Pagaya Technologies Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2025
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Operator

Ladies and gentlemen, greetings and welcome to the Pagaya Technologies Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Josh Fagan, Head of Investor Relations. Please go ahead.

Joshua Fagen
Joshua Fagen
COO of Finance and Head of Investor Relations at Pagaya Technologies

Thank you, and welcome to Pagaya's fourth quarter and full year twenty twenty four earnings conference call. Joining me today to talk about our business and results are Gal Kroubner, Chief Executive Officer of Pagaya Sanjeev Das, President and Evangelos Peros, Chief Financial Officer. You could find the materials that accompany our prepared remarks and a replay of today's webcast on the Investor Relations section of our website at investor.pegaya.com. Our remarks today will include forward looking statements that are based on our current expectations and forecasts with respect to, among other things, our operations and financial performance, including our financial outlook for the first quarter and full year of 2025. Our actual results may differ materially from those contemplated by these forward looking statements.

Joshua Fagen
Joshua Fagen
COO of Finance and Head of Investor Relations at Pagaya Technologies

Factors that could cause these results to differ materially from our expectations include, but are not limited to, those risks described in today's press release and our filings with the U. S. Securities and Exchange Commission. We undertake no obligation to update any forward looking statements as a result of new information or future events. Please refer to the documents we file from time to time with the SEC, including our 10 K, 10 Q and other reports for a more detailed discussion of these factors.

Joshua Fagen
Joshua Fagen
COO of Finance and Head of Investor Relations at Pagaya Technologies

Additionally, non GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, fee revenue less production costs or FR LPC, FR LPC as a percent of network volume and core operating expenses will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available to the extent available without unreasonable efforts in our earnings release and other materials, which are posted to our Investor Relations website. We encourage you to review the shareholder letter, which was furnished with the SEC on Form eight ks today for detailed commentary on our business and performance in conjunction with the accompanying earnings supplement and press release. With that, let me turn the call over to Gal.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

Thank you for joining us today for a discussion of our fourth quarter and full year '20 '20 '4 results, as well as an update on our business as we enter 2025 on the strongest overall footing in our company's history. You will see from our press release this morning that we closed out 2024 with an annual revenue of more than $1,000,000,000 up twenty seven percent year over year, FRLPC of $4.00 $7,000,000 up 54% year over year and adjusted EBITDA of $210,000,000 up 156% year over year. All of our key reported metrics were at record levels and beat our prior guidance. As we close out 2024 and as part of our regular quarterly process, we have updated the fair market values for our risk retention securities tied to 2021, '20 '20 '2 and 2023 loan vintages. We noted during the third quarter twenty twenty four earnings that we expected to have taken the vast majority of expected impairment charges associated with our 2022 vintages along with prior vintages by year end 2024.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

The 2023 risk retention securities, which totaled at $275,000,000 at the end of the third quarter, were marked down by $145,000,000 this quarter, which impacted our P and L. Even with the vast improvement in credit performance, the values of these securities, as mentioned in the past, were extremely sensitive to even small changes in underlying credit in prepayment assumptions, because of the challenging funding environment that existed during 2023. We believe that we are now poised to generate consistent growth going forward that is profitable and as such we are providing our first ever GAAP net income profit guidance as part of our 2025 outlook. Ypi will provide more detail on our financial results later in the call. I want to take a step back and revisit where Pagaya is in its evolution, while it is sets our product and company apart and underscore the value that we bring across our network, our ecosystem and to our shareholders.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

We created Pagaya to enable lenders to provide more credit products and services to more customers, customers who have traditionally been excluded from the financial ecosystem. These are good borrowers, hardworking mainstream Americans. And the country's biggest lenders are increasingly leveraging Pagaya's differentiated product value proposition to do exactly that, offering more credit products and services to more customers. And when they do, they retain and add more customer and more valuable depositor accounts, they maintain and enhance customer lifetime value and they boost return on marketing spend, all without bearing the balance sheet costs. Recently, several lending partners have expanded the use of our unique solution to further engage existing customers to boost cross sell and further solidify relationships.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

As important as the unique value proposition our product offer is the deep level of integration within our partners' internal lending funnel. This enables Pagaya to seamlessly add and service customers on behalf of these lending partners. The best evidence of our solution is the industry demand and usage with over $2,600,000,000,000 of loan application running through across our network resulting in a $28,000,000,000 of loan originated provided to 2,000,000 people. To put things in perspective, that's nearly 1% of all adult Americans. And with this demand and success, the flywheel only getting stronger.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

Each application across our network provide Pagaya more valuable data, which is used to make our underwriting technology even stronger. This in return enhance the value we provide to our partners and when our partners thrive, Pagaya thrives. The timing has never been better for Pagaya to help our 31 lending partners in the fast changing environment. Momentum on the funding side of our network is just as robust and truly underscores the support from several of the largest institutional investors in the financial investment world. Look no further than our recently announced forward flow agreement with funds managed by Blue Owl Capital to purchase up to $2,400,000,000 in consumer loans through Pagaya Network over twenty four months.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

This is the second large forward flow agreement announced in just less than six months, a testament to the demand for the high quality consumer loan originated on our network. In addition to that, we have raised $27,000,000,000 in our ADS program across 66 transactions with over 130 institutional funding partners. We closed our sixth AAA rated ABS transaction in the fourth quarter and executed our third pass through securitization of the year in December for $100,000,000 We expect that all of our funding program will continue to experience strong growing and oversubscribed demand as Pagaya becomes a one stop shop for big institutional investors that are looking to get exposure to the space in the form of personal loans, auto loans or point of sale loans. Our current management team is highly experienced, having navigated challenging credit businesses through various titles. This management's job has been to drive the maturity of our operating model and financial structure to amplify and maximize the value we can provide not only to our partners, but to our shareholders as well.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

Over the last year, we have built the strongest and most efficient funding mechanism in Pagaya's history. We have restructured our balance sheet and hence our liquidity profile and that means we are now fully self funded. Investors may wonder if we need to raise equity capital to support the business given the quarter's outside GAAP net loss. The answer is simple. It's no.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

We do not expect to need any equity capital moving forward. Our certainty is derived from the optimization our team achieved on our funding and operating model in 2024. We worked tirelessly to increase our net sales reflected in FRLPC by 55 year over year to 4.5% of our volume, while at the same time reducing our net cash requirement to fund our volume from 3% to almost 1.5%. Along with high quality liquid securities on our balance sheet, this paves the way to positive cash flow eliminating any need for equity raise. We believe that we now have the operational and financial momentum, balance sheet strength, maturity and deep institutional credit skills to manage through various environments.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

We expect that our growth will be disciplined. And while credit impairment will always be part of any credit related business, for Pagaya, their impact is expected to be far smaller. This is reflected in our inaugural GAAP net income guidance, which we will discuss later in the call. We are entering 2025 at a pivotal point where we believe that we have achieved the scale, operating and structural efficiency to be GAAP net income positive by the second quarter of twenty twenty five. In closing, I could not be more excited standing here today in front of you ahead of what Pagaya will deliver to the investment community and partners throughout this year and going forward.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

This inflection point is an important one. We will continue our mission to boost financial inclusion, to bridge mainstream and Wall Street, and at the same time showcase our ability to generate powerful and consistent EPS growth for our shareholders. We look forward to demonstrating the benefits of all of our hard work and investment to maximize the value of one of the country's most unique and in demand lending networks. With that, let me turn the call over to our President, Sanjeev Das to provide an update on our product and growth strategy.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

Thank you, Gal.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

I'd like to

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

start where Gal left off by reiterating that we believe that our business is now the strongest it's ever been. Our solutions have never been as in demand as they are currently and our business has never been as well positioned to service that demand, while sustainably maximizing the impact for our shareholders. In terms of our lending partners, growth from existing partners and our new partner pipeline remain extremely robust. We expect that we will continue to boost monetization among leading institutional partners, adding new products to better penetrate their existing customer bases, while seeing the ramp from more recently added relationships. In fact, we anticipate at least eight lending partners will each generate $500,000,000 or more of network volume during 2025.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

I want to take a moment to review our momentum across our three core products personal loans, auto and point of sale loans. These three product lines are at different stages of maturity and monetization within our business, which drives a mix of strong stable growth from longer standing products along with more rapid growth trends from newer products, fueling consistent long term growth from both volume and monetization. Starting with our most mature product, personal loans, partner demand remains robust as we look into 2025. Growth here is disciplined as we continue to see strong and stable consumer performance among loan vintages that have seasoned over the last twelve to eighteen months. In terms of monetization, personal loan FRLPC is robust at 6.3% versus 4.5% overall.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

Despite the relative maturity of this product on our network, volumes this quarter grew by 24% on an organic basis to $1,600,000,000 Turning to auto lending, here too we are focusing on disciplined and judicious growth as we ramp back up to leverage improving sector trends. Here too, we have seen strong and stable credit performance with 2023 vintages markedly better than 2022 peaks. EP will discuss these trends in detail later in the call. After an uncertain macroeconomic backdrop, we focused our efforts during 2024 on improved credit underwriting and are positioned to benefit from substantially improving funding efficiency and notable improvement in returns and margins. We completed the onboarding of OneMain Financial and expect to start generating more volume from recently onboarded partners.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

Our year end auto volume annualized run rate was nearly $1,000,000,000 with fourth quarter sequential growth of just under 40%. Our POS product, the newest and fastest growing vertical is said to be the most powerful contributor to medium term growth, leveraging very strong demand for our product. Here, we are pushing forward with existing partners, Klarna and U. S. Banks, Elavon, while discussions continue with many major center banks and global payment brands.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

Already, we are seeing robust growth in this vertical with over 170% sequential growth in our POS volumes in fourth quarter. Our year end exit rate represents a run rate of more than $1,000,000,000 in network volume with strong returns. Turning to our new partner pipeline, demand remains extremely robust. Among our potential new partners, I'd like to highlight several late stage discussions among U. S.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

Regional banking institutions and look forward to sharing more progress through 2025. As we gain more traction with new and existing partners, we have evolved our product strategy to help partners serve their customers' needs outside of the second look product. Our prescreen product for instance, which is in testing with three existing partners, has enabled lenders to drive engagement with substantially lower customer acquisition costs and we believe that over time will drive increased conversion. As a reminder, the prescreen product is truly innovative. It leverages our access to Lending Partners' customer data combined with our own data to provide recommendations for additional lending products to customers who deserve them and who would benefit from them.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

By helping our partners to offer additional products and opportunities to engage with qualified customers, the prescreen product enables our partners to drive further growth without additional marketing costs, not only boosting return on investment, but retention. We look to scale this product further through 2025. We are also focused on helping our partners leverage customer acquisition products across asset classes outside their traditional channels. For instance, we are testing affiliate expansion with several existing partners and see promising customer acquisition trends, which is another avenue to help our partners drive customer and revenue growth, engagement and returns on investment. We believe that the best way we can measure the value we provide our partners is through the FRLPC we generate on network volume.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

After all, as our partners benefit, so do we. In fact, our FRLPC grew by 55% in the fourth quarter of twenty twenty four, resulting in a record 4.5% of network volumes, the top of our guidance range. Our quarterly application volume of 197,000,000,000 helps illustrate our deep integration across many large lending institutions. And the fact that we have funded under 1% of those loans speaks to our extremely prudent underwriting standards. As I turn over to EP to discuss our financials in more detail, I want to leave you with the understanding that we expect our growth will be as balanced and disciplined as ever.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

We have extremely robust demand trends from both new and existing partners and opportunities to expand the ways in which we help them engage and monetize their customers across their enterprise offerings.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

With that, I will now pass it over to EP.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Thank you, Sanjeev. Twenty twenty four was a solid year for Pagaya from a financial perspective as we turn the corner to a new chapter in our company's history. In the beginning of 2024, we set out two aspirational goals to become cash flow positive and to set ourselves up to become GAAP net income positive in 2025. And while the journey to get there has been very challenging, the team readily embraced it and successfully executed towards achieving these goals.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

We are ready to leverage all of the hard work, tough decisions, instructive learnings from our disappointing past performance and deep management experience to truly demonstrate the earnings power of our business in 2025 and beyond. Throughout 2024, we were enlightened by our experience dealing with legacy issues and the adverse impact from our 2021 to 2023 performance, but still remained laser focused on building a disruptive business that can withstand all cycles and create long term shareholder value. Pagalia has been tested as has our sector, U. S. Consumers and our lending partners, and we have persevered and emerged from a series of macro and other factors with a strong fee generating engine, improved capital structure and liquidity profile and significant operating leverage.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

I'm very pleased to be here today and provide our inaugural launch of positive GAAP profitability guidance, which we expect in the second quarter of this year, while executing on a business plan that is self funded. This is no small feat for a company of our size and short history. Our results for the fourth quarter were better than our guidance, demonstrating strong monetization of robust network volume and continued operating leverage leading to 88% EBITDA growth. We are publicly guiding to GAAP net income profitability for the first time, which I will discuss in more detail later. Before turning to detailed results, I'd like to highlight several achievements, which reflect consistent execution of our financial strategy.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

FR LPC as a percent of volume at a record 4.5% increased 25 basis points quarter over quarter and 130 basis points year over year, the truest measure of the value we provide to our network partners. Core operating expenses were 49% of our FR LPC, the lowest in our public history, a testament to the operating leverage in our model and the trend which will persist going forward. Our funding program has been further optimized with diverse funding sources such as the recent forward flow from Blue Owl and improvement within our ABS program. Net cash required to fund our volume has declined to 2% to 3% for personal loans and 1.5% to 2.5% for all network volume. This is a step function improvement in our risk exposure in absolute terms as well as cash flow characteristics.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Our interest expense and access to liquidity have improved meaningfully as we completed our previously announced balance sheet restructuring and refinancing. Lastly and importantly, we no longer expect to face material headwinds to profitability from securities on our balance sheet associated with 2021 through 2023 vintages. This allows us to demonstrate the true earnings power of our operating model as stable recurring growth in revenue is expected to drive profitability. Turning to network volume, we saw 9% growth in the fourth quarter to $2,600,000,000 of which we funded under 1% of the flow through our network, relatively in line with the trend over the last several quarters. Part of the increase was attributable to CRM and higher than expected conversion versus what we expected with our previous guidance.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Personal loans remain the largest contributor to volume, up 24% year over year, organically at approximately 60% of total. Total revenue and other income of $279,000,000 grew by 28% from the year ago quarter with fee revenue up 31% primarily due to personal loans. FRLPC grew 55% to a record $117,000,000 in the quarter and was a record 4.5% of network volume. This was at the high end of the 3.5% to 4.5% range we provided for the second half of twenty twenty four and was up 130 basis points from the year ago quarter. Once again, lending product fees made up the majority or 71% of total FRATC, up from sixty three percent one year ago and thirty two percent two years ago.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

This is an important and purposeful shift towards more sustainable and predictable revenue growth through the cycle. Our adjusted EBITDA grew 88% year over year to a record $64,000,000 with margins up seven thirty basis points to 23%. Incremental margins of 49% in the quarter reflected strong operating leverage, a trend we expect to continue going forward. Net income attributable to Pagaya was a loss of $238,000,000 and was primarily impacted by fair value adjustments, a risk that we have highlighted during our third quarter earnings. The losses ended up higher than we expected.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Overall, fair value adjustments net in our overall portfolio were a loss of $156,000,000 versus $101,000,000 in the prior quarter. Addition, of $79,000,000 in other comprehensive income on our balance sheet were reversed and reported as other expenses net on our P and L. This reversal is attributable to our fair value estimate assuming we will exercise our optional redemption rights on several of our investments as the most likely scenario compared with prior estimates. We believe we have taken the majority of our losses related to historical vintages in the last quarter and we do not expect them to have a material impact, if any, to our performance in the future. I want to highlight a few things and emphasize what I mentioned before.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Losses in any consumer lending business are to be expected, but the outcome of our execution over the challenging 2021 to 2023 period is still deeply disappointing. Throughout 2024, we have taken significant actions to effectively navigate similar outcomes in the future. Select examples include our scale and expanded flow access, improved credit underwriting and risk management overlay, funding optimization and diversification, cost of capital improvement, all of which have been validated by third parties such as rating agencies, corporate funding partners and institutional investors looking to gain access to our production. In addition, introducing GAAP net income guidance is one step towards driving visibility and accountability. Continuing with our results, interest expense was $26,000,000 in the quarter, while share based compensation expense of $16,000,000 was towards the lower end of our expected range of $15,000,000 to $20,000,000 per quarter.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Adjusted net income was positive for the sixth consecutive quarter at $13,000,000 excluding share based compensation and other noncash items such as fair value adjustments. Our credit performance remains strong with continued improvement over the past two years, driven by enhancement of our underwriting models. Our personal loan cumulative net losses for first and third quarter twenty twenty three vintages are 20% to 35% lower than peak losses in late twenty twenty one at the same month on book. Auto cumulative net losses for first and third quarter twenty twenty three vintages are trending approximately 30% to 50% lower than peak 2022 vintages at the same month on book. Turning to funding, the team has driven meaningful improvements in diversification and efficiency of our funding channels.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

In our ADS program, as of the end of twenty twenty four, we have issued $26,000,000,000 across 64 transactions with more than 130 partners, including our sixth AAA rated transaction, which closed in the fourth quarter. We expect net risk retention levers in our personal loan paid ABS program to remain in the 4% to 5% range of notional size of the deals. Last week, we announced our second large forward flow agreement with funds managed by Blue Owl Capital to purchase up to $2,400,000,000 in consumer loans through the Pagaya network over a twenty four months period. This is a clear testament to the attractiveness and demand of consumer credit originated across Pagaya's platform and our focus on funding loan origination in a capital efficient manner. We have further diversified on the back of our third pass through securitization of the year in December for $100,000,000 As a reminder, pass through transactions not only help to diversify our funding sources, but the net risk retention requirement is at a minimal 1% of the notional size of the deal.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

We will continue to leverage strong demand from investors for these products. We currently expect all non ABS funding channels to represent 25 to 50% of our twenty twenty five funding sources. This will lead to continued reduction in required risk retention, and we will continue to consider holding more securities when and if it makes economic sense. Before turning to guidance, I want to review our balance sheet and provide more details on fair value adjustments for the quarter. We ended the year with $227,000,000 in cash and cash equivalents and $764,000,000 in investments in loan and securities.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

In the fourth quarter, the fair value of the overall investment portfolio net of non controlling interest and prior to any new additions in the quarter was adjusted downward by $156,000,000 versus $101,000,000 last quarter. 90% of those adjustments were driven by the 2023 vintages as a result of the meaningfully higher cost of capital at which these transactions were executed, leaving minimal to no cushion against changes in initial loss assumptions, which still ended up being higher than expected at the time of pricing. Additionally, we reversed the previous loss of $79,000,000 in other comprehensive income in our shareholders' equity, which was a reclassification to other expense as I explained earlier. Our 2025 guidance, which includes positive GAAP profitability in 2025, reflects multiple illustrative scenarios related to future impairments, if any, as laid out in our earnings supplement. In the fourth quarter, we also added $17,000,000 of new investments in loan and securities, net of pay downs from prior investments, inclusive of an $8,000,000 gain on sale.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

As of year end, the mix of our investments was 31% notes and 68% certificates versus 13 notes and 87% certificates a year ago. The improvement in mix and quality of our assets is an additional source of potential liquidity for Pagaya as we head into 2025. Turning to our outlook. Our full year 2025 and Q1 twenty twenty five outlook reflect the current momentum and resilience in our business. And while we see improvement in the macro environment, we remain cautious.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

The focus remains on profitable growth and we expect to generate positive GAAP net income profitability in the second quarter of the year. We expect continued growth across personal loan, auto and POS products, while FRLTC reflects the full year impact of the improvement in fees in 2024 and the change in funding mix. Given the investments to date in operating efficiencies, we do not expect any material investment in the business in 2025. GAAP net income profitability will be driven by these factors along with lower fair value adjustments, if any, as well as lower interest expense, all the result of our relentless execution in 2024 to get the company to be cash flow and GAAP net income positive. For the first quarter of twenty twenty five, we expect network volume in the range of $2,500,000,000 to $2,700,000,000 total revenue and other income in the range of $280,000,000 to $295,000,000 and adjusted EBITDA in the range of $65,000,000 to $75,000,000 We expect first quarter GAAP net income in the range of negative $20,000,000 to breakeven.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

For the full year, we expect network volume in the range of $10,250,000,000 to $11,750,000,000 total revenue and other income of $1,150,000,000 to $1,275,000,000 and adjusted EBITDA in the range of $265,000,000 to $315,000,000 We are guiding to GAAP net income for the year in the range of negative $10,000,000 to positive $40,000,000 With that, let me turn it back to the operator for Q and A.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. The first question comes from the line of John Hecht from Jefferies. Please go ahead.

John Hecht
John Hecht
Managing Director at Jefferies Financial Group

Good morning guys. Thanks very much for taking my questions and all the details that you provided. And I guess my question is, you've done some you've given us some details around the fair value marks in the quarter. The marks were a little bit bigger than prior quarters. Maybe can you give us a little bit more detail on kind of what framework you use to make the fair value marks?

John Hecht
John Hecht
Managing Director at Jefferies Financial Group

What's baked into them now? And what gives you confidence that there won't be ongoing fair value marks as we go through 2025?

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

Sure, John. Hi, it's Gal here. Thank you so much. So I will take the first piece and then we'll hand it over to AP to speak more specific about the framework and where the loss is coming from and Sanjeev to speak about what it means for the business. So first, let me tell let me say that.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

As we think about the impairments and as you mentioned now, the last three quarters were an outsized losses versus what we used to have in the past and what we expect to have in the future. Most of them were are the things that are driving for 2023. If you recall in our last earning call that we stood here in November, we actually said that we are going to have another quarter of losses coming through. Most of the losses and if you will speak specific numbers are related to the 2023 vintages that throughout the year got seasoned and therefore versus where they are marked on the balance sheet where the actual data coming in took the fair market value hit. And all of that in 2023 was because the funding conditions were so challenging that in order to support the network, the funds and the investors, etcetera, we needed to put up these things that we knew could have some potential losses in the form of the level of sensitivity to it.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

But really the bigger question that you're asking is, how should we feel comfortable that this will not be happening again? So first and foremost, let me share that the guidance that we provided for 2025 is including any potential credit related impairments. We have built in the last two, three quarters a very robust infrastructure and capabilities to be much more predictive about these type of outcome as it relates to the losses and the different parts. And if you remember, we repeatedly said that as we think about the 2024 deals and transactions that we have on the balance sheet because of the different environment they were produced in, plus how we know the performance of the credit is performing and it's performing well, we are in the very strong belief and we have the visibility to know that a meaningful or a magnitude like that of losses is out of the question. That comes to the last piece, which is when we are thinking and speaking about the 2024 trends and where we are standing today as the business and what the business is underwriting today is a very strong production that is consisted both on the credits on the income side, but a lower cost of capital and a better structures on the other side that is translated into normal future losses meaningful on the 2024 in the future.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

And when we did the full fair market value adding our regular process to bring these down, the prior 2024 vintages should not have any material drag on our performance. And hence, we are today having the ability to provide a GAAP net income guidance inclusive of any potential credit related impairments. I will hand it over now to DP to speak a little bit more about the specific of the numbers and the things behind and then Sanjeev will close it out with the understanding of the business impact.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Thanks, Kyle. Hi, John. Thank you for your question. Just wanted to give a little bit more context as well, a little bit more details and more importantly highlight what we have done to mitigate such outcomes in the future. In the last quarter, we did highlight that we expected more losses on the 2023 vintages where were the challenging vintages.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

We had indicated that we had a mark on those of $275,000,000 and we did take a $144,000,000 impairment against those this quarter out of the total of 156 Overall credit related impairments were at $229,000,000 net of non controlling interest, which included a $79,000,000 reversal of previously accumulated losses on our balance sheet that were moved into other expense. 90% of those losses I pointed out are driven by the twenty twenty three's and the rest from the 2021 and 2022 vintages. As a reminder, these were executed during very challenging funding environment where the cost of capital was higher than the actual expected return. So even small changes in credit was exposing us to potentially large losses. I was exposing us to potentially large losses.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

I still want to highlight that despite that the credit performance of the 2023 vintages are significantly better and improved relative to the 2021 and 2022 peaks in the range of 20% to 50% relative to those and you can see a lot more of that details in our supplement. And the second piece I want to highlight is that based on what the market we currently have on the 2023 and the prior vintages, we do not expect any material impact on this on our performance relative to those vintages. All of that gives us confidence obviously together with all the other factors driving our guidance in our ability to deliver the GAAP net income positive for the year. We are providing more visibility in our supplement on what we are assuming in terms of potential impairments if any for 2025 in our supplement. I encourage you to look at that for more details.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Now to your question around the approach on the valuation for those, as you know fair value is effectively based on a range of all different relevant assumptions that drive the changes in projected cash flows. These securities are now seasoned if you think about the 2023 is right, they're seasoned twelve to eighteen months now approximately, which is basically the point where we can really start being predictive about end state losses and assumptions that we have to make three to four years out. So while we have some trends from the earlier vintages in 2023, we did warn about this in 3Q, but we had to go through the full process and get significant more data at the end of the year to conduct the full testing assessment. What's more important I think is here to highlight the actions that we have taken to basically mitigate similar outcomes in the future. And those are driven by three things.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

The optimization of our ABS structures, the diversification of our funding sources and obviously some improvement in the macro environment. On the ABS structure, the structural improvements that we have validated by AAA rating in our PL portfolio and AA in our auto, all of that has lowered the cost of capital and that's a permanent improvement in these structures. In addition, 25% to 50% of our funding is expected to come by non ABS vehicles and therefore put that require basically no capital to be put at risk. All of that lowers the absolute amount of capital that we put to use to fund our volume, which is significantly lower than it would have been related to the 2023. And obviously the macro environment has improved, has been a tailwind, even though we do remain cautious about that and interest rates are still at a very high level relative to historical levels.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

But all of that allows us to have a buffer in terms of the cost of capital that we're currently seeing relative to the expected return of the assets. All of that gives us very strong confidence and this is why we're here today guiding to positive GAAP net income as it relates on our 2025 performance.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

I will pass it over to Sanjeev for maybe some additional remarks.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

Yes. I mean, basically, AP and I'll just to close it out briefly, but very importantly, the way I think about this, John, is the benefits of having leaned in to grow and develop a really solid operating business through a challenging funding period are quite clear. We see that we stood by our lending and our funding partners through the cycle with very good returns. We've now grown our FRLPC to very, very strong levels as you saw at 4.3%.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

We gained our AAA rating through this process, significantly improved our ABS structure. We've strengthened the pipeline of potential partners. You've heard about U. S. Bank, Larnell, OneMain, all of this was done as a result of leaning in, Entered new asset classes with significant payoff like POS as we noted last quarter and this quarter.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

And finally, diversified our funding sources beyond ABS to forward flows and pass throughs with huge institutional partners on both sides in Blue Owl and Castle Lake. And of course, net net, what this has done to the operating business that we are generating today is very strong. And so now we are able to focus on growing it through 2025 and 2020.

Operator

Thank you. The next question comes from the line of David Sharp from Citizens JMP. Please go ahead.

David Scharf
Analyst at Citizens JMP Securities, LLC

Yes, good morning. Thanks for taking my questions. Obviously demand in the pipeline remains very strong. So I'll just follow-up with a couple of follow on credit questions. Hey, first is, I guess for EP, I just want to make sure I understand the guidance correctly because I'm looking at the slide that has the Slide 21, which has the scenarios about write downs and impairments in the loan portfolio.

David Scharf
Analyst at Citizens JMP Securities, LLC

It looks like scenario A is sort of driving your guidance. Am I led to believe that if expected cash flows actually perform in line with your forecast that you're that we'll have $100,000,000 to $150,000,000 more pretax income and then tax effected for GAAP. Is that how we're supposed to interpret Slide 21 that this represents that inherent in the GAAP guidance is some very conservative assumptions around expected cash flows?

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Hi. Thank you for the question. No, I think I would let me provide more clarity. If we expected any more losses on our existing portfolio, we would have obviously taken that. So the base case is what drives effectively our expectation for 2024.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

What we are doing is in our guidance together with everything else, we're just using that scenario A, which provides an additional $100,000,000 to $150,000,000 potential impairments, if any. And that's what's basically driving our guidance. And that's just to be clear, it's on the full year guidance for 2025, not 2Q.

Operator

Thank you. The next question comes from the line of Sanjay Sakhrani from KBW. Please go ahead.

Steven Kwok
Managing Director at Keefe, Bruyette & Woods (KBW)

Hi, this is Steve with Quack filling in for Sanjay. Thanks for taking my questions. I just wanted to follow-up around the network volume growth. It seems like there's a pretty wide range across what you're guiding to for 2025. Could you just talk about what the current operating environment look like and what are the factors that we should consider in terms of how you get to either end of the range?

Steven Kwok
Managing Director at Keefe, Bruyette & Woods (KBW)

Thanks.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

Sure. So I think I would like to take your question to a little bit of bigger question, which I think that will frame exactly what you're trying to ask. I think the question is how Pagaya is thinking about growth. And there is a very important piece that lends to that, that is actually building the budget or the guidance as you see it now and giving us the north star of our solving for over the cycle. So the long story short of it is that we perceived ourselves as a network.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

When you perceived yourself as a network and not an originator, what we're actually providing or the way we grow is either to get more customers, our lending partners, or to sell to our lending partners more products, such as the prescreen that Sanjeev has shared over the phone call and there are many more. When you take these top of the funnel type of growth activities, which are not driven by changes so much in macro, we are trying to build an over the cycle business that would provide products and services that are relevant to lenders in any environment. And that we think about it as a steady state of growth of a 20% CAGR over the cycle regardless of the different pieces and will not bore you on this phone call, but there are many other factors that in different environments are balancing themselves out to make sure that only the relevant piece is the increase of the top of the funnel, which is how much we are solving for our partners and the different products to our partners. In spite of that, the levers or the way you can think about it or the pulls and the push are how good our models are and therefore we are progressing them, how good are the products and how much we can sell off them, how good the team is executing into getting more partners, how cheap our cost of capital is, so we can actually later sell the loans in a more profitable way or in the same time could approve more loans because our cost of capital is lower.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

But I think the more interesting piece and that I would love Sanjeev to take is how our customers' needs has changed that is really talking to the maturity of the company and the strategy. Sanjeev, you want

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

to take it?

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

Sure. I'll just say a couple of things. Agal has pretty much addressed it. I'll just say a couple of additional things.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

Number one, our partners today are large public companies. We are a large proportion of what they do on the PL side. Predictability to our partners is extremely important to our partners. And so instead of going all in and showing spikes and troughs in growth, we show predictability in our growth. And that has been one of the reasons why we have given the outlook that we have.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

That's number one. Number two, I will say just from an operating environment standpoint, you asked about the operating environment and why the range. We see that consumer FICOs are relatively stable in 2024 compared to 2023 and 2025 seems to be pretty stable as well. Our personal loan delinquencies are down, our auto delinquencies are largely stable. And so we've taken all that into consideration, including the fact that we don't we have not accounted for any rate drops.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

And so we've been in our opinion, somewhat conservative, but extremely responsible.

Operator

Thank you. The next question comes from the line of Pete Christiansen from Citi. Please go ahead.

Pete Christiansen
Pete Christiansen
Equity Research Analyst at Citi

Good morning. Thanks for the question. Ebi, I think you mentioned in your prepared remarks, I was just hoping you can reiterate it. I think you were able to overcome some redemption issues that you've had potentially with these marks. And then as a quick follow-up, just curious how you see the mix of network volume evolving this year.

Pete Christiansen
Pete Christiansen
Equity Research Analyst at Citi

I would assume a higher degree of point of sale could translate to lower risk of on the risk retention side. Just some thoughts there would be helpful. Thank you.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Sure. Just to clarify a little bit on your first point, what I was highlighting is that in the valuation that we did for our fair value for Q4, Some of that is coming through early redemption rights that we have on some of those securities. We didn't have any issues or anything, just to provide some clarity. But moving on to the important question, as we think about the volume guidance, again, as we have been doing in the past, you need to appreciate the fundamentals of our model. We don't grow by chasing credit growth or chasing conversion.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

We grow by adding more partners to the network. So when you think about the higher end of our range on the volume side, effectively that would imply that some of the newer partners that we have announced will accelerate more than we would versus the lower end of the range, which means we will take a little bit more time for those relationships to mature. That's a little bit how to think about the volume growth. And then in terms of areas of investments, as you think about the different asset classes, personal loan will continue to grow, but most of the investment and call it higher ROI and growth potential that we see is in our auto platform and POS. And maybe Sanjeet can add a little bit more color to those.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

Sure. I mean, in the last quarter, we gave some indication of how much we would grow our POS business. As you can see, we've delivered that. The exit rate on our POS, 24% year on year growth and 176% sequential growth demonstrates the fact that we will deliver on POS what we are seeing. And right now, we are like talking to a bunch of large POS players, both amongst regional banks, as well as leading POS lenders.

Sanjiv Das
Sanjiv Das
Co-Founder and President at Pagaya Technologies

I should emphasize that we have also got Elavon in addition to Klarna. And frankly, we've been very, very conservative on the Elavon numbers in 2025. We will grow with them. They are very successful partner and so we've been somewhat conservative on our numbers, but extremely bullish on POS.

Operator

Thank you. The next question comes from the line of Joseph Vafi from Canaccord Genuity. Please go ahead.

Joseph Vafi
Managing Director, Equity Research at Canaccord Genuity - Global Capital Markets

Sorry about that. Thanks guys and for all the color and nice to see the outlook for 2025. Just wondering if it's too early to have maybe kind of a more normalized fair value adjustment kind of margin or percentage of FRLPC or network volume as we move forward and maybe if we've gotten past some of these rough bumps, how to think about that on a normalized basis over the medium term? Thanks.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

So Joe, it's Gal here. I think in the numbers, there is some baked assumptions that are relatively stable numbers that you saw in the past. We are not yet in the place to characterize it in a percent, etcetera. We are working through that. But you should assume that in the GAAP net income full year guidance, there is some part of it and post the call we can take you to the different pieces to see where it stands.

Operator

Thank you. Ladies and gentlemen, that was the last question. I will now hand the conference over to Gal Kroubena for his closing comments.

Gal Krubiner
Gal Krubiner
Co-Founder and Chief Executive Officer at Pagaya Technologies

So thank you everyone for coming. I want to hand it over to Ipi to say a few closing remarks for this session.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

Thanks, Gal. And allow me a little bit to take you a little bit through a longer journey that we have delivered this year. This was been a very challenging growth with a lot of surprises, tough decisions and highly instructive learnings. We delivered major accomplishments throughout the year and with a new management team in place, but the same vision of building a disruptive business that can deliver sustainable growth through the cycle. Let me walk you through what we have accomplished this year and what we have delivered.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

In Q4, we did warn about the impairments. We said these twenty twenty three vintages will be behind us with no future expected material and we strongly believe we're delivering that today. In the beginning of the year, we set two goals, cash flow positive and GAAP net income positive. And the pillars for that were through higher fees, more operating leverage and capital efficiency. We delivered 130 basis points improvement in FRAPC.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

That is 130,000,000 more profit on our $10,000,000,000 of volume. On operating leverage in 2Q, we took action and delivered $25,000,000 of annualized savings with core operating expenses as a percent of April LPC coming down from 67% to 49% a year ago. In 2Q earnings, we indicated that there is room for improvement on our interest expense and we delivered again $30,000,000 in savings through refinancing transactions that we executed in 3Q. On the capital efficiency and diversification, in 1Q, we said we will get forward flows and pass throughs and we delivered over $3,000,000,000 in forward flow programs and a robust pass through program as well. In addition, we optimized our ABS structure.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

All of that basically led to cash required to fund our volume down by 200 basis points versus 4Q twenty twenty three. That is a $200,000,000 less cash required per $10,000,000,000 of volume and still with a buffer. On the business side, we said we're going to add new lending partners and we delivered relationship with OneMain and Helovon. We also launched new products. We expanded existing relationships into new asset classes.

Evangelos Perros
Evangelos Perros
Chief Financial Officer at Pagaya Technologies

All of that coupled with our strong pipeline of new partners, we delivered the seed for future sustainable growth. We delivered positive cash flows. We improved our balance sheet and created more access to liquidity to eliminate concerns for future equity raise needs. Now we're giving you guidance on GAAP net income positive and we're here again to deliver. Thank you very much for joining us today.

Operator

Thank you. Ladies and gentlemen, the conference of Pagaya Technologies has now concluded. Thank you for your participation. You may now disconnect your lines.

Executives
Analysts
    • John Hecht
      Managing Director at Jefferies Financial Group
    • David Scharf
      Analyst at Citizens JMP Securities, LLC
    • Steven Kwok
      Managing Director at Keefe, Bruyette & Woods (KBW)
    • Pete Christiansen
      Equity Research Analyst at Citi
    • Joseph Vafi
      Managing Director, Equity Research at Canaccord Genuity - Global Capital Markets
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Earnings Conference Call
Pagaya Technologies Q4 2024
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