I'm down on Opendoor and Offerpad... BAD. Besides Lending Club, iBuying is the only speculative high growth name that I held on to during the market crash, thinking I had high conviction. And I believe the reason to have conviction in them was there... so, that's something I w̶a̶n̶t̶ NEED to revisit here.
If you aren't familiar with iBuyers like Opendoor and Offerpad, then I suggest you watch my previous video where I covered the model. Obviously, things have changed significantly in the market, but the model remains the same.
The Business Model
Watch previous video here or newsletter here.
As a reminder, all valuation sheets are available to premium members of The Hawk Letter and Discord. I highly recommend you join, to make your own assumptions and investment thesis :)
- 2021 was a great year and they proved the model
- My favorite metric to track would be Contribution Profit After Interest (CPAI) or Contribution Margin After Interest (CMAI) which clearly shows improvement even in a tough market environment. This was the case until Q2 2022.
- However, forward guidance is.... well, shitty.
- GAAP Net income is negative, because of the inventory write-downs, but positive after adjustments. Cool, but they have to eventually hit their adjusted numbers when they sell... which is reflected in guidance.
- Their Q3 adjusted EBTIDA guidance is negative, which it hasn't been since 2020.
- However, we don't know if the accounting impacts will be positive for GAAP.
- That would only be the case if/when the housing market stops slowing down, and they realize less losses than anticipated.
- They're positioning for the housing market slowdown in by slowing down purchases and including a larger spread in their offers. This is the ultimate test of their model.
- I think they're doing a good job, but it's impossible to say how/when/if they turn things around with the housing market. Which leaves us analyzing the macro to get a better understanding on the housing market (which we'll get into later)
- Valuation is impossible to forecast here, so I'm left with looking at Price/Book, which it's trading at near 1x. Is this attractive? Let's look at Offerpad first.
- Offerpad has pretty identical metrics on margins to Opendoor
- However, they're operating at significantly less volume and in less markets. That alone makes me lean towards investing in Opendoor being the market leader.
- But, the OPAD shares took a massive dump in June and is far from recovering.. was this a sponsor selling? Likely... and this is why SPACs get a bad rep.
- But, insiders are buying (as opposed to OPEN)
- In any case, they're also at a Price/Book just above 1x (same as OPEN).
Check out some of my TikToks on this topic, and make sure you follow!
@bhspeaks #realestate #realestateinvesting #investing #housingmarket #stocks #finance #recession #business #economy ♬ Say Something - Piano Covers Club from I’m in Records
Basically, I don't think this will be an '08 style crash in housing. We don't have the consumer debt to support that, but we do have insane amounts of public debt globally – which is a whole different problem. I don't think the housing market will be a catalyst or concentrated victim in that case. So, I'm not trying to call the bottom, but I do believe this is a buying opportunity in real estate.
The reason I bring up REITs, is because we're now valuing these companies based on P/B. So, why buy for 1x when I can buy at a discount (to NAV)? I think that's a VERY valid question!
Where were REIT discounts to NAV in the past corrections?
Previous crisis lows included a discount to NAV of 22% at the end of the dot.com bubble in December 1999; 17% in the GFC in February 2009; and 15% in the Taper Tantrum of August 2013. Had an investor purchased REITs during these three periods, their 12-month forward returns would have been 16.51%, 85.47%, and 19.35%, respectively. – Duff & Phelps
Clearly, this is a good time to buy – unless you think 2000 or something bigger is your base case (not mine!).
Basically, to sum it up, it's hard to say this is a great buying opportunity for iBuyers like Opendoor and Offerpad. There's just too many unknowns. But, it's probably a bad time to sell. Maybe. However, if I want real estate exposure with a better risk/reward, I think REITs are the way to go. Because, yes, we're not comparing apples to apples – one has income versus one has a potential capital loss on the horizon. Okay, but the iBuyers have revenue growth? Right? Actually, no they don't because they're slowing down home purchases so revenue growth will slow... so that's not a valid argument. So, again, if I want real estate exposure, I rather have income and buy it a discount so that any further correction is priced in. That's the safer and better way, imo.
So, what should I do, sell for REITs? Let me know what you think!
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