Opendoor Technologies, Inc. (OPEN) Management Presents at Jefferies Virtual Internet Summit – Transcript

Okay. Great. So Opendoor talks a lot about building a strong company culture and a positive user experience. How do those go hand-in-hand to ultimately help drive growth and profitability.

Carrie Wheeler

Everything at our company starts in hands with the customer at Opendoor. If you leave and listen to an earnings and in a coffee [ph] notice that we actually start every earnings call with a customer testimonial. Having for us, having a strong product market fit is absolutely key. We do customers love your product. And when they love your product, those experience drive changes in consumer behavior. And this is all credit to Eric.

This is what he focused on when he started the company 8 years ago. He really wanted to remanage and deliver a totally delightful and totally different consumer experience that frankly was uses impossible at the time. And that’s what we’ve done for home sellers. We started by creating and nailing that customer experience.

We then built all the capabilities to allow us to scale it at very high NPS. And then we focused on optimizing for margin, which is what you’re seeing is today. You’ve taken 240 basis points of structural cost out of the system to allow us to deliver to the CM targets we have today. And what we’ve discovered is that when you delight customers, they trust you and when they trust you have the right there and deliver other services to them over time.

So we’ve done that with title and escrow, which has been very successful, attaches at north of 80% to our buy-side and sell-side transactions, and we’ll continue to demonstrate this on the home buying side and other services that marry with that like home financing, what have you.

John Colantuoni

So Opendoor had a record first quarter. You’ve smashed growth and profitability expectations. How sustainable are the margins you reported for Q1? What sort of contribution margin are you targeting across cycles?

Carrie Wheeler

As we said on our earnings call, we began widening our spread at the beginning in Q3 in response to the expectations we had for greater market volatility, certainly something I think we’re all experiencing right now. And we made a decision to prioritize higher margins.

You saw some of that benefit in Q1, and we expect to see even more of that show up in Q2 as we just lean into current market strength and capture more realized home price appreciation into margin. So our contribution margins will be sequentially higher in Q2, and they expect to come and come down over time as home price appreciation will moderate in the back half of the year. in part because that’s what happens every season. That’s a normal seasonal pattern for software HPA, but also because I’m sure Daniel will speak to later, our base case assumption is that the housing cycle will sort of start to abate in the back half of the year.

So we won’t see that level of CM and that we’re going to see in Q2 for the back half. But overall, on an annual basis, we are managing our business and feel good about the ability to manage against a baseline of 4% to 6% contribution margins. We hold ourselves to that standard. It’s fundamental to how we operate, how we underwrite homes and how we manage our business, and we feel really comfortable with our ability to deliver results relative to that range.

And one of the callouts particularly in this moment is we’ve long had the hypothesis that the certainty that we provide that you can’t get offline through the more traditional route that certainty is even more valuable to onsellers and times of greater uncertainty, just as we’re seeing right now. And while it’s early, what we’re seeing is that our conversion actually performs better than our expectations even as we’ve been widening our spreads. In other words, as we’ve increased the conservatism of our offers, we haven’t really seen a market hit to conversion rates. I think that’s a pretty important call out.

And we’ve continued to meet customer expectations. We’ve continued to grow our acquisition volumes. And we think that’s all testament to the fact that the value proposition of our products should only increase as volatility rises. We don’t just offer a better experience for offering certainty, and we actually think the value we’re giving to customers today is greater than what we’re charging, and we’re seeing that in our performance.

John Colantuoni

Talk a little bit about the extent to which Opendoor is shielded from inroads by its competitors. Where did the mods come from?

Carrie Wheeler

I think there’s three core advantages that set us apart. One is we have a superior consumer experience. Two, we’re still Daniel [ph] here. We have deep and robust pricing systems. Three, we’ve built systems to have operational excellence at scale. So number one, but one of the few. I mean, I’d argue we’re actually the only probably company that’s vertically integrating to make the entire real estate transaction, digital and instant. We’re delivering a superior consumer experience and you can’t get it anywhere else. No one’s working harder on behalf of customers than we are, and we’re doing that with our expertise and product and with our expertise in technology. So that’s one.

Two, we’ve built a sizable advantage in pricing that just continues to compound with scale. The more homes we assess and the more homes we sell through, the more data we collect, the better our systems, the better our feedback loops become. So pricing is a whole important competitive moat. And then last, we have scale economies and systems that have resulted in the ability to transact for a home that lets us be 13x more efficient than the average realtor.

A bunch of examples of this to bring it to life, one, we’ve centralized the vast majority of what used to be in market rules for us across pricing and home operations, all using technology. We have developed proprietary tooling that automates what were viviously labor-intensive tasks to manage vendor capacity across different markets for home repairs. We have fully virtualized our interior home assessments, leading to an 80% reduction in time to complete assessments to having an operational system that allows us to scale the 50 markets and then eventually nationwide.

All three of these are moats that we believe will win over time. I’d also say that just part of our DNA, keeping focus on what makes the experience the best we can for the consumer, solving pain points with innovative technology solutions and then caring about every single basis point, we call it basis points for breakfast, is really what allows us to be more efficient, and it’s really core to what we’re all about.

John Colantuoni

Okay. Great. Let’s zoom out a bit and turn our discussion to the current macro environment. How do you see the housing market trending over the next several quarters?

Carrie Wheeler

I hand that one over to Daniel.

Daniel Morillo

I guess the macro side is my. Yes. So look, at the high level, I think we said this during our earnings call. We are managing to a baseline scenario where we do expect some gradual slowdown into the second half. It’s of note that, that is partly seasonal anyway, right? It’s something that we would expect to happen every year. But given the [indiscernible] expecting a greater slowdown in HPA, a gradual slowdown in volumes on the back of that. I think it’s important to highlight that given how strong the market has been, particularly in terms of availability of supply, very low inventories, et cetera.

We do believe that there’s potentially a range of outcomes that might include not much of a slowdown. But of course, in this period of being sort of conservative in how we think about our targeting, our planning is based on that idea of a gradual slowdown into the second half.

John Colantuoni

Great. And maybe related to that, what signals do you track to predict HPA and market demand? Are you seeing any indications of waning demand?

Daniel Morillo

Yeah. Okay. So in the signals that I re-track actually quite a lot of signals and one of the things that is sometimes missing in the discussion is the fact that we track them at a pretty granular level right. So it’s not just HPA at the same national market level. We track literally hundreds of individual data points in many cases all the way down to the individual neighbourhood or house, not just above the house, right, the number of bedrooms etcetera, but also demand and supply indicators for that sort of very granular level, right? And so we have the range of items on that front.

Just to give you an example of the sort of thing that we look at our level is you can look at portal views, visits, early interest from [indiscernible] applications and approvals that you can get a pretty granular or sort of. Like I said, almost all the way into the individual home. In terms of what those signals are telling us today, it’s consistent with what I said before, right? We would expect, given the rising rates, mortgages are running in the, call it, $5.2-ish, they picked that 5.5, what, two weeks ago or so had come down a little bit. But obviously, that’s higher than it’s been in a little while.

And on the back lot, we do expect a decline in demand. But again, that decline in demand in our expectation and from all of our modeling is consistent with a gradual slowdown. The sort of thing that you would see sort of in a typical slowdown rather than something that you would see with a rapid decline like you saw One of the key differentiators is, of course, the supply situation, right?

So even as demand wanes on the back of higher rates, supply remains incredibly tight and it continues to be essentially lowest ever for this time of year going back to 40 years ago, right? And so while, obviously, that will start to wane as demand comes down, that will continue to provide some support for prices, which is why we think there is any slowdown would be pretty gradual.

John Colantuoni

What features of the Opendoor business or the industry make open door resilient or more resilient to a housing market downturn?

Daniel Morillo

Well, we should make a decision between the industry and Opendoor. I obviously can talk about Opendoor industry as a whole, obviously could be quite different depending on the individual company that you’re talking about. Look, for us, I think you want to separate that question into two pieces, right? So when you think about what’s happening with HPA, in this case, there’s really two components to it, right?

One is, if you knew what HBA was, what do you do with it, right? How does it actually sort of feed through into your pricing processes, the offers that you make, the resell strategy that you use? And then separately, how good are you at in fact, predicting what HPA is going to be, right? The first piece of it, if you knew what HPA was going to be, it’s actually pretty easy to explain why we can be pretty resilient, right?

It’s because it essentially becomes an input in how we manage our offers, right? So if I think HPA is going to be, say, I don’t know, I’ll make it up, 15%, through the period when I hold the home, I can make a better offer today to you if you’re selling house to me than I could have I thought HPA was going to be 5, right?

So if I think four is going to be high, I can make more attractive better offers kind of price in that forward view of HPA. And if I think HPA is going to be poor, I make a more conservative offer, right? And so you can think of it as almost a cost right If the cost is going to be high, we make more conservative offers and vice versa, right? And so in that sense, if you knew what is going to be, you can deliver any margin you care to target as it relates to HBA.

Of course, we don’t know exactly what where all the modeling and forecasting comes in. We talked a little bit about it in the previous question. We made a huge amount of effort with years of investment in measuring very granular sort of behavior that allows us to predict HPA, call it one, two, three, four, five, six months in advance, reasonably accurately. It’s not a crystal ball, of course, right? They’re still forecasting error or forecasting variability, but that’s something that we can also price, right?

So if I think that my forecasting variability is, say, plus or minus 1% or plus or minus 2%, that’s something that I can also sort of bring in, in terms of how aggressive or conservative my offers can be as well as same thing on the resale side. We find — you didn’t ask the question specifically, but we find when we go back in time in our live operations as well as all of the modeling that we were with historical data that we can predict that HPA more than closely enough to deliver to the margins at that Carrie has described in our earnings calls, right? So when we say that we can deliver on an annualized basis, four to six as a baseline, something that we’re pretty comfortable doing kind of no matter whether that HPA forecast is.

John Colantuoni

Okay, great. And I think the last time we saw home price appreciation at these levels was prior to the great financial crisis. How does this market differ from the one that we saw in 2008? And does it primarily come down to the health of the consumer balance sheet?

Daniel Morillo

That’s a key component, yes, but there’s actually more additional differences to just add. We’ve been getting a question — this question quite a lot, which isn’t surprising. Everybody is a little worried about what happens in a housing slowdown. — and everybody remembers 2008, right? And the — I think the point that we will make around that is that 2008 is not a particularly good pattern to think about when you think about a typical housing slowdown in general and also specifically this potential slowdown, right? There are a couple of differences to highlight. One is the consumer balance sheet. You said that already.

So post-GFC, there was a huge amount of deliv
ering by the consumer, higher saving rates significantly more conservative behavior in terms of taking on debt and levers in general, the postponement of life events, right, decline in birth rates declining, household formation, et cetera. And so on the back of that, the consumer balance sheet, whether you measure in terms of, say, debt to disposable income or financial navigations to the possible income.

It is significantly better than what it was in the run of 2008. In fact, it’s better than it was even in the late ’90s. And so there’s quite a lot more room in terms of consumer balance sheet. But in addition, the other thing that is important to highlight is, yes, prices have gone up quite a lot over the last 2 years as they did in the run of 2008, but the mechanics are very different. In 2008, it was a demand-driven sort of push on prices, right? People took on a lot of debt, a lot of leverage, even at high rates to push on that demand.

So for example, mortgage applications at the peak of the bubble in 2008 was more than double what it is today, even after having grown from pre-pandemic, and that’s what pushed prices. It was really the man-driven effect, whereas, now, what you see is demand indicators, obviously, are better since, say, 2010, ’11. They’ve slowly gotten better, but they’re not nearly as high as they were before 2008. And most of the price appreciation is on the back of essentially no inventory, right?

Supply levels on inventory are as low as it’s ever been since the data exists since the ’80s or so. And so obviously, as demand wanes from increasing rates, you do expect some softening as we’ve talked about, but the fact that the supply is so low results and essentially some price support that we expect will result in essentially just a gradual normalization rather than a rapid decline.

John Colantuoni

Okay. Great. And given the macro drop, what is Opendoor’s approach to managing a rising interest rate environment? And how do you optimize the balance sheet and financial structure of the company? And have you seen any changes in appetite from your lender base?

Carrie Wheeler

I can take that one. We’re certainly modeling rising rates into our forecast. But the main takeaway is we expect the overall impact on our P&L to be pretty manageable. Two key reasons: One, we pass on the cost of interest into our offers. And two, when you think about the impact of higher rates on a per home basis, given the fact that we’re turning our homes close to 4x a year, I think the impact is often soon to be much higher than it really is in any one unit that we’re managing.

Just unpacked a little bit on a senior loan basis, today, we have about 70 basis points of financing costs per home based on our inventory turns, and we expect that to go up to 100 basis points by Q4 based on both where the curve is today and also the mix of senior facilities we expect to bring online. And that differential, that 30 basis points I just mentioned, that’s pretty modest relative to our overall cost structure.

But more importantly, as we pass on that full cost of interest to the customer via our spreads, but the objective is that on a contribution margin after interest basis, we want to stay neutral. So that’s on the rising rate side. I’d also say with respect to our financing structure in general, we’ve been quite proactive about just changing our mix of facilities over the past year.

We’re at 50-50 fixed versus floating rate today. So we’re certainly not immune to the impact of rising rates, but more muted than we would have been, say, a year or 2 ago, consistently able to increase our lending capacity over time. We’ve not seen a change in appetite to your question, John.

And just a reminder, because these questions come up quite often these days from investors, our facilities are all committed. So our lenders are contractually required to fund. There’s no mark-to-market in the way our facilities work. And as I mentioned, we have this diverse base of lenders, we have stage maturity. So we feel really good about the composition of our capital structure and also the size of it.

We have $2.8 billion of cash on our balance sheet, $11 billion facilities. That’s $35 billion of home purchase power sitting on our balance sheet today. So extremely well capitalized to continue to drive growth, continue to invest in our business. And I think the fact we’ve been able to do so well on the lending side is the testament to that. We’ve grown up with a lot of these lenders. These are long-dated relationships for us, and we’ve proven to be really good stewards of capital.

John Colantuoni

Okay. Great. And wanted to ask a question about kind of ancillary products, Carrie, you mentioned that you’re creating a product suite that helped you — helps you kind of generate revenue throughout the entire transaction you’re kind of going about that in a unique way. Talk about which products you’ve rolled out so far, which ones you’ve had the most success kind of attaching to transactions? And how you kind of see the evolution of your product [indiscernible] over time?

Carrie Wheeler

Yes, I’m happy to do that. So I made the comment earlier that the way we built the core seller business, you sell your home direct to us. First of all, create the experience the customers love, make sure that it’s high NPS that people are demanding it. Optimize the platform behind it and then solve for margin. And we’ve done that very successfully in the cell direct side. And today, I think our focus has shifted to how do we take those two thirds of buyers we have we’re looking — sorry, two thirds of sellers that we have who are looking to be a buyer of another home.

And how do we make it easier for them to be a better home buyer. And we started with title and escrow. Today, we have one of the largest title escrow businesses in the country. attaching, as I mentioned earlier, about 80% of our transactions profitable and accretive to the overall transaction. And today, we’re focused on the other services that enable a buyer. So Opendoor Backed Offers and Opendoor Complete, which for us is about creating the seamless experience between when I go to sell and how do discrete on integrated steps and mortgage fits into that and certainly other services that wrap themselves into the home transaction will fit to that over time.

John Colantuoni

Okay. Great. Well, I wanted to wrap up there. Carrie, Daniel, thank you so much for joining us today. Really appreciate your time.

Carrie Wheeler

Thanks for having us, John. Appreciate it.

Daniel Morillo

Thanks for having us.