Finance Of America Companies Inc. Q1 2023 Earnings Call
Good afternoon. Thank you for attending todays finance of America first quarter 2023 earnings call. My name is Frances and I'll be your moderator today.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you'd like to ask a question. Please press star one on your telephone keypad.
I would now like to pass the conference over to our host Michael Fant with Finance of America.
Thank you and good afternoon, everyone welcome to finance of America's first quarter earnings call.
With me today are Greg Fleming, Chief Executive Officer, and Johan <unk>, Chief Financial Officer.
As a reminder, this call is being recorded and you can find the earnings release and supplement 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 efforts discussed on today's call in our earnings press release and supplement 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 financial Americas 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. These are interim period financials NRI unaudited.
Now I would like to turn the call over to finance of Americas, Chief Executive Officer Grant funding Graham.
Thank you Michael Good afternoon, everyone and thank you for joining us on our first quarter 2023 earnings call.
Im excited to join the call today is finance of Americas CEO .
I believe strongly that financial America provides a truly differentiated and modern retirement solutions platform that gives the older Americans more choices and new ways to consider and fund their retirement.
I am honored to drive that vision forward.
For today's call I will begin with a brief discussion of our financial results for the quarter. I will then spend the remaining time focused on our go forward business structure and strategic priorities. Johan will then offer a deeper dive into our financials.
We achieved several milestones in the first quarter. This was largely due to our efforts over the past year to streamline the organization and invest in core businesses that underpin our modern retirement platform with home equity as its centerpiece.
Current demographic trends point to a substantial market opportunity and we believe <unk> is the significant competitive advantages needed to capitalize on this.
On a continuing operations basis, we recorded GAAP net income of 55 million or <unk> 29 per basic share in Q1, driven primarily by favorable increases in valuations across our asset base.
On an adjusted basis, we recognized a net loss of $15 million or <unk> <unk> per fully diluted share.
For the year, we expect our adjusted diluted earnings per share for continuing operations to be between nine and 12.
As we complete the integration of AEG.
Optimize our corporate structure as Johan will touch on in a moment, we recently updated our segment reporting to align with our new operating structure. We believe the new structure offers a simpler and more accurate breakdown of finance of America today and moving forward.
Both our retirement solutions and portfolio management businesses delivered profitable results on an adjusted basis. In Q1. This was encouraging as we expected a substantial reduction in volume for the first quarter of the year.
Overall profitability in our continuing operations was down quarter over quarter on an adjusted basis as lower profitability in our operating segments wasn't fully offset by a reduction in corporate expenses.
We remain focused on our efforts to right size, our corporate structure to better align with our current footprint and expect to materially complete this work by the third quarter of 2023 since the first quarter of 2022, we have seen a 32% reduction in corporate salaries and benefits and we expect to see further reductions in the <unk>.
Coming quarters.
Finally in line with our commitment to strengthen our balance sheet a series of actions, including the recently closed AEG acquisition as well as the concurrent 30 million equity raise from existing shareholders increased our tangible book value for continuing operations.
$108 million at the end of last year to over $200 million this quarter.
A significant improvement and further validation that our efforts are beginning to deliver real results.
Further into our balance sheet and operating improvement efforts in Q2, we signed an agreement to sell a majority share of the remainder of the lender services businesses. This transaction is expected to close in Q2.
The previously announced sale of our title insurance business to essence is also on track to close early in Q3 subject to regulatory approvals and customary closing conditions. Once both of those transactions have closed we will have completed the full scale transformation of finance in America and to a modern retirement solutions platform.
Our new structure and suite of innovative solutions are designed to help retirees agent place and thrive later in life.
Looking beyond we expect that the acquisition of the assets of AEG will materially enhance finance of America's gross prospects and position the company as a leader in the retirement solutions field.
This acquisition marks a new chapter in our strategic plan to expand awareness of our offerings and accelerate growth in the market.
We are quite optimistic about what this new combination means for our business in terms of one increased market share as we are now the largest originator of reverse mortgages by volume.
Two greater reach and awareness among consumers as a result of our increased presence and brand awareness and three our ability to grow the customer base through a combination of direct to consumer outreach via the AEG brands and strategic educational partnerships and initiatives via finance of America reverse.
<unk>.
Importantly, aig's expanded reach and retail presence.
Complement the innovative proprietary product suite ax.
<unk> of America reverse.
<unk> brands direct to consumer retail channel alone reaches more than 10 million consumers annually via targeted marketing and advertising.
This combination creates a remarkable opportunity for finance of America to become a lifelong resource for.
An enormous number of customers with.
We strongly believe there is a growing need for a modern retirement solutions platform like ours in the U S. The retirement savings gap is approaching $4 trillion.
Yeah, and homeowners 862, and older have amassed more than 11, five trillion and home equity value. This is the market opportunity, helping older homeowners use their homes superpower to achieve their financial goals, whether by tapping our home equity via AA GFR, securing finance of America.
Improvement loan are generating additional income by home sharing with silver nest.
Together, AEG and far will enable the overall financing market company to better serve the growing needs of retirees across the nation. We are excited by the long term potential of finance of America, and our modern retirement solutions platform.
Given the transformative changes and investments we have made to position financing of America for the future. We are confident our strategy will result in continued growth and success.
That I will pass the call to Johan to discuss the financials.
Yes.
Thank you, Greg and good afternoon, everyone.
As Greg mentioned, we have made significant changes to our financial reporting in the first quarter.
Following the successful wind down of our mortgage operations, along with our recently announced divestitures of our commercial title insurance and lender services businesses.
We have designated each of these business lines as discontinued operations.
For the quarter, our continuing operations reported net income of $55 million or 29 cents per basic share primarily driven by the market rate changes that increase the value of <unk> assets.
Excluding these fair value changes and other nonrecurring items. The company reported an adjusted net loss of $15 million or <unk> <unk> per fully diluted share as earnings and our operating segments segments were more than offset by corporate expenses.
From a balance sheet perspective, the acquisition of the assets of AIG occurred on March 31st.
Adding five 6 billion in assets and $62 million in equity to the company.
Most significantly we added $5 4 billion in loans held for investment subject to <unk> obligations.
Additionally, the $30 million capital raise from existing shareholders and profitable results for the quarter led to a significant improvement in tangible equity.
As of March 31, the company reported $203 million intangible equity an.
An increase of 88% from December 31st.
Additionally, we have worked diligently to de lever our balance sheet.
As of September 30 of last year, the company had $2 3 billion in other financing lines of credit.
As of March 31 that number had decreased by 52% to $1 1 billion.
Over the same timeframe loans held for investment and loans held for sale.
Declined from $2 2 billion.
0.8 billion or a reduction of 62%.
As we streamline our organization we have also updated our segments to more closely align with our go forward business strategy that <unk> laid out a moment ago.
Beginning this quarter, we will present, our operating results through three reporting segments.
<unk> solutions portfolio management, and corporate and other.
Our retirement solutions segment fulfilled finance of America's goal to help older homeowners.
<unk> financial goals in retirement and includes all origination activity for the company.
Including the reverse mortgage and home improvement lately.
For the quarter, we funded $357 million down from the prior quarter as volume has suffered due to seasonality and competitive pressures.
Even with this decline the segment recognized $2 million and adjusted net income for the quarter as revenue margins for the segment improved to seven 3% from four 6% in the fourth quarter.
Please note that the results for the operations acquired from AIG are not yet included in our P&L.
But it will be included in the <unk> solution is beginning in the second quarter.
We expect the acquisition to drive profitable growth as we realize both revenue and expense synergies over the coming quarters.
Our portfolio management segment did not see any reporting changes due to the realignment for.
For the quarter portfolio management recognized $99 million and pretax income.
As market rate adjustments relate to increased values of our diverse assets.
On an adjusted basis the segment recognized $4 million of adjusted net income in Q1.
Combined these two segments and $6 million and adjusted net income for the quarter as mentioned earlier the company reported a total adjusted net loss of $15 million. The Delta represents the unallocated costs at our current corporate infrastructure.
As we work to streamline our organization and complete the remaining transactions.
We will further reduce corporate overhead to align with the size and simplicity of our organization.
As Greg mentioned and I want to reiterate we have already seen a significant reduction in corporate expenses.
Since the first quarter of 2002, we have reduced corporate salaries and benefits by 32% and we will continue to optimize this.
In conclusion finance of America has worked hard to position itself for success moving forward. So far we have executed on every step we set out to take and plan to continue to make the right decisions to improve profitability strengthen liquidity and derisk our balance sheet.
With that let me now hand, it back to Greg for closing remarks.
Overall, we are pleased with our start to the year to continuing operations of our business is profitable and we hope to deliver further value by focusing on our core businesses and right sizing our corporate infrastructure moving forward. We are confident we will drive continued strength in retirement solutions and portfolio management as we work through these efforts.
And we believe in the long term earnings power of our organization.
With that operator, we will open it up for questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to repeat that question Press star followed by Tim.
Again to ask a question Thats Star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question comes from the line of Stephen Laws with Raymond James. Please go ahead.
Hi, good afternoon.
Yes.
It looks like a really solid quarter you guys came in a little ahead of me and I always love to see that kind of wanted to get your.
Thoughts maybe first grant from a higher level can you talk about the.
The turmoil of banks kind of what if any.
Direct impacts are there from that and maybe how much did you compete with banks for for some of your loan products or.
Maybe in home improvement or asked another way you know credit availability is contracting elsewhere in the system. How much are you seeing anybody turn yet to your products do you think thats coming opportunity. How do you think about the bigger picture in the banking market.
Yes, so Steven Thanks for the question so.
Let's look at it through two lenses thrive on the on the reverse side right. We have clearly seen banks in that space.
For a number of years, it's been nonbank lenders.
Although we would be thrilled with the bank agreement with space that would increase and increase the visibility of the product with our customer base.
But on the home improvement right we have seen.
Or we've read right around Goldman and market them.
Them selling their portfolio and potentially exiting exiting that business. So we do see that as an opportunity. We haven't seen we've been focused on the integration of AIG and getting those.
Those licensing getting the marketing up the curve. So we've been focused on getting.
The AG guys back to where they were pre acquisition haven't seen any earlier indications yet.
The tightening of credit.
I've seen some.
And some widening of spreads here in Q2.
As we as we worked through some deals but nothing.
Nothing that indicates it's going to be longer term, but.
And we have seen some from widening but we haven't seen much in the way of credit tightening at this point.
Yeah I appreciate those comments, so it's kind of a lease for a follow up on the outlook for origination volume.
Johan I think in your prepared remarks, maybe you said.
Seasonality and maybe a little bit more competition, but can you talk about volumes maybe in April and it seems like margins really improved sequentially and how youre seeing margins hold up quarter to date.
Yes, Stephen Thank you, yes so.
We expect.
Volumes to pick up in Q2, obviously on the back of the AIG acquisition right.
Alright, and so.
As I look at where we stand today.
Probably closer to Q4.
Once we get the AAD integration fully up to speed.
Yes.
From a practical perspective, the first few weeks in April we had to go through typically integrate them things when you do an asset acquisition. So they were some licensing.
Given everybody.
Fully integrated into the platform and net and net working perfectly.
Well, obviously, we wont have the full benefit of the <unk>.
The nation power of AIG, but once we roll into the sector.
And part of Q2.
I expect that to be operating.
And as they had prior to the acquisition.
But as Glenn said.
Spreads widened a little bit starting here in April .
So probably on the back of the banking.
This location so to speak.
So margin, maybe a little bit softer in Q2.
But it's so early it's hard to say, where we ended up to be honest.
Yes fair enough I appreciate the comments this afternoon. Thank you.
Thank you for your question.
The next question comes from Leon Cooperman with Omega Advisors. Please go ahead.
Thank you you have been a number of changes in the company as you transition to a modern.
No.
Retirement structure would be.
Do you think normalized earnings are as you restructure the company looking at 12 to 18 months from today.
Normalized.
12 to 18 months from today.
It's going to be obviously volume dependent.
But I.
I think if we if we look at where we sold Q4 right and we say okay with the AAD acquisition, we can get something better than that.
And then you see.
Say what is a decent bottom line.
For that business and I still believe that at somewhere in the.
4% to 5% range.
On the volume Alright, and then you look at the portfolio management.
Which should run relatively stable.
And once we layer in.
The AIG acquisition that number should.
Maybe twice as high as what it is today.
And then we do some further rationalization in Q1, we said, we expect our corporate expenses to come down.
To what had half of what it was at the peak. So we're about two thirds of the way there I'd say.
So when you layer all of that in.
It should give you a good indication of kind of where the profitability is there.
They're in excess of 50% this year.
Yes.
At the right volume could be.
Okay. Thank you.
Thank you for your question.
At this time there are no further questions waiting so long.
Pass the conference back over to Graham for any additional remarks.
Yes. Thank you Francis I want to thank everybody for joining the call.
I appreciate the questions and we look forward to our next earnings call.
<unk> to provide an update on our progress. So thank you everybody for joining.
That concludes the finance of America first quarter 2023 earnings call.
For your participation you may now disconnect your lines.
Thanks, Carl Thank you for your participation.