Offerpad Solutions Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Offerpad operates a technology-enabled home-buying and selling platform across 25 metropolitan markets in 15 states. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $230.1 | $1,079.5 | $839.7 | $2,453.4 |
| Gross profit / margin | $22.2 / 9.7% | $93.0 / 8.6% | $29.5 / 3.5% | $225.1 / 9.2% |
| Operating income (loss) | $(21.8) | $8.4 | $(73.6) | $52.8 |
| Net income (loss) | $(22.3) | $11.6 | $(81.8) | $52.5 |
| Adjusted EBITDA (non-GAAP) | $(17.3) | $13.7 | $(62.1) | $64.2 |
In Q2, Offerpad sold 650 homes, down 77% year over year; average resale price was $357,000 versus $372,000. First-half homes sold totaled 2,259, down 65%, with average resale price of $374,000 versus $377,000. Q2 gross margin improved year over year, while first-half margin declined.
Q2 non-GAAP contribution profit was $4.5 million (1.9% margin); contribution profit after interest was a loss of $1.9 million (-0.8% margin). These supplemental measures are not substitutes for GAAP results.
- Balance sheet at June 30: Cash and cash equivalents $115.6; restricted cash $6.7; real estate inventory $211.1; total assets $353.1; total liabilities $219.9; stockholders’ equity $133.2.
- Debt: Credit facilities and other debt, net, totaled $191.2, down from $666.1 at December 31, 2022. The balance sheet classifies the debt as current. Facilities are generally asset-backed and non-recourse, subject to limited exceptions.
- Borrowing access: Management reported $1,365.3 of undrawn capacity, of which $435.3 was committed and $930.0 uncommitted. Total facility capacity was $1,557.5; lenders have discretion over uncommitted advances.
- Cash flows, first half: Operating activities provided $371.5, investing used $2.0, and financing used $387.6. Cash, cash equivalents and restricted cash decreased $18.0 to $122.3.
Material changes and management commentary
- Revenue fell 78.7% in Q2 and 65.8% in the first half year over year, primarily because home sales volume dropped amid weaker housing demand and Offerpad’s reduced acquisition pace. Average resale prices also edged lower.
- Q2 gross margin rose to 9.7% from 8.6%, mainly as inventory valuation adjustments declined to $0.2 million from $21.2 million. First-half valuation adjustments were $7.5 million versus $22.2 million; nonetheless, first-half gross margin fell to 3.5%, reflecting a narrower resale-versus-acquisition price spread.
- Operating expenses declined, but more slowly than revenue: Q2 operating expenses were $44.1 million, down 47.9%, and first-half expenses were $103.1 million, down 40.2%. Expenses therefore increased as a share of revenue.
- Operating cash generation chiefly reflected a $446.1 million reduction in real estate inventory. Financing cash use primarily reflected $889.8 million of debt repayments, partly offset by $412.0 million of borrowings and $90.0 million gross proceeds from pre-funded warrants. All pre-funded warrants were exercised during the first half, issuing 10.7 million shares.
- Q2 market conditions showed signs of stabilization versus the second half of 2022 and Q1 2023. Management said acquisitions and inventory increased sequentially, and average holding period for homes sold improved to 138 days from 185 days in Q1.
Outlook, risks and unusual items
- Management expected elevated mortgage rates, inflation, economic uncertainty and affordability pressures to continue affecting housing demand in Q3 2023. It did not anticipate entering new markets during the remainder of 2023 and said holding periods could decline further if conditions improved.
- Management believed cash on hand, home-sale proceeds and available facility borrowings or new financing would cover obligations for at least 12 months. Some facilities mature within 12 months; management expected to renew or replace financing, but this depends on lender access and market conditions. The filing warns that uncommitted capacity may not be available and additional financing could be costly or dilutive.
- At June 30, the company was in compliance with facility covenants and reported no event of default. It was under contract to purchase 481 homes for an aggregate $132.5 million.
- The NYSE minimum-price condition was deemed cured July 27, 2023 following a 1-for-15 reverse stock split, though continued listing compliance is not assured. The company reported no material change in risk factors from its 2022 Form 10-K and no material pending legal proceedings.
- Other notable items: $90.0 million of pre-funded warrant financing involving investors that included company insiders and significant shareholders; related-party credit facilities and service arrangements; and derivative options on U.S. Treasury futures with $157.8 million gross notional amount and $1.2 million fair value. The filing reports an $82.0 million valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether home-sale volume, acquisition pace, gross margins and inventory holding periods continue to improve, and whether inventory values support expected sale prices.
- Availability, pricing, commitments and maturity or renewal terms of secured facilities, particularly the uncommitted borrowing capacity and facilities maturing within 12 months.
- Whether cash generation can be sustained without further inventory liquidation or additional equity or debt financing, and the potential dilution from future capital raises.
- How elevated mortgage rates, housing affordability, low resale-home supply and broader economic conditions affect customer demand and resale economics.