Finance of America Companies Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 10, 2024. Finance of America (FOA) is transitioning to a retirement-solutions platform centered on reverse mortgages, with Portfolio Management supporting loan securitization, sales and servicing. Comparisons are affected by business-line exits and the March 2023 AAG/Bloom acquisition.
Financial results and key metrics
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Total revenue, continuing operations | $74.7 million | $140.9 million; down 47.0% |
| Net loss from continuing operations | $15.8 million | Net income of $55.5 million |
| Net loss attributable to controlling interest, total | $7.5 million; $0.08 per basic and diluted share | Net income of $3.1 million; $0.05 basic EPS |
| Adjusted EBITDA, non-GAAP | Loss of $1.0 million | Loss of $12.4 million |
| Cash from operating activities | Use of $132.2 million | Provided $221.8 million |
| Cash and restricted cash, quarter end | $243.6 million, including $48.2 million unrestricted cash | $331.8 million at Q1 2023 end |
| Total assets / total liabilities / equity | $27.7 billion / $27.4 billion / $255.7 million | At December 31, 2023: $27.1 billion / $26.8 billion / $272.4 million |
| Notes payable, net | $436.2 million carrying value; $373.9 million estimated fair value | $410.9 million carrying value at year-end |
Revenue contraction primarily reflected a $83.8 million decrease in net fair value gains on loans and related obligations, as gains from market-input and model-assumption changes were substantially lower. Total expenses rose 9.0% to $91.3 million, including higher marketing costs; net interest expense improved to $24.3 million from $29.5 million. Continuing-operations pretax loss was $15.8 million versus pretax income of $58.0 million.
- Retirement Solutions: Revenue increased 73.5% to $45.7 million; pretax loss narrowed to $3.9 million from $9.2 million. Reverse mortgage originations were $423.5 million, up 36%, and weighted average production margin rose to 9.37% from 7.86%. Retail originations grew to $166.3 million from $51.5 million.
- Portfolio Management: Revenue fell to $37.2 million from $123.8 million and pretax income fell to $14.5 million from $99.1 million, principally due to lower fair-value gains from market inputs and assumptions. Portfolio net interest margin increased to $70.2 million from $62.6 million.
- Discontinued operations: Net loss was $4.5 million, including a $3.0 million contingent liability. The comparable 2023 period reported a $40.9 million loss, including costs associated with exited businesses.
Financial position, debt and liquidity
- At March 31, 2024, loans held for investment subject to HMBS obligations were $18.1 billion, against $17.8 billion of HMBS obligations. Loans subject to nonrecourse debt were $8.4 billion, against $7.9 billion of nonrecourse debt.
- Other financing lines of credit were $1.07 billion, up from $928.5 million at year-end. The company reported approximately $27.2 billion of debt obligations, much of which is asset-backed HMBS and nonrecourse financing rather than unsecured corporate debt.
- Q1 cash flow from investing activities was $49.5 million provided; financing activities provided $101.6 million. Combined cash and restricted cash increased $18.8 million. Operating cash use was attributed mainly to lower net proceeds from loan sales and changes in operating assets and liabilities.
- Management stated existing operating cash flows, portfolio financing proceeds and facility capacity provide adequate resources for anticipated ongoing cash needs, and expects facilities to be renewed as they mature. This depends on continued access to financing and market liquidity.
- The company reported compliance with its financing covenant requirements. FAR was compliant with Ginnie Mae requirements after receiving a waiver for its minimum outstanding capital ratio; its actual net worth was $466.2 million versus a $177.1 million minimum, and cash of $42.7 million versus a $35.4 million minimum liquidity requirement.
- FAM was in violation of Fannie Mae’s material-decline-in-lender-tangible-net-worth covenant. It had $10.3 million actual net worth against a $10.1 million minimum requirement. The filing describes planned surrender of remaining approvals following servicing transfers, expected in Q2 2024 for Fannie Mae and Freddie Mac.
Management commentary, outlook and risks
No specific financial guidance or quantified forecast is provided. Management highlighted higher interest rates, market volatility and credit spreads as pressures on loan volume, margins, financing availability and fair values. It cited stronger reverse-mortgage production and margins, particularly through the acquired AAG/Bloom retail platform, alongside cost-cutting and restructuring efforts. The home-improvement lending wind-down was substantially complete by quarter-end, with no loans remaining in its pipeline and no further funding expected.
Fair-value accounting is a major source of earnings volatility: most loan assets and related obligations are measured using Level 3 models and unobservable assumptions. A hypothetical 25-basis-point decrease in rates was estimated to increase asset fair values by $152.9 million and liabilities by $89.8 million; a 25-basis-point increase was estimated to reduce assets by $152.7 million and liabilities by $99.0 million. These sensitivities are hypothetical and do not capture all interacting market changes.
- Material risks include sustained high rates, secondary-market disruption, fair-value estimation uncertainty, funding and refinancing needs, warehouse-facility renewals and margin calls, regulatory and servicing requirements, and dependence on subsidiary distributions to fund the holding company.
- Reverse-mortgage borrower advances and undrawn commitments are significant: $4.5 billion of agency and non-agency reverse-mortgage commitments were outstanding. Nonrecourse debt had estimated contractual payments of $1.28 billion for the remainder of 2024, though repayment depends on cash flows from pledged loans.
- The $350 million senior unsecured notes mature in November 2025 and bear 7.875% interest. Related-party working-capital notes totaled $84.6 million, bear 10% interest rising to 15% on May 15, 2024, and mature in May 2025.
- The company disclosed coordinated California PAGA representative lawsuits whose outcome and possible loss range could not be estimated. It reported no other matters considered probable or reasonably possible with estimable losses. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether reverse-mortgage volume and the improved retail production margin can persist while marketing and platform costs are controlled.
- How much future earnings and equity may be affected by Level 3 valuation assumptions, interest-rate movements and model changes.
- Availability, renewal terms and covenant headroom of warehouse and other secured facilities, including upcoming 2024 maturities and potential margin calls.
- Resolution and consequences of FAM’s Fannie Mae covenant violation, its planned license and approval surrenders, and FAR’s Ginnie Mae capital-ratio waiver.
- Ability to meet the 2025 senior-note and related-party-note maturities, and the impact of the related-party rate increase to 15% in May 2024.
- Cash needs associated with $4.5 billion of reverse-mortgage unfunded commitments, contingent liabilities, litigation and the Tax Receivable Agreement.
- Reconciliation of reported cash generation and liquidity: Q1 operating cash use was $132.2 million, while only $48.2 million of the $243.6 million cash-and-restricted-cash balance was unrestricted cash.