Finance of America Companies Inc.

Hello, thank you for standing by. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Finance of America first quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question, it is star one. I would now like to turn the conference over to Michael Fant, Senior Vice President, Finance. You may begin.

Thank you, and good afternoon, everyone, and welcome to Finance of America's first quarter 2024 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 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 on today's call to the extent available without unreasonable efforts 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, 2023, filed with the SEC on March 15, 2024. The 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 that today we are discussing interim period financials, which are unaudited. Now, I would like to turn the call over to Finance of America's Chief Executive Officer, Graham Fleming. Graham?

Thank you, Michael. Good afternoon, everyone, and thank you for joining us on our first quarter 2024 earnings call. Finance of America continues to deliver against its strategic plan. We believe the business is well positioned to return to sustained profitability and continues to be the leading provider of home equity-based financing solutions for a modern retirement with the potential to reach tens of millions of customers nationwide. To that end, we announced earlier today our plans to consolidate our existing wholesale and retail branding, Finance of America Reverse and AAG, under the single brand name of Finance of America. We believe that a unified brand will help elevate the company's product offerings, which is crucial to our broader efforts to modernize how customers perceive and engage with the brand. Looking at the numbers, on a continuing operations basis, we recorded gap net loss of $16 million, or $0.06 per basic share, in the first quarter. These results were driven primarily by an improvement in operating performance compared to recent quarters, as margin improved and remained strong through the quarter. On an adjusted basis, in the first quarter, we recognized a net loss of $7 million, or $0.03 per fully diluted share. This is a 65% improvement from the net loss of $20 million, or $0.09 per fully diluted share in the fourth quarter. These numbers point to an overall increase in operating profitability, resulting from both higher revenue and lower costs. In fact, on an adjusted EBITDA basis, The company improved from a loss of $18 million in the fourth quarter to less than $1 million of loss in the first quarter of 2024. During the quarter, reverse volumes were down only 3% to the prior quarter, as previously guided. However, improved margins led to a $5 million increase in revenue in our Originations platform. Our net balance sheet markup due to outside factors was minimal for the quarter, as spread tightening and home price appreciation improvements offset an increase in interest rates. Looking forward, as we come into the spring and summer months and begin to leverage our operational initiatives, we aim to generate an approximate 10% increase in origination volumes for the second quarter to between $465 million and $500 million. Let me now turn things over to Kristen for an update on our operations. Kristen?

Thanks, Graham, and good afternoon, everyone. We're pleased to share that much of our previously communicated work to streamline our operations is now behind us and the integration of AAG's platform is complete. In early Q1, we finalized the transition onto one loan origination system, the last step in the full integration process. Completing this integration paves the way for the next pillar of our strategic plan, which is to modernize our go-to-market strategy. The team is energized by the opportunity to broaden our customer base moving forward. The first step is to create a unified brand to optimize and maximize our resources and reach. This entails sunsetting both the AAG and FAR brands and unifying under a single brand name of Finance of America. Subject to regulatory considerations, this change is expected to take effect in early Q3. In parallel, we have efforts underway to modernize our digital capabilities and integrate these modern experiences throughout the entire customer journey. We know that mainstream consumers have come to expect a frictionless and intuitive experience, which we intend to deliver through these efforts. Our team also continues to optimize our core business with a heightened focus on expanding our reach through our wholesale channel. We are seeing growing interest from larger traditional mortgage lenders and servicers, specifically around our home safe second lien product. In March, we expanded the reach of this product through a leading broker facing platform, and approved the product to be offered through our principal agent channel, giving partners more flexibility in how they bring the product to market. Following the launch in the most recent loan origination system, we've seen interest in the product grow to over 6% of our overall submission volume. HomeSafe Second is a great example of our commitment to innovating to attract new kinds of borrowers and serve those who already have a low-rate primary mortgage but want the convenience of a flexible second lien with no monthly mortgage payments required. There is much dialogue about homeowners being locked into their current home due to rising rates and limited inventory. Those homeowners, many of whom have been turned down for a traditional HELOC because of concerns surrounding the ability to make additional debt service payments, have few options to tap their equity. We are optimistic we can continue to increase volume of this product as interest rates remain higher for longer. Our product suite is of growing interest to our customer base and we're excited about our increasing pipeline volume. When you consider the number of seniors who are financially unprepared for retirement while simultaneously holding a record amount of home equity, it's clear that our home equity based products can be a solution for many older homeowners. Now I'll turn it over to Matt to discuss our financials.

Thank you, Kristen. Good afternoon, everyone. Within our continuing operations for the first quarter, we recognized GAAP net loss of $16 million, or $0.06 per basic share. On an adjusted basis, the company recognized a net loss of $7 million for the quarter, or $0.03 per fully diluted share, a 65% improvement over the fourth quarter, now performing every quarter in 2023. The key driver was the strong top-line revenues within our retirement solutions business of $46 million for the quarter. As expected, funded volumes were modestly down from the fourth quarter as we completed the LOS consolidation. However, revenue margins for the segment equated to 10.8%, or a 17% increase over the fourth quarter. This is due to spread tightening across our suite of products, leading to improved margins. Expenses decreased from the prior quarter as the company continues to align our infrastructure to our current business model. Turning to the balance sheet, our unrestricted cash balance was $48 million at the end of the first quarter, comparable to December as additional working capital financing was used to cover operating cash needs. We completed two proprietary securitizations during the quarter, but increased production of our HomeSafe product suite kept our loan balances available for securitization at roughly the same as the end of December. Our residuals at the end of the first quarter were valued at $250 million as tightening spreads and increases to home price appreciation assumptions mostly offset the increase in market rates in the quarter, validating our continued confidence in the long-term value of these assets. For additional information, last month we published a presentation on our investor relations website that addresses the value of these residuals and how we think about our portfolio. Finally, I want to touch briefly on our balance sheet and more specifically, the high-yield debt, which matures in November 2025. We are moving proactively to review our options and holding productive conversations with the necessary parties to identify an optimal path forward. While it is premature to discuss specifics, we are encouraged by the early conversations. With that, let me hand it back to Graham for closing remarks.

Yes, thank you, Matt. Throughout the first quarter, Finance of America continued to execute against its strategic priorities and remains on track to return to sustained profitability. As the leading provider of home equity-based financing solutions for a modern retirement, we are well positioned to benefit from home price appreciation and a growing senior homeowner population. And with that, we'll open the call for any questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Please ensure your line is unmuted if you are called upon. One moment, please, for your first question. Your first question comes from the line of Douglas Harder with UBS. Your line is open.

Thanks. Hoping you could talk about, you know, kind of how you see the the market and, more specifically, your volumes progressing now that you've continued to make progress on the integration with AAG?

Yes. So, Doug, as we look at the – you know, as we look at our pipelines here at the end of April, right, it's clear we've probably got the largest pipeline that we've had over the course of 23 and 24. So, in my remarks, I guide to about 10 percent volume increase quarter over quarter. You know, we'd hope to continue that pace, you know, but obviously it's a little early to comment on Q3 and Q4, but we're feeling pretty confident, right, that we'll be between 460 and 500 in Q2, which will be a 10% increase quarter over quarter.

And I guess within that, how are you seeing, you know, kind of the demand for your different products? You know, Seconds, Private, Techums, you know, kind of is one product Is one product resonating more in the market than others right now?

I think the one that's not been impacted as much by rates is the Home Safe Second product. With the HECM product and the regular Home Safe product, as the rates rise, the LTVs are compressed a little bit. We don't have that dynamic on the Home Safe Second. And so it's freeing up more capital for people to access the cash that they need. We see that as one of the bigger growth opportunities for us, especially in conversations with larger traditional mortgage bankers and servicers that have portfolios of products that borrowers are looking for different solutions that the traditional products just aren't filling the needs right now.

Great. Thank you.

Your next question comes from the line of Steven Laws with Raymond James. Your line is open.

Hi, good afternoon. Congrats on continuing to move forward and nice successes over the last couple of quarters, making some progress. You know, as we think about margins, you know, I know you just touched on volumes, you know, do you think the 10.8 holds up? How do you think about margins and, you know, I guess where spread today? And Matt, you may have mentioned it roughly in your prepared remarks as far as the loans available for But, you know, can you talk about the securitization pipeline and kind of the pace of deals that you expect over the next few months?

Sure, Stephen. So, I think that, you know, spreads have been pretty steady now for a few months. And we've seen the effect of that on both of our HMBS securitizations as well as our proprietary securitizations. You know, during the quarter, we did do a couple of securitizations. I guess a little bit our shift of product mix during the quarter maybe tilted a little bit more towards the home safe product. And so we still had in excess of $200 million available for securitization. I think as we look out over the next year or so, we anticipate doing a home safe securitization of some magnitude, 300 million range every quarter throughout the rest of this year and maybe in the Q1 of next year. And, of course, HMVS we do monthly. That's really kind of the cadence we're on. The only thing on top of that is occasionally we have some season deals that we will call and reissue opportunistically as we see some opportunities there. And so maybe every other quarter or so you might expect us to see a call and reissue as well.

Great. And, you know, I guess we're almost to the middle of the quarter, but any – Any color on fair value marks quarter to date? I know there's a few different things that go into it. Rates have been up, but now they seem to move lower a little bit. Any comments on how spreads and HPA assumptions have moved quarter to date?

We only update HPA quarterly when we get the Moody's report. Right, I would. I would say you know everything that we read, you know, let us know that HPA remains robust. So you're more than likely there might be some pickup for HPA in Q2. You know, obviously rates they did take up in April, which is a negative. They've started to come down again, you know, so we really have to wait till the end of the quarter Steven to see. But as rates go up, it's a negative as HPA goes up, it's positive and obviously it spreads tighten in. It's a positive, but. you know, as Matt said, spreads have remained consistent. We think there's HPA, there's going to be HPA growth in Q2, and we'll just have to see where rates end at the end of June.

Great. And then, you know, as you think about, I don't know if you want to talk about this on an A&I basis, or frankly EBITDA, you're almost at break-even, really close in Q1. But, you know, when you think about where margins are today, and then you look at the plus 10%, you know, on the volume outlook, you know, do you think, you know, ANI, is that a 2Q event that we see at a breakeven or is it a 3Q or, you know, how do you think about the breakeven point and then, you know, profitability growth in the back half of the year?

So, I think, I mean, it's somewhere in that timeframe. I mean, I appreciate the comments and we've certainly made a lot of progress over the past year. Now that the integration of AAG is really completed and we have kind of all the legacy discontinued operations kind of wound down, we're really able to kind of focus on our core business, start to increase the top line revenue, get the production back up, and, you know, frankly, continue to work on our expenses, which have been trending down. And we think, you know, that will continue to be the case, of course, next year. So it kind of depends, but you're kind of spot on. We're right in that ballpark now. We're into Q2, possibly Q3. We think we can turn the corner based on the current trajectory that we have. going.

Great. And one final one. You know, can you talk to your, you know, financing lines, warehouse facilities, you know, your capacity there? How are conversations with those lenders? And, you know, do you have what you need in place to support the, you know, your growth outlook?

You know, we do. In our core financing, we have really adequate financing of every sort. Kind of the two areas where we're really looking for some change or change in the financing mixes. One, can we obtain additional leverage on the MSR asset? As you look at the supplemental materials we posted in April to our investor website, we talked a little bit about that and getting additional leverage on the MSR, which has been a bit of a difficult asset to finance over the past 12 months. And then separately, as also we mentioned, we'll be looking to do something with our high yield debt, which matures at the end of 2025. about possibly doing something creative with that. But, yeah, too soon to speak to specifics there, but definitely on our radar is one of the financing facilities we need to attend to.

Great. Well, I know you're working diligently on that. Look forward to the update when you have one to provide the market. Appreciate the comments this afternoon.

There are no further questions at this time. I'll turn the call to Graham Fleming for closing remarks.

Thank you, everybody, for joining our Q1 call. We look forward to having the call in August and updating you on our progress around Q2 and providing some information around what we see for Q3. So thank you, everybody, for joining the call today.

This concludes today's conference call. Thank you for joining. You may now disconnect your line.