Offerpad Solutions - Q2 2023

Transcript

Operator (participant)

We ask all analysts to limit themselves to one question and one follow-up. I'll now turn the call over to Stefanie Layton, Senior Vice President of Investor Relations and ESG at Offerpad. Stefanie?

Stefanie Layton (SVP of Investor Relations and ESG)

Thank you, and good afternoon, everyone. Welcome to Offerpad Solutions' second quarter 2023 earnings call. Our Chairman and Chief Executive Officer, Brian Bair, Chief Financial Officer, Jawad Ahsan, and Senior Vice President, Finance, James Grout, are here with me today. During the call today, management will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain, and events could differ significantly from management's expectations. Please refer to the risks, uncertainties, and other factors relating to the company's business described in our filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Offerpad does not intend to update or alter forward-looking statements, whether as a result of new information, future events, or otherwise. On today's call, management will refer to certain non-GAAP financial measures.

These metrics exclude certain items discussed in our earnings release under the heading Non-GAAP Financial Measures. The reconciliations of Offerpad's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the second quarter earnings release on Offerpad's website. I'll now turn the call over to Brian.

Brian Bair (CEO)

Thanks, Stefanie. Hey, everyone, appreciate you joining us. Today, I'll cover Q2 highlights, market trends, and operational updates. Before we dig in, I would like to introduce Jawad Ahsan, our new Chief Financial Officer. Jawad is a highly regarded CFO with extensive experience and an accomplished career. He previously served as CFO at Axon and spent 13 years in various roles at GE, including serving as CFO for their health record and enterprise software businesses. I believe his strengths and expertise will add significant value to Offerpad by helping drive profitable growth and improving our operational excellence. We are excited to have Jawad as part of our senior leadership team. Turning to our second quarter results, we beat our financial expectations across the board. Our homes sold, revenue, and Adjusted EBITDA all exceeded the top end of our second quarter guidance ranges.

This outperformance reflects the improvements we have made to our business processes and our elevated focus on profitability. Other highlights for the quarter include: reporting our highest gross margin since Q3 2021 at 9.7%, achieving 9.5% contribution margin after interest per home sold on homes acquired after September 1, 2022, which is above our target range of 3%-6%, and surpassing 31,000 lifetime renovations. We emphasized last quarter that our plan to produce positive Adjusted EBITDA by year-end is not dependent on market acceleration. We were prepared to perform through a period of depressed residential transaction volume, and that is exactly what we did in the second quarter. We remain confident in our ability to execute our 2023 plan. As we move into the second half of the year, the economy and housing market continue to show resilience.

Despite mortgage rates reaching 7%, low supply continues to support stabilizing resale prices as buyers outnumber sellers in many markets. However, the elevated mortgage rates are also contributing to the lower transaction volume and adding to the affordability challenge for many potential homeowners. Our forecasted 2023 acquisition volume reflects our expectation that current market conditions will continue throughout the remainder of the year. Given our acquisition volume increased by 131% from Q1 to Q2, we have demonstrated our ability to increase our pace in this present environment. On the operation side, our renovation service is more important than ever. The average age of homes in our markets is over 30 years old. This play to our strength of buying a home and adding value. Our ability to renovate is a key differentiator and competitive advantage.

Our culture of continuous improvement has been a key driver supporting our ability to meet our goals this year. As an example, we recently made tech advances with our customer-facing app and enhancements in our ability to leverage forward-looking data when underwriting homes. Our commitment to providing a seamless real estate transaction experience for our customers is evident in the significant enhancements made to our mobile and online applications. We've incorporated upgraded features that deliver meaningful and relevant information to sellers, granting them full visibility from request to closing. New features will include video tutorials, seller push notifications, the ability to upload and sign documents, and direct messaging with the seller's dedicated Offerpad team members, further providing transparency and control for our customers. Additionally, we expect these changes can help boost overall efficiency and reduce costs for Offerpad.

We've also integrated new tools to incorporate forward-looking data to better predict market trends. The goal is to use this data to make more competitive offers on desirable properties and increase our acquisition volume. At the same time, we can reduce risk exposure by not pursuing homes that are likely to be low-performing properties. Upgrading our data-driven systems facilitates intelligent growth, our experienced local real estate professionals remain critical to our success. We believe combining human and artificial intelligence is key to making the best decisions possible. While on the note of technology, I'm very excited about the tremendous potential to harness the power of artificial intelligence. Since the beginning, machine learning has added valuable insights, helping us become smarter with every home we buy. Now, with the rapid advancements of AI, like NLP and computer vision, the possibilities are endless.

From the way we find and communicate with likely customers, underwrite and price a home, and sell our homes, there are amazing possibilities with AI. I'm enthusiastic about the potential for thoughtfully incorporating AI across our company's operations. With the right strategic integration, we can unlock incredible innovations that propel us forward. Coming back to the operational front, I wanna provide an exciting update on our Flex Sell program. As a reminder, the program gives customers even more flexibility. They can accept our instant cash offer or test the open market with an Offerpad agent while retaining the cash offer as a backup. Given the major shift in market conditions last year, we paused Flex Sell. However, I'm thrilled to announce we plan to relaunch this program in all Offerpad markets in quarter three.

From the very beginning, our vision has revolved around being a comprehensive real estate solution center for everyone. In addition to serving the needs of home buyers and sellers, our reach extends to business-to-business partners and real estate agents across the nation. Our Direct+ program, that connects investors with sellers, continues to build as we onboard new investor partners. Our renovation team continues to expand its impact by renovating non-Offerpad single and multifamily homes. To further pursue our real estate solution center goals, we are committing even more resources to strengthen and expand our Home Builder Alliance and Agent Partnership programs. With around 100 home builder brands, our home builder program provides customers with a cash offer on their current home and the flexibility to select a closing date. Home builders benefit as Offerpad removes the contingency hurdle with the current home.

Additionally, our Agent Partnership program has proven to be a desirable offering, generating over 130,000 agent-initiated offer requests. This valuable lead generation channel for Offerpad is also a simple solution for home sellers, while their agent receives a referral fee upon a successful close, a win for all. In conclusion, the achievement of surpassing our second quarter goals instills even greater confidence in the success of our 2023 strategy. Simply put, our product offerings are strong, led by our cash offer. More and more customers start their real estate journey with us first and have consistently rated us over 90% in customer satisfaction. With proven ability to scale, even in a challenging macro environment and a commitment to continuous improvement, we are well prepared to seize the opportunity once again.

As we evolve our processes and products, they become even more efficient and add increased value to our customers. We set out to change the way real estate transacts forever, and that's exactly what we're doing. I'll now turn the call over to Jawad.

Jawad Ahsan (CFO)

Thanks, Brian. I'm very excited to be at Offerpad and work with this incredibly talented group of individuals. I'd also like to acknowledge Mike for helping make my transition a smooth one and for building a world-class finance team. I'm also excited to share our strong financial results this quarter. Our expectation that momentum will accelerate throughout 2023 is reflected in our top and bottom-line results. There are three things in particular that I wanted to highlight. First, the key leading indicators of our business model are trending in the right direction. Second, we've made substantial progress towards reaching profitability. Third, our balance sheet continues to strengthen. I'd like to start by highlighting the positive trends in our key leading indicators.

We've reduced our inventory of homes aged greater than 180 days, down to less than 2%, well below our previously stated target of 10%. Our acquisition of homes grew month-over-month in the quarter. Time to cash, or our holding period, reflected a 47-day sequential improvement at 138 days in Q2, compared to 185 days in Q1. In fact, for the month of June, time to cash was 94 days, solidly below our 100-day target. We expect holding times to continue to trend down this year and will likely remain below our 100-day average target in Q3, which lowers our holding costs and reduces our exposure to market volatility.

Finally, we're seeing a market improvement in the contribution margin for the cohort of homes acquired on or after September of 2022, as opposed to those acquired prior to this timeframe. In the Q2, we saw contribution margins of 9.5%, or $31,000 per home, for homes acquired after September of 2022. This is an important measure of our unit economics and speaks to the strengthening performance of homes in our inventory. Moving to the P&L, we generated $230 million of revenue, exceeding the top end of our guidance range by 15%. Our revenue was driven by the sale of 650 homes, which also exceeded the top end of our guidance range at an average selling price of $348,000.

The lower average selling price in the second quarter is the result of our intentional focus on acquiring homes near the median in each market. This is where we see the strongest demand and highest transaction volume. The $22.3 million net loss in the second quarter reflects a 62% improvement over Q1. Our Adjusted EBITDA for the quarter improved to -$17.3 million, compared to -$44.8 million in the first quarter. This reflects a 61% increase in Adjusted EBITDA quarter-over-quarter. The sequential quarterly improvement in Adjusted EBITDA was driven by significant increases in gross profit and disciplined cost reductions. Gross profit increased over 200%, primarily due to improved margins on more recently acquired homes and a lower number of legacy cohort sales.

Our 9.7% gross margin reflects both a quarter-over-quarter and year-over-year improvement from the 1.2% gross margin in Q1 2023 and the 8.6% gross margin in Q2 2022. This is consistent with our expectation that gross margins and contribution margins would trend upward this year as the last of our inventory acquired prior to September 1, 2022, is sold, and the positive performance of inventory acquired in recent periods is recognized. On the cost side, total operating expenses decreased 25% from $59 million in Q1 to $44 million in Q2, due to previously announced headcount reductions and other general cost reduction measures. Year-over-year, operating costs have decreased 48%. This is the fifth consecutive quarter of operating expense reductions, demonstrating our rigorous commitment to disciplined cost management.

At our current level, we are well positioned to realize improving margins in the second half of the year. From a balance sheet perspective, our unrestricted cash balance increased to $115 million at the end of Q2, up from $108 million at the end of Q1. Inventory increased to $211 million from $173 million in the first quarter. This reflects an increase from 557 homes in inventory at the end of Q1 to 747 homes in inventory at the end of Q2. This increase in inventory was driven by the 840 homes we acquired in the second quarter, which exceeded our expectations and was more than double the 364 homes we acquired in the first quarter.

Our inventory build, coupled with the aforementioned reduction in inventory aged over 180 days to less than 2%, highlights the quality of our current inventory. Our June 30th debt balance was $191 million. During the second quarter, we successfully extended the maturity date for our largest credit facility to June 2025, while maintaining our favorable terms and conditions, including interest rate spreads and advance rates. We continue to have a blue-chip roster of lending partners that provide a strong foundation to our debt capital structure. Looking forward to the second half of the year, we expect Q3 to reflect the second quarter-over-quarter improvement in time to cash, as well as increases in acquisitions, inventory, and contribution margin after interest.

We also expect Q3 to continue the trend of sequential improvement for gross margin, net loss, and Adjusted EBITDA that began in Q1. Specifically, in the third quarter of 2023, we expect to sell between 600 and 700 homes, generating revenue of between $200 million and $240 million. We also expect Adjusted EBITDA to be between negative $17 million and negative $9 million, which represents another significant sequential improvement, bringing us closer to meeting our expectation of achieving positive Adjusted EBITDA in the fourth quarter of this year. Our results in the first half of this year are a reflection of this team's rigorous commitment to adapting to changing market and economic conditions. Our revenue streams will continue to diversify beyond our cash offering, and we are excited to share more updates on these areas in the coming months.

Our business has never been more resilient than it is today and has never been better positioned to capitalize on the tremendous opportunity in front of us. I joined Offerpad to help this team forever change the way real estate transacts, making it more efficient and driving more value. Given the volatility, uncertainty, and ambiguity facing home sellers and buyers today, there has perhaps never been a more pressing time for our mission. We were built for this moment, and we can't wait to continue sharing our progress with you. With that, I'll turn the call over to the operator to begin the question and answer session.

Operator (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press Star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press Star followed by two. Again, to ask a question, please press Star one. We ask all analysts to limit themselves to one question and one follow-up, after which you may reenter the queue for any additional questions. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Dae Lee with JP Morgan. Please go ahead.

Dae Lee (Equity Analyst)

Great, thanks for taking the questions. I have two. First one, you talked about home acquisition pace quarter month-over-month. I was just curious, revise that today from a home acquisition per month perspective, and is 500 per month by the end of the year still the right number to think about? Secondarily, on your unit economics and margins, I understand that Q3 should improve from Q2 due to the mix shift, but when you compare the contribution margin and gross margins relative to homes acquired after September of last year, do you expect those margins to step up or stay stable, or should it come down as you accelerate your home acquisition pace?

James Grout (SVP, Finance)

Hey, thanks, Jay. This is James. On your first question around our acquisition pace overall, like, kinda like what Brian mentioned, we have been seeing improvement month-over-month. That overall target of 500 per home, or excuse me, 500 per month, you know, one thing that's important to keep in mind there is, is as we're on our path here to profitability, acquisition volume is only one of the levers that, that's out there, right? The returns on those homes, also our cost-saving efforts and the mix shift with those other product lines is important. You know, we're continuing to work on that and seeing that improvement month-over-month, but what we'll always be focused on is, you know, maximizing that return versus volume expectation for the business.

To your second question there, in terms of that, that new cohort of performance and how contribution margin and, and margin should, should proceed going forward. I think the, the important thing there is, you know, when you look at how we've been underwriting over the past, you know, three or so, so quarters, really the largest spreads that we were underwriting to were that Q4, Q1 timeframe. As the conditions have been improving and we've been more comfortable in certain markets, we've been, you know, releasing some of that conservatism there, you know, all while making sure that we're, we're buying the right homes that are performing.

Now that when you look forward into Q3 and Q4, you'll see less of the drag on gross margin and contribution margin from the legacy stuff, but you will see those returns start to normalize for those cohorts going forward. We should see, you know, those new cohorts start to come down more in line with our expectations for our, our long-term contribution margin.

Dae Lee (Equity Analyst)

Got it. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Nick Jones with JMP Securities. Please go ahead.

Nick Jones (Managing Director - Internet Equity Research)

Great. Thanks for taking the questions. The first one can you maybe touch on how the kind of an iBuyer solution or Offerpad solution is being received in the marketplace today? Some of the questions we get, is around, with prices being pretty stable the market having little supply how does an iBuyer come in and provide value in this environment? Is there any clarity on how things have changed over the last 12 months, and what homeowners and buyers, sellers and buyers, and how they're receiving the iBuying solutions? Thanks.

Brian Bair (CEO)

Nick, it's Brian. It's important to note that request volume has been consistent all year. We're seeing very similar to what we saw in the uptick the last couple of years. Cash offers, I would say are more important than ever. A lot of the customers that are coming to us for a cash offer, the number one reason is certainty and control, but also it allows them, because of the limited supply, to find their to buy their next home, under their without contingencies and then in their timeframe. Similar to what we saw before when the market had low supply and we saw really increased home price appreciation, now you're seeing the lack of supply.

If a potential seller finds a home that they want, we're able to close on their schedule to make sure that they can get that home. That's what we're seeing. The other thing a lot of the noise out of the cash buyers is gone. I mean, there's really only 2 cash buyers right now buying at volume. So we're seeing more and more opportunity there than we had before. Then obviously, as we add in more of our products on that, it even makes, you know, more and more of our solutions viable as well.

Nick Jones (Managing Director - Internet Equity Research)

Great. Then maybe to follow up on some of the newer products like Direct+, the listing service, you know, renovation as a service, how are the what's the uptake on those, and how should we think about those maybe starting to show up in the P&L or in the model over time? Thanks.

Brian Bair (CEO)

Overall, we're signing up new, new partners every day for both of those, both for Direct+ and for Renovate. What's exciting to see is we're seeing more customers using our renovation service. Well, using our Direct+ service to buy, to buy their home, and then using our renovation as a service to have us renovate the home for them, which has been great. Obviously, with the transaction level focused on that, that's going to affect especially the single-family, and some of the other people buying in those channels. We have been really happy with the market conditions of where those, those, those products are going right now.

We're seeing good growth in both of those products.

Nick Jones (Managing Director - Internet Equity Research)

Great. Thanks, Brian.

Operator (participant)

Thank you. Our next question comes from the line of Ryan Tomasello with Stifel. Please go ahead.

Ryan Tomasello (Managing Director and Lead Research Analyst - Fintech Software and Real Estate Technology)

Hey, everyone. Thanks for taking the questions. Just a follow-up on the prior remarks. Reading between the lines, it sounds like maybe maintaining a more tempered purchase volume stance, over this quarter and next, but I guess maybe stronger margins, filling that gap to still allow you to hit the profitability targets. I mean, how sustainable do you think these higher spreads are in the current environment, given how tight inventory conditions are? What are you looking for in terms of market conditions to get more comfort ramping volumes? Do you feel like that is completely under your control, to widen the acquisition funnel with lower spreads, or perhaps is the ability to ramp volumes somewhat limited, given the conditions out there? Thanks.

Brian Bair (CEO)

Hey, Ryan. I'll jump in and then let James or Jawad jump in after that. First and foremost, I think for what we're buying, it's our buy box. I really like. We're right around the medium home price, so I really like what we're buying right now in this environment, and which is great. As we scale up, we can move that buy box up as we want to get more market penetration and start buying more homes. Right now, what we're focused on is the sensitivity of mortgage rates.

Even a 0.1 basis point right now is things we're close to. Just watching and monitoring really well, especially as interest rates get up above 7%. Overall, like, this market has been extremely resilient from the volume. You know, there's a 20% reduction in transactions across the country. If you look at some of the signs, you could argue it could be even more than that. We are seeing a lot of opportunities continue to grow by a really good product in a really disciplined way right now, and really focused, controlling of what we can control.

I'm really happy is with where we've gone with our legacy inventory and where we are today, and now we can just focus on what we're buying going forward. I really like the position where we're at across the board there. James or Jawad?

James Grout (SVP, Finance)

I think one thing just to add to that, Ryan, in our letter to the shareholders, we shared a couple interesting graphs that break out the contribution margin, and it highlights the other services in particular. That would be those other. That's the Renovate, Direct+, the Flex Listing, and buyer services there. What's been great to see the business as we've brought down our volume, is we've seen those other lines of business as we had hoped and expected to, to come in and provide more value into the overall profitability for contribution margin, right?

As we look going forward and that pace on exactly how many homes do we need to acquire for that profitability, it really is a strategy around ramping all of those collectively and having that diversified income. Which gives us a lot of opportunity and levers there to go and approach that.

Ryan Tomasello (Managing Director and Lead Research Analyst - Fintech Software and Real Estate Technology)

Just an update on how you feel about the balance sheet here in terms of capital. Have you thought about how much volume you think you can drive off of the current equity base? How that compares to the volume you ultimately need to drive for not only cash flow break-even, including the net negative carrying cost and the financing side, but also ultimately to generate positive returns here in terms of the business model?

James Grout (SVP, Finance)

There's a couple sides to that. The first one is with our current capital structure in terms of cash and our credit facilities on the debt side, we do have a plan that supports things going forward with that, right? The important thing about the leverage side of the business is coming out of the legacy inventory. You look at that sequential improvement in cash quarter over quarter, and a big part of that is going to be driven by leverage returning to normalized levels. You take this back to our ability to extend and renew our largest credit facility with the same favorable terms we've had in place and maintain those good relationships with our partners.

That allows us to be very efficient with our capital. Those facilities are daily warehouse facilities that have a lot of activity happening on them regularly, right? That allows us to buy at the volumes that we're anticipating.

Brian Bair (CEO)

Ryan, this is Jawad. I'd like to chime in here. I feel great about the balance sheet, and the team has done a lot of great work to get the credit facilities, you know, where we want them. We've got, as James mentioned, really good relationships there, and we've got the ability to have our volume grow and reflect, you know, the market opportunities that are in front of us. The thing that I love the question about our non-cash offer solutions because that ultimately is one of the big reasons I joined the company. We are positioning Offerpad to be more asset light over time, with more of our revenues coming from Direct+ and Flex and renovations.

That's going to mute the, the need for us to have too much reliance on the credit facilities. The credit facilities we do have, we feel great about.

Ryan Tomasello (Managing Director and Lead Research Analyst - Fintech Software and Real Estate Technology)

Thanks. Appreciate the color.

Operator (participant)

Thank you. Our next question comes from the line of Michael Ng with Goldman Sachs. Please go ahead.

Michael Ng (Managing Director - Global Investment Research)

Hey, good afternoon. Thank you for the question. I have one on the gross margins for the September 2022 and later cohort, you know, really strong at nearly 13%. How are you thinking about the drivers of that 13%, you know, gross margin? You know, what's the headline service fee? You know, how much is home price appreciation during the holding period? You know, how much contribution from renovation? Just as a quick follow-up to some of the questions asked earlier in the call, how are you thinking about your target home inventory balance? You know, obviously, you guys were carrying 3,000-4,000 homes at one point. What's the right way to think about what that looks like into 2024, 2025? Thank you.

Brian Bair (CEO)

Michael Ng, I'll jump in first. This is Brian Bair, then I'll let James Grout jump in. The thing that you're seeing with the performances, with our risk and underwriting is obviously the more uncertain we were in the market as coming out of it with our legacy inventory, we're underwriting with more conservative risk built into that. As we've seen the market started to stabilize, we've taken some of that risk off. Like I said, we've been focused on the home prices between, you know, think of $250,000-$450,000 price points. And that's a, that's a really good spot right now. The affordability is really strong.

Midwest markets have, have been performing well as long with the Florida markets, and so we've been hyper-focused on the type of products that we're buying. The other thing just to note on that is that the value we're getting in renovation is really strong. Maybe you can argue stronger than ever. Most of our inventory that we're seeing hitting the market is homes that need renovation and can get value in renovations. A lot of the data from most of the 51% of the, the homes we're seeing right now are maybe older than 1990, something like to that extent. Adding value through renovation has been, has been key as well.

I would think underwriting is how we're underwriting the homes and then adding value through renovation. That's really important because as our houses then hit the market, we have a really desirable product that people can buy, and then which limits our time to cash as well, which I'm very happy is below 100 days again. And that's, you know, that's where we like to be as we move forward. With that.

James Grout (SVP, Finance)

I think just to add on the inventory side if you look back historically, you know, obviously, it ranges and, and there's some seasonality in there, but kind of our inventory turnover usually is about 100% on a quarterly basis. Whatever our ending inventory is, we'll sell that many homes in the following quarter. There's, you know, plenty of seasonal trends that factor into that from a quarter-by-quarter basis. If you think about just generally a 500 a month acquisition target, that would suggest about a 1,500-unit inventory, you know, carry seasonally adjusted.

I think what's important is kind of back to our earlier comments around diversifying our product mix, you know, focusing on Direct+ and the opportunities there. That's gonna change as we go forward, just based on what the market conditions are doing and how these other product lines are ramping. You know, we'll continue to evolve that. Overall, you know, our current capital base and our credit facility structure there would support that level of, of activity.

Brian Bair (CEO)

Mike, I know this wasn't your question, but just something that James said made me think of this as well. One of the strengths of just the cash offer as well, relaunching Flex Sell that I talked about a little bit earlier is gonna be key as well. Because if as people see limited inventory, and if they wanna explore the open market and see what they can get on the retail side, we can help them with that as well, then have our cash offer as a backup. You know, that was a very popular product before we paused it, and relaunching that again will give people, again, that flexibility of seeing what the market can do, but also the cash offer.

Anyway, I just, just want to hit on that as well.

Michael Ng (Managing Director - Global Investment Research)

Great. Thanks for the thoughts, Brian and James. Appreciate it.

Brian Bair (CEO)

Awesome. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of John Colantuoni with Jefferies. Please go ahead.

John Colantuoni (Equity Research Analyst - Internet)

Hey, great. thanks for taking my questions. Two about inventory and growth. Starting with inventory. You saw a ramp in homes purchased, but you're expecting homes sold to be about flat in the third quarter. If you keep making progress toward your goal of 500 home purchases per month in Q3, you know, our math suggests that would sort of imply you're gonna end next quarter with about 1,000 homes in your inventory balance. You know, does that mean that we should expect to see sort of a substantial step up in homes sold during the fourth quarter?

Second question, when you think about transitioning the business from right-sizing inventory levels and improving efficiencies to reaccelerating growth next year, you know, what are some key areas of sort of permanent efficiencies that you've been able to draw out of the business that will help you improve, sort of the balance between growth and profitability over time? Thanks.

Brian Bair (CEO)

I'll jump into the efficiencies. I think there's countless efficiencies. We've learned a lot, and we've done a lot of look-backs as well when the market, you know, hit the pause button and, with the rapid interest rates from last year, we've learned a lot. Underwriting is absolutely key and to all the above, and the type of inventory that we want to buy, is, is gonna be key. Also, the renovations we continue to get more efficiency out of our renovations and our renovation teams. The other things, just with our customer engagement as well.

As you know, when we're not buying thousands of homes a month, we've been able to focus on different products we wanted to roll out for a while, our customer communication has never been stronger than ever. You know, we're getting that from the feedback of our customer satisfaction scores and everything else. As it comes from the property level, the segmentation in underwriting we have a project internally called Limelight, that we focus highly on the type of homes, so we get smarter and better with every home that we buy. You know, we're constantly trying to learn and how to get better.

I think our efficiencies are super strong, and I mean, strong, and I think everyone's more aligned than ever, of what success looks like. You know, as we talked a lot about growth that's a meter to increase our buy box. Like I said, if we can get Volatility now is coming more from the mortgage markets than it is really anything else in the real estate markets.

That volatility is definitely something, again, like I said, we're, we're watching closely, but as we get more comfortable there in, in certain markets, we can move from higher up the value of homes, and then also take on certain kind of renovation homes as well to help us on the growth side. Again, the ability to grow, but really grow disciplined right now in what we're doing. You know, we are just laser-focused on being profitable. That's every day the teams are talking about that, and that's really important now and making through what we just did, and super proud of where we've been and really excited about where we're going. But that is massive eye on the, the path to profitability.

I'll let you, James, jump in.

James Grout (SVP, Finance)

And then, John, on your question around inventory and sales pace there, right? When you look at Q2, 650 homes sold, if you exclude the legacy inventory, those homes acquired in August and earlier from last year, there was 491 of the new inventory that was sold in that in Q2. The midpoint of our range is 650 is about a 32% increase quarter-over-quarter there. You're spot on in terms of as inventory growth expect things to increase there going forward. The one thing I would caution, though, right, is Q4 in particular from a real estate perspective is a seasonal slow month with the holidays.

You know, just with market conditions, things are uncertainty this year of how things will play out, right? That's why we need to remain diligent and cautious, and with the inventory that we're acquiring right now to make sure that it's gonna be good performing homes for Q4.

Brian Bair (CEO)

One other thing I'll just jump in on there. The seasonality over the last couple of years, because the lack of supply has not been what we've seen traditionally, the lack of supply we haven't seen. We've seen some seasonality, but not near the seasonality that we would seen maybe a few years ago. The lack of supply is definitely, you know, is, is, is, throwing a little bit of a wrench at the seasonality side. Again, it's something that we're watching closely. December is definitely one of those months.

Jawad Ahsan (CFO)

Yeah. John, this is Jawad. I wanted to weigh in here as well. Look, it's been a challenging year. I wasn't here for it, but I love the way that we responded. I saw us take really difficult decisions and make the tough decisions and actions to right-size our cost structure. What I see now is a business that has fundamentally rightsized and gotten its costs and infrastructure positioned to grow profitably from here. For me, it's not just profitability, but cash flow. As you know, we gave our guidance on profitability, but we're also laser-focused on getting that cash flow positive as well, and that's something that we're gonna drive very hard towards. There's still a lot of uncertainty in the market.

Brian mentioned volatility in the mortgage markets, and for sure, there's still some uncertainty, but I feel really good about how the company is positioned to grow from here.

John Colantuoni (Equity Research Analyst - Internet)

Great. Thanks, thanks for all the details.

Operator (participant)

Thank you. Our next question comes from the line of Jay McCanless with Wedbush. Please go ahead.

Jay McCanless (Equity Research Analyst)

Hey, good morning. Thanks for taking my questions. The first one I had, in terms of the people who are selling homes to you, Brian, is it typically primary homeowners, you know, family selling? Or is have you seen an uptick in people who maybe thought they could be a landlord, couldn't pull it off, and/or some of these Airbnb owners we've heard that are starting to bail? If you could maybe talk about that supplier base of your homes now versus maybe where it was a year ago or two years ago.

Brian Bair (CEO)

I think fundamentally, it's a great, I was actually going to throw in the Airbnb when you said that. I was thinking about that because there's definitely a little pocket that's happening right there. I think fundamentally, just as where interest rates, where they're at, there's definitely the story of people locked into their 3% or 4% mortgage. So there's not a lot of people that are moving because they want the nicer kitchen or nicer cabinets or want a bigger backyard right now. So most people are moving for a purpose. Majority of the people that we're buying the homes from, are owner-occupants that are living in the homes, you know, a vast majority of that.

In saying that, we are seeing a lot more action than we've seen with short-term rentals, and even some of the long-term rentals on that end of it. We're definitely seeing volume from that end of it as well. To your point, I think there was a rush for the short-term rentals and the Airbnb and those of the world, and I think they're having, whatever, we're just seeing more activity on that end as well. Definitely a vast majority are people that are owner-occupied that are selling us their homes.

Jay McCanless (Equity Research Analyst)

Okay, that's great. Then, my second question, unpack what you're talking about with mortgage rate volatility, Brian. Is 8% too high, even at these new spreads and, and sticking around the medium price, which sounds great? I think that's the right approach right now. Is there a ceiling where if, if mortgage rates, 30-year rates go above it, then the underwriting doesn't work for what you're buying and what you're trying to sell right now?

Brian Bair (CEO)

You know what, what's interesting, you know, obviously, we're, we're, we're, we're watching it very closely. I would have told you, you know, not a while ago, that 7% would have been, you know, would, would have been. We've seen still because of lack of supply, we're, we're still seeing strong demand with anything that we're putting on the market. I think the one thing that maybe doesn't get mentioned enough is because we haven't had the home price depreciation that everyone was expecting coming coming through this, the jobs are, are still holding strong, you still have people with a lot of equity in, in their current home.

People that are selling their home might have $200,000-$300,000 of equity into that home that they now can put down as a down payment, that, that can offset some of the cost of, instead of getting a mortgage at $500,000, they're getting a mortgage at $250,000 or $200,000, which is offsetting some of the burden of the, of the interest rates. You know, we're still seeing about, you know, 25%, maybe cash buyers of because some of that equity that I mentioned.

Also you're, you're seeing a lot of first-time home buyers as well, I think that have been moved out of the market or that are coming out of a rental that they've been renting the last year or 2, that they want to get in on, and buying a house while they can. Anyway, that's long-winded answer, but I hope that answered where, what, and what your question was.

Jay McCanless (Equity Research Analyst)

Absolutely. Thanks.

Brian Bair (CEO)

Thank you.

Operator (participant)

Thank you. That concludes the question and answer session. That concludes today's conference call. I would like to thank you all for your participation. You may now disconnect your line.