Good morning, ladies and gentlemen and welcome to the Finance of America’s Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call will be recorded.

I would now like to turn the conference over to Michael Fant, Senior Vice President of Finance at Finance of America. Please go ahead, Michael..

Thank you and good morning everyone and welcome to Finance of America's second quarter earnings call. With me today are Patty Cook, Chief Executive Officer; Johan Gericke, Chief Financial Officer; and Graham Fleming, President.

As a quick reminder, this call is being recorded and 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 to the extent available without unreasonable efforts discussed in today's call, in our earnings press release and 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, 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 yesterday's news 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 Americas Form S-1, originally filed with the SEC on May 25, 2021.

We are not undertaking any commitment to update these statements, if conditions change. Please note these are interim period financials and are unaudited. On today's call, Patty will begin with a brief discussion of our business model. Johan will cover the financial results, and Graham will spotlight a reverse origination segment.

Now, I'd like to turn the call over to Finance of America's Chief Executive Officer Patty Cook, Patty..

Thanks, Michael. And good morning, everyone. Before we get started, I want to mention a few significant changes for Finance of America that happened this quarter. Effective April 1, we completed our business combination and began trading on the New York Stock Exchange on April 5.

Additionally, we began the integration of our home improvement business along with the previously announced acquisition of Parkside lending in May. We are really excited about the value these investments will bring to our shareholders over time. Now let's turn to slide 3 of the presentation.

As our results this quarter demonstrated there is significant value in our diversification. For models key competitive advantages include an extensive product set, multiple distribution channels, and bespoke capital markets capability.

The Finance of America business model is unique in that we have built a platform that includes mortgage, reverse, commercial, and most recently home improvement loans, together with multiple distribution channels to serve our customers as they prefer.

In addition, our fee for service businesses and portfolio management segments produce recurring revenue streams that help limit the effects of a cyclical mortgage market. Each of these businesses is supported by unique tailwind that provide resiliency to the platform through varying interest rate and economic environments.

In fact, every segment generated meaningful growth in revenue year-to-date compared to last year. As an example, revenue growth in our reverse business is driven by an increasing population of baby boomers who would like to age in place, but have inadequate savings for retirement. Yet they have significant untapped wealth in their homes.

A reverse mortgage is an efficient way to access that equity. Another example of the diversified nature of our model relates to our extensive capital markets capability, which allows us to seamlessly connect borrowers with investors in order to manage liquidity, transfer risk, and optimizes funding costs.

This was evidenced in our recent securitization of non-owner occupied loans completely in June the first of its kind for our company, which freed us from the constraints of the recent GSE cap. Our powerful end to end platform enables us to identify gaps in the market and introduce consumers’ centric products that add to our competitive advantage.

This quarter, we've funded the first equity avail loan, an innovative product, which combines many of the benefits of traditional and reverse mortgages. It is designed to provide greater financial flexibility for homeowners at or near retirement. Identifying and meeting customer needs is what we do best.

And we look forward to continuing to innovate across our platform. Let's turn to highlights for the quarter on slide four. Our working segment was not immune to the industry dynamics, and we saw declines in revenues aligned with our peers. In contrast, we saw substantial growth in our reverse, commercial, and lender services segments.

Both reverse and lenders services generated record revenue in the quarter, and in combination, revenue growth from these three businesses offset a portion of our mortgage revenue decline. In mortgage results in the TPO channel were particularly stressed due to steep margin decline and elevated costs as we integrated the Parkside lending acquisition.

On a positive note, we have made progress with the integration of our home improvement business and expected to contribute to the bottom line starting in Q4. We also saw a shift from refinance to purchase volume, and our distributed retail channel is well suited to serve this market dynamic.

In fact, purchase funded volumes grew from $2.7 billion to $3.5 billion quarter-over-quarter. Margin stabilized in the second quarter, and have shown modest improvement in July and August. That said, we expect to see continued pressure in the mortgage segment for the remainder of the year.

With that, I would like to turn the call over to Johan to discuss our second quarter results in more detail, Johan..

Thanks Petty. As mentioned earlier, this is our first quarter as a publicly traded company. And our results include several non-recurring items related to the spectrums action, which I will cover later in the presentation.

Beginning on slide six, we generated $57 million of adjusted net income or $0.30 per share in Q2, compared to $107 million or $0.56 per share last quarter. Our adjusted net income decreased by 50 million quarter-over-quarter, despite the decline in mortgage revenue of more than double that amount. This is our diversified model in action.

For the company overall on a GAAP basis, we reported a net loss of $15 million for the quarter, compared to net income of $124 million in the first quarter, and $146 million in the second quarter of 2020. The Q2 loss resulted from $20 million of fair value marks and $43 million of non-recurring items related to the business combination.

Adjusted EBITDA of $87 million for the second quarter of 21 was down $67 million or 44% compared to Q1 as the $102 million decrease in mortgage revenue was partially offset by increased revenues in reverse commercial and lender services. Turning to our segments and starting with our mortgage originations business on slide 7.

Net break loss volume of $6.7 billion was down 21% from $8.4 billion in the prior quarter and relatively flat year-over-year. Mortgage originations margin declined 18% from the prior quarter, and combined with lower volume. This resulted in a 32% decrease in segment revenue.

The second quarter 21 pre-tax loss of $6 million, compared to a pre-tax income of $96 million for the prior quarter was predominantly due to the drop in revenue mentioned earlier. The loss also includes non-occurring costs related to the business combination and the impact associated with previously announced acquisitions.

Combined, these two items totaled over $14 million. Turning to slide 8, we are very proud of the results generated in our reverse business. Funded volumes were up 32% quarter-over-quarter to 1 billion, our highest quarter ever.

This generated segment revenue of $95 million and pre-tax income of $53 million for the second quarter of 21 up 38% and 18% respectively compared to prior quarter levels. The reverse segment results also includes 4 million of non-recurrent costs related to the business combination. Turning to slide 9.

On the commercial side, funded volumes continued to rebuild from 2020 levels and were up 17% on a sequential quarter basis to $400 million. As a result, revenues were up 64% from Q1 and pre-tax income for the segment increased $3 million, despite a $1 million non-recurring costs related to the business combination.

Turning to portfolio management on slide 10. Segment, profitability was negatively impacted by $20 million in fair value marks along with $7 million of nonrecurring costs related to the business combination.

The fair value marks are primarily driven by home price appreciation, and higher expected prepay speeds observed in securitized mortgage assets and MSR. Our capital markets team completed three securitizations totaling over $1.1 billion in UPV, including our inaugural non-owner occupied securitization.

The segment also includes our MSR assets that grew by $23 million over Q1 with $291 million, with UPV of $3 billion. As shown on slide 11, lender services delivered another record quarter with total revenue of 81 million, up considerably compared to prior quarter and year ago level.

Pre-tax income for the second quarter of in lender services, like other segments, was impacted by $3 million of non-recurring costs related to the business combination. Segment growth drivers include continued growth in third party clients, doing more business with existing clients and increased adoption of services by FOA lending segments.

Turning to slide 13, I would like to spend a few minutes discussing the accounting impact of the business combination on our financial statements. Due to the nature of the transaction, and the GAAP regulations, FOA was determined to be an accounting acquirer in the business combination.

Accordingly, the company booked $1.1 billion of goodwill and 688 million of intangible assets to the balance sheet. In connection with the transaction, the company also redeemed the non-controlling interest in Finance of America commercial LLC, for a purchase price of $203 million, and FOA now wholly owned this business.

For the quarter, the income statement was negatively impacted by $43 million and non-recurring expenses related to the business combination. This includes share based compensation and other transaction related expenses. Lastly, turning to capital allocation.

We will continue to make investments that reduce the cyclicality of our earnings and remain focused on maximizing shareholder value over time, capitalizing on M&A opportunities as part of our DNA, and we remain proactive in identifying the creative market opportunities that will further complement our business and drive profitable growth.

Let me now hand over to Graham who is going to spotlight our reverse mortgage business, Graham?.

Yes, thanks Johan. As mentioned earlier, a reverse origination segment originated over 1 billion for the quarter, a first for the company and we believe this business is poised for further growth. Turning to pages 15 through 17, you can see that the average senior citizen in America hasn't saved enough for retirement.

However, 84% of senior homeowners hold more than 50% of their wealth in the equity of their home. Our experience has shown that many seniors are unclear how to access this equity as part of their retirement plan. A reverse mortgage is a flexible financial tool that allows seniors to convert the equity in their home to cash.

This can be used to eliminate monthly mortgage payments and supplement shortfalls in retirement income. Turning to slide 18, Finance of America is a leader in the reverse mortgage industry and has been the top producer in the wholesale channel for more than a decade.

The opportunity is to work with industry peers and partners to increase awareness of product benefits, leading to greater adoption. Therefore, we are focused on educating seniors on their opportunities in retirement, and we are well-positioned to make home equity an accepted part of a prudent sustainable retirement plan.

The opportunity in reverse is both sizeable and under penetrated. Current estimates show that senior citizens hold more than 8 trillion in home equity and that less than 2% of this addressable market has taken advantage of a reverse mortgage.

As mentioned earlier, the secular tailwinds in reverse are tied to the increasing senior population, which is growing at 3% annually. Add to that the fact that 90% of seniors want to age in place, and it is clear this presents a substantial opportunity to create value for shareholders over time. I will now hand it back to Patty for closing remarks.

Patty?.

Thanks, Graham. Let me close by giving you an update of what we expect for the rest of the year. In Q1, I mentioned that we expected adjusted EBITDA for 21 to be roughly 20% lower than 2020. In Q2, we saw mortgage revenues decreased faster than expected.

And despite a modest uptick in July, we now estimate a reduction in adjusted EBITDA for full year 2021 of roughly 25% to 30%. Thank you, everyone for your time and interest. As mentioned earlier, we believe our results this quarter reinforced the value of our diversified platform.

As a public company, we remain focused on continuing to build shareholder value in everything we do. With that, we'll open up the call for questions. Operator, please..

Thank you. We will now begin the question and answer session. The first question comes from Douglas Harter with Credit Suisse. Please go ahead. .

Thanks. And good morning. Can you talk about the near term growth outlook for commercial and reverse originations coming off kind of strong quarters where they can go from here..

Yes. Good morning, Doug. We're excited about the opportunity in both those channels. If you look at the tailwinds that we describe for reverse, and for commercial, they remain in place. So while it's hard to forecast the growth, month-to-month or quarter-to-quarter, we believe we have a sustainable opportunity to grow businesses..

Great. And it seems like the revenue margin in both of those channels was up sequentially in the second quarter. Just talk about the outlook for both of those revenue margins..

Yes. I would answer similarly, which is the dynamics that are in play in those markets are expected to continue. There's always some variability in margin but I would expect good margins to hold in both those channels. .

Thank you, Patty..

The next question comes from Stephen Laws with Raymond James. Please go ahead..

Good morning. I've had a follow up on Doug's commercial question. When you think about the opportunities there, very hot, number of companies reporting strength across those types of loans.

How do you think about growth opportunities there? Will it all be internal are there? I know you've done a number of acquisitions, are there opportunities there to get into regions? Or maybe products that you don't have? What is the? I don't know other than internal growth what is your thoughts around how to continue to increase volumes there?.

Yes. I think if we look at the opportunity, I'm going to go to the competitive advantage of our, I'll call it bespoke capital markets group, I think the opportunity for us to innovate in that sector is meaningful.

So if I were going to prioritize our own organic, innovative growth versus acquisition, I'm going to lean in to our own innovative growth through new product creation..

Great. And switch to the forward segment I think you closed with maybe EBITDA down 25% to 30%. I wanted to confirm that that's versus previous kind of thoughts around roughly 20.

And then what drove the change? Was it more volume related as you look at backpack originations in your thoughts? Are our mortgage rates may go or is it more margin outlook as you've seen a little bit of rebound, but maybe not a lot and expect that, as you said, competition to remain pretty fierce there?.

So first of all, I'll confirm that your observation is correct. We're now talking about 25% to 30%, down relative to 2020. And the guidance down is really a reflection of the dynamics we saw in the second quarter. Margins tightened faster than we expected them to.

And even though we've seen a little bit of comeback in those margins in July and August, the outlook remains very uncertain in mortgage. So when we might get back to a more stable level is unclear. So we're going to take the second quarter, and adjust our forecast based on that experience..

Great, and then tied to the expense side. And maybe this is a better question for Johan, but even if I removed the $43 million, the comp and benefits maybe didn't drop quite as much as I would have expected, given the volumes and margins.

And can you talk about how variable comp is based? Is that volume driven? Is it profit driven on margins? And then as you look longer term what is? Is there an expense side of the equation of benefiting margins mean does the industry need to contract and reduce the number of origination people kind of what are your thoughts on longer term operating expense run rate in declining ReFi world..

So, first of all, on variable comps. Variable comp is pretty much directly tied to volume. So the amount we're paying our load since and changing variable comp on average is going to go up and down with volume. I think on cost cutting, and I'm going to let Graham, take this when I make a cup of tea after a couple of quick observations.

So if you look at what happened in the first quarter, in the second quarter, the first thing you do when volumes come down, is you cut your overtime, because part of the way you flex up during periods of high volume is through overtime. So the first thing you do is you cut back on the overtime.

Then you need to adjust for some staple level of originations going forward, and you can begin to look at some of your fixed costs. I think we do a really good job in each one of the channels at trying to balance the outlook against the near term volume.

I don't expect you to see a huge change in expense reductions in mortgage in particular, over the remainder of the year.

Graham, would you add anything to that?.

Yes, I would add a couple of things to Steven, good morning. So over the course of the quarter, we did have some reductions in our call center. And we are also as Johan pointed out, right, we had some elevated expenses in wholesale with the acquisition of Parkside lending.

We did have some reductions there in July, and we're continuing to evaluate the size of that wholesales group, relative to the volume.

So it's an ongoing initiative what it really is segment by segment and channel by channel but we're keenly focused on the expenses in each of those channels to make sure that all of them are right sized, and contributing the right amount of profitability to the bottom line..

Great. Appreciate both your comments on that I know one of the others in the space kind of an analysis of variable comp reduction. Last question for me I want to touch on stock buyback.

I know the last time we spoke on this call it was some stock was a little higher also had less float and it was an unlikely scenario given the expiration of the lockup on the pipe shares, the float is up, I think 13% at least with those shares and locking stocks come under pressure.

Can you update us on your thoughts around the stock repurchase when you look at where shares are trading today?.

Yes Stephen, I will. So, as we look at our capital management and capital deployment, there are always a variety of considerations that are going to weigh into that decision.

But as Johan mentioned in his prepared remarks we will continue to look at making investments in the business that reduce the cyclicality of our earnings and remained focused on maximizing shareholder value over time..

Well, I look forward to those announcements and good to see the strong growth and reverse income and commercial this quarter both were above what I was looking for. Thanks for your time today..

Yes. Thanks for yours..

The next question comes from Leon Cooperman with Omega Family Office. Please go ahead..

Thank you. Good morning, and congratulations on your first conference call or second, I guess it kind of goes a public company. And there's three questions. One, which measure of book value does management think is most indicative of value of the company? Tangible is about two? Stated book values by 12? That's the question one.

Second can you put EPS number around your guidance regarding the EBITDA margin you talked about? And finally, in terms of the earnings, how much of the earnings you're generating represents free cash flow and your priorities for the use which I think in the last question, you implied, the priorities were to kind of do tuck in acquisitions.

But I'd like to kind of explore that a little bit more. Those three questions if you wouldn't mind..

Johan. .

Yes. Morning. So we look at the business on the first question, across a number of dynamics, obviously, book value, tangible book value, are all very important for us. As well as the desired level of capital that we need to continue to do, as Patty mentioned, drive investments that can avoid the cyclical nature of the earnings.

But I would say, at the end of the day as the market looks at tangible book value that's probably the most important metric..

Yes, I would add to that, since we are not an asset heavy company, I think book value is more relevant to us than someone that might be carrying a big balance sheet but nonetheless, we've got to consider both, as we look at managing the overall balance sheet, the income statement, and the strategic imperative to the business..

Well, to be honest, what's behind the question is clearly, if you're looking at tangible book value as being important, you're unlikely to book value being important, you're unlikely to be buying stock back at six and change, because you're diluting tangible book value. The other hand, you're adding to your gross book value stated book value of 12.

But anyway, is the second question, is it EPS number you have in mind that you can share with the group?.

No, at this point, we're not giving guidance on the EPS..

So my man tells me a buck 70 this year, you want to come into that estimate?.

No, actually, Lee I don't..

Lastly, free cash flow and priorities for use. And the read what's behind it, I understand that you guys make it very clear. And I'm not really debating you that you would rather do a tuck in good acquisition and buy back your own stock.

If the gross book value of 12 is indicative of value, I noticed that two analysts to cover the company what is 12, has a 12 price objective. The other one is a 13.5 price objective. So if you use a lower objective, it's only twice the current stock price.

Do you believe these tuck in acquisitions will create more value than buying back your stock at half what other people think is worth?.

I think over a long period of time, more strategic investments that will continue to improve. I'll say the non cyclicality of our earnings to the right answer..

Congratulate you guys going public at the top of the market. top. Congratulations..

Thanks Lee. Always good to hear from you..

There are no further questions on the phone lines. And this concludes the question and answer session..

Thank you everybody for joining the call. We appreciate your time and attention and look forward to seeing you again next quarter. Thank you..