Finance of America Companies Inc. Q1 FY2021 Earnings Call

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 Patti Cook, Chief Executive Officer; Johan Gericke, 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.

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 1, we completed our business combination with Replay Acquisition Corporation and Finance of America officially started trading on the New York Stock Exchange on April 5. 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 helps consumers improve their homes while giving contractors the tools they need to grow their businesses, providing access to the large and growing home renovation market. Finance of America Reverse also launched EquityAvail, a groundbreaking new mortgage product designed to provide greater financial flexibility for homeowners at or near retirement. This product combines elements of a traditional mortgage with the reverse mortgage to improve cash flow and help retirees accomplish their retirement goals. Finance of America's home improvement and EquityAvail 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 enables 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 serves 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.

Thank you, Patti. 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. This reinforces 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 continue to rebuild and were up 11% on a sequential quarter basis to $341 million.

Our first question comes from Stephen Laws with Raymond James. Please proceed with your question.

Hi, good afternoon and congratulations on your first quarter as a public company and the completion of your transaction in early April. Great first step.

Thank you.

You got that. How do you note a lot to cover given different business lines, but I guess, first to start with the forward origination business 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. As you can see, the margins have for mortgages went from roughly 430 to 340 in the first quarter. 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 bit differently, correct me if I'm looking at this wrong, but the reverse is really more of a penetration story and it seems like your margins are probably pretty well protected. Was the recent growth consistent with what you expect to see going forward, and on commercial, 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, and that is more a segment expansion. The growth that we see there is very encouraging because I think it reflects the tailwinds that we've been expecting. You've got health price appreciation, you've got the aging baby boomers and they are anxious to tap into the equity in their home. So, I think there, it's more about - I'm going to say on average stable margins, but definitely continued growth. When you look at the commercial business, there are two products that are important. One is fix and flip and the other is the single-family rental. There is more margin competitiveness in 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 market. If you couple that with the recent GSE announcement to put a cap on non-owner occupancy, 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 backend for SRL. I think we’re unique in SRL, and I'd like to say for fix and flip, there is going to be great demand there.

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

Yes, 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. This is particularly true of title. I also love that the insurance, title insurance business is growing consistently with that. I think margins have stayed healthy; I don't see any reason for that to change.

Great, I appreciate the comments this afternoon, Patti. And thanks very much, let me - I'll be on the call. Take care.

Absolutely.

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

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

Okay. On the home improvement side, this is also an exciting new vertical for us. The point of sale technology brings us not only into the home improvement business but gives us a great opportunity to expand. I think right off the bat, they are already set up. We’re doing business as we speak in their traditional product, which is contractors with homeowners doing home improvement. However, I think what you'll see is we can leverage our distribution volume, and I think we can also improve the backend execution, so that by itself will provide growth to that vertical. Excitingly, we can put new products on that platform. We may look - we're looking at solar as one example. The products will expand and we can also expand the growth as we plug it into 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; it's less important for Finance of America to be looking at bulk acquisitions.

That's helpful. 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 Patti Cook for closing remarks.

Well. That was quick, I didn't expect that to be the answer. 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 volumes, margins, revenue, and earnings. Second, we remain proactive and increasingly leveraging our strong balance sheet to further develop our footprint via strategically complementary and financially accretive acquisitions. As a public company, we remained focused on continuing to build shareholder value. 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.