Finance of America Companies Q3 2023 Earnings Call Transcript

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November 7, 2023

Key Takeaways

  • In Q3, FOA completed the sale of its title insurance, home improvement, and offshore fulfillment assets to sharpen its focus on modern retirement home equity solutions.
  • On a continuing operations basis, the company recorded a GAAP net loss of $172 million and an adjusted net loss of $25 million, driven by high rates, spread compression, and portfolio fair value write-downs.
  • Through targeted cost initiatives, FOA has realized $80 million in annualized savings since early 2022 and reduced corporate expenses by 17% quarter-over-quarter.
  • The integration of AAG’s retail platform is on track, with a migration to a unified loan origination system beginning in December and expected to complete by the end of Q1 2024, unlocking operational efficiencies.
  • FOA originated $470 million in reverse loan volumes, up 18% sequentially, maintaining a 37% HECM market share, although margins narrowed from 9.2% to 7.8% due to rising treasury yields.
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Earnings Conference Call
Finance of America Companies Q3 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Hello, and welcome to the Finance of America Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I'll now turn the conference over to Michael Sandt, Senior Vice President of Finance. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone, and welcome to Finance of America's 3rd quarter earnings call. With me today are Graham Fleming, Chief Executive Officer and Interim Chief Financial Officer and Crispin Seifert, President of Finance of America. As a reminder, this call is being recorded, 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 measures on this call. You can find reconciliations of non GAAP to GAAP financial measures discussed on today's call and our earnings press release and presentation on the Investor Relations page of our website.

Speaker 1

Also, I would like to remind everyone that comments on this conference Regarding the company's expected operating and financial performance for future periods may be forward looking statements within the meaning of the Private Securities Litigation Reform Act of 19 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 ks for the year ended December 31, 2022, filed with the SEC on March 16, 2023. As such, 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, today, we will be discussing interim period financials that are unaudited.

Speaker 1

Now, I would like to turn the call over to Finance of America's Chief Executive Officer and Interim Chief Financial Officer, Graham Funk. Graham?

Speaker 2

Yes. Thank you, Michael. Good afternoon, everyone, and thank you for joining us. Before we begin, I would like to acknowledge Johan Gerrick's departure from Finance of America Effective October 13. We appreciate Johan's work during his tenure and we wish him well in his future endeavors.

Speaker 2

Looking ahead, We're excited for Matt Engel to become Finance of America's Chief Financial Officer effective November 15. Matt is a seasoned financial leader With deep reverse mortgage industry experience and will play an important role supporting our goal of offering modern retirement solutions that utilize home equity for older homeowners. We look forward to introducing Matt to everyone after he officially starts as CFO later this month. To begin, I would like to briefly review our top line financial results for the quarter and the macro trends affecting them. I will then turn things over to Christen To share some important operational updates, followed by a review of the financials for Michael.

Speaker 2

Finance of America continues to lead the way And helping homeowners 55 and older benefit from their growing home equity and remains the preeminent provider of modern retirement solutions focused on the home. Along this path, there were several key strategic actions taken during the quarter as we continue to focus our vision towards the retirement space. First, we completed the sale of our title insurance business during the 1st few days of the quarter. In September, we completed 2 additional transactions to further refine our focus. These were the sale of the operational assets of our home improvement platform and the transition of our offshore fulfillment services team.

Speaker 2

Understanding our commitment to building a modern retirement solutions platform, we saw this as a unique opportunity to advance our goals. On a continuing operations basis, we recorded GAAP net loss of $172,000,000 or $0.74 per basic share in the 3rd quarter, driven primarily by the negative impact of rates and spreads. On an adjusted basis, we recognized a net loss of 25,000,000 or $0.11 per fully diluted share as we absorbed additional losses from the home improvement platform and downward pressure on margins. Balance sheet write downs make up a significant portion of the GAAP net loss due to fair value adjustments and interest rate increases impacting the portfolio. Amid a challenging macro environment, we are focused on executing against what's in our control.

Speaker 2

With this focus, we have identified core operating initiatives, which will enhance revenue and improve expenses within our operating segments and will also streamline our corporate overhead. As laid out on Slide 3 of the supplemental presentation, Finance of America is focused on a number of items. To enhance revenue, we are looking to expand our product suite, modernize the customer experience and optimize our marketing opportunity to lead conversion. To improve expenses, We are planning to consolidate our technology, lower our cost to produce and efficiently scale our marketing. Finally, to rationalize corporate, We will continue to streamline our enterprise functions and simplify our structure to more appropriately align with our go forward operational strategy.

Speaker 2

I will now turn things over to Kristin for an update on our operations, the integration with AEG and the work we've been doing to enhance our products and sales channels.

Speaker 3

Thanks, Graham, and good afternoon, everyone. I'm happy to share that our integration of AAG's retail platform into FOA is on track. Team morale is high and everyone is excited to come under one umbrella and begin offering the full array of products of the combined company. As we've said before, we believe a substantial opportunity exists to offer our proprietary products through our direct to consumer division, AAG. These products are already the leading suite of available options in the wholesale sector within our industry and fill many gaps not addressed through the traditional HECM product.

Speaker 3

We've already seen an increase in volumes following our acquisition, which gives us confidence As we continue the integration, the final significant hurdle is the consolidation of our technology stack, which includes migrating to a single loan origination system. This migration is projected to start in December and should largely be completed by the end of Q1, 2024. While we know this will temporarily slow some of our operations, There are many workflow and expense efficiencies to be gained post consolidation. As it relates to production, While rising rates put downward pressure on loan to value levels, there has been no degradation in inbound inquiries from our borrowers. These borrowers need alternate ways to access their equity and the broader market dynamics have created an increased appeal of our HomeSafe second lien product.

Speaker 3

We will be better able to serve those borrowers go forward through 2 main avenues. 1st is expanding this product to the full sales team within the AAG call center, which is scheduled to occur this month and second, by making the product available in the loan origination system used by the majority of industry originators that do business with us through our wholesale division. HomeSafe 2nd helps homeowners 55 and older access their home equity through a second lien without impacting their low first rate mortgage and without adding a new monthly mortgage payment. This is the first product of its kind and was built to provide access to equity to the many people not being served by the existing options in the market today. Given that homeowners in our demographic hold more than $12,000,000,000,000 in home equity, extending the products through these channels is a strategic step to unlocking more of this market.

Speaker 3

To remind everyone, AAG's direct to consumer channel reaches more than 20,000,000 consumers annually via targeted marketing and advertising and has long been the leader in HECM submission volume. In all, we're very excited with how these efforts are progressing. The final technology consolidation over the next two quarters will enable us to focus on increasing our market penetration through the optimization of the marketing and sales platform and expanding product suite and a modernized digital customer experience. Over to you, Michael.

Speaker 1

Thank you, Kristen. I'll start by providing a brief overview of our financial results before I dive into specifics on the quarter. Turning to the operating results. The company recognized a GAAP net loss of $172,000,000 or $0.74 per basic share in the 3rd quarter. On an adjusted basis, we recognized a net loss of $25,000,000 or $0.11 per share.

Speaker 1

1st and foremost, we increased volumes in the 3rd quarter. In our reverse business, we originated $470,000,000 in loan volumes, up 18% from $397,000,000 in the 2nd quarter. This was primarily due to the successful integration of the AAG Windtail platform. During the quarter, we maintained over 37% share of the HECM reverse market. While the increased volume provided upward pressure on revenue, the top line ultimately came in relatively flat due to reduced margins.

Speaker 1

Our margins fell from 9.2% to 7.8% quarter over quarter due to several factors, including 10 year treasuries rising 74 basis points. If margins had held constant to the Q2, our growth in volume would have equated to an $8,000,000 increase in revenue. As shown on Slide 4 in the supplemental presentation, our core operating segments continue to execute against our strategic plan during the quarter. The divestiture of our Home Improvement and Offshore Fulfillment operations are not considered material from a GAAP perspective and as such do not qualify as discontinued operations. However, when these business line results are excluded from our quarterly reporting, our Retirement Solutions and Portfolio Management businesses Recognized adjusted net income for the quarter of just above breakeven.

Speaker 1

While adding or when adding in corporate overhead, Finance of America would have recognized adjusted net loss of $19,000,000 for Q3 or approximately $0.08 of earnings per share, in line with what we discussed in our Q2 call even with this reduction in margin. Additionally, We continue to focus on reducing our cost base as planned and are making solid progress. Since the peak in early 2022, We've achieved approximately $80,000,000 in annualized savings or the baseline of our $80,000,000 to $100,000,000 goal. In the Q3, we saw a reduction in corporate expense of 17% compared to Q2. Our success is the result of further reductions in overall corporate spend and the rightsizing of our corporate structure.

Speaker 1

We're pleased with our progress to date and are on track to identify additional savings in the Q4 and beyond. With that, let me hand it back to Grant for closing remarks.

Speaker 2

Thank you, Michael. Overall, this is another busy quarter with several macro headwinds beyond our control, We remain focused on ensuring our long term success and sticking to our strategy as we have been. Without these headwinds, the company has the ability to generate enterprise value The earnings from our core operation or increase to the fair value of our assets should rates and or spreads improve. We are seeing real traction across our business, improving our top and bottom lines, leveraging the AAG channel and taking real steps becoming better partners for our customers by providing them with the tailored retirement solutions they need. Before we open the call to questions, I do want to take a moment and send our deepest sympathies to the friends and family of Patti Cook.

Speaker 2

Patty was an extraordinary leader for Finance of America, but more importantly, she was a wonderful woman and friend. Her impact on Finance of America and all of us We'll never be forgotten. And with that, we'll open the call for questions.

Operator

Thank Your first question comes from the line of Stephen Laws of Raymond James. Your line is open.

Speaker 4

Hi, good afternoon. I guess maybe bigger picture, Graham, as you look out and there's some things out of your control here near term and you're working on expense reductions. Now, when you look out, what do you think the adjusted net income kind of run rate or earnings power is of the platform? And Is that something you think will be achieved more through volume growth or expense reductions or kind of what's the mix of those two things that are going to Kind of drive us to this targeted adjusted net income number.

Speaker 2

Yes, sure. Thanks, Stephen. So first of all, right, I think we outlined in our We've probably got 8 or 9 things in front of us for the next two quarters that we're looking to accomplish by the end of Q1 of 2024. With that, right, we'll be able to complete the transformation, right, in the pivot and the integration of AAG, right. So we think that will get us to a cost structure That's optimized for where we're at today.

Speaker 2

What we've said in the past is that at $300,000,000 a month or roughly 900, We think we can achieve that $0.40 of ANI and we do believe that that is still an appropriate level of volume. Yes, we're $460,000,000 a month, right? We have some way to get to that $300,000,000 But we do believe Based upon the marketing that we've been doing and the inbound phone calls that we are getting from the customers that there is a meaningful demand for the product. That's why we rolled out the second product because with the increase in rates, LTVs to the consumer were coming down, right? People still need to access the equity.

Speaker 2

So we've had no We're fully confident that the marketing will drive the leads and ultimately when we integrate the seconds and the digitization and the consolidation of the LOS, Right. The volume will follow.

Speaker 4

Great. And then kind of on maybe the next quarter or 2 on a volume standpoint, I think I've heard during the prepared remarks that some of the technology consolidation may, yes, possibly hiccup in near term volume And maybe any seasonality also around year end, but can you give us an idea of what your near term volume expectations are?

Speaker 2

Yes, I think I'd answer that. We're Similar, I would say similar 5% to 10% of where we were in Q3. And I think, Stephen, it's primarily driven from the seasonality Ishu, right, we do have we have had strong submissions. We do have a strong pipeline, right? It's just a little unclear As you come through November, December, January, as you know, there's going to be a little seasonality in play here.

Speaker 2

But I would from what I see today, I'd project volumes in Q4 and Q1, right, to be similar or slightly above what we saw in Q3.

Speaker 4

Great. And my final question, Graham, kind of bigger picture. 2nd quarter in a row, we've had a lot of fair value marks run through the revenue line. How core do you view Portfolio Management to the bigger platform? Is that a business segment that could be sold?

Speaker 4

Or are there Possibly other accounting measures you could look at to reduce kind of the volatility of the income statement? Or Are those fair value marks just something we've got to live with for better or for worse?

Speaker 2

So the fair value at the end of on our jumbo residuals was under $40,000,000 at the end of the quarter, right? So we've had So there's 2 things at play here, right? 1, as we have to make adjustments to the fair value, you're also Impairing the GAAP earnings, right, because you don't have a yield on the residual, right, to recognize as well, Stephen. So not only do you have the write down, Right. But then you're also you've got a lower residual that you're recognizing the yield on.

Speaker 2

So I would When we can have this conversation, right, I would call it maybe the top of rates is in, right? And hopefully, we do see an entity's fair value marks running through the At least the negative fair value marks running through the P and L going forward.

Speaker 4

Got it. Appreciate the comments this afternoon, Graham. Thank you.

Speaker 2

Thanks, Stephen.

Speaker 1

There are

Operator

no further questions at this time. I will now turn the call over to Graeme Fleming.

Speaker 2

Thank you, everybody, for joining the call. As you can see, we're making tremendous strides towards our strategic initiatives, and we look forward to updating everybody on our next Call afterwards the end of Q1 'twenty four. Thank you, everybody, and have a good evening.

Operator

This concludes today's conference call. You may now disconnect.

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