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

Good afternoon, everyone. My name is Dae Lee, I'm an Internet Analyst at JPMorgan. With us today is Offerpad's, Founder and CEO, Brian Bair. Brian founded Offerpad in 2015 with the mission to provide the best way to buy and sell a home, and fast forward 9 years, Offerpad is one of the largest home buyers in the U.S. So with that, let's get started. Brian, thanks for joining us today.

Thank you. Thank you for having me.

All right. So we're going to start off high level. So for those in the audience who might be less familiar with Offerpad, could you give us an overview of what Offerpad is and what makes Offerpad unique?

Sure, Offerpad is a real estate platform. People can come to Offerpad and sell their home within 24 hours, basically takes them a few minutes to upload their home. We'll give them a cash offer within 24 hours. We also have 4 distinct services. We have our home buying business, which is straight from the homeowner, a renovation business that will do renovations on behalf of others. People don't look at Offerpad this way, but not just we're one of the largest home buyers, but we're also one of the largest renovation companies in the country from doing our own renovations. Now we outsource that to others. And we have our -- what we call Direct Plus. That's where we allow other investors to buy top of funnel with us, which is our Direct Plus. And then we have our partner program and our partner is where we work with agents and has a -- for different services to our real estate agents.

Okay. We'll touch on that later too. But when you look across those major services that you offer, like what's the mix across those services today?

Yes. So we're making really good progress with those services. A few years ago, about 90% of every -- by 95% of everything was through just our cash offer business. Now about 1/3 of our business is coming from our other platforms. So renovation is making really good headway. What we want to do, the goal is if someone comes to Offerpad, we want to have the solution and we solve the hardest part, that's the transaction. So when someone comes to us, they can accept our cash offer or we can give them to one of our partners, if they can help them list their home on the open market, and always come back and sell it for a cash offer at any time. So we're making really good progress with all other services, and we'll continue to do so.

Okay. And when you look at your cash offer side, I mean obviously, they have options in front of them. So like what -- why do you think sellers sell to Offerpad? And how could you get more homeowners to sell to you?

Yes. So, the easy answer is certainty and control. What we provided when we founded Offerpad is to remove the friction of the real estate transaction. So people could come, like I said, tell us about their home and get an offer within 24 hours. Because all the customer does is want to close their home, they just want their home sold, so that's what we provide. So the certainty and control and removing the friction is key. The other part of that is as we continue to grow our market share, as we roll out more services, there's a lot of ways to get market share in one market, not just through your cash offer business. So we'll continue to have other services, not just our cash offer business.

Okay. And I guess looking across your offering is like how much a frame, how big the opportunity is for you guys?

I'm biased. But as I look at what we want to do in every product that we roll out, we look at it as how can we solve a problem and "Why would anyone go anywhere else?" If they can come to us and get a strong cash offer and to have the choice to list a home on the open market and/or decide to potentially renovate their home in the future, we want to provide products that separate ourselves from others but also gives the consumers exactly what they want. That's the control and to remove the friction from it. So I think the opportunity is massive. As we saw, before the music stopped about 1.5 years ago and the interest rates and everything else I'm sure we'll talk about, you saw our market share continue to grow and grow and grow. And like I said, what we -- the service we offer, especially our cash offer business, is exactly what the homeowner wants. They want their homes sold, and that's what we can provide.

Okay. Got it. All right. So let's touch on the housing market, since you mentioned it. So you are one of the biggest home buyers in the U.S. I do think it's important, and it will be helpful to hear your assessment of the current state of the industry. And I guess, what key assumptions guide your current operational decisions?

Yes. So it's -- we're starting to see it stabilize definitely from what it was over maybe a year ago or even several months ago. The thing that's still the most vulnerable is the interest rates. And so from the overall market, you have a seller that's locked into their current mortgage rates, right? And so they're going to have to give up that mortgage. And so that's where you see some of that. But then you have a buyer that is struggling with affordability. And so one of the things that we talk about all the time is there is less transaction and people talk about the -- there's 1.5 month's supply of homes, which is true, but also you have buyers that are trying to get into that home from an affordability standpoint. So a move in 25 to 50 basis points in mortgage rates really affects what they can buy. And so those are the things that we've been watching very closely. Though I'll tell you that you're seeing the market, especially home prices and things, stabilize again from where they were. But -- so those are what -- that's what we're seeing.

Okay. And I guess given the changes you talked about that happened in the industry over the past 1.5 years, like how has Offerpad adapted its approach and operations? And I think you talked about industry reaching some level of stability, but has your operations reached stability as well?

Yes. Operations definitely reached stability. We've had to course correct when the market started to change and adjust. But we've been -- real estate is always doing something in every market, say all the time, there's always -- you can never get a normal market, people say. Just there's always something going on. But we've definitely seen something that I think is really generational over the last 1.5 years of just everything that we just talked about earlier with mortgage rates going up so fast and home prices in a lot of markets increased 60%, 70%, 80% with 2 years when they run up. And so you have this just this kind of standoff right now that's happening. But what we've done is, we've looked at it and we've been very disciplined in how we're going to approach it, and what type of home we're going to buy to make sure that we're buying, one, focused on affordability on the home prices. But also the markets and where we're buying is a little bit different than what we've seen in the past as well. The markets we're focused on, that's been more of the affordable markets, places like Charlotte and Raleigh and those areas.

Okay. I mean I guess, does that mean if a similar shift in the market were to happen in the future, like could you do things differently to better navigate through that kind of shift?

Yes. First and foremost, we pride ourselves in always adjusting, being flexible, and always trying to get better every day. That's just kind of one of our core messages as a company. As you look for -- as you look through the rapid mortgage rates, there's not a lot we could have -- it just never happened in the last 30 or 40 years. But what we have done is, as we roll out more of our asset-light services, doesn't make us so heavy on the asset-heavy services on the cash offer business. So when -- as you roll out other services, people don't have to look for us just as a cash offer option. Again, they can list their home or use other services that we have.

Okay. That makes sense. And I guess this is maybe a million dollar or maybe a billion dollar question, but like where do you think the industry is headed in the next 6 to 12 months? And I guess, first of all, what would you like to see happen in the market? And then conversely, like where things could go wrong?

Yes, I think -- even with the recent NAR settlement and everything else, I've been screaming from the rooftops for a long time, one of the reasons Offerpad was founded is the way that everyone looks at traditional real estate is changing, and it's going to continue to evolve and change. And everything that affects our life, even from the way that you buy and sell a car to food delivery to everything else is changing, and housing is going to change drastically as well. Customers are going to want -- consumers want more certainty, more control of the transaction. And so as you look at the -- over the next 6 to 12 months, I think you're going to continue to see, especially with the new lawsuit and you see what happens to buyer broker commissions, you're going to see sellers get more and more used to dealing straight -- I'm sorry, buyers dealing straight with the sellers instead of having -- there's a couple of things that are significant there is that one of the reasons a buyer needs an agent is so they can get access to the home. That's a key point in to help them with the contracts and to show various homes. As we look at our positioning, we have an instant access product that people can access our homes directly through our app so they can open the homes themselves, they can submit an offer to us directly. So I think that -- you're going to see that evolve and starting to change over time. And you're going to see more and more be tech-enabled and more and more consumer control than what it's been. Because I just want to -- if you really look at it, real estate from the transaction process. And when you sell your home traditionally, yes, you can look at what your home is online and see pictures online and maybe the price or, I guess, what the price would be, but everything else has been the same since 1984 of the transaction. I mean everything is very varied. So all of those different friction points are going to change. It's going to be a much easier process in the future. Not as if that's 6 or 12 months, but that -- over time, that's what you're going to see.

I mean that was one of the questions I had in here, maybe for later. But I mean since you mentioned it, so it sounds like you think NAR settlement could drive changes in the industry that could be favorable for you guys. I mean does that -- I mean you guys have to shift your value proposition a little bit going forward?

No. Actually, we were -- I'd like to say I was this smart that I knew this was happening, but I knew real estate was changing fundamentally. But what's happened over the last year, especially with the buyer agent commissions and what's happened is, like a lot of our pass-through fees when -- in our service fees are commissions that we pay on the other end. And so what happens, that gives us more ability to control the process. But our -- and just like instant access, we've had instant access since 2017. It's -- we've had that for a while. So we're really set up for that and of what you can see. And agents aren't going away tomorrow. That's -- none of this is going to happen overnight. And no one really even knows where it's going to really open, where it's going to land. But once you open that where buyers can have more direct communication with sellers, I think that's when you're going to start seeing the industry move over and over again.

Okay. All right. So it doesn't sound like any out there scares you, but I mean looking out next 6 to 12 months, are there anything that could go wrong there or something that's keeping you up at night?

No. I mean listen, I'd love to see -- mortgage rates are always the thing. If you remember going into this year, we were expecting a Fed drop of 2, 3, 4, whatever you wanted to believe of what the indication was. And so -- but what we've done, and this is kind of the part being disciplined, we built the model now that we're prepared for the amount of volume we expect right now and not expecting for hyper growth or needing that interest rates to drop. But the one thing that we were talking about this morning that's really interesting about this market is that you have sellers and buyers that are -- there's this massive demand. When you see interest rates go down just a little bit, you see your buying activity or showing activity goes up drastically. I mean literally, day by day, buyers never watched interest rates this closely in the past. Now they do if they get into their home. And then you see the same thing on the selling side as well. So you just see people that are -- there's this pent-up demand that's going to happen. It's just it is a lot of the sensitivity of the interest rates.

Right. We're all holding our breath for that to happen. Okay. So digging closer to your business. So when you think about driving growth versus improving profitability, like given where the industry is at right now, like what's more important?

Yes, profitability. So as we look at it, which we -- I think we talked about in our last earnings call, but -- so we're really focused to getting to EBITDA profit by the end of the year, and then responsible and then growth after that, again, preparing for the -- knowing what we know now about the market conditions. We want to get profitable, and we're making massive strides in headway in doing that. And again, what I really like about that, it's not just through our cash offer business, it's through our other channels. And I was telling the team before I got here is that a lot of these different asset-light businesses are, in my opinion, are going to be the lowest volume we've ever seen from those channels. The massive growth in our renovation business with our -- really our enterprise B2B business has grown in this environment, and so where transactions for investors are down there. So there is a lot of opportunity. But from that perspective, I really like that we're seeing dollars come from different revenue streams, and that's going to help our growth, help us get profitable quicker and help us invest in growth to grow again.

Right. Okay. And I guess in Internet, like becoming profitable and generating free cash flow could be viewed differently. So just wondering, like just becoming profitable means you're now generating free cash flow or is it from -- I guess, where is that?

Yes. Yes. So step by step, want to get EBITDA profitable there. And then the next very close step is we want to start creating free cash flow on that end of it. And then once we get this, then again, start to grow. But we -- again, controlling what we can control right now is what we keep saying is there's -- over the last 1.5 years, there was all the uncertainty and so having to evolve and adapt to like the way we did, like with the position we are right now, but now we've got to focus on let's get EBITDA profitable and cash flow profitable. And then...

Okay. How close behind is cash flow profitability behind EBITDA profitability? Is that something you can comment on?

Yes. I think -- I don't know if I could comment on that with -- I'm looking at my CFO right here and he's getting nervous if anything that I'm going to say. No, it's -- what I will say, you say is it -- one should follow the other one fairly closely, I would -- I mean we've been as disciplined as we have been with our OpEx and our margins from our asset-light businesses. We're making really good headway on that end.

Right. And it is just interest that's between EBITDA and free cash flow, right? Okay. All right. Okay. So let's dig into your cash offer side. So I know you said you're prioritizing profitability, but top line growth is obviously very important as well. So what are the drivers of your top line growth?

Yes. And this is interesting because I feel like what I hear a lot is when you're going to start buying thousands of homes, couple thousands of homes in a month again, this is why it's really important for us to be disciplined. Like for example, if I had done that 3 or 4 months ago and interest rates did what no one expected them to do, so we just got -- we want to stay disciplined and continue to grow, not hockey stick growth, but look at our revenue, make sure we're buying the right type of product in this environment, again, like I mentioned, affordable. Now we're starting to widen our buy box. So we can see -- and that's the other thing is to explain, so everything for us is a risk metric of every home that we buy. And so as market has more uncertainty, our buy box narrows. And as we see more certainty in the market or -- and this is very market specific, subdivisions specific, you can see our buy box continue to grow and grow. And so -- and you open up from the price point to the type of home that we buy, and everything else. And I will tell you the one thing that is playing -- that has played nicely in this environment is I mean, just for us having the renovation skill set we do, a lot of the people over the last year have been people -- it's really been a life moment that they're not moving because they want to move, they're moving because something has happened that they have to move. And so us being able to acquire their home but also put renovation into that home and put a better product on the market for the next buyer, is been really important. And so it's -- in some cases, these people don't have another option because their home is really rough to live there or other situations going on. We can go in there and take that and again, put a better product on the market once we buy it.

Okay. And I guess you kind of touched on this already, but what do you need to see to accelerate your pace of home acquisition? And does that require additional investments?

Yes. So I would say we're starting to see a little bit of that now, but I would say more consistency in the mortgage. Again, just I'm a broken record, the interest rates on that end of it. And again, in normal worlds, it wouldn't be, but just because the affordability is so tight on these markets of people getting into the home. So those are things that we've -- so we're watching that very, very closely. And again, it's all market specific. The Midwest is much different than like the Phoenixes and Denvers and those areas. And so we're just looking at so we can accelerate that. But in the meantime, as we're doing that and being disciplined on what we're buying and we feel buying the right product in this environment, we're also focused on the other 3 service products that we have that we can grow, like we've seen with Renovate. Our -- the ability to get in this time to get top of funnel from not just our straight consumer marketing and advertising, but through our agent network, and so we have -- we launched our product with our agents. And so agents are coming to us first before they list a house on MLS to see what we can pay for that home. So we're getting top of funnel different places that help balance sheet and CAC and see all those things.

Right. And before we get to the -- your source of traffic or a source of seller leads, but you're still taking share even in this rate environment, right? So you are still driving...

Yes, because I think we're like 2% to 4% during when -- during the normal times, I would say, or back before the music stopped. They, on -- now we're still -- compared to the transaction, we're still getting good market penetration. Now we still want to get that back. We still want to grow that back because our buy box has been a little more narrow so we want to open that up and get more. And like I've always said, our ability because of our renovation, we can buy older product -- properties that need a little bit more work. So we can also buy the kind of the Grade A properties, but go down the funnel. So we can turn that. And the easiest switch we can turn on, I guess the way I would want to communicate, the easiest switch that we can turn on is buying more homes. That is something that depends on what we want to pay and what our risk tolerance is. So -- and again, those are things that we watch daily.