Q1 2024 Offerpad Solutions Inc Earnings Call

Participants

Taylor Giles

Brian Bair; Chairman of the Board, Chief Executive Officer; Offerpad Solutions Inc

James Grout; Interim Principal Financial Officer and Senior Vice President of Finance; Offerpad Solutions Inc

Nick Jones; Analyst; Citizens JMP Securities, LLC

Ryan Tomasello; Analyst; Stifel Financial Corp.

Dae Lee; Analyst; JPMorgan

John Colantuoni; Analyst; Jefferies

Presentation

Operator

Good afternoon. Thank you for attending today's Offerpad First Quarter 2024 earnings call. My name is Tammer, and I will be your moderator for today's call. (Operator Instructions) I would now like to pass the conference over to your host, Taylor Giles. You may proceed.

Taylor Giles

Good afternoon, and welcome to Offerpad's First Quarter 2024 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 US Securities and Exchange Commission, except as required by applicable law, Ofer that 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. The reconciliations of offer pads, non-GAAP measures to the comparable GAAP measures are available in the financial tables of the first quarter earnings release on our pads website.
And with that, I'll turn the call over to Brian.

Brian Bair

Thanks, Taylor, and thanks to those who joined the call. The first quarter of 2024 continued the positive trajectory I discussed in our last earnings call. With $285 million in revenue, we met the high end of our revenue guidance reflected a 19% increase versus Q4 of 2023 and marking our third consecutive quarter of top line growth.
We also met the high end of our guidance for home sold coming in at 847, up 19% quarter over quarter. Adjusted EBITDA was also in line with expectations. Importantly, we remain confident in our ability to reach sustainable positive adjusted EBITDA in 2024.
Both gross margin and contribution margins improved in the quarter as our asset-light platform services grew and tied to cash or TTC was in line with expectations. Despite the ongoing macro challenges of affordability and locked in sellers, our focus remains on the factors within our control.
Our team's strong execution is driving the expansion of our platform scalability, encompassing four distinct platform services. As a reminder, those four services include renovate, which allows B2B partners, the opportunity to tap into our renovation technology cost management, logistics and ground game within the offer pad platform.
Similar to renovate Direct Plus enables B2B partners to integrate with our top of funnel strategies, conversion efficiencies and in-house closing teams. This program allows us to help more homeowners and reach more customers while also providing them with the benefit of receiving an optimized offer for their home.
Our agent Partnership Program Services are lifting their referral platform with the goal to discover the best solution for every customer.
And finally, our cash offer standards. The foundation of our services renovate continues to thrive demonstrating strong operating and financial performance. We consistently receive extremely positive feedback from our customers who value our timely, cost-efficient and high-quality renovations.
In quarter one, renovation projects grew 78% year over year and represented 11% of our overall contribution profit after interest. We successfully completed nearly 400 projects, yielding more than $5 million in revenue and setting us on an annual run rate significantly above the $12 million we achieved in 2023.
Alongside the success of renovate, our other asset-light platform services continued to scale. Together three, three services represented 43% of total transactions in the quarter, reshaping our product mix and yielding higher contribution margins.
These services were instrumental in expanding our reach into markets where our cash offer solution is not currently available. We are pleased with the continued growth and great potential of these asset-light businesses in conjunction with the performance we are seeing in our core cash offerings.
In the previous quarter, I emphasized the significance of our partner programs, including homebuilder services, agent referral network and the recently enhanced agent partnership program, or APP. As a reminder, APP offers industry leading referral fees to agents who sellers opt for our cash offer.
This program has been a key contributor to our growth. In quarter one, APP requests represented over 20% of total requests, with acquisitions from those requests rising by 50% quarter over quarter. APP allows customers to use offer pad in the way that works best for them.
Their agents at offer pad. Real estate continues to evolve and change. As we have seen at the recent North settlements. It's very important to note offer Pat's founding vision was to create a one-stop solutions platform that removes the friction out of the real estate transaction and gives consumers what they want certainty and control.
Having a seamless platform where customers trade in their current home and find their next home is exactly why offer pads was founded. We strongly believe that the ability to own the home and the listing will be more valuable than ever.
And this is the core of our business. We anticipate that over the coming months and years, homebuyers become more accustomed to dealing with sellers of listing agents directly and occupied is uniquely positioned for this new environment.
We are pleased with our strong start to the year. Our teams are laser focused on advancing our three strategic imperatives taking the friction out of real estate, growing our asset-light platform services and expanding our partner ecosystems to support more consumers.
We're pacing to achieve positive adjusted EBITDA and remain committed to building long-term shareholder value. I want to thank our world-class offer Pat team members for their hard work and dedication to our mission. We look forward to updating you on the continued progress throughout the year.
I'll now turn the call over to James.

James Grout

Thank you, Brian. First quarter was solidly on plan as we continue to see growth among our various businesses. We also continue to drive improved operating leverage, more efficient ad spend and productivity from our partner channels, all of which are helping us drive down operating expenses.
We're on track to deliver more than $30 million in incremental cost efficiencies in 2024 we highlighted last quarter. This is enabling us to execute towards our goal of positive adjusted EBITDA and ultimately, free cash flow.
We exited Q1 with our portfolio in a healthy position. We had 900 homes in inventory, of which only 8.5% were owned over 180 days, with roughly half of those under contract to be sold. This is a normal seasonal increase from the end of the year and a significant improvement from the prior year at 32.3%.
Homes sold in the quarter had an aggregate TTC. of 113 days, up quarter over quarter and in line with our seasonal expectations. We expect TTC. to seasonally come down in the second quarter. As we mentioned last quarter, after the slowdown in the market at the end of the year, we saw improved request volume and acquisition pace to start the year.
We acquired 806 homes in the quarter, up 19% compared to Q4 and 121% year over year. With the recent rise in mortgage rates, we will continue to maintain a more conservative approach to acquisitions and thus expect acquisitions to be flat to slightly up compared to Q1.
As Brian said, our cash offer is the foundation of our business and our asset-light services continue to show strong momentum, diversifying our revenue through these additional services will continue to be a priority in the first quarter.
They provided roughly a third of contribution margin after interest, and we expect this momentum to continue. It's still early in our rollout of APPMAX., but we feel confident about our strategic approach to working with partner agents to monetize our out of box leads.
We're particularly pleased with the progress of renovate, which is becoming a more strategic offering, allowing us to expand into additional markets in any way.
In the quarter, we began working on renovate projects for existing clients in Minneapolis and Oklahoma City. This introduces an efficient way for us to enter a market and begin building a local presence with our upfront capital investment.
In the first quarter, revenue was $285 million at the top end of our guidance range and up 19% quarter over quarter. We sold 847 homes also at the top end of our guidance and up 19% quarter over quarter. Net loss was $17.5 million, a 13% decrease from Q4 and a 71% or $42 million improvement year over year.
Fourth quarter adjusted EBITDA was negative $7.1 million, coming in flat as expected quarter over quarter. This represents an 84% or $38 million improvement year over year. Gross margin for the first quarter was 7.9%, a 100 basis point improvement from 6.9% last quarter and up significantly from 1.2% in the first quarter of last year.
Gross profit was $23 million, an improvement of more than 200% year over year, largely driven by expanding contribution margin in our cash offer business and the strength of our asset-light services at more than 40% of total transactions.
Operating expenses when excluding property related selling and holding costs and contribution margin were up $27.8 million in Q1, up from the prior quarter, where a one-time $7 million credit positively impacted OpEx. That's down 26% year over year, driven by our advertising spend, efficiencies and cost management activities.
We ended the first quarter was $69 million in unrestricted cash, $266 million in inventory and $255 million of SPV level asset backed debt and zero parent-level debt. As a reminder, in Q4, we extended three of our primary credit facilities used to finance our inventory and maintain key terms around advance rates and funding mechanics, while adjusting size to align with our expected needs in the coming years.
Looking forward to the second quarter, we're again expecting sequential improvement and profitability. Sales pace is expected to follow the previous quarter's acquisitions producing revenue between $250 million to $300 million, supported by 750 to 875 homes sold. With our focus on operating leverage and expanded contribution margins, we're expecting approximately breakeven adjusted EBITDA.
Looking at the balance of the year, we're pleased to be closing in on sustainable positive adjusted EBITDA as we continue to strategically invest and grow our asset-light services.
With that, I'll open the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Nick Jones, JMP Securities.

Nick Jones

Renovate piece, I think the contribution private branches, it's like kind of low 20% range. Can you remind us how high can that contribution probably going to go over time? And I guess given the low kind of supply and transaction volume, is there an opportunity to maybe invest and some advertising and accelerate growth there, given people maybe they're often renovated as opposed to move.

James Grout

And Nick, and we missed the very first part of your question, but I think it was around renovate contribution margins and where that can go up. Maybe, Brian, you take that advertising parts to begin and then I'll hop in on that yet.

Brian Bair

Right now, we've been focused on the growth of the RB. two B. line, a lot of the vacant homes. And we've been focused on that. We will eventually evolved into the B2C side, which because you hit it perfectly, Nick, there's and there's a very big opportunity of homeowners that are trapped in within our stores, their equity right now or mortgage rates, and that will be interested in staying in their homes much longer. And so that's definitely something that we are we are exploring and what you'll continue to hear more about.

James Grout

And then Nick, on the in terms of contribution margin, you're right, the renovated business, it's performing kind of roughly in that 20% range overall. And I think the thing it's been fairly consistent kind of quarter by quarter since we've turned that on.
I think the thing that will allow us to expand that over time is as we start getting into a little bit more customizable type work as right now, we're working primarily with institutions that are in doing work at scale on if we start to get into a little bit more customized work, maybe potentially get into working more directly with consumers on renovate.
That's where you could start seeing that expand and it could be pretty material what that could expand to. But right now, just in terms of efficiency from the platform that we've got and utilizing our teams in an effective way, we'll be focusing on that more institutional level. So the contribution margin should stay pretty flat for them overall from a margin perspective.

Nick Jones

Got it. Helpful. And then it is on you kind of focus on getting to kind of sustainable EBITDA profitability of kind of philosophically how are you balancing investing in growth, which I think there's an increasing eye on what we can, what can we see acquisitions and home sales start to increase more meaningfully versus kind of making sure you can be profitable at current volumes.
I guess how are you thinking about the current cost base of a fridge higher longer? Is there more wood to chop in terms of cost cutting or is the business in good shape to kind of navigate, I guess, forward increasingly having line of sight to lower rates? And I guess ostensibly higher volumes?

Brian Bair

Yes, we've made a lot of progress on navigating just this entire environment over the last year and a half. I really like where we are right now and positioned especially with some of the other asset-light product lines that we talked about.
As we as we look at the is our cash offer business, we're still being very cautious there as far as the as far as turning that on and for extensive growth, again, we're focused right now on the performance of each home that we buy from is, as you know, the sensitivity to affordability is very, very high right now.
So we have started to expand our buy box that's buying up funnel a little bit more of the loans from [$200] to [$400] to buy more of that to the [$600] price point. So we'll start seeing that, but we're definitely being down.
I'd be more cautious with the cash offer product right now and making sure that I don't think it's the time to really start jumping in 100% yet on that, but where we're buying decent volume there. And then in turn focused on our other products as well.

James Grout

And then, Nick, on the cost side of the equation, I think there's kind of two components to that on the first one being our request channel mix and our advertising spend efficiencies. And the second one being more on the traditional OpEx sense.
And on the former there on advertising, we've done a lot of work over the past years to really dial things in their content for this new norm of what this market looks like and rather than kind of trying to find a homeowner, right when they're at the point of trying to sell. But that's where we've been leveraging ramping up their partnership networks and things like that.
On your overall, we've actually driven our cash down year over year in the in the first quarter by over 50%. So we're pretty pleased with the work that we've done there. We feel like we're actually in a pretty good spot in terms of the efficient frontier on our on our cost per lead curve.
And so if we find good opportunities to invest from a marketing standpoint, I think there's the efficiency there from that standpoint, um, and then on the more traditional OpEx side, we've done a lot of work, as you know, over the past couple of years here to sort of optimize what our structure looks like and do we have make sure we have the right people that are the most effective in the right areas.
And I feel like we've done the we made the tough decisions there and we've moved the folks around to the right areas that we feel pretty good about the setup and the structure that we have right now right now, it's all about just optimizing that operating leverage there in increasing volume and where we are.
And I think a good example is the expansion of our renovate business really allowed us to figure out a new way to utilize those renovation teams over time. Right.
And so just being making sure we remain with efficient and I get every dollar we every ROI out of every dollar spending right now.

Nick Jones

Right. Really helpful. Thanks, Brian. Thanks James.

Operator

Ryan Tomasello, Stifel.

Ryan Tomasello

Hi, everyone. Thanks for taking the questions. And just following up on the contribution from the non-cash offer products, I think in the prepared remarks, you mentioned those services represented around a third of contribution margins in the quarter.
How should we expect that mix to evolve over the course of the year? Can you say what you're assuming in the 2Q guide from a mix perspective on the cash offer versus the non-cash offer products?

James Grout

Yes, Ryan, I think the right now overseeing the overall mix that we've got on in terms of the cash offer piece versus the cash offer is probably fairly consistent with what it was, what we should expect. The remaining is that for the remainder of the year here, I think with maybe some potential upside on that renovate business as some of the areas of momentum that we're seeing there.
And I think one thing, though is as we look at the actual contribution margin dollars that are falling to the bottom line. We guided to improving on the bottom line adjusted EBITDA here in Q2. So that's going to see some expansion overall in the cash offer margin side there as well.
So I think that will be when you look at it purely as a percentage overall, it might fluctuate quarter to quarter here just as the cash offer business has some variability in it. But overall, the mix, I think from a volume perspective is pretty well set right now.

Ryan Tomasello

Okay. That's helpful. And then just to clarify another comment you made in the prepared remarks, I believe you mentioned a $7 million one-time credit that benefit the OpEx line and forgive me if I heard that wrong, but any more color on what exactly that was.
And if that was included in the initial guide you gave heading into the quarter on an if what EBITDA would have been excluding that, I assume we would just back out $7 million credit, which would imply an EBITDA loss of closer to $14 million. But let me know if I'm thinking about that wrong.

James Grout

Yes. So just to clarify, that was in Q4 of '23 and really that's just onetime compensation related adjust for in the quarter. So the OpEx run rate that you're seeing more so in Q1 is more reflective, I'll go forward.

Ryan Tomasello

Okay. My mistake, I just heard that logs from and then just a last one. I'll just squeeze in here. Just in terms of the balance sheet, can you just discuss your comfort overall with the current liquidity and capital position in terms of being able to self-fund the growth plans for the business over the intermediate term?
I know you've talked about having rightsized the OpEx base and put in right plans to be able to do that in terms of self-funding operations, but any update there on that front would be helpful.

James Grout

Yes. I mean, overall, we feel pretty good about the balance sheet, right? And we've been obviously actively working towards making sure we manage around our own what we have and ending the quarter with $69 million of cash and you add interest and liquidity from the community and the equity from homes on the balance sheet that takes it up closer to $90 million.
But our portfolio, we purchased homes at a discount and we have a service fee that we're capturing there. So when you actually combined kind of our anticipated equity out of the homes that we have in the portfolio as well, it's well over $100 million of, call it total liquidity.
And I think the main thing is the overall from a forecast perspective around an environment of rates are higher for higher for longer, no necessarily tailwinds. We're going to get from rate cuts or from an increase in transactions or anything like that. So we're being very prudent around making sure that we're managing with within our capabilities here.

Ryan Tomasello

Great. Thanks for the color.

Operator

Dae Lee, JPMorgan.

Dae Lee

Great. Thanks for taking the questions. I have two. So the first one on your 2Q revenue outlook at the mid-point, both for kind of normal seasonality a little bit. I think you talked about rates being a driver known, but can you just double-click on that a little bit of help explain what scenarios there contemplated at each end and how we can get to approximately breakeven EBITDA in a wide range of revenue outcomes, my follow-up.

James Grout

Yes. So I think from a revenue standpoint, we were still down in revenue. Revenue is obviously still very much influenced by the cash offer side of the business. But as we've been growing these other services, those were not unexpected as much there. And so from a profitability standpoint, despite the 125 homes on range that we've provided.
It's not a ton of variability from an adjusted EBITDA perspective, thus our guidance of approximately breakeven. And I think the main thing is we saw mortgage rates rise here at the end of Q1 in the first part of Q2 and overall pace in the market.
And I think the main thing is with this transition here in the kind of the new norm of the market, expecting homes to move quickly isn't necessarily on your size or your expectations and that isn't a bad thing that just means that as we're underwriting or underwriting expecting longer TTC.s for the homes overall come in and if they don't get an offer in the first week and it's not a big deal.
Eventually these homes will sell and they are performing against your expectations, but that just puts a little bit more variability in that the overall quarter revenue metric for us.

Dae Lee

But I know as a follow-up on the NSR settlement, I know it's still kind of early, but just curious if you're seeing any changes to behaviors or sellers buyers or median partners that you interact with in the following?

Brian Bair

Hey Dae. Its Brian. It's very early. Still. There's some things that need to be sorted out there. But nothing to note there is we're obviously watching that closely. And as I mentioned in the prepared remarks, we think there's an opportunity and for offer pad through some of our instant access channels and some of the other things that we allow buyers to access our homes instantly.
And that's why I think the world of real estate is definitely changing. And that's something that we've been we've been focused on and talking about for a long time, but nothing from buyers or sellers yet.

Dae Lee

I understand. Thank you.

Operator

John Colantuoni, Jefferies.

John Colantuoni

Great. Thanks for taking my questions on. It's been a little over a year since you paused market expansion. Can you talk about the KPIs or measurement criteria that you're using to determine when it's the right time to start expanding into new markets and whether you'd characterize the timeframe for that as a near term or something that is a few years away.
And turning to the platform services talk about there are capabilities and investments that you need to make in order to sort of unlock growth or start to scale those services in a more meaningful way over time?

James Grout

Yes. Thanks, John. Its James, I'll take the market, pass it over to Brian there from a market expansion perspective. I think the main thing is that as we're expanding these other services, we're looking at kind of overall market penetration in our existing markets and kind of prior to the market transition, we had say market share anywhere between 1% and 4% in any given market, just depending on the current status of that market, the tenure and whatnot.
Overall today, across all of our markets, we're probably closer to about 50 bps of market share from. And so when we look at the opportunity to expand into new markets, mainly from a cash offer perspective. There's still a lot of wood to chop from our belief that we can go and grow and capture in our existing markets. And so right now we're focused on maximizing the utility out of our existing teams and tools, and that's really where the focuses as we're building things out.
But I will add, as we've mentioned in the prepared remarks. And as these new services are expanding and they're starting to catch, but we are getting the ability to expand into new markets in a new way. And so it might mean that we're offering part some of our services, but not all of our services in every market, and that's the case with renovate this past quarter, we started doing projects in Minneapolis in Oklahoma City and are currently advertising there.
We're not driving request volume and planning to purchase homes there in the near future. And but it is a nice efficient way for us to continue to utilize those teams in a very efficient manner and drive bottom line accretion overall. And so I think you'll start to see that overall market expansion strategy kind of evolved for us over the next several quarters.

Brian Bair

Yes. And as far as the platform services, as we've been mentioning, we've spent a lot of time there over the last year and a half. And as we as we've seen the cash offer business slow, we've been focused even more on developing the right products for really hyper growth with lot of either with renovate, like certainly been extremely happy.
What we've seen the renovated just a year as transaction volumes picked up, you're going to see more and more volume coming from that end in a clinical, describe the sky's the limit there. We've we're in the process of developing what we call rental cap and internally, which is a which is a really awesome technology to help with our efficiency and our speed even get better as every day matters.
And on the renovate side, on the Direct Plus side, as we look at more and more partner investors coming to our platform to offer on homes at the same time that we do and close on those homes. So we don't balance sheet, those homes that opportunity as we see the SFR scale up to fix and flip to other investors that want to buy a certain type of home.
Obviously, our path there is what we want to focus on conversion there. So we can get the customer, the most money for the home and whatever the customers wanted to accomplish their direct plus you'll see that as trends transaction volume starts to pick up and really just the world starts to normalize there a little bit.
And as is the one thing that I want to make sure that we get across though acquiring more homes through our cash offer business, we can turn on that machine from what we're seeing from the request world and the activity we're seeing even the sellers right now, it's us that are choosing not to turn on that machine right now is we're being cautious on what we're buying and what we're going to own with the variability that we're seeing in the mortgage markets.
But and if you're going to judge what's my lease concern over the next little bit, it's buying enough and ramping up our cash offer business. Again, I feel like that is something that we've from brand awareness and where people are coming first that that that business will ramp up as we feel more comfortable at the market where it's at.
And in the meantime, getting these other asset-light services come along with clinical plug into the machine that we've built and other others or other companies can plug into that, that that's going to be an awesome opportunity as we continue to grow, though.
So and we've made a lot of progress over the last year and that I'm really excited about what we built there.

John Colantuoni

Thanks so much.

Operator

Thank you. Question and answer session has concluded. This concludes our prepared First Quarter 2024 earnings call and thank you for your participation. You may now disconnect your lines.