Finance Of America Companies Inc. (NYSE:FOA) Q4 2023 Earnings Call Transcript
Finance Of America Companies Inc. (NYSE:FOA) Q4 2023 Earnings Call Transcript March 6, 2024
Finance Of America Companies Inc. misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.08. FOA isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you, for standing by. My name is [Natalie], 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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [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 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.financeofamerica.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 31, 2022, filed with the SEC on March 16, 2023.
As such, risk factors may be amended and updated in our subsequent filings with the SEC. We are not undertaking any commitment to update these statements if conditions change. Please note, today, we will be discussing interim period financials that are unaudited. Now I would like to turn the call over to Finance of America's Chief Executive Officer, Graham Fleming. Graham?
Graham Fleming: Yes. 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 Kristen 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 that addresses the potential total addressable market and our view of the investment opportunity. Finance of America is making home equity part of a mainstream, modern retirement plan so that more Americans can benefit from the wealths 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, decreases 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. These 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 AAG 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 AAG 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 we're 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 reached 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 their 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 a no payment 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. Our third reason for confidence is that we now have the components to change this. 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 industry's leading retail and leading wholesale platforms, allowed Finance of America to control a 37% share of the HECM 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 AAG platform. By December, following the decline in market rates, our revenue margin peaked to 11.3% or 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 moderate 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 or 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 HomeSafe securitization, meaning that much of our cash was used to invest in our balance sheet as equity in newly funded HomeSafe loans. During February 2024, we completed two large securitizations, bringing up significant cash that will 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. Their 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 want 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, 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 U.S. continue to make us confident in the long-term value of our business. The proportion of retirees is 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.
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