Business Impact of COVID-19
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported and subsequently spread worldwide. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. In response to the COVID-19 pandemic and the consequent health risks, we substantially ceased purchasing additional homes in March 2020 to safeguard the health and safety of our customers and employees. After ensuring our ability to close transactions safely, seeing the lifting of shelter-in-place mandates, and retooling certain operational processes to enable “contactless” transactions, we resumed making offers to purchase homes in select markets in May 2020. We resumed operations across all of our markets by the end of August 2020.
Despite pausing new acquisitions in March 2020, we continued to sell down inventory at a healthy pace, leading to a low point in home inventory of $152 million as of September 30, 2020 compared to inventory of $1,312 million as of December 31, 2019. As our revenues are dependent on inventory levels available for sale, our top line was pressured due to limited inventory. Accordingly, we experienced sequential, quarter-over-quarter declines in revenue in the second, third and fourth quarters of 2020. We have been actively rebuilding our inventory since August 2020, leading to sequential growth in the fourth quarter of 2020 and the first quarter of 2021. Likewise, we returned to sequential revenue growth in the first quarter of 2021 and we expect this trend to continue for the remainder of the year. See “— Components of Our Results of Operations — Revenue.”
Our Business Model
Revenue and margin model
We acquire homes directly from individual sellers and resell those homes to buyers, including both individual consumers and institutional investors. Upon acquiring a home, we typically make necessary renovations and repairs before listing it for sale on our website, our mobile app, Multiple Listing Services (“MLS”) and other online real estate portals. Our average hold period for homes purchased since January 2020, from acquisition to resale, ranged from 70 to 100 days and varied by market. Home sales comprise the vast majority of our revenues today, but we expect increasing contribution from adjacent services as our current offerings mature and we introduce additional services over time.
To achieve our long-term margin objectives, we must both maintain pricing accuracy as the business expands and increase customer adoption of our newer services, such as Opendoor Home Loans, Buy with Opendoor, and List with Opendoor. We also plan to achieve operating leverage by growing our revenue at a faster pace than our fixed cost base, which includes general and administrative as well as technology and development expenses. Given the size of the opportunity in front of us, we plan to invest aggressively in the near term and appropriately balance trade-offs between growth and margin as we scale.
Offers
We generate demand for our services through organic awareness and word-of-mouth, paid media spend, and partnership channels such as our relationships with homebuilders and online portals. Home sellers can visit our website or mobile app and answer a few questions about their home’s condition, features and upgrades. For eligible homes, customers receive an initial home valuation range, which can be refreshed at any time through their personalized seller dashboard. The majority of our initial offers are algorithmically generated and do not require any human intervention.
In order to finalize our offer, we conduct a free assessment to confirm all of the home details and identify any repairs that may need to be performed. We have developed purpose-built software to guide home assessment workflows and collect over 100 unique data points regarding a home’s condition and quality, which we incorporate as structured data into our underlying pricing models. Once completed, we finalize our offer, taking into consideration any necessary repairs, and produce the purchase agreement for the seller. Our objective is to provide a competitive cash offer to sellers and we believe this approach builds trust with our potential customers. Our business model is designed to generate margins from our service charge to sellers and adjacent products and services associated with a transaction, and not from the spread between acquisition price and resale price.
We closely track the number of potential sellers who accept the Opendoor offer versus listing their home on the MLS, and this conversion rate is an important factor for our growth.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
Home acquisition and renovation
Once a seller has received and accepted our final purchase offer, we enable the seller to close the transaction on a flexible timeline. This is a particularly important feature to sellers, as their home sale can accommodate other life events (including the purchase of their next home) and further differentiates our service from a traditional sale. Depending on the condition of the home, we leverage our vetted contractor network within each market to complete required repairs and upgrades. Our repair scopes are focused on high-return investments and ensuring the home is in market-ready condition. We continuously refine and adjust our repair strategies based on our operating experience in markets and reviewing neighborhood-level resale outcomes.
Home resale
Post-renovation, we market our homes across a wide variety of channels to generate buyer awareness and demand. These include the Opendoor website and mobile app, local MLS and syndication across real estate portals. We also generate buyer awareness through Opendoor signage for listed properties. Efficiently turning our inventory, inclusive of repairing, listing, and reselling the home, is important to our financial performance, as we bear holding costs (including utilities, property taxes and insurance) and financing costs during our ownership period.
As part of the listing and marketing process, we determine an appropriate pricing strategy for each home. Our proprietary pricing engine helps automate many of these steps, including relevant adjustments over time. We measure our inventory performance compared to local market trends, and our pricing models can incorporate granular, relative demand signals to optimize pricing and sell-through across the portfolio. Our resale models, in conjunction with our pricing team, aim to maximize resale margin while maintaining appropriate transaction velocity and overall inventory health.
When we receive an acceptable offer on a given home, we enter into a resale contract. Buyers will then typically conduct an inspection on the property, finalize their mortgage application process and ultimately take possession of the home upon closing of the transaction.
Factors Affecting our Business Performance
Market Penetration in Existing Markets
Residential real estate is one of the largest consumer markets, with approximately $1.9 trillion of home value transacted annually. Given we operate in a highly fragmented industry and offer a differentiated value proposition to the incumbent agent-led transaction, we believe there is significant opportunity to expand our share in our existing cities. By providing a consistent, high-quality and differentiated experience to our customers, we hope to continue to drive positive word-of-mouth, awareness and trust in our platform. We believe this creates a virtuous cycle, whereby more home sellers will request an offer from Opendoor, allowing us to deepen our market penetration.
Expansion into New Markets
Since our inception in 2014, we have expanded into 27 markets as of March 31, 2021. The following table represents the number of markets as of the periods presented:
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March 31,
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Year Ended December 31,
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(in whole numbers)
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2021
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2020
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2019
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2018
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Number of markets (at period end)
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27
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21
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21
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18
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After launching 12 markets in 2018, we focused on centralizing our operations platform in 2019 for long-term scalability. We launched three additional markets in 2019 and did not launch any markets in 2020, primarily due to COVID-19. We plan to double the markets we serve by the end of 2021 and have launched six new markets in the first quarter of the year. We believe our centralized systems will allow for a higher velocity and lower cost market launch process in the future. We are able to launch a market with only a small field team focused on home assessments and subcontractor oversight, with all other key functions managed centrally, including marketing, customer sales and support and pricing.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
We view the first year of a market launch as an investment period during which we refine our pricing models, renovation strategies and cost structure. Historically, we have seen purchase cohort Contribution Margins for new markets reach positive, steady-state levels approximately one year after initial launch. The significant number of new market launches in 2018 contributed to our lower Contribution Margins in 2019; as those same markets matured, we were able to improve Contribution Margin performance in 2020.
We expect to make substantial investments to support our market launches in 2021, which will impact both Contribution Margin and EBITDA as these new markets mature.
Adjacent Services
We believe home sellers and buyers value simplicity and convenience. To that end, we are building an online, integrated suite of home services, which currently include title insurance and escrow services, listing and real estate brokerage services, and mortgage services. We believe that vertically integrating services that are adjacent to the core real estate transaction will allow us to deliver a superior, seamless experience to the consumer. Our success with title insurance services helps validate our thesis that customers prefer an online, integrated experience. We expect that these adjacent services will also be accretive to our Contribution Margins.
We will continue to evaluate new ways to improve our end-to-end solution and expect to invest in additional adjacent products and services over time.
Unit economics
We view Contribution Margin and Contribution Margin after Interest as key measures of unit economic performance. Our long-term financial performance depends, in part, on continuing to expand unit margins through the following initiatives:
•Pricing engine optimization and enhancements, especially as we enter new markets and expand our reach in existing markets.
•Lowering platform costs through process refinement, greater automation and self-service, and more efficient forms of financing.
•Successful introduction of additional services that supplement the core transaction margin profile.
Seasonality
The residential real estate market is seasonal, with greater demand from home buyers in the spring and summer, and typically weaker demand in late fall and winter. We expect our financial results and working capital requirements to reflect seasonal variations over time, although our growth and market expansion have obscured the impact of seasonality in our historical financials and may continue to do so. That said, we generally expect stronger sequential revenue growth in the first quarter of the year versus the third and fourth quarters.
Risk management
We have invested significant time and resources into our pricing engine and inventory management systems. Our engineering, data science and pricing teams collectively focus on pricing accuracy for both home acquisition and disposition, as well as managing our inventory health across markets.
While residential real estate markets are subject to fluctuations, as with any market, we believe we are well-positioned to manage our inventory risk exposure due to the following:
•Our business model is based on transaction velocity and short-duration hold times, with our average days in possession typically ranging from 70 to 100 days for homes acquired since January 2020. We have historically concentrated our home purchases on the more liquid segments of the residential real estate market, thus limiting our duration risk. Moreover, residential real estate prices tend to move gradually relative to other asset classes, which meaningfully reduces our exposure to price fluctuations during our ownership period.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
•Our pricing models and inventory management systems are designed to recalibrate to market signals on a daily basis. Accordingly, changing market conditions will be immediately reflected in our pricing for new acquisitions, leaving only previously-acquired inventory at risk to potential market volatility.
•At any moment in time, a significant portion of our inventory is under resale contract; this means we have already found buyers for those homes and are in the process of closing the resale transactions. This further limits our exposure to the remaining homes in inventory.
•Our listed homes are not occupied and are in resale condition given the repairs and renovations we perform. We believe that this increases the salability and liquidity of our portfolio.
•We operate in 27 distinct markets as of March 31, 2021, affording us diversification across our inventory portfolio. While there are macro forces that may impact all markets, local real estate markets tend to be idiosyncratic in terms of their individual supply-demand dynamics.
We will continue to make substantial investments in our pricing systems and risk management functions.
Inventory Financing
Our business model is working capital intensive and inventory financing is a key enabler of our growth. We rely on our access to non-recourse asset-backed financing facilities, which consist of senior revolving credit facilities and asset-backed mezzanine term debt facilities, to finance our home acquisitions. See “—Liquidity and Capital Resources — Debt and Financing Arrangements.”
Non-GAAP Financial Measures
In addition to our results of operations below, we report certain financial measures that are not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).
These measures have limitations as analytical tools when assessing our operating performance and should not be considered in isolation or as a substitute for GAAP measures, including gross profit and net income. We may calculate or present our non-GAAP financial measures differently than other companies who report measures with similar titles and, as a result, the non-GAAP financial measures we report may not be comparable with those of companies in our industry or in other industries.
Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest
To provide investors with additional information regarding our margins and return on inventory acquired, we have included Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest, which are non-GAAP financial measures. We believe that Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest are useful financial measures for investors as they are supplemental measures used by management in evaluating unit level economics and our operating performance in our key markets. Each of these measures is intended to present the economics related to homes sold during a given period. We do so by including revenue generated from homes sold (and adjacent services) in the period and only the expenses that are directly attributable to such home sales, even if such expenses were recognized in prior periods, and excluding expenses related to homes that remain in inventory as of the end of the period. Contribution Profit provides investors a measure to assess Opendoor’s ability to generate returns on homes sold during a reporting period after considering home purchase costs, renovation and repair costs, holding costs and selling costs. Contribution Profit After Interest further impacts gross profit by including interest costs attributable to homes sold during a reporting period. We believe these measures facilitate meaningful period over period comparisons and illustrate our ability to generate returns on assets sold after considering the costs directly related to the assets sold in a given period.
Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest are supplemental measures of our operating performance and have limitations as analytical tools. For example, these measures include costs that were recorded in prior periods under GAAP and exclude, in connection with homes held in inventory at the end of the period, costs required to be recorded under GAAP in the same period. These measures also exclude the impact of certain restructuring costs that are required under GAAP. Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
results as reported under GAAP. We include a reconciliation of these measures to the most directly comparable GAAP financial measure, which is gross profit.
Adjusted Gross Profit / Margin
We calculate Adjusted Gross Profit as gross profit under GAAP adjusted for (1) inventory impairment in the current period and (2) inventory impairment in prior periods. Inventory impairment in the current period is calculated by adding back the inventory impairment charges recorded during the period on homes that remain in inventory at period end. Inventory impairment in prior periods is calculated by subtracting the inventory impairment charges recorded in prior periods on homes sold in the current period. We define Adjusted Gross Margin as Adjusted Gross Profit as a percentage of revenue.
We view this metric as an important measure of business performance as it captures gross margin performance isolated to homes sold in a given period and provides comparability across reporting periods. Adjusted Gross Profit helps management assess home pricing, service fees and renovation performance for a specific resale cohort.
Contribution Profit / Margin
We calculate Contribution Profit as Adjusted Gross Profit, minus (1) holding costs incurred in the current period on homes sold during the period, (2) holding costs incurred in prior periods on homes sold in the current period, and (3) direct selling costs incurred on homes sold during the current period. The composition of our holding costs is described in the footnotes to the reconciliation table below. Contribution Margin is Contribution Profit as a percentage of revenue.
We view this metric as an important measure of business performance as it captures the unit level performance isolated to homes sold in a given period and provides comparability across reporting periods. Contribution Profit helps management assess inflows and outflows directly associated with a specific resale cohort.
Contribution Profit / Margin After Interest
We define Contribution Profit After Interest as Contribution Profit, minus interest expense under our senior revolving credit facilities incurred on the homes sold during the period. This may include interest expense recorded in periods prior to the period in which the sale occurred. Our senior revolving credit facilities are secured by our homes in inventory and drawdowns are made on a per-home basis at the time of purchase and are required to be repaid at the time the homes are sold. See “— Liquidity and Capital Resources — Debt and Financing Arrangements.” We do not include interest expense associated with our mezzanine term debt facilities in this calculation as we do not view such facilities as reflective of our expected long term capital structure and cost of financing. Contribution Margin After Interest is Contribution Profit After Interest as a percentage of revenue.
We view this metric as an important measure of business performance. Contribution Profit After Interest helps management assess Contribution Margin performance, per above, when fully burdened with expected long-term costs of financing.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
The following table presents a reconciliation of our Adjusted Gross Profit, Contribution Profit and Contribution Profit After Interest to our gross profit, which is the most directly comparable GAAP measure, for the periods indicated:
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Three Months Ended March 31,
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(in thousands, except percentages)
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2021
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2020
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Gross profit (GAAP)
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$
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97,132
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$
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91,047
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Gross Margin
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13.0
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%
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7.3
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%
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Adjustments:
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Inventory impairment – Current Period(1)
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20
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6,222
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Inventory impairment – Prior Periods(2)
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(114)
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(8,421)
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Adjusted Gross Profit
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$
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97,038
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$
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88,848
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Adjusted Gross Margin
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13.0
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%
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7.1
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%
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Adjustments:
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Direct selling costs(3)
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(17,340)
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(36,648)
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Holding costs on sales – Current Period(4)(5)
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(2,126)
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(4,876)
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Holding costs on sales – Prior Periods(4)(6)
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(1,426)
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(8,768)
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Contribution Profit
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$
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76,146
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$
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38,556
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Contribution Margin
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10.2
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%
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3.1
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%
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Adjustments:
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Interest on homes sold – Current Period(7)(8)
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(2,333)
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(6,563)
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Interest on homes sold – Prior Periods(7)(9)
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(902)
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(8,578)
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Contribution Profit After Interest
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$
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72,911
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$
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23,415
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Contribution Margin After Interest
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9.8
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%
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1.9
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%
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________________
(1)Inventory impairment — Current Period is the inventory valuation adjustments recorded during the period presented associated with homes that remain in inventory at period end.
(2)Inventory impairment — Prior Periods is the inventory valuation adjustments recorded in prior periods associated with homes that sold in the period presented.
(3)Represents selling costs incurred related to homes sold in the relevant period. This primarily includes broker commissions, external title and escrow-related fees and transfer taxes.
(4)Holding costs include mainly property taxes, insurance, utilities, association dues, cleaning and maintenance costs. Holding costs are included in Sales, marketing, and operations on the Consolidated Statements of Operations.
(5)Represents holding costs incurred in the period presented on homes sold in the period presented.
(6)Represents holding costs incurred in prior periods on homes sold in the period presented.
(7)This does not include interest on mezzanine term debt facilities or other indebtedness. See “— Liquidity and Capital Resources — Debt and Financing Arrangements.”
(8)Represents the interest expense under our senior revolving credit facilities incurred on homes sold for the current period during the period.
(9)Represents the interest expense under our senior revolving credit facilities incurred on homes sold for the current period during prior periods.
Adjusted Net Loss and Adjusted EBITDA
We also present Adjusted Net Loss and Adjusted EBITDA, which are non-GAAP financial measures that management uses to assess our underlying financial performance. These measures are also commonly used by investors and analysts to compare the underlying performance of companies in our industry. We believe these measures provide investors with meaningful period over period comparisons of our underlying performance, adjusted for certain charges that are non-recurring, non-cash, not directly related to our revenue-generating operations or not aligned to related revenue.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
Adjusted Net Loss and Adjusted EBITDA are supplemental measures of our operating performance and have important limitations. For example, these measures exclude the impact of certain costs required to be recorded under GAAP. These measures also include impairment costs that were recorded in prior periods under GAAP and exclude, in connection with homes held in inventory at the end of the period, impairment costs required to be recorded under GAAP in the same period. These measures could differ substantially from similarly titled measures presented by other companies in our industry or companies in other industries. Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We include a reconciliation of these measures to the most directly comparable GAAP financial measure, which is net loss.
Adjusted Net Loss
We calculate Adjusted Net Loss as GAAP net loss adjusted to exclude non-cash expenses of stock-based compensation, derivative and warrant fair value adjustment and intangible amortization. It also excludes non-recurring restructuring charges, gain on lease termination, and convertible note payment-in-kind (“PIK”) interest and issuance discount amortization. Adjusted Net Loss also aligns the timing of impairment charges recorded under GAAP to the period in which the related revenue is recorded in order to improve the comparability of this measure to our non-GAAP financial measures of unit economics, as described above. Our calculation of Adjusted Net Loss does not currently include the tax effects of the non-GAAP adjustments because our taxes and such tax effects have not been material to date.
Adjusted EBITDA
We calculated Adjusted EBITDA as Adjusted Net Loss adjusted for depreciation and amortization, property financing and other interest expense, interest income, and income tax expense. Adjusted EBITDA is a supplemental performance measure that our management uses to assess our operating performance and the operating leverage in our business.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
The following table presents a reconciliation of our Adjusted Net Loss and Adjusted EBITDA to our net loss, which is the most directly comparable GAAP measure, for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands, except percentages)
|
|
2021
|
|
2020
|
Net loss (GAAP)
|
|
$
|
(270,436)
|
|
|
$
|
(62,196)
|
|
Adjustments:
|
|
|
|
|
Stock-based compensation
|
|
238,832
|
|
|
2,970
|
|
Derivative and warrant fair value adjustment(1)
|
|
15,272
|
|
|
1,012
|
|
Intangibles amortization expense(2)
|
|
580
|
|
|
1,080
|
|
Inventory impairment – Current Period(3)
|
|
20
|
|
|
6,221
|
|
Inventory impairment — Prior Periods(4)
|
|
(114)
|
|
|
(8,421)
|
|
Restructuring(5)
|
|
79
|
|
|
889
|
|
Convertible note PIK interest and discount amortization(6)
|
|
—
|
|
|
2,695
|
|
|
|
|
|
|
Gain on lease termination
|
|
(5,237)
|
|
|
—
|
|
Other(7)
|
|
203
|
|
|
(44)
|
|
Adjusted Net Loss
|
|
$
|
(20,801)
|
|
|
$
|
(55,794)
|
|
Adjustments:
|
|
|
|
|
Depreciation and amortization, excluding amortization of intangibles and right of use assets
|
|
8,434
|
|
|
5,046
|
|
Property financing(8)
|
|
6,980
|
|
|
18,210
|
|
Other interest expense(9)
|
|
4,019
|
|
|
6,822
|
|
Interest income(10)
|
|
(867)
|
|
|
(2,680)
|
|
Income tax expense
|
|
94
|
|
|
119
|
|
Adjusted EBITDA
|
|
$
|
(2,141)
|
|
|
$
|
(28,277)
|
|
Adjusted EBITDA Margin
|
|
(0.3)
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%
|
|
(2.3)
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%
|
________________
(1)Represents the gains and losses on our warrant liabilities, which are marked to fair value at the end of each period.
(2)Represents amortization of intangibles acquired in the OSN and Open Listings acquisitions which contribute to revenue generation and are recorded as part of purchase accounting. The acquired intangible assets have useful lives ranging from 2 to 5 years and amortization is expected until the intangible assets are fully amortized.
(3)Inventory impairment — Current Period is the inventory impairment charge recorded during the period presented associated with homes that remain in inventory at period end.
(4)Inventory impairment — Prior Periods is the inventory valuation adjustments recorded in prior periods associated with homes that sold in the period presented.
(5)Restructuring costs consist mainly of employee termination benefits, relocation packages and retention bonuses as well as costs related to the exiting of certain non-cancelable leases.
(6)Includes non-cash payment-in-kind (“PIK”) interest and amortization of the discount on the convertible notes issued from July through November 2019. We exclude convertible note PIK interest and amortization from Adjusted Net Loss since these are non-cash in nature and were converted into equity in September 2020 when the Company entered into the Convertible Notes Exchange Agreement with the convertible note holders.
(7)Includes primarily gain or loss on disposal of fixed assets, gain or loss on interest rate lock commitments, gain or loss on the sale of marketable securities and sublease income.
(8)Includes interest expense on our senior revolving credit facilities and our asset-backed mezzanine term debt facilities.
(9)Includes amortization of debt issuance costs and loan origination fees, commitment fees, unused fees, and other interest related costs on our senior revolving credit facilities and our mezzanine term debt facilities.
(10)Consists mainly of interest earned on cash, cash equivalents and marketable securities.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
Components of Our Results of Operations
Revenue
We generate revenue primarily from the sale of homes that we previously acquired from homeowners. In addition, we generate revenue from additional services we provide to both home sellers and buyers, which consists primarily of title insurance and escrow services, Buy with Opendoor, List with Opendoor and Opendoor Home Loans.
Due to the pause in home purchases following the outbreak of the COVID-19 pandemic, our inventory levels began to meaningfully decline in March 2020. We experienced sequential, quarter-over-quarter declines in revenue in the second, third, and fourth quarters of 2020. We resumed operations in all markets in August 2020 and have been actively rebuilding our inventory, leading to sequential growth in balances for the fourth quarter of 2020 and the first quarter of 2021. Likewise, we returned to sequential revenue growth in the first quarter of 2021 and expect this trend to continue for the remainder of the year.
Home sales revenue from selling residential real estate is recognized when title to and possession of the property has transferred to the buyer and we have no continuing involvement with the property, which is generally the close of escrow. The amount of revenue recognized for each home sale is equal to the sale price of the home net of any concessions.
Cost of Revenue
Cost of revenue includes the property purchase price, acquisition costs, direct costs to renovate or repair the home and real estate inventory valuation adjustments, if any. These costs are accumulated in real estate inventory during the property holding period and charged to cost of revenue under the specific identification method when the property is sold. Additionally, for our revenue other than home sales revenue, cost of revenue consists of any costs incurred in delivering the service, including associated headcount expenses such as salaries, benefits and stock-based compensation.
Other Operating Expenses
Sales, Marketing and Operations Expense
Sales, marketing and operations expense consists primarily of resale broker commissions (paid to the home buyers’ real estate agents, if applicable), resale closing costs, holding costs related to real estate inventory including utilities, property taxes and maintenance, and expenses associated with product marketing, promotions and brand-building. Sales, marketing and operations expense also includes any headcount expenses in support of sales, marketing, and real estate operations such as salaries, benefits and stock-based compensation.
General and Administrative Expense
General and administrative expense consists primarily of headcount expenses, including salaries, benefits and stock-based compensation for our executive, finance, human resources, legal and administrative personnel, third-party professional services fees and rent expense.
We expect our recurring general and administrative expense to increase following the Closing, as we begin to incur public company costs. See “— The Business Combination” above. Additionally, we incurred a significant increase in stock-based compensation in the first quarter of 2021 as a result of certain performance-based awards and historical RSUs satisfying their liquidity event vesting condition. We expect stock based compensation to continue to be elevated in the second quarter of 2021 while we continue to record expense for certain performance-based awards and then decline beginning in the third quarter of 2021. The increase in stock-based compensation will impact each line item within Other operating expenses.
Technology and Development Expense
Technology and development expense consists primarily of headcount expenses, including salaries, benefits and stock-based compensation for employees in the design, development, testing, maintenance and operation of our mobile applications, websites, tools and applications that support our products. Technology and development expense also includes amortization of capitalized software development costs.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
Derivative and Warrant Fair Value Adjustment
Derivative and warrant fair value adjustment consists of unrealized and realized gains and losses as a result of marking our warrants and embedded derivatives related to the Convertible Notes to fair value at the end of each reporting period and subsequent settlement through exercise of warrants and conversion of the Convertible Notes to equity.
Interest Expense
Interest expense consists primarily of interest paid or payable and the amortization of debt discounts and debt issuance costs. Interest expense varies period over period, primarily due to fluctuations in our inventory volumes and changes in LIBOR, which impact the interest incurred on our senior revolving credit facilities (see “— Liquidity and Capital Resources — Debt and Financing Arrangements”).
We expect our overall interest expense to increase as revenue increases. Subject to market interest rate drivers, we will evaluate opportunities to reduce our borrowing costs over the long-term, including through limiting our reliance on the higher cost mezzanine term debt facilities and exploring new sources of financing.
Other Income — Net
Other income-net consists primarily of interest income from our investment in marketable securities.
Income Tax Expense
We record income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future tax effects of differences between the financial statement and income tax basis of existing assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. We recognize the effect on deferred income taxes of a change in tax rates in income in the period that includes the enactment date.
We record a valuation allowance to reduce our deferred tax assets and liabilities to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
Results of Operations
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
The following table sets forth our results of operations for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Change in
|
(in thousands, except percentages)
|
2021
|
|
2020
|
|
$
|
|
%
|
Revenue
|
$
|
747,274
|
|
|
$
|
1,255,795
|
|
|
$
|
(508,521)
|
|
|
(40)
|
%
|
Cost of revenue
|
650,142
|
|
|
1,164,748
|
|
|
(514,606)
|
|
|
(44)
|
%
|
Gross profit
|
97,132
|
|
|
91,047
|
|
|
6,085
|
|
|
7
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
Sales, marketing and operations
|
69,066
|
|
|
81,689
|
|
|
(12,623)
|
|
|
(15)
|
%
|
General and administrative
|
222,084
|
|
|
29,583
|
|
|
192,501
|
|
|
651
|
%
|
Technology and development
|
50,677
|
|
|
15,787
|
|
|
34,890
|
|
|
221
|
%
|
Total operating expenses
|
341,827
|
|
|
127,059
|
|
|
214,768
|
|
|
169
|
%
|
Loss from operations
|
(244,695)
|
|
|
(36,012)
|
|
|
(208,683)
|
|
|
579
|
%
|
Derivative and warrant fair value adjustment
|
(15,272)
|
|
|
(1,012)
|
|
|
(14,260)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
Interest expense
|
(10,999)
|
|
|
(27,727)
|
|
|
16,728
|
|
|
(60)
|
%
|
Other income-net
|
624
|
|
|
2,675
|
|
|
(2,051)
|
|
|
(77)
|
%
|
Loss before income taxes
|
(270,342)
|
|
|
(62,076)
|
|
|
(208,266)
|
|
|
336
|
%
|
Income tax expense
|
(94)
|
|
|
(120)
|
|
|
26
|
|
|
(22)
|
%
|
Net loss
|
$
|
(270,436)
|
|
|
$
|
(62,196)
|
|
|
$
|
(208,240)
|
|
|
335
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M - Not meaningful.
Revenue
Revenue decreased by $508.5 million, or 40%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease in revenue was primarily attributable to lower sales volumes, reflecting the decline in our inventory levels in response to the COVID-19 pandemic. See “— Business Impact of COVID-19”. We sold 2,462 homes during the three months ended March 31, 2021, compared to 4,908 homes during the three months ended March 31, 2020, representing a decrease of 50%, while revenue per home sold increased 19% between periods. Average resale prices were positively impacted by mix, home price appreciation, and buybox expansion.
Cost of Revenue and Gross Profit
Cost of revenue decreased by $514.6 million, or 44%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. This decrease in cost of revenue was primarily attributable to lower sales volumes.
Gross profit margins improved from 7.3% to 13.0% for the three months ended March 31, 2020 and March 31, 2021, respectively. For the same periods, adjusted Gross Margins improved from 7.1% to 13.0%. Gross margin improvement was primarily due to a combination of healthy inventory mix, home price appreciation and enhanced inventory management strategies. In addition, we saw gains in home renovation efficiency and margins associated with adjacent services. Contribution Margin increased from 3.1% to 10.2% for the same periods, due largely to higher Adjusted Gross Margins as well as improvements in direct selling and holding costs. See “— Non-GAAP Financial Measures.”
Other Operating Expenses
Sales, Marketing and Operations. Sales, marketing and operations decreased by $12.6 million, or 15%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease was primarily attributable to resale broker commissions and resale transaction costs, which declined by $16.6 million and $2.4 million, respectively, due to lower resale volumes. In addition, property holding costs declined by $4.6 million due to lower inventory volumes. The decreases were partially offset by a $12.3 million increase in advertising expense as we increased advertising in an effort to ramp up acquisition volumes in both existing and new markets.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
General and Administrative. General and administrative increased by $192.5 million, or 651%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily attributable to $195.5 million of additional stock based compensation from the commencement of expense recognition of certain performance awards following the consummation of the Business Combination in December 2020 as well as the expense recognition of certain restricted stock units ("RSUs") upon the fulfillment of the liquidity event vesting condition satisfied by the February 2021 Offering.
Technology and Development. Technology and development increased by $34.9 million, or 221%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily attributable to a $34.3 million increase in stock based compensation from the expense recognition of certain RSUs upon the fulfillment of the liquidity event vesting condition satisfied by the February 2021 Offering.
Derivative and Warrant Fair Value Adjustment
Derivative and warrant fair value adjustment decreased by $14.3 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The loss for the three months ended March 31, 2021 was attributable to an adjustment to the fair value of the Sponsor Warrants of $15.3 million. The increase in the fair value of the Sponsor Warrants is observed through the increase in the quotable price for the Public Warrants, which trade on the Nasdaq Stock Market LLC under the ticker symbol "OPENW." This is compared to the loss for the three months ended March 31, 2020 that was attributable to the increase in the fair value of the Warrant Commitment of $1.0 million.
Interest Expense
Interest expense decreased by $16.7 million, or 60%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease was primarily attributable to a 48% decrease in the average outstanding balance of our financing facilities due to the reduction in inventory levels as well as the elimination of interest expense related to the Convertible Notes which were converted into equity in September 2020.
Other Income — Net
Other income – net decreased by $2.1 million, or 77%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease was primarily attributable to lower interest income from cash, cash equivalents and marketable securities.
Income Tax Expense
Income tax expense decreased by a nominal amount for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity have historically consisted of cash generated from our operations and from financing activities. As of March 31, 2021, we had cash and cash equivalents of $2,039.9 million, marketable securities of $58.6 million and total outstanding balances on our credit facilities and secured borrowings of $736.6 million. In addition, we had committed and undrawn borrowing capacity of $875.7 million under our asset-backed senior revolving credit facilities and committed and undrawn borrowing capacity of $309.0 million under our mezzanine term debt facilities (as described further below).
We have incurred losses from inception through March 31, 2021 and expect to incur additional losses for the foreseeable future. Our ability to service our debt, fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to our future operating success, and obtain inventory acquisition financing on reasonable terms, which is subject to factors beyond our control, including general economic, political and financial market conditions.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
We expect our working capital requirements to continue to increase in the immediate future, as we seek to increase our inventory and expand into more markets across the United States. We believe our cash on hand, including the cash we obtained as a result of the Business Combination and the February 2021 Offering together with cash we expect to generate from future operations and borrowings, will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months from the date of this Quarterly Report on Form 10-Q. The discussion below does not include transactions that occurred subsequent to March 31, 2021. See “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 18. Subsequent Events” for additional information regarding transactions subsequent to the balance sheet date.
Debt and Financing Arrangements
Our financing activities include short-term borrowing under our asset-backed senior revolving credit facilities, the issuance of long-term asset-backed mezzanine term debt, borrowing under our mortgage repurchase financing, and new issuances of equity. Historically, we have required access to external financing resources in order to fund growth, expansion into new markets and strategic initiatives and we expect this to continue in the future. Our access to capital markets can be impacted by factors outside our control, including economic conditions.
We primarily use non-recourse asset-backed financing facilities, consisting of asset-backed senior revolving credit facilities and asset-backed mezzanine term debt facilities to provide financing for our real estate inventory purchases and renovations. Our business is capital intensive and maintaining adequate liquidity and capital resources is needed as we continue to scale and accumulate additional inventory. While there can be no assurances that these trends will continue, we have observed increased availability and engagement for this lending product across a variety of financial institutions and we have seen improved terms and an increase in our borrowing capacity over the last two years. We actively manage our relationships with multiple financial institutions and seek to optimize duration, flexibility, efficiency and cost of funds.
Our asset-backed facilities are each collateralized by a specified pool of assets, consisting of real estate inventory, restricted cash and equity interests in certain consolidated subsidiaries of Opendoor that directly or indirectly own our real estate inventory.
Our real estate-owning subsidiaries’ assets and credit generally are not available to satisfy the debts and other obligations of any other Opendoor entities except to the extent other Opendoor entities are also a party to the relevant financing arrangements. Our asset-backed financing facilities are non-recourse to Opendoor except for limited guarantees provided by an Opendoor subsidiary for certain obligations in situations involving “bad acts” by an Opendoor entity and certain other limited circumstances that are generally under our control.
Our asset-backed senior revolving credit facilities generally advance 80% to 90% of our cost basis in the underlying properties upon acquisition and our asset-backed mezzanine term debt facilities will finance up to 100% of our cost basis in the underlying properties upon acquisition. The maximum initial advance rates for a given financed property vary by facility and generally decrease on a fixed timeline that varies by facility based on the length of time the property has been financed and any other facility-specific adjustments.
Asset-backed Senior Revolving Credit Facilities
The table below summarizes our asset-backed senior revolving credit facilities as of March 31, 2021:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
Borrowing
Capacity
|
|
Outstanding
Amount
|
|
Weighted
Average
Interest
Rate
|
|
End of
Revolving
Period
|
|
Final
Maturity
Date
|
Revolving Facility 2018-2
|
|
$
|
750,000
|
|
|
$
|
—
|
|
|
—
|
%
|
|
September 23, 2022
|
|
December 23, 2022
|
Revolving Facility 2018-3
|
|
100,000
|
|
|
30,472
|
|
|
3.62
|
%
|
|
June 1, 2023
|
|
June 1, 2023
|
Revolving Facility 2019-1
|
|
300,000
|
|
|
50,893
|
|
|
2.86
|
%
|
|
March 4, 2022
|
|
March 4, 2022
|
Revolving Facility 2019-2
|
|
1,030,000
|
|
|
398,952
|
|
|
2.70
|
%
|
|
July 8, 2021
|
|
July 7, 2022
|
Revolving Facility 2019-3
|
|
475,000
|
|
|
108,457
|
|
|
3.25
|
%
|
|
August 22, 2022
|
|
August 21, 2023
|
Total
|
|
$
|
2,655,000
|
|
|
$
|
588,774
|
|
|
|
|
|
|
|
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
In some cases, the undrawn borrowing capacity amounts under the asset-backed senior revolving credit facilities as reflected in the table are not fully committed and any borrowings above those amounts are subject to the applicable lender’s discretion. As of March 31, 2021, the Company had fully committed borrowing capacity with respect to asset-backed senior revolving credit facilities of $1,464.5 million.
The revolving period end dates and final maturity dates reflected in the table above are inclusive of any extensions that are at the sole discretion of the Company. Certain of our asset-backed senior revolving credit facilities also have additional extension options that are subject to lender approval that are not reflected in the table above. Historically, we have had success in renewing these facilities to the extent we have wished to do so.
Asset-Backed Mezzanine Term Debt Facilities
In addition to the asset-backed senior revolving credit facilities, we have issued asset-backed mezzanine term debt facilities which are subordinated to the related senior facilities. The table below summarizes our asset-backed mezzanine term debt facilities as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
Borrowing
Capacity
|
|
Outstanding
Amount
|
|
Interest
Rate
|
|
End of
Draw
Period
|
|
Final
Maturity
Date
|
Term Debt Facility 2016-M1
|
|
$
|
149,000
|
|
|
$
|
40,000
|
|
|
10.00
|
%
|
|
October 31, 2023
|
|
March 31, 2025
|
Term Debt Facility 2020-M1
|
|
300,000
|
|
|
100,000
|
|
|
10.00
|
%
|
|
January 23, 2023
|
|
January 23, 2026
|
Total
|
|
$
|
449,000
|
|
|
$
|
140,000
|
|
|
|
|
|
|
|
|
|
Issuance Costs
|
|
(3,527)
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
$
|
136,473
|
|
|
|
|
|
|
|
Undrawn amounts under the mezzanine term debt facilities of $309.0 million as reflected in the table above are fully committed and generally may be drawn at any time during the draw period.
See “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 7. Credit Facilities and Long-Term Debt” for additional information regarding our non-recourse asset-backed financing facilities.
Mortgage Financing
We primarily use debt financing to fund our mortgage loan originations. In 2019 we entered into a master repurchase agreement to finance substantially all of the mortgage loans that we originate. Once our mortgage business sells a loan in the secondary mortgage market, we use the sale proceeds to reduce the outstanding balance under the repurchase facility. See “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 7. Credit Facilities and Long-Term Debt” for additional information regarding our master repurchase agreement.
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2021
|
|
2020
|
Net cash (used in) provided by operating activities
|
|
$
|
(404,707)
|
|
|
$
|
436,382
|
|
Net cash used in investing activities
|
|
$
|
(25,287)
|
|
|
$
|
(55,152)
|
|
Net cash provided by (used in) financing activities
|
|
$
|
1,107,653
|
|
|
$
|
(346,915)
|
|
Net increase in cash, cash equivalents, and restricted cash
|
|
$
|
677,659
|
|
|
$
|
34,315
|
|
Net Cash (Used in) Provided by Operating Activities
Net cash (used in) provided by operating activities was $(404.7) million and $436.4 million for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, cash used in operating activities was
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
primarily driven by the $374.7 million increase in inventory and a $17.8 million increase in escrow receivables correlated to the increase in first quarter 2021 revenue. For the three months ended March 31, 2020, cash provided by operating activities was primarily driven by a $480.2 million reduction in real estate inventory offset by adjusted net loss of ($55.8) million.
Net Cash Used in Investing Activities
Net cash used in investing activities was $25.3 million and $55.2 million for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, cash used in investing activities primarily consisted of the $11.1 million increase in marketable securities and the $10.0 million purchase of a strategic investment in a privately held company. For the three months ended March 31, 2020, cash used in investing activities primarily consisted of the $49.5 million increase in marketable securities.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by (used in) financing activities was $1,107.7 million and $(346.9) million for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, cash provided by financing activities was primarily attributable to $886.1 million in proceeds from the February 2021 Offering, net of $28.8 million of issuance costs, and $250.2 million net proceeds from our senior revolving credit facilities. For the three months ended March 31, 2020, cash used in financing activities was primarily attributable to the repayment of $346.1 million to our senior revolving credit facilities and mezzanine term debt facilities.
Contractual Obligations and Commitments
There have been no material changes outside the ordinary course of business in our commitments under contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, except for the categories of contractual obligations included in the table below, which have been updated to reflect our contractual obligations as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Year
|
(in thousands)
|
Total
|
|
Less than
1 year
|
|
|
|
|
|
|
Senior revolving credit facilities(1)
|
$
|
592,930
|
|
|
$
|
592,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage financing(2)
|
7,795
|
|
|
7,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitments(3)
|
1,302,506
|
|
|
1,302,506
|
|
|
|
|
|
|
|
Total
|
$
|
1,903,231
|
|
|
$
|
1,903,231
|
|
|
|
|
|
|
|
______________
(1)Represents the principal amounts outstanding as of March 31, 2021. Includes estimated interest payments, calculated using the variable rate in existence at period end over an assumed holding period of 90 days. Borrowings under the senior revolving credit facilities are payable as the related inventory is sold. The payment is expected to be within one year of March 31, 2021.
(2)Represents the principal amounts outstanding as of March 31, 2021. The facility provides short-term financing between the origination of a mortgage loan and when Opendoor Home Loans sells the loan to an investor. Included estimated interest payments, calculated using the variable rate in existence at period end over the Company’s average holding period for mortgage loans.
(3)As of March 31, 2021, we were under contract to purchase 4,027 homes for an aggregate purchase price of $1,302.5 million.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2021.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
Critical Accounting Policies and Estimates
Discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue, and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the consolidated financial statements. Based on this definition, critical accounting policies and estimates are discussed in “Part II – Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in the Annual Report. There have been no significant changes to these critical accounting estimates during the first three months of 2021, except as noted below. In addition, we have other key accounting policies and estimates that are described in “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Note 1. Description of Business and Accounting Policies” in this Quarterly Report on Form 10-Q.
Public and Sponsor Warrants
On April 30, 2020, SCH consummated its initial public offering of 41,400,000 units, consisting of one share of Class A common stock and one third of one warrant exercisable for Class A common stock, at a price of $10.00 per unit. Each whole warrant entitles the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share (the “Public Warrants”). Simultaneously with the closing of the IPO, SCH completed the private placement of 6,133,333 warrants to SCH’s sponsor at a price of $1.50 per warrant (the “Sponsor Warrants”). Each Sponsor Warrant allows the sponsor to purchase one share of Class A common stock at $11.50 per share. As of December 31, 2020, there were 19,933,333 warrants outstanding.
The Sponsor Warrants and shares of common stock issuable upon the exercise of Sponsor Warrants may not be transferred, assigned, or sold until 30 days after the completion of a Business Combination. Additionally, the Sponsor Warrants are eligible for cash and cashless exercises, at the holder’s option, and are redeemable only if the Reference Value, as defined in the Warrant Agreement, is less than $18.00 per share. If the Sponsor Warrants are held by someone other than the sponsors and certain permitted transferees, the Sponsor Warrants will redeemable and exercisable on the same basis as the Public Warrants.
We evaluated the Public and Sponsor Warrants under ASC 815-40, Derivatives and Hedging-Contracts in Entity’s Own Equity, and concluded that the Sponsor Warrants do not meet the criteria to be classified in shareholders’ equity. Specifically the exercise and settlement features for the Sponsor Warrants preclude them from being considered indexed to the Company’s own stock given that a change in the holder of the Sponsor Warrants may alter the settlement of the Sponsor Warrants. Since the holder of the instrument is not an input to a standard option pricing model, a consideration with respect to the indexation guidance, a change in the holder for the Sponsor Warrants impacting their value means the Sponsor Warrants are not indexed to the Company’s own stock. Since the Private Warrants meet the definition of a derivative under ASC 815, we recorded these warrants as liabilities on the balance sheet at fair value upon the consummation of the Business Combination, with subsequent changes in their respective fair values recognized in the consolidated statement of operations at each reporting period. The Company concluded that the Public Warrants, which do not have the same exercise and settlement features as the Sponsor Warrants, meet the criteria to be classified in shareholders' equity.
The Public Warrants are publicly traded and thus had an observable market price. The Sponsor Warrants are held by a single entity whereby distributions of the Sponsor Warrants to individual owners is subject to certain barriers. As the Sponsor Warrants are held by a single market participant and the transfer of the Sponsor Warrants outside of a small group of permitted transferees would result in the Sponsor Warrants having substantially the same terms as the Public Warrants, management determined that the fair value of each Sponsor Warrant is the same as that of a Public Warrant, with an insignificant adjustment for short-term marketability restrictions. While the changes in the fair value of the Sponsor Warrants may be material to our future operating results, there is no significant judgment involved in measuring the fair value of the Sponsor Warrants.
OPENDOOR TECHNOLOGIES INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular amounts in thousands, except share and per share data and ratios, or as noted)
Recent Accounting Pronouncements
For information on recent accounting standards, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 1. Description of Business and Accounting Policies”.
OPENDOOR TECHNOLOGIES INC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.
Interest Rate Risk
We are subject to market risk by way of changes in interest rates on borrowings under our inventory financing facilities and mortgage financing repurchase agreement. As of March 31, 2021 and December 31, 2020 we had outstanding borrowings of $596.6 million and $346.3 million, respectively, which bear interest at a floating rate based on a London Interbank Offered Rate (“LIBOR”) reference rate plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense. We may use interest rate cap derivatives, interest rate swaps or other interest rate hedging instruments to economically hedge and manage interest rate risk with respect to our variable floating rate debt. Many of our floating rate debt facilities also have LIBOR floors. Assuming no change in the outstanding borrowings on our credit facilities, we estimate that a one percentage point increase in LIBOR would increase our annual interest expense by approximately $4.0 million and $4.4 million as of March 31, 2021 and December 31, 2020, respectively.
In July 2017 the U.K. Financial Conduct Authority announced its intention to phase out LIBOR rates by the end of 2021. It is not possible to predict the effect of any changes in the methods by which the LIBOR is determined, or any other reforms to LIBOR that may be enacted in the United States or elsewhere. Such developments may cause LIBOR to perform differently than in the past, including sudden or prolonged increases or decreases in LIBOR, or cease to exist, resulting in the application of a successor base rate under our senior revolving credit facilities, which in turn could have unpredictable effects on our interest payment obligations under our senior revolving credit facilities.
Inflation Risk
We do not believe that inflation has had a material effect on our business, results of operations or financial condition. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability to do so could harm our business, results of operations and financial condition.
Item 4. Controls and Procedures.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2021, due to the material weaknesses described below, our disclosure controls and procedures were not effective at the reasonable assurance level.
Material Weaknesses
Management identified the following control deficiencies that constituted a material weakness in our internal control over financial reporting for the year ended December 31, 2020 related to our general information technology controls, including the design and implementation of access and change management controls. Additionally, key components of the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) have not been fully implemented, including control and monitoring activities related to: (1) electing and developing general controls activities over technology to support the achievement of objectives; and (2) electing, developing, and performing ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning.
OPENDOOR TECHNOLOGIES INC.
The material weakness identified in our internal control over financial reporting primarily related to insufficient Information Technology (“IT”) general controls over our accounting and proprietary systems used in our financial reporting process. Specifically, our systems lacked controls over access and program change management that are needed to ensure access to financial data is adequately restricted to appropriate personnel.
Remediation Activities
Management has been actively engaged in remediating the above described material weakness since the fourth quarter of 2020. The following remedial actions were completed during the quarter ended March 31, 2021:
•hired a Chief Information Security Officer to help implement policy and processes with respect to the information technology environment;
•conducted a comprehensive risk assessment that identifies the risks of material misstatement whether due to error or fraud in the consolidated financial statements;
•implemented software in our enterprise resource planning system to detect and remediate segregation of duties conflicts and assist with documentation of access and change management controls;
•strengthened our internal policies, processes and reviews, including drafting of related documentation thereof; and
•implemented a ticketing process to support IT general controls for multiple systems
The following remedial actions, which management commenced in conjunction with the implementation of its Sarbanes-Oxley Compliance program in 2021, are in process as of March 31, 2021:
•document processes and controls, and evaluate the effectiveness of our controls to mitigate the identified risks of material misstatement;
•remediate any control gaps identified by implementing new controls or redesigning existing controls, including entity level, process level and IT general controls; and
•perform a segregation of duties analysis, segregate conflicting roles and remove unnecessary user access to financial reporting systems and applications relevant to the preparation of our financial statements.
In addition, as a result of the correction of prior period amounts as described in “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Note 1. Description of Business and Accounting Policies” management has concluded that the Company had an additional material weakness as of December 31, 2020 related to the accounting and classification of significant and unusual transactions. The significant & unusual transaction review performed to evaluate the accounting for the Business Combination was incomplete in that a thorough analysis of the Warrants was not performed under Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”). Specifically, while the equity classification of warrants with provisions similar to those of the Sponsor Warrants was historically broadly accepted industry practice, our management did not sufficiently analyze the propriety of this classification and did not identify the error in this accounting practice until the SEC’s issuance of the Staff Statement on April 12, 2021. This material weakness resulted in the correction of our consolidated financial statements as of and for the year ended December 31, 2020. This deficiency is a result of our previously smaller accounting team as a private company coupled with insufficient controls to ensure the completeness of all material components of each significant and unusual transaction evaluated. To remediate this material weakness we:
•hired additional personnel subsequent to the Business Combination and are continuing to expand our team in order to have sufficient capacity to thoroughly evaluate all material components of each significant and unusual transaction; and
•revisited our controls over accounting for significant and unusual transactions in conjunction with the implementation of the Company's Sarbanes Oxley Compliance program in 2021. The Company will enhance these controls with a focus on ensuring the analysis is complete and includes each of the material components of the transaction.
The process of implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may take additional actions to address control deficiencies or modify certain of the remediation measures described above. Our management and board of directors will continue to work with our auditors and other outside advisors to ensure that our controls and procedures are adequate and effective.
OPENDOOR TECHNOLOGIES INC.
While significant progress has been made to enhance our internal control over financial reporting, we are still in the process of implementing, documenting and testing these processes, procedures and controls. Additional time is required to complete implementation and to assess and ensure the sustainability of these procedures. We believe the above actions will be effective in remediating the material weaknesses described above and we will continue to devote significant time and attention to these remedial efforts. However, the material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Notwithstanding the material weaknesses, management has concluded that the financial statements included elsewhere in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.
Changes in Internal Control over Financial Reporting
Other than as described above, there have been no material changes in our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OPENDOOR TECHNOLOGIES INC.