Description

ELEVATOR PITCH

·        Opendoor (OPEN) operates a digital marketplace for buying and selling residential real estate that makes transacting as easy as hailing an UBER or booking a flight online. The company currently operates in 50 cities around the United States with plans to expand nationally over the next few years

·        We believe OPEN has the potential to 10x over the medium term as iBuying penetration grows from a very low single digits % of existing home sales to ~10% over the next decade

·        OPEN created the category of iBuying and is evolving into a one stop shop for housing offering cash back offers (power buying), mortgages, title/escrow, home warranty and many other services that will make each transaction 2-3x more profitable than pre-COVID levels

·        The company is set to generate ~$15B of revenue in 2022 and at a “mature” EBITDA margin of 5% the stock is trading at ~1x EBITDA

·        We believe 4-6% EBITDA margins are reasonable to low relative to the entire housing supply chain (home builders, maintenance and construction at mid-teens, finance companies at 50%+ and Real Estate agents in the MSD)

·        OPEN is currently navigating the most volatile period for home pricing and volumes in history and playing through to the other side will prove the resiliency of their model

THESIS

OPEN is an early stage compounder in the residential real estate market that we believe has the potential to be a multi bagger over the next five years as the process of buying and selling homes moves online. As an “iBuyer” the company is a disruptor to the traditional real estate brokerage and mortgage industries. The company offers home sellers and buyers a more convenient and transparent option at a lower all-in cost. OPEN currently has a ~75% share of the iBuying industry and we believe OPEN will continue to be the leading company to bring efficiency to the residential real estate market by driving down costs, increasing transaction speeds, and reducing the number of intermediaries that extract economics.

IBuying is a technology-enabled process whereby OPEN buys a home directly from a seller (eliminating the need for a listing agent) using a proprietary pricing machine learning derived algorithm. A seller can go to OpenDoor.com, type in their home address, fill out some details and within minutes get a cash offer, subject to an assessment by OPEN. OPEN allows a consumer to close a sale within a week if desired versus the traditional route which could take 60-120 days driven by showings, inspections, repairs, and financing timelines. Selling to OPEN means that the seller can line up the sale with the exact time they plan to move to their new home, they don’t need to have strangers walking through their house, and they don’t need to worry about the transaction falling through. For this convenience, the company charges a 5% service fee (not dissimilar from the traditional model which typically takes 5-6% in brokerage fees), and the seller benefits from lower closing costs, doesn’t need to stage a home, and doesn’t need to have two mortgages at once.

OPEN is building a double-sided platform with network effects. In addition to selling a home to OPEN, customers can also buy homes that OPEN owns or homes owned by third-parties.

OPEN’s core Total Addressable Market (TAM) is the $1.6+ trillion US existing home sales market. The company is rapidly expanding its Serviceable Addressable Market (SAM) through geographic expansion and buy box expansion (a list of criteria that the property must meet to be eligible for purchase, including the value of the home). The company doubled its markets in 2021 and has plans to roll out nationally over the next few years. Since 2019, OPEN increased its “buy box” by >50% and is now able to buy homes >$1.4 million.

In H1 22, OPEN sold over 23K representing close to 1% of all homes sold in the US. Over the next five years, we expect OPEN to achieve a low single digit penetration of its TAM (below its mature markets of 4-6%). This equates to $55B of top line up >20x from 2020 levels. Given the strong value proposition, over the long-term we believe “iBuying” could represent a material percent of real estate transactions with OPEN maintaining a significant share of the market, but this is unmodelled upside.

Over time we expect the company to significantly improve its unit economics through superior buying/selling and attaching incremental ancillary services to a transaction (Title & Escrow, Buy with OpenDoor, Home Loans, Insurance, Warranty, Moving Services), which together represent >$20K of contribution profit per home. Increased penetration of ancillary services will be driven by OPEN’s ability to attract more buyers to its platform. The company quickly scaled its Buy with Opendoor product from $0 to >$1 billion run-rate.  As a buyer’s agent, OPEN can attach services that come at high incremental contribution margin (75%+) driving significant profit per transaction. The company’s most mature service (Title & Escrow), which it launched in 2017, can serve as a proof of concept for how future offerings may evolve. After 9 quarters, the company now has ~84% penetration on Title & Escrow. Primary research suggests that it is reasonable that the company could hit a ~30-40% penetration on the newer services like mortgages and home warranty over time.

In addition to contribution margin expansion through ancillary service attach, we expect the company to continue to drive automation and centralization as well as benefit from significant operating leverage on fixed costs within G&A, R&D, and advertising as it scales. Similar to Carvana, Wayfair and Amazon, we expect OPEN’s brand awareness and organic traffic to improve through word of mouth, particularly given its high Net Promotor Score of 80+.

As a result of contribution margin expansion and operating leverage, we expect the company to generate mid-single digit EBITDA margins over time. Based on the company’s current share price of <$5 it is trading below 1x 2025 EV/EBITDA and only 1.26x TBV/share, a significant discount to eCommerce and housing peers. This valuation discount is not justifiable given that OPEN has a larger TAM, is growing much faster and is already shown several quarters of profits. While the bands of outcomes are wide, we think the risk reward ranges are highly favorable.

FRAMEWORK: EARLY STAGE COMPOUNDER

Total Addressable Market: The US TAM is ~$1.6 trillion (of which OPEN will do ~$15 billion in 2022).  In unit terms, the company will sell <50k of the 6M+ existing single-family homes in 2022. The company is set to grow >80% this year and for 2023, we expect top line growth well in excess of the low double digit % consensus. This expansion is driven by market share gains in mature markets and rapid market expansion while navigating the current slowdown and price drops the housing market is experiencing

Unit Economics: OPEN has been profitable at the unit level since 2017 and in 2Q 2021 became EBITDA positive for the first time, 2 years ahead of schedule. The company’s more seasoned cohorts tend to be more profitable as the company has had more time to refine its pricing algorithm and is able to get more operating leverage on its fixed overhead due to higher volumes.  In Q1 2020 (pre rapid home price appreciation), OPEN was profitable in 90% of markets and that is before new services.

On a home that OPEN offers a $350,000 quote on, a 5% service fee equates to $17,500 and the company also provides Title & Escrow services equivalent to 1% of the home value or ~$3,250, so a seller will receive a net offer price of $329,000, less any required repairs.  In addition to the $20,750 in fees that OPEN is receiving, the company also benefits from mark ups to its initial quote, selling properties at MSD premium to the agreed purchase price driven by both general home price appreciation and superior buy/sell capabilities than any single seller. During the 2021/early 2022 market environment, OPEN had been getting >5% home price appreciation. However, we assume 2% is sustainable because the company is structurally better than the market at buying and selling homes (sees thousands of transactions and has much better information). OPEN on average invests ~$4,000 in renovations and we assume they sell the home for $357,000 (or more in the current housing environment), so all in the company can generate $29,500 of gross profit in this transaction. The company then pays ~$10,700 for holding (property taxes, utilities, maintenance) and selling costs (brokerage commissions) and generates ~$19,000 of contribution profit per home. After the cost of financing the home purchase (typically 1% of a home’s value), OPEN generates $15,000 of profit.

In some cases, prospective sellers may decide that OPEN’s initial quote is too low and choose to “List with OpenDoor” to get access to OPEN’s web traffic. OPEN effectively acts as a seller’s agent and takes a 5% service fee, which it splits with the buyer’s agent and can once again attach title & escrow. To sweeten the deal, OPEN offers these sellers a $10,000 cash advance to upgrade their home to make it more attractive to buyers.

In the company’s mature markets >50% of customers that sell it homes also buy homes with OPEN. In the case where a seller is also buying an OPEN owned home, OPEN saves on buyer’s agent brokerage commissions. In the case where they are buying a third-party home, OPEN splits the buyer’s agent brokerage commission in a win-win situation (typically buyer will get 1%, agent will get 1% and OPEN will get 1%).  The company also offers prospective buyers additional services including Cash Backed Offers and Home Loans. In the case of a cash backed offer, for a third party owned home, a buyer can waive their mortgage contingency, making their bid more certain and therefore attractive to a seller and then can move in to their new home in 14 days and live in it for up 120 days rent free (or whenever their mortgage closes). In the case of a cash-backed offer, OPEN will take 2% of the brokerage fee, while the buyer’s agent takes 1%. OPEN also cross-sells home loans with competitive interest rates, which generate ~$1,000-5,000 of contribution profit per transaction. Home mortgages are still early in their penetration with attach rates between 5-20% compared to 80%+ for Title and Escrow.

The company is also in the process of launching other ancillary services including home warranty, insurance, remodeling and moving which will contribute up to $7,500 of contribution profit per transaction.

As OPEN’s penetration of potential buyers increases, it has the opportunity to take its contribution margin from ~3-4% to 11%+ on each home. 

Competitive Advantage:

OPEN is competing primarily with 2 million highly fragmented realtors in the U.S., of which 2/3 do between 0-15 transactions per year. These realtors do not have the same access to information or scale that OPEN has. They also are unable to provide the home seller with certainty of close and the ease of use and/or convenience of an OPEN offer.

Proprietary Pricing Algorithms: As the principal in 100,000 transactions over the last 7 years the company has developed a hyperlocal dataset of offline feature specific information that underpins its pricing engine and allows it to bid more effectively to gain more share at a higher contribution margin. Over time as a result of more data, operational history and machine learning, the company has been able to make consistent pricing improvements. The algorithm is largely automated (>60% of offers are made without the need to have a human get involved), which allows the company to scale rapidly.

Lowest Cost Operator: OPEN has built the most efficient platform for home operations (inspections, data collection, repairs, and renovations). Through centralization and automation, the company is able to take cost out of the system and over the last year this has led to a 200 bps structural improvement of contribution margins. The company’s models can accurately predict which very high ROI repairs to make and the company is able to get 40%+ bulk pricing discounts on home materials, allowing it to capture more of the profit pool when it resells the home.

Value Proposition: Cheaper and Faster

Stress Free Sale Process:  OPEN provides cash offers that provide sellers with certainty that the deal will close and are not subject to financing contingencies. The seller can skip staging, showings, and repairs and has flexibility when they move, which prevents the need for 2 mortgages, 2 moves, or temporary storage. OPEN has the ability to close a deal within a week versus the traditional route which takes 60-120 days.

Cost Savings: OPEN charges a 5% service fee versus a typical brokerage fee of 5-6% for the sale of a home. The company can also bundle other services including title, mortgage, moving, home warranty, etc. at an all-in lower cost. All else being equal, OPEN saves customers thousands of dollars and over time we expect this number to increase as they cut costs and in turn, pricing on mortgage, title & other services, and pass the benefits to the end customer to gain incremental scale.

VARIANT PERCEPTION

OPEN will be able to generate high single digit contribution margins over time despite over-earning in 2021/1H 2022 due to a strong home price appreciation environment. While it is true that the company has benefited from time arbitrage in a hot housing market we believe that the business model works in any housing market environment. The fear is that at some point, housing prices will deflate which could cause the company to take mark downs on its inventory and threaten its liquidity. While this is certainly a risk over the medium to long-term we believe the company has the tools to get through and potentially benefit from a falling home price environment where the iBuying value proposition increases for the consumer. It takes about 3 months for the company to turn over its inventory, and during that period the company can adjust its pricing downward on new acquisitions to account for the changing market conditions. Also, typically movements in housing prices are not uniform across the country and depend on local supply and demand factors. While all recessions and financial crises are made differently, the COVID pandemic serves as an example of how the company was able to quickly react to changing conditions. The company quickly paused offers for new home acquisitions and reduced inventory by $850M all while maintaining solid gross margins.

If a sudden housing recession were to occur, we think the company has enough liquidity to play through a potential 3-month liquidation of “high” cost inventory. As of June 30, 2022, the company had $2.5B of cash and marketable securities on its balance sheet and significant undrawn borrowing capacity on its asset-backed senior credit facilities.

Over the past ~40 years home prices have generally been positive but in a worst-case scenario dropped ~3% at peak in the GFC.

OPEN also has limited inventory risk as ~35% of its inventory is under contract for sale at any point.

KEY INVESTMENT FACTORS

Revenue Growth:

1)    Will be a function of market expansion, seasoning of older market cohorts, buy box expansion, ancillary services attach and to a lesser extent changes in home prices

Contribution Margins:

2)    The company has guided to 7-9% long-term contribution margins, absent the benefit of short-term home price appreciation, but has since structurally improved its costs by 200 bps. The company has already proven these margins are possible

EBITDA Margins:

3)    This will be a function of contribution margins as well as required operating expenses investment before the company is fully at scale

TOP DOWN DRIVERS

·        Existing Home Sales, New Home Sales, Mortgage Rates

·        iBuying Penetration

·        OPEN Market Share of iBuying

RISKS

The three biggest risks to the thesis are a seizing in the capital markets, a declining home price environment, and execution. Ironically, going through COVID recently provided a test case to see how OPEN would perform in a weak economic environment. The company was able to rapidly change its inventory acquisition, reduce costs, and pay down ~$800m of their non-recourse loans in under 3 months. During this period, OPEN generated a slight premium to historical selling prices and strong margins providing us with confidence that the model works in both good and bad economic environments. While the company has not experienced a period of broad-based home price depreciation, we believe the impacts would be short-lived as the company would adjust its pricing algorithms. In terms of execution risk, we believe management is laser focused on growing deliberately and profitably. The management team is highly experienced both in building disruptive business models and driving improved profitability through scaling. Many of the company’s executives came from Amazon, Uber, Lyft, Trulia and private equity backgrounds. Since going public, the company has significantly beat and raised most quarters it has reported, confirming the team’s ability to execute.

PRE-MORTEM

Housing recession (potentially driven by a significant increase in interest rates or significant economic slowdown) causes housing prices to fall and new home acquisition and revenue growth to slow materially. Also, the company fails to get traction with buyers and is unable to drive strong attach rates for ancillary services causing it to miss its long-term contribution margin targets. 

DISCLAIMER

The information in this presentation is for illustration and discussion purposes only.  It is not intended to be, nor should it be construed or used as, investment, tax or legal advice, any recommendation or opinion regarding the appropriateness or suitability of any investment or strategy, or an offer to sell, or a solicitation of an offer to buy, an interest in any security, including an interest in any private fund or account (the “Fund”) or any other private fund or account advised by Stamina Capital Management LP (the “Investment Manager”) or any of its affiliates.  This material does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific investor. You should not rely in any way on this summary. Performance targets or objectives should not be relied upon as an indication of actual or projected future performance; past performance is not indicative of future results.  Actual returns will depend on a variety of factors including overall market conditions. No representation is made that these targets or objectives will be achieved, in whole or in part. This information is as of the date indicated, is not complete and is subject to change. Certain information has been provided by and/or is based on third party sources and, although believed to be reliable, has not been independently verified.  The Investment Manager is not responsible for errors or omissions from these sources.  No representation is made with respect to the accuracy, completeness or timeliness of information and the Investment Manager assumes no obligation to update or otherwise revise such information.

This information herein will be qualified in its entirety by the information contained in the Fund’s confidential offering documents, including the private placement memorandum or other offering memorandum (collectively, the “Offering Documents”).   Any offer or solicitation of an investment in the Fund may be made only by delivery of the Fund’s Offering Documents to qualified investors.  Prospective investors should rely solely on the Offering Documents in making any investment decision.  The Offering Documents will contain important information, including, among other information, a description of the Fund’s risks, investment program, fees and expenses, and should be read carefully before any investment decision is made. An investment in the Fund is not suitable for all investors. The Fund’s investments are subject to the risks of market volatility, which may be severe.  Such market volatility may be caused by, among other events, unpredictable economic and political events that may cause sudden and severe reductions in the value of the Fund’s investments.  The Offering Documents will contain detailed information relating to the Fund’s investment objective and strategy, fees, risks and other material aspects of an investment in the Fund and should be carefully reviewed.

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Catalyst

• Mortgage rate stabilization