Offerpad Solutions Inc. (OPAD) Earnings Call Transcript & Summary

Great. Well, welcome to the Offerpad presentation at the Goldman Sachs Communacopia & Technology and Internet Conference. I have the privilege of introducing the co-founder and CEO of Offerpad, Brian Bair. My name is Mike Ng, and I cover Offerpad and real estate technology here at Goldman. We have about 35 minutes for today's presentation, inclusive of Q&A, so if you have a question towards the end of the session, please raise your hand and we'll get a mic over to you. So first, Brian, thank you so much for being here at the conference and supporting us. We really appreciate all your time and your insights.

So to start things off, let's talk a little bit about Offerpad's business model. The business model has evolved from origins as an iBuyer with initial focus on value-added purchases and sales. Could you talk a little bit about the suite of services that Offerpad offers today and how the business model has kind of changed over time?

First, and thank you for inviting us. Great to be here. Yes, so we have 4 main products in our platform. One is the iBuying, which is the cash offer, which we call EXPRESS. The second one is FLEX and then we have Direct Plus and Renovate. Let me just explain that. So EXPRESS, people can come to Offerpad, get a cash offer within 24 hours on their home. Super strong product. The second part is FLEX. So people, for whatever reason, don't want to accept the cash offer, they can choose to list their house on the open market, and they can use our services to help them list that. We'll even advance renovations and provide a lot of other services on that side of it. Direct Plus is something that is -- during the last 6 months we've been working on a lot, but that's allowing partners to be able to bid on homes top of funnel with us. What we want to do is try to get the customer the most money they can for their home in an easy process. And so think of the SFR groups out there, and they're able to bid at the same time and get the customer more money. We don't take balance sheet risk on that home and we make a service fee on that end of it. And then the fourth is Renovation. And so what a lot of people don't probably give us credit for is that we're probably one of the top renovation companies in the country. Last year, even with all the adversity, we did over 10,000 renovations. And so because we built this machine at Offerpad, it allows us to for people to plug into the machine and be able to use our service for other things. And so we actually outsource our renovations for other people that need our renovation product.

Great. That's a really great overview. And, I do want to hit on each of those throughout the session. But before we do, let's talk a little bit about the macro. You know, Offerpad's one of the 2 remaining true scaled iBuyers in the United States. You know, how have macro factors impacted the business, particularly the run up in prices in 2021 and the subsequent normalization. What is the shape of Offerpad's recovery look like through this period of price volatility, after peaking in June of 2021?

Yes, it was interesting. Last year is something I've been in real estate for 20 years, live it, eat and breathe in it. Something that I hadn't seen is with interest rates rising so fast, there was really a pause in the market. And so for a short period of time, there was no activity and actually prices started to decline. And at that point, we owned 4,000 homes. And so the most important thing for us was, and the playbook is, let's sell the current inventory and let's replace it with, higher margin homes that we know exactly what the market's going to be doing. And so that was our focus at the end of last year. Affordability and interest rates, obviously what people, keep hearing about is obviously something we've been focused on. And so the team did an awesome job of getting rid of all of our -- I would say, legacy inventory when the market changed. And now we're replaced it with new inventory. And so there's a couple things that have happened. The pricing volatility has definitely settled in most of our markets -- and so the volatility overall. So our Buy Box is more narrow, but the type of homes we're buying, we really like the product we're buying, more of the affordable type of homes that the customers want. But the other thing that hasn't settled yet is mortgage rates. And so not that they're at 7% or 7.5% or 8% or wherever they end up, it's the volatility. One day they're at 6.75%, the next day they're at 7.25%, which with affordability being so sensitive, it's something we're watching really closely. And so we're focused on the affordable product so it's not as impacted, but again, something we're watching closely.

Great. And, I'd like to expand -- I'd like for you to expand on that a little bit and just talk a little bit about, your purchase strategy, right? You talked about narrowing the Buy Box. Obviously, inventory is very limited and I think there continues to be a little bit of uncertainty as it relates to the pricing outlook for housing. So, what is your current home purchase philosophy and, how might that be different relative to the last several years?

What's interesting is, I think people are surprised to hear me say this, but I'm actually surprised that the volume's not down even more over the last, over the last year. Because, if we look back a year ago and you say where interest rates have gone from, in the 3s to into the mid-7s, but in most of our markets, you're seeing transaction volume down anywhere from 17% to 30%, but mostly about 17% to 25% is where we're seeing a transaction volume. So that means places like Phoenix and Atlanta and Dallas, you're still seeing 7,000 to 8,000 transactions a month. So the volume is still, it's down, but not as significant as that we would expect on that. But as far as the Buy Box goes, is that from our express product, as far as narrowing it, so we've always lived in about the 200 to 750 price point. What we are focused on because of the affordability is we are focused more on the 200 to 450 price point. And so, we're really focused on the affordability, but also what we call own to rent. And so what it would take to rent that house at the same point. And so right now we're able to buy, but we're also being cautious of what those mortgage rates are doing just long term.

Great. That's really helpful. And could you talk a little bit about service fees and spreads, right? There's the kind of explicit service fee that typically gets charged to a home seller, but, embedded in the offer price is also the spread to, presumably what you think you could sell it at. So, how is Offerpad approaching pricing and spreads and, are they widening out because of some of the uncertainty out there? Yes.

So last year, our spread was the most it's ever been because of the uncertainty in the market. So we were underwriting with a lot of spread in there, because of the uncertainty. A lot of that uncertainty has settled in most of the markets, like I talked about before, the affordability. So with a narrower Buy Box, we're able to get back to still a little more conservative, but nothing like we were at the end of last year. There's -- the other thing too important with our EXPRESS product. There's really 2 ways to make -- how we make our fees is one is the service fee, which is anywhere from 5% to 8%, depending on the product and the market. But the other part is adding value through renovations. And so when we buy a home, more in what we call as is condition is of what renovations we're going to add to that home to add value. So 2 things, so we can sell the house for -- for a good value. But the other part, so our house will sell first before other homes in the area, because time to cash is really important to us. The holding time we have with that home.

Great. What are you looking at to increase the pace of acquisition from here on out?

Yes, I'd come back again with mortgage rates. And when we see mortgage rates settle again, just where that's going to be, we'll be able to widen that Buy Box. And, markets that have been impacted more than others is like Austin and Vegas and Phoenix. Those markets had almost 70% home price appreciation over a 2 year period of time, so, the appreciation. And then you add the mortgage rates. And so the affordability is something we're watching -- we're watching really closely. But in the Midwest and the Southeast, those markets have been held strong. They didn't have quite the appreciation. But if we widen the Buy Box in all those markets, I'll be able to pick up the acquisition volume for the EXPRESS product.

Okay. Great. And, you know, assuming mortgage rates don't change dramatically, how are you thinking about what the right target home inventory balance is for now, for the next couple of years?

Yes, and that's where we focus on -- on all of our products, because, you know, we necessarily don't have to balance sheet all the homes that we buy. Direct Plus is an impact. And, as we talked about earlier, the retail buyer has I'm surprised it's only down, let's say 20% in most of our markets. But the more the single family rental buyers are down significantly more than that in the market, because they're more affected from the interest rates and securitization, everything else that they're -- that they're dealing with right now. And so the way that we're focused on that is, is on all of our products going forward. We're seeing really, really positive as our as we widen our margins of the homes that we buy. We're seeing more people use our FLEX option. We're basically wanting to list with us. And so that's been really, really impactful. So we'll see all those products start to go with -- with our platform starting to -- to build up. On the EXPRESS site, specifically, what we are hyper-focused on is, again, is our time to cash. And something -- what I look at some -- some key data points every day. One of them is, what we call our tail inventory or time to cash 180 days. We want to have in normal market conditions less than 10% of our inventory that we own more than 180 days, right now, with the inventory that we have now. It's less than 2%. So all the signs are -- are really, really good on that. A lot of it is because, again, we're narrowing the Buy Box, buying the stuff we know is going to move really quickly. And then again, we'll and it is also important when we talk about how we how we acquire and underwrite homes and -- and from our algorithms and technology and everything we use to price homes. That is -- that is literally every day we're trying to get better with every home that we buy. So we're always adjusting. There's not one price box or price to say, hey, here's what we're going to do this month. Every home that we buy, we want to get smarter the next time we buy that type of product. And so that's where we use our data and analytics to get smarter on that end of it. And so that's but every day we're -- we're adjusting the way that we buy homes.

Great. You had mentioned a couple of times that, Offerpad's Renovation business is one that tends to be a little bit underappreciated. So I was wondering, if you could talk a little bit about, the renovation business. What does demand look like for renovation now versus, a couple of years ago? And, what are some of the steps that you take to ensure that you get a positive ROI for renovation, particularly for those homes that, you put your own capital for?

Yes. What's interesting about a renovation? I think it's important for people to understand is that we vertically integrate most of our renovation teams. And so we don't outsource a lot of that. So from the -- the renovation director we have specifically in that market, the project managers to foreman, even in people who are swinging the hammers are employees of Offerpad's. So that lets us control the quality, the cost and on that side of it. And so, we can in most cases, we can turn a $25,000 renovation job in less than 25 days. And so we can move really quickly through -- through renovation. What's interesting, the opportunity we see we're using. So and that's we've been using that on our own behalf. But how we expand renovation, which we call renovate, and that's renovations on behalf of others, not just large business-to-business relationships. But there's a customer, a consumer that is going to be locked into a 3% to 4% mortgage rate for a long time. And if they don't want to sell their home, they can come to Offerpad, use our renovation teams to refresh in their home carpet, paint, appliances, countertops, lighting. And then eventually be able to even add additions to their home on that end of it. And right now, most of the inventory that's hitting the market is over 30 years old. So there's a lot of need for -- for those renovation services. And so it allows the seller or the consumer to benefit from our time and efficiency, but also our costs that we get. And then we make a service beyond that of doing the renovation for them and -- and continuing to strengthen our renovation footprint. So it's -- it's there's going to be a lot of opportunity. I'm very excited about where we're heading with the renovation side. And the other thing I would -- I would talk about, just because you mentioned it, is, the credit is that, renovations is as much as logistics as anything else. And so you can't have really strong logistics without really strong technology. So our technology that empowers our renovation teams in the field is really important because our communication with people out swinging hammers with our pricing team who price the home and or our FLEX team who might be listing that home all that is super important. So the technology that we build has been super strong and -- and we're actually getting stronger with that every day with some of our technology to make our efficiency that much stronger.

Great. And just as a follow-up to that. So, you mentioned renovate products for renovation products for consumers. There's the ROI value added renovation products for EXPRESS. Could you just talk a little bit more about what you're doing in B2B precisely, yes?

Sure. So, one of the opportunities that we're seeing right now is that with the people when I talk about Direct Plus the investors that are that we allow to bid at the top of funnel with we that like we do. And give the customer a home. Most of the mid and small players don't have a renovation team built in internally. So it's really a double win for us because they're using our Direct Plus service to help them acquire the home to win for the customer as well. But then more often than not they're wanting to use our renovation teams for the efficiency to go through on the renovation side. So think of all your the large single family rental companies, but the mid and small size, there's large opportunities on that as well. But also a lot of the larger institutional government agencies out there that need renovation help on that side of it. So the sky's the limit of what we can do on the renovation side. But B2B, like I said, because of our efficiency and in most cases and without sounding dramatic, we can actually finish the renovation when a lot of these when it comes to B2B customers. It takes them to bid out that, to get the bids from -- from other contractors, because what we do and what we talk about is we're going to going to treat their inventory like it's our own inventory. So we want to get in and out as quickly as we can. We want to put the right -- the right renovations in place and the right quality in place, just like we do for our own product. And they can just plug in with us and allow them to do that.

Great. And it's a good segue to talk a little bit more about Direct Plus, right? Which, as I think about it is really a marketplace that connects prospective home sellers as well as investors or whether they're SFRs or institutional investors. How does Direct Plus fit into, Offerpad's broader offering? Is Offerpad's take rate the same in Direct Plus versus an express deal? Does the -- lower capital intensity actually mean that this is a more attractive business for Offerpad relatively?

Yes, I think there's a lot there. I think what you have to understand, like when we buy -- when we when we make an offer on a home, we want to buy, renovate and sell that home in 100 days. It's much different. Let's just -- that's on the Direct Plus side from a single family rental company. They're holding that home for 7 to 10 years. And in some cases, depending on the product, they can bid more than in some cases pay retail for the home without the service fee. And so, what we want to do is empower the consumer to get the best offer for they can for their home. And so we're very selective about who we allow to our top of funnel, because we want the customer experience to be -- that's the most important part of us. And the subtle brag here is that, right now when people use Offerpad from the beginning of Offerpad until today, we have over a 92%, 93% customer satisfaction. That's really important because the cash offer product is so strong. So anyone that we allow to plug into to our Direct Plus product has to -- they have to provide the same service and making sure that they're going to close that home and the expectations similar to us. And so the long term plan for that is, we never founded Offerpad to own the most homes in America. That was never what we founded it for. We founded it to remove the friction from the traditional -- the traditional real estate product. And so as we get more people to allow more people our top of funnel, there is we'll see more and more Offerpad change to even more balance sheet light because we're allowing more people for that product where we make more of a service fee than half of the balance sheet that. But I think it's really important. The reason why people come in and the product is so strong and the cash offer removes all the friction. And so, there's countless websites that you can go to that have, that are aggregators. Let me tell you, 3 real estate agents you can talk to, 3 mortgage brokers, 3 home warranty, whatever it is, what people come to Offerpad, they know they're getting the transaction. And that's the most important part. And that's -- that's where it was really founded to remove that friction. So allowing the right partners in there to help us remove that friction from the customer is going to be really -- going to be really important. And so I don't think anyone's ever questioned the product that Offerpad has. They might question the balance sheet side of it. And, that will never go away because that is the -- the most important. Like you mentioned before, there's only 2 of us right now that are doing that. And the cash offer is more important than ever. But that doesn't necessarily mean that we got to own all those of ourselves. So we can go through, use our model and have more and more people use our Direct Plus product.

Great. That's really helpful. And just to contextualize, the magnitude of something like a Direct Plus, like how much of the -- I guess, homes purchased today are 2 institutional buyers or somebody coming through Direct Plus? And any color and texture around, whether an SFR or fix and flip or short term rental is more meaningful today relative to before would be helpful.

The problem with the fix and flip side is they have to work on much larger margins. And the thing that we love about Offerpad is when people come to Offerpad, we want to give them our best offer. And so real estate has been built before. It was, you know, how we look at it is as a platform, as real estate as a service. We want to give everyone our best offer. And so we don't know if you're going through a divorce. We don't know what's happening, but we want to put our foot, our best foot forward. It's giving you -- giving you a strong offer, or a strong offer on your product. When it comes to on traditionally with -- with our direct program that's been anywhere from 10% to 20% of our -- of our transactions is, is through our direct program. What we see that, like I mentioned before, that's been impacted more. The investor side has been impacted more than, than anything through the transition. It will come back when it comes back. It will turn on. We're expecting that to turn on when -- when things settle a little bit, the Direct Plus to turn on. And -- and that it's significant volumes. And, when I say 10% to 20% in the past 5 to 6 years of Offerpad, we would we've had the opportunity to sell even more on the direct -- the direct side to some of our -- to the SFRs. But we wanted to put more product back on the market. And as we built out our model, but we see that significantly changing in the future as well to sell more on the Direct Plus side.

Great. Why don't we switch gears a little bit and talk about financials? Offerpad has a goal to achieve positive EBITDA by year-end. And, as you mentioned earlier, the inventory is in a much improved position with less than 2% of inventory aged more than 180 days. So maybe you could just talk a little bit about this improving profitability that we're seeing in Offerpad and how we've come to that relative to some of the more burdened inventory in the past?

And there's -- there's times in the world for hyper-growth and there's time for profitability as you as you build. And what we try to do is balance both of them, right. So we've significantly cut our OpEx, $40 million to $50 million. And as we've seen our volume and as we look through the transition of what the market is doing right now, that's impacted. But what we need to do is just that, we have to have discipline and execute. That's -- that's what it comes down to. And, we say every dollar and everyday matters. And that's really what we're focused on right now. Now is not the time to use a football reference to go out there and throw Hail Mary's. Now is the time right now to run some, some safe pass plays, some good run plays as the volatility with mortgage rates happen. But we're working. We're hyper-focused right now on the profitability side. And we've made a lot of really good strides on that. And we'll continue to do that. So I'm really excited about what the team has done.

Great. Can you talk a little bit about Offerpad's funding model? You know, what does that look like today? What's the capacity funding costs? What's the -- what's the environment for your lenders?

Yes, we have -- we have amazing lender partners and they're all blue chip that the blue chip people, the names that everybody knows. And they've been awesome partners through this. When all the adversity happened last year, you never know how our lender is going to react. And not that anything's been easy, but execution and performance can solve most things. And so my biggest concern with when you say interest rates go different, you saw the positive market is not specifically what like how we're going to handle it, but how the sector was going to handle it, because we could be put into a box of the sector. And so, the message I gave a team is let's focus on what we can control and that's our own. And the 4,000 homes, let's focus on removing those from the balance sheet and replace them with inventory we underwrote for today's conditions. And that's what we did. So our lenders have been really, I mean, truly partners. They've been really, really good from the very beginning until now. And so even like a lot of our facilities, we've refreshed most of our facilities right now. Our finance team has done a really good job with that. And so we're positioned to ready to buy homes. We want to wait. We just -- we don't want to jump right back into it. We want to be we want to be, again, disciplined about how we're -- how we're buying and what type of inventory we're buying.

Right. And you're being very flexible with how you help facilitate that home sale and purchase?

And that's what's really nice about having the -- the reason why we have the 4 products is for, is for a reason. You never want to be put into a position that you have to buy homes because that's the only thing you can do for your model, right? And so, for example, as I mentioned before, as you -- as you build out the other products, like, for example, our FLEX and FLEX is where people could list instead of -- list their home on the open market instead of selling this cash. We saw in the first quarter that was almost 50% of our business, from the transactions from the EXPRESS side. And so having that lever when we don't, that we can have different products that people can use helps with our conversion, helps with market share. But also we're giving the customers what they want in our platform is, is they just want their home sold, right? And so we give them the best -- the best ability going. Here's your cash offer. That doesn't work for you. We can help you market and sell the home just like we would on our own behalf. And we even advance renovations and give them other services. So having that is really important. And again, it's for a reason for moments like this. So you can -- you can stay flexible is the word you used. And that's been really important.

Great. And, I'd love to follow-up on FLEX a little bit. So it seems like, it's more of a traditional brokerage offering. Is that done with partner agent?

I'm trying to do everything. I'm trying to do everything possible. So it's not called a traditional broker's model.

Sorry.

But no, I don't. But it's -- but it looks and feels that way. I mean, for example, we kind of outsmart our self in the early days because I hated, like, for example, we called our agents solution experts and we didn't call a listing. We called it a marketing agreement. We don't know the different things because I was trying to be, the satisfaction score with the traditional listing is less than 40%. People, the communication, they have a lot of fusses with that. So we want to make it just like how we revolutionize the way people sell their home, our cash offer. We want to do that with the listing side of it. So, for example, to say, hey, we can help you market and sell your home and we can -- we can advance renovations and again, treat the house like we would. And you can just pay us back at closing and -- and then using our renovation teams and our marketing and all that. And so I will tell you is, our satisfaction score is like I was bragging about earlier of over 90%. If people use our FLEX offering where they put their house on the open market and we call it FLEX Sell, but they have the ability to take our cash offer at any time. They love that option, because they feel like they're getting -- they're getting the best of both worlds. And let me go see what the market can do. And if the market doesn't, if I can't sell a house, the open market, I have this cash offer. And so that's been really important. So we re-launched that. I mean, we had to freeze it when the market was transitioning. We just re-launched it. Really excited about that, that has a higher customer satisfaction than anything else. And again, it's more of people using other services and just our cash offering service. Again, what we -- what we focus on with the platform is we just want to get people a solution, like whether it's the cash offer, which people love or the flex or even renovating their home. We just want to have a solution for them, right.

Can we talk a little bit about Offerpad's geographical footprint, I think Offerpad is in about 25 markets today. What are the most attractive markets and regions for -- for iBuying right now? Where is Offerpad best positioned just because of its infrastructure and its technology?

Yes, so it would -- we've been really focused on the Midwest. We re-launched right during the COVID times, we launched the Midwest. Midwest has been a great market, been great markets for us. The medium home price in some cases are below $300,000. You didn't have the home price acceleration like you see in some of the other markets. So what we're focused on is Midwest and the Southeast have been really strong markets and more consistent markets than we've seen haven't been as impacted. Texas has been overall strong for us as well. As we look at expansion and growth, before the interest rates, the rapid increase in interest rates last year, we identified another 5 or 6 markets that we were going to go into. So right now we're focused on more market penetrations in the markets we're at right now, especially in 2023. But as we look at 2024 and 2025, we'll look at that, but with a hyper-focus on affordability right now. And there's a lot of ifs out there in the market as everybody knows. But the one thing I love especially with our products, our model is able to work in -- in smaller markets like Tucson. And into very large metro areas that everyone's familiar with Phoenix and Atlanta and those markets. Charlotte's also really, Charlotte, Raleigh's also super, really strong markets, by the way.

Okay. Great. So we have a few minutes left. Why don't I see if there are any questions from the audience here? Okay. Yes. I'm just going to get a mic over to you.

You sort of spoken about the Buy Box expanding as mortgage rates settle down. Do you have any sense on the timing for that and how do you think you're going to be pivoting as you start to see that in the market?

Yes, so great question. The Buy Box is very market specific, the Buy Box, for example. Like, when you look at Denver, the median home price of Denver is around $500,000. And so you look at the buy box, for example, like, you know, you look at Denver, the medium home price of Denver is around $500,000, and so you look at the Buy Box on that. We want to be around the median home price in most of the markets. What we're looking to expand that Buy Box again is just more consistency in the mortgage rates. And so we can't have mortgage rates moving 25 bps in a day or 2 days. That's -- that's not good and because the affordability. And so to expand that is something that we could it's fairly easy for us to turn back on again. And we're doing that with like we're talking about our technology limelight and some of the AI stuff that we're working on and continuing to build out with the homes. And so we're getting indicators from technology going, hey, this kind of product in these markets, you are performing really well. So it's -- right now it's a balance between all of our -- the technology we leverage, but also our boots on the ground, because every market is different right now. So but -- but mortgage rates is specifically from our Buy Box of how we're what we'll increase. But thank you.

Great. Well, in closing, could you talk a little bit about, long-term vision for Offerpad, tied all together for us. And, what you see as the trajectory from Offerpad here on out, what are some of the things that you're most excited about that we collectively may not be as focused on, yes?

Yes, I think so. I think the most important thing is, we're still very early. We're still probably bottom of the first inning of where Offerpad is heading. The best thing and the worst thing has been the success of our iBuying business. And so because people look at us as an iBuyer and only the cash offer. What I started Offerpad to do was to be a one stop solution platform that people can come to and handle all of their -- all of their real estate needs and not real estate needs of, hey, here's 3 of this. But real estate needs is I can get the transaction. And so what I'm really excited about is the progress we've made on the technology front, but also on our new products over the last 6 to 8 months, because we haven't been buying the volume of homes on the EXPRESS side. The focus we've had on rolling out these products, when -- today's our 2 year anniversary going public, and so everything has been a been a whirlwind from our growth of, hundreds of percents over a year. And with the success of the iBuying business, this has given this allowed us time to more to give us even more focus on the other solutions that we have on our platform, which has been really, really important. And so I think when and I'm very confident when people see what the ability of Direct Plus and Renovate, and they and they don't put us just in an iBuyer category, and then look at all of the solutions that we can provide with what we've built. I'm really excited about where we're heading with that. And like I said, I think it's just, the adversity in the markets from COVID to coming out with -- and both ends of this, there's been supply issues on both ends. From the supply issues when the market was doing this, to supply issues right now of people not transacting. But when you get back to a normalized market, I mean, we're built to be very successful during those times, and so that's what I get excited about.

It's a fantastic way to cap off the presentation. So, Brian, thank you so much for all your thoughts and insights, that was great.

All right. Thanks a lot, Mike. Really appreciate it. Thank you everyone.