Finance of America Companies Inc.

Hello and welcome to the Finance of America third quarter 2022 earnings call. My name is Harry and I'll be coordinating your call today. If you would like to ask a question during the Q&A, you may do so by pressing star one on your telephone keypad. I'll now hand you over to Michael Fant, Senior Vice President, Finance to begin. Michael, please go ahead.

Thank you and good morning everyone and welcome to Finance of America's third quarter 2022 earnings call. With me today are Graham Fleming, President and Interim Chief Executive Officer, and Johan Gerrit, 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 metrics on this call. You can find reconciliations of non-GAAP to GAAP financial metrics to the extent available without unreasonable effort, discussed on today's call and our earnings press release and presentation 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 31st, 2021, originally thought with the SEC on March 15th, 2022, as such risk factors may be amended and updated in our subsequent periodic 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. Now, I would like to turn the call over to Finance of America's President and Interim Chief Executive Officer, Graham Fleming. Graham? Yeah, thank you, Michael.

Good morning, everyone, and thank you for joining us on our third quarter 2022 Earnings Conference Call. On today's call, I would like to briefly touch on our recent announcement before discussing our SF&S businesses and go-forward strategy. Johan will then jump in with a review of our financials before we open the call for questions. The decision to discontinue our forward mortgage business was the outcome of a thorough review of our business and the broader economic outlook. Ultimately, we determined that market conditions have fundamentally changed and we need to change with We expect to materially complete the wind down across both retail and wholesale mortgage channels by the end of this year. As a company, we took this decision very seriously and understand the impact it will have on our employees who are highly valued members of our team. In response, we are providing support to assist departing employees in their search for new employment opportunities and are committed to facilitating the transition as they move to other mortgage lenders. I would like to thank everyone for the partnership and continued dedication to supporting our customers and our company. The exit from forward mortgage will allow FOA to optimize our resources and prioritize high growth businesses where we already hold distinct competitive advantages and leading positions in markets with positive macro tailwinds. In the near term, we believe home equity will be a crucial asset for retirees to supplement their income. We believe that in the future, many consumers will seek to broaden discussions with their financial advisors to include home equity as they reassess retirement planning and their long-term financial needs. Against this backdrop, and with FOA's leading position offering reverse mortgage products that lever home equity, we will better serve our customers in their financial journey. Our company has a history of product innovation, and our reverse business has tremendous opportunity to continue this legacy during these changing market conditions. We will also look to expand our partnership model with large mortgage lenders and other financial services companies to offer our products on their platforms. Where we previously were focused on leveraging our own mortgage retail platform to offer these products, we will now pursue the opportunity to expand this program throughout the mortgage industry. We intend to have several large retail lenders and other financial services companies offer our reverse products. Additionally, we recently debuted a collaboration with Morningstar to educate financial advisors about reverse mortgages and other home equity solutions available to their clients. We continue to believe that education is key to the growth of the reverse industry, and the collaboration will make education about reverse mortgages, including the Finance of America suite of products, available to around 150,000 advisors. By teaming with Morningstar, we can ensure that mortgage advisors are educated about home equity as they create diverse and long-term financial strategies for their clients. In the third quarter, our SF&S businesses continued to be profitable and generated $7 million in adjusted net income in line with our previous guidance. Of note, our reverse business earned $34 million in pre-tax income during the quarter. Looking a little closer at each business line, our reverse business has been the leading wholesale origination platform in the industry for more than a decade. The industry has not been immune to the impacts of the market, and we are seeing attractive opportunities to strengthen our platform and expand this cornerstone line of business. This should allow FOA to exit this downturn in a position of strength to capitalize on structural long-term market opportunities resulting from Baby Boomer's significant home equity. While we expect to see a further decline in refinance volumes, we continue to see year-over-year growth in new to reverse customers, including seven straight quarters of growth in our home safe new to reverse loans. A strong complement to our reverse business is our home improvement vertical. As one of our most efficient customer acquisition channels, home improvement complements our reverse products given the overlapping customer characteristics. The average age of a home improvement customer is 52 years old. As these customers look to update their home for retirement, a home improvement loan offers an effective solution for homeowners seeking to leverage their equity and is an attractive option for those who have already locked in low interest rates on their mortgages. The competitive dynamic has improved, and as a result, volume has increased and margins are expected to expand. This business continues to grow, and volumes in Q3 22 were 8% higher than volumes in Q3 last year. In our commercial business, we continue to focus on a return to profitability. We have raised coupons on new volume and pipeline multiple times as rates continue to rise at a rapid rate. In addition, we remain focused on our cost structure to match capacity with demand. Our lender services business continues to introduce new products to better serve our partners in the mortgage industry. With access to our appraisal management, title, insurance, and other in-house services, we are well-placed to sell a bundle of products to our existing customers and deepen the relationship. Over time, we expect these value-added products and services to replace the revenue lost due to the rapid decrease in the refinance market. In addition, we remain focused on costs to ensure we optimize the platform based on current demand. Looking forward, we believe that the combination of our SF&S platform along with continued investments in technology will enhance our customer experience. And with that, I will pass the call to Johan to discuss the financials.

Thank you, Graham, and good morning, everyone. For today's discussion, I want to spend a moment discussing our Q3 results for the company. and then for our SF&S business segment. From there, I will dig into the additional costs resulting from the discontinuation of our forward mortgage business. Turning to the operating results, the overall company recognized an adjusted net loss of 20 million and fully diluted adjusted loss per share of 10 cents as our forward mortgage origination segment continued to be pressured by current market conditions. During the third quarter, Mortgage generated an adjusted net loss of 27 million, and our SF&S businesses generated adjusted net income of 7 million, in line with prior guidance. I will discuss revenue and other financial impacts in more detail when I cover the individual segments. From a balance sheet perspective, cash in Q3 decreased by 50 million, predominantly due to the repayment of secured debt. Year-to-date, we have paid down over $150 million of secured lines of credit. In addition, we are focused on preserving liquidity in this volatile environment. Mortgage MSR balances decreased as we completed strategic sales of these assets during the quarter, but have increased HECM MSR and, in Q4, closed a new financing facility secured by this asset to further enhance liquidity. Book value as of September 30th stands at $575 million, of which tangible net worth was $137 million. Turning to our individual reporting segments, and as mentioned earlier, mortgage originations recorded a $27 million adjusted net loss. Beginning in Q4, these results will be recorded as discontinued operations in accordance with GAAP. Our reverse segment originated funded volumes of $1.1 billion generated revenue of $72 million with improved margins and generated pre-tax income of $34 million. Our commercial segment originated funded volumes of $355 million and revenue of $12 million as margins returned to more normalized levels. Lender services revenue for the quarter was $44 million and the segment generated an $11 million pre-tax loss inclusive of corporate allocations and other non-cash expenses. Finally, looking at our portfolio management segment, pre-tax income was negatively impacted by non-cash fair value marks on our assets. As of September 30th, the residual value of assets subject to non-recourse debt totaled $61 million, down from $390 million as of December 31st, 2021. Turning to the effect of winding down the mortgage business, as identified in our recent 8-day filing, we are expecting costs related to the mortgage shutdown to total between $145 and $164 million. This includes $130 to $138 million in non-cash expenses such as the impairment of intangibles and other assets, of which $129 million was incurred in Q3. Total cash expenses comprising predominantly of severance costs as well as anticipated lease and vendor contract termination buyouts are expected to be between 15 and 26 million, with most of these anticipated to occur in Q4 2022. With that, let me now hand it back to Graham for closing remarks.

Yeah, thank you, Johan. In the near term, we're going to focus on successfully managing the shutdown of our mortgage originations business. But looking ahead to 23 and beyond, we are bullish on the earnings power of the organization. With respect to 2023, we project adjusted fully diluted earnings per share of 45 to 55 cents per year, driven predominantly by a reverse origination segment where we see powerful macro tailwinds continuing to exist. In closing, streamlining of the organization will allow us to focus all of our resources on those businesses that drive growth and which, in turn, will drive long-term shareholder value. And with that, we'll open the call up for any questions. Operator?

Thank you. To ask a question, please tell staff, follow by one on your telephone keypad now. And our first question is from the line of Stephen Laws from Raymond James. Please go ahead.

All right. Thank you. Graham, good morning. You know, can you talk about the the MSR sales, you know, and if there have been any additional MSR sales quarter to date.

Hey, Steven. It's Johan. Yeah, I think we'll have... Good morning. We will have, you know, a number of MSR sales in Q4. But as you saw from, you know, our sales in Q3, then most of the sales happened in that quarter. If you think about the dynamics there, Ford MSRs were, you know, priced relatively attractive during the course of that quarter, and so we capitalized on that trend, whereas HECM MSRs were, you know, we felt there was actually some value in that, and so we've been investing in HECM MSRs, obviously, and as I mentioned, you know, secure the new funding facility on the back of HECM MSR.

Great. Thanks, Johan. When I think about the charges, I went through a bunch of numbers. I've got the 8K from a couple weeks ago pulled up, but did you say 129 million of charges related to the Ford business were incurred in Q3, and is that kind of comparison to the number from the 8K of a midpoint of 140 million of total charges that will be incurred in 2022? So does that mean most of it hit and there's very little left, or how do we think about and items that are going to hit in Q4?

Yeah, so the 129 was predominantly the impairment of intangibles and other assets, so it's almost entirely a non-cash expense. You could think of the Q4 expenses really to be those expenses that will incur in cash. So that would be things like plane severance, you know, buying out of any leases we may have to buy out, as well as, you know, buying out of vendor contracts. And that's the, you know, the roughly 15 to 26 million that we estimate. I'd say the bulk of that's going to happen in Q4, and maybe a little bit that holds over into the early part of next year.

Okay. And any holdovers reflected in the guidance provided at the end of the call?

Yeah, we anticipate, you know, that those will obviously be disclosed as discontinued operations and will be materially wrapped up by the end of the year.

Great. And then on the reverse business, you know, volume declined a little more than I was expecting. Can you talk about what's going on there and how the rate volatility is impacting that market and, you know, how quickly or lack thereof you're able to reset pricing in the reverse business given the current environment?

Yes, Stephen, we are seeing reductions in refinance volumes as rates have gone up and as we've reset rates based upon, you know, current securitization economics on the deals that we're issuing. We are, as I mentioned, we're continuing to see growth in new and reverse. And, you know, given current economic climate, we are working on some new products, right, that will assist seniors accessing equity, you know, such as a second product or other, you know, other opportunities that we can create. I mean, I will say that we did back off our correspondent acquisitions in Q3. The volumes were down as a result of not acquiring, I think, on an equivalent basis in Q2 is about 150 to 200 million of correspondent. So we think as that market normalizes, we'll be able to increase the volume through new to reverse, a second lean product, and increasing our correspondent acquisitions.

Great. Appreciate the comments, Graham and Johan. Thank you.

Our next question is from the line of Doug Harter of Credit Suisse. Doug, please go ahead.

Thanks. Can you talk about your expectations for kind of cash flow, cash earnings, you know, both in kind of 4Q and as we head into 23, given, you know, kind of further shutdown costs and also just kind of the remaining businesses?

Yeah, good morning, Doug. You know, obviously, liquidity is something that's at the front of what we're focused on. I think if you look at what we've been doing, you'll notice that we have been de-risking and de-leveraging the balance sheet, you know, both reducing our inventory of loans and obviously having haircuts locked up in there, as well as paying off secure debt. And as I mentioned, we sold our forward MSR assets because pricing was pretty attractive there for a while to monetize that. And then obviously we've invested in HECM MSR, which we think is attractively priced for investment at the moment, and secured some financing on that. And so as we look forward, to Q4, one thing I would say is our securitization activity in Q3 of proprietary home safe assets, of reverse assets, was pretty light. We expect that activity to pick up and then obviously generate some cash with that. And then as we wind down the forward mortgage business, obviously all the haircut and the other cash that we have invested in that business, um, will be freed up and, um, and obviously trust to use to pay, um, to pay down the, uh, the expenses in forward mortgage. Um, but then whatever is left, um, you know, we will obviously have access to, for the rest of the business. So it's kind of the macro on, on liquidity.

And I guess, you know, kind of as you free up, you know, cash from, from the forward, business, you know, I guess, how are you thinking about priority of, of usage? And then kind of along that, you said you paid down some secured debt this year, you know, I guess, how are you thinking about, you know, paying down secure debt versus, you know, maybe trying to, to repurchase some of your unsecured debt, which, you know, would trade at discounts and just kind of how you're thinking about future cash flow usage?

Yeah, no, that's a great question. Look, I mean, I would say it shouldn't come as a surprise that there's some opportunity in the market here for us to strengthen our businesses where we have a dominant share. And so we are actively looking at pretty much everything that we can that is a sensible way to spend our cash for all stakeholders, quite honestly. And we're going to deploy the cash in a manner that's going to get us the best return, strengthen our platforms, capitalize on some potential opportunities that are out there so that when, as Gray mentioned, we accept this downturn, we're in a very strong position. So that's going to be the broad kind of framework for looking at our liquidity at the moment and building cash and using that to strengthen the franchises.

All right, thank you.

As a reminder, if you would like to ask a question, please dial star followed by one on your telephone keypad now. And our next question is from the line of James Fawcett of Morgan Stanley. James, please go ahead.

Thank you, and thanks for the details this morning. Just quickly, are there any business lines or segments that may be impacted by the discontinuation of the forward mortgage business? Just Wondering where cross-sell was particularly important and how that may impact some of these other remaining segments' trajectories.

Yeah, so as I said in my remarks, we're assisting a lot of our branches to go to other mortgage lenders during the shutdown, wind down. And with that, we're also working with the lenders that they're going to to help them introduce these products. So we actually believe that, not in the short term, but over the course of 23, we think there's a bigger opportunity to cross-sell. As I also said in my remarks, we're working with a couple of large retail lenders to embed our reverse products in their offering, where they'll distribute it through their franchise. So we do think that we can enhance the cross-sell opportunity. But yes, there will be, we don't see a negative impact of anything we see, you know, an opportunity as we get our products introduced to more lenders as our branches go, you know, and go work with other mortgage banks.

Got it, got it. And then, you know, obviously in these periods, there's a lot in flux operationally, but anything else that we should be aware of, particularly as it relates to the cost-cutting initiatives and and um how you plan to manage those costs and what are the things that uh you'll be looking at to determine if you need to be more aggressive or maybe less than planned in in terms of managing those costs um so i will let's i mean i think that's segment by segment right will be substantially complete with the wind down of mortgage uh by the end of november right there's going to be some trailing

operational folks to wind down the remaining pipeline, deliver that pipeline into the secondary market early 23. So we're substantially complete with that. As a result, a knock-on effect of that is it allows us to become more streamlined in our corporate functions, and we're actively working on streamlining those functions. And then, as I said, with commercial and under-services, we are managing those expenses on a monthly basis. It's a function of the volume and the volume is somewhat a function of the rates that are in the market and the desire of borrowers to take products at those rates. So while we've seen a small reduction in volume in commercial, we've been adjusting the operating expenses monthly as a result of that. So I think it's an ongoing effort and one that we probably will be continuing all the way through Q1 of next year.

That's great. Thank you very much. Thank you, everyone.

That concludes the question and answer session for today. And this also concludes the Finance of America's Third Quarter 2022 Earnings School. Thank you for joining, and you may now disconnect your lines.