Finance of America Companies Inc. (FOA) has evolved from a vertically integrated lending and complementary services platform to a leading provider of innovative home equity-based financing solutions tailored to the modern retirement landscape. With a sharp focus on empowering senior homeowners, the company has navigated significant strategic shifts and market challenges to solidify its position as a trusted partner in unlocking the power of home equity.
Navigating a Transformative Journey
Finance of America's origins date back to 2013 when it was founded as Finance of America Holdings LLC. Over the next several years, the company grew through a series of acquisitions, expanding its lending and services capabilities. In 2017, the company rebranded to Finance of America Companies Inc. and began preparing for an eventual public listing.
In April 2021, Finance of America completed its initial public offering and began trading on the New York Stock Exchange under the ticker symbol FOA. The public listing was a major milestone for the company, providing access to capital markets to support its continued growth and expansion.
However, the company faced significant challenges in the following years. In the fourth quarter of 2022 and throughout 2023, Finance of America underwent a strategic transformation, discontinuing certain business lines such as its mortgage originations and commercial lending segments. This was part of the company's broader shift from a vertically integrated lending and services platform to a more focused modern retirement solutions provider.
The company's decision to exit these business lines and refocus on its core reverse mortgage and home equity lending products was not without difficulties. Finance of America had to navigate complex legal and regulatory hurdles, as well as manage the operational disruption of winding down legacy operations. Despite these challenges, the company was able to successfully execute on its strategic realignment, positioning itself as a leading provider of home equity-based financing solutions for the growing senior population.
The acquisition of American Advisors Group (AAG) in March 2023 marked a significant milestone in this transformation. The integration of AAG's retail loan originations platform has bolstered Finance of America's capabilities, enabling the company to better serve senior homeowners through a unified brand and streamlined workflows.
Embracing the Power of Home Equity
With approximately $14 trillion in home equity held by older homeowners in the United States, Finance of America is uniquely positioned to address the financial needs of this growing demographic. The company's innovative suite of reverse mortgage and home equity-based products, such as the HomeSafe Second loan, provide senior homeowners with flexible options to access their home's equity without refinancing their primary mortgage.
The HomeSafe Second loan, in particular, has gained traction in the market, experiencing an 89% increase in volume in the third quarter of 2024 compared to the previous quarter. This product caters to the needs of homeowners aged 55 and older who seek to unlock their home equity without affecting their existing low-rate conventional mortgages.
Driving Operational Efficiency and Profitability
Finance of America's strategic transformation has yielded tangible results in terms of operational efficiency and profitability. The company's cost-cutting initiatives and focus on right-sizing have led to a significant reduction in expenses, with total expenses decreasing by 23.8% in the third quarter of 2024 compared to the same period in the previous year.
The company's adjusted net income for the third quarter of 2024 reached $15 million, or $0.67 per share, a marked improvement from the $23.7 million adjusted net loss, or $1.03 per share, reported in the third quarter of 2023. This progress reflects the company's ability to adapt to changing market conditions and maintain a disciplined approach to cost management.
Financials
Finance of America's financial performance has shown notable improvement following its strategic transformation. The company reported adjusted net income of $15 million for the third quarter of 2024, translating to $0.67 per share. This represents a significant turnaround from the $23.7 million adjusted net loss, or $1.03 per share, reported in the same quarter of the previous year.
For the most recent fiscal year (2023), Finance of America reported revenue of $177.03 million, a net loss of $218.16 million, and negative operating cash flow (OCF) and free cash flow (FCF) of $71.57 million. However, the company's performance has significantly improved in recent quarters. In the third quarter of 2024, revenue reached $290.07 million, with net income of $203.75 million. Despite this improvement, OCF and FCF remained negative at $81.37 million for the quarter.
The company's funded volume reached $513 million in the third quarter of 2024, exceeding the high end of its guidance range. This achievement is particularly noteworthy given the challenging macroeconomic environment, including higher interest rates.
For the first nine months of 2024, Finance of America generated $444 million in total revenue, $183 million in net income, $9 million in adjusted net income, and $42 million in adjusted EBITDA.
Liquidity
Finance of America has taken significant steps to strengthen its balance sheet and enhance its liquidity position. As of September 30, 2024, the company reported a tangible net worth of $231 million, or approximately $10 per share. This robust capital position provides a solid foundation for the company's growth initiatives and enhances its ability to weather potential market volatility.
The company's debt-to-equity ratio stood at 32.04 as of September 30, 2024, with $44.26 million in cash on hand. Finance of America has access to $995 million in reverse mortgage warehouse facilities, of which $576.48 million was outstanding as of September 30, 2024. Additionally, the company has $513.30 million in other secured credit facilities, with $478.09 million outstanding as of the same date.
The successful completion of a debt exchange offer in October 2024 further bolstered the company's financial flexibility. This transaction, which saw nearly 98% participation from noteholders, involved the issuance of new senior secured notes and exchangeable senior secured notes, effectively restructuring the company's debt profile.
Strengthening the Balance Sheet and Financial Flexibility
In October 2024, Finance of America completed a significant exchange offer and consent solicitation for its 2025 Unsecured Notes, with nearly 98% participation from noteholders. This transaction, which involved the issuance of new senior secured notes and exchangeable senior secured notes, has significantly enhanced the company's balance sheet and financial flexibility.
The successful debt restructuring, combined with the company's improved operational performance, has positioned Finance of America for sustained growth and profitability. As of September 30, 2024, the company reported tangible net worth of $231 million, or approximately $10 per share, further strengthening its ability to capitalize on opportunities in the evolving retirement solutions market.
Navigating a Challenging Macroeconomic Environment
Finance of America has demonstrated its ability to adapt to shifting market conditions, including the higher interest rate environment experienced in 2023 and 2024. Despite these headwinds, the company has managed to maintain its momentum, with funded volume reaching $513 million in the third quarter of 2024, exceeding the high end of its guidance range.
The company's focus on diversifying its product offerings, such as the HomeSafe Second loan, has proven to be a strategic advantage. As interest rates rise, this product has become an increasingly attractive option for senior homeowners, allowing them to access their home equity without refinancing their primary mortgages.
Looking Ahead: Poised for Sustained Growth
Finance of America's transformation into a modern retirement solutions platform has positioned the company for continued success. The company expects to deliver adjusted earnings per share between $2.60 and $3 in 2025, reflecting its confidence in the long-term growth potential of the home equity-based financing market. Additionally, Finance of America anticipates generating funded volume of around $2.7 billion for the full year 2025.
With a strengthened balance sheet, improved operational efficiency, and a diversified product portfolio, Finance of America is well-equipped to capitalize on the growing demand for innovative retirement solutions among the aging population. The company's digital innovation strategy, which aims to deliver a seamless customer experience, further enhances its ability to reach and serve this underserved market segment.
Retirement Solutions Segment
The Retirement Solutions segment of Finance of America is the cornerstone of the company's strategic focus on helping senior homeowners achieve their financial goals in retirement. This segment encompasses all loan origination activity, including Home Equity Conversion Mortgages (HECMs) insured by the Federal Housing Administration (FHA) and non-agency reverse mortgage loans.
Revenue in this segment is primarily generated from fees earned at the time of loan origination and the initial estimate of net origination gains. All originated loans are accounted for at fair value and subsequently transferred to the Portfolio Management segment.
In the third quarter of 2024, the Retirement Solutions segment demonstrated strong performance:
- Loan originations reached $513.36 million, a 9.2% increase from $469.96 million in the prior year period. - The weighted average margin on reverse mortgage loan production improved to 11.15%, up from 6.68% in the same period last year, driven by higher volumes and improved margins in the retail channel. - Fee income decreased to $7.25 million, compared to $10.98 million in the prior year period, primarily due to the wind-down of the home improvement lending business. - Net origination gains increased by 82.4% to $57.22 million on the $513.36 million in loan originations. - Total segment revenues increased 60.6% to $64.46 million, up from $40.15 million in the same period of 2023. - Segment expenses decreased 19.2% to $48.53 million, reflecting the company's ongoing cost-cutting initiatives.
Portfolio Management Segment
The Portfolio Management segment plays a crucial role in Finance of America's business model, providing product development, loan securitization, loan sales, risk management, servicing oversight, and asset management services. This segment acts as the bridge between borrowers and investors, leveraging the company's FINRA-registered broker-dealer to innovate and manage risk effectively.
Key highlights from the Portfolio Management segment in the third quarter of 2024 include:
- Total segment revenues increased significantly to $234.95 million, up from $102.99 million in the prior year period. - This improvement was largely driven by a $343.2 million increase in net fair value changes on loans and related obligations, reflecting market interest rate and yield volatility. - The segment saw a $3.5 million increase in gain on securitization of HECM tails, net, due to higher premiums from its tail securitizations. - Portfolio interest income rose to $489.90 million, up from $444.00 million in the prior year period. - Portfolio interest expense increased to $426.84 million from $372.46 million. - Net portfolio interest income decreased to $63.06 million from $71.54 million a year earlier. - Segment expenses decreased 14.4% to $18.39 million, reflecting ongoing operational streamlining and cost-saving initiatives.
The Portfolio Management segment's performance underscores its critical role in connecting Finance of America's loan origination capabilities with a diverse investor base, facilitating the efficient monetization of the company's loan products.
Industry Trends and Market Opportunity
The reverse mortgage market in the United States has been experiencing steady growth, driven by an aging population and increasing home equity among seniors. This demographic trend represents a significant long-term opportunity for Finance of America and its suite of home equity-based financing solutions.
As the senior population continues to grow and seek ways to fund their retirement, the demand for innovative financial products that leverage home equity is expected to rise. Finance of America's strategic positioning in this market, coupled with its diverse product offerings and strong origination capabilities, places the company in a favorable position to capitalize on these industry trends.
Conclusion
Finance of America's journey from a diversified lending and services platform to a focused retirement solutions provider is a testament to the company's strategic agility and its commitment to serving the evolving needs of senior homeowners. By navigating a transformative period, strengthening its balance sheet, and driving operational excellence, Finance of America has positioned itself as a leading player in the burgeoning home equity-based financing market.
The company's improved financial performance, particularly in the Retirement Solutions and Portfolio Management segments, demonstrates the success of its strategic shift. With a strong pipeline of innovative products, a robust capital position, and a clear focus on the growing senior demographic, Finance of America is well-positioned to drive sustained growth and value creation in the years ahead.
As the senior population continues to grow and increasingly seeks to unlock the value of their homes, Finance of America is poised to play a vital role in empowering a modern and financially secure retirement. The company's outlook for 2025, including projected adjusted earnings per share of $2.60 to $3 and anticipated funded volume of $2.7 billion, reflects its confidence in the long-term potential of its business model and the broader market opportunity in home equity-based retirement solutions.