Q4 2021 Finance of America Companies Inc Earnings Call

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Hello, and welcome to the Finance of America fourth quarter, and full year 2021 earnings call.

My name is Katie and I'll be coordinating your call today.

You'd like to ask a question during the presentation you may do so by pressing star one on your telephone keypad.

I'll now hand over to your host Michael Fun 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 Garrett 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 Dot Finance of America Dot 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 effort discussed on today's call in our earnings press release and presentation on the Investor Relations page of our website.

Also I'd 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 for the Americas form S. One originally filed with the SEC on May 25th 2021, as well as our subsequent filings with the.

C C.

We are not undertaking any commitment to update these statements if conditions change please.

Please note. These are year end in the interim period financials and are unaudited.

Now I would like to turn the call over to finance and Americas, Chief Executive Officer, Patty Cook County.

Thanks, Michael and good morning, everyone.

You for joining our fourth quarter and full year 2021 earnings call.

I am extremely proud of what the financing Americas team has accomplished.

Delivering a solid performance in our first financial year as a public company.

On a full year basis finance to America delivered $1 7 billion in revenue and adjusted net income of $308 million.

Our specialty finance 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 for the Americas unique business model and the reverse.

Commercial lender services and capital markets capability that collectively form S definite separate us from other lenders in the category.

This model also helps F away maintained 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 for 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 <unk> accounted for 51% of our revenue and the bulk of our adjusted net income. These businesses continue to perform well and we expect <unk> 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 <unk> businesses, and three leveraging our technology data and operating model to transform from a product to customer centric company.

First we have taken steps to position our mortgage business for dramatically reduced refinance volume.

We're still maintaining our ability to benefit from the 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 whole buying season approach.

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. Two or a customer who was the <unk>.

<unk> talked for multiple jobs.

Or a customer who briefly fell on hard times due to Covid and has a gap in their in company history.

We're 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 with loan officers 10 brokers is an untapped asset that can help sell other finance to the merits of the product.

As refinance volumes declined it allows our roughly 1100 loan officers and 250 broker relationships to supplement their business by selling with first in commercial mortgages.

In 2021 R. Ellison brokers each sold on average half the Woodford and 110th of a commercial loan and we believe there is opportunity to increase that meaningful.

Our second strategic priority is focused on investing in our high growth assets in that business.

As noted earlier, our specialty finance and services segment is a significant contributor to our business in.

In the fourth quarter, it contributed $196 million in revenue and $73 million and adjusted net income.

This follows an impressive two years of adjusted net income growth with <unk>, delivering a 19% CAGR over the period.

A key driver of our assets and our success is our reverse mortgage business, which offers products and services designed to help all through American tap home equity as part of their retirement plan.

The strength in this market is driven by both new originations and refinancing due to recent pulp price appreciation.

In the fourth quarter, we set another production of revenue record as our proprietary products fueled strong growth.

The reverse eligible population in the U S is growing as baby Boomers age. In addition, many boomers have not saved enough to maintain their current lifestyle.

Our reverse mortgage isn't attractive.

Illusion cannot 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 <unk>.

On the retirement.

Our commercial business also generated a record quarter with $580 million in funded volume.

Demand for commercial and faster load is being driven by the aging housing stock and a large number of first time millennial homebuyers, who aren't looking for updated com.

Our pipeline remains strong despite the recent market volatility.

Our home improvement business, while a small or a newer piece of our product offering remain safe 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.

Home improvement loan allows owners to stay in their current home and create the modern living spaces. They require.

While we expect a home a.

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 to refinance her 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 at new clients and client penetration.

Typically lender services added over 500, new clients in 2021, bringing total third party client relationship to over 1900 afford it.

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 catapult value inherent in our business.

We touched on this briefly during our last call, but I wanted to spend a moment hovering our efforts in more detail.

Today F away 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 built 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 chase and 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 the strategy.

We put 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 capabilities that drive product innovation.

Ultimately this will fuel long term growth and allow us to maximize lifetime household values.

In all its 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 Perry mentioned earlier, if <unk> had a strong year.

Asset finance businesses gained momentum.

Before we dig into the numbers I want to touch briefly on the 1.3 dollars 6 billion pre tax GAAP loss for the quarter.

This was entirely due to an impairment of goodwill and intangible assets.

GAAP require 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 a supportable control premiums.

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 amortize over time.

Excluding the impact of the impairment of goodwill and intangible assets the company generated $15 million and net income.

Turning to the numbers the.

The company generated adjusted net income of $70 million and fully diluted adjusted earnings per share of 37.

In line with our Q4 guidance.

I will discuss revenue and other financial impact 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.

But page sporadic.

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 some mismatches between accrued and paid expenses such as bonuses.

We continued to grow our MSR balances with a 26% increase quarter over quarter to $428 million as.

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 nine basis points quarter over quarter.

Merrily due to channel mix as we originated a higher percentage of volume through our wholesale channel and a lower percentage in our retail channel.

A reverse origination segment.

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 impairment of goodwill and intangible assets.

A 127% increase compared to the prior year.

Our commercial originations business also continued its path of expansion.

Producing record quarterly funded volume of $590 million in revenue growth of 7% quarter over quarter.

For the full year 2021 revenue increased 157% compared to 2020.

Pre tax income, excluding the impairment of goodwill and intangible assets was $8 million growing 33% compared to last quarter.

We continue to see a strong pipeline in this business.

Linda services produced 83 million in total revenue pre.

Pre tax income, excluding the impairment of goodwill and intangible assets remained flat relative to last quarter.

For the full year, and then the services delivered $39 million and pretax income, excluding the impairment of goodwill and intangible assets compared to $20 million last year.

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 a year over year revenue growth of 86% in 2021.

And pre tax income, excluding the impairment 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 lifetime impact 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 or <unk>.

To finish 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 <unk> for closing remarks. Thank.

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.

For mortgage we expect revenue between 150 and $170 million and adjusted net income margin between zero and 2%.

Sure, especially finance and services, we expect revenue between 230 and $250 million and adjusted net income margin between 19 and 21%.

We expect margins and repairs to commercial to tightened during the third quarter and have incorporated this into our guidance.

We have also includes the comparative we have also included the comparative first quarter.

2021 metrics 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 in 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 America.

It has been an honor and a privilege to lead such a dynamic and stationary 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.

We remain committed to ensuring a smooth transition and we will continue to lead Finance America until an appropriate successor is identified who will help execute against the strategic roadmap we've laid out.

Wanted to thank all of you for your continued support of Finance to America and I look forward to the continued success of the business.

Yes.

With that let's open the call for questions.

Yes.

If you'd like to ask a question. Please press star followed by one on your telephone keypad now.

If you'd like to remove your question. Please press star followed by T.

When preparing to ask a question please and show you'll find as Amit had lately.

We take our first question from Doug cautious from Credit Suisse. Please go ahead.

Thanks, you talked about expecting to see.

Commercial in reverse.

Margins down in the first quarter can you talk how much of that is kind of related to volatility.

Execution and securitization markets versus competitive dynamics.

Ah you're spot on that it is related to the volatility we're seeing in the market. So you know not surprisingly in times like this you will 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.

Yeah.

So I guess, so what kind of this one volatility kind of subsides.

Margins seen in the fourth quarter in 2000, and the full year 'twenty one would those be in.

Representative of where you think it could be longer term.

Yes.

I do.

Right.

And then on the forward business, you mentioned that the home improvement.

New new product line and kind of caused the loss in the quarter can you just talk about what specifically that was.

The expectation score for profitability for for that going forward.

Yeah, I'd say, the lowest since 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 brand in that space getting our salespeople and our ops aligned so I'd say, it's sort of a normal absorption and set up a 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. So it's 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, and congratulations on your retirement.

Thanks, Don appreciate it.

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

Hi, good morning.

Peggy all he both commented on the.

Reverse.

Yeah, it's three quarters in a row with record record button. She mentioned, but can you comment on kind of what's driving that.

Penetration story of sort of that.

What's driving them to pick up there what do you what does that what are you doing it proactively but how are you kind of the new customers.

As a follow up obviously that 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 over at first both of which are propelling volume. One is you know it is the uptake the awareness for new customers, we're seeing very solid growth in what I would say our first time.

Rockford as borrowers, but at the same time, you know the amazing home price appreciation has certainly fueled volume from call. It a cash out refi. So it's really both of those that are continuing to contribute to the volume in regard.

As we've mentioned on prior calls we're also excited about the marketing and sort of awareness activities that are going on and work hard to continue to increase the population size of participants.

Johan would you add anything no I don't have much debt, how do you I think you're 100% correct.

Even though we have seen a steady mentioned growth both on the new 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 prologis station 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're concerned as you have you mentioned earlier around the volatility on margins the volatility in the market and how that plays out in margins.

Great only expense side can you talk about.

I guess, we're almost expense guidance, but where that's headed kind of how much of the expenses are variable tied to refi volumes subtle.

Come out and kind of where do we 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 are forward mortgage business.

The mix shifting more to purchase.

How's the variable fixed cost 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've reduced head count both on and offshore to continue to optimize mortgage to breakeven or make a little bit of money. We certainly think as we enter it.

The spring buying season that the prospect for our mortgage business improve that alongside with flat I mean, it's a relatively new product, it's 18% of our volume now, but as we go into the purchase market.

And we think that product will continue to benefit.

Yeah, just to add to that Steve and I would say a good rule of thumb was to think of the fixed variable components split roughly 50 50 in the mortgage business.

That's great as we thought.

It's already mentioned you know like the fixed component will come down too.

Great.

Thoughts around a stock buyback with the stock where it does certainly company forecasted.

Profitability plenty of cash flow can you.

Give us any updated thoughts on potentially stock repurchase we purchases.

You know if you look at our performance, we're continuing to I couldn't say conserved and reserve had cash for continued investment in the growth of the business right and do you see commercial and refer business grows that has implication for decide.

So the balance sheet, we're carrying while we're waiting for those to be securitized. So at this point the best use of our cash continues to be to reinvest in the business.

Great.

And as Doug said, Doug Congratulations congrats on your retirement.

Okay.

Yeah.

Our next question comes from James Faucette from Morgan Stanley . Please go ahead James.

Hi, Thanks, This is sandy BD on for James.

Just wanted to follow up quickly on reverse and particularly on a just in terms of the rising rate environment. How is 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.

Okay.

The difference between where birds to let's say your traditional mortgage business is that I would say that catalyst for refinancing in the reverse business is more about home price appreciation that is pinterest stripe.

No.

Yes.

The equity and there were various borrowers how got us 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 compliment 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.

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.

Not dissimilar from what motivates the repaired 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 <unk>.

<unk> seen mortgage.

So as long as the you know 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 got it.

Yes.

Okay.

Our next question comes from Lee Cooperman from Omega family Office. Please go ahead, Lee Yeah, I need a little help from new everything I'm hearing from you basic.

Basically is optimistic and constructive about the outlook. Your stock has collapsed remove out tend to three and change. So what do you think the market is missing about the prospects of the company.

I gather.

The response to a previous question regarding stock repurchase.

Lloyds business growing for you record capital retention.

And you said, you're not generating free cash flow, but what do you think the market is missing about the prospects of the company.

Does it seem to be very much of a disconnect between how the stock is performing versus where you sounded Nicole.

Yeah, Lee I don't know, whether it's I mean, the story, we've told has been consistent.

We can see yes, that's a net add business is there to provide.

The let's say the counter to that cyclicality in mortgage we said it every quarter. We spent on the call and the results are proving it out so from my perspective, I would say you know people have to believe that that trend continues and if you think of.

Does then we should be beginning to be distinguished from the peer group.

So maybe I think the story, we're telling is clear and maybe if they wanted to see it in results for some period of time before they put it in the multiple of the stock price, but that's.

You have goodwill.

I think probably you would help educate the market if you've showed the rate of return.

This business is it's growing versus the rate of return of buying back stock.

Because most people think of the stock is under three times earnings and you're already 50% done.

Book.

The stock would be mispriced.

Generally speaking you know you'd 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 with good luck in your retirement by the way.

Thanks, Lee and I appreciate the comment.

Yeah.

As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad now.

Uh huh.

We currently have no questions registered so I'll hand, it back to al speak a T.

Thank you everybody for joining the call this morning.

We're happy with our performance and delighted to be able to share 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.

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