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spk01: Good morning, ladies and gentlemen, and welcome to the Finance of America's second 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.
spk03: Thank you, and good morning, everyone, and welcome to Finance of America's second quarter earnings call. With me today are Patty Cook, Chief Executive Officer, Johan Gehrig, Chief Financial Officer, and Graham Fleming, President. As a quick 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. You can find reconciliations of non-GAAP to GAAP financial measures to the extent available without unreasonable effort discussed on 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 yesterday'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 factors section of Finance of America's Form S-1 originally filed with the SEC on May 25th, 2021. We are not undertaking any commitment to update these statements if conditions change. Please note, these are interim period financials and are unaudited. On today's call, Patty will begin with a brief discussion of our business model. Johan will cover the financial results, and Graham will spotlight our reverse origination segment. Now, I'd like to turn the call over to Finance of America's Chief Executive Officer, Patty Cook. Patty?
spk02: Thanks, Michael, and good morning, everyone. Before we get started, I want to mention a few significant changes for Finance of America that happened this quarter. Effective April 1st, we completed our business combination and began trading on the New York Stock Exchange on April 5th. Additionally, we began the integration of our home improvement business, along with the previously announced acquisition of Partside Lending in May. We are really excited about the value these investments will bring to our shareholders over time. Now let's turn to slide three of the presentation. As our results this quarter demonstrated, there is significant value in our diversification. Our model's key competitive advantages include an extensive product set, multiple distribution channels, and bespoke capital markets capabilities. The Finance of America business model is unique in that we have built a platform that includes mortgage, reverse, commercial, and most recently, home improvement loans, together with multiple distribution channels to serve our customers as they prefer. In addition, our fee-for-service businesses and portfolio management segment produce recurring revenue streams that help limit the effects of a cyclical mortgage market. Each of these businesses is supported by unique tailwinds that provide resiliency to the platform through varying interest rates and economic environments. In fact, every segment generated meaningful growth in revenue year to date compared to last year. As an example, revenue growth in our reverse business is driven by an increasing population of baby boomers who would like to age in place. but have inadequate savings for retirement, yet they have significant untapped wealth in their homes. A reverse mortgage is an efficient way to access that equity. Another example of the diversified nature of our model relates to our extensive capital markets capability, which allows us to seamlessly connect borrowers with investors in order to manage liquidity, transfer risk, and optimize funding costs. This was evidenced in our recent securitization of non-owner-occupied loans completed in June, the first of its kind for our company, which freed us from the constraints of the recent GSE cap. Our powerful end-to-end platform enables us to identify gaps in the market and introduce consumer-centric products that add to our competitive advantage. This quarter we funded the first equity avail loan, an innovative product which combines many of the benefits of traditional and reverse mortgages. It is designed to provide greater financial flexibility for homeowners at or near retirement. Identifying and meeting customer needs is what we do best, and we look forward to continuing to innovate across our platform. Let's turn to highlights for the quarter on slide four. Our mortgage segment was not immune to the industry dynamics, and we saw declines in revenues aligned with our peers. In contrast, we saw substantial growth in our reverse, commercial, and lender services segments. Both reverse and lender services generated record revenues in the quarter, and in combination, revenue growth from these three businesses offset a portion of our mortgage revenue declines. In mortgage, results in the TPO channel were particularly stressed due to steep margin declines and elevated costs as we integrated the part-side lending acquisition. On a positive note, we have made progress with the integration of our home improvement business and expected to contribute to the bottom line starting in Q4. We also saw a shift from refinance to purchase volume, and our distributed retail channel is well-suited to serve this market dynamic. In fact, purchase funded volumes grew from $2.7 billion to $3.5 billion quarter over quarter. Margins stabilized in the second quarter and have shown modest improvement in July and August. That said, we expect to see continued pressure in the mortgage segment for the remainder of the year. With that, I would like to turn the call over to Johan to discuss our second quarter results in more detail. Johan?
spk08: Thanks, Patty. As mentioned earlier, this is our first quarter as a publicly traded company, and our results include several non-recurring items related to the SPAC transaction, which I will cover later in the presentation. Beginning on slide six, We generated $57 million of adjusted net income or $0.30 per share in Q2 compared to $107 million or $0.56 per share last quarter. Our adjusted net income decreased by $50 million quarter over quarter despite the decline in mortgage revenue of more than double that amount. This is our diversified model in action. For the company overall, on a GAAP basis, we reported a net loss of $15 million for the quarter. compared to net income of $124 million in the first quarter and $146 million in the second quarter of 2020. The Q2 loss resulted from $20 million of fair value marks and $43 million of non-recurring items related to the business combination. Adjusted EBITDA of $87 million for the second quarter of 2021 was down $67 million, or 44%, compared to Q1, as the $102 million decrease in mortgage revenue was partially offset by increased revenues in reverse, commercial, and lender services. Turning to our segments and starting with our mortgage originations business on slide seven. Net break-lock volume of 6.7 billion was down 21% from 8.4 billion in the prior quarter, and relatively flat year over year. Mortgage originations margin declined 18% from the prior quarter, and combined with lower volume, This resulted in a 32% decrease in segment revenue. The second quarter 21 pre-tax loss of $6 million compared to a pre-tax income of $96 million for the prior quarter was predominantly due to the drop in revenue mentioned earlier. The loss also includes non-recurring costs related to the business combination and the impact associated with previously announced acquisitions. Combined, these two items totaled over $14 million. Turning to slide 8, we are very proud of the results generated in our reverse business. Funded volumes were up 32% quarter over quarter to $1 billion, our highest quarter ever. This generated segment revenue of $95 million and pre-tax income of $53 million for the second quarter of 21, up 38% and 18% respectively compared to prior quarter levels. The reverse segment results also include $4 million of non-recurring costs related to the business combination. Turning to slide 9, on the commercial side, funded volumes continued to rebuild from 2020 levels and were up 17% on a sequential quarter basis to $400 million. As a result, revenues were up 64% from Q1, and pre-tax income for the segment increased $3 million despite a $1 million non-recurring cost related to the business combination. Turning to portfolio management on slide 10, segment profitability was negatively impacted by $20 million in fair value marks, along with $7 million of non-recurring costs related to the business combination. The fair value marks are primarily driven by home price appreciation and higher expected prepay speeds observed in securitized mortgage assets and MSR. Our capital markets team completed three securitizations totaling over 1.1 billion in UPV, including our inaugural non-owner-occupied securitization. This segment also includes our MSR assets that grew by 23 million over Q1 to 291 million, with UPV of 30 billion. As shown on slide 11, lender services delivered another record quarter with total revenue of $81 million, up considerably compared to prior quarter and year-ago levels. Pre-tax income for the second quarter in lender services, like other segments, was impacted by $3 million of non-recurring costs related to the business combination. Segment growth drivers include continued growth in third-party clients, doing more business with existing clients, and increased adoption of services by FOA lending segments. Turning to slide 13, I would like to spend a few minutes discussing the accounting impact of the business combination on our financial statements. Due to the nature of the transaction, under GAAP regulations, FOA was determined to be an accounting acquirer in the business combination. Accordingly, the company booked $1.1 billion of goodwill and $688 million of intangible assets to the balance sheet. In connection with the transaction, the company also redeemed the non-controlling interest in Finance of America Commercial LLC for a purchase price of $203 million, and FOA now wholly owns this business. For the quarter, the income statement was negatively impacted by $43 million in non-recurring expenses related to the business combination. This includes share-based compensation and other transaction-related expenses. Lastly, turning to capital allocation. We will continue to make investments that reduce the cyclicality of our earnings and remain focused on maximizing shareholder value over time. Capitalizing on M&A opportunities is part of our DNA, and we remain proactive in identifying the creative market opportunities that will further complement our business and drive profitable growth. Let me now hand over to Graham, who is going to spotlight our reverse mortgage business. Graham?
spk06: Yeah, thanks, Johan. As mentioned earlier, our reverse origination segment originated at over $1 billion for the quarter, a first for the company, and we believe this business is poised for further growth. Turning to pages 15 through 17, you can see that the average senior citizen in America hasn't saved enough for retirement. However, 84% of senior homeowners hold more than 50% of their wealth in the equity of their home. Our experience has shown that many seniors are unclear how to access this equity as part of their retirement plan. A reverse mortgage is a flexible financial tool that allows seniors to convert the equity in their home to cash. This can be used to eliminate monthly mortgage payments and supplement shortfalls in retirement income. Turning to slide 18, Finance of America is a leader in the reverse mortgage industry. and has been the top producer in the wholesale channel for more than a decade. The opportunity is to work with industry peers and partners to increase awareness of product benefits leading to greater adoption. Therefore, we are focused on educating seniors on their opportunities in retirement, and we are well-positioned to make home equity an accepted part of a prudent, sustainable retirement plan. The opportunity in reverse is both sizable and under-penetrated. Current estimates show that senior citizens hold more than $8 trillion in home equity, and that less than 2% of this addressable market has taken advantage of a reverse mortgage. As mentioned earlier, the secular tailwinds in reverse are tied to the increasing senior population, which is growing at 3% annually. Add to that the fact that 90% of seniors want to age in place, and it is clear this presents a substantial opportunity to create value for shareholders over time. I will now hand it back to Patty for closing remarks. Patty?
spk02: Thanks, Graham. Let me close by giving you an update of what we expect for the rest of the year. In Q1, I mentioned that we expected adjusted EBITDA for 21 to be roughly 20% lower than 2020. In Q2, we saw mortgage revenues decrease faster than expected. And despite a modest uptick in July, We now estimate a reduction in adjusted EBITDA for full year 2021 of roughly 25% to 30%. Thank you, everyone, for your time and interest. As mentioned earlier, we believe our results this quarter reinforce the value of our diversified platform. As a public company, we remain focused on continuing to build shareholder value in everything we do. With that, we'll open up the call for questions. Operator, please.
spk01: Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from Doug Harder with Credit Suisse. Please go ahead.
spk04: Thanks, and good morning. Can you talk about the near-term growth outlook for commercial and reverse originations coming off strong quarters where they can go from here?
spk02: Yeah, good morning, Doug. We're excited about the opportunity in both those channels. If you look at the tailwinds that we described for reverse and for commercial, they remain in place. So while it's hard to forecast the growth month to month or quarter to quarter, we believe we have a sustainable opportunity to grow those businesses.
spk04: Great. And it seems like the revenue margin in both of those channels was up sequentially in the second quarter. Can you just talk about the outlook for both of those revenue margins?
spk02: Yeah, I would answer similarly, which is the dynamics that are in play in those markets are expected to continue. There's always some variability in margins, But I would expect good margins to hold in both those channels.
spk07: Thank you, Patty. Sure.
spk01: The next question comes from Stephen Laws with Raymond James. Please go ahead.
spk05: Hi. Good morning. Hi, Patty. To follow up on Doug's commercial question, you know, when you think about the opportunities there, very hot, a number of companies reporting strength across those type loans. You know, how do you think about growth opportunities there? Will it all be internal or, you know, I know you've done a number of acquisitions. Are there opportunities there to get into regions or maybe products that you don't have? You know, what is the, I don't know, you know, other than internal growth, you know, what is your thoughts around how to continue to increase volumes there?
spk02: Yes. I think if we look at the opportunity, I'm going to go to the competitive advantage of our, I'll call it, bespoke capital markets group. I think the opportunity for us to innovate in that sector is meaningful. So if I were going to prioritize our own organic innovative growth versus acquisition, I'm going to lean into our own innovative growth through new product creations.
spk05: Right. And to switch to the forward segment, you know, I think you closed with maybe EBITDA down 25 to 30 percent. I wanted to confirm that that's versus previous kind of thoughts around roughly 20. And then, you know, what drove the change? Was it more volume related as you look at back half originations and your thoughts around where mortgage rates might go? Or is it more margin related? as you've seen a little bit of rebound, but maybe not a lot, and expect that, as you said, competition to remain pretty fierce there.
spk02: So, first of all, I'll confirm that your observation is correct. We're now talking about 25% to 30% down relative to 2020. And the guidance down is really a reflection of the dynamics we saw in the second quarter. You know, margins tightened faster than we expected them to. And even though we've seen a little bit of comeback in those margins in July and August, the outlook remains very uncertain in mortgages. So when we might get back to a more stable level is unclear. So we're going to take the second quarter and adjust our forecast based on that experience.
spk05: Great. And then tying to the expense side, and maybe this is a better question for Johan, but You know, even if I remove the $43 million, you know, the comp and benefits maybe didn't drop quite as much as I would have expected given the volumes and margins. I mean, can you talk about how variable comp is based? Is that volume-driven? Is it profit-driven on margins? And then, you know, as you look longer term, you know, what is – Is there an expense side to the equation of it benefiting margins? I mean, does the industry need to contract and reduce the number of origination people? Kind of what are your thoughts on longer-term operating expense run rate in a declining refi world?
spk02: So, first of all, on variable comp, variable comp is pretty much directly tied to volume. So, you know, the amount we're paying our LOs isn't changing. Variable comp on average is going to go up and down with volume. I think on cost cutting, and I'm going to let Graham take this after a couple of quick observations. So if you look at what happened in the second quarter, the first thing you do when volumes come down is you cut your overtime. Because part of the way you flex up during periods of high volume is through overtime. So the first thing you do is you cut back on the overtime. Then you need to adjust for some stable level of originations going forward, and you can begin to look at some of your fixed costs. I think we do a really good job in each one of the channels at trying to balance the outlook against the near-term volume. I don't expect you to see a huge change in expense reduction in mortgage in particular over the remainder of the year. Graham, would you add anything to that?
spk06: Yeah, I would add a couple of things to Stephen. Good morning. So over the course of the quarter, we did have some reductions in our call center. And we are also, as Johan pointed out, right, we had some elevated expenses in wholesale with the acquisition of Parkside Lending. We did have some reductions there in July. And we're continuing to evaluate, you know, the size of that wholesale group. you know, relative to the volume. So it's an ongoing initiative, you know, but it really is segment by segment and channel by channel, right? But we're keenly focused on, you know, on the expenses in each of those channels to make sure that all of them are right-sized and contributing the, you know, the right amount of profitability to the bottom line.
spk05: Great. I appreciate both your comments on that. I know one of the others in the space kind of announced a variable comp reduction. Last question for me. I want to touch on stock buyback. I know the last time we spoke on this call, it was, you know, stock was a little higher, also had less float, and it was an unlikely scenario. You know, given the expiration of the lockup on the pipe shares, you know, the float is up, I think, 13%, at least with those shares unlocking, the stocks come under pressure. Can you update us on your thoughts around a stock repurchase when you look at where shares are trading today?
spk02: Yes, Stephen, I will. So as we look at our capital management and capital deployment, there are always a variety of considerations that are going to weigh into that decision. But as Johan mentioned in his prepared remarks, we will continue to look at making investments in the business that reduce the cyclicality of our earnings and remain focused on maximizing shareholder value over time.
spk05: Okay, well, I look forward to those announcements, and, you know, good to see the strong growth in reverse and commercial this quarter, so both are above what I was looking for. Thanks for your time today.
spk02: Yeah, thanks for yours.
spk01: Once again, if you have a question, please press star, then 1. The next question comes from Lee Cooperman with Omega Family Office. Please go ahead.
spk00: Thank you. Good morning, and congratulations on your first conference call. Second, I guess, conference call is a public company. Just three questions. One, which measure of book value does management think is most indicative of value in the company? Tangible is about two, and stated book value is about 12. That's question one. Second, can you put an EPS number around your guidance regarding the EBITDA margin you talked about? And finally, in terms of the earnings, how much of the earnings you're generating represents free cash flow and your priorities for the use, which I think in the last question you implied the priorities were to kind of do tuck-in acquisitions, but I'd like to kind of explore that a little bit more. Those three questions, if you wouldn't mind.
spk02: Johan? Morning, Lee. Good morning.
spk08: Good morning. So, you know, we look at the business on the first question across a number of dynamics. Obviously, book value, tangible book value are all very important for us, as well as, you know, the desired level of capital that we need to continue to, as Patty mentioned, you know, drive investments that can avoid the cyclical nature of the earnings. But I would say At the end of the day, as the market looks at tangible book value, that's probably the most important metric.
spk02: Yeah, I would add to that, since we are not an asset-heavy company, I think book value is more relevant to us than someone that might be carrying a big balance sheet. But nonetheless, we've got to consider both as we look at managing the overall balance sheet, the income statement, and the strategic imperative to the business.
spk00: Well, to be honest with you, what's behind the question is clearly if you're looking at tangible book values being important, you're unlikely to be buying stock back at six and change because you're diluting tangible book value. On the other hand, you're adding to your gross book value, stated book value of 12. But anyway, the second question, is it an APS number you have in mind that you can share with the group?
spk02: No, at this point, we're not giving a guidance on EPS.
spk00: Okay, so my man tells me $1.70 this year. You want to comment on that, our estimate?
spk02: No, actually, Lee, I don't.
spk00: Okay. And lastly, free cash flow and priorities for use. And there's really much behind it. I understand that you guys make it very clear, and I'm not really debating you, that you would rather do a tough acquisition and buy back your own stock. If the gross book value of 12 is indicative of value, I noticed that two analysts that cover the company, one is 12, has a $12 price objective. Another one is a $13.5 price objective. So if you use a lower objective, it's almost twice the current stock price. Do you believe these tuck-in acquisitions will create more value than buying back your stock at half of what other people think it's worth?
spk02: I think over a long period of time, smart, strategic investments that will continue to improve, I'll say, the noncyclicality of our earnings to the right answer.
spk00: Well, I congratulate you guys for going public at the top of the market. You caught the top. Congratulations.
spk02: Thanks, Lee. Always good to hear from you.
spk01: There are no further questions on the phone lines, and this concludes the question and answer session.
spk02: Thank you everybody for joining the call. We appreciate your time and attention and look forward to seeing you again next quarter. Thank you.
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