Earnings Call Transcript - FOA Q1 2024

Operator, Operator

Hello. Thank you for joining us. My name is Sarah, and I will be your conference operator today. I would like to welcome everyone to the Finance of America First Quarter 2024 Earnings Call. I will now turn the conference over to Michael Fant, Senior Vice President, Finance. You may begin.

Michael Fant, Senior Vice President, Finance

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 Sieffert, 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?

Graham Fleming, CEO

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 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 GAAP 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.

Kristen Sieffert, President

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 HomeSafe 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 and 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 away 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 the 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 volumes. 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.

Matthew Engel, CFO

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 and outperforming 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.

Graham Fleming, CEO

Yes. Thank you, Matt. Throughout the first quarter, Finance of America continued to execute against its strategic priorities and remain 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.

Douglas Harter, Analyst

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

Stephen Laws, Analyst

Yes. So Doug, as we look at our pipeline 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 guided to about 10% volume increase quarter-over-quarter. We'd hope to continue that pace. But obviously, it's a little early to comment on Q3 and Q4, but we're feeling pretty confident, right, that it will be between $460 and $500 million in Q2, which will be a 10% increase quarter-over-quarter.

Douglas Harter, Analyst

And I guess within that, how are you seeing kind of the demand for your different products, seconds, private, HECMs? Kind of is one product resonating more in the market than others right now?

Kristen Sieffert, President

I think the one that's not been impacted as much by rates is the HomeSafe Second product. With the HECM product and the regular HomeSafe product, as the rates rise, the LTVs are compressed a little bit. We don't have that dynamic on the HomeSafe 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.

Stephen Laws, Analyst

Congratulations on the progress you've made over the last couple of quarters. Regarding margins, you mentioned volumes earlier. Do you think the 10.8% will be sustainable? How do you view margins and the current spread? Matt, you briefly mentioned the loans available for securitization in your prepared remarks. Could you elaborate on the securitization pipeline and the pace of deals you anticipate in the upcoming months?

Matthew Engel, CFO

Sure, Steven. I think that spreads have remained quite stable for several months, and we have noticed their impact on both of our HMBS and proprietary securitizations. During the quarter, we initiated a couple of securitizations. However, our product mix shifted slightly towards the HomeSafe product, as we still had over $200 million ready for securitization. Looking ahead to the next year, we expect to carry out a HomeSafe securitization of around $300 million each quarter for the remainder of this year and possibly into the first quarter of next year. We also conduct monthly transactions. That sets our regular pace. Additionally, we occasionally revisit seasoned deals to call and reissue when opportunities arise, so you could expect to see a call and reissue roughly every other quarter.

Stephen Laws, Analyst

Great. And I guess we're almost through the middle of the quarter, but 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 have moved lower a little bit. Any comments on kind of how spreads and HPA assumptions have moved up quarter-to-date?

Graham Fleming, CEO

We only update HPA quarterly when we receive the Moody's report. Everything we read suggests that HPA remains strong, so it's likely there will be some increase in HPA in Q2. Rates increased in April, which is a negative development, but they have started to decline again. We'll need to wait until the end of the quarter to see the full picture. Rising rates are a negative factor, while increasing HPA is a positive one. Additionally, as spreads tighten, that's also positive. However, as Matt mentioned, spreads have been stable. We anticipate HPA growth in Q2, and we will see where rates stand at the end of June.

Stephen Laws, Analyst

Great. As you consider whether to discuss this in terms of ANI or EBITDA, you're very close to breakeven in Q1. With today's margins in mind and a projected 10% increase in volume, do you believe reaching breakeven on ANI will happen in Q2, or is it more likely to be in Q3? How do you assess the breakeven point and the potential for profitability growth in the latter half of the year?

Matthew Engel, CFO

So I think I mean it's somewhere in that time frame. I mean I appreciate the comments, and we've certainly made a lot of progress over the past year. And 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. Starting to increase the top line revenue, get the production back up and frankly, continue to work on our expenses, which have been trending down. And we think that will continue through the course of 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 upon the current trajectory that we have going.

Stephen Laws, Analyst

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

Matthew Engel, CFO

We have sufficient financing across the board. We are particularly focused on two areas for potential changes in our financing mix. First, we are exploring the possibility of gaining additional leverage on the MSR asset, which has been challenging to finance over the past year. In the supplemental materials we shared in April on our investor website, we provided some insights on this. Second, we are also considering options for our high-yield debt that matures at the end of 2025, looking for something innovative regarding that. It’s still early to provide specifics, but it's definitely a priority for us as we assess our financing strategies.

Stephen Laws, Analyst

Great. 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.

Operator, Operator

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

Graham Fleming, CEO

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.

Operator, Operator

This concludes our 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.