FOA - NYSE

Good day everyone, and welcome to the Finance of America Second Quarter 2024 Earnings Call. [Operator Instructions]. At this time, I would like to handover the call to Michael Fant, please go ahead sir.

Thank you and good afternoon, everyone, and welcome to Finance of America's second 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. Finally, the recently completed reverse stock split effective July 25th, all earnings per share matrix for both current and historical periods will be calculated using the updated basic and fully diluted share count to provide an apple-to-apple comparison across time period. 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. To begin, I would like to review our results and discuss several key events that transpired during the quarter and how they will impact FOA. Kristen will then share some important operational updates followed by a review of our financials from Matt. For additional information, we have posted a supplemental presentation to our Investor Relations website, which we encourage you to review in concert with today's call. Overall, I'm pleased to share that Finance of America continues to deliver improved fundamentals across the business in the second quarter, resulting in our fourth consecutive quarter of improved ANI. As a team, we've been dedicated to executing our strategic plan, strengthening our operations, and advancing our path to profitability. As a result of our efforts, we see continued growth across the business, both volume and revenue grew and expenses declined over the prior quarter. Taking a high level look at the numbers on a continuing operations basis, we recorded GAAP net loss of $5 million or $0.20 per basic share. On an adjusted basis, we recognized a net loss of $1 million or $0.5 per fully diluted share and adjusted EBITDA of positive $9 million. This marks the first quarter of positive adjusted EBITDA since 2022. Looking back, Q2 2023 marked the first quarter of the combined businesses of Finance of America and AAG. Since that time our revenues excluding other fair value changes, have grown by 33% and our expenses have reduced by 26%. Year-over-year, we have markedly reduced our ANI from $26 million to $1 million. Furthermore, we have made a substantial turnaround in adjusted EBITDA, improving from a negative $26 million in 2023 to a positive $9 million in 2024. Beyond these improved results, we see significant milestones throughout the second quarter that we believe further establish a foundation for continued operational improvement and growth. First, we announced a one for 10 reverse stock split recently completed in July, which put us back in compliance with the New York Stock Exchange Continued Listing Standards. As we have said in the past, we are committed to maintaining access to the public markets and trading on the NYSE. Second, we announced an exchange offer support agreement and that holders of over 93% of our senior unsecured notes had indicated their intent to participate in the exchange offer. As of today, holders of over 99% of senior unsecured notes have indicated their intent. This is significant milestone for the company and the transactions contemplated by the exchange offer support agreement will have later maturities, enhance our financial flexibility, and help align our cash flows with our debt obligations thereby improving our capital structure for the future. We appreciate the partnership we have with these investors and look forward to their continued support. Next, we closed on two related warehouse facilities with two lending partners new to the reverse space to help minimize haircuts on our proprietary loan production. These new loan relationships are another example of greater interest being shown to the reverse mortgage industry by interested counterparties. Lastly, the release of the preliminary term sheet for Ginnie Mae's HMBS 2.0 program at the end of June marked an important step in providing enhanced liquidity to the reverse mortgage industry. This exciting program provides a more favorable HMBS structure that will significantly reduce the capital required for buyouts and allows for the securitization of these buyouts in the pools backed by Ginnie Mae. This has the potential to have a positive impact on earnings, tangible net worth, and liquidity. Each of these events has left Finance of America in a better position to achieve long-term success and help homeowners unlock the joy that comes from realizing the full potential of their retirement. Our entire team has worked diligently to improve the operations of the business while integrating and becoming a unified finance America. We sincerely appreciate all the hard work and I want to share a huge thank you to everyone that has been a part of our company's transformation over the past two years. To tell us more about the brand transition to Finance of America and further operational updates, let me turn the call over to Kristen.

Thank you, Graham, and good afternoon, everyone. Beginning in late 2022 and taking place over the last 18 months, we work to transform our operation to align with our refocused strategy centered on retirement, the 55 plus demographic, and home equity. With most of the work completed, we've turned our attention to strategic initiatives to optimize our platform and pave the way for future growth. This translates into improved operations, improved conversion, and a better customer experience overall. Last month, we successfully unified all of our brands under the single name, Finance of America. This milestone included launching new brand assets consisting of television ads featuring Tom Selleck, a streamlined corporate website, enhanced social media presence, and new multimedia advertising and collateral. In concert with the brand unification, we also developed and introduced a singular company purpose and shared values. This achievement marks a significant step in our evolution, enabling full alignment across the organization to maximize our productivity as a group and realize the full value of our investment. Within our retail division, we modified our go-to-market strategy to focus on our most efficient channels and stepped away from strategies that have been less fruitful over time. We expected to see outside returns from this shift and early results are supporting this theory. Looking at our industry leading suite of proprietary products, we continue to have strong demand from our best in class wholesale channel as we introduce solutions that appeal to the vast customer base held by our wholesale partners. We are confident in our ability to grow origination and continue to explore new strategies to attract and meet the needs of more customers. In Q2, we enhanced the LTV of HomeSafe Second to appeal to a wider segment of borrowers and introduced a streamlined underwriting option for high-credit quality customers. In that same period, we experienced a 168% increase in submission volume quarter-over-quarter and a 30% reduction in average term time. We will continue to expand the state availability each quarter and plan to launch HomeSafe Second specific marketing campaigns in our retail channel by the end of Q3. Last, in our efforts to increase the penetration of the total addressable market, we continue to invest in digital technologies that capitalize on growth opportunities and create tailored experiences for our customers. With the heavy lift of the LOS and brand transitions behind us, we're shifting the team's attention to building out these capabilities as their top priority and look forward to sharing updates around these enhancements as they're introduced. Now I'll turn it over to Matt to discuss our financial.

Thank you, Kristen, and good afternoon, everyone. Within our continuing operations, we recognize gas net loss of $5 million or $0.20 per basic share for the second quarter. On an adjusted basis, the company recognized a net loss of $1 million for the quarter or $0.05 per fully diluted share, the fourth consecutive quarter of improved results in our business. As Graham mentioned earlier, it's been just over a year since the acquisition of certain assets of AAG. During that time, the business has completed its integration and seen significant improvement in its operations. We saw origination volumes increase by 5% from the first quarter. We originated $447 million in loan volumes, up from $424 million in the first quarter. While we came in slightly under the provided guidance range for the quarter, we did see positive momentum in our production. In fact, our higher margin retail and broker channels grew volumes by 18% and 12%, respectively, offset by decreased production in our correspondent channel. Focusing on our retail and broker origination channels was a conscious financial decision that led to improved operating results and higher overall margins for the business. Additionally, we have seen an increase in average loan balances both for proprietary and HECM products, which have resulted in part in the recent decrease in interest rates. Since the fourth quarter of 2023, the average size of the HECM loan across our retail channel has increased around 10%. Note that we have enhanced the revenue section of our income statement presentation, which more clearly lays out the key drivers of our business. You can see this on Slide 8 of the earnings supplement posted to our Investor Relations website. As you can see, year-over-year net portfolio interest income is flat, while runoff has decreased from $55 million to $48 million resulting in a higher accretive yield on our portfolio. In addition, net origination gains have increased from $33 million to $40 million. As we grow new loan origination volumes in the future, this will show up in the net origination gains and fee income lines of the income statement. Excluding fair value changes from market inputs or model assumptions, total revenue for our continuing operations was $68 million in the second quarter of 2024 compared to $51 million in the second quarter of 2023. This is a 33% increase in revenue across our operations in the last year. While revenues have increased year-over-year, we continue to see an overall decrease in expenses. For continuing operations, total expenses declined from $110 million in the second quarter of 2023 to $91 million in the first quarter of 2024 to $85 million in the second quarter of 2024 as the cost reduction initiatives we have taken over the past year have continued to materialize. Turning to the balance sheet, our unrestricted cash balance was $47 million at the end of the second quarter, comparable to March as the new financing Graham mentioned earlier reduced the cash invested in our balance sheet as of the end of the quarter. Finally, I want to reiterate our excitement surrounding the initiatives Finance of America was able to accomplish during the second quarter beyond our operating results. We've been discussing these actions for several quarters and we're very pleased to be able to share the results of our efforts. The reverse stock split announced in June and effective July 25, took Finance of America back into compliance with New York Stock Exchange continued listing standards. The transactions contemplated by the exchange offer support agreement are expected to improve Finance of America's capital structure, and we look forward to the continued support of our note holders. Additionally, the recently published proposed term sheet of the HMBS 2.0 program is expected to be a significant benefit to Finance of America and the reverse mortgage industry at large. The program allows for the securitization of buyouts into Ginnie Mae back securitizations and limits the capital required to manage these buyouts during the claims process. Looking forward, we are excited about the early results in our third quarter. July volumes were strong and recent declines in market interest rates, should they hold, would result in positive adjustments to the fair value of our assets. From an operational standpoint, we expect volumes in the third quarter to be between $475 million and $500 million and given our reduced expense base and higher margins, we expect to return to ANI profitability during the third quarter. With continued improvement across our top and bottom lines, we expect to continue on the path to sustain profitability. With that, let me hand it back to Graham for closing remarks.

Yeah. Thank you, Matt. Given the material move in market rate interest rate so far in the third quarter and the potential for a shift in Fed policy, it may be worthwhile to recap how these events impact our business. In a declining rate environment, our operations will benefit in two key ways. First, we have the potential for an increase in tangible net worth as asset values are expected to increase. Secondly, we would expect originations to increase as lower rates result in higher initial loan-to-value ratios on new loans allowing more borrowers to qualify. Increased funded volumes with minimal near-term changes to our fixed expense structure would also reduce our origination cost for funded loan. Throughout the second quarter, Finance of America stayed the course and continue to focus heavily on growth, delivering a strong customer experience and continuous innovation. We're excited about our pipeline and 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 unprepared for retirement while simultaneously holding a record amount of home equity, will be poised to meet their needs with our home equity based retirement products. Today, FOA holds top market share and we're more confident than ever that we will continue to grow our customer base and transform lives by helping our customers make the most out of their largest asset, their home. As in previous quarters we continue to execute on what we can control. We have built a strong platform that positions us well for growth and profitability while delivering an enhanced experience to our customers. And with that, we'll open the call up for any questions.

Thank you, sir. [Operator Instructions]. Our first question from Douglas Harter from UBS.

Thanks. Hi. This is actually Will on for Doug today. I heard you touch on the new HMBS 2.0 program in your prepared remarks, and I was really just hoping, you could expand a bit more on the potential cash flow benefits that you might receive from this program?

So, it's a little early to define exactly, the net cash proceeds. I think the industry as a whole gave feedback to the draft G&A proposal that came out just recently, and we expect the final return to come out in the coming months. However, based on the draft proposal that was presented, we see a significant portion of our buyout that would be eligible to put into the new program, with advanced rates, you know, clearly above where we are today on a warehouse line. So we'll be we'll be quantifying those numbers a little more closely, over the coming quarter as that gets finalized.

Okay. Great. Thanks. And then just one follow-up. I had a comment on the third quarter origination outlook, and given the recent move in rates, if you could just comment on the pipeline you're seeing so far and then how would you expect a level revenue margin to trend, going forward given that moving rates?

So on the pipeline side, the pipeline is the risk Yeah. So the pipeline has remained strong. I think we're with the refinance activity. If we see any with rates coming down, we'll probably see that, funding in Q4, but the increase in borrowers that are following today on new leads coming in, we're already starting to see that pick up this week, and that's built into the guidance that we gave for the origination volumes in Q3.

And I think the second part of the question on margins, I think, generally, you might see a little bit of margin expansion on our loan products, but maybe not significant. Then we'll watch for spreads land in terms of the margin we can securitize these loans for. The market's a little volatile right now. Spreads are moving around a little bit, but, we think that'll settle in, here in the coming weeks.

Okay. Thank you.

The next question will come from the line of Stephen Laws from Raymond James.

Hi, good afternoon. Congrats on the EBITDA positive. I know the reiterating of hitting ANI positive next quarter under the something you guys have worked very hard to achieve over the past four to six quarters. So nice to see the progress you've made so far. Wanted to touch base around some smaller things. Frist to verify the volume outlook, you guys say in the prepared remarks that that July was 10% up, or can you give help quantify where, July volumes are?

So I think that, the guidance we gave for the third quarter is between $475 million to $500 million and our July production was on a pace to really hit that target for the quarter, a high end target.

Fantastic. As you think about funding that and cash flow needs, can you talk about how the cash balance will trend to the back of the year and are you are you tapping the working capital loan and, I guess, the non-funding interest expense increased slightly sequentially? So curious what drove that if it was a late increase on that that working capital or something else?

So on the first part of the question, in terms of funding the new production, so one thing that Graham as mentioned in his remarks, we do have a new, couple of lenders that have kind of partnered together to help fund our proprietary loan production, and it's greatly decreased our haircuts necessary to hold those real loans on our warehouse line, but that's really helpful from minimizing the cash burn. On the second part, that maybe was, rate driven on the non-funding notes.

Great, and then, last one for now. You know, a lot of accomplishments in from the expense reduction initiatives. Is this kind of a good rate now moving forward? Do you think there's more, kind of synergies or expense reductions that can occur from here? Curious what your outlook is on the expense side.

I mean, I think that we we've largely got the heavy lifting behind us at this point. We don't see, you know, maybe significant reductions, but I think there's always opportunity to sharpen the pencil. I think, you know, some extent, we still have some legacy contracts and whatnot that we're into when we are a much larger company. Then as we roll off, we enter into more right sized contracts or current organization, which we can continue with less of those contracts won't go off. So I think there'll be continued kind of downward pressure on the expense line, but I wouldn't expect macro changes at this point.

Although I'd add that we expect to see lower cost per funded loan because our fixed expense base can support a much higher level of production than we're doing today. So we expect to see that in the coming quarters.

Great. Appreciate the comments, this afternoon. Again, congrats on a nice second quarter.

Thanks, Stephen.

And everyone at this time there are no further questions. I'll hand the call back to Graham Fleming for any additional or closing remarks.

Again, thank you for joining, our Q2 call, and we will look forward to having our call in November and we'll update everybody on our progress in Q3. So thank you very much everybody and, we'll talk to everybody soon. Thank you.