Finance Of America Companies (FOA) 6 Nov 242024 Q3 Earnings call transcript

Hello, and welcome to the Finance of America Third Quarter 2024 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Michael Fant, Senior Vice President of Finance.

You may begin.

Thank you, and good afternoon everyone, and welcome to Finance of America's Third 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 and presentation on our Investor Relations website at www.financeofamericacompanies.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 in our earnings press release and presentation on the Investor Relations page of our website to the extent available without unreasonable efforts. 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.

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 that we will be discussing interim period financials for our continuing operations, 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 today.

Our performance this quarter is the culmination of a number of strategic and operational initiatives we've undertaken over the last year to strengthen the business. These efforts are now paying off as we focus on continued execution of our strategic plan. Finance of America generated improved financial results with $204 million in net income or $8.48 in basic earnings per share, $15 million in adjusted net income or $0.67 in adjusted earnings per share and $32 million of adjusted EBITDA.

Our performance in Q3 brought our net income, adjusted net income and adjusted EBITDA all positive on a year-to-date basis. Volume in the quarter reached $513 million, exceeded the high end of our guidance range of $475 million to $500 million. This demonstrates our ability to execute on our strategic initiatives and continue delivering value to our customers. Notably, during the quarter, we completed a reverse stock split and finalized the exchange offer and consent solicitation of our 2025 unsecured notes, which significantly enhances our balance sheet and financial flexibility of the business. This exchange was completed on October 31, and we look forward to continuing our partnership with our noteholders. Overall, we are executing and delivering on everything we set out to do.

Our team has been focused and the results speak for themselves.

Our continued momentum and improved profitability, driven by strong execution across the board have positioned us for sustained growth and success. With approximately $14 trillion of home equity held by older homeowners, we are uniquely positioned to meet the evolving financial needs of this growing demographic through our innovative home equity-based retirement products.

We are focusing on market segments where we see the most growth potential, such as consumers 55 and older seeking second lien mortgage loans as a way to access their home equity without refinancing away from low-rate conventional mortgages.

Our HomeSafe Second product could be a valuable solution for this population. To discuss this opportunity and more, I'll turn it over to Kristen? Kristen.

Thank you, Graham, and good afternoon, everyone. In the second quarter, we talked about our significant progress in transforming operations through a consolidated platform and improved efficiency. We focused on the unification of the Finance of America Reverse and AAG brands under the single name of Finance of America as well as the streamlining of our workflows and adjustments to our sales processes. I'm pleased to share that our third quarter results indicate that these ROI maximization initiatives are having the intended impact. We surpassed our volume expectations and continued optimizing operations while staying dedicated to enhancing the customer experience and expanding our market presence.

Our retail channel saw a 38% productivity improvement measured by fundings per loan officer compared to the prior quarter.

Additionally, October experienced our largest submission and funding month of 2024. The consolidation of our brand in July was highly successful, marking a critical milestone. Being unified under one brand sets the stage for modernizing our approach to customer experience and acquisition. Developing a digital-first channel with a modern advertising strategy is vital for mainstreaming our products and enhancing production efficiency. This means building a channel to supplement our existing lines of business that prioritizes online experiences over traditional methods and leverages automated digital tools to improve efficiency and the overall ease of transacting. We believe this will result in materially lower cost of origination and an overall better customer experience.

Our digital innovation strategy is designed to deliver financial services to seniors in a way that is both modern and user-friendly. We launched a new HomeSafe Second focused digital marketing campaign at quarter end to identify strategies that attract new customers and are in the process of building out a dedicated team to support these efforts.

As the campaigns and team mature, insights gained will inform our growth strategy and investments for a digital-first channel for next year and beyond.

We are also focused on improving our overall marketing strategy with a new advertising agency by introducing regional and local programs to build our brand profile and drive business in strategic markets starting in 2025.

Regarding product innovation, we recently expanded our HomeSafe Second product to additional states and materially lowered the loan interest rate. HomeSafe Second allows homeowners aged 55 and older to access their home equity without affecting their traditional low rate first lien mortgage. In the third quarter, we saw an 89% increase in HomeSafe second loans compared to Q2, and we anticipate further growth in this area as we intentionally invest more capital and resources to the product.

While home equity lending nationwide is on the rise, recent Home to data shows people 55 and older face denial rates eclipsing 35%. Many have considerable home equity but struggle with tighter credit conditions affecting qualification. This represents a significant opportunity for us as our products are specifically designed to serve this demographic. If rates stay higher longer, our second lien home equity loan will continue to be a better option for many borrowers 55 and older. When rates start to fall, the traditional home equity conversion mortgages and our first lien proprietary suite may offer more attractive outcomes as well as increased refinance opportunities to our borrower base. By harnessing the power of digital innovation and leveraging a modernized approach to advertising, we're poised to transform how we deliver our services to our customers and help empower more of them to unlock the full potential of retirement through the power of their homes equity.

Now I'll turn it over to Matt to discuss our financials.

Thank you, Kristen, and good afternoon, everyone.

Let me start with a brief overview of our financial results before I dive into specifics on the quarter.

As Graham noted, we delivered $204 million in net income or $8.48 in basic earnings per share with adjusted net income reaching $15 million or $0.67 in adjusted earnings per share and adjusted EBITDA hitting $32 million.

Our funded volume for the quarter was $513 million, which exceeded our guidance range of $475 million to $500 million. Tangible net worth rose to $231 million or approximately $10 per share. Comparing our performance to the previous quarter, we saw notable improvements across the board. Revenue increased from $79 million in Q2 to $290 million in Q3, driven by higher origination volumes and significant fair value gains on our residual assets. Net income rose to $204 million in Q3 from a loss of $5 million in Q2, largely due to favorable fair value adjustments from improving market inputs and model assumptions combined with increased operational efficiencies. Adjusted EBITDA also saw an uptick, growing from $10 million last quarter to $32 million in Q3. This reflects a combination of higher revenue from increasing volumes and improved margins, along with continued reductions in operating expenses, particularly in the salaries and benefits as well as the general and administrative expense lines. Continuing to look at our quarter-over-quarter performance, we see solid progress across several financial metrics as outlined in the income statement slides in the earnings supplement.

First, net portfolio interest income saw a slight decline, primarily due to the higher interest expense from our new non-agency financing facilities as we discussed last quarter. This was, however, more than offset by a reduction in fair value changes from model amortization, which led to a higher accreted yield on our portfolio compared to last quarter.

On the originations front, net originations gains increased notably from $40 million to $57 million as our originations platform grew both in volumes by 15% and margins by 19%.

On the expense side, total expenses continued to decrease as a result of the company's cost-saving initiatives. Salaries and benefits saw the largest reduction driven by the impact of our rightsizing efforts. This was the first full quarter in which we realized the full benefits of these operational efficiencies.

This quarter-over-quarter improvement highlights the strength of our business model, our ability to adapt to market conditions and the operational discipline that has positioned us for sustained profitability.

Looking at our year-to-date performance, we've made significant progress across several key financial metrics. Through the third quarter of 2024, we generated $444 million in total revenue. Net income year-to-date has reached $183 million, while adjusted net income stands at $9 million.

Additionally, adjusted EBITDA for the first 9 months of the year totaled $42 million, demonstrating the strong momentum we've built throughout 2024. These results reflect the success of our strategic initiatives, improved operational efficiencies and disciplined cost management, which have all contributed to enhanced profitability and long-term growth potential.

Our adjusted earnings per share came in at $0.67 for the quarter, underscoring our ability to drive both top line growth and operational improvements.

As we continue executing our plan, we expect to achieve sustained profitability by investing in growth opportunities in our origination platform and maintaining an optimized fixed cost structure.

For 2025, we expect to deliver adjusted earnings per share between $2.60 to $3 and remain confident in our trajectory and our ability to meet our financial targets.

Turning to the balance sheet.

With the completion of the unsecured note exchange, which has bolstered our capital structure and extended our debt maturities, we've greatly enhanced our ability to focus on growth. Recently, our team has executed several transactions that were critical to supporting our long-term objectives and maintaining financial flexibility.

During the third quarter, we completed another quarterly securitization of our HomeSafe product totaling $794 million, our third such securitization in 2024, which provided us with enhanced liquidity. In the month of October, we completed the call and reissue of our HECM buyout securitizations totaling $705 million, providing long-term financing for this asset class and generating positive cash flow to the business.

Looking ahead, we are encouraged by the favorable trends in the reverse mortgage market and the strength of our proprietary product offerings.

Our ability to adapt to changing market conditions, combined with a strong balance sheet following the successful debt exchange and improving liquidity position provides a solid foundation for future growth.

We expect to continue generating positive cash flow and building on our financial successes as we progress into the fourth quarter and 2025. With that, let me hand it back to Graham for closing remarks.

Thank you, Matt.

As we conclude a successful third quarter, I want to express my gratitude for the dedication and resilience of our team. Their efforts are central to Finance of America's strong performance, and I'm proud of the results we've delivered.

Looking ahead, as Matt noted, we expect to deliver adjusted earnings per share between $2.60 and $3 in 2025 as we continue to execute our plan and achieve sustained profitability.

With the senior population expected to nearly double by 2050, we are excited about our pipeline of 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 prepared 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. And with that, we'll open the call up for some questions.

Your first question comes from the line of Douglas Harter with UBS.

It's actually Marissa Lobo on for Doug. I was hoping you could give us an outlook for volume given the backup in rates.

For which time period?

For '25.

So the number we have -- we did over $500 million in our third quarter.

We expect to see something in that same ballpark here in the fourth quarter.

For next year, we're starting to see some sequential growth.

As you pointed out, the rates are up a little bit. We'll see where the rates settle out here over the long term. But some of the growth initiatives we have going into 2025, lead us to believe we'll be able to increase that number a bit.

So we're probably looking more in the range for 2025 full year in the neighborhood of about $2.7 billion, somewhere in that ballpark.

Sorry, I did jump in. I question on the rates, though, right? One of the reasons we introduced our HomeSafe Second program and our second lien reverse mortgage is exactly because of that reason.

So we feel if rates are going up, a second lien product will be ideal for our borrowers. If rates come down, they can refinance out of their forward mortgage into a reverse.

So we think we're positioned to grow that volume kind of I don't want to say regardless of rates, but if rates stay around the ZIP code, we think that we could continue to increase our volume on a monthly basis.

And also, could you give us an update on the timing and your thoughts on the impact of HMBS 2.0?

So we were in Denver last week in the [indiscernible]. Their latest feedback to us was sometime around the middle of November.

So we're still waiting to see that letter, but that was their communication to us last week.

Your next question comes from Stephen Laws with Raymond James.

Great volumes in Q3, and I appreciate the guidance. I'm sitting at 263.

So nice to be on the low end of what you put out. I wanted to follow up to your comments about volumes.

You mentioned Q4, you kind of expect similar to Q3, a little surprised by that.

So I'm curious kind of the pipeline, I guess, seems somewhat immune to the rate volatility? Or is it more that maybe it would have grown sequentially had we not seen the vol in rates?And then to follow up on that, as I think about Q1, is there any seasonality there kind of just coming after the year where maybe it tends to be a lighter quarter or maybe you don't expect to see that?

I'll start and then kick it around to my team here. But as Kristen mentioned in her comments, October of this year was our highest month this year for both funding volume and submission volume, right? So we had a pretty strong start to the funding volume for the quarter. And also, we have a good strong start to our pipeline heading into the rest of Q4.

So that's very favorable.

Now -- but November and December, you start to get into holiday periods, right, which will depend on the number of business days, may curtail your funding ability a little bit and also curtail your lead generation and your new pipeline a little bit.

So we're thinking about it that for Q4, even though we have a strong start, probably going to be in the same context of Q3. And then the seasonality, if there is some, will probably be reflected in the Q1 volumes, right, because you'll have the lower lead generation in the November and December time frame. And then after Q1, that's when you start to see the real uptick.

Yes. And I'd just add, we have such low market penetration that as rates stay higher for longer, we continue to get more interest from traditional mortgage bankers and loan officers, which can then go out and tap more of that available market that isn't being educated on the product opportunity today.

So we see that as a potential growth opportunity for 2025 as well.

And then around the rate volatility, fair value marks got a big gain in Q3. How do we think about any reversal since given the move in October and where we are today? Or how should we think about the impact on fair value marks from the rate move?

So I think, as always, there's multiple factors that go into our fair value analysis, interest rates being one. And they were down in Q3. They're up here in October, early November. We'll see where it settles out over the course of the full quarter. But you also have to think about what's going on with spreads, right, and home price appreciation, among other factors.

So rates are up, but we've seen some spread tightening in the market.

Our last HomeSafe deal was pretty strong. We did the [ Nabo ] securitization collapse and reissue here just a couple of weeks ago, saw very good spreads.

So that will mute and offset some of the interest rate increase. We'll get to the end of the quarter and see where some of the other factors like home price appreciation settle out on a market-by-market basis.

So it's hard to pin down exactly. But -- so it will be down somewhat because interest rate moves, but then we'll bring it back a little bit because of the spread tightening.

This concludes the question-and-answer session. I will turn the call to Graham Fleming for closing remarks.

Yes. Thank you, everybody, for your time today, and we look forward to updating our Q4 and full year results in March of next year.

So thank you very much.

This concludes today's conference call. Thank you for joining.

You may now disconnect your lines.