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Hell is the truth seen too late.” – Thomas Hobbes, Leviathan

Today we take a first look at Offerpad Solutions Inc. (NYSE: OPAD). The company went public through special purpose acquisition firm Supernova Partners in the first half of 2021. It was the brainchild of Zillow (Z) and co-founder of Hotwire Spencer Rascoff. Like most SPAC debuts of this ‘ancient‘, the stock is now in ‘Failed IPO‘ territory. The company has an interesting business model, but one that may prove misguided given the recent spike in mortgage rates and these impacts on the housing market. An analysis and first look at this small cap concern follows below.

OPAD Stock Chart

Looking for Alpha

Company presentation

Offerpad Solutions Inc. is based just outside of Phoenix. The company buys, sells, rents and renovates properties from owners in the United States. Offerpad provides and operates iBuying, a real estate solutions platform for on-demand customers. This allows customers to sell and buy homes online with easy access to ancillary services, such as mortgage and title insurance services.

Company footprint

May Company presentation

The company continues to grow and expects to be present in approximately 30 different markets in the United States by the end of the year. Offerpad is different from most concerns in this space, such as mortgage companies like Rocket Companies (RKT). Instead of offering referrals to businesses or individuals, customers can use to complete every part of their transaction, such as agents, home improvement companies, mortgage companies, moving companies, etc. Offerpad can support the entire buying and selling process.

Return on equity of renovations

May Company presentation

This includes Offerpad’s renovation team in each market who can quickly complete renovations to increase listing value while the home is going through the sales process. The company offers multiple, customizable solutions for owners, which has resulted in increased gross profit per sale.

Company presentation

May Company presentation

The stock is currently trading at nearly $3.50 per share and has a market capitalization of approximately $825 million.

First quarter results

On May 4, the company released the first quarter Numbers. Offerpad generated 16 cents per share in GAAP earnings as revenue grew more than 380% year-over-year to $1.37 billion. The top and bottom results easily exceed analyst consensus.

First Quarter 2022 Financial Highlights

Q1 2022

Q1 2021

Percentage change

Acquired houses

2,856

1,196

139%

Houses sold

3,602

1,018

254%

Revenue

$1.37 billion

$284.0 million

384%

Gross profit

$132.1 million

$33.5M

294%

Net income/(loss) (reported)1

$41.0M

($0.2M)

n / A

Adjusted net income/(net loss)

$35.3M

($0.2M)

n / A

Adjusted EBITDA

$50.4M

$3.0M

1562%

Contribution profit after interest per dwelling sold

$24,400

$23,100

6%

As can be seen above, it was an impressive quarter. Both gross profit and adjusted EBITDA soared, with homes sold up more than 250% from the same period a year ago, and earnings per home also rose 6%. The number of days between buying and selling a house was less than 100 days. The business expanded to 600 new postcodes (a 15% increase). The company has also expanded its Offerpad Home Loans mortgage service to nine states.

For the second quarter, the company offered the following tips.

Q2 2022 outlook

Houses sold

2,900 – 3,100

Revenue

$1.1B – $1.15B

Adjusted EBITDA1

$27M – $37M

Analyst Commentary and Review

So far in 2022, the company has received five buy recommendations and three hold ratings from analyst firms. Over the past month, Jefferies reiterated its holding rating with a price target of $5.00, while JMP Securities ($8.50 price target) and Compass Point ($5.50 price target ) have launched the stock as a new buy over the past two weeks.

Balance sheet

May Company presentation

About eight percent of this stock’s overall float is currently held short. In mid-March, two CEOs bought just over $140,000 in new stock. These are the only insider trades in those shares so far in 2022. The company ended the first quarter with about $200 million in cash and marketable securities on its balance sheet.

Verdict

Current analyst consensus is that the company is earning 25 cents per share on nearly $5.2 billion in revenue in fiscal 2022. They expect earnings to fall to 20 cents per share on $7 billion in revenue. earnings in fiscal year 2023. It is important to note that there is a wide range of possible earnings results (a net loss of 14 cents per share to a profit of 36 cents per share) from analysts for the next fiscal year given the uncertainty in the housing market.

Revenue increase

May Company presentation

The company has done a great job growing revenue, adjusted EBITDA and net income during its time as a public company. However, this was largely in a market where the average home price rose every year in the mid-teens. Until this year, it was also a market environment with a robust economy and 30-year mortgage rates hovering around 3%. The 30-year average mortgage ended the week of June 10 at 5.65%.

Higher interest rates mean lower asking prices and lower home sales. While the company’s business model is more robust than Zillow’s in this area, remember that the company had to exit its home buying business late last year. Additionally, it looks like the country is headed for at least a mild recession as the Fed continues to hike rates to calm inflation, which is at its highest level since the early 1980s.

The company has never navigated this type of economic environment before, so I pass on any investment recommendations even though I find the company’s business model intriguing. If Offerpad survives this downturn in the housing market, it’s the name I’d probably be looking to hoard towards the end of any recession as the central bank winds down its monetary policy tightening after the inflation genie has been returned to its bottle.

It’s always a matter of timing. If it’s too early, no one understands. If it’s too late, everyone is forgotten.” -Anna Wintour


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