Q4 2023 Offerpad Solutions Inc Earnings Call

Participants

Taylor Giles; Investor Relations; Offerpad Solutions Inc

Brian Bair; Chief Executive Officer, Founder; Offerpad Solutions Inc

James Grout; Senior Vice President, Finance; Offerpad Solutions Inc

Nick Jones; Analyst; JMP Securities LLC

Dae Lee; Analyst; JPMorgan Chase & Co.

Ryan Tomasello; Analyst; Stifel Financial Corp.

Michael Ng; Analyst; The Goldman Sachs Group, Inc.

Presentation

Operator

Good afternoon. Thank you for attending the Offerpad Q4 2023 earnings call. My name is Matt, and I'll be your moderator for today's call. (Operator Instructions) I'd now like now pass the conference over to our host, [Taylor Giles, with Investor Relations]. 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 Blair; 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 Security and Exchange Commission. Except as required by applicable law be 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 and 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 broader share of wins.
We demonstrated a clear path toward sustained profitability with adjusted EBITDA up over 1,200 basis points year over year. We grew our partnership and 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 our pads. Workforce continued 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 engagements.
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 offer best 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 offer pads, 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 offer pad 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 this product line our partner network is a key lever in our growth strategy that encompasses our homebuilder services, our agent partnership program and our agent referral networks by incentivizing partners to leverage offer pad 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 our prepared 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 it acquired home and ready for resale.
Offerpad matches our top-tier invite only subscription fee base program designed for highly motivated agents with significant marketing, reach and 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 defining zones, and they'll have the potential to lift other offer pad owned homes in their zones. Initial available subscriptions have sold quicker than anticipated.
Meanwhile, we are swiftly expanding our available zones for offer pad 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 lines 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 reflected 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 line.
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 in 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 the property portfolio in a strong position. We had 940 homes in inventory, of which only 4.4% are owned over 180 days, with nearly half of those under contract to be sold. And 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 advance rates and funding mechanics.
While we adjusted size to align our expected needs over the coming years, our lenders remain strong supporters of the business and continue to be great working partners. All of 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 and how they can transform off a pad 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 customer's 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 sell 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 see improved 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 and 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 leaner 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.

Question and Answer Session

Operator

(Operator Instructions) Nick Jones, JMP.

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 lighter than maybe what the targeted initially was. Is that a goal that's achievable in 2024? And then a follow-up.

Brian Bair

Yeah. Hey, Nick, it's Brian. On the 500 that's obviously the goal we're looking at where we are very focused on, obviously, the macro world out there and the dynamics of controlling what we can control. And so as we as we're watching interest rates and what's happening out there, where 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 we're going to do it. We're more focused on property performance, right now that 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 incremental contribution margin from kind of other services. How high can that go to that 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 incremental contribution margin?

Brian Bair

Yeah, I'll jump into that. I'll have James comment on the breakdown there. But the one thing you know through the adversity that that that we felt in the real estate over the last year and a half overall, I'll tell you that 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 is cutting costs and focused on what we can do really well.
And one of those is a lot like first specifically on the renovate side, the Direct Plus side that we'll talk a little bit more about and then allowing others to plug into to offer patent some of our services. And so I think what I will say, the general, the sky's 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, is that the market starts to normalize, you'll see those those light asset line 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

Yeah, hey, Nick. So I think one thing that's really exciting about what we're seeing in our other lines of businesses. They're growing at the same time that the express the cash offer business is growing and so you have $5,000 of incremental contribution margin per home sold on 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 contribution margin after interest. And ultimately, I think where we can get as 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. And you also just have a key focus on continuing to diversify.

Brian Bair

And one thing I'll add there just with the direct plus business, is that the cash offer business, it's really and you almost have to segment it into two worlds. It's one of the cash out for business at the homes that we buy. So the customer gets cash offer and are prepared to go at the balance sheet at home.
And then the other section is the direct plus business, which the customer gets a cash offer that get to the occupant experience up until closing off of that doesn't close that home on one of our direct plus partners will close that home. And so two significant path to that. And let's say, I still I feel like we're making headway in both and and as they continue to grow.

Nick Jones

Thanks, guys.

Operator

Dae Lee, JPMorgan.

Dae Lee

Great. Thanks for taking my questions. So the first one on your expectation to reach adjusted EBITDA profit for the year. Just to clarify, are you expecting to get adjusted EBITDA for the full year or exit the year. And as I said, it is a profitable and a flat macro conditions against (inaudible)? And then I have a follow-up.

James Grout

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 in US.
And I'm not really trying to bake in any sort of tailwinds from from decreasing rates or anything like that. But overall, kind of expectations throughout the years following the first quarter on a period of investing in inventory growth there that we should see some sequential increases there and improvements to ultimately produce full year adjusted EBITDA profitability.

Dae Lee

Okay, great. I guess another follow-up. It sounds like you guys are underwriting would be more of a risk-off from buyers and the homes that you are acquiring. So we would ask that if that's true and what do you guys need to see to, I guess, operate the business with volume in mind as well?

Brian Bair

Sorry, the last part, the last part cut off what we'd have to see on the website. Sorry, I couldn't hear the last.

Dae Lee

I asked, what do you guys need to drive or operate the business for volume growth as well? It sounds like you guys are operating more of a focus in mind right now. So what do we need to see for you guys to go after more more volume?

Brian Bair

Yes. So a lot of it. You know, everything we do is assumption based, right of what the market's doing and are each very market-specific product line specific just in general, and I think I've mentioned before in different calls that to ramp up that starts to ramp up volume as one of the easiest metrics we can ramp up. I would think more than anything else is the volatility in the in the mortgage rates.
I mean, for example, in the fourth quarter, we saw rates hit almost on the well that they read they hit over eight. And then we saw them. They have been down to like the high sixes in November, December. And so more consistency in the mortgage rates would definitely what's interesting is just when we talk about the macro world, you have sellers that that they're obviously locked into their to their current mortgage and equity of the lock in their the lock-in effect.
But then you have buyers on the affordability side. And so but both of them have desperately want something to happen. You can just see it. And as interest rates drop down below seven, you can see sellers willing to sell and then yet, and you can see buyers that now want to buy. And so that right now is so sensitive.
So we're watching that really, really, really closely but affordability overall, and we're tied to that. So everything is very, very interest rate driven right now, and it's getting more consistency there and it doesn't need to go back down to where they were by any means, but it's just more consistency. So you can see the affordability and sellers willing to sell there too.

Dae Lee

Great. Thank you.

Operator

Ryan Tomasello, Stifel.

Ryan Tomasello

Hi, everyone. Thanks for taking the questions on. It would be helpful if you can just give us a quick overview of the revenue model, maybe a reminder or refresher of the revenue model behind some of the more meaningful asset-light service offerings and economics from a gross margin perspective, I would assume things like renovation that seemed to be a more material material driver.
And then in addition to that, these various Asian partnership programs, just the volume and expense efficiencies, how you measure those relative to following volume from more traditional sources? Any added perks around that? It looks like there's a membership fee involved if that can be meaningful just in general, trying to understand the economics and revenue model behind the noncash offer products?

Brian Bair

Sure. I'll give a high level and let James get into some of the details there. But yes, from a from a high level, one thing that we're we want to accomplish is get our products and services out to more people as fast as we can the faster we can and to scale it as fast and especially some of the asset-light services. So we've always been focused on giving the customer the consumer a choice on what they come to us to get a cash offer or they could potentially list their home and whatever works best for them at that moment. And it should be able to scale and using agents to help us scale those programs.
As we mentioned in the prepared remarks, that's been scaling at fairly quickly. And as we see in even in this market and the landscape in that even scale even faster is giving agents the ability to plug into a lot of our services. And and that included that includes our renovation services. So they can basically use our renovation teams to upgrade our upscale home that they that they need, but also some of the others are sold in our 60 program that the ability to have the cash offer, but able to list the house on the open market with knowing that they have the insurance that the cash offer in the backdrop.
So the agents are like I said we're scaling that fairly quickly. And and as you know, from when we launched it and we're getting, we're getting really good, really good feedback. And it's scaling very, very fast and with some of the zones and other things that we're doing. But again, we want to find a solution for everybody and that consumes the no matter what to meet the customer where they're at, whether they want to use an eight directly. We want to be there for them. But I'll let James talk a little bit about the economics make sure.

James Grout

Hey, Ryan. So I guess just to kind of walk through each of them really quickly, one by one on the renovation side, like you mentioned, we are seeing some really good progress there and good momentum kind of across the board and the various markets, the way the renovation revenue model works as effectively think about an average renovation cost.
Right now, we're in the $15,000 range from an average rental cost to these customers. And then we're capturing a service fee on top of that, it can be anywhere from 20% to 30% or so of a service fee. So this comes through a, call it a 20% gross margin plus or minus. Overall, from an overhead perspective, that's a shared resource from with our Express business with folks in the markets and all that. So it's a nice kind of value accretive overall business line to tack onto our existing operations.
And under Brett, the direct plus side, like like Brian mentioned, from a customer perspective, it's very similar from experience overall with the request comes in we're underwriting the home and we're managing that request all the way up until the time of closing effectively what's happening at closing is we're transitioning or assigning over that contract, whoever the ultimate buyer that home isn't.
So we're capturing our service fee as the revenue on that for that project or for that home. So really that comes through at a very high gross margin, I think 95%-plus type gross margins there since it's effectively just a service fee coming through.
And then on the listing side, this is where the kind of interesting thing that Brian just talked through. Again, this is also service fees that comes through at a very high overall gross margin there. And for leads that were referring out there, the referral fee that's coming through backthrough is just going to be a percent of the overall sales price that ultimately that that agent closed on. So that should come through again, a 90%-plus type gross margin there.
And again, the subscription fee is it's our mechanism for it being able to engage with those types of very highly motivated and engaged agents within the market that are willing to invest capital upfront in order to get access to leads and listings and all the other great products and services that offer PAD can can offer them there. So again, as a subscription-based type fee coming through, that's another kind of 90%-type gross margin, ultimately.

Ryan Tomasello

Great, really appreciate all that color. Very helpful. And just a follow-up here. You mentioned another $30 million I think of cost efficiencies you expect to realize in 2024. Is that mainly driven by the annualization of the expense expense efficiencies you drove last year or is any of that incremental? And if so, any any color on where those savings are coming from? Thanks.

James Grout

Yeah, great question. It is a little bit of both. So we did kind of continue to optimize the cost structure through the end of the year. So part of that is going to be coming through from that standpoint. And the other part is going to be a lot of our focus and attention invested in our partnership program.
And then overall, what that means from a CAC perspective and what we need to invest into kind of direct marketing in order to generate the amount of leads necessary for the business. And now so I view the innovation part really tied with the kind of expense management we're doing at the end of the year, but then also will carry forward some and more marketing efficiencies throughout the year as well.

Ryan Tomasello

Okay. Thanks for taking the questions.

Operator

Michael Ng, Goldman Sachs.

Michael Ng

Hey, good afternoon and thank you for the question. It was encouraging to hear about the renewal and extension of the three credit facilities. I was just wondering if you could talk a little bit more about some of the changes in the terms of those facilities.
I think you said there was an adjustment on target size? Like how should we think about how that translates into your home purchase and selling prices on a go-forward basis? And and could you just remind us what the current capacity is today and what percentage of the capacity was renewed? Thank you.

James Grout

Yeah, great question. So right now, where we ended the year from an overall capacity standpoint, and don't expect any imminent changes right now and the renewals coming up for a bit of time here is we had about $560 million of committed capacity and another [$490 million-ish] of uncommitted capacity for a little bit over [$1 billion] total.
Historically we've we've had the ability to flex in and out of our uncommitted capacity overall. But right now we ended the year at about $260 million of total outstanding debt. And we felt that the changes that we made and overall committed capacity. We're pretty prudent just given our expectations of what we're seeing from a volume perspective, the kind of the balance sheet side of the business there.
So again, feel very good about those renewals that we put in place. And importantly, we maintain those key terms around advance rates and funding mechanics that really allow us to be really efficient with our capital and purchase the amount of homes that we do.

Michael Ng

Okay, great. Thank you very much.

Operator

The question-and-answer session has concluded. I will now turn the call over to Brian Blair, Chairman and CEO for closing remarks.

Brian Bair

Right. Just really proud of the team and hitting the, getting that the scale of these asset-light services the way up and going into 2024, but appreciate to everyone in all their hard work. And thank you for everyone joining the call.

Operator

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.