Offerpad Solutions Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022. Offerpad operates a residential home-buying and selling platform across 25 metropolitan markets in 15 states. Financial amounts below are in U.S. dollars; “m” means millions.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $609.6m | $1,373.8m |
| Gross profit / margin | $7.3m / 1.2% | $132.1m / 9.6% |
| Operating income (loss) | ($51.8m) | $44.4m |
| Net income (loss) | ($59.4m), or ($0.17) per share | $41.0m, or $0.17 basic per share |
| Adjusted EBITDA (non-GAAP) | ($44.8m), margin (7.3)% | $50.4m, margin 3.7% |
| Contribution profit (loss) after interest (non-GAAP) | ($75.4m), margin (12.4)% | $88.0m, margin 6.4% |
| Cash from operating activities | $426.4m | $279.8m |
| Cash used in investing / financing | ($1.3m) / ($422.5m) | ($0.4m) / ($238.1m) |
Financial position and liquidity
- At March 31, 2023, cash and cash equivalents were $107.7m and restricted cash was $35.2m. Inventory was $172.7m, down from $664.7m at year-end 2022. Total assets were $338.0m, versus $825.1m at December 31, 2022.
- Credit facilities and other debt, net, totaled $155.2m, down from $666.1m at year-end. Debt is primarily secured by home inventory and classified as current because repayment is generally expected when homes are sold.
- Management reported $1,369.5m of undrawn borrowing capacity, including $488.6m committed and $880.9m uncommitted. Uncommitted advances are subject to lender discretion; borrowing capacity depends on eligible collateral and facility terms.
- Management said cash on hand, home-sale proceeds and existing or new financing should be sufficient for at least 12 months after issuance of the statements. Several facilities mature within 12 months of issuance, so this outlook depends in part on refinancing or renewals. The company reported covenant compliance and no defaults at March 31.
- Operating cash flow was largely supported by a $484.8m reduction in inventory, rather than earnings. Financing cash outflow included $700.6m of debt repayments, partly offset by borrowings and $90.0m gross proceeds from pre-funded warrants.
Material changes and operating trends
- Revenue declined 55.6% year over year, primarily as homes sold fell 55%, to 1,609 from 3,602. Average resale price edged down to $379,000 from $381,000.
- Gross margin fell to 1.2% from 9.6%. The company attributed pressure to weaker demand, a smaller spread between average acquisition and resale prices, longer inventory holding periods and $7.3m of inventory valuation adjustments, compared with $1.0m a year earlier.
- Average holding period for homes sold rose to 185 days in Q1, from 101 days for full-year 2022. Management said it expects the period to decline in Q2 as the inventory mix shifts toward more recently acquired homes.
- Operating expenses fell 32.7% to $59.1m, but increased as a share of revenue to 9.7% from 6.4%, as expense reductions lagged the revenue decline. Sales, marketing and operating costs decreased 39.4%; advertising expense fell to $8.0m from $14.7m.
- Interest expense was $7.4m, slightly above the prior-year $7.2m. Higher variable rates were partly offset by lower average senior-facility balances. Senior facility rates shown at quarter-end ranged from 7.0% to 9.46%; mezzanine rates ranged from 9.5% to 13.0%.
Outlook, risks and unusual items
- No specific full-year financial guidance was provided. Management expected residential real estate demand to remain pressured in Q2 2023 by mortgage rates, affordability and economic uncertainty, and did not anticipate entering new markets in Q2.
- Management described early signs of stabilization in some macroeconomic conditions but cautioned that prolonged weakness could further affect demand, resale prices, margins and liquidity. The business is exposed to home-price and inventory valuation risk, transaction volumes, interest rates, and access to asset-backed financing.
- The company recorded a $7.3m inventory valuation adjustment and a $0.4m loss from changes in warrant liabilities. It also entered into Treasury futures options for a $1.2m premium; their fair value was $0.6m at quarter-end.
- In January, Offerpad issued 160.7m pre-funded warrants for approximately $90.0m gross proceeds. By quarter-end, 150.0m had been exercised into Class A shares, with 10.7m still outstanding. This financing increased the share count and diluted existing holders.
- The NYSE had notified the company that its share price did not meet the $1.00 continued-listing standard. Offerpad said it intended to address the deficiency; stockholders were scheduled to vote at the June 2023 annual meeting on a reverse split within a 1-for-10 to 1-for-60 range. The filing also states that the CEO planned to convert his Class B shares to Class A after that meeting.
- Management reported no material legal proceedings, no material changes to risk factors since the 2022 Form 10-K, and effective disclosure controls as of March 31, 2023.
Important facts for investors to verify
- Whether home-sale volumes, inventory holding periods and unit margins improve as management anticipated, and whether further inventory write-downs are needed.
- Whether committed financing is renewed or replaced before facility maturities, and how much of reported undrawn capacity lenders will actually make available.
- Whether cash generation remains dependent on inventory liquidation and how the company funds operations if home sales or financing access weaken.
- The outcomes and effects of the NYSE listing cure process, proposed reverse split, Class B conversion, and remaining pre-funded warrant exercises on ownership and dilution.
- How interest-rate movements and housing-market conditions affect financing costs, home valuations, sales prices and liquidity.