Finance Of America Companies - Q1 2024

Transcript

Operator (participant)

Hello, thank you for standing by. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Finance of America Q1 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question, it is star one. I would now like to turn the conference over to Michael Fant, Senior Vice President, Finance. You may begin.

Michael Fant (SVP of Finance)

Thank you, and good afternoon, everyone, and welcome to Finance of America's Q1 2024 earnings call. With me today are Graham Fleming, Chief Executive Officer, Kristen Sieffert, President, and Matt Engel, Chief Financial Officer. As a reminder, this call is being recorded, and you can find the earnings release on our investor relations website at www.financeofamerica.com. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed on today's call to the extent available without unreasonable efforts in our earnings press release on the investor relations page of our website. Also, I would like to remind everyone that comments on this conference call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the company's expected operating and financial performance for future periods.

These statements are based on the company's current expectations and are subject to the safe harbor statement for forward-looking statements that you will find in today's earnings release. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks or other factors, including those that are described in the Risk Factors section of Finance of America's Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 15, 2024. The risk factors may be amended and updated in our subsequent filings with the SEC. We are not undertaking any commitment to update these statements if conditions change. Please note that today we are discussing interim period financials, which are unaudited.

Now, I would like to turn the call over to Finance of America's Chief Executive Officer, Graham Fleming. Graham?

Graham Fleming (CEO)

Thank you, Michael. Good afternoon, everyone, and thank you for joining us on our Q1 2024 earnings call. Finance of America continues to deliver against its strategic plan. We believe the business is well positioned to return to sustained profitability and continues to be the leading provider of home equity-based financing solutions for a modern retirement, with the potential to reach tens of millions of customers nationwide. To that end, we announced earlier today our plans to consolidate our existing wholesale and retail branding, Finance of America Reverse and AAG, under the single brand name of Finance of America. We believe that a unified brand will help elevate the company's product offerings, which is crucial to our broader efforts to modernize how customers perceive and engage with the brand.

Looking at the numbers, on a continuing operations basis, we record a GAAP net loss of $16 million, or $0.06 per basic share in the Q1. These results were driven primarily by an improvement in operating performance compared to recent quarters, as margins improved and remained strong through the quarter. On an adjusted basis, in the Q1, we recognized a net loss of $7 million, or $0.03 per fully diluted share. This is a 65% improvement from the net loss of $20 million, or $0.09 per fully diluted share in the Q4. These numbers point to an overall increase in operating profitability, resulting from both higher revenue and lower costs.

In fact, on an Adjusted EBITDA basis, the company improved from a loss of $18 million in the Q4 to less than $1 million of loss in the Q1 of 2024. During the quarter, reverse volumes were down only 3% to the prior quarter, as previously guided. However, improved margins led to a $5 million increase in revenue in our originations platform. Our net balance sheet markup due to outside factors was minimal for the quarter, as spread tightening and home price appreciation improvements offset an increase in interest rates. Looking forward, as we come into the spring and summer months and begin to leverage our operational initiatives, we aim to generate an approximate 10% increase in origination volumes for the Q2 to between $465 million and $500 million.

Let me now turn things over to Kristen for an update on our operations. Kristen?

Kristen Sieffert (President)

Thanks, Graham, and good afternoon, everyone. We're pleased to share that much of our previously communicated work to streamline our operations is now behind us, and the integration of AAG's platform is complete. In early Q1, we finalized the transition onto one loan origination system, the last step in the full integration process. Completing this integration paves the way for the next pillar of our strategic plan, which is to modernize our go-to-market strategy. The team is energized by the opportunity to broaden our customer base moving forward. The first step is to create a unified brand to optimize and maximize our resources and reach. This entails sunsetting both the AAG and FAR brands and unifying under a single brand name of Finance of America. Subject to regulatory considerations, this change is expected to take effect in early Q3.

In parallel, we have efforts underway to modernize our digital capabilities and integrate these modern experiences throughout the entire customer journey. We know that mainstream consumers have come to expect a frictionless and intuitive experience, which we intend to deliver through these efforts. Our team also continues to optimize our core business with a heightened focus on expanding our reach through our wholesale channel. We are seeing growing interest from larger traditional mortgage lenders and servicers, specifically around our HomeSafe second lien product. In March, we expanded the reach of this product through a leading broker-facing platform and approved the product to be offered through our Principal Agent channel, giving partners more flexibility in how they bring the product to market. Following the launch in the most recent loan origination system, we've seen interest in the product grow to over 6% of our overall submission volume.

HomeSafe Second is a great example of our commitment to innovating to attract new kinds of borrowers and serve those who already have a low rate primary mortgage, but want the convenience of a flexible second lien with no monthly mortgage payments required. There is much dialogue about homeowners being locked into their current home due to rising rates and limited inventory. Those homeowners, many of whom have been turned down for a traditional HELOC because of concerns surrounding the ability to make additional debt service payments, have few options to tap their equity. We are optimistic we can continue to increase volume of this product as interest rates remain higher for longer. Our product suite is of growing interest to our customer base, and we're excited about our increasing pipeline volumes.

When you consider the number of seniors who are financially unprepared for retirement while simultaneously holding a record amount of home equity, it's clear that our home equity-based products can be a solution for many older homeowners. Now, I'll turn it over to Matt to discuss our financials.

Matthew Engel (CFO)

Thank you, Kristen. Good afternoon, everyone. Within our continuing operations for the Q1, we recognized GAAP net loss of $16 million or $0.06 per basic share. On an adjusted basis, the company recognized a net loss of $7 million for the quarter, or $0.03 per fully diluted share, a 65% improvement over the Q4, now performing every quarter in 2023. The key driver was the strong top-line revenues within our retirement solutions business of $46 million for the quarter. As expected, funded volumes were modestly down from the Q4 as we completed the LOS consolidation. However, revenue margins for the segment equated to 10.8% or a 17% increase over the Q4. This is due to spread tightening across our suite of products, leading to improved margins.

Expenses decreased from the prior quarter as the company continues to align our infrastructure to our current business model. Turning to the balance sheet, our unrestricted cash balance was $48 million at the end of the Q1, comparable to December, as additional working capital financing was used to cover operating cash needs. We completed two proprietary securitizations during the quarter, but increased production of our HomeSafe product suite kept our loan balances available for securitization at roughly the same as the end of December. Our residuals at the end of the Q1 were valued at $250 million, as tightening spreads and increases to home price appreciation assumptions mostly offset the increase in market rates in the quarter, validating our continued confidence in the long-term value of these assets.

For additional information, last month, we published a presentation on our investor relations website that addresses the value of these residuals and how we think about our portfolio. Finally, I want to touch briefly on our balance sheet and more specifically, the high yield debt, which matures in November 2025. We are moving proactively to review our options and holding productive conversations with the necessary parties to identify an optimal path forward. While it is premature to discuss specifics, we are encouraged by the early conversations. With that, let me hand it back to Graham for closing remarks.

Graham Fleming (CEO)

Yes, thank you, Matt. Throughout the Q1, Finance of America continued to execute against its strategic priorities and remains on track to return to sustained profitability. As the leading provider of home equity-based financing solutions for a modern retirement, we are well positioned to benefit from home price appreciation and a growing senior homeowner population. And with that, we'll open the call for any questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure your line is unmuted if you are called upon. One moment, please, for your first question. Your first question comes from the line of Douglas Harter with UBS. Your line is open.

Douglas Harter (Equity Research Analyst)

Thanks. Hoping you could talk about, you know, kind of how you see the market and more specifically, your volumes progressing, now that you're continue to make progress on the integration with AAG.

Graham Fleming (CEO)

Yeah. So Doug, as we look at the, you know, as we look at our pipelines here at the end of end of April, right, it's clear we've probably got the largest pipeline that we've had over the course of 2023 and 2024. So in my remarks, I guided to about 10% volume increase quarter-over-quarter. You know, we'd hope to continue that pace. You know, but obviously, it's a little early to comment on Q3 and Q4, but we're feeling pretty confident, right, that we'll be between $460 and $500 in Q2, which will be a 10% increase quarter-over-quarter.

Douglas Harter (Equity Research Analyst)

I guess within that, how are you seeing, you know, kind of the demand for your different products? You know, seconds, privates, HECMs, you know, kind of is one product resonating more in the market than others right now?

Kristen Sieffert (President)

I think the one that's not been impacted as much by rates is the HomeSafe Second product. You know, with our HECM product and the regular HomeSafe product, as the rates rise, the LTVs are compressed a little bit. We don't have that dynamic on the HomeSafe Second, and so it's freeing up more capital for people to access the cash that they need. We see that as one of the bigger growth opportunities for us, especially in conversations with larger traditional mortgage bankers and servicers that have portfolios of products that, you know, borrowers are looking for different solutions, that the traditional products just aren't filling the needs right now.

Douglas Harter (Equity Research Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from the line of Stephen Laws with Raymond James. Your line is open.

Stephen Laws (Managing Director)

Hi, good afternoon. Congrats on continuing to move forward and nice successes over the last couple of quarters making some progress. You know, as we think about margins, you know, I know you just touched on volumes, you know, do you think that the 10.8 holds up? How do you think about margins and, you know, I guess, where are spreads today? And Matt, you may have mentioned it roughly in your prepared remarks as far as the loans available for securitization, but, you know, can you talk about securitization pipeline and kind of the pace of deals that you expect over the next few months?

Matthew Engel (CFO)

Sure, Steven. So I think that, you know, spreads have been pretty steady now, for a few months, and we've seen the effect of that on both of our HMBS securitizations as well as our proprietary securitizations. You know, during the quarter, we did do a couple securitizations, but I guess a little bit, our shift of product mixture in the quarter maybe tilted a little bit more towards the HomeSafe product. And so we still had, you know, in excess of $200 million available for securitization. I think as we look out over the next, you know, year or so, we anticipate doing a HomeSafe securitization of some magnitude, you know, $300 million range every quarter, throughout the rest of this year and maybe, you know, into Q1 of next year.

Of course, at HMBS, we do monthly. That's really kind of the cadence we're on. The only thing on top of that is occasionally we have some seasoned deals that we will call every issue, opportunistically as we see some opportunities there. And so maybe every other quarter or so, you might expect us to see a call on reissue as well.

Stephen Laws (Managing Director)

Great. And, you know, I guess we're almost to the middle of the quarter, but any color on, you know, fair value marks quarter to date? I know there's a few different things that go into it. Rates have been up, but now they seem to move lower a little bit. You know, any comments on, you know, kind of how spreads and HPA assumptions have moved quarter to date?

Graham Fleming (CEO)

So we only update HPA quarterly, when we get the Moody's report. Right, I would say, you know, everything that we read, you know, lets us know that HPA remains robust. So, you know, more than likely, there might be some pickup for HPA in Q2. You know, obviously, rates, they did tick up in April, which is a negative. They've started to come down again. So we really have to wait till the end of the quarter, Steven, to see. But as rates go up, it's a negative. As HPA goes up, it's positive. And obviously, as spreads tighten in, it's a positive. But, you know, as Matt said, spreads have remained consistent.

We think there's HPA growth in Q2, and we'll just have to see where rates end at the end of June.

Stephen Laws (Managing Director)

Great. And then, you know, as you think about, I don't know if you wanna talk about this on a, an ANI basis or, or frankly, EBITDA, you're almost at breakeven, you're really close in, in Q1. But, you know, when you think about where margins are today, and then you look at the +10%, you know, on the volume outlook, you know, do you think, you know, ANI, is that a 2Q event that, that we see at a breakeven, or is it at 3Q? Or, you know, how do you think about the, the breakeven point and then, you know, profitability growth in the back half of the year?

Matthew Engel (CFO)

So I think, I mean, it's somewhere in that time frame. I mean, I appreciate the comments, and we've certainly made a lot of progress over the past year. Now that the integration of AAG is really completed, and we have kind of all the legacy discontinued operations kind of wound down, we're really able to kind of focus on our core business, start to increase the top-line revenue, get the production back up, and, you know, frankly, continue to work on our expenses, which have been trending down, and we think, you know, that'll continue to be the case for the course of next year. So it kind of depends, but you're kind of spot on. We're right in that ballpark now. We're into Q2, possibly Q3.

We think we can turn the corner based on the current trajectory that we have going.

Stephen Laws (Managing Director)

Great. And one final one. You know, can you talk to your, you know, financing lines, warehouse facilities, you know, your capacity there, how are conversations with those lenders? And, you know, you know, do you have what you need in place to support the, you know, your growth outlook?

Matthew Engel (CFO)

You know, we do. In our core financing, we have really adequate financing of every sort. Kind of the two areas where we're really looking, you know, for some change or change in the financing mix is, one, can we obtain additional leverage on the MSR asset? Right, as you look at the supplemental materials we posted in April through our investor website, we talked a little bit about that, and getting additional leverage on the MSR, which has been, you know, a bit of a difficult asset to finance over the past 12 months. And then separately, as also we mentioned, we'll be looking to do something with our high-yield debt, which matures at the end of 2025, about, you know, possibly doing something creative with that.

But yeah, too soon to speak to specifics there, but definitely on our radar as one of the financing facilities we need to attend to.

Stephen Laws (Managing Director)

Great. Well, I know you're working diligently on that. Look forward to the update when you have one to provide the market. Appreciate the comments this afternoon.

Operator (participant)

There are no further questions at this time. I'll turn the call to Graham Fleming for closing remarks.

Graham Fleming (CEO)

Thank you, everybody, for joining our Q1 call. We look forward to having the call in August and updating you on our progress around Q2, and providing some information around what we see for Q3. So thank you, everybody, for joining the call today.

Operator (participant)

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.