Opendoor Technologies Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Opendoor operates a digital platform for buying and selling homes, including adjacent title, escrow, brokerage and mortgage services. The company had completed more than 100,000 home transactions and operated in 39 U.S. markets as of June 30, 2021. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared primarily with the corresponding 2020 periods.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,185.4 million | $739.8 million | $1,932.7 million | $1,995.6 million |
| Gross profit | $158.8 million | $54.6 million | $255.9 million | $145.6 million |
| Gross margin | 13.4% | 7.4% | 13.2% | 7.3% |
| Loss from operations | $(152.8) million | $(38.9) million | $(397.4) million | $(74.9) million |
| Net loss | $(143.8) million | $(55.9) million | $(414.2) million | $(118.1) million |
| Net loss per share | $(0.24) | $(0.66) | $(0.72) | $(1.40) |
| Adjusted EBITDA | $25.6 million | $(21.7) million | $23.4 million | $(49.9) million |
| Adjusted EBITDA margin | 2.2% | (2.9)% | 1.2% | (2.5)% |
| Contribution margin | 10.8% | 2.7% | 10.5% | 2.9% |
Q2 home sales totaled 3,481, up 19% from 2,924 in Q2 2020. Revenue per home increased 35%, reflecting higher resale prices, home price appreciation and buybox expansion. For the first six months, homes sold declined 24% to 5,943 because of the COVID-19-related inventory reduction in the prior year.
Cash and cash equivalents were $1.558 billion at June 30, 2021, with marketable securities of $200.1 million and restricted cash of $131.7 million. Real estate inventory increased to $2.724 billion from $465.9 million at December 31, 2020. Total assets were $4.868 billion and shareholders’ equity was $2.418 billion.
Net cash used in operating activities was $2.312 billion for the six months ended June 30, 2021, principally due to a $2.249 billion increase in real estate inventory. Investing activities used $174.0 million, while financing activities provided $2.670 billion. Financing inflows included approximately $859.5 million of net proceeds from the February 2021 equity offering and substantial asset-backed borrowings.
Debt and liquidity
- Total credit facilities and other secured borrowings were approximately $2.286 billion at carrying value, compared with $481.8 million at December 31, 2020. The company separately reported $25.4 million of mortgage loans held for sale pledged under a repurchase facility.
- Asset-backed senior facilities had $3.855 billion of borrowing capacity and $1.817 billion outstanding; fully committed senior capacity was $2.058 billion.
- Asset-backed mezzanine term facilities had $449.0 million outstanding at a 10% interest rate, with no undrawn capacity.
- The company stated that cash, marketable securities, expected operating cash flow and anticipated borrowings should be sufficient for at least twelve months from the filing date, while also noting continuing losses and increasing working-capital requirements.
- The company was in compliance with its financial covenants at June 30, 2021, and reported no events of default.
Material changes versus the prior comparable period
- Q2 revenue increased 60%, gross profit increased 191%, and gross margin expanded by 600 basis points to 13.4%.
- Six-month revenue declined 3% because Q1 2021 volumes remained affected by the COVID-19 inventory pause, although management stated that Q2 inventory had returned to pre-COVID levels.
- Operating expenses increased 233% in Q2 and 196% for the six-month period. General and administrative expense rose primarily because of stock-based compensation associated with performance awards, the Business Combination and RSUs whose liquidity-event condition was satisfied by the February offering.
- Stock-based compensation was $164.2 million in Q2 and $403.0 million for the first six months, compared with $3.7 million and $6.6 million, respectively, in the prior-year periods. Management expects stock-based compensation to decline beginning in Q3 2021 because most expense related to certain performance awards had been recognized by June 30.
- Adjusted EBITDA improved to positive $25.6 million in Q2, despite a GAAP net loss, primarily because of the significant stock-based compensation and warrant fair-value adjustments excluded from the non-GAAP measure.
- The company completed a $27-per-share public offering of 32.8 million shares in February 2021 and received approximately $859.5 million of net proceeds.
Guidance, outlook, commentary and risks
- Management expected sequential revenue growth to continue for the remainder of 2021 and planned to double the number of markets served by year-end; 18 markets had been launched during the first half of 2021.
- Management expects to invest substantially in new market launches, which may pressure Contribution Margin and Adjusted EBITDA during the market-maturation period.
- The company expects working-capital needs and interest expense to increase as inventory expands. It also intends to evaluate lower-cost financing and reduce reliance on higher-cost mezzanine debt over time.
- Management identified residential real estate demand, home-price volatility, inventory valuation, competition, interest rates, access to asset-backed financing, COVID-19 developments, regulatory compliance and technology execution as significant risks.
- A one-percentage-point increase in LIBOR was estimated to increase annual interest expense by approximately $13.9 million at the June 30, 2021 borrowing level. LIBOR transition also creates uncertainty for certain debt contracts.
- The company disclosed material weaknesses in information-technology general controls and in controls over the accounting and classification of significant and unusual transactions. Disclosure controls and procedures were therefore not effective as of June 30, 2021. Remediation was in progress but was not complete.
- The company was negotiating with the Federal Trade Commission regarding advertising claims about offer amounts, repair costs and sellers’ net proceeds. It had accrued an immaterial amount but could not estimate any incremental loss; a settlement could result in material monetary remedies or compliance requirements.
- As of June 30, 2021, the company was contractually committed to purchase 8,158 homes for an aggregate purchase price of approximately $2.962 billion.
Unusual and subsequent items
- The company corrected prior-period warrant accounting after concluding that Sponsor Warrants should have been recorded as liabilities rather than equity. The correction increased December 31, 2020 liabilities by $47.3 million and reduced shareholders’ equity by the same amount; management deemed the error immaterial.
- At June 30, 2021, Sponsor Warrant liabilities were $38.7 million, and the company recognized a $24.0 million Q2 gain from the decrease in their fair value.
- On July 9, 2021, the company redeemed outstanding Public and Sponsor Warrants. Warrant exercises generated $22.4 million of cash proceeds and resulted in additional common shares.
- On July 30, 2021, the company entered into a new senior revolving facility and amended existing facilities, increasing aggregate senior borrowing capacity to $3.980 billion and fully committed capacity to $2.255 billion.
- The company recognized a $5.2 million gain from early termination of its San Francisco headquarters lease during the first six months of 2021.
Important facts for investors to verify
- Whether rapid inventory growth and the $2.962 billion purchase commitment can be funded and converted into sales without material inventory impairments or margin deterioration.
- The sustainability of Q2 gross margin, Contribution Margin and positive Adjusted EBITDA after excluding unusually high stock-based compensation and warrant-related adjustments.
- Availability, renewal terms, borrowing-base requirements and lender discretion under the company’s asset-backed financing facilities.
- Progress and independent validation of remediation of the two disclosed material weaknesses in internal control over financial reporting.
- The ultimate scope, cost and compliance requirements of any FTC settlement or enforcement action.
- Exposure to home-price declines, slower transaction volumes, higher interest rates, COVID-19 developments and LIBOR transition.