Q3 2022 Finance of America Companies Inc Earnings Call
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Hello, and welcome to the Finance America third quarter 2022 earnings call.
My name is Harry and I'll be coordinating your call today if.
If you'd like to ask a question during the Q&A you May do so my question is star one on your telephone keypad.
I'll now hand, you over to Michael <unk> Senior Vice President Finance to begin Michael. Please go ahead.
Thank you and good morning, everyone and welcome to finance of America's third quarter 2022 earnings call.
With me today are Greg Fleming, President and interim 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 metrics on this call you can find reconciliations of non-GAAP to GAAP financial metrics 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 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 todays 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 American <unk> Annual report on Form 10-K for the year ended December 31, 2021, originally thought with the.
SEC on March 15, 2022, as such risk factors may be amended and updated in our subsequent periodic filings with the SEC.
We are not undertaking any commitment to update these statements if conditions change please.
Please note. These are interim period financials and are unaudited.
Now I would like to turn the call over to finance of America's President and interim Chief Executive Officer Grant Flemming Graham Yes.
Yes, Thank you Michael.
Good morning, everyone and thank you for joining us on our third quarter 2022 earnings conference call.
On today's call I would like to briefly touch on our recent announcement before discussing our <unk> businesses and go forward strategy. Johan will then jump in with a review of our financials before we open the call for questions.
The decision to discontinue our forward mortgage business was the outcome of a thorough review of our business and the broader economic outlook. Ultimately, we determined that market conditions have fundamentally changed and we need to change with them, we expect to materially complete the wind down across both retail and wholesale mortgage channels by the end of this year.
As a company we took this decision very seriously and understanding the impact that will have on our employees who are highly valued members of our team. In response, we are providing support to assist departing employees in their search for new employment opportunities and are committed to facilitating the transition as they move to us.
Other mortgage lenders.
I would like to thank everyone for the partnership and continued dedication to supporting our customers and our company.
The exit from forward mortgage will allow us to optimize our resources and prioritize high growth businesses, where we already hold distinct competitive advantages and leading positions in markets with positive macro tailwind in.
In the near term in the near term, we believe home equity will be a crucial asset for retirees to supplement our income.
We believe that in the future many consumers will seek to broaden discussions with their financial advisors to include home equity as they reassess retirement planning and their long term financial needs.
Against this backdrop and with <unk>, leading position offering reverse mortgage products that lever home equity, we will better serve our customers in their financial journey. Our company has a history of product innovation and our reverse business has tremendous opportunity to continue this legacy during these changing market conditions.
We will also look to expand our partnership model with large mortgage lenders and other financial services companies to offer our products on their platforms, where we previously were focused on leveraging our own mortgage retail platform to offer. These products. We will now pursue the opportunity to expand this program throughout the mortgage industry.
We intend to have several large retail lenders and other financial services companies offer our reverse products.
Additionally, we recently debuted a collaboration with Morningstar to.
<unk> financial advisors about reverse mortgages and other home equity solutions available to their clients.
We continue to believe that education is key to the growth of the reverse industry and the collaboration will make education about reverse mortgages, including the financial America suite of products available to around 150000 advisors by teaming with Morningstar. We can ensure that mortgage advisers are educated about home equity.
As they create diverse and long term financial strategies for their clients.
In the third quarter, our <unk> businesses continued to be profitable and generated $7 million and adjusted net income in line with our previous guidance.
Note, our reverse business earned $34 million of pre tax income during the quarter.
Looking a little closer at each business line, our reverse business has been the leading wholesale origination platform in the industry for more than a decade.
The industry has not been immune to the impacts of the market and we are seeing attractive opportunities to strengthen our platform and expand this cornerstone line of business issues.
This should allow <unk> to exit this downturn in a position of strength to capitalize on the structural long term market opportunities, resulting from baby boomers significant home equity.
While we expect to see a further decline in refinance volumes, we continue to see year over year growth and new to reverse customers, including seven straight quarters of growth in our home safe neutral reverse loans.
A strong complement to our reverse business as our home improvement vertical.
As one of our most efficient customer acquisition channels home improvement complements our reverse products given the overlapping customer characteristics. The average age of our home improvement customer is 52 years old as these customers look to update their home for retirement home improvement loan offers an effective solution for home.
Owners seeking to leverage their equity and is an attractive option for those who have already locked in low interest rates on their mortgages.
The competitive dynamic has improved and as a result volume has increased and margins are expected to expand this.
This business continues to grow and volumes in Q3, 22 were 8% higher than volumes in Q3 last year.
In our commercial business, we continue to focus on our return to profitability. We have raised coupons on new volume and pipeline multiple times as rates continue to rise at a rapid rate. In addition, we remain focused on our cost structure to match capacity with demand.
Our lender services business continues to introduce new products to better serve our partners in the mortgage industry, we access with access to our appraisal management title insurance and other in house services, we are well placed to sell a bundle of products to our existing customers and deepen the relationship.
Over time, we expect these value added products and services to replace the revenue loss due to the rapid decrease in the refinance market.
In addition, we remain focused on cost to ensure we optimize the platform based on current demand.
Looking forward.
We believe that the combination of our <unk> platform, along with continued investments in technology will enhance our customer experience and with that I'll pass the call to Johan to discuss the financials.
Yes.
Thank you Graham and good morning, everyone.
For today's discussion I want to spend a moment discussing our Q3 results for the company.
And then for our financial business segment.
From there I will begin to the additional costs, resulting from the discontinuation of our forward mortgage business.
Turning to the operating results.
The overall company recognized an adjusted net loss of $20 million and fully diluted adjusted loss per share of <unk> <unk> as our forward mortgage origination segment continued to be pressured by current market conditions.
During the third quarter mortgage generated an adjusted net loss of $27 million and our <unk> businesses generated adjusted net income of $7 million in line with prior guidance.
I will discuss revenue and other financial impact in more detail when I cover the individual segments.
From a balance sheet perspective cash in Q3 decreased by $50 million.
Dominantly due to the repayment of secured debt.
Year to date, we have paid down over $150 million of secured lines of credit.
In addition, we are focused on preserving liquidity in this volatile environment.
Mortgage MSR balances decreased as we completed strategic sales of these assets during the quarter.
But have increased hickam MSR, ending Q4 closed a new financing facility secured by this asset to further enhance liquidity.
Book value as of September 30 stands at $575 million of which tangible net worth was $137 million.
Turning to our individual reporting segments and as mentioned earlier mortgage originations recorded a 27 million adjusted net loss.
Joining in Q4. These results will be recorded as discontinued operations in accordance with GAAP.
Our reverse segment originated funded volumes of $1 1 billion.
<unk> revenue of $72 million with improved margins and generated pretax income of $34 million.
Our commercial segment originated funded volumes of $355 million and revenue of $12 million as margins returned to more normalized levels.
Lender services revenue for the quarter was $44 million and the segment generated an $11 million pretax loss inclusive of corporate allocations and other noncash expenses.
Finally, looking at our portfolio management segment pretax income was negatively impacted by noncash fair value marks on our assets.
As of September 30th the residual value of asset subject to non recourse debt totaled $61 million down from $319 million as of December 31, 2021.
Turning to the effect of winding down the mortgage business as identified in our recent 8-K filing we are expecting costs related to the mortgage shutdown to total between $145 and $164 million.
This includes $130 million to $138 million.
Noncash expenses, such as the impairment of intangibles and other assets of.
Which $129 million was incurred in Q3.
Total cash expenses, comprising predominantly of severance costs as well as anticipated lease and vendor contract terminations buyouts are expected to be between 15% and $26 million with most of these anticipated to occur in Q4 2022.
With that let me now hand, it back to blame for closing remarks, yes. Thank.
Thank you Johan.
In the near term, we're going to focus on successfully managing the shutdown of our mortgage origination business were looking ahead to 'twenty three and beyond we are bullish on the earnings power of the organization with respect to 2023, we project adjusted fully diluted earnings per share of <unk> 45 to 55 for the year.
Driven predominantly by a reverse origination segment, where we see powerful macro tailwind continuing to exist.
In closing streamlining of the organization will allow us to focus all of our resources on those businesses to drive growth and which in turn will drive long term shareholder value and with that we'll open the call up for any questions operator.
Thank you to ask a question. Please tell stoffel about one on your telephone keypad now and our first question is from the line of Stephen laws from Raymond James.
Please go ahead.
Alright, thank you.
Graham.
Good morning.
Can you talk about the the.
The MSR sale.
And if theres been any additional MSR sales quarter to date.
Hey, Stephen it's Johan.
Yeah, I think we are.
Good morning.
We will have.
A number of MSR sales in Q4.
But as you saw from our sales.
Q3s amongst the sales happened in that quarter.
If you think about the dynamics there.
For the MSR, well priced relatively attractive during the course of that quarter and so we capitalized on that trend.
Whereas heck amendments are.
We're.
We felt there was actually some value in that and so we've been investing in Heck Amendment, Josh obviously and as I mentioned.
<unk> secured a new funding facility on the backup.
Hey come MSR.
Great. Thank.
Thanks, Sean when I think about the the charges went through a bunch of numbers that <unk> got the 8-K from a couple of weeks ago called up but did you say $129 million of charges related to the <unk> business or <unk>.
<unk> incurred in Q3 and is that kind of comparison to the number from the 8-K.
A midpoint of $140 million of total charges will be incurred in <unk>.
In 2022, so does that mean most of it has been very little left or how do we think about.
Expenses and items that are going to hit in Q4.
Yes, so the.
The 129.
Was predominantly the impairment of intangibles and other assets. So it's almost entirely.
Noncash expenses.
Think of the Q4 expenses really to be those expenses that we will incur in cash so that would be things like clean severance.
Buying out of any leases, we may have to buyout.
As well as buying out of vendor contracts and that fee.
The roughly 15 two.
$26 million that we estimate I'd say, the bulk of thats going to happen in Q4, and maybe a little bit that holds over into the early part of next year.
Yes.
Okay, and any holdover as reflected in the guidance provided at the end of the call.
Yes, we anticipate.
Sure.
That those will obviously be disclosed as discontinued operations and will be materially.
Wrapped up by the end of the year.
Great and then on the reverse business.
Volume declined a little more than I was expecting can you talk about what's going on there and how the rate volatility is impacting that market.
How you're how quickly your or lack thereof, you're able to reset pricing in the reverse business.
Given the current environment.
Yes, Stephen we are seeing we are seeing reductions in refinance volume.
As rates have gone up and as we've reset rates based upon.
Current securitization economics on the deals that we're issuing.
We are.
And we're continuing to see growth in new reverse.
And given current economic climate, we are working on some new products, but thats going to that will assist seniors accessing equity.
The second product for other.
Are there opportunities that we can create I mean, I will say that we did back off our correspondent acquisitions in Q3, but the volumes were down as a result of <unk>.
Acquiring I think on an equivalent basis in Q2 was about $150 million to $200 million of correspondent.
So we think as that market normalizes, we will be able to increase the volume.
Who knew to reverse.
Our second lien product and increasing our correspondent acquisitions.
Alright, I appreciate the comments Graham and Johan Thank you.
Thank you Steven.
Our next question is from the line of Doug Harter of Credit Suisse. Please go ahead.
Thanks.
Can you talk about your expectations for kind of cash flow cash earnings.
And kind of <unk> as we head into 'twenty three given.
Further shutdown costs and also just kind of.
The remaining businesses.
Yes, good morning, Doug.
<unk>.
Obviously liquidity is.
It's something that at the front of.
What we're focused on.
If you look at what we've been doing Youll notice that we have been derisking and deleveraging the balance sheet.
Both reducing our inventory of loans and obviously haven't haircuts are locked up in that.
As well as paying of secured debt and as I mentioned, we sold.
MSR assets, because pricing was pretty attractive there for a while.
And.
To monetize that and then obviously, we've invested in heck of MSR, which we think is attractively priced for investment at the moment and unsecured Sims some financing.
On that.
And so as we look forward.
Two Q4.
One thing I would say is our securitization activity in Q3 of proprietary home safe assets of reverse assets was pretty light.
We expect that activity to pick up.
And then obviously generate some cash with that.
And then as we wind down that forward mortgage business, obviously, all the haircut and the other cash that we have invested in that business.
Will be freed up and and obviously for us to use to pay.
To pay down.
The expenses in towards mortgage.
But then whatever is left.
We'll obviously have access to for the rest of the business. So.
It's kind of the macro on.
On liquidity.
And I guess kind of as you free up.
Cash from from the forward business I guess, how are you thinking about priority of <unk>.
Usage.
And then kind of along that you said you paid down some secured.
Debt. This year I guess, how are you thinking about paying down secured debt versus maybe trying to to repurchase some of your unsecured debt rich with trade.
Discounts and just kind of how youre thinking about future cash flow usage.
Yeah, No. That's a great question look I mean, I would say.
Okay.
It Shouldnt come as a surprise that there is.
Some opportunity in the market here for us.
To strengthen our businesses, where we have a dominant share and so we are actively looking at pretty much everything that we can that is a.
Sensible way to spend our cash for all stakeholders quite.
Quite honestly and.
And we're going to deploy that cash in a manner, that's going to get us the best return.
Strengthen our platforms capitalize on some potential opportunities that are out there. So they would win as Greg mentioned, we exit this downturn, we're in a very strong position.
Physician.
So.
That's going to be the broad kind of framework.
Four looking at our liquidity at the moment and building cash and using that.
To strengthen the franchise.
Alright, thank you.
As a reminder, if you'd like to ask a question. Please tell stoffel about what your telephone keypad now.
Next question is from the line of James Faucette of Morgan Stanley . Please go ahead.
Thank you and thanks for the details this morning.
Just quickly are there any business lines or segments that may be impacted by the discontinuation of the Ford mortgage bonds.
Wondering where cross sell was particularly important to us and how that may impact some of these other remaining segments trajectories.
Yes, so as.
As we.
As I said in my remarks, we're assisting a lot of our branches.
To go to other mortgage lenders during this during the shutdown wind down.
With that we're also working with the lenders that they are.
Going to to help to help them introduce these products. So we actually believe that.
Not in the short term, but over the course of 'twenty. Three we think there is a bigger opportunity to cross sell.
I also said in my remarks.
We're working with a couple of large retail lenders to embed our reverse products in their offering.
They are distributed through their franchise.
So we do think that we can enhance the cross sell opportunity.
But yes, there will be we don't see a negative impact of anything we see an opportunity as we get our products introduced more lenders as our as our branches go and go work with other mortgage banks.
Got it got it and then I'll.
Obviously in these periods.
There is a lot in flux operationally, but.
Maybe anything else that we should be aware of particularly as it relates to the cost cutting initiatives then.
Yes.
How do you plan to manage those costs and what are the things that you.
Youll be looking at to determine if you need to be more aggressive or maybe less than planned and in terms of managing those costs.
So I will.
I think that segment by segment or it will be substantially complete with the wind down of mortgage.
By the end of November right, there is going to be some trailing operational folks to wind down the remaining pipeline deliver that pipeline into the secondary market.
Early 'twenty three so we're substantially complete with that as a result.
And knock on effect of that is it allows us to be more streamlining our corporate functions and we're actively working we're actively working on streamlining those functions and then I've said that with commercial.
The commercial and other services.
We are managing those expenses on a monthly basis, it's a function of it's a function of the volume and the volume is somewhat a function of the rents that are in the market and.
The desire of borrowers to take products at those rates. So while we have seen a small reduction in volume in commercial we've been we've been adjusting the operating expenses.
Monthly as a result of that so I think it's an ongoing effort.
And one that we probably will be continuing all the way through Q1 of next year.
That's great. Thank you very much.
Yeah.
Thank you everyone that concludes the question answer session for today and this also concludes the finance America's third quarter 2022 earnings call. Thank you for joining and you may now disconnect your lines.
Okay.
Right.