Finance of America Companies Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. The company is restructuring into a home-centered retirement solutions platform, primarily reverse mortgages, home improvement lending and portfolio management. Results are not necessarily indicative of future periods.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue from continuing operations | $140.9 million | $46.1 million |
| Pre-tax income (loss), continuing operations | $58.0 million | $(58.4) million |
| Net income (loss), continuing operations | $55.5 million | $(50.6) million |
| Net income (loss), including discontinued operations | $14.6 million | $(64.0) million |
| Net income (loss) attributable to controlling interest | $3.1 million | $(8.5) million |
| Adjusted EBITDA, non-GAAP | $(12.4) million | $63.4 million |
| Adjusted net income (loss), non-GAAP | $(15.2) million | $41.2 million |
| Net cash provided by operating activities | $221.8 million | $323.7 million |
| Net cash used in investing activities | $(226.8) million | $(600.1) million |
| Net cash provided by financing activities | $59.2 million | $355.5 million |
- Revenue and earnings drivers: Net fair-value gains on loans and related obligations were $176.4 million, versus $7.0 million a year earlier, principally reflecting changes in market discount-rate assumptions. Net interest expense rose to $29.5 million from $22.3 million. Fee income fell to $6.4 million from $55.2 million, mainly due to the much smaller mortgage-servicing-rights portfolio and lower servicing fees.
- Margins and production: Total net interest margin, including interest recognized within fair-value gains, was $68.5 million versus $34.8 million. Reverse mortgage new originations were $311.4 million, down 78.9%; reported production margin increased to 7.86% from 7.17%. Home-improvement originations were $45.5 million versus $47.9 million.
- Expenses: Continuing-operations expenses declined 22% to $83.8 million, attributed mainly to lower headcount, lower origination activity and cost reductions.
Financial position and liquidity
- At March 31, 2023, total assets were $26.83 billion and total liabilities $26.34 billion; equity was $490.4 million, including an accumulated deficit of $631.2 million.
- Cash and cash equivalents were $69.3 million; restricted cash was $228.3 million. Cash and restricted cash together were $297.6 million on the balance sheet. The cash-flow statement reports $331.8 million at quarter-end including discontinued operations.
- Major funding obligations included $16.41 billion of HMBS-related obligations, $8.03 billion of nonrecourse debt, $1.11 billion of other financing lines of credit and $409.0 million of notes payable. The company reported approximately $26.0 billion of debt obligations. Most debt is secured or nonrecourse and associated with loan assets; notes payable carried at $409.0 million had a reported fair value of $323.1 million.
- Warehouse and other financing lines had $2.19 billion of stated total capacity and $1.11 billion outstanding at quarter-end; availability is conditional on covenants and eligible collateral. Their weighted-average borrowing rate was 7.25%.
- Operating cash flow was lower year over year, primarily because net cash proceeds from loans held for sale declined. Cash and restricted cash increased $54.3 million during the quarter.
Material changes and transactions
- The AAG/Bloom asset acquisition closed March 31, 2023, for total recorded consideration of $215.4 million. The acquired assets included $5.45 billion of loans subject to HMBS obligations; assumed liabilities included $5.35 billion of HMBS obligations. Consideration included cash, debt repayment, seller notes and equity units; no goodwill was recorded.
- The company completed the sale of its Commercial Originations assets on March 14 and completed the wind-down of most Mortgage Originations operations on February 28. These businesses, along with designated Lender Services operations, are presented as discontinued operations. Discontinued operations generated a $40.9 million net loss, including a $10.2 million loss on disposal.
- Reverse mortgage origination volume fell sharply from the prior-year period, while the AAG acquisition substantially increased the reported loan and servicing portfolios at quarter-end. Mortgage-servicing-rights unpaid principal balance declined from $8.60 billion at year-end to $1.70 billion, reflecting sales and runoff.
- The company issued $30.0 million of Class A common stock to related-party investors and issued 19.7 million Class A LLC units to the AAG/Bloom seller. Additional seller units may be issuable under contingent and indemnity arrangements.
- A sale of title subsidiaries ANTIC and BNT for $100 million cash was expected to close in July 2023. Subsequent to quarter-end, the company agreed to sell a 70% interest in other Lender Services assets for $17.5 million, comprising $3.5 million cash and a $14.0 million note.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management is focused on integrating AAG/Bloom, expanding retirement solutions and completing planned business exits and sales.
- Management cited high interest rates, inflation, housing-market conditions, wider investor spreads, financing availability and fair-value assumptions as significant influences on demand, margins, asset values and liquidity. A large portion of fair-valued assets and liabilities uses Level 3 inputs and estimates.
- The company reported a $715.5 million net loss for 2022 and covenant violations at certain warehouse facilities at year-end and in Q1 2023. It obtained waivers or amendments, or repaid affected facilities. FAM also obtained waivers for certain Fannie Mae tangible-net-worth covenant violations; FAR received a waiver for a Ginnie Mae capital requirement. Management said its plans, including the expected $100 million sale and renewal of warehouse lines, were probable and expected to provide sufficient liquidity for at least twelve months and one day after issuance. The filing says the conditions, before management’s plans, raised questions about meeting obligations and covenants over that period.
- Unfunded borrower commitments included approximately $4.7 billion for agency and non-agency reverse mortgages, $74.3 million for fix-and-flip loans and $6.4 million for agricultural loans. These can require liquidity as borrowers draw funds.
- The company faces ongoing regulatory, servicing, repurchase, representation-and-warranty and litigation risks. It reported no matters considered probable or reasonably possible with estimable losses, but three coordinated California PAGA lawsuits remain unresolved and a loss range could not be reasonably estimated.
Most important facts for investors to verify
- Whether AAG/Bloom integration delivers expected operating benefits and whether contingent seller equity or indemnity obligations change dilution or costs.
- Completion, proceeds and timing of the announced ANTIC/BNT and other Lender Services sales, including collection of the $14 million seller-financing note.
- Renewal and availability of warehouse facilities, continued covenant compliance and the assumptions behind management’s liquidity assessment.
- How much reported earnings depend on volatile, largely Level 3 fair-value gains, and whether core operating results improve as reverse mortgage production recovers.
- The effect of the $4.7 billion reverse-mortgage unfunded commitment balance, servicing and repurchase obligations, and unresolved legal matters on cash needs and potential losses.