Finance of America Third Quarter 2026 Earnings Call - FINANCE OF AMERICA COMPANIES INC

Financial Performance:

• Third quarter funded volume reached $748 million, a 24% year-over-year increase and up from $730 million in Q2 2026; YTD production was $2.1 billion (up 17% YoY).
• GAAP pre-tax loss was $130 million, driven primarily by $167 million in unfavorable non-cash fair value adjustments on portfolio assets due to rising discount rates, partially offset by reduced convertible note liability.
• Adjusted net income was $6 million ($0.28/share); adjusted earnings per share for the quarter reflects temporary margin compression.
• Retirement solutions revenue margin declined to 9% in Q3 2026 (vs. 11.3% in Q3 2025) due to rate environment impacts; portfolio management segment generated $11 million adjusted net income.
• Total expenses (excluding securitization costs) increased only $2 million YoY, with variable compensation rising due to retail growth offset by lower marketing spend.
• Cash from operations and capital markets activities totaled $145 million YTD, including $33 million in Q3; cash and cash equivalents rose to $118 million as of September 30.

Guidance and Future Outlook:

• Full-year 2026 funded volume guidance maintained at the low end of the range ($2.8–$3.1 billion); adjusted EPS guidance lowered to below $4.50–$5.00 for 2026 due to margin compression and pipeline lag.
• 2027 funded volume expected to reach $3.1–$3.4 billion, driven by demographics and product breadth.
• Adjusted EPS guidance updated to a run rate of $4–$5 for the second half of 2027, contingent on margins normalizing.
• Revenue margins are projected to return to historical levels (~10.7%) in the first half of 2027; Q4 2026 earnings are expected to approximate Q3 results.
• Management anticipates strong volume growth despite potential continued interest rate volatility, with no specific rate assumptions embedded in 2027 guidance.

Business Segments and Product Lines:

• Retail platform productivity per loan officer increased 40% YoY to $1.2 million per month; retail funded volume up 54% YoY to $303 million.
• Wholesale channel (60% of volume) funded $444 million (up 10% YoY); submissions reached $625 million (highest in 7 quarters).
• Product line performance: HELOC (Hecum) volume up 14% YoY, HomeSafe first liens up 15% YoY, and HomeSafe seconds up 63% YoY.
• Digital platform scaling: pre-qualification starts up 89%, digital opportunities up 61%, and lead-to-application time reduced to under six days (from ~20 days).
• New product launch: Line of credit version of HomeSafe Second launching soon; broader home equity solutions suite expansion planned for 2027.
• Strategic acquisitions: Completed acquisition of Onity's HECM servicing portfolio; repurchased remaining Blackstone equity position.

Market and Competitive Landscape:

• Company volume growth (20% annual since 2023) significantly outpaces the traditional forward mortgage industry growth (~6% CAGR expected through 2027).
• Growth driven by retirement demographics rather than refinancing incentives; demand remains resilient despite high rates.
• Traditional mortgage industry applications projected to decline by 5% in 2027, whereas FOA expects double-digit growth.
• Competitive advantage leveraged through proprietary product suite and technology enabling higher conversion rates compared to peers.

Risks and Challenges:

• Rising interest rates (10-year Treasury yields up >75 bps in Q3) caused temporary margin compression and unfavorable non-cash fair value adjustments on assets.
• Long production cycle for reverse mortgages (60–90 days from lead to funding) delays the full impact of pricing adjustments on earnings.
• Potential for further Fed rate increases in late 2026 could necessitate additional product pricing adjustments and delay margin normalization.
• Seasonality risk: Q1 fundings are historically the lowest of the year due to holiday dips in submissions.

Management Commentary and Tone:

• Tone is confident and resilient, emphasizing that growth is demographic-driven and not dependent on the interest rate cycle.
• Management expressed strong belief that margin compression is temporary and that long-term fundamentals remain intact.
• Highlighted successful navigation of similar high-rate environments in 2022 as precedent for effective price/product adjustments.
• Emphasized discipline in cost management, capital allocation, and shifting focus from "quantity" to "quality" in loan origination.

Analyst Questions and Answers:

• Q: Margin Recovery Timing: Management confirmed new pricing/LTV adjustments made in October will restore margins; Q4 will remain below historical levels as legacy pipeline clears, with normalization expected in Q1/Q2 2027.
• Q: 2027 Rate Assumptions: Management remains agnostic to interest rates, stating they will adjust products/pricing to maintain the target ~10.7% revenue margin regardless of Fed moves.
• Q: Guidance Lag: Explained that the leaner EPS guidance for H1 2027 stems from the long senior cycle timeline for reverse mortgages and potential Q1 seasonality, not just margin issues.
• Q: Capital Allocation: Confirmed $60 million debt paydown scheduled for October and $90 million remaining to be retired by November 2027; potential share buybacks and dividends likely post-debt retirement, aided by cash flow from securitization re-issuance and HECM MSR financing.

Other Key Points:

• The company has successfully reduced headcount or maintained it while significantly increasing output, with retail headcount remaining flat YoY despite productivity gains.
• Management views the $167 million non-cash loss as a valuation artifact rather than an economic loss; assets continue to accrete yield in the mid-teens.
• A new website launch is scheduled for the first half of 2027 to further improve funnel conversion.
• The company plans to maintain financial flexibility by extending ~$90 million in senior secured notes to November 2027 after paying down $60 million.