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spk01: If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I would now like to turn the conference over to Michael Fant, Senior Vice President of Finance. Please go ahead.
spk03: Thank you, and good afternoon, everyone, and welcome to Finance of America's fourth quarter and full year 2023 earnings call. With me today are Graham Fleming, Chief Executive Officer, Kristen Siefert, President, and Matt Engel, Chief Financial Officer. As a reminder, this call is being recorded and you can find the earnings release and presentation on our investor relations website at www.financeofamerica.com. In addition, we will refer to certain non-GAAP financial measures on this call. To the extent available without unreasonable efforts, you can find reconciliations of non-GAAP to GAAP financial measures discussed on today's call 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, 2022, filed with the SEC on March 16, 2023. As 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, today we will be discussing interim period financials that are unaudited. Now, I would like to turn the call over to Finance of America's Chief Executive Officer, Graham Fleming.
spk02: Graham? Yeah, thank you, Michael. Good afternoon, everyone, and thank you for joining us. To begin, I would like to review our results as well as the broader macro trends we are seeing in the industry. I will then turn things over to Kristen to share our strategic plan. followed by a review of our financials from our Chief Financial Officer, Matt Engel. Overall, 2023 was a transformational period for Finance America. Throughout the year, we completed a series of strategic transactions that helped establish the company as the preeminent platform for homeowners 55 and older seeking to benefit from their home equity. With most of these efforts now behind us, we are excited to move forward. As a business, we are firmly positioned as the leading provider of modern retirement solutions with the potential to reach tens of millions of customers nationwide. For additional information, we have included a presentation on our investor relations website that addresses the potential total addressable market and our view of the investment opportunity. Finance of America is making home equity part of a mainstream modern retirement plan so that more Americans can benefit from the wealth in their home and have better outcomes later in life. With respect to our continuing operations, we recorded gap net income of $171 million or $0.72 per basic share in the fourth quarter. These results were driven primarily by fair value gains recognized in our portfolio of assets given decreases in market rates in the quarter and improved results from operations, which we will discuss shortly. On an adjusted basis, in the fourth quarter, we recognized a net loss of $20 million or $0.09 per fully diluted share. an improvement over the third quarter of 20%. Beginning in retirement solutions, as expected, volumes decreased in the quarter due to seasonality, but improved margins and reduced expenses led to a 67% improvement in adjusted net loss for the quarter. In portfolio management, market volatility had a significant impact on quarterly results. In the fourth quarter, decreases across the yield curve brought about significant increases in fair value of our portfolio of assets. Over the course of the year, the net balance increased by $24 million. Having established a solid foundation from which to grow, we are excited for what lies ahead. We continue to look at avenues to expand our product suite, enhance the customer experience, and drive conversion. These include identifying ways to utilize AI. We have selected key AI partners and are excited to leverage these tools across sales, operations, marketing, and data analytics. Additionally, we remain focused on managing expenses and strengthening our balance sheet for the long term. Let me now turn things over to Kristen for an update on our operations, the integration of the AEG retail platform, and the work we've been doing to enhance our products and sales channels.
spk00: Kristen? Good afternoon. As Graham mentioned, our vision is to make home equity an essential part of a modern mainstream retirement plan. We've designed a three-year strategic plan that we believe will enable us to achieve this goal, while also helping us provide the most value to those we serve, including our shareholders. A key factor for advancing that plan was moving to one loan origination platform, which was the last major milestone related to the integration of the AAG retail platform. This was launched in late December as planned, and the beginning of this year will be devoted to improving the efficiencies of that platform and ensuring we have strong workflows to support the originations engine and the planned growth. With much of the foundational work close to being completed, it paves the way for a shift of attention to the growth levers in the plan. We think Finance of America's modern retirement platform will create long-term growth at scale, and we have a few main reasons for this confidence. The first is that we see a significant addressable market, which we believe we're well-positioned to capture as the category grows. Reverse mortgages are utilized by approximately 2% of the total addressable market. As the industry's leading retail and wholesale originator, Finance of America has close to 40% market share of this activity. We have our eyes fixed on driving market penetration over the long term so that as the total pie grows, we will have the ability to meaningfully increase our reach and impact as well. When you consider the nearly $3.7 trillion retirement savings gap and the record number of seniors who are financially unprepared for retirement using traditional vehicles alone, a solution must emerge. The obvious one is to incorporate the $13 trillion in home equity held by seniors. The second reason for confidence is the power of our distribution platform and its connection to product innovation. Through our direct-to-consumer channel, we reach more than 20 million consumers annually via our marketing and advertising, and our reach grows tremendously when you consider the large traditional mortgage lenders who utilize our suite of products with their clientele through our industry-leading wholesale channel. We've long been pioneers in our industry in creating non-agency products that fill gaps for customers, and our most recent innovation was a no-payment second lien home equity loan that we launched in 2023. During the fourth quarter, we saw significant growth in non-agency volume, funding 50% more proprietary production in Q4 than during Q3, further helping our customers thrive. While new loan products can provide solutions for a broader set of customers, we also recognize there's a significant gap as it relates to customer understanding and appeal of reverse mortgage products and the category overall. Our third reason for confidence is that we now have the components to change this. Within our three-year plan, we're committed to breaking this adoption barrier by investing in modernized messaging, digital technology, and tailored customer-centric experiences. These experiences are essential in unlocking the massive market opportunity that exists and providing our customers and partners the service and experience they deserve and expect. In all, we have a strong rationale for our approach and optimism around our strategic plan given our dominant position within the industry. We have a clear vision, a strong team, and a proven track record of delivering results. We are confident we'll continue to see growth and strong operational performance within the business as we execute against our long-term vision, and we look forward to sharing continuous indicators of progress with you each quarter. Now, let me turn things over to our CFO, Matt Engel.
spk05: Thank you, Kristen, and good afternoon, everyone. I'm excited to have joined the Finance of America team. We have a compelling story to tell and are at an exciting inflection point in the business. I look forward to speaking with and meeting many of you over the coming months. With that, let me start with a brief overview of our financial results before I dive into specifics on the quarter. Within our continuing operations, we recognize GAAP net income of $171 million or $0.72 per basic share. Turning to the operating results, the company recognized an adjusted net loss of $20 million for the quarter or $0.09 per fully diluted share. an improvement of 20% from the third quarter. In our reverse platform, volumes decreased in the fourth quarter due to seasonality. Additionally, as Kristen mentioned, we began the consolidation of our loan origination system during the quarter, further impacting retail production. We originated $436 million in loan volumes, down 7% from the $470 million in the third quarter. For the full year, we originated $1.6 billion in funded loan volume. While volumes were down compared to the prior year, maintaining industry's leading retail and leading wholesale platforms allowed Finance of America to control a 37% share of the HECM reverse market and a significant portion of the non-agency market. Retirement Solutions' fourth quarter revenue margin was 9.2%, an improvement of nearly 18% from the prior quarter. This is even more stark when looking at the monthly margins during the quarter. During October, when market rates reached their peak, our revenue margin fell to 7.4%, the lowest level since the acquisition of the AAG platform. By December, following the decline in market rates, our revenue margin peaked to 11.3%, or the highest level of the year. So far during the first quarter of 2024, we have continued to see strong performance in revenue margins as market rates stay below the highs experienced in October. When it comes to operating expenses, the company continues to focus on finding ways to align our infrastructure to our modern retirement platform. During the fourth quarter, expenses reduced by $7 million, or 7%, from the third quarter. In addition, our corporate divisions continued to see a decline in operating expenses during the quarter as we further reduced our expense base by nearly 10%. This brings our annualized run rate reduction within corporate to nearly $90 million from our peak in early 2022, or the midpoint of our target range. Turning to our balance sheet, our cash balance was $46 million at the end of the year, down from $66 million in September. During the quarter, FOA completed a small home safe securitization, meaning that much of our cash was used to invest in our balance sheet as equity in newly funded home safe loans. During February 2024, we completed two large securitizations, freeing up significant cash that will be used to invest in and grow our business. Our residuals at the end of the year were valued at $260 million, up from $49 million as of the end of September. Their value increased from the prior quarter as interest rates declined in November and December, validating our continued confidence in the long-term value of these assets. Based on comments from the Fed, interest rates appear to be on a downward trend over the next few years. we expect will have favorable impacts to the fair value of our balance sheet in the long run. Lastly, I want to touch on the recent letters we have received from the New York Stock Exchange regarding compliance with listing requirements. Finance of America's leadership remains focused on generating enhanced enterprise value for all stakeholders and ensuring the company's long-term success. We intend to comply with NYSE listing standards and are actively considering steps to bring the company back into compliance within the required time period. which we do not anticipate impacting our ongoing business operations. While we're not done, we have made great strides as an organization to achieve our strategic goals. We are excited about the opportunity that lies ahead in 2024, and we believe in the long-term earnings power of the company. We're optimistic about our ability to achieve our goal of $0.40 to $0.50 in adjusted EPS on an annual basis and originating $300 million a month based on our scaled reverse mortgage business and current margins. With that, let me now hand it back to Graham for closing remarks.
spk02: Yes, thank you, Matt. 2023 was a year of significant transformation for our business. In the face of an uncertain macro environment, we believe we both improved and strengthened their operations via acquisition and streamlined their business to establish a foundation for success moving forward. More importantly, the overarching demographics in the U.S. continue to make us confident in the long-term value of our business. The proportion of retirees is at an all-time high and growing. at a time when most don't have nearly enough saved for retirement, and older homeowners as a whole have more than $13 trillion in home equity. We believe we are well-positioned to benefit from a more favorable interest rate environment and a growing customer base open to utilizing their home equity to help them thrive in retirement. And with that, we'll open the call for some questions.
spk01: The floor is now open for your questions. To ask a question this time, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Stephen Laws with Raymond James. Your line is open.
spk06: Hi, good afternoon. Hi, Stephen. Hi, Graham. First, Matt, I actually want to start with you based on a couple of comments you made. I think you said in February you did two securitizations which freed up some cash. Were those, I think one was a refinance. Can you talk about, you know, demand for those deals on your securitizations and then, you know, how much liquidity or cash does that free up and what are you able to do with that incremental cash flow?
spk05: So I think overall demand for those deals was strong. You know, they're fully subscribed. We sold all the bonds in the stack. So they received pretty well in the market. You know, with that cash, we're just ongoing cash, grow the business, you know, continue to invest in the home safe production. And that causes some cash in the interim months until you do the next securitization. That's kind of the main use of it. The rest of this kind of corporate cleanup is behind us in 2023, as Graham mentioned. So a lot of that cash burn of the past is behind us.
spk06: And then what's the outlook for additional securitization calls? Do you have any more deals that you may call and lever back up in a new deal? Or how do you think about the call opportunity going forward?
spk02: Yeah, so I'd answer that this way, Stephen. something in the range of 30 deals outstanding. We look at them. First of all, we look at our operating liquidity needs over the coming years. We look at the value of these residuals at the option date and at the call date. And we do not have a specific plan at this time to call more deals, but obviously we'll look at the economic value and maximize that kind of crossover between the liquidity and the economics. But as you can see from the Q4 results, you know, there's a lot of value now inherent in these residuals, and, you know, we'll call and reissue, you know, as we see fit depending upon the call date or the, you know, the mandatory or the auction date or the mandatory or the call date. Great. There is definitely opportunity to generate liquidity, you know, by calling and reissuing some of these past deals.
spk06: So, I guess along those lines, do you expect to build cash? Should you think about where we'll end Q1? You know, how do you expect to see... cash balance maintained as we move through the first half of this year?
spk05: I don't think we'll really start to build cash in the first half of the year. It's a bit of a delay as the retail origination platform kind of gets the volume going back up. We get some additional production, do the home safe deals towards maybe the end of the second quarter, end of the third quarter. I think I would not expect to see a large cash build certainly in the first half of the year.
spk06: Great. And then, Matt, just to make sure I got my notes down, I think you said kind of continuing to target $300 million a month and that volume level still supports a longer-term A&I outlook of $0.40 annually. Is that what you said?
spk05: That's exactly right.
spk06: Great. And then lastly for me for now, I think one of your competitors may be priced to deal pretty attractively in Q1. Can you talk about know we're almost into the quarter but i realized things could change in the next 25 days but how do you think about or how are the year-to-date fair value changes you know certainly q4 was a welcome relief after you know that being a headwind in the in the summer last year but how is your today for value changes trending so um look obviously there's three there's three major components uh stephen all right and that number one is the rates right which we're not exactly sure where rates will finish at the end of uh
spk02: At the end of the quarter, we've seen them move up about 30 basis points and come back down a little bit here. The second component is spreads. We've seen spreads definitely tightening in here at the beginning of the year, not just on our proprietary product, but also on our agency HECM product. And the last piece is HPA. It's remained robust. We're waiting on some days to come out here in March, which hopefully supports what we've seen from Kay Schiller, but if that's positive and spreads are tight and rates are, let's say rates come down a little further before the end of the quarter, it should be an overall positive impact for fair value.
spk06: Great. Appreciate the comments this afternoon. Thank you.
spk01: Our next question comes from the line of Doug Harter with UBS. Your line is open.
spk04: Hi, this is Corey Johnson on for Doug Harter. I just wanted to see, could you talk me through, is there any way to perhaps limit the mark-to-market volatility of the balance sheet and or reduce the balance sheet intensity of the business?
spk02: You know, unfortunately, right, You know, unfortunately, these are gap, right? These are gap issues, and these are all mandated in accordance with gap. So, you know, there's no ideas right at the top of my head other than marking everything to zero, which obviously gap won't allow us to do. You know, it is based on some close to almost a $10 billion UPB balance. So, relatively speaking, it is basis points. Matt, anything to add?
spk05: I think, you know, you can always look at, you know, I think the question we sometimes get is around hedging and whether you put big hedges in place. You know, there's upsides and downsides to that from a liquidity standpoint when rates go against you. So something we look at from time to time. We've hedged some in the past. We'll consider doing some in the future. But right now, given where we are in the rate cycle, you know, we're okay with some of this volatility. It's moving kind of back in our favor.
spk04: Great, thank you. And I want to see, is the path to operating profitability going to be through increased revenue, or is there further expense reductions that could take place?
spk02: Yeah, there's a little more on the expense side that we're going to tackle in Q2. Primarily, revenue margins have improved. We don't expect them to be much higher than they were in December. So the path The path to profitability now is increased volume, which we also expect to see increased volume as we're through this loan origination consolidation. We're currently anticipating A&I profitability kind of over towards the end of Q2 over the summer. So we do have a path to returning to A&I profitability.
spk04: Great, thanks. And this is the last question for me. Could you maybe talk to me a little bit about the outlook for reverse origination volumes in the current rate environment?
spk00: Yeah, I would say that right now it's probably less about the current rate environment and just about getting the kind of operating platform and the technology integration completed. We've got the levers to pull to drive the growth. We just need to do so from a stable foundation, which is what we've been mainly focused on over the last two quarters. And so the plan is to incrementally begin growing the production volume through the course of this year and well into the future. And obviously, when rates come down, it makes it easier. But with where rates are today, we still believe in the growth model that we have.
spk04: Great. Thank you. Appreciate the answer.
spk01: Next question comes from the line of Lee Cooperman with Omega Family Office. Your line is open.
spk07: Thank you. I have four questions and maybe one you already responded to. What are the expectations for recurring operating earnings? Somebody mentioned on the call the volatility. The $0.40 to $0.50 that you mentioned, Was that recurring operating earnings this year or your objectives down the road? That's question one.
spk02: So, Lee, the 40 to 50 cents will be based on 300 million a month of originations. You know, we're currently averaging somewhere around 140 to 150. So, we're going to need to grow into that. You know, we would expect... like to be on a path for that towards the end of this year. I don't think we're going to achieve 40 to 50 cents.
spk07: So what is your expectation for operating earnings this year? Do you have one? And you're willing to share?
spk02: You know, we haven't provided that specific guidance. I would say that our submissions and our pipelines are growing. You know, we're optimistic that the volume will grow over the course of the year. You know, we haven't given out specific... It's an open mic.
spk07: It's an open platform. Do you want to make a statement? But you'd rather not?
spk02: I'd rather not at this point, Lee.
spk07: Second, how do you rate your capital adequacy to conduct the business that you want to conduct, the way you want to conduct it? Do you have adequate capital?
spk05: We do have adequate capital. We are constantly kind of addressing our needs as we see fit with warehouse lines, timing our securitizations, lines of credit, and so forth. So we feel that we're properly capitalized for our growth in 2024.
spk07: I don't follow it that closely, though I own a lot of shares. But hold on, my cell phone is ringing. Hold on. There was an enormous increase in the share count from $88 million to $229 million fully diluted. Basically, what is the actual share count currently fully diluted? Is it the $229.3? If you look at page 7 of your press release. That's the fully diluted share count, yes, Lee. What accounted for the 200 and, I'd say, about 150, 140 million increase in shares?
spk03: There wasn't a... I don't think there was a 140 million share increase.
spk07: Well, it says here on page 7 of your release, the basic weighted average share is outstanding. It was 88.4. And the dilution, the diluted shares... 229.3, and a year ago was 87.7. So it's a pretty big... Yeah, that... Gotcha.
spk03: Yes, Lee. No, so that actually has to do with the method by which we run the if converted or fully diluted EPS calc. And so because it is not dilutive, right, or it is anti-dilutive on the fully dilutive view, when you add in all shares, For that, GAAP requires us to just use the basic share count instead. So that's why you can see the basic and diluted per share number is the same in each of those periods. It's just Q4 of this year where the diluted EPS is diluted compared to basic.
spk07: You mentioned your view of interest rates. I happen to be of the view that short rates could drop, but long rates are not going to go down, and in effect, they'll probably go up. What's more important to you, the 90-day bill rate or the 10-year rate? The reason I say what I say is prior to the great financial crisis, the 10-year bond used to yield in line with nominal GDP. Assuming 2% real growth and 3% inflation, that would be 5%. The 10-year wouldn't be 10%.
spk02: We're not quite out as far as the 10-year. Lee, what's important to us is probably in the five to seven-year range.
spk07: Five to seven-year. All right. Well, that rate goes down, but whatever. But the 10-year rate is less significant to you than the short-term rates.
spk02: Yeah, our assets are probably a seven-year duration. So that's kind of where we're focused on the curve.
spk07: Gotcha. Okay. Thank you very much. Good luck.
spk02: Thank you.
spk01: There are no further questions at this time. Mr. Fleming, I turn the call back over to you.
spk02: Yes, I'd like to thank everybody for joining the call, and we look forward to our updates at the end of Q1, which we expect in May. So thank you, everybody, and good night.
spk01: This concludes today's conference call. You may now disconnect.
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