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Operator
Thank you for attending today's OfferPad first quarter 2023 earnings call. My name is Bethany, and I will be the moderator for today's call. 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. I would now like to pass the conference over to our host, Stephanie Layton, Senior Vice President of Investor Relations and ESG at Offerpad. Stephanie?
Stephanie Layton
Thank you and good afternoon, everyone. Welcome to Offerpad Solutions' first quarter 2023 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 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 it's required by applicable law, Overpad 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 table of the first quarter earnings release on OfferPad's website. I'll now turn the call over to Brian.
Brian Baer
Thanks, Stephanie. Hey, everyone. Appreciate you joining us today. I'll cover our priorities, a Q1 summary, market trends, and operational updates. Mike will share our first quarter 2023 financial results and our second quarter outlook. The extraordinary increase in interest rates last year and the resulting impact on home values and sales volume required us to adjust our plans, revise near-term objectives, and execute decisively. In the fourth quarter 2022 and the first quarter 2023, we focused on the following top priorities. First, renovating and selling homes acquired prior to September of last year. As of last week, 99% of those homes have sold or are under contract to sell. This allows us to focus entirely on our go-forward plans. Second, acquire new homes at a cautious pace to test markets and prove our ability to achieve positive returns on new acquisitions in this uncertain market. In fact, we have largely achieved or exceeded our normalized return targets on homes acquired after September 1st, even as many markets have been under stress. Third, reducing costs to adjust to today's market dynamics. Cumulative headcount and other cost reductions are expected to decrease our annual operating costs by $40 million in 2023 compared to last year. Fourth, raising equity capital to strengthen our balance sheet. Now in the second quarter of 2023 and looking forward to the third quarter, we are executing a plan that we expect to produce positive adjusted EBITDA by year end. Importantly, we believe that our ability to execute and achieve profitability is not dependent on home price appreciation. We are prepared to perform through this period of depressed residential resale transaction volumes. There is plenty of upside if this broader market accelerates. However, our plan is not dependent on market acceleration. Our plan targets the following top three priorities. First, optimizing our market footprint with targeted cost reductions while doubling down on higher performing markets. Second, increasing acquisitions to approximately 500 per month with a targeted time from acquisition to close of 100 days or less. Third, leveraging our deep market knowledge and operational capabilities to precisely execute our core cash offer business while also innovating and expanding our fee-based service offerings to increase the number of ways that we can serve customers and partners. We are an agile organization. We know what we need to do, and we remain focused on continuing to execute and innovate with enthusiasm. Turning to our first quarter results, we exceeded our top line goals and met our bottom line expectations. On our fourth quarter call, we anticipated that Q4 2022 would represent the low point of our reported net income, and Q1 would reflect quarter-over-quarter bottom line improvement. In Q1, our adjusted EBITDA loss was half of the prior quarter. Reduced costs and positive margins on the sale of new inventory helped us offset losses associated with the sale of legacy inventory, which was still two-thirds of our Q1 sales. With affordability challenges and many consumers choosing to stay in their current home with lower mortgage rates, general expectations are that transaction volumes in the broader real estate market will remain substantially lower this year compared to 2022. Accordingly, we initiated additional cost reductions this month to right-size the business for current and anticipated market volumes. This reduction includes recalibrating our internal resources and marketing spend to support our higher performing and more affordable markets. These changes support our plan to achieve positive adjusted EBITDA at approximately 500 acquisitions per month through a combination of express cash offers and direct plus sales by year end. Our progress in Q1 was supported by improving conditions and sentiment across many of our markets. In most markets, we are no longer seeing significant price cuts on listed homes, particularly more affordable homes. And multiple offers are reappearing in certain areas. As price volatility has normalized to more historic ranges, it has allowed us to price more competitively on targeted homes. Our pricing model does not require home price appreciation to succeed. Rather, it is rapid changes in home prices in either direction that cause the most challenges. We believe that more competitive pricing will help us accelerate the trend of increasing acquisition volume. In addition, we continue to utilize our in-house renovation expertise to create value, reduce risk, and position our inventory to sell. Our strong established brand and core express cash offer business create a powerful and efficient top of funnel source of leads. Add this to our deep operational capabilities, and we have a lot of opportunity to further help customers and generate additional revenue outside of our core business. Turning to operations, I will update you on the following three products and services that are in addition to our core Express Cash Offer business. Renovate, Direct Plus, which is acquiring homes for our investor partners, and our Flex Listing service. Last quarter, we shared our plans to expand our fee-based business-to-business services with our new Renovate and Direct Plus offerings. We believe these offerings provide a great value proposition for single family rental companies, but our plan does not rely on significant volumes this year, as many of these investors are on the sidelines for now. Nonetheless, we believe these services can be an important part of our business over time. Through Renovate, we are providing renovation services on non-Offerpad single and multifamily homes. During the first quarter, multiple new businesses started using our renovation services, and we completed approximately 225 projects under this business model. Our Direct Plus program that connects investors with sellers is taking shape. In the first quarter, we onboarded several new investor partners with diverse buy boxes and target markets. In addition, we expanded this offering from two to eight offer pad markets. Importantly, many of the current and potential Direct Plus partners, such as single-family and short-term rental companies, can also benefit from utilizing our renovate services. Growing our flex listing service and agent referral network also supports our goal to provide a solution for every customer. With a team of more than 100 agents, our local experts provide an alternative to those looking for a cash offer. For customers in markets we don't currently serve, We have an agent referral network where we connect customers with an agent in that market. OfferPad receives a percentage of the commission for any transaction that closes through our referral program. Customers we otherwise could not be able to assist are connected with a solution by working with a local real estate professional. This is another way we are meeting the needs of more individuals and capitalizing on our top of funnel request volume. To manage our expanding services and partners, our data and analytics team enhanced OfferPad's technology to automatically match each customer with the solution that best fits their needs. A cash offer on behalf of OfferPad for our Direct Plus partners, flex listing our agent partner services. Our goal is to deliver each person who contacts OfferPad with the best solution for their needs. This software and analytics update helps maintain one of our primary value propositions. a simpler, less stressful real estate experience. As we navigated through the abrupt market shift last year, we used this time and experience to build an even better, more diverse business. We thrived in the hot buyers market during 2021, we adapted during the market shift in 2022, and we are demonstrating our ability to perform under the current market conditions with improving operational and financial results. For our core express cash offer business, it is more important than ever to leverage our deep data, technology, and local market expertise to be laser focused on buying the right homes in the right submarkets at the right price and applying our expert operational capabilities to target, underwrite, renovate, and sell homes while maintaining a great customer experience. In closing, I remain excited about our opportunity to change the way real estate transacts. We believe we have the right cost structure, right financing, and right products to succeed in any environment by offering our customers their best way to buy and sell a home, period. I'll now turn the call over to Mike. Thanks, Brian.
Stephanie
We had an encouraging start to the year with macro conditions beginning to stabilize and quarter-over-quarter improvement in our bottom-line financial results. Importantly, we accomplished our stated goal to sell or have under contract substantially all our homes purchased prior to the market shift. This was critical to support continued improvement in our financial performance this year, and we accomplished this on schedule and in line with our financial expectations. During the first quarter, we generated $610 million of revenue, exceeding the top end of our Q1 guidance range by 13%. Our revenue was supported by the sale of 1,609 homes, which also exceeded the top end of our guidance range, at an average selling price of $379,000. The $59.4 million net loss in the first quarter reflects a 51% improvement over Q4 2022. Our adjusted EBITDA for the quarter was negative 44.8 million, compared to negative 103.7 million in the fourth quarter last year. This reflects a 57% improvement in adjusted EBITDA quarter over quarter. The sequential quarterly improvement was supported by a $52 million increase in gross profit due to a significant decline in the inventory valuation adjustment, as well as improved margins on more recently acquired homes. Our gross margin improved 780 basis points from the fourth quarter loss to 1.2% in Q1. This is consistent with the disposition of inventory acquired prior to the market shift partially offset by the positive performance of homes underwritten after September of 2022. Of the 1600 homes sold in the first quarter, nearly two-thirds of the homes were acquired before September. Early results for the homes underwritten during the fourth quarter last year and first quarter of this year continue to show returns at or above our target range, and we expect gross margins and contribution margins to trend upward in the coming quarters. Total operating expenses decreased 9% from the prior quarter due to previously announced headcount reductions and other general cost reduction measures. As Brian mentioned, we also initiated additional cost reductions in early May and expect those actions to result in approximately $9 million of additional annualized savings. All told, the cost reduction measures that we've implemented over the last nine months are expected to reduce costs by approximately $40 million in 2023. Turning to our operational metrics, time to cash or our holding period peaked at 185 days in Q1 compared to 142 days in Q4 of 2022. This was consistent with our expectation for a longer holding period in Q1 given the seasonality of our business as well as selling a significant number of homes acquired prior to the market shift. Here again, homes sold in Q1 that were acquired after last September had an average time to cash of 106 days, demonstrating the performance of our more recent cohorts of homes. We have already seen an improvement in our holding time through the end of April, and we expect that time to cash will decline in Q2 and normalize around 100 days in Q3 of this year. As part of our risk mitigation strategy in the second half of last year, we significantly reduced the pace of home acquisitions. We hit our lowest level of monthly acquisitions in January of this year and have been prudently increasing each month since. We expect acquisition volumes in the second quarter to nearly double the 364 homes that we acquired in the first quarter. From a balance sheet perspective, our unrestricted cash balance increased to $108 million at the end of Q1 from $97 million at year end. Inventory declined to $173 million from year end, and we repaid over half a billion dollars of debt in the first quarter as we continued to de-risk the balance sheet. Our March 31st debt balance was $155 million, and as of the end of Q1, we had $1.5 billion of total borrowing capacity, $600 million of which was committed. We have a blue-chip base of diversified lenders. and our strong relationships with them, along with the structure of our credit facilities, has enabled us to work collectively through one of the most sudden and significant real estate dislocations in decades. Importantly, we continue to have the debt capacity and terms in place to rebuild our inventory levels consistent with achieving our 2023 business plan. At a run rate of 500 acquisitions per month, we would only utilize about 70% of our committed warehouse lines with an additional $900 million uncommitted, leaving ample capacity to ramp up acquisitions should more favorable market conditions materialize. Additionally, from a liquidity perspective, at the end of Q1, our inventory included approximately $50 million of embedded equity, which is higher than usual due to temporary reductions in our leverage levels. In the second quarter, those leverage metrics revert to their prior levels, And therefore, we expect a reversal of this use of cash as homes that are sold in Q2 release more cash back to our balance sheet. With this positive cash flow, we anticipate our cash balance at the end of the second quarter to be only slightly less than the cash balance at the end of Q1, despite growing our inventory. Continuing our thoughts on the second quarter, we expect Q2 leading key performance metrics to continue the trend of sequential improvements for gross margin, net loss, and adjusted EBITDA that began in Q1. We also expect Q2 to reflect the first quarter-over-quarter improvements in time to cash, as well as increases in acquisitions, inventory, and contribution margin after interest. Revenue is more of a lagging metric for us due to the holding period between acquisition and sale, creating a one- to two-quarter delay between increases in acquisition volume translating into higher revenues. Accordingly, we anticipate our second quarter revenue to represent the low point in the cycle and to increase quarter over quarter from there. Specifically, in the second quarter of 2023, we expect to sell between 400 and 550 homes, generating revenue of between $140 million and $200 million. We also expect adjusted EBITDA to be between negative 25 million and negative 40 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 quarter reflect the first step in our expectation that momentum will accelerate throughout this year, positioning us for sequential improvements in our quarter-over-quarter results. We have a clear 2023 business plan that builds upon our foundational expertise to deliver more solutions and increase the number of customers we serve. Our expansion into business-to-business-facing services is yet another diversified revenue stream and customer base, supporting our ability to grow. We are on a more unified path than ever before and optimistic about what is ahead for OfferPath. I'll now turn the call over to the operator to begin the question and answer session.
Operator
Thank you. 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, please press star one. We ask all participants to limit yourself to one question and one follow-up. We will pause here briefly as questions are registered. Our first question comes from the line of Nick Jones with JMP. Please go ahead.
Nick Jones
Maybe a finer point on some of the outlook that was provided here. As you kind of progress through the year and increase acquisition sequentially, I mean, can this kind of accelerate throughout the year? Is it going to be more linear? And I guess, how does this kind of tie to your 4Q comments around higher velocity markets? Should we really be expecting to kind of hit this 500 a month cadence, kind of just like November, December, or is there room to kind of hit that early. Just any additional call there would be great, and then a quick follow-up.
Stephanie
Sure. Hey, Nick. It's Mike. Thanks for the question. We've already seen, you know, good progress as we've gone month by month through, you know, the current year, and so I think it's reasonable for us to be able to get to that, you know, from an acquisition standpoint, you know, that 500 pace ahead of year-end. I wouldn't put a a completely fine point on it to give, you know, give a month at this point, but we've made good progress there. We're seeing good request volume. We're getting good offer levels out there in the market currently. So I think, you know, we'll hit that earlier in that, you know, we'll then in turn help enable the expectation of achieving positive adjusted EBITDA at the year end.
Brian Baer
Yeah. And one thing I'll just say, Nick, it's Brian, but one thing I would just add there is You know, last year we saw a lot of volatility in the market and that makes it really hard to underwrite. And we've seen definitely that volatility change in most every one of our markets. And so, you know, we can underwrite and buy homes under any market conditions where the markets are going up or going down or even staying steady. The volatility is what it's really hard. And so we're seeing that. And so we have a much clearer picture when we're underwriting homes in these markets. So we're able to start acquiring homes again at decent volumes.
Nick Jones
Great. And then maybe a follow-up on just kind of the EBITDA profitability by the end of the year. Should we take that as kind of full quarter EBITDA profitability, or maybe it shows up in November, December, and 4Q maybe as a whole isn't positive?
Stephanie
Yeah, Nick, it'll be tough to tell. I mean, I think if we execute against our plan that we've got out there for us, we could see reported EBITDA for the quarter positive. It's a little bit of a fine point on that. I certainly think we'll be at that run rate. But the way that we've got things positioned here, again, you asked a little bit from focusing on the market standpoint, too. We've got 25 markets that we're active in out there right now. So it's getting up to 500 with our current footprint. I don't think it's a huge lift. Obviously, there are a number of headwinds out there that we deal with, but that's what we do day in and day out. So our goal is to be able to get to the fourth quarter and report positive EBITDA.
Brian Baer
And we want to take a very realistic approach to this year because of the macro environment that's out there. That's why we, again, took significant cost reductions as a company and put realistic, as far as the end of year, what we can do from a volume standpoint. And to Mike's point, we're in 25 markets. And so what that means in some of even our core markets that we've been in a long time, in different times, we're used to buying hundreds of homes a month in those markets. We're down to buying 40 or 50 homes a month in those markets. And so very realistic with expectations in this market. And listen, if the market accelerates or changes, we can definitely take advantage of that. But for right now, the focus is getting EBITDA profitable by end of year and by cutting costs and hitting the numbers by the end of the year.
Nick Jones
Great. Thanks, Brian. Thanks, Mike.
Brian Baer
Appreciate it.
Operator
Thank you. Our next question comes from the line of Ryan Tomasello. With KBW, please go ahead.
Ryan
Hey, guys, thanks for taking the questions. This is hoping for you to walk through how the unit economics differ between the express and direct plus products. Does the mix at all matter in terms of your EBITDA break even at 500 homes per month between those two products? And how much more volume, do you think you need to be at in order to be. You know cash flow break even inclusive of financing costs from the express product that's still capital intensive.
Stephanie
Sure hey Ryan it's Mike first on the unit economics they contribute similar amounts of gross margin they come through obviously one on a gross basis, which is more of our express model, so the full. Sales price of the home comes through revenue, but then you've got the full acquisition cost offsetting that. On the direct plus model, it's more of a fee-based service. And so there it's coming through on a net basis. So your revenue is going to look different there, but by the time you get to your gross margin line, those economics are pretty similar between the two. So from that standpoint, it doesn't make a huge difference. amount of difference there. And then to your second question on becoming profitable, we don't have a lot of cash items between net income and adjusted EBITDA. It really comes down to our financing costs, our interest there. So what you've seen in the past when we had a path to profitability and achieved profitability, it was shortly thereafter from us getting TAB, Mark McIntyre, mover break even from an adjusted EBITDA standpoint so those two are pretty tightly correlated and, and so the expectation would be similar to what we've achieved in the past that shortly thereafter, I think we should be in that position.
Ryan
TAB, Mark McIntyre, got it and then in terms of the financing capacity. Does the $600 million of committed funding reflect what you think is true capacity here relative to where the company's equity base is today and where it will probably go by year end? I guess just trying to judge, Mike, the risk that the capacity could come down a bit as your facilities come up for renewal or if you feel like the relationship with your lending partners is such that this capacity here is intact.
Stephanie
Yeah, Ryan, I feel really good about where we are from a financing capacity. Over the last four years, we've really built up a strong partnership, if you will, with our lenders. We have three of the largest, most reliable lenders out there from a banking standpoint. We've got strong partners in other lenders that we utilize within the facility. You know, candidly, you know, it was, you know, the last, you know, six plus months, you know, have been challenging on that front. But, you know, we've worked together, you know, they've been supportive of the company, you know, and I think on our side, we've, you know, we've taken a very realistic approach of recognizing where their risks are and working with them through this. And obviously, you know, nobody was out of dime, you know, one way or another. And so, you know, the 600 committed, you know, we feel very good about. And even, you know, from a historical perspective, the way that we've got the facility set up, you know, split between committed and uncommitted, we've got a good track record there of going back to the institutions and moving the uncommitted into a committed position, you know, on a pretty timely basis. So, you know, a fair amount of time working with both the teams and the credit teams over there. But we've got a solid relationship there and I feel good about where we're at.
Brian Baer
Yeah. And the one thing I'll just push down on there too, Ryan, is that getting through 99% of this inventory the way we have and the way we did it and the communication with our lenders has been key. And again, they have been great partners and we're excited to look forward with them now. Now we can focus on the future and going to do what we're going to need to do this year in a very realistic way and do that. So we've done, I think, a great job with the lenders, and they've been great partners.
Ryan
Great. Thanks for the call.
Nick Jones
Thanks, Ryan.
Operator
Thank you. The question and answer session has concluded. I will now turn the call over to Brian Baer, Chairman and CEO for closing remarks.
Brian Baer
I'm really proud of our team's focus, determination, and execution in managing our way through some really challenging times. Going forward, we have a realistic and achievable plan to hit our operational and financial goals. I'm confident in our team's ability to perform and I'm excited about our opportunity to change the way real estate transacts. Thank you all for joining us today.
Operator
That concludes today's conference call. I hope you all have a great rest of your day. You may now disconnect your lines.
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