Good evening. Thank you for attending today's Offerpad Third Quarter 2022 Earnings Call. My name is Megan, and I will be your moderator today. I'll now turn the call over to Stefanie Layton, Vice President of Investor Relations and ESG at Offerpad. Stefanie?

Thank you, and good afternoon, everyone. Welcome to Offerpad Solutions Third Quarter 2022 Earnings Call. Our Chairman and Chief Executive Officer, Brian Bair, and Chief Financial Officer, Michael Burnett are here with me today. During the call today, management will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and events could differ significantly from management's expectations. Please refer to the risks, uncertainties, and other factors relating to the company's business described in our filings with the US Securities and Exchange Commission. Except as required by applicable law, Offerpad does not intend to update or alter forward-looking statements, whether as a result of new information, future events, or otherwise. On today's call, management will refer to certain non-GAAP financial measures. These metrics exclude certain items discussed in our earnings release under the heading non-GAAP financial measures. The reconciliations of Offerpad's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the third quarter earnings release on Offerpad’s website. I'll now turn the call over to Brian.

Thanks, Stefanie. Hey everyone. I appreciate you joining us today. I'll cover some company highlights, market trends, operational updates and our focus for the remainder of the year. Michael will share our third quarter 2022 financial results and our fourth quarter expectations. In the third quarter, we maintained an average timing from home acquisition to sale below 100 days, kept inventory aged over 180 days or 5% or 150 homes, earned a 93% customer satisfaction rating and grew our listing and buyer closings by 100% year-over-year. Given the macro and real estate market conditions in the third quarter, these accomplishments really speak to the flexibility of our model and the value our products offer to homeowners. In the second quarter, we shared the softening in the real estate market what's here. Since then, the economy consumer sentiment and the real estate market has changed significantly. And increasingly [indiscernible], persistent inflation, substantial increases in mortgage rates and further escalation of global conflict have put the financial and credit markets on edge. The downstream impact less to residential consumers in a temporary state of shock. Since the launch in 2015, most of the US has experienced the seller's market, but the value proposition we provide is even stronger in the buyers' market, when sellers can go from listing to pending and days, and it's going to take weeks or months, ibuying [ph] becomes even more attractive. And if we are smart about how we underwrite homes in the market, there is an opportunity for enormous growth, but we aren't there yet. Right now, we are in between the seller's market and a buyers' market and expectations between the two parties are vastly different. Sellers are holding on to the ether home is still worth what it was six months ago and buyers…

Thanks, Brian. Despite some of the most challenging conditions in residential real estate, we continue the disciplined execution of our business strategy. The dramatic drop in demand for housing, driven by affordability issues resulting from the significant rapid rise in interest rates and elevated home prices was further extended in the third quarter. Given the expected continuation of these conditions, we are keenly focused on selling our existing inventory that was acquired in the first half of the year before the disruption in the housing market at the best available price. We are utilizing real-time market data, analytics and our years of real estate experience with thousands of transactions in our individual markets to do that. We are making tough decisions in uncertain times with a commitment to aiming for the best outcome given the circumstances. Right now that often means accepting losses on homes that we believe may decline further in the short term, to be able to conserve or redeploy that capital more effectively. We are making these decisions on a market-by-market and home-by-home basis to optimize the outcome. At the same time, we have temporarily but significantly reduced the number of homes we are acquiring during this period of transition. At times of considerable market dislocation, we narrow our Buy Box to limit the homes that we are evaluating and adjust the input variables in our underwriting model to be more conservative. This results in us acquiring fewer homes, but acquiring homes that we feel will generate underwritten return in this market. Though the sample size is small at this point in time, we are seeing positive tangible results from the homes that were acquired after the change in mortgage rates that have sold in September and October. We believe this process of selling through inventory acquired…

Thank you. [Operator Instructions] Our first question comes from the line of Dae Lee with JP Morgan Chase. Your line is now open.

Great. Thanks for taking the question. Question about two. On the first one, you talked about gain stability in some markets that you operate in. So, what are you seeing in those markets that's driving that? And – how long do you think it take from other markets to kind of see a similar behavior to stability? And then secondly, how far along are you in selling the home for the market conditions deteriorated and – it seems like you guys are expecting that the mix of home sold to shift more towards your home wasn't is that right? And as the homes that remain on your plate over --- over some of the reasons those are taking longer to sell?

Yeah. Hey, Dae, it's Brian. Yeah, as far as the market conditions that we're seeing, specifically, a lot of that has to do with the affordability. We're seeing that primarily in the Midwest markets. I think Indianapolis, Fort Wayne, Columbus, Ohio, those markets where you didn't have the home price appreciation as you saw in some of the other markets. So I think affordability is a lot driving that. You still have less than month – month and half supply of homes in those markets as well. So that's where we've seen. As far as, when we're going to see the other markets kind of settle a little bit. I think it's going to be pretty volatile until the end of the year, especially in places like Phoenix and Denver, and some of the really high home price appreciation markets that we saw due to affordability. I think you're going to see an increased seasonality. But obviously, we're watching that closely. But there's – there's spots in other markets that we're seeing. But a lot of it has to do with the immediate home price and affordability is what we're focused on.

Hey, Dae, it's Mike. Just in terms of your second question there on the homes and inventory. What I'd tell you, there is generally speaking, I think we will continue to sell through those in the fourth quarter in Q1 that is our expectation. We are anticipating that based on what we're seeing in the market and our current pacing that by the end of first quarter, we should be predominantly through that older inventory, anything, call it, acquired pre up through July of this year. So that's driving some of the negative results in the guidance for Q4, because more of the homes that we sell in there will be from that vintage. As we move into Q1, I think you start to see that weighting shift to some of the newer homes, but we'll still need to be working through that at that point in time. But, based on what we can see right now, that's our expectation.

Yes. One other thing Dae, I'll just add to that is, remember what's -- in real estate, a lot of the data is trailing. And so what will happen is on the underwritten side, for example, if we underwrite a home and the some chose to close in 45 or 60 days from when we underwrote that home originally. And then we have to get the house, put it through renovation, get it on the market. So, that's where -- and I mentioned this in my remarks before, but when we underwrote that home is the most important part. And what we're seeing, the stuff that we -- that are underwriting that their current market conditions. Those properties are starting to see, it's really for us hard to see good signs of how those homes are performing. It's more of that legacy that was -- there that are complete different market conditions that we're working through right now.

Just as a quick follow-up. Is that said, fast on to be the key quarter of your, I guess, order on the written homes being sold? And do we see being second biggest or you're seeing a smaller number of those homes getting sold?

Yes, that is the expectation is that the bulk -- the majority of those will come through in the fourth quarter.

Thank you. Our next question comes from Ryan Tomasello with Stifel. Your line is now open.

Thank you for taking the questions. I guess first question on the considering the decline in book value this quarter and presumably the pressure that will exist into the end of the year. Can you talk about your conversations with your financing partners, how you feel about financial covenants. And overall, I guess, how you're thinking about protecting the capital base to maintain the financing capacity required to scale this business beyond this market correction that we're going through.

Yes. Hey, Ryan, it's Mike. Without a doubt now, these periods are when you need to be in regular communication with your financial partners and your banks and we do that regularly. We've got a great team in the finance and treasury group over here. We've got good relationships and built up a very good working group on the debt capital side of the equation. So, we we're in close contact with them. We're proactive in our communications with them and try to give them good visibility, because they're critical to our collective success. So we are in compliance with our covenants. It is something that we look at all the terms and conditions there to make sure that we're abiding by those and in line with those. We ended the quarter with just short of $200 million in cash. The other thing to consider, too, is that as we go through now and the end of the year and into the first quarter. Our inventory and debt balances will be coming down as we talked about in our prepared remarks with slowing intentionally temporarily slowing the pace of buying. And so, those outstanding amounts come down, part and parcel to that as well. So again, something very critical in terms of partnerships with them, but we've had these relationships in some instances, for the past four years, we've added to them as we've gone along and they've been good supporters of the company.

Great. Thanks for all the color, Mike. And then on the guidance for 4Q, can you provide some color around what gross and contribution margins you're baking into that forecast? And then beyond that, how we should think about speeding in a recovery as you work through the inventory into 2023? And then on the OpEx side, you alluded to some of the -- some workforce reductions there. If you can maybe explain the amount of cost that you split out of the system and how we should be thinking about run rate OpEx following those efficiencies, however you prefer to define OpEx. I think you mentioned about 14% reduction quarter-over-quarter?

Yes. Okay. A lot there. So come back to me, if I skip over anything, but first, on contribution margin. We don't specifically guide to that. But bear in mind that our contribution margin calculation is really aimed at taking into account the total cost of ownership of a particular home. And so in that calculation, we're aggregating the cost that come and go even if it's not in a particular period. So that being said, we believe that Q4 is probably going to be the bottom trough of contribution margin with Q1 then coming back up in terms of recovery. On the -- just in terms of the recovery on your question on that, tough to say. I mean, we run all sorts of different areas under different ones, under different conditions. And ideally, as we said earlier, if we can get moved through the legacy inventory and then give selves in a position where we can begin to rebuild back where we're comfortable at points in buying in 2023, that's the objective. The time frame for doing that is really just tough to call at this point. In terms of the reduction in force, we did go through a process that resulted in reducing our workforce by about 7%. We had earlier in the year -- that was in September we had earlier in the year put measures in place where we were pausing hiring tightening the belt on the cost structure. And so we're actually from our peak employment over the summer time, we're actually down about 12% from that peak due to just hiring pauses and natural attrition in the business, and we'll continue with that through the end of the year here. So that I would expect about a $2 million benefit for that this year, and then you can annualize that, that's about a quarter's worth in 2022 for next year.

Hey, Brian. One thing I'll just add to that is coming back to the third quarter again. What was unique about the third quarter, I said this last time, is that the market cycle kind of changing, I think was a surprise, it was the speed. And so what we saw in the third quarter, that's where you're going to see the fourth quarter as moving through it a lot more and more of these homes is that there was a pause as the buyers who thought they were qualified for a certain amount mortgage rates increased. And so there was a shock there, there was basically kind of a logjam in the system of buyers and their ability to move and what was affordable was affordable. So there was kind of a status shock that happened there. We're certain-- like I mentioned, we're starting to see that settle a little bit. And we're looking at our homes weekly and moving through this. And so we've been -- we've been moving through inventory at -- and at a pace that feels so slow, but obviously in these conditions. I'm actually happy with what the team and what we've been doing moving through the inventory right now.

Thank you. Our next question comes from Nick Jones with JMP. Your line is now open.

Great. Thank you for taking the questions. You mentioned earlier on the call kind of an expectation the volatility will last longer than a typical transition. How are you kind of -- are you able to kind of bought that in and kind of what -- how long that might be or how you're thinking about it? Do we kind of need to see where peak rates go, and then do spreads starting to tighten and then that's when there'll be more kind of confidence in affordability for home buyers. Can you just kind of put a finer point on that? And then I have a follow-up. Thanks.

Yeah. No, it's -- so what's happened, when we talk about volatility, obviously, that's a really loose term. What volatility is, it's the -- really the sales price on the selling end of it that's really volatile because we can buy under any kind of market conditions, whether market is going up, whether market is going down and depending on how fast it's going down. What we look for is consistency in that. So for example, in a certain market or a certain segment of home, if it's going down in other downturns I've been evolved before, it's going down 2%, 2.5% a month. We can build that in. Where this has been unique, and when I say the height of volatility is because where 2007 to 2010, you see it was the opposite problem, then it was people had no equity in their home. And so people were trying to squeeze out what they could basically of the mortgage to go through. What we're seeing today is people have so much equity in their home. There are $250,000, $300,000 of equity in a home, and so what's happened is you're seeing really inconsistent pricing out there for sellers. And so that's what we're watching really closely in especially the high HPA markets that we're watching closely. So I think with what we're seeing and what we're seeing in like I mentioned some of the Midwest markets overall, obviously, affordability is key. We're expecting to be volatility as far as pricing. And as far as the amount of equity that sellers have and just kind of where that gets a little bit more consistent and people start moving through inventory a little bit, buyer shock that kind of what I call it is getting more consistent on that in. So I'm anticipating the first part of next year, we'll start seeing depending on what happens with the fed and Revere, but I think we're just start to seeing more consistency at least in what we're underwriting, which is the most important factor that we're looking for an it's just the consistency.

Got it. That's helpful. And then, Mike, could you kind of touch on how you said about the cash position? I know you spoke to some cost cuts freezing hiring. It sounds like there's about $8 million benefit next year we should look for. How do you feel about kind of the cash position kind of heading into next year to the extent that the macro environment stays challenged maybe a bit longer? Thanks.

Yeah. Nick, it's -- we ended the quarter in a good position there. But obviously, as we work through some of these losses in the next quarter. That's something that we just have to manage closely. But I'll tell you, it's absolutely been a hallmark of the company for the past six years. We've always been very cost conscious. We've been very efficient in how we run the organization. We run very lean, and we'll continue to do that. So it's obviously something that is high on our radar. We'll continue to monitor it and manage the business appropriately.

The one thing that I'll also add just to that. Right now, we're hyper focused on, obviously, our current inventory, but also more of our asset-light products. Flex, for example, and working with our SFR partnerships and not just our disposition homes, but being able to buy and they'll sell buying some of those homes from us as well. And so as we continue to make it through -- again, what I'll say, the volatility, we also being smart on the way that we're approaching it from the asset light side of it as well. And as I mentioned, I think in the last call, being a solution center, it's not just to provide more solutions for the consumer, but it also gives us leverage during times of volatility that we can focus on different products that we can highlight and roll out to the consumers

Thank you. next question comes from Justin Ages with Berenberg. Your line is now open.

Hi, thanks for taking the question. First, on the renovation, I do think it's a key differentiator. I think you've disclosed about 22,000 average cost of renovations, which is up from where it's historically been, has that been an impediment to getting homes sold that even though you have to put in a little more money to make them more attractive, it's making the house's cost more?

Okay. It's actually just the opposite. So, what we're doing is we -- when we're underwriting any new inventory we have, we're being more -- definitely more conscious about how we're underwriting it for the renovations needed for that home. But once we own that home, we're intentionally increasing the amount of renovations that's needed as the supply and demand and normal times, what you want is you want to -- you can make money through your service fee and by maximizing the price of your home through renovation. In times like this, what you want to do is you want to make sure that your home sells before the other homes. And so we've been able to use our renovation team to add different upgrades like granite and appliances and different things that are going to make our homes unique in the markets to make sure our homes are prepared to sell first and a good product. So, we're intentionally doing that. With the ability of our renovation, some of those things are not -- they're leading to a little bit longer renovation times, but it's very much worth it because its reducing the time of the market. So, -- but right now that's been our focus. And to your point earlier and I have mentioned this for the last six years is when there's a market transition, the importance of renovation because of everything that we just mentioned, being able to control the renovations, your cost, your efficiency, your timing, and that is going to be really important, just again from the supply and demand, we want to hope to sell first.

All right. That's helpful. Thank you. And then along those lines with this introduction of My Way, has the response been good? I think you said you introduced it in October? And has it been well-received enough that you're also considering expanding to other markets outside of Phoenix? Thank you.

Yes. So, I would say it's really early right now. There's two things. What I like about My Way is the timing -- we've been working on this product for a while. The timing is key because now it's a buyer's market. It's really a buyer's product. So, as we renovate an Offerpad at home, we're choosing before the house is in the market is what we're going to renovate. But sometimes, there's just a personal preference of what someone wants to have in their house and so we're able to do that through My Way. But for that, the first phase is just Offerpad product. But the next phase of that will be -- is the secondary phase of that is we use it outside of Offerpad products. So, a buyer that our Flex teams are representing will be able to and optimize the house that they want and a -- kind of a non-Offerpad home. But so I am very, very bullish on where we're going. The response is it's one of just an early indicator of customers' paper product that we have. They love the ability to choose the finishes on a house like you would in a new home. So they really like that. But we are hyper focused on rolling that out in our other markets. But it's early but my plan is to get that rolled out very, very quickly as it's going to be great timing for buyers in a lot of our other markets.

Thank you. Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Your line is now open.

Hi guys. Thanks for taking the time. I guess my question is rates have continued to go up, call it, 100 basis points at end of September if anything, the pace of home price decline should theoretically accelerate. I guess what gives you confidence that the homes you're purchasing now, when prices have yet to fully adjust to call normal levels, won't face the same issues you're currently facing with the older vintage homes that you had in pre-July.

Yes. I agree overall with your overall take. We're obviously extremely focused on that. And its very market specific of what we're doing. So where -- the markets that are the most volatile that we're expecting more depreciating prices in we're being extremely careful in those markets, and you're going to see it with the volume that we buy in those markets, place like Phoenix and Denver, Vegas, those markets, we are expecting still a good decline in those markets. So we're underwriting those with a decelerator per month and very wide margins. But in areas like the Midwest, like I mentioned before, the Indies and some of the markets up there, can see. You're not seeing the nearly the impact that you're seeing in some of these other markets, we're getting -- we're buying more homes in those markets. And so, even places like Charlotte and Raleigh are areas. And so, how we prevent that one is, remember, we're underwriting other new conditions that we did with some of our -- that we did with our older inventory. So we're underwriting with what's more wider margins, more assumptions, especially with purchase price and knowing that, that home in a lot of these markets is not going to be worthwhile -- what it is when we underwrite that, so like I said, that the early signs of markets are performing well. The other thing that we're doing in the markets that just quite broadly that, we're not, wanting to buy a lot of inventory in. We're having -- we're pushing more and more people to use our FLEX, where we'll help them market their home for them. We'll even add upgrades and renovation to their home. But that helps them and helps us to work with them on selling the home in the open market, but that's not anything that we're going to buy, just because of the uncertainty in the market. I think the other thing I'll just add, this is just more for the areas specifically and what you're seeing in most parts around the country, the outline areas are the areas that are getting hit the hardest. And so, you're seeing much higher depreciation in those or home prices decline, more of the places at 30, 45 minutes outside the main metros. So those are -- and then -- so we're very sensitive about buying in any market, anything there. And then also, anything next to new homebuilders, they're very aggressive on what they're doing with their pricing and that. So -- we're just being very selective of what we're buying right now and pushing more people to the FLEX product right now. And/or buying it and moving it to a single-family rental company.

Perfect. That makes sense. And then maybe just a comment, another, call it, $27.5 million inventory impairment, should we expect that to moderate, or how should we think about that going forward?

So that's always a tough one from a prediction standpoint. What we do at the end of each quarter is go through our existing inventory. And we have a very thorough process that we involve our local folks all the way down to each of the marketplaces. We run that back up through our regional operations head to our Chief Real Estate Officer. And so, it's a thorough process that considers the markets, the homes, the neighborhood, specifically, and we mark them to market basically at that point in time. The inventory balance is expected to be below where we're at now. So between that and the markdowns that we take, I would tell you sitting here today, I would expect lesser of an impact as we go along. And, hopefully, we start to see the market settle down a little bit, but candidly, it's impossible to predict at this point.

Thank you. Our next question comes from Jay McCanless with Wedbush. Your line is now open.

Hey. Good afternoon. Thanks for taking my questions. I guess, the first one I had, assuming all else equals rate, I guess, what is the difference between the top end versus the bottom end of the home sales guidance you have out there for the fourth quarter. What are some factors that would keep you from getting to the top end?

I think, first and foremost, it's really just going to be where. What the demand characteristics are in each of the markets. And that's really been the root cause of -- from an affordability standpoint, to slow down the demand prospects. The other thing that we have in our sites too, is the fourth quarter from a seasonality standpoint is usually the most pronounced. And so how typical seasonality comes into play in an environment like this. I'd say there is some uncertainty there. And so that's why we've put a little bit of a wider range similar to what we did last quarter to try to account for some of that variability.

I was just going to say one of the things that we're seeing right now in some of the most volatile markets is -- the nice moves are not happening right now, some of them wants to upgrade their home or their kitchen or that's just not happening. The majority of the transactions are coming from people who need to move lifestyle for whatever reason. And so, the transactions let the volatility as well, right? So the transaction volume is question mark that we're seeing and just to Mike's point. So of course, we're watching that closely because that leads in the buyer demand of anything that we buy. So, we want to make sure that anything that we acquire, we're able to sell it and buy renovate and sell it within 100 days and then also, if not going to push it into Flex.

And then assuming that mortgage rates stabilized, have you put any type of expansion plans on hold right now or are you still looking to possibly enter new markets at some point?

Yes. We still -- we've been on pace the last couple of years of adding about 7 to 8 new markets. I would say right now, we still have that in our sites next year, but we're going to have to play it by year. It really needs to be something that is geared more towards the second half of the year first. And then secondly, we would again probably have more of a bias towards – in our model, we can open up larger hub markets and then we can also open up more satellite type markets. And so right now, given the circumstances, I would say our position is, we’ll push out, see how the first half of the year looks and then have a little bit more of a bias to some of the satellite or adjacent markets first. End of Q&A:

Thank you. Question-and-answer question has concluded. I will now turn the call over to Brian Blair, Chairman and CEO for closing remarks.

Thing I'm most proud of is that over the last seven years, we've created momentum maturing real estate will never be the same. We are being realistic about the world around us, but I believe even more strongly today in our mission and our people. I'm excited to be part of the solution that can revolutionize a $2 trillion industry. Thank you all for joining us today.

That concludes the Offerpad Third Quarter 202 Earnings Call. Thank you for your participation. You may now disconnect your lines.