OFFERPAD SOLUTIONS INC. The following discussion and analysis provides information that Offerpad's management believes is relevant to an assessment and understanding of Offerpad's consolidated results of operations and financial condition. The discussion should be read together with the unaudited interim condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and accompanying notes included in Item 8 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 filed with theSecurities and Exchange Commission (the "SEC") onFebruary 28, 2023 . This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements" in this Form 10-Q. Offerpad's actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" in Part I, Item 1A of Offerpad's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 .
Overview
Our Business
Offerpad is a customer-centric, home buying and selling platform that provides customers with the ultimate home transaction experience, offering convenience, control, certainty, and value. Since our founding in 2015, we have created a pioneering iBuying company and leading on-demand real estate marketplace that has transacted on homes representing approximately$10.0 billion of aggregate revenue throughMarch 31, 2023 . We are headquartered inChandler, Arizona and operated in over 1,700 cities and towns in 25 metropolitan markets across 15 states as ofMarch 31, 2023 . As we expand further into our existing markets, launch new markets, and develop a wide range of new ancillary services, we look forward to bringing our mission of providing your best way to buy and sell a home to even more homeowners and prospective home purchasers across the country.
Current Economic Conditions and Health of the
Our business and operating results are impacted by the general economic conditions and the health of theU.S. residential real estate industry, particularly the single-family home resale market. Our business model depends on a high volume of residential real estate transactions throughout the markets in which we operate. This transaction volume affects substantially all of the ways that we generate revenue, including our ability to acquire new homes and generate associated fees, and our ability to sell homes that we own. During the first quarter of 2023, the residential real estate market conditions were significantly more challenging compared to the first quarter of 2022, as the combination of the rapid rise to relatively high mortgage interest rates, increased inflation in the broader economy, volatility in the stock market, and various other macroeconomic and geopolitical concerns that impacted consumer budgets and confidence throughout the second half of 2022 continued to impact consumer demand for residential real estate. These macroeconomic factors continued to negatively impact housing affordability and homebuyer sentiment, causing many prospective customers to delay their homebuying decisions. These turbulent residential real estate market conditions continued to significantly impact our operating results during the first quarter of 2023. Our revenue decreased by$764.3 million , or 55.6% in the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 driven by a 55% reduction in homes sold. Further, during the first quarter of 2023, we experienced an increase in the average period of time our homes are being held in inventory, causing an increase in holding costs and downward pressure on sales prices and margins. Although certain macroeconomic conditions have begun to show early signs of stabilization, including the mortgage interest rate environment, we expect interest rate and economic uncertainties as well as affordability pressures to continue to negatively impact consumer demand for residential real estate during the second quarter of 2023. Further, if these macroeconomic trends continue for an extended period of time, we expect these factors will continue to negatively impact housing affordability and homebuyer sentiment, and result in a decline in the demand for our homes and the services offered by our platform, which could materially impact our financial condition and results of operations.
New York Stock Exchange Delisting Notice
OnNovember 15, 2022 , we were notified by the NYSE that we are not in compliance with Section 802.01C of the NYSE Listed Company Manual because the average closing price of our Class A common stock was less than$1.00 over a consecutive 30 trading-day period. The notice does not result in the immediate delisting of our Class A common stock from the NYSE.
OnNovember 16, 2022 , we notified the NYSE that we intend to cure the stock price deficiency and to return to compliance with the NYSE continued listing standard. We can regain compliance at any time within the six-month period following receipt of the NYSE notice if on the last trading day of any calendar month during the cure period we have a closing share price of at least$1.00 and an average closing share price of at least$1.00 over the 30 trading-day period ending on the last trading day of that month. We intend to consider available alternatives, including, but not limited to, a reverse stock split, subject to stockholder approval no later than at our next annual meeting of stockholders, if necessary to cure the stock price non-compliance. Under the NYSE's rules, if we determine that we will cure the stock price deficiency by taking an action that will require stockholder approval at our next annual meeting of stockholders, the price condition will be deemed cured if the price promptly exceeds$1.00 per share, and the price remains above that level for at least the following 30 trading days.
Our Class A common stock will continue to be listed and trade on the NYSE during this period, subject to our compliance with other NYSE continued listing standards.
As described in our definitive proxy statement filed with theSEC onApril 24, 2023 , at the Company's 2023 Annual Meeting of Stockholders, the Company's stockholders will vote on a proposed amendment to the Company's certificate of incorporation to effect a reverse stock split of all of the Company's outstanding shares of Class A Common Stock and Class B Common Stock at a ratio ranging from any whole number between 1-for-10 and 1-for-60, with the exact ratio within such range to be determined by the Board in its discretion.
Factors Affecting Our Performance
We believe that our performance and future success depend on a variety of factors that present significant opportunities for our business but also present risks and challenges that could adversely impact our growth and profitability, including those discussed below.
Market Penetration in Existing Markets
Residential real estate is one of the largest industries, with roughly$2.3 trillion in value of homes transacted in 2022 inthe United States , and is highly fragmented with over 100,000 real estate brokerages, according to theNational Association of Realtors (NAR). In 2022, we estimate that we captured roughly 0.9% market share across our then active 28 markets. Given this high degree of fragmentation, we believe that bringing a solutions-oriented approach to the market with multiple buying and selling services to meet the unique needs of customers could lead to continued market share growth and accelerated adoption of the digital model. We have demonstrated higher market share in certain markets, providing the backdrop to grow our overall market penetration as our offerings expand and evolve. By providing a consistent, transparent, and unique experience, we expect to continue to build upon our past success and further strengthen our brand and consumer adoption.
Expansion into New Markets
Since our launch in 2015 and throughDecember 31, 2022 , we expanded into 28 markets, which covered roughly 24% of the 5.6 million homes sold inthe United States in 2022. Given this market coverage, we believe there is significant opportunity to both increase market penetration in our existing markets and to grow our business through new market expansion, although new market expansion typically generates lower initial margins as we begin operations that increase as we scale volumes. Also, because of our strategic approach to renovations, as well as the listing and buyer representation of our listing service product, we believe a significant portion of the total addressable market is serviceable with our business model. While we intend to be flexible in assessing market entry points, we will generally look to expand into new markets with qualities similar to our existing markets, including median price point, annual transaction count, as well as strong presence of new homebuilders. We believe the scale and versatility of our platform will allow us to continue to expand into new markets, with our primary barriers to entry consisting largely of capital needed to expand operations and the tendency of consumers to adopt our real estate offerings. Given the recent volatility in the residential real estate market conditions, we did not expand into any new markets during the first quarter of 2023 and we currently do not anticipate expanding into any new markets in the second quarter of 2023.
Ancillary Products and Services
Core to our long-term strategy is a suite of offerings to meet the unique needs of our customers. As such, we view adding both additional products and services as well as additional product specific features as critical to supporting this strategy. We aim to deliver our offerings to customers in a smooth, efficient, digital driven platform, focused on transparency and ease of use. The primary goal is to be able to offer multiple services tied to the core real estate transaction, allowing customers to bundle and save. Although further developing these products and services will require significant investment, growing our current offerings and offering additional ancillary products and services, potentially including energy efficiency solutions, smart home technology, insurance, moving services, and home warranty services, we believe will strengthen our unit economics and allow us to better optimize pricing. Generally, the revenue and margin profiles of our ancillary products and services are different from our cash offering service that accounts for the vast majority of our revenue, with most ancillary products and services having a smaller average revenue per transaction than our cash offering service, but a higher margin.
Below is a summary of our current ancillary products and services:
•
Concierge Listing Service: While partnering with Offerpad, the customer may have access to complementary list-ready services to prepare their home for market, such as carpet cleaning, landscape and pool maintenance, and handyman services. Customers also have the ability to utilize Offerpad's renovation advance program to complete strategic upgrades to maximize the resale value of the home.
•
Offerpad Home Loans ("OPHL"): We provide access to mortgage services through our in-house mortgage solution, OPHL, or through a third-party lending partner.
•
Bundle Rewards: The Offerpad Bundle Rewards program allows customers to receive multiple discounts when selling and buying a home with Offerpad, and by obtaining their home loan with OPHL.
•
Title and Escrow: To deliver title and escrow closing services, we have a national relationship with a leading title and escrow company, through which we are able to leverage our size and scale to provide exceptional service with favorable economics.
Expand relationships with home buyers
We continue to pursue opportunities that enable us to grow our service offerings, and have recently begun offering a program that allows investors and single-family rental companies an opportunity to purchase homes directly from the homeowner, matching investors with sellers. We expect this program will allow us to help more homeowners sell their home, while also expanding our ability to reach more customers.
Unit Economics
We view Contribution Margin and Contribution Margin after Interest (see "-Non-GAAP Financial Measures") as key performance indicators for unit economic performance, which are currently primarily driven by our cash offer transactions. Future financial performance improvements are expected to be driven by expanding unit level margins through initiatives such as:
•
Continued optimization of acquisition, renovation, and resale processes, as we increase our market penetration in existing markets;
•
Effectively increasing our listing service business alongside the cash offer business, optimizing customer engagement and increasing conversion of requests for home purchases; and
•
Introducing and scaling additional ancillary services to complement our core cash offer and listing service products.
Operating Leverage
We utilize our technology and product teams to design systems and workflows to make our operations teams more efficient and able to support and scale with the business. Many positions are considered volume based, and as our business grows, we focus on developing more automation tools to gain additional leverage. Additionally, in periods when our business is growing, we expect to be able to gain operating leverage on portions of our cost structure that are more fixed in nature as opposed to purely variable. These types of costs include general and administrative expenses and certain marketing and information technology expenses, which grow at a slower pace than proportional to revenue growth.
Inventory Financing
Our business model requires significant capital to purchase inventory homes. Inventory financing is a key enabler to our growth and we rely on our non-recourse asset-backed financing facilities, which primarily consist of senior and mezzanine secured credit facilities to finance our home purchases. The loss of adequate access to these types of facilities, or the inability to maintain these types of facilities on favorable terms, would impair our performance. See "-Liquidity and Capital Resources-Financing Activities."
Seasonality
The residential real estate market is seasonal and varies from market to market. Typically, the greatest number of transactions occur in the spring and summer, with fewer transactions occurring in the fall and winter. Our financial results, including revenue, margins, inventory, and financing costs, have historically had seasonal characteristics generally consistent with the residential real estate market, a trend we expect to continue in the future, subject to the market conditions discussed above.
Risk Management
Our business model is based upon acquiring homes at a price which will allow us to provide a competitive offer to the consumer, while being able to add value through the renovation process, and relist the home so that it sells at a profit and in a relatively short period of time. We have invested significant resources into our underwriting and asset management systems. Our real estate operations team, including our pricing team, together with our software engineering and data science teams are responsible for underwriting accuracy, portfolio health, and workflow optimization. Our underwriting tools are constantly updated with inputs from third-party data sources, proprietary data sources as well as internal data to adjust to the latest market conditions. This allows us to assess and adjust to changes in the local housing market conditions based on our technology, analysis and local real estate experience, in order to mitigate our risk exposure. Further, our listed homes are in market-ready and move-in ready condition following the repairs and renovations we conduct. Historically, we have been able to manage our portfolio risk in part by our ability to manage holding periods for our inventory. Traditionally, resale housing pricing moves gradually through cycles; therefore, shorter inventory holding periods limit pricing exposure. As we increased our scale and improved our workflow optimization in prior years, our average inventory holding period of homes sold improved from 138 days in 2016 to 76 days during 2021, which was primarily due to the favorable housing market conditions across our markets in 2021. The combination of the rapid rise to relatively high mortgage interest rates, increased inflation in the broader economy, volatility in the stock market, and various other macroeconomic and geopolitical concerns that impacted consumer budgets and confidence throughout the second half of 2022 continued to negatively impact consumer demand for residential real estate during the first quarter of 2023. Given our focus on risk management, and in response to this softening consumer demand which began during the second half of 2022, we adjusted our home purchase criteria through more conservative acquisition underwriting, resulting in higher expected internal rates of return based on current market conditions, and continued to adjust pricing on our inventory to reflect market level trends in second half of 2022 and throughout the first quarter of 2023. These actions resulted in a significant reduction in our home acquisition pace to allow us to manage overall inventory growth. This, in turn, led to the average holding period of homes sold increasing to 101 days during 2022, which is consistent with our expected average inventory holding period and our historical norm, and further temporarily increased to 185 days during the first quarter of 2023 as we sold through our aged inventory. As our overall inventory mix continues to shift and includes a greater composition of newer acquired homes, our average inventory holding period generally decreases. As a result, we anticipate our average inventory holding period will decline in the second quarter of 2023. The increase in the average period of time our homes are being held in inventory has caused an increase in holding costs and downward pressure on sales prices and margins. If these macroeconomic trends continue for an extended period of time, we expect these factors will continue to negatively impact sales prices and margins. Non-GAAP Financial Measures In addition to our results of operations below, we report certain financial measures that are not required by, or presented in accordance with,U.S. generally accepted accounting principles ("GAAP"). These measures have limitations as analytical tools when assessing our operating performance and should not be considered in isolation or as a substitute for GAAP measures, including gross profit and net income. We may calculate or present our non-GAAP financial measures differently than other companies who report measures with similar titles and, as a result, the non-GAAP financial measures we report may not be comparable with those of companies in our industry or in other industries.
Adjusted Gross Profit, Contribution Profit, and Contribution Profit After Interest (and related margins)
To provide investors with additional information regarding our margins, we have included Adjusted Gross Profit, Contribution Profit, and Contribution Profit After Interest (and related margins), which are non-GAAP financial measures. We believe that
Adjusted Gross Profit, Contribution Profit, and Contribution Profit After Interest are useful financial measures for investors as they are used by management in evaluating unit level economics and operating performance across our markets. Each of these measures is intended to present the economics related to homes sold during a given period. We do so by including revenue generated from homes sold (and ancillary services) in the period and only the expenses that are directly attributable to such home sales, even if such expenses were recognized in prior periods, and excluding expenses related to homes that remain in inventory as of the end of the period presented. Contribution Profit provides investors a measure to assess Offerpad's ability to generate returns on homes sold during a reporting period after considering home acquisition costs, renovation and repair costs, and adjusting for holding costs and selling costs. Contribution Profit After Interest further impacts gross profit by including interest costs (including senior and mezzanine secured credit facilities) attributable to homes sold during a reporting period. We believe these measures facilitate meaningful period over period comparisons and illustrate our ability to generate returns on assets sold after considering the costs directly related to the assets sold in a presented period.
Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest (and related margins) are supplemental measures of our operating performance and have limitations as analytical tools. For example, these measures include costs that were recorded in prior periods under GAAP and exclude, in connection with homes held in inventory at the end of the period, costs required to be recorded under GAAP in the same period.
Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We include a reconciliation of these measures to the most directly comparable GAAP financial measure, which is gross profit.
Adjusted Gross Profit / Margin
We calculate Adjusted Gross Profit as gross profit under GAAP adjusted for (1) net inventory valuation adjustment plus (2) interest expense associated with homes sold in the presented period and recorded in cost of revenue. Net inventory valuation adjustment is calculated by adding back the inventory valuation adjustment charges recorded during the period on homes that remain in inventory at period end and subtracting the inventory valuation adjustment charges recorded in prior periods on homes sold in the current period. We define Adjusted Gross Margin as Adjusted Gross Profit as a percentage of revenue. We view this metric as an important measure of business performance, as it captures gross margin performance isolated to homes sold in a given period and provides comparability across reporting periods. Adjusted Gross Profit helps management assess performance across the key phases of processing a home (acquisitions, renovations, and resale) for a specific resale cohort.
Contribution Profit / Margin
We calculate Contribution Profit as Adjusted Gross Profit, minus (1) direct selling costs incurred on homes sold during the presented period, minus (2) holding costs incurred in the current period on homes sold during the period recorded in sales, marketing, and operating, minus (3) holding costs incurred in prior periods on homes sold in the current period recorded in sales, marketing, and operating, plus (4) other income, net which is primarily composed of interest income earned on our cash and cash equivalents and fair value adjustments of derivative financial instruments. The composition of our holding costs is described in the footnotes to the reconciliation table below. We define Contribution Margin as Contribution Profit as a percentage of revenue. We view this metric as an important measure of business performance as it captures the unit level performance isolated to homes sold in a given period and provides comparability across reporting periods. Contribution Profit helps management assess inflows and outflow directly associated with a specific resale cohort.
Contribution Profit / Margin After Interest
We define Contribution Profit After Interest as Contribution Profit, minus (1) interest expense associated with homes sold in the presented period and recorded in cost of revenue, minus (2) interest expense associated with homes sold in the presented period, recorded in costs of sales, and previously excluded from Adjusted Gross Profit, and minus (3) interest expense under our senior and mezzanine secured credit facilities incurred on homes sold during the period. This includes interest expense recorded in prior periods in which the sale occurred. Our senior and mezzanine secured credit facilities are secured by our homes in inventory and drawdowns are made on a per-home basis at the time of purchase and are required to be repaid at the time the homes are sold. See "-Liquidity and Capital Resources-Financing Activities." We define Contribution Margin After Interest as Contribution Profit After Interest as a percentage of revenue.
We view this metric as an important measure of business performance. Contribution Profit After Interest helps management assess Contribution Margin performance, per above, when fully burdened with costs of financing.
The following table presents a reconciliation of our Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest to our gross profit, which is the most directly comparable GAAP measure, for the periods indicated:
Three Months Ended March 31,
(in thousands, except percentages and homes
sold, unaudited) 2023 2022
Gross profit (GAAP) $ 7,285 $ 132,142
Gross margin 1.2 % 9.6 %
Homes sold 1,609 3,602
Gross profit per home sold $ 4.5 $ 36.7
Adjustments:
Inventory valuation adjustment - current period
(1) 7,285 434
Inventory valuation adjustment - prior period (2) (51,515 ) (1,114 ) Interest expense capitalized (3) 4,677 4,278 Adjusted gross (loss) profit$ (32,268 ) $ 135,740 Adjusted gross margin (5.3 )% 9.9 % Adjustments: Direct selling costs (4) (18,061 ) (31,854 ) Holding costs on sales - current period (5)(6) (1,248 ) (1,991 ) Holding costs on sales - prior period (5)(7) (1,886 ) (819 ) Other income, net (8) 282 4 Contribution (loss) profit$ (53,181 ) $ 101,080 Contribution margin (8.7 )% 7.4 % Homes sold 1,609 3,602
Contribution (loss) profit per home sold $ (33.1 ) $
28.1
Adjustments:
Interest expense capitalized (3) (4,677 ) (4,278 ) Interest expense on homes sold - current period (9) (5,498 ) (5,312 ) Interest expense on homes sold - prior period (10) (12,032 ) (3,443 ) Contribution (loss) profit after interest$ (75,388 ) $
88,047
Contribution margin after interest (12.4 )% 6.4 % Homes sold 1,609
3,602
Contribution (loss) profit after interest per home sold $ (46.9 ) $ 24.4 (1)
Inventory valuation adjustment - current period is the inventory valuation adjustments recorded during the period presented associated with homes that remain in inventory at period end.
(2)
Inventory valuation adjustment - prior period is the inventory valuation adjustments recorded in prior periods associated with homes that sold in the period presented.
(3)
Interest expense capitalized represents all interest related costs, including senior and mezzanine secured credit facilities, incurred on homes sold in the period presented that were capitalized and expensed in cost of sales at the time of sale.
(4)
Direct selling costs represents selling costs incurred related to homes sold in the period presented. This primarily includes broker commissions and title and escrow closing fees.
(5)
Holding costs primarily include insurance, utilities, homeowners association dues, property taxes, cleaning, and maintenance costs.
(6)
Represents holding costs incurred on homes sold in the period presented and expensed to Sales, marketing, and operating on the Condensed Consolidated Statements of Operations.
(7)
Represents holding costs incurred in prior periods on homes sold in the period presented and expensed to Sales, marketing, and operating on the Condensed Consolidated Statements of Operations.
(8)
Other income, net principally represents interest income earned on our cash and cash equivalents and fair value adjustments of derivative financial instruments.
(9)
Represents both senior and mezzanine interest expense incurred on homes sold in the period presented and expensed to interest expense on the Condensed Consolidated Statements of Operations.
(10)
Represents both senior and mezzanine secured credit facilities interest expense incurred in prior periods on homes sold in the period presented and expensed to interest expense on the Condensed Consolidated Statements of Operations.
Adjusted Net Income (Loss) and Adjusted EBITDA
We also present Adjusted Net Income (Loss) and Adjusted EBITDA, which are non-GAAP financial measures, which our management team uses to assess our underlying financial performance. We believe these measures provide insight into period over period performance, adjusted for non-recurring or non-cash items.
We calculate Adjusted Net Income (Loss) as GAAP Net Income (Loss) adjusted for the change in fair value of warrant liabilities. We define Adjusted Net Income (Loss) Margin as Adjusted Net Income (Loss) as a percentage of revenue.
We calculate Adjusted EBITDA as Adjusted Net Income (Loss) adjusted for interest
expense, amortization of capitalized interest, taxes, depreciation and
amortization and stock-based compensation expense. We define Adjusted EBITDA
Margin as Adjusted EBITDA as a percentage of revenue.
Adjusted Net Income (Loss) and Adjusted EBITDA are supplemental to our operating
performance measures calculated in accordance with GAAP and have important
limitations. For example, Adjusted Net Income (Loss) and Adjusted EBITDA exclude
the impact of certain costs required to be recorded under GAAP and could differ
substantially from similarly titled measures presented by other companies in our
industry or companies in other industries. Accordingly, these measures should
not be considered in isolation or as a substitute for analysis of our results as
reported under GAAP.
The following table presents a reconciliation of our Adjusted Net Income (Loss)
and Adjusted EBITDA to our GAAP Net Income (Loss), which is the most directly
comparable GAAP measure, for the periods indicated:
Three Months Ended March 31 ,
(in thousands, except percentages, unaudited) 2023 2022
Net (loss) income (GAAP)$ (59,447 ) $
40,988
Change in fair value of warrant liabilities 389 (5,664 ) Adjusted net (loss) income$ (59,058 ) $
35,324
Adjusted net (loss) income margin (9.7 )% 2.6 % Adjustments: Interest expense 7,432
7,196
Amortization of capitalized interest (1) 4,677 4,278 Income tax expense 122 1,899 Depreciation and amortization 202 119 Amortization of stock-based compensation 1,843 1,628 Adjusted EBITDA$ (44,782 ) $ 50,444 Adjusted EBITDA margin (7.3 )% 3.7 % (1) Amortization of capitalized interest represents all interest related costs, including senior and mezzanine secured interest related costs, incurred on homes sold in the period presented that were capitalized and expensed in cost of sales at the time of sale. Results of Operations
The following details our consolidated results of operations and includes a
discussion of our operating results and significant items explaining the
material changes in our operating results during the three months ended
Three Months Ended March 31,
% of Revenue
(in thousands,
except percentages) 2023 2022 $ Change % Change 2023 2022
Revenue $ 609,579 $ 1,373,837 $ (764,258 ) (55.6 )% 100.0 % 100.0 %
Cost of revenue 602,294 1,241,695 (639,401 ) (51.5 )% 98.8 % 90.4 %
Gross profit 7,285 132,142 (124,857 ) (94.5 )% 1.2 % 9.6 %
Operating expenses:
Sales, marketing
and operating 42,351 69,888 (27,537 ) (39.4 )% 6.9 % 5.1 %
General and
administrative 14,479 14,657 (178 ) (1.2 )% 2.4 % 1.1 %
Technology and
development 2,241 3,182 (941 ) (29.6 )% 0.4 % 0.2 %
Total operating
expenses 59,071 87,727 (28,656 ) (32.7 )% 9.7 % 6.4 %
(Loss) income from
operations (51,786 ) 44,415 (96,201 ) (216.6 )% (8.5 )% 3.2 %
Other income
(expense):
Change in fair
value of warrant
liabilities (389 ) 5,664 (6,053 ) (106.9 )% (0.1 )% 0.4 %
Interest expense (7,432 ) (7,196 ) (236 ) 3.3 % (1.2 )% (0.5 )%
Other income, net 282 4 278 * 0.1 % 0.0 %
Total other expense (7,539 ) (1,528 ) (6,011 ) 393.4 % (1.2 )% (0.1 )%
(Loss) income
before income taxes (59,325 ) 42,887 (102,212 ) (238.3 )% (9.7 )% 3.1 %
Income tax expense (122 ) (1,899 ) 1,777 (93.6 )% (0.1 )% (0.1 )%
Net (loss) income $ (59,447 ) $ 40,988 $ (100,435 ) (245.0 )% (9.8 )% 3.0 %
* Not meaningful
Revenue
Revenue decreased by$764.3 million , or 55.6%, to$609.6 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . The decrease was primarily attributable to lower sales volumes and a slightly lower average sales price. We sold 1,609 homes during the three months endedMarch 31, 2023 compared to 3,602 homes during the three months endedMarch 31, 2022 , representing a decrease of 55%. Additionally, the average resale home price decreased slightly from$381,000 in the three months endedMarch 31, 2022 to$379,000 in the three months endedMarch 31, 2023 . These decreases were the result of the considerable softening in consumer demand for residential real estate during the three months endedMarch 31, 2023 as compared to the strong residential real estate market conditions during the three months endedMarch 31, 2022 , in addition to our significant reduction in home acquisition pace to allow us to manage overall inventory growth during the second half of 2022 and throughout the first quarter of 2023.
Cost of Revenue and Gross Profit
Cost of revenue decreased by$639.4 million , or 51.5%, to$602.3 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This decrease was primarily attributable to lower sales volumes, which was partially offset by a higher average home acquisition price. Gross profit margin was 1.2% for the three months endedMarch 31, 2023 compared to 9.6% for the three months endedMarch 31, 2022 . The decrease in gross profit margin was primarily due to a decrease in the difference between the average home resale price and the average home acquisition price during the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This decrease was primarily due to the impact of the considerable softening in consumer demand for residential real estate, which began during the second half of 2022 and continued through the first quarter of 2023, as the combination of the rapid rise to relatively high mortgage interest rates, increased inflation in the broader economy, volatility in the stock market, and various other macroeconomic and geopolitical concerns impacted consumer budgets and confidence throughout the second half of 2022 and into the first quarter of 2023. This, in turn, also resulted in an increase in the average period of time our homes are being held in inventory. Additionally, we recorded inventory valuation adjustments of$7.3 million during the three months endedMarch 31, 2023 as a result of the softening consumer demand for residential real estate, causing the net realizable value for certain homes in inventory to be lower than their respective cost, as compared to$1.0 million of inventory valuation adjustments during the three months endedMarch 31, 2022 .
Sales, Marketing and Operating
Sales, marketing and operating expense decreased by$27.5 million , or 39.4%, to$42.4 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This represented an increase as a percentage of revenue of 180 basis points to 6.9%. The decrease in expense was primarily attributable to the decrease in variable costs associated with the decrease in homes sold, and lower employee compensation costs associated with decreased average employee headcount as a result of the softening consumer demand for residential real estate. Additionally, advertising expense decreased by$6.7 million as we reduced marketing efforts in the first quarter of 2023 in response to the softening consumer demand for residential real estate. The increase as a percentage of revenue was primarily due to the significant decrease in revenue outpacing our cost reduction efforts.
General and Administrative
General and administrative expense decreased by$0.2 million , or 1.2%, to$14.5 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This represented an increase as a percentage of revenue of 130 basis points to 2.4%. The decrease in expense was primarily attributable to lower employee compensation costs associated with decreased average employee headcount as a result of the softening consumer demand for residential real estate, and decreased insurance costs. This decrease in expense was partially offset by an increase in fees associated with our credit facilities and overall inflationary increases. The increase as a percentage of revenue was primarily due to the significant decrease in revenue outpacing our cost reduction efforts.
Technology and Development
Technology and development expense decreased by$0.9 million , or 29.6%, to$2.2 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . This represented an increase as a percentage of revenue of 20 basis points. The decrease in expense was primarily attributable to lower employee compensation costs associated with decreased average employee headcount as a result of the softening consumer demand for residential real estate.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities for the three months endedMarch 31, 2023 and 2022 represents a$0.4 million loss and$5.7 million gain, respectively, that were recorded as a result of the fair value adjustment of the warrant liabilities that were assumed in connection with the Business Combination.
Interest Expense
Interest expense increased by$0.2 million , or 3.3%, to$7.4 million for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . The increase in expense was primarily attributable to a 4.38% increase in the weighted average variable interest rates associated with our senior secured credit facilities, which was partially offset by a$452.8 million decrease in the average outstanding balance of these senior credit facilities, from$740.0 million during the three months endedMarch 31, 2022 to$287.2 million during the three months endedMarch 31, 2023 .
Other Income, Net
Other income during the three months endedMarch 31, 2023 principally represents interest income earned on our cash and cash equivalents, which is partially offset by the loss that was recorded as a result of the fair value adjustment of the derivative financial instrument that was entered into duringMarch 2023 to manage risks that are principally associated with interest rate fluctuations.
Income Tax Expense
We recorded income tax expense of$0.1 million and$1.9 million during the three months endedMarch 31, 2023 and 2022, respectively, and our effective tax rate was (0.2)% and 4.4% for the respective periods. Our effective tax rate during the three months endedMarch 31, 2023 differed from the federal statutory rate of 21% primarily due to net operating loss carryforwards, stock-based compensation, changes in the fair value of warrant liabilities and state taxes.
Liquidity and Capital Resources
Overview
Cash and cash equivalents balances consist of operating cash on deposit with financial institutions. Our principal sources of liquidity have historically consisted of cash generated from our operations and financing activities. As ofMarch 31, 2023 , we had cash and cash equivalents of$107.7 million and had a total undrawn borrowing capacity of$1,369.5 million ,$488.6 million of which is committed and$880.9 million uncommitted.
With the exception of the year ended
We expect our working capital requirements to continue to increase over the long term, as we seek to increase our inventory and expand into more markets acrossthe United States . We believe our cash on hand, together with proceeds from the resale of homes and cash from future borrowings available under each of our existing credit facilities, or the entry into new debt financing arrangements or the issuance of equity instruments, will be sufficient to meet our short-term working capital and capital expenditure requirements for at least the next twelve months. However, our ability to fund our working capital and capital expenditure requirements will depend in part on the residential real estate market conditions in the markets in which we operate and in theU.S. in general, and various other general economic, financial, competitive, legislative, regulatory and other conditions that may be beyond our control. Depending on these and other market conditions, we may seek additional financing. Volatility in the credit markets, rising interest rates and softening consumer demand for residential real estate may have an adverse effect on our ability to obtain debt financing on favorable terms or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, or may require us to agree to unfavorable terms, and our existing stockholders may experience significant dilution.
Pre-Funded Warrants
DuringJanuary 2023 , we entered into a pre-funded warrants subscription agreement with the investors named therein (the "Investors") pursuant to which we sold and issued to the Investors an aggregate of 160.7 million pre-funded warrants (the "Pre-funded Warrants") to purchase shares of our Class A Common Stock. Each Pre-funded Warrant was sold at a price of$0.5599 per Pre-funded Warrant and has an initial exercise price of$0.0001 per Pre-funded Warrant, subject to certain customary anti-dilution adjustment provisions. The exercise price for the Pre-funded Warrants can be paid in cash or on a cashless basis, and the Pre-funded Warrants have no expiration date. The aggregate gross proceeds to us was approximately$90.0 million , which is being used for general corporate purposes, including working capital. The Investors includedBrian Bair , our founder, chief
executive officer and chairman of our board of directors;Roberto Sella , a member of our board of directors; First American Financial Corporation ("First American"), a holder of more than 10% of our outstanding Class A Common Stock; andKenneth DeGiorgio , a member of our board of directors and chief executive officer of First American. The Pre-funded Warrants became exercisable duringMarch 2023 . During the three months endedMarch 31, 2023 , 150.0 million Pre-funded Warrants were exercised, upon which, 150.0 million shares of our Class A common stock were issued. As ofMarch 31, 2023 , there were 10.7 million Pre-funded Warrants outstanding.
Financing Activities
Our financing activities primarily include borrowing under our senior secured credit facilities, mezzanine secured credit facilities and new issuances of equity (including the issuance of Pre-funded Warrants, as discussed above). Historically, we have required access to external financing resources in order to fund growth, expansion into new markets and strategic initiatives, and we expect this to continue in the future. Our access to capital markets can be impacted by factors outside our control, including economic conditions. Buying and selling high-valued assets, such as single-family residential homes, is very cash intensive and has a significant impact on our liquidity and capital resources. We use non-recourse secured credit facilities, consisting of both senior secured credit facilities and mezzanine secured credit facilities, to finance a significant portion of our real estate inventory and related home renovations. Our senior and mezzanine secured credit facilities, however, are not fully committed, meaning the applicable lender may not be obligated to advance new loan funds if they choose not to do so. Our ability to obtain and maintain access to these or similar kinds of credit facilities is significant for us to operate the business.
Senior Secured Credit Facilities
The following summarizes certain details related to our senior secured credit facilities (in thousands, except interest rates):
Weighted- End of
Average Revolving / Final
Borrowing Capacity
Outstanding Interest Withdrawal Maturity
As of
Rate Period Date
Financial institution
1 $ 200,000 $ 200,000 $ 400,000 $ 36,858 7.39 % June 2024 June 2024
Financial institution
2 100,000 100,000 200,000 27,634 7.00 % September 2023 March 2024
Financial institution
3 125,000 375,000 500,000 15,027 7.08 % December 2023 December 2023
Related party 50,000 25,000 75,000 5,630 9.46 % March 2024 September 2024
Senior secured credit
facilities $ 475,000 $ 700,000 $ 1,175,000 $ 85,149
As ofMarch 31, 2023 , we had four senior secured credit facilities that we use to fund the purchase of homes and build our real estate inventory, three with separate financial institutions and one with a related party, which holds more than 5% of our Class A common stock. Borrowings under the senior secured credit facilities accrue interest at a rate based on a Secured Overnight Financing Rate ("SOFR") reference rate, plus a margin which varies by facility. Borrowings under our senior secured credit facilities are collateralized by the real estate inventory financed by the senior secured credit facility. The lenders have legal recourse only to the assets securing the debt and do not have general recourse against us with limited exceptions. We have, however, provided limited non-recourse carve-out guarantees under our senior and mezzanine secured credit facilities for certain of the SPEs' obligations in situations involving "bad acts" by an Offerpad entity and certain other limited circumstances that are generally under our control. Each senior secured facility contains eligibility requirements that govern whether a property can be financed. When we resell a home, the proceeds are used to reduce the corresponding outstanding balance under the related senior and mezzanine secured revolving credit facilities.
Mezzanine Secured Credit Facilities
In addition to the senior secured credit facilities, we use mezzanine secured
credit facilities which are structurally and contractually subordinated to the
related senior secured credit facilities. The following summarizes certain
details related to our mezzanine secured credit facilities (in thousands, except
interest rates):
Weighted- End of
Average Revolving / Final
Borrowing Capacity
Outstanding Interest Withdrawal Maturity
As of
Rate Period Date
Related party
facility 1 $ 65,000 $ 32,500 $ 97,500 $ 6,438 11.00 % June 2024 June 2024
Third-party lender 1 22,500 22,500 45,000 5,533 12.50 % September 2023 March 2024
Third-party lender 2 - 112,500 112,500 4,147 9.50 % December 2023 December 2023
Related party
facility 2 35,000 17,500 52,500 11,781 13.00 % March 2024 September 2024
Mezzanine secured
credit facilities $ 122,500 $ 185,000 $ 307,500 $ 27,899
As of March 31, 2023 , we had four mezzanine secured credit facilities, two with
separate third-party lenders and two with a related party, which holds more than
5% of our Class A common stock. Borrowings under the mezzanine secured credit
facilities accrue interest at fixed rates, which vary by facility and range from
9.5% to 13.0%.
Borrowings under our mezzanine secured credit facilities are collateralized by a
second lien on the real estate inventory financed by the relevant credit
facility. The lenders have legal recourse only to the assets securing the debt,
and do not have general recourse against us with limited exceptions. When we
resell a home, the proceeds are used to reduce the corresponding outstanding
balance under the related senior and mezzanine secured revolving credit
facilities.
Covenants for Senior Secured Credit Facilities and Mezzanine Secured Credit Facilities
The secured credit facilities include customary representations and warranties, covenants and events of default. Financed properties are subject to customary eligibility criteria and concentration limits. The terms of these facilities and related financing documents require the Company to comply with a number of customary financial and other covenants, such as maintaining certain levels of liquidity, tangible net worth or leverage (ratio of debt to tangible net worth).
As of
Senior Secured Debt - Other As ofMarch 31, 2023 , we have borrowing arrangements with two separate third-party lenders to support purchases of real estate inventory. Borrowings under each of these arrangements accrue interest at a rate based on a SOFR reference rate, plus a margin which varies by arrangement. As ofMarch 31, 2023 the weighted-average interest rate under our other senior secured debt was 9.41%.
Warehouse Lending Facility
We have a warehouse lending facility with a related party that is used to fund
mortgage loans that we originate and then sell to third-party mortgage
servicers. As of
Cash Flows
The following summarizes our cash flows for the three months endedMarch 31, 2023 and 2022: Three Months Ended March 31, ($ in thousands) 2023 2022 Net cash provided by operating activities$ 426,443 $ 279,827 Net cash used in investing activities (1,287 ) (381 ) Net cash used in financing activities (422,508 ) (238,121 )
Net change in cash, cash equivalents and restricted cash $ 2,648
$ 41,325 Operating Activities Net cash provided by operating activities was$426.4 million and$279.8 million for the three months endedMarch 31, 2023 and 2022, respectively. For the three months endedMarch 31, 2023 , net cash provided by operating activities primarily resulted from a$484.8 million decrease in real estate inventory due to an intentional reduction in inventory levels given the dramatic decline in consumer demand for residential real estate, which began toward the end of the second quarter of 2022 and continued through the first quarter of 2023. During this period of time, we focused on selling our existing inventory of homes
acquired in the first half of 2022 and significantly reduced the number of new homes acquired in the second half of 2022 and into the first quarter of 2023. Net cash provided by operating activities during the three months endedMarch 31, 2023 was also impacted by the$59.4 million net loss during the period, which included a$7.3 million non-cash inventory valuation adjustment as a result of the softening consumer demand for residential real estate. For the three months endedMarch 31, 2022 , net cash provided by operating activities was primarily due to a$260.1 million decrease in real estate inventory as a result of sales volumes increasing at a higher rate compared to home acquisitions, as well as net income of$41.0 million . This was partially offset by a$15.6 million increase in accounts receivable due to an increased number of home sales pending receipt of cash from the title company as ofMarch 31, 2022 . Investing Activities Net cash used in investing activities was$1.3 million and$0.4 million during the three months endedMarch 31, 2023 and 2022, respectively. Net cash used in investing activities during the three months endedMarch 31, 2023 principally represents the purchase of a derivative instrument.
Net cash used in investing activities during the three months ended
Financing Activities
Net cash used in financing activities was$422.5 million and$238.1 million during the three months endedMarch 31, 2023 and 2022, respectively. Net cash used in financing activities during the three months endedMarch 31, 2023 primarily consisted of$700.6 million of repayments of credit facilities and other debt, which was partially offset by$186.4 million of borrowings from credit facilities and other debt. This net decrease in credit facility funding of$514.2 million was directly related to the decrease in financed inventory during the period. This was partially offset by$90.0 million of proceeds from the issuance of pre-funded warrants, net of issuance costs of$0.8 million . Net cash used in financing activities during the three months endedMarch 31, 2022 primarily consisted of$1,134.2 million of repayments of credit facilities and other debt, which was partially offset by$892.8 million of borrowings from credit facilities and other debt. This net decrease in credit facility funding of$241.4 million was directly related to the decrease in financed inventory during the period.
Material Cash Requirements and Other Obligations
Information regarding our material cash requirements and other obligations is provided in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 .
There have been no material changes in our material cash requirements and other
obligations since
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Although we believe our estimates, judgments and assumptions are reasonable, actual results may differ from our estimates under different assumptions, judgments or conditions given the inherent uncertainty involved with such matters, which would impact our financial statements. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis
There have been no material changes to the critical accounting estimates
included in our Annual Report on Form 10-K for the fiscal year ended
Our significant accounting policies and methods used in the preparation of our condensed consolidated financial statements are described in Note 1. Nature of Operations and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 .
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 1. Nature of Operations and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this Quarterly Report on Form 10-Q.
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