerpad for property buying, selling and renovations, we expand our reach and serve customers in markets beyond our direct service area. Since 2019, our agent partnership program has provided an industry-leading referral fee to agents who sell or select our cash offer. With more than 130,000 cash offer requests, the agent partnership program has grown from generating 5% of our overall requests to more than 20% last quarter. This program is tailored to meet consumers at their exact point of need, enabling them to utilize Offerpad in a way that best suits their home-selling situation, while also serving as a valuable resource for real estate agents.

In late January, we announced major enhancements to the program. The Offerpad Pro tier allows agents to continue to request a cash offer on behalf of their clients and, for the first time, have the ability to list an acquired home and ready for resale. Offerpad Max is our top tier, invite-only subscription fee-based program designed for highly motivated agents with significant marketing region influence. Max agents will receive the same benefits as Pro agents with several added advantages. Importantly, they will gain access to highly qualified sellers in defined zones and that they’ll have the potential to list other Offerpad-owned homes in their zones. Initial available subscriptions have sold quicker than anticipated. Meanwhile, we are swiftly expanding our available zones for Offerpad Max with plans to expand to additional markets in the near future.

All of this supports our three strategic imperatives. First and foremost is our mission to take the friction out of real estate, starting with the cash offer. Our second imperative is to continue to make great progress on our asset-light product line, offering end-to-end services that encompass the entire process of selling, buying and homeownership. Offerpad’s third imperative is expanding our partner ecosystem to enhance our reach to meet customers where they are. We are delivering on all three of these imperatives. Reflecting on 2023 and the many challenges and tough decisions we faced, I’m so proud of the Offerpad team, grateful to our customers and partners and optimistic that we are moving toward a return to sustained profitability and growth.

We have a robust strategic roadmap, a solid operational foundation and a huge market opportunity ahead of us. I’ll now turn the call over to James. With as many years in senior finance leadership at Offerpad, he has taken over the reins as Interim Principal Financial Officer seamlessly. Thank you. James?

James Grout: Thank you, Brian. From a financial perspective, our three imperatives are producing the results needed to drive business excellence as we expect to achieve sustainable positive adjusted EBITDA this year. In the fourth quarter, we continued to scale back our cost structure and narrow our operating loss. In 2023, our operating expenses, when excluding property-related selling and holding costs and contribution margin, decreased by $69 million, compared to 2022. Through continued operating leverage, more efficient advertising spending and expanded partnership channels, we plan to capture an additional $30 million in cost efficiencies in 2024. We remain diligent about how we allocate our spend to ensure the entire organization is streamlined, while we strategically invest to capture our share of the market.

We exited the year with a property portfolio in a strong position. We had 940 homes in inventory, of which only 4.4% were owned over 180 days, with nearly half of those under contract to be sold. This is down from 35% at the end of 2022, as we slowed our acquisition pace and focused on risk management of our legacy portfolio. The homes sold in the quarter had an aggregate time to cash, or TTC, of 97 days, in line with our seasonal expectations. Q1 should see a slight growth in TTC before again reducing seasonally in the summer quarters of 2024. We acquired 678 homes, which was partially impacted after the quick rise in mortgage rates to above 8% early in the quarter, ultimately resulting in fewer transactions across the market. With rates decreasing through the end of the quarter, in January, we saw a better than normal historical increase in request volume, up nearly 60% over December.

As a result, acquisition pace has improved to start the year, and we anticipate sequential quarterly growth in the first quarter. To continue to support our cash offer business, we successfully renewed and extended three of our primary credit facilities used to finance our inventory. As part of these renewals, we maintained key terms around advanced rates and funding mechanics, while we adjusted size to align with our expected needs over the coming years. Our lenders remain strong supporters of the business and continue to be great working partners. Although our cash offer continues to be the foundation of our operations and results, I’m excited about the momentum of our asset-light product lines in how they can transform Offerpad over time.

In the second half of 2023, our asset-light product lines accounted for nearly half of our closed transactions, producing 2% of contribution margin. Additionally, the evolution of our agent partnership program opens up several interesting opportunities for us in 2024. By enhancing the Offerpad Pro program to provide even more value to the agent, we anticipate increased agent partnership program-driven request volume. Also, the introduction of the Offerpad Max offering should allow us to better monetize the requests we generate that fall outside of our buy box, further diversifying our revenue. Turning to the numbers. Revenue in the quarter was $240 million, which landed within our guidance range. Our revenue was supported by the sale of 712 homes, also in line with our expectations.

Roughly $10 million of revenue moved from Q4 into Q1 due to the temporary unexpected interruption of one of our title partners at the end of the year. The team did a great job working through the challenge, limiting overall impact to our customers’ timeline. Net loss in the quarter was $15 million, a 23% improvement from Q3 and an 87% improvement year-over-year. We’ve now realized four consecutive quarters of improvement in net income. Fourth quarter adjusted EBITDA improved to negative $7 million, a 47% improvement from Q3 and a 93% or $97 million improvement as compared to Q4 of the prior year. This improvement was significant as we continue to optimize our operating expenses despite a slight decrease in contribution margins in the fourth quarter.

Gross margin for the fourth quarter was 6.9%, compared to 10.2% last quarter and was an improvement from negative 6.6% compared to the fourth quarter of last year. This was in large part driven by pricing decisions made to move homes with velocity as mortgage rates quickly rose from 7% to over 8% early in the fourth quarter. Total operating expenses decreased 36% from $44 million in Q3 to $28 million in Q4, driven by our advertising spend efficiency and cost management activities. Revenue for the full year 2023 was $1.3 billion, supported by the sale of 3,674 homes. Net loss for the full year was $117 million, a 21% improvement from 2022. 2023 adjusted EBITDA was negative $82 million, also reflecting a 21% improvement from last year. Gross margin for the year was 5.3%, up from 4.6% in 2022, we ended the year with $76 million in unrestricted cash, $277 million in inventory and asset-backed debt of $257 million.

Looking forward to the first quarter of 2024, we’re expecting sequential improvements in most major metrics compared to the prior quarter. Sales pace is expected to seasonally improve, producing revenue between $245 million and $285 million, supported by 750 to 850 homes sold. As we invest in growing acquisitions in the first quarter, adjusted EBITDA is expected to be between negative $10 million and negative $2.5 million, up almost 90% year-over-year at the midpoint. Reflecting on 2023, I’m particularly proud of the team’s ability to adapt and manage through a challenging an unpredictable macro environment. This gives me confidence in our ability to execute on our strategic imperatives in 2024, while adapting to the new challenges and opportunities this year may bring.

We’ve made the tough decisions to create a lean organization that’s ready to meet our 2024 objectives on our march to return the company to profitability. With that, I’ll open the call for questions.

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Q&A Session

Operator: [Operator Instructions] First question is from the line of Nick Jones with JMP. Your line is now open.

Nick Jones: Great. Thanks for taking the questions. Two, if I could. First on — how should we think about the path to acquiring 500 homes per month? I think it’s a little lighter than maybe what the target initially was. Is that a goal that’s achievable in 2024? And then a follow-up.

Brian Bair: Yes. Nick, it’s Brian. The — on the 500, that’s obviously the goal we’re looking at. We are very focused on, obviously, the macro world out there and the dynamics of controlling what we can control. And so as we’re watching interest rates and what’s happening out there, we’re focused on buying the type of homes we want in our buy box. And so if the opportunity is there, we’re going to do it. We’re more focused on property performance right now than, I would say, volume of the homes we’re buying. And so that’s our focus.

Nick Jones: Great. And then in the prepared remarks, you talked about $5,000 of incremental contribution margin from kind of other services. How high can that go? Could that — if you think about path to profitability, is that a key driver to getting there? And can you kind of contextualize how much more wood to chop there is in adding more dollars to incremental contribution margin?

Brian Bair: Yes. I’ll jump in and then I’ll have James comment on the breakdown there. But the one thing true to the adversity that we felt in the real estate over the last 1.5 years, overall, I’d tell you, the win that we’ve had is we’ve had a lot of time to focus on these asset-light products. And if you remember, I’ve said I wanted to be a solution center for everyone for a long time. And we are really getting some headway with a lot of this. And what we’ve been really focused on is cutting costs and focus on what we can do really well. And one of those is a lot like specifically on the renovate side, the direct plus side that we’ll talk a little bit more about and then allowing others to plug in to Offerpad some of our services.

And so I think and maybe I’ll say that the sky is the limit of what we can do on the asset-light stuff there. But I think we are just getting started, again, in this environment. As we’ll start buying more homes as the market starts to normalize, you’ll see those light asset lines start to grow even more and more on, I think, across the board, but I’ll let James talk a little bit more about that.

James Grout: Nick. So I think one thing that’s really exciting about what we’re seeing in our other lines of business is they’re growing at the same time that the EXPRESS — the cash offer business is growing. And so $5,000 of incremental contribution margin per home sold for 2023, that was $7,000 per home just in the second half of the year. I think, long term, we still have, overall, our 6% to 9% target for the contribution margin after interest. And ultimately, I think where we can get is our goal is to get to 50% of that being driven by the cash offer business and 50% of that coming from the other lines of businesses overall. So still some more room to chop there. I think we’ve got a lot of good momentum in some of those businesses, especially like a renovate business right now. So we’ll just have a key focus on continuing to diversify that.

Brian Bair: And one thing I’ll add there, just with the Direct Plus business is that the cash offer business, it’s really in — you almost have to segment out into two worlds. It’s — one of them is the cash offer business of the homes that we buy. So the customer gets a cash offer and Offerpad is going to balance sheet that home. And then the other section is the Direct Plus business, which the customer gets a cash offer, they get the Offerpad experience up until closing, Offerpad doesn’t close that home. One of our Direct Plus partners will close that home. And so two significant paths to that. And like I said, I feel we can make it headway in both and as they continue to grow.

Nick Jones: Thanks guys.

Brian Bair: Thanks.

Operator: Thank you for your question. Next question is from the line of Dae Lee with JPMorgan. Your line is now open.

Dae Lee: Great. Thanks for taking my questions too The first one, on your expectations to reach adjusted EBITDA profit for the year. Just to clarify, are you expecting to get adjusted EBITDA for the full year or that was the year adjusted EBITDA profitable and what macro conditions are you assuming for now? And then I have a follow-up.

James Grout: Yes. So right now, our expectations are for the full year to be adjusted EBITDA profitable. Currently, right now, I think, overall, from a macro perspective, I’ll let Brian go in a little bit more about what he’s seeing there, but from a planning standpoint, we’re planning around flat prices, flat transaction costs, flat interest rates. So not really trying to bake in any sort of tailwinds from decreasing rates or anything like that. But overall, kind of expectations throughout the year is following the first quarter a period of investing in inventory growth there, then we should see some sequential increases there and improvements to ultimately produce full year adjusted EBITDA profitability.