Q4 2023 Finance of America Companies Inc Earnings Call

Participants

Michael Fant; Senior Vice President, Finance; Finance of America Companies Inc

Graham Fleming; Chief Executive Officer; Finance of America Companies Inc

Kristen Sieffert; President; Finance of America Companies Inc

Matthew Engel; Chief Financial Officer; Finance of America Companies Inc

Stephen Laws; Analyst; Raymond James & Associates, Inc.

Cory Johnson; Analyst; Credit Suisse

Lee Cooperman; Analyst; Omega Family Office, Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. My name is Leslie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Finance of America Fourth Quarter and Full Year 2023 earnings call. (Operator Instructions) I would now like to turn the conference over to Michael Fant, Senior Vice President of Finance. Please go ahead.

Michael Fant

Thank you and good afternoon, everyone, and welcome to Finance of America's Fourth Quarter and Full Year 2023 earnings call. With me today are Graham Fleming, Chief Executive Officer, Kristen Sieffert, President and Matt Engle, 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 w. w. w. dot finance of America.com.
In addition, we will refer to certain non-GAAP financial measures on this call. To the extent available without unreasonable efforts, you can find reconciliations of non-GAAP to GAAP financial measures discussed on today's call 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 31st, 2022, filed with the SEC on March 16th, 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.
Now I would like to turn the call over to finance America's Chief Executive Officer, Graham Fleming. Graham?

Graham Fleming

Thank you, Michael. Good afternoon, everyone, and thank you for joining us.
To begin, I would like to review our results as well as the broader macro trends we are seeing in the industry. I will then turn things over to Kristien to share our strategic plan, followed by a review of our financials from our Chief Financial Officer, Matt Engel.
Overall, 2023 was a transformational period for Finance of America. Throughout the year, we completed a series of strategic transactions that helped establish the Company as the preeminent platform for homeowners 55 and older seeking to benefit from their home equity. With most of these efforts now behind us, we are excited to move forward as a business. We are firmly positioned as the leading provider of modern retirement solutions with the potential to reach tens of millions of customers nationwide.
For additional information, we have included a presentation on our Investor Relations website. It addresses the potential total addressable market and our view of the investment opportunity for. Finance of America is making home equity part of the mainstream modern retirement plan. So the more Americans can benefit from the wells in their home and have better outcomes later in life.
With respect to our continuing operations, we recorded GAAP net income of $171 million or $0.72 per basic share in the fourth quarter. These results were driven primarily by fair value gains recognized in our portfolio of assets, given decreases in market rates in the quarter and improved results from operations, which we will discuss shortly.
On an adjusted basis, in the fourth quarter, we recognized a net loss of $20 million or $0.09 per fully diluted share, an improvement over the third quarter of 20%. Beginning in retirement solutions, as expected, volumes decreased in the quarter due to seasonality, but improved margins and reduced expenses led to a 67% improvement in adjusted net loss for the quarter. In portfolio management market volatility had a significant impact on quarterly results.
In the fourth quarter. Decrease across the yield curve brought about significant increases in fair value of our portfolio of assets. Over the course of the year, the net balance increased by $24 million.
Having established a solid foundation from which to grow. We are excited for what lies ahead. We continue to look at avenues to expand our product suite, enhance the customer experience and drive conversion fees include identifying ways to utilize AI. We have selected key AI partners and are excited to leverage these tools across sales, operations, marketing and data analytics. Additionally, we remain focused on managing expenses and strengthening our balance sheet for the long term.
Let me now turn things over to Kristen for an update on our operations, the integration of the ag retail platform and the work we've been doing to enhance our products and sales channels.
Kristen?

Kristen Sieffert

Good afternoon. As Graham mentioned, our vision is to make home equity an essential part of a modern mainstream retirement plan. We've designed a three-year strategic plan that we believe will enable us to achieve this goal while also helping us provide the most value to those we serve, including our shareholders.
A key factor for advancing that plan was moving to one loan origination platform, which was the last major milestone related to the integration of the AG. retail platform. This was launched in late December as planned and the beginning of this year will be devoted to improving the efficiencies of that platform and ensuring we have strong workflows to support the originations engine and the planned growth with much of the foundational work close to being completed.
It paves the way for a shift of attention to the growth levers in the plan. We think Finance of America's modern retirement platform will create long-term growth at scale, and we have a few main reasons for this confidence. The first is that we see a significant addressable market, which we believe were well positioned to capture as the category grows. Reverse Mortgages are utilized by approximately 2% of the total addressable market as the industry's leading retail and wholesale originator, Finance of America has close to 40% market share of this activity. We have our eyes fixed on driving market penetration over the long term so that as the total pie grows, we will have the ability to meaningfully increase our reach and impact as well.
When you consider the nearly $3.7 trillion retirement savings gap and the record number of seniors who are financially unprepared for retirement using traditional vehicles alone, a solution must emerge. The obvious one is to incorporate the $13 trillion in home equity held by seniors. The second reason for confidence is the power of our distribution platform and its connection to product innovation.
Through our direct to consumer channel, we reach more than 20 million consumers annually via our marketing and advertising and our reach grows tremendously when you consider the large traditional mortgage lenders who utilize our suite of products with our clientele through our industry-leading wholesale channel. We've long been pioneers in our industry in creating non-agency products that fill gaps for customers.
And our most recent innovation was I no payments second lien home equity loan that we launched in 2023. During the fourth quarter, we saw significant growth in non-agency volume funding 50% more proprietary production in Q4 than during Q3, further helping our customers thrive. While new loan products can provide solutions for a broader set of customers. We also recognize there's a significant gap as it relates to customer understanding and appeal of reverse mortgage products and the category overall.
A third reason for confidence is that we now have the components to change that. Within our three year plan, we're committed to breaking this adoption barrier by investing in modernized messaging, digital technology and tailored customer-centric experiences. These experiences are essential in unlocking the massive market opportunity that exists and providing our customers and partners the service and experience they deserve and expect.
In all we have a strong rationale for our approach and optimism around our strategic plan, given our dominant position within the industry. We have a clear vision, a strong team and a proven track record of delivering results. We are confident we'll continue to see growth and strong operational performance within the business as we execute against our long-term vision. And we look forward to sharing continuous indicators of progress with you each quarter.
Now let me turn things over to our CFO, Matt Engel.

Matthew Engel

Thank you, Kristen, and good afternoon, everyone. I'm excited to have joined the Finance of America team. We have a compelling story to tell and are at an exciting inflection point in the business. I look forward to speaking with and meeting many of you over the coming months.
With that, let me start with a brief overview of our financial results before I dive into specifics on the quarter, within our continuing operations, we recognized GAAP net income of $171 million or $0.72 per basic share.
Turning to the operating results, the company recognized an adjusted net loss of $20 million for the quarter or $0.09 per fully diluted share, an improvement of 20% from the third quarter. In our reverse platform, volumes decreased in the fourth quarter due to seasonality. Additionally, as Kristen mentioned, we began the consolidation of our loan origination system during the quarter, further impacting retail production.
We originated $436 million in loan volumes, down 7% from the $470 million in the third quarter. For the full year, we originated $1.6 billion in funded loan volume. While volumes were down compared to the prior year, maintaining the industry's leading retail and leading wholesale platform has allowed finance America to control a 37% share of the Haggen reverse market and a significant portion of the non-agency market.
Retirement Solutions fourth quarter revenue margin was 9.2%, an improvement of nearly 18% from the prior quarter. This is even more stark when looking at the monthly margins during the quarter. During October, when market rates reached their peak, our revenue margin fell to 7.4%. The lowest level since the acquisition of the AG platform. By December. Following the decline in market rates, our revenue margin peak to 11.3% are the highest level of the year.
So far during the first quarter of 2024, we have continued to see strong performance in revenue margins as market rates stay below the highs experienced in October when it comes to operating expenses. The Company continues to focus on finding ways to align our infrastructure to our modern retirement platform. During the fourth quarter, expenses reduced by $7 million or 7% from the third quarter. In addition, our corporate divisions continued to see a decline in operating expenses during the quarter as we further reduced our expense base by nearly 10% This brings our annualized run rate reduction within corporate to nearly $90 million from our peak in early 2022 for the midpoint of our target range.
Turning to our balance sheet. Our cash balance was $46 million at the end of the year, down from $66 million in September. During the quarter, FOA completed a small home safe securitization, meaning that much of our cash was used to invest in our balance sheet as equity and newly funded home safe loans.
During February 2024, we completed two large securitizations, freeing up significant cash to be used to invest in and grow our business. Our residuals at the end of the year were valued at $260 million up from $49 million as of the end of September. Fair value increase from the prior quarter as interest rates declined in November and December, validating our continued confidence in the long-term value of these assets based on comments from the Fed interest rates appear to be on a downward trend over the next few years, which we expect will have favorable impacts to the fair value of our balance sheet in the long run.
Lastly, I wanted to touch on the recent letters we have received from the New York Stock Exchange regarding compliance with listing requirements. Finance of America's leadership remains focused on generating enhanced enterprise value for all stakeholders and ensuring the company's long-term success. We intend to comply with NYSE listing standards and are actively considering steps to bring the company back into compliance within the required time period, which we do not anticipate impacting our ongoing business operations.
While we're not done we have made great strides as an organization to achieve our strategic goals. We are excited about the opportunity that lies ahead in 2024 and we believe in the long-term earnings power of the company. We're optimistic about our ability to achieve our goal of $0.40 to $0.50 in adjusted EPS on an annual basis and originating $300 million a month based on our scaled reverse mortgage business and current margins.
With that, let me now hand it back to Graham for closing remarks.

Graham Fleming

Yes. Thank you, Matt. 2023 was a year of significant transformation for our business. In the face of an uncertain macro environment, we believe we both improved and strengthened our operations via acquisition and streamline their business to establish a foundation for success moving forward. More importantly, the overarching demographics in the US continue to make us confident in the long-term value of our business. The proportion of retirees at an all-time high and growing. At a time when most don't have nearly enough save for retirement and older homeowners as a whole have more than $13 trillion in home equity. We believe we are well positioned to benefit from a more favorable interest-rate environment and a growing customer base open to utilizing their home equity to help them thrive in retirement and with that, we'll open the call up for some questions.

Question and Answer Session

Operator

(Operator Instructions) Stephen Laws, Raymond James.

Stephen Laws

Hi, Good afternoon. Hi, Graham, how efforts on that? Actually want to start with you based on a couple of comments you made, I think you said in February, you did two securitizations which freed up some cash or were those I think one was a refinance. Can you talk about demand for those deals on your securitizations? I mean how much liquidity or cash does that free up? And what are you able to do with that incremental loss cash?

Matthew Engel

So I think overall demand for those deals was strong I know they're fully subscribed. We sold all the bonds in the stack. There received pretty well in the market with that cash or just ongoing cash grow. The business continue to invest in the Homesafe production that causes some cash in later months until you do the next securitization. That's kind of the main use of it. The rest of the kind of corporate cleanup is behind us in 2023, as Graham mentioned. So a lot of that cash burn of the passes is behind us.

Stephen Laws

And then what's the outlook for additional securitization calls. Do you have any more deals you may call in lever back up in a new deal? Or how do you think about the call opportunity going forward?

Graham Fleming

So I'd answer that this way, Stephen, right. Obviously, there's a -- it was something in the range of 30 deals outstanding on when we look at them, look, first of all we look at our operating liquidity needs over the coming years. We look at the value these residuals at the option date and have the call date and we make we do not have a specific plan at this time to call more deals. But obviously, we'll look at the economic value and maximize that kind of crossover between the liquidity and the economics.
But as you can see from the Q4 results, there's a lot of value now inherent in these residuals and thatwe'll call them the issue as we see fit depending on the call date or the mandatory or the auction date or mandatory of calling right. Whether that look, there is definitely opportunity to generate liquidity by calling and reissuing some of these are these on past deals?

Stephen Laws

I guess one is how do you expect to build cash as you think about where one Q. one year? How do you expect to see them cash balance maintained as we move to the first half of this year?

Matthew Engel

No, I don't think we'll really start to build cash in the first half of the year was a bit of a delay as that our retail origination platform kind of get the volume going back up. We get some additional production through the Homesafe deals towards maybe the end of second quarter into the third quarter. I think I would not expect to see a large cash build certainly in the first half of the year.

Stephen Laws

Great. And then, Matt, just to sort of make sure I got my notes down. I think you said kind of lumpiness continuing to target $300 million a month. And at that volume level, it still supports a longer-term and a outlook of $0.40 annually. Is that does that what you said?

Matthew Engel

That's exactly right, righ.

Stephen Laws

And then lastly for me for now, and I think one of your competitors maybe price to deal pretty attractively in Q one. Can you talk about -- we're almost into the quarter, but I realize things can change in the next 25 days. But how do you think about or how are the year to date fair value changes? And certainly Q4 was a welcome relief after that being a headwind in the summer and last year, but it was year to date for value changes.

Graham Fleming

So on lookups industry, there's three major components as Stephen. And that number one is the rates, right, which we're not exactly sure where it's essentially at the end of at the end of the quarter, we've kind of seen and we've seen it move up about 30 basis points and come back down a little bit here.
The second component spreads -- we've seen spreads definitely tightening in here on at the beginning of the year, not just on our proprietary product, but also on our agency outcome product. And the last piece is HPA. It's remained robust with some, I guess, some phase to come out here in in March, which hopefully supports what we've seen from Case-Shiller. But if that's positive and spreads are tightened tight and rates are, let's say, rates come down a little further before the end of the quarter, it should be an overall positive impact for value.

Stephen Laws

Great. Appreciate the comments this afternoon and thank you.

Operator

Doug Harter, UBS.

Cory Johnson

Hi, this is Cory Johnson on for Doug Harter. And I just wanted to could you talk talk me through is there any way to perhaps limit the mark to market volatility of the balance sheet and or reduce the balance sheet volatile on that balance sheet intensity of the business?

Graham Fleming

Unfortunately right on unfortunately the gap right these are GAAP issues. And these are these are these are all mandated in accordance with GAAP. So Uhm-hmm, there's none. There's no ideas right at the top of my head of market, everything to zero, which obviously capital and allow us to do. It is based on a some close to almost a $10 billion UPB balance. So relatively speaking it is basis points, but Matt, any anything to add?

Matthew Engel

I think you know, it's always look at the question we sometimes get is around around hedging and whether you put the hedges in place and there's upside and downside to that from a liquidity standpoint when rates go against you. So some we look at from time to time, we've hedged some of the past, we'll consider doing so in the future. But right now, given where the rate cycle because we're paying some of this volatility, it's just moving kind of back in our favor.

Cory Johnson

Great. Thank you. And I want to see is the path to operating profitability on that's going to be through increased revenue or is it or is there further hence reductions that could take place.

Graham Fleming

There's a little more on the expense side, right, that we're going to tackle in Q2, primarily in our revenue. Margins have have improved. We don't expect them to be much higher than they were in December. So the path to profitability now is increased increased volume, which we also we also expect to see increased volume as we're through this loan or loan origination consolidation. We're currently anticipating a high profitability kind of over towards the end of Q2 over the summer pricing. We do have we do have a path to return to an IRA bill.

Cory Johnson

Great, thanks. And just a last question for me. Can you maybe talk a little bit about the outlook for reverse origination volumes in India in the current recombinant?

Kristen Sieffert

Yeah, I would say that right now it's probably less about the current rate environment and just about getting the kind of operating platform and the technology integration completed. We've got the levers to pull to drive the growth. We just need to do so from a stable foundation, which is what we've been mainly focused on over the last two quarters. So the plan is to incrementally begin growing the production volume know through the course of this year and into the well into the future. And obviously, when rates come down, it makes it easier. But with where rates are today, we still believe in the growth model that we have.

Cory Johnson

Great. Thank you. Appreciate the answer.

Operator

Lee Cooperman, Omega Family Office.

Lee Cooperman

Thank you. I have four questions and maybe one, you already responded to. What are your expectations for recurring operating earnings. Some I mentioned on the call, the volatility in the $0.40 to $0.50 that you mentioned, is that recurring operating earnings this year are your objections and the ROE objectives down the road. It's question one.

Graham Fleming

So on the $0.40 to $0.50 be based on $300 million. A month of originations are currently averaging somewhere around $140 million, $150 million solar need to grow into that arm. We would expect to be on a path for that towards the end of this year. I don't think we're going to achieve $0.40 to $0.50.

Lee Cooperman

What does your expectation for operating earnings this year? Do you have one? You're willing to share?

Graham Fleming

We haven't provided that specific guidance. I would say that our our our submissions and our pipelines are growing on it. And we're optimistic that the volume will grow over the course of the year. We haven't given out specific (multiple speakers)

Lee Cooperman

It's an open platform. Do you want to make a statement?

Graham Fleming

I'd rather not, at this point, Lee.

Lee Cooperman

All right. Second, how do you rate your capital adequacy conduct conductor business that you want to conduct? Do you want to conduct? Do you have adequate capital?

Michael Fant

We do have adequate capital. We are constantly addressing our needs as we see fit with warehouse lines, timing our securitizations, our lines of credit and so forth. So we feel that we're properly capitalized for our growth in 2024.

Lee Cooperman

I will follow that closely the way I want to leather shoes to fill them with cellphone as we put all the enormous increase in the share count from $88 million to $229 million fully diluted basically, what is the what is the actual share count currently fully diluted? Is it 229.3 million? Can you say seven of your press release?

Michael Fant

That's the fully diluted share count.

Lee Cooperman

Yes, which would account for the 200 million and -- I would say about 150 million, 140 million increased shares.

Michael Fant

There wasn't I don't think that was a 140 million share increase.

Lee Cooperman

Will it says here on page 7 of your release, the basic weighted average shares outstanding was 88.4 million. And the dilution diluted shares to 229.3 million. And a year ago was 87.7 million.

Michael Fant

Got it. Yes. Will you know, so that actually has to do with the method by which we run the if converted or fully diluted EPS calc. And so because it is not dilutive or anti-dilutive on a fully diluted view when you add in all shares for that GAAP requires us to just use the basic share count that. So that's why you can see the basic and diluted per share number is the same in each of those periods. It's just Q4 of this year where the diluted EPS it's dilutive compared to basic.

Lee Cooperman

You mentioned your view of interest rates. I haven't to be of the view that short rates could drop, but long rates are not going to go down and effective probably go up.
What's more important to the 90 day bill rate or the 10-year rate? The reason I say what I say is prior to the Great Financial Crisis, the 10-year bond yield in line with nominal GDP, assuming 2% real growth and 3% inflation, that would be 5%, 10 year wouldn't be undervaluing 5.

Graham Fleming

We're not quite out as far as the tenure was important to us is probably in the five to seven year range.

Lee Cooperman

Five to seven year. well has that rate goes down, but whatever. The 10-year rate is less significant to you in the short term rates?

Graham Fleming

Yes, our assets are up probably seven year duration and the non-op. So that's kind of where that's kind of where we're focused on the CO2.

Lee Cooperman

Okay. Thank you very much. Good luck.

Graham Fleming

Thank you.

Operator

There are no further questions at this time. Mr. Fleming, I turn the call back over to you.

Graham Fleming

Yes. I'd like to thank everybody for joining the call, and we look forward to our updates at the end of Q1, which we expect in May. So thank you, everybody, and good night.

Operator

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