Finance Of America Companies - Q2 2023

Transcript

Operator (participant)

Thank you for standing by. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Finance of America second quarter 2023 earnings call. All lines have been placed on mute to prevent any feedback noise. After the speaker's remarks, there will be a Q&A session. If you would like to ask a question during this time, simply press the star followed by the 1 on your telephone keypad. If you would like to withdraw your question again, press the star and the 1. Thank you. Michael Fant, Senior Vice President of Finance, you may begin your conference.

Michael Fant (SVP of Finance)

Thank you, good afternoon, everyone, and welcome to Finance of America's second quarter 2023 earnings call. With me today are Graham Fleming, Chief Executive Officer, and Johan Gericke, Chief Financial Officer. As a reminder, this call is being recorded. 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 to the extent available without unreasonable efforts, discussed on today's call in our earnings press release on the investor relations page of our website at www.financeofamerica.com. Also, I would like to remind everyone that comments on this conference call regarding the company's expected operating and financial performance for future periods may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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, 2022, filed with the SEC on March 16, 2023. Such 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, these are interim period financials and are unaudited.

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

Graham Fleming (CEO)

Yeah. Thank you, Michael. Good afternoon, everyone, thank you for joining us on our second quarter 2023 earnings call. Finance of America continues to lead the way in helping provide older Americans with more choices and flexibility when it comes to meeting the evolving needs of today's modern retirees. More importantly, Finance of America is now at an exciting inflection point. Over the last several months, we executed a series of strategic actions, including the sale of our title insurance business, the sale of the majority stake of the remaining lender services business, and most importantly, the initial steps in the integration of the AAG platform. The completion of these transactions marks an important and pivotal step in the execution of our long-term growth strategy, designed to help Americans achieve their retirement goals with the use of home equity.

Our business is now fully transformed into a leading modern retirement solutions platform. We believe it is well positioned for long-term success. For today's call, I'm going to begin by briefly reviewing our financial results for the quarter. I'll spend time discussing business structure updates and the progress we've made against executing against our strategic priorities. Johan will discuss our financials in more detail. Our results this quarter illustrate our commitment to streamlining the organization and making significant investments in our Retirement Solutions business, which we believe is poised for long-term growth due to demographic tailwinds. However, today's cyclical mortgage market has been significantly impacted by wider spreads and higher interest rates, which place downward pressure on our results due to negative fair value adjustments and reduced volumes.

On a continuing operations basis, we record a GAAP net loss of $221 million, or $0.91 per basic share in Q2, driven primarily by negative impact of rates and spreads during the quarter. On an adjusted basis, we recognize a loss of $26 million or $0.12 per fully diluted share, as the growth in volume in our reverse business does not yet fully offset the increased costs of the expanded operational infrastructure as we integrate the AAG platform. We continue to manage our business with discipline and a focus on our long-term strategic priorities. This includes streamlining our operations to reduce expenses and investing in business lines with the greatest long-term growth potential. Corporate expenses continue to trend downward, and we expect to see additional savings in the second half of the year as we realign our corporate infrastructure in light of recent activity.

As of June 30th, we are approximately 80% of the way to our savings target of $80 million-$100 million annually and expect to secure an additional $20 million in annualized savings by the end of the year. The combined Finance of America and AAG brands now have a commanding market share lead in reverse mortgages, with a nearly 40% share of the HECM market year-to-date, measured by HMBS issuance. Our acquisition of the AAG platform as a sophisticated marketing engine that has the ability to further raise product awareness and increase the addressable market. Despite a difficult economic environment and amid a complex integration, we are starting to see positive traction in our pipeline and operational processes.

During the second quarter, Finance of America assisted over 2,300 customers in finding ways to thrive in retirement through the use of a reverse mortgage. Compared to the first quarter, this resulted in a 95% increase in the number of funded loans. This quarter, we funded $447 million in UPB, a 25% increase from the prior quarter, as we began the integration of the AAG platform into our business. Prior to our acquisition of the AAG platform, AAG was the leading originator of HECM loans in the reverse industry. Our HECM volume in Q2 doubled compared to Q1, and we believe a substantial opportunity exists to sell our proprietary jumbo reverse loans through the AAG platform as well. We've done significant work to successfully integrate the AAG teams and operations into our existing infrastructure, and we are already seeing the results.

Today, the team is unified, morale is high, and we're energized for the opportunity and long-term potential in front of us. Since the start of the AAG integration, we have onboarded over 400 employees to bolster our retail channel and support our corporate segment, while continuing to streamline overhead costs. Many of these resources were temporary as we worked through the transitional phase. Additionally, we onboarded nearly 150 vendors into our ecosystem, the majority of which are marketing vendors engaged to expand and strengthen our advertising and educational reach. We are working tirelessly to identify and consolidate redundant vendor engagements and overlapping loan origination systems in an effort to optimize costs and alleviate the reporting and leadership challenges that come from working out of multiple systems. The AAG brand's direct-to-consumer retail channel reaches more than 10 million consumers annually via targeted marketing and advertising.

Once fully integrated, the AAG brand and reach will enable us to better serve the growing needs of retirees across the nation. We're encouraged by the continued strength in submission volumes in the quarter and are optimistic about the rest of 2023. Finance of America Reverse legacy wholesale channel, which has been a market leader for over 10 years, has seen growth in its pipeline since the end of March, and it currently stands at its highest level since late 2022. This pipeline growth and increase in submission volume is a positive sign that should drive funded volume growth in the coming months. We know we have a substantial opportunity to address the retirement gap in America, which we believe we are well-positioned to help solve.

If we can continue to increase awareness of our products and solutions, grow our customer base, and innovate new financial solutions centered around the home. Our goal is to help our existing customers as they harness the power of their home and the different ways it can be used to help obtain a better outcome later in life. This is consistent with macroeconomic trends we've seen for the last few quarters. The U.S. retirement savings gap is approaching $4 trillion, yet senior homeowners have amassed more than $12 trillion in home equity value, according to the latest data from NRMLA. This is our market opportunity at its core, helping older homeowners use their homes as a superpower to achieve their financial goals. In summary, I'm proud of how our team navigated challenges this quarter while making huge strides in a complex integration.

We continue to prudently manage our operations and right-size our expenses while investing in our core business segments, where we're seeing prominent signs of growth. With that, I will pass the call to Johan to discuss the financials.

Johan Gericke (CFO)

Thank you, Graham. Good afternoon, everyone. I will provide a brief overview of our financial results before I dive into the specifics on the quarter. Turning to the operating results, the company recognized a net loss of $221 million or $0.91 per fully diluted share, which was driven primarily by negative fair value adjustments to our portfolio as interest rates and spreads were impacted by the fallout from the bank collapses late in Q1. On a continuing basis, the company recognized an adjusted net loss of $26 million or $0.12 per fully diluted share. As Graham mentioned, although we have begun to see an increase in funded volumes, these were outpaced in the quarter by the additional operational infrastructure and further investments we made in the acquired AAG platform.

In Retirement Solutions, we funded $447 million in UPB, for a 25% increase over the first quarter. We expect to continue to see quarter-over-quarter growth in this business as we fully integrate AAG and fund the increase in submission volume we are already seeing in our pipeline. Revenue margins increased as the shift towards the AAG retail channel leads to higher margin business. For the quarter, we saw revenue margins increase from 7.3% in Q1 to 9.2% in Q2. This increase is net of a roughly 1.6% drop in HECM revenue margin quarter-over-quarter. Combined with the increased volume, total revenue grew roughly 58% from the prior quarter. This was, however, offset by expenses attributable to the onboarded infrastructure of the AAG platform.

Expenses increased by 65% quarter-over-quarter from $35 million to $59 million. This increase includes transitory costs that were needed to ensure a smooth transition in Q2, and we expect to see those costs decline starting in Q3. In addition, we invested in headcount and marketing to expand volumes and expect to see this volume growth in Q3 and beyond as we fund the higher pipeline. Our team is focused on creating an efficient and sustainable business model that can operate in all macro environments. We look forward to providing progress updates on this transformation in future periods. Speaking of transformations, we've continued to make strides toward a more streamlined corporate infrastructure. However, this is a time-intensive initiative as we work to complete the ongoing efforts.

With the wind down of our discontinued operations, recent sale transactions completed in the quarter, and the sale of the title insurance business that closed on July 3rd, we are now in a position to further reduce the infrastructure to match our current operations. Moving to the balance sheet, total assets declined 1% to $26.5 billion, as the combined fair value of our portfolio of assets declined quarter-over-quarter due to rising interest rates and the widening of credit spreads. Cash balances totaled $56 million as of June 30th, down from March 31st. Please note that this balance does not yet include the proceeds from the sale of our Title Insurance Business, as this transaction was completed during the first week of July.

In conclusion, it was a difficult quarter financially for the company, but we are starting to see key performance indicators trending in a positive direction, and we are optimistic for the remainder of 2023. With that, let me now hand it back to Graham for closing remarks.

Graham Fleming (CEO)

Yeah, thank you, Johan. We remain focused on executing our strategy, as we said we would, and took actions we believe will best position our business for the long term. Looking ahead to the remainder of 2023, we do not expect to achieve our previous full year guidance of $0.09-$0.12 adjusted earnings per share. That said, we believe the earnings potential of the company is $0.40-$0.50 per share once the AAG acquisition is fully integrated and the market stabilizes. To our marketing powerhouse and product innovation, we are confident that we can grow our customer base and meet our customers' needs wherever they are in life, to serve them with tailored Retirement Solutions. With that, we'll open the call for questions.

Operator (participant)

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for a moment to compile the roster. Your first question comes from Stephen Laws with Raymond James. Your line is open.

Stephen Laws (Research Analyst)

Thank you. Hi, good afternoon, Graham and Johan. A couple of follow-up questions on some of your comments. I guess first, you know, can you give us an outlook on volume up sequentially? Maybe a little below what I was looking for. Can you, can you talk about what July volumes look like, and, you know, maybe what you think quarterly run rate is gonna be as we look at the back half of the year?

Graham Fleming (CEO)

Yeah, thanks, Stephen. We would, based on what we see currently in our pipeline with submissions, we'd expect Q3 to be something in the, you know, $500 million-$525 million range. If we continue on this growth trajectory, we'd expect Q4, you know, to look like something, in the $600 million range.

Johan Gericke (CFO)

Just to put a finer point on that, Stephen, if you look at the origination volume in the earnings release, the $447 million, I'd say think about $50 million of that is home improvement. The rest is reverse, right?

Stephen Laws (Research Analyst)

Okay.

Johan Gericke (CFO)

Just as you level set.

Graham Fleming (CEO)

Yeah. Yeah, the numbers I'm speaking with are just the reverse, just reverse volumes.

Stephen Laws (Research Analyst)

Just reverse on those numbers. Okay, great. To touch on expenses, I just want to make sure I'm triangulating the right numbers. Graham, I think you mentioned maybe $20 million more expense reductions. Does that compare to the $59 million number that Johan mentioned, and that's what we should look at going to, you know, from basically 60 to 40?

Johan Gericke (CFO)

No, the, the 59 was for the Retirement Solutions only, and the 20 that Graham is talking is the entire corporate infrastructure for the overall company, Stephen, before allocations, right? Some of that gets allocated to the Retirement Solutions, some of it gets allocated to portfolio management, and then a big chunk of it is unallocated and stays behind in the corporate segment.

Stephen Laws (Research Analyst)

Okay, say $20 million can be synergies from here, and over what time frame do you expect that?

Johan Gericke (CFO)

Between now and the end of the year, we expect to generate those savings, that if you look at the if you just hit a chalk line today, and you hit a chalk line at the end of the year, and you look at the delta...

Stephen Laws (Research Analyst)

Mm-hmm

Johan Gericke (CFO)

... that on an annualized basis, that delta should be $20 million.

Stephen Laws (Research Analyst)

Great. One last question. Just do you have a quarter-to-date update on, on fair value marks and the cash balance that you referenced, does not include the title sale or the remainder of the lender services sale since once quarter end?

Johan Gericke (CFO)

It's a little bit early. We're in the market pricing, and so that'll dictate where spreads are. So it's a little bit early to give a, an indication at this point.

Stephen Laws (Research Analyst)

Okay. Thanks a lot. Appreciate it.

Johan Gericke (CFO)

All right.

Operator (participant)

Again, if you would like to ask a question, please press star and then number one in your telephone keypad. There are no further questions at this time. I turn the call...

Graham Fleming (CEO)

Thank you.

Operator (participant)

I turn the call back over to Graham Fleming.

Graham Fleming (CEO)

Thank you. I'd like to thank everybody for joining our call, and we'll update everybody at the end of Q3 and on our next earnings call. Thank you very much.

Operator (participant)

This concludes today's conference call. You can now disconnect.