How spending money got Opendoor in the black

When Opendoor reported its second quarter earnings last week, it reported a profitable quarter despite losing money.

But the San Francisco-based iBuyer’s apparently successful quarter likely doesn’t make sense to anyone who doesn’t run a large public company or who doesn’t have an accounting degree.

For the second quarter in a row, the company bought back some of its debt, issued in the form of bonds, for less than the bonds were worth when they were issued. In doing so, it took $104 million off its debt balance, which it was able to report as income, thereby reaching its first profitable quarter in over a year.

It’s able to count that reduction as profit because it creates more equity for shareholders, even though it had to spend more money than it otherwise would have to pay down the debt.

“It was an opportunistic decision based on our view of how strong our balance sheet is today,” said a company executive familiar with the decision.

As a result, Opendoor spent $169 million it could have kept in the bank to buy back $279 million worth of bonds. Of that difference, $6 million was eaten up by fees. That’s on top of a $101 million buyback the company made in the first quarter, which reduced its outstanding debt by $84 million.

Together, the buybacks reduced the number of Opendoor’s outstanding bonds by roughly 50 percent, according to comments made during the second quarter earnings call by interim CFO Christy Schwartz.

Opendoor finished the second quarter with $1.6 billion in capital, according to Schwartz, including $1.2 billion in unrestricted cash and cash equivalents.

The rising rate environment and Opendoor’s relatively low stock value made the buybacks possible.

Bonds are a debt product that fall in value when interest rates rise. Those issued by Opendoor have a convertible feature, meaning the lenders could eventually turn them into equity. But because Opendoor’s stock is down roughly 90 percent since its IPO, lenders don’t see that as a viable option.

“It’s got a long way to go for the equity option to be in the money,” said the executive.

The timing might seem odd to some: The company lost over $1 billion in two quarters last year during the market downturn, and Eric Wu, stepped down as CEO last December. It also conducted two rounds of major layoffs.

But David Friedman, founder of the wealth data platform WealthQuotient, said the move makes sense as long as Opendoor has enough cash left over to weather the slow market.

“That’s three birds with one stone — buy out debt, eliminate debt service, kick them into profitability all in one,” he said. “If you look at it through those lenses it kind of becomes a no-brainer.”