Finance of America Companies Inc (FOA) 2021 Q4 法說會逐字稿

Hello, and welcome to the Finance of America fourth-quarter and full-year 2021 earnings call. My name is Katie, and I will be coordinating your call today. (Operator Instructions) I will now hand over to your host, Michael Fant, Senior Vice President of Finance, to begin. Michael, please go ahead.

Thank you. And good morning, everyone. And welcome to Finance of America's fourth-quarter and full-year 2021 earnings call. With me today are Patty Cook, Chief Executive Officer; and Johan Gericke, 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'll 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 effort discussed on today's call in our earnings press release and presentation on the Investor Relations page of our website.

Also, I would like to remind everyone that comments on this 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 yesterday'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 Form S-1, originally filed with the SEC on May 25, 2021, as well as our subsequent filings with the SEC. We are not undertaking any commitment to update these statements if conditions change. Please note these are year-end and interim period financials and are unaudited.

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

Thanks, Michael, and good morning, everyone. Thank you for joining us for our fourth-quarter and full-year 2021 earnings call. I am extremely proud of what the Finance of America team has accomplished, delivering a solid performance in our first financial year as a public company.

On a full-year basis, Finance of America delivered $1.7 billion in revenue and adjusted net income of $308 million. Our specialty finance and services business had a standout quarter and beat the high end of our adjusted net income guidance. Notably, our reverse business outperformed again, with revenue growth of 3% quarter over quarter and 101% year-over-year increase.

Our continued success is a direct result of Finance of America's unique business model. And the reverse, commercial, lender services, and capital markets capability that collectively formed SF&S separate us from other lenders in the category. This model also helped FOA maintain operating profitability despite the mortgage market evolution. As many of you know, the mortgage industry is currently facing a tough environment and persistent headwind.

The demand for refinancing has dramatically decreased from the highs of 2020 as rates have increased. These macro conditions have led to a shift from refinancing to home purchase. We believe Finance of America is well-positioned to take advantage of the expected growth in the purchase and non-agency market, yet remain able to leverage the episodic refinance opportunities as we did in 2020.

In the fourth quarter, SF&S accounted for 51% of our revenue and the bulk of our adjusted net income. These businesses continue to perform well, and we expect SF&S to be the main driver of our profitability and growth in the foreseeable future. To continue building on this momentum, while also managing against the broader economic outlook, we are committed to executing the three strategic priorities that I outlined last quarter. These are, one, optimizing our mortgage business; two, investing in our high-growth SF&S businesses; and three, leveraging our technology, data, and operating models to transform from a product to customer-centric company.

First, we have taken steps to position our mortgage business for dramatically reduced refinance volume, while still maintaining our ability to benefit from expected growth in the purchase and non-agency market. This quarter, our mortgage segment posted a loss, which can be primarily attributed to our nascent home improvement business that is reported as part of the mortgage origination segment. Excluding the loss from home improvement, our mortgage business broke even, and we expect the mortgage business will return to profitability as the homebuying season approaches.

We are also focused on our non-agency proprietary product that caters to borrowers who don't qualify for agency loans. This recently launched product doesn't change our credit risk but allows us to serve a broader subset of qualified customers who don't fulfill the traditional requirement, such as a customer who has an independent business and doesn't get a W-2, or a customer who is a consultant, or receives income from multiple jobs, or a customer who briefly fell on hard times due to COVID and has a gap in their income history.

We are looking at those who are just outside the agency guidelines and providing a solution to help them achieve their dream of homeownership. Our non-agency product is becoming a much bigger piece of the mortgage market, contributing 18% of our total mortgage originations during the fourth quarter.

Lastly, our distribution network of loan officers and brokers is an untapped asset that can help sell other Finance of America products. As refinance volumes decline, it allows our roughly 1,100 loan officers and 1,250 broker relationships to supplement their business by selling reverse and commercial mortgages. In 2021, our LOs and brokers each sold on average half the reverse and one-tenth of the commercial loan. And we believe there is opportunity to increase this meaningfully.

Our second strategic priority is focus on investing in our high-growth SF&S businesses. As noted earlier, our specialty finance and services segment is a significant contributor to our business. In the fourth quarter, it contributed $196 million in revenue and $73 million in adjusted net income. This follows an impressive two years of adjusted net income growth, with SF&S delivering a 90% CAGR over the period.

A key driver of our SF&S success is our reverse mortgage business, which offers products and services designed to help older Americans have home equity as part of their retirement plan. The strength in this market is driven by both new originations and refinancing due to recent home price appreciation.

In the fourth quarter, we set another production of revenue record as our proprietary product fuels strong growth. The reverse eligible population in the US is growing as baby boomers age. In addition, many boomers have not saved enough to maintain their current lifestyle. A reverse mortgage is an attractive solution to not only allow homeowners to age in place but also to fund their lifestyle. We are continuing to invest in education and advertising to drive market awareness around the benefits of a reverse mortgage and the responsible use of home equity as an effective means to help fund retirement.

Our commercial business also generated a record quarter, with $580 million in funded volume. Demand for commercial investor loans is being driven by the aging housing stock and a large number of first-time millennial homebuyers who are looking for updated homes. Our pipeline remains strong despite the recent market volatility.

Our home improvement business, while a smaller and newer piece of our product offering, remains a very efficient customer aggregation tool. Home improvement is benefiting from an aging housing stock, lack of supply, and a greater number of people working from home. A home improvement loan allows owners to stay in their current home and create the modern living spaces they require. While we expect the home improvement business to be profitable later this year and provide strong growth year over year, we believe the real value is in the customers we acquire. Ultimately, these customers who refinance or purchase additional Finance of America products are acquired at essentially zero cost.

And finally, our lender services business continues to build momentum. While we expect to see a decline in revenue from refinance volume, there has been strong growth in new clients and client penetration. Specifically, lender services added over 500 new clients in 2021, bringing total third-party client relationships to over 1,940. Client penetration also increased with clients on average now using two or more products.

Our third and final strategic priority is to leverage our technology, data, and operating model to monetize the substantial lifetime household value inherent in our business. We touched on this briefly during our last call, but I want to spend a moment covering our efforts in more detail.

Today, FOA exists to help people thrive. We do this by developing indispensable solutions that empower our customers, illuminating pathways that can lead to greater financial freedom. We want to give our customers choices, bring them into our ecosystem, and build enduring relationships so we can offer them tailored financing solutions to meet their needs at every stage of life.

This is not an overnight transition. Instead, it will manifest over the coming quarters and beyond through incremental building blocks that we will share with you along the way. The result will be a complete end-to-end consumer lending platform that is aligned with customers and households throughout their financial journey.

To demonstrate our commitment to this effort, we recently hired Jason Rudman as our new Chief Customer Officer. Jason brings a wealth of experience, helping companies enhance customer loyalty and retention while increasing enterprise value. We look forward to sharing more on our progress as Jason settles into his new role in the coming months.

Finance of America has a strong foundation to execute these strategies. We possess all the building blocks necessary to be successful: a broad distribution network and extensive customer data, market-leading positions in high-growth profitable businesses, and best-in-class capital market capability that drive product innovation. Ultimately, this will fuel long-term growth and allow us to maximize lifetime household value.

In all, it's been an exciting year for our business. And I am pleased with the progress we have made to date. We maintained a high level of profitability, even as the mortgage market declined materially, and in the process, demonstrated the value of our unique business model.

I will now pass the call to Johan to discuss the financial results.

Thank you, Patty, and good morning, everyone. As Patty mentioned earlier, FOA had a strong year as our SF&S businesses gained momentum. Before we dig into the numbers, I want to touch briefly on the $1.36 billion pre-tax GAAP loss for the quarter. This was entirely due to an impairment of goodwill and intangible assets. GAAP requires that we evaluate our goodwill and intangibles as part of our year-end close process.

Due to a sustained decline in our stock price, the company recognized a $1.4 billion charge in the fourth quarter as we wrote off all goodwill and certain intangible assets to align the company's book value per share with supportable control premium. The impairment did not impact adjusted net income and increased tangible book value by roughly $30 million as it created a deferred tax asset that will amortize over time. Excluding the impact of the impairment of goodwill and intangible assets, the company generated $15 million in net income.

Turning to the numbers, the company generated adjusted net income of $70 million and fully diluted adjusted earnings per share of $0.37, in line with our Q4 guidance. I will discuss revenue and other financial impacts in more detail as I cover the individual segments.

Moving to the balance sheet. Cash decreased by $51 million in Q4, primarily due to an increase in cash invested in proprietary assets and periodic outflows related to compensation and other expenses that are accrued monthly but paid sporadically. You should expect to see fluctuations in our cash position quarter to quarter, based on the timing of securitizations and other large transactions, as well as mismatches between accrued and paid expenses such as bonuses. We continue to grow our MSR balances with a 26% increase quarter over quarter to $428 million as we retain servicing rights on agency mortgages originated in our retail channel. Tangible equity increased by $39 million or 9% quarter over quarter, benefiting from the impairment of goodwill and intangible assets.

Turning to our individual reporting segments, revenue in mortgage originations decreased by 20% relative to the third quarter and reported a pre-tax loss of $8 million, excluding the impairment of goodwill and intangible assets. The $3 million adjusted net loss for the segment was entirely driven by our home improvement business as mortgage broke even on an adjusted net income basis. Mortgage originations margin decreased 9 basis points quarter over quarter, primarily due to channel mix, as we originated a higher percentage of volume through our wholesale channel and a lower percentage in our retail channel.

Our reverse origination segment set a third consecutive quarterly funding record. The high funding volumes were driven by both new originations and refinances resulting from recent home price appreciation. This delivered quarterly revenue of $114 million, up 3% from the prior quarter, and an increase of 107% year over year. Pre-tax income, excluding the impairment of goodwill and intangible assets, was $75 million, growing 9% compared to last quarter. For the full year, reverse originations generated $389 million in revenue or a 101% increase over 2020, and $243 million in pre-tax income excluding the impairments of goodwill and intangible assets, a 127% increase compared to the prior year.

Our commercial originations business also continued its passive expansion, producing record quarterly funded volume of $580 million and revenue growth of 7% quarter over quarter. For the full year 2021, revenue increased 157% compared to 2020. Pre-tax income, excluding the impairments of goodwill and intangible assets, was $8 million, growing 33% compared to last quarter. We continue to see a strong pipeline in this business.

Lender services produced $83 million in total revenue. Pre-tax income, excluding the impairments of goodwill and intangible assets, remained flat relative to last quarter. For the full year, lender services delivered $39 million in pre-tax income, excluding the impairments of goodwill and intangible assets, compared to $20 million last year, a 95% increase. We continue to focus on expanding business lines to deepen cross-sell and onboarding new third-party customers to drive further growth.

On a combined basis, reverse, commercial, and lender services delivered the year-over-year revenue growth of 86% in 2021. And pre-tax income, excluding the impairments of goodwill and intangible assets, grew 144%, an impressive performance for these businesses.

Finally, looking at our portfolio management segment, revenue was negatively impacted predominantly by fair value marks on reverse assets as actual prepayment speeds exceeded modeled outcomes. These marks reflect the lifetime impacts across the portfolio of assets and are driven by several factors, including home price appreciation.

In closing, this was a strong quarter and year for Finance of America. Our SF&S businesses beat the fourth-quarter earnings guidance. And for the full year, the company generated $308 million of adjusted net income, or adjusted earnings per diluted share of $1.61.

With that, let me now hand back to Patty for closing remarks.

Thanks, Johan. I want to provide a glimpse of what we see for the first quarter. Similar to last quarter, you will see that we divide our guidance into two parts: mortgage and specialty finance and services. For mortgage, we expect revenue between $150 million and $170 million, and adjusted net income margins between 0% and 2%. For specialty finance and services, we expect revenue between $230 million and $250 million, and adjusted net income margins between 19% and 21%. We expect margins in reverse and commercial to tighten during the third quarter and have incorporated this into our guidance.

We have also included the comparative first-quarter 2021 metric to highlight our year-over-year growth. The reduction in revenue in our mortgage origination business, in line with industry expectations, will be offset by continued growth on our specialty finance and services segment.

And finally, before we open the call to questions, I want to take a moment to address some recent news. As many of you will have seen, I announced my retirement from Finance of America. It has been an honor and a privilege to lead such a dynamic and visionary organization. I am so proud to have played a role in building this purposely different consumer lending platform and to play an important role in its evolution to a public company and the implementation of its long-term strategic roadmap.

After a career spanning 40-plus years, it is now time for me to move on to my next chapter. I am ready to spend more time with my family and my growing grandchildren. I remain committed to ensuring a smooth transition and will continue to lead Finance of America until an appropriate successor is identified, who will help execute against the strategic roadmap we've laid out. I want to thank all of you for your continued support of Finance of America, and I look forward to the continued success of the business.

With that, let's open the call for questions.

(Operator Instructions) Doug Harter, Credit Suisse.

You talked about expecting to see commercial and reverse margins down in the first quarter. Can you talk how much of that is kind of related to volatility and execution in securitization markets versus competitive dynamics?

You are spot on, Doug, that it is related to the volatility we are seeing in the market. So not surprisingly, in times like this, you'll see some pressure on spreads in non-agency product and that's what's reflected in our first-quarter guidance. It's not related to competitive pressures.

So yeah, I guess so kind of if, when volatility kind of subsides, would margins seen in the fourth quarter and the full-year 2021, would those be representative of where you think it could be longer term?

Yes, I do.

Great. And then on the forward business, you mentioned that the home improvement new product line kind of caused the loss in the quarter. Can you just talk about what specifically that was and kind of your expectations for profitability for that going forward?

Yeah, I would say the loss is really related to setting up the business, getting us in a position where the business is recognizing Finance of America as the new owner of the brands in that space, getting our salespeople and our ops aligned. So I would say it's sort of the normal absorption and setup of the new business. And as I said during my remarks, we expect that to flip to profitability during this year.

The exciting thing about that business, though, is not only the profit it'll generate, but it's our opportunity to acquire those customers who we are quite confident we have other products that will satisfy them where the real opportunity lies.

Great. Thanks, Patty, and congratulations on your retirement.

Thanks, Doug. Appreciate it.

Stephen Laws, Raymond James.

Patty and Johan, you both commented on the strong reverse. It's three quarters in a row, I think, you had record volumes you mentioned. Can you comment kind of what's driving that -- the penetration story, sort of? And what's driving the pickup there? What are you -- what is that really doing that's proactive, and how are you acquiring the new customers? And as a follow-up, obviously, kind of where do you see that pipeline going as you think about where quarterly volumes can be over the next couple of years?

So there's two dynamics that are going on in reverse, both of which are propelling volume. One is it is the uptake, the awareness for new customers. We are seeing very solid growth in what I would say are first-time reverse borrowers. But at the same time, the amazing home price appreciation has certainly fueled volumes from, call it, a cash-out refi. So it's really both of those that are continuing to contribute to the volume in reverse.

As we have mentioned on prior calls, we are also excited about the marketing and sort of awareness activity that are going on in reverse to continue to increase the population size of participants. Johan, would you add anything?

Yeah. No, I don't have much to add, Patty. I think you are 100% correct. Stephen, we have seen, as Patty mentioned, growth, both on the new to reverse as well as the cash-out refinance piece. And I think the other thing that gives us comfort about continued growth is it's a long, call it, gestation period before you actually originate these loans. And so we have good visibility into what's coming into the pipeline. The issue is obviously we are concerned, as you heard Patty mention earlier, around volatility on margins, volatility in the market, and how that plays out on margins.

Great. On the expense side, can you talk about -- I guess almost expense guidance, but where that's headed, kind of how much of the expenses are variable tied to refi volumes that'll come out, and kind of how do we think of margins as we move through the year?

Here, are you talking about overall mortgage, in particular?

Really, in the forward business, forward mortgage business so -- that you have the mix shifting more to purchase. How is the variable fixed comp structure there as volumes decline on the refi side?

Yeah. Clearly, we, like the rest of the industry, are adjusting our capacity for the expectation of lower volume. We have reduced headcount, both on and offshore, to continue to optimize mortgage to breakeven or make a little bit of money. We certainly think as we enter the spring buying season, that the prospects for our mortgage business improve. That, alongside with Flex, I mean, it's a relatively new product, it's 18% of our volume now. But as we go into the purchase market season, we think that product will continue to benefit.

Yeah. Just to add to that, Stephen, I would say a good rule of thumb is to think of the fixed variable components: split roughly 50-50 in the mortgage business. But already as Patty mentioned, like the fixed components will come down, too.

Great. Patty, thoughts around a stock buyback with the stock where it is, certainly, company forecasted profitability, plenty of cash flow. Can you give us any updated thoughts around potentially stock repurchase, repurchases?

If you look at our performance, we are continuing to, I am going to say, conserve and reserve that cash for continued investment in the growth of the business, right? As you see commercial and reverse business growth, that has implications for the size of the balance sheet we are carrying while we are waiting for those to be securitized. So at this point, the best use of our cash continues to be to reinvest in the business.

Right. And as Doug said, congrats on your retirement. Thank you.

Thanks, Stephen.

James Faucette, Morgan Stanley.

This is Sandy Beatty on for James. I just wanted to follow up quickly on reverse, and particularly on -- just in terms of the rising rate environment. How has that product held up historically? I mean, is there any correlation there? Anything we should keep in mind? Obviously, that's been a pretty big topic just with mortgage broadly.

The difference between reverse and, let's say, your traditional mortgage business is that I would say the catalyst for refinancing in the reverse business is more about home price appreciation than it is interest rates. So as the equity in the reverse borrower's count goes up, they have the opportunity to take out cash. And that really is what's fueling the higher volume in that sector. It's much less correlated to interest rates than forward mortgage, which is one of the reasons we love the business. It's a complement to mortgage.

Got it. That's super helpful. And then maybe just as a quick follow-up there. I know cash-out refi has been a focus across the space, particularly recently. I just wanted to get a sense. Are those products competitive from the perspective of the borrower? I mean, what are the relative attractiveness there just in terms of balancing between those? Can you just provide a little bit of color there?

So if I understand your question, it's not dissimilar from what motivates the reverse borrower, right? It's an opportunity for them to take advantage of house price appreciation, and potentially then monetize the equity they have in their home. In terms of a competitive product, in the forward business, those are mostly agency mortgages. So as long as the rate on the mortgage is still relatively attractive, borrowers are likely going to continue to take advantage of monetizing the equity they have in their home. So I think what you'll end up is --

Got it. Thank you, guys.

Lee Cooperman, Omega Family Office.

Yes, I need a little help from you. Everything I am hearing from you, basically, is optimistic and constructive about the outlook yet your stock has collapsed from about $10 to $3 and change. So what do you think the market is missing about the prospects of the company?

And I gather in response to previous question regarding stock repurchase that the lines of business that are growing for you require capital retention, and so you are not generating free cash flow. But what do you think the market is missing about the prospects of the company? Because there seems to be a very much of a disconnect between how the stock is performing versus the way you sound on the call.

Yeah. Lee, I don't know whether it's -- I mean, the story we told has been consistent, right, which is the SF&S business is there to provide the, let's say, the counter to the cyclicality of mortgage. We said it every quarter we have been on the call, and the results are proving it out.

So from my perspective, I would say people have to believe that that trend continues. And if you think it does, then we should be beginning to be distinguished from the peer group. So maybe -- I think the story we are telling is clear. And maybe if they want to see it in results for some period of time before they put it in the multiple of the stock price. But that's -- that would be one point (multiple speakers)

I think, probably, you would help educate the market if you showed the rate of return on this business that's growing versus the rate of return of buying back stock. Because most people think when your stock is under three times earnings and you are earning 50% on tangible book, that the stock would be mispriced. But generally speaking, you would like to see the company have a similar view, which it doesn't, because of the need for capital retention. So I think return on capital in these new businesses versus stock repurchase, if you could explain that to the market better, maybe that would help. But good luck in your retirement, by the way.

Thanks, Lee, and I appreciate the comments.

(Operator Instructions) We currently have no questions registered. So I will hand it back to our speaker team.

Thank you, everybody, for joining the call this morning. We are happy with our performance and delighted to be able to share it with you this morning. Have a good day.

This now concludes today's call. Thank you all for joining. You may now disconnect your lines.