Finance of America Companies Inc.

Good afternoon, ladies and gentlemen, and welcome to the Finance of America first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this call will be recorded. I would now like to turn the conference over to Michael Fant, Senior Vice President of Finance at Finance of America. Please go ahead, Michael.

Thank you, and good afternoon, everyone. and welcome to Finance of America's first quarter earnings call. With me today are Patty Cook, Chief Executive Officer, Johan Garrett, Chief Financial Officer, and Graham Fleming, President. As a quick 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 in today's call in our earnings press release and 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 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 news 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 factor section of Finance of America's Form 8K, originally filed with the SEC on April 7, 2021. We are not undertaking any commitment to update these statements if conditions change. Please note, these are interim period financials and are unaudited. Now, I'd like to turn the call over to Finance of America's Chief Executive Officer, Patty Cook. Patty?

Thanks, Michael, and good afternoon, everyone. Before we cover our first quarter results, I want to mention a very important milestone for Finance of America. On April 1st, we completed our business combination with Replay Acquisition Corporation, and Finance of America officially started trading on the New York Stock Exchange on April 5th. We are excited for the next stage of Finance of America's evolution, and I would like to express my gratitude to the entire team, Replay, and all of our clients who made this accomplishment possible. Besides closing the transaction, the first quarter was a busy time for our company. We recently launched a new vertical, Finance of America Home Improvement, via the acquisition of Renovate America's industry-leading home improvement financing product. Finance of America Home Improvement's proprietary technology platform that helps consumers improve their homes while giving contractors the tools they need to grow their businesses. provides us access to the large and growing home renovation market. Finance America Reverse also launched Equity Avail, a groundbreaking new mortgage product designed to provide greater financial flexibility for homeowners at or near retirement. This product will combine elements of a traditional mortgage with a reverse mortgage to improve cash flow and help retirees accomplish their retirement goals. Finance of America Home Improvement and Equity Avail are the latest examples of our proven ability to innovate and create products that meet the evolving needs of our customers. It is the proprietary insights gleaned from our powerful end-to-end platform that enable us to identify gaps in the market providing us with a sustainable, competitive advantage. Solving problems is what we do best, and we look forward to continuing to introduce new innovations across our platform that serve large addressable markets with strong tailwinds, thereby further diversifying our business model to ensure growth over time. Furthermore, Capitalizing on M&A opportunities is part of our DNA. Since the company's formation in 2013, Finance of America has successfully acquired, integrated, expanded, and optimized 16 companies in industries spanning from originations and lender services to capital markets. We remain proactive in identifying accretive market opportunities that further complement our existing lines of business and will drive profitable growth. And as you may have seen, we recently announced an agreement to acquire certain assets of Parkside Lending, a wholesale and retail lender that will strategically increase our third-party origination coverage. Another key milestone was bringing on Johann Garrick as CFO to further strengthen our leadership team Johan is a seasoned executive with extensive finance experience and a proven track record, with leadership positions at major publicly traded financial institutions. I look forward to working with him as we go forward as a public company. Turning to our results for the first quarter, Finance of America continued to generate strong performance. further reinforcing the strength of our diversified consumer lending platform, spanning mortgages, reverse mortgages, and commercial loans offered across distributed retail, third-party brokers, and digital direct-to-consumer channels. In addition, our fee-based portfolio management and lenders services businesses contributed meaningfully to this quarter. First quarter highlights included near record volumes and strong growth for our reverse originations business, where growth drivers are less correlated with the direction of interest rates. More specifically, baby boomers are increasingly looking to age and place, and our reverse mortgage products provide the opportunity to this demographic to tap the equity accumulated in their homes. Commercial loans to residential real estate investors continue to accelerate in the first quarter. And looking ahead, the aging housing stock and the market's bias for newer construction or remodeled properties bode well for ongoing demands in this segment. Turning to mortgage originations, key performance metrics remain strong on a year-over-year basis, though softened from record levels in the prior quarter. Consistent with the decline in primary-secondary spreads, our mortgage origination margins declined quarter over quarter, and that trend has continued into the second quarter. In addition, as refinancing activity wanes, overall industry volumes are expected to decline. On the other hand, our distributed retail channel is ideally positioned to capitalize on what we expect to be a strong purchase market. Aside from our lending segment, our lender services segment provides a broad offering of services, including title and appraisal management. The increase in business per client and the growth in new clients continues to drive differentiated and uncorrelated fee income. as the channel experienced its best quarter ever. Turning to portfolio management, our strong relationship with investors allows us to respond to opportunities in the market through each cycle. Over time, we expect to continue to invest in assets such as MSR and residuals as we did in the first quarter, which will provide stable and consistent revenue. Looking ahead, We believe macro tailwinds from growing consumer wealth will fuel expanding consumer credit and will continue to support the long-term growth prospects of our businesses. One of our key differentiating factors is our diversified model, both within lending and across our platform, that generates sustainable returns across economic cycles and capitalizes on market tailwinds. In fact, we expect contributions from our non-mortgage segments to continue to increase during the remainder of the year, while the mortgage origination segment declines year over year. We estimate, based on the current market, the net effect could be a reduction in adjusted EBITDA for full year 2021 of roughly 20% year over year. which would indicate a continuation of return on pro forma equity north of 20%. We remain focused on the multitude of opportunities presented to us by maximizing the potential of our existing platform as we look to strategically add the right new products, businesses, or distribution channels. So with that, I will now turn the call over to Johan to discuss our financials in more detail. Johan?

Thank you, Patty. As mentioned earlier, we generated strong results for the first quarter of 2021. Total funded volume grew 78% to $9.5 billion, compared to $5.3 billion in the prior year quarter. On a sequential quarter basis, funded volume declined by just 3%. while net rate lock volume increased by 7% versus the prior quarter. Total revenues of 499 million were up 165% year-over-year and were down 7% versus the fourth quarter of 2020, even as our mortgage origination margin compressed by 21% on a sequential quarter basis, thereby reinforcing our diversified cycle-resistant model. Following through, We reported pre-tax net income of $125 million for the quarter, compared to $153 million in the fourth quarter, and a loss in the prior year quarter. Adjusted EBITDA of $154 million for the first quarter of 2021 was down 11% compared to $174 million in the fourth quarter, but up more than four times the $35 million generated in the prior year quarter. Turning to our segments and starting with our mortgage originations business, we generated funded volumes of $8.4 billion, double the $4.2 billion for the first quarter of 2020, although down 5% on a linked quarter basis. Net rate lock volume of $8.4 billion was up from $7.9 billion in the prior quarter and increased substantially from $6.2 billion a year ago. Total revenue of $320 million, more than doubled year over year, but was down from $367 million in the fourth quarter. The sequential decline was largely a function of lower gain on sale margins, as mentioned earlier, and consistent with industry trends, partially offset by a 7% increase in net rate lock volume. First quarter 2021 pre-tax net income of $96 million compared to $129 million in the prior quarter. and is consistent with the drop in revenue mentioned earlier. Reverse originations funded volumes were up 17% quarter over quarter to $769 million. This drove segment revenue to $69 million and pre-tax income to $45 million for the first quarter of 2021, up 25% and 36% respectively compared to prior quarter levels. Our business continues to benefit from the unique tailwinds present in this sector. On the commercial side, funded volumes continued to rebuild and were up 11% on a sequential quarter basis to $341 million. Turning now to portfolio management, assets under management totaled $17.3 billion as of March 31st, 2021, up 10% year-over-year and 3% for the quarter. Assets under management excluding HMBS and loan recourse obligations totaled $2.2 billion, up from $1.8 billion at the end of 2020, with growth coming from loans held for investment not yet securitized of $370 million and MSR growth of $87 million. As of March 31, 2021, our MSR totaled $267 million. Segment revenue of $30 million decreased 21% on a linked quarter basis, predominantly related to the impact of fair value adjustments period over period. Accordingly, pre-tax income was down 25% from prior quarter to 6 million, but rebounded since the COVID-related net loss in the prior year quarter. Lender services delivered another record quarter, with total revenue of 76 million and pre-tax net income of 13 million, up considerably compared to prior quarter and year-ago levels. Segment growth drivers include the continued expansion of third-party clients, as well as increased adoption by FOA companies. Finally, with regards to our balance sheet, cash and cash equivalents were up 49% on a sequential quarter basis to $348 million. We maintain plenty of capacity to continue to invest in the business organically or via strategic M&A opportunities. And with that, we'll open up for questions. Operator, back to you.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Steven Laws with Raymond James. Please proceed with your question.

Hi, good afternoon, and congratulations on your first quarter as a public company and completion of your transaction in early April. It's a great first step. Thank you, Stephen. You bet. Patty, you know, a lot to cover given the different business lines, but I guess first to start with the forward origination business, you know, margins. Can you maybe go in depth in that a little more detail, margins across different channels and maybe how your mix compares to where the industry is seeing the most margin compression and how we should think about that as we move through the year.

Sure. I mean, as you can see, the margins in mortgages went from roughly 430 to 340 in the first quarter. And what I would say about margins, and I think you're hearing it from all of our competitors, is that margins are tighter across the board, but led by, I'd say, correspondent and wholesale. So the percent decline in those margins is greater than we're seeing in retail.

Great. And then on the other two sides, the reverse and the CRE, I think about it maybe a little differently, and correct me if I'm looking at this wrong. You know, the reverse is really more of a penetration story, and it seems like your margins there are probably pretty well protected. Yes. You know, with just recent growth consistent with what you expect to see going forward, and on commercial, you know, certainly much more competitive landscape there. So how do we think about your pipeline of loans there and your ability to protect margins on those production?

Okay. So reverse first, you're spot on. in that that is more a segment expansion. And I think the growth that we see there is very encouraging because I think it reflects the tailwinds that we've been expecting, right? You've got house price appreciation, you've got the aging baby boomers, and they are anxious to tap into the equity of their home. So I think there it's more about, I'm going to say on average, stable margins but definitely continued growth. I think when you look at the commercial business, you know, there are two products there that are important. One is fix and flip, and the other is the single family rental. And there's probably, I don't know, I guess I'd say more margin competitiveness and fix and flip. But we feel good about where that market is and where it will continue to go. I think the real opportunity for us is when you look at the SRL markets. And if you couple that with the recent GSD announcement to put a cap on non-owner occupied, we think we're in a great position to grow our market share of that combined segment and leverage the investors we've already identified on the back end for SRL. So I think we're unique in SRL. And, you know, I'd like to stay for fix and flip. I think there's going to be great demand there.

Fantastic. And one last question if I may. Lender services, solid margin, very strong margin improvement there. And I think the press release cited some cross-sell opportunities, maybe another thing or two. But can you talk a little bit about the opportunity to keep expanding, you know, not only grow revenue, but keep expanding margin in some of these other segments to provide growth to offset, you know, finding refis that will happen?

Yeah, the great thing about the lender services business, is the growth is coming from two, well, really three areas. One is obviously increased adoption from Finance of America. But more exciting and more important is the fact that we're adding new customers and we're doing more business with existing customers. So that's particularly true of title. And I also love the insurance. Title insurance business is growing consistently with that. I think margins, you know, margins have stayed healthy. I don't see any reason for that to change.

Great. Well, I appreciate the comments this afternoon, Patty, and thanks very much for letting me be on the call. Take care. Absolutely.

Thank you. Our final question comes from Eric Hagan with BTIG. Please proceed with your question.

Hey, good afternoon. Hope you guys are well. I got a couple questions. The home improvement financing you announced earlier this week, can you talk about the, I guess, types and structure of the products you're offering and how you plan to source those loans? And then how are you guys thinking about the growth of the MSR portfolio, too? I mean, in addition to just creating the asset through your own production, are you guys seeing any opportunities to acquire bulk or mini-bulk MSR there? Thanks.

Okay, so on the home improvement side, this is also an exciting new vertical for us, right? The point of sale technology it brings us not only puts us into the home improvement business, but gives us a great opportunity to expand. I think right off the bat, they're already set up. We're doing business as we speak in their sort of traditional product, which is contractors with... homeowners that are doing home improvement. But I think what you'll see there is we can leverage through our distribution volume, and I think we can also improve the backend execution. So that by itself will provide growth to that vertical. But then excitingly, we can put new products on that platform. You know, we may look – we're looking at solar as one example. So I think the products will expand and we can also expand the growth as we plug it in to our distribution channel. On the MSR side, we'll continue to retain our retail MSR within Finance of America and we will continue to sell our TPO MSR to the fund. The fund could be looking at bulk, less important to Finance of America to be looking at bulk acquisitions.

That's helpful detail. Thank you very much.

You're welcome.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Patty Cook for closing remarks.

Wow, that was quick. I didn't expect that to be the answer. So thank you for all of you that are on the call. As mentioned earlier, we believe our results this quarter reinforce two key differentiating factors, First, our diversified platform, with market-leading businesses that are less correlated to refinance volumes or interest rates, continues to drive more sustainable origination volume, margins, revenue, and earnings. Second, we remain proactive in increasingly leveraging our strong balance sheet to further develop our footprint via strategically complementary and financially accretive acquisitions. As a public company, we remain focused on continuing to build shareholder value, and we look forward to discussing our progress on future calls. Thank you all, and have a great evening.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a great day.