Finance of America Companies Inc.

Welcome to the Finance of America second quarter 2024 earnings call. At this time, I would like to hand the call over to Mr. Michael Fantz. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to Finance of America's second 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 and presentation on our investor relations website at ir.financeofamericacompany.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 to the extent available without unreasonable effort in our earnings press release and presentation on the investor relations page of our website. 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 FDC on March 15, 2024. The risk factors may be amended and updated in our subsequent filings with the FDC. 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 on an audit. Finally, following the recently completed reverse stock split effective July 25th, all earnings per share metrics for both current and historical periods will be calculated using the updated basic and fully diluted share count to provide an apples-to-apples comparison across time periods. Now, I'd like to turn the call over to Finance of America's Chief Executive Officer, Graham Flynn.

Graham? Yeah, thank you, Michael. Good afternoon, everyone, and thank you for joining us today. To begin, I would like to review our results and discuss several key events that transpired during the quarter and how they will impact FOA. Kristen will then share some important operational updates, followed by a review of our financials from Matt. For additional information, we have posted a supplemental presentation to our investor relations website, which we encourage you to review in concert with today's call. Overall, I'm pleased to share that Finance of America continues to deliver improved fundamentals across the business in the second quarter. resulting in our fourth consecutive quarter of improved A&I. As a team, we've been dedicated to executing our strategic plan, strengthening our operations, and advancing our path to profitability. As a result of our efforts, we see continued growth across the business, both volume and revenue grew, and expenses declined over the prior quarter. Taking a high-level look at the numbers on a continuing operations basis, we recorded gap net loss of $5 million, or $0.20 per basic share. On an adjusted basis, we recognize a net loss of $1 million, or $0.05 per fully diluted share, and adjusted EBITDA of positive $9 million. This marks the first quarter of positive adjusted EBITDA since 2022. Looking back, Q2-23 marked the first quarter of the combined businesses of Finance of America and AAG. Since that time, our revenues, excluding other fair value changes, have grown by 33% and our expenses have reduced by 26%. Year over year, we have markedly reduced our ANI from 26 million to 1 million. Furthermore, we have made a substantial turnaround in adjusted EBITDA, improving from a negative 26 million in 23 to a positive 9 million in 24. Beyond these improved results, we see significant milestones throughout the second quarter that we believe further establish a foundation for continued operational improvement and growth. First, we announced a one for 10 reverse stock split recently completed in July, which put us back in compliance with the New York Stock Exchange continued listing standards. As we have said in the past, we're committed to maintaining access to the public markets and trading on the NYC. Second, we announced an exchange offer support agreement and that holders of over 93% of our senior unsecured notes had indicated their intent to participate in the exchange offer. As of today, holders of over 99% of senior unsecured notes have indicated their intent. This is a significant milestone for the company and the transactions contemplated by the exchange offer support agreement will have later maturities, enhance our financial flexibility, and help align our cash flows with our debt obligations, thereby improving our capital structure for the future. We appreciate the partnership we have with these investors and look forward to their continued support. Next, we close on two related warehouse facilities with two lending partners new to the reverse space to help minimize haircuts on our proprietary loan production. These new loan relationships are another example of greater interest being shown to the reverse mortgage industry by interested counterparts. Lastly, the release of the preliminary term sheet for Ginnie Mae's HMDS 2.0 program at the end of June marked an important step in providing enhanced liquidity to the reverse mortgage industry. This exciting program provides a more favorable HMDS structure that will significantly reduce the capital required for buyouts and allows for the securitization of these buyouts into pools backed by Ginnie Mae. This has the potential to have a positive impact on earnings, tangible net worth, and liquidity. Each of these events has left Finance of America in a better position to achieve long-term success and help homeowners unlock the joy that comes from realizing the full potential of their retirement. Our entire team has worked diligently to improve the operations of the business while integrating and becoming a unified Finance of America. We sincerely appreciate all the hard work and I want to share a huge thank you to everyone that has been a part of our company's transformation over the past two years. To tell us more about the brand transition to Finance of America and further operational updates, let me turn the call over to Kristen.

Thank you, Graham, and good afternoon, everyone. Beginning in late 2022 and taking place over the last 18 months, we worked to transform our operations to align with our refocus strategy centered on retirement, the 55-plus demographic, and home equity. With most of the work completed, we've turned our attention to strategic initiatives to optimize our platform and pave the way for future growth. This translates into improved operations, improved conversions, and a better customer experience overall. Last month, we successfully unified all of our brands under the single name Finance of America. This milestone included launching new brand assets consisting of television ads featuring Tom Selleck, a streamlined corporate website, enhanced social media presence and new multimedia advertising and collateral in concert with the brand unification we also developed and introduced a singular company purpose and shared values this achievement marks a significant step in our evolution enabling full alignment across the organization to maximize our productivity as a group and realize the full value of our investments within our retail division we modified our go-to-market strategy to focus on our most efficient channels and stepped away from strategies that have been less fruitful over time. We expected to see outsized returns from this shift and early results are supporting this theory. Looking at our industry-leading suite of products, we continue to have strong demand from our best-in-class wholesale channel as we introduce solutions that appeal to the vast customer base held by our wholesale partners. We are confident in our ability to grow originations and continue to explore new strategies to attract and meet the needs of more customers. In Q2, we enhanced the LTV of Home Safe Second to appeal to a wider segment of borrowers and introduced a streamlined underwriting option for high credit quality customers. In that same period, we experienced 168% increase in submission volume quarter over quarter and a 30% reduction in average term times. We will continue to expand the state availability each quarter and plan to launch Home Safe Second's specific marketing campaigns in our retail channel by the end of Q3. Last, in our efforts to increase the penetration of the total addressable market, we continue to invest in digital technologies that capitalize on growth opportunities and create tailored experiences for our customers. With the heavy lift of the LOS and brand transitions behind us, We're shifting the team's attention to building out these capabilities as their top priority and look forward to sharing updates around these enhancements as they're introduced. Now, I'll turn it over to Matt to discuss our financials.

Thank you, Kristen, and good afternoon, everyone. Within our continuing operations, we recognize GAAP's net loss of $5 million, or 20 cents per basic share, for the second quarter. On an adjusted basis, the company recognized a net loss of $1 million for the quarter, or $0.05 per fully diluted share, the fourth consecutive quarter of improved results in our business. As Graham mentioned earlier, it's been just over a year since the acquisition of certain assets of AAG. During that time, the business has completed its integration and seen significant improvement in its operations. We saw origination volumes increase by 5% from the first quarter. We originated $447 million in loan volumes, up from $424 million in the first quarter, While we came in slightly under the provided guidance range for the quarter, we did see positive momentum in our production. In fact, our higher margin retail and broker channels grew volumes by 18% and 12%, respectively, offset by decreased production in our correspondent channel. Focusing on our retail and broker origination channels was a conscious financial decision that led to improved operating results and higher overall margins for the business. Additionally, we have seen an increase in average loan balances, both for proprietary and HECM products, which have resulted in part from the recent decrease in interest rates. Since the fourth quarter of 23, the average size of the HECM loan across our retail channel has increased around 10%. Note that we have enhanced the revenue section of our income statement presentation, which more clearly lays out the key drivers of our business. You can see this on slide eight of the earnings supplement posted to our investor relations website. As you can see, year over year, net portfolio interest income is flat, while runoff has decreased from $55 million to $48 million, resulting in a higher accreted yield on our portfolio. In addition, net origination gains have increased from $33 million to $40 million. As we grow new loan origination volumes in the future, this will show up in the net origination gains and fee income lines of the income statement. Excluding fair value changes from market inputs or model assumptions, Total revenue for our continuing operations was $68 million in the second quarter of 24 compared to $51 million in the second quarter of 2023. This is a 33% increase in revenue across our operations in the last year. While revenues have increased year over year, we continue to see an overall decrease in expenses. For continuing operations, total expenses declined from $110 million in the second quarter of 2023 to $91 million in the first quarter of 2024 to $85 million in the second quarter of 2024, as the cost reduction initiatives we have taken over the past year have continued to materialize. Turning to the balance sheet, our unrestricted cash balance was $47 million at the end of the second quarter, comparable to March, as the new financing grant mentioned earlier reduced the cash invested in our balance sheet as of the end of the quarter. Finally, I want to reiterate our excitement surrounding the initiatives Finance of America was able to accomplish during the second quarter beyond our operating results. We have been discussing these actions for several quarters, and we are very pleased to be able to share the results of our efforts. The reverse stock split announced in June and effective July 22nd put Finance of America back into compliance with New York Stock Exchange continued listing standards. The transactions contemplated by the Exchange Offer Support Agreement are expected to improve Finance of America's capital structure, and we look forward to the continued support of our note holders. Additionally, the recently published proposed term sheet for the HMBS 2.0 program is expected to be a significant benefit to Finance of America and the reverse mortgage industry at large. The program allows for the securitization of buyouts into Ginnie Mae-backed securitizations and limits the capital required to manage these buyouts during the claims process. Looking forward, we are excited about the early results in our third quarter. July volumes were strong and recent declines in market interest rates, should they hold, would result in positive adjustments to the fair value of our assets. From an operational standpoint, we expect volumes in the third quarter to be between $475 million and $500 million. And given our reduced expense base and higher margins, we expect to return to ANI profitability during the third quarter. With continued improvement across our top and bottom lines, we expect to continue on the path to sustained profitability. With that, let me hand it back to Graham for closing remarks.

Thank you, Matt. Given the material move in market interest rates so far in the third quarter and the potential for a shift in Fed policy, it may be worthwhile to recap how these events impact our business. In a declining rate environment, our operations will benefit in two key ways. First, we have the potential for an increase in tangible net worth as asset values are expected to increase. Secondly, we would expect originations to increase as lower rates result in higher initial loan-to-value ratios on new loans. allowing more borrowers to qualify. Increased funded volumes with minimal near-term changes to our fixed expense structure would also reduce our origination costs for funded loans. Throughout the second quarter, Finance of America stayed the course and continued to focus heavily on growth, delivering a strong customer experience and continuous innovation. We're excited about our pipeline and submission volumes, and we see a massive total addressable market over the long term. which we are well positioned to capture as the market grows. When you consider the record number of seniors who are financially unprepared for retirement while simultaneously holding a record amount of home equity, we'll be poised to meet their needs with our home equity based retirement products. Today, FOA holds top market share and we're more confident than ever that we will continue to grow our customer base and transform lives by helping our customers make the most out of their largest asset, their home. As in previous quarters, we continue to execute on what we can control. We have built a strong platform that positions us well for growth and profitability while delivering an enhanced experience to our customers. And with that, we'll open the call up for any questions.

Thank you, sir. And everyone, if you would like to ask a question today, please press star 1 on your telephone keypad. We'll take our first question from Doug Carter, UBS.

Thanks. Hi, this is actually Will Masta on for Doug today. I heard you touch on the new HMBS 2.0 program and your prepared remarks. And I was really just hoping you could expand a bit more on the potential cash flow benefits that you might receive from this program.

So it's a little early to define exactly the net cash proceeds. I think the industry as a whole gave feedback to the JAF JMA proposal that came out just recently. And we expect the final returns to come out in the coming months. However, based on the draft proposal that was presented, we see a significant portion of our buyouts that would be eligible to put into the new program with advance rates clearly above where we are today on a warehouse line. So we'll be quantifying those numbers a little more closely over the coming quarter as that gets finalized.

Okay, great. Thanks. And then just one follow-up. I know you commented on the third quarter origination outlook. And given the recent moving rates, if you could just comment on the pipeline you're seeing so far, and then how would you expect a level of revenue margin to trend going forward, given that moving rates?

On the pipeline side, the pipeline is very similar.

Yeah, so the pipeline has remained strong. I think with the refinance activity, if we see any rates coming down, we'll probably see that funding in Q4. But the increase in borrowers that are qualifying today on new leads coming in, we're already starting to see that pick up this week, and that's built into the guidance that we gave for the origination volumes in Q3.

I think the second part of the question on margins, I think generally you might see a little bit of margin expansion on our loan products, but maybe not significant. Then we'll watch where spreads land in terms of the margin we can securitize these loans for. The market's a little volatile right now. Spreads are moving around a little bit, but we think that'll settle in here in the coming weeks.

Okay. Thank you.

The next question will come from the line of Stephen Laws, Raymond James.

Hi. Good afternoon. Congrats on the EBITDA positive. I know reiterating hitting A and I positive next quarter. I know that's something you guys have worked very hard to achieve over the past four to six quarters. So nice to see the progress you've made so far. You know, I wanted to touch base kind of around, you know, some smaller things. First, to verify, you know, the volume outlook. You guys say in the prepared remarks that July was kind of 10% up, or kind of can you help quantify where July volumes are?

So, I think that the guidance we gave for the third quarter is between $475 to $500 million. And our July production was on a pace to really hit that target for the quarter, high-end target.

Fantastic. As you think about, you know, funding that and cash flow needs, can you talk about how the cash balance will trend through the back of the year? And, you know, are you tapping the working capital loan? And I guess the non-funding interest expense increase slightly sequentially. So curious what drove that, if it was a way to increase on that working capital loan or something else.

So on the first part of the question, in terms of funding the new production, one thing that Graham mentioned in his remarks, we do have a new couple of lenders that have kind of partnered together to help fund our proprietary loan production, and it's greatly decreased our haircuts necessary to hold those loans on our warehouse side. That's really helpful for kind of minimizing the cash burn. On the second part, that maybe was rate driven on the non-funding notes.

Great. And then the last one for now, you know, a lot of accomplishments from the expense reduction initiatives. Is this kind of a good rate now moving forward? Do you think there's more kind of synergies or expense reductions that can occur from here? Kind of curious what your outlook is on the expense side.

I mean, I think that we largely have got the heavy lifting behind us at this point. We don't see, you know, maybe significant reductions. I think there's always opportunities to kind of sharpen the pencil. I think, you know, some extent we still have some legacy contracts and whatnot that we're entered into when we're a much larger company, then that will roll off when we enter into more right-side contracts for current organizations. We can continue with less as those contracts fall off. So I think there'll be continued kind of downward pressure on the expense line, but I wouldn't expect, you know, massive changes at this point.

Although I'd add that we expect to see lower costs for funded loans because our fixed expense base can support a much higher level of production than we're doing today. So we expect to see that in the coming quarters.

Great. Appreciate the comments this afternoon. Again, congrats on a nice second quarter. Thanks, Stephen. Thank you.

And everyone, at this time, there are no further questions. I'll hand the call back to Graham Fleming for any additional or closing remarks.

Again, thank you for joining our Q2 call, and we will look forward to having our call in November, and we'll update everybody on our progress in Q3. So thank you very much, everybody, and we'll talk to everybody soon. Thank you.

And again, that does conclude today's conference. We would like to thank you all for your participation. We may now disconnect.