Ladies and gentlemen, greetings, and welcome to the Pagaya Technologies’ Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Josh Fagen, Head of Investor Relations. Please go ahead.

Thank you, and welcome to Pagaya's fourth quarter and full year 2024 earnings conference call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya; Sanjiv Das, President; and Evangelos Perros, Chief Financial Officer. You can 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.pagaya.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. 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 US 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. Additionally, non-GAAP financial measures including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, fee revenue less production costs or FRLPC, FRLPC 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 8-K today for detailed commentary on our business and performance in conjunction with the accompanying earning supplement and press release. With that, let me turn the call over to Gal.

Thank you for joining us today for a discussion of our fourth quarter and full year 2024 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 billion up 27% year-over-year, FRLPC of $407 million up 54% year-over-year, and adjusted EBITDA of $210 million 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, 2022, and 2023 loan vintages. We noted during the third quarter 2024 earnings that we expected to have taken the vast majority of expected impairment charges associated with our 2023 vintages, along with prior vintages by year end 2024. The 2023 risk retention securities, which totals at $275 million at the end of the third quarter were marked down by $145 million this quarter, which impacted our P&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 and 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. EP 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 sets…

Thank you, Gal. I'd like to 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 basis, while seeing the ramp from more recently added relationships. In fact, we anticipate at least eight lending partners will each generate $500 million or more of network volume during 2025. 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 12 to 18 months. In terms of monetization, personal loan FRLPC is robust at 6.3% versus 4.5% overall. Despite the relative maturity of this product on our network, volumes this quarter grew by 24% on an organic basis to $1.6 billion. Turning to auto lending, here too we are focusing on disciplined and judicious growth as we ramp back up to leverage…

Thank you, Sanjiv. 2024 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 cashflow 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. 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. Pagaya 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. 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…

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

Morning guys. Thanks very much for taking my questions and all the details that you've 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? 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?

Sure. John. Hi, it's Gal here. Thank you so much. So, I will take the first piece and then will hand it over to EP to speak more specific about the framework and where the loss is coming from, and Sanjiv to speak about what it means for the business. So first let me say that, as we think about the impairment and as you mentioned out, the last three quarters were outsize losses versus what we used to have in the past and what we expect to have in the future. Most of them where 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 EP 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, et cetera, 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. 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…

Thanks, Gal. 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 we're the challenging vintages. We had indicated that we had a mark on those of $275 million and we did take a $144 million impairment against those this quarter out of the total of $156 million. Overall credit related impairments were $229 million net of non-controlling interest, which included a $79 million 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 2023 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 still want to highlight that despite that the credit performance of the 2023 vintages are significantly better and improved relative to the ‘21 and ‘22 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 2023s and the prior businesses, we do not expect any material impact on this on our performance relative to those vintages. All of that give us confidence, obviously, together with all the other factors driving our guidance in our ability to deliver the GAAP net income positive for the…

Yes, I mean, basically, EP and Gal, 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, you know, 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%. We gained our AAA rating through this process, significantly improved our ABS structure. We strengthened the pipeline of potential partners. You've heard about U.S. Bank, Klarna, 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. 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 Castlelake. 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 '25 and '26.

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

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. 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 million to $150 million more pretax income effective for GAAP? Is that how we're supposed to interpret Slide 21 that inherent in the GAAP guidance is some very conservative assumptions around expected cash flows?

Hi, thank you for the question. No, I think 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. What we're doing is in our guidance together with everything else, we're just using that scenario A, which provides an additional $100 million to $150 million 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.

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

Hi. This is actually Steven Kwok 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?

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 led into that, that is actually building them 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 ourself as a network, when you perceived yourself as a network and not an originator while 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 pre-screen that Sanjiv 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 product 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, in our and the different products to our partners. Inside 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? But I think that the more interesting piece and that I would love Sanjiv to take is, how our customers’ needs has changed. That is really talking to the maturity of the Company and the stages. Sanjiv, if you want to take it.

Sure. I'll just say a couple of things, Gal’s pretty much addressed it, but I'll just say a couple of additional things. 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. 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. And so we've been, in our opinion, somewhat conservative, but extremely responsible.

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

Good morning. Thanks for the question. EP, 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. I would assume higher degree of point of sale could translate to lower risk of on the risk retention side. Just some thoughts there would be helpful.

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, 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 partnerships 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 investment, 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 Sanjiv can add a little bit more color to those.

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. 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 a very successful partner, and so we've been somewhat conservative on our numbers, but extremely bullish on POS.

The next question comes from the line of Joseph Vafi from Canaccord Genuity. Please go ahead. Joseph, if you can please unmute your line from your end and ask your question.

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?

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, et cetera. We are working through that, but you should assume that in the GAAP net income full year guidance, there is some out of it. And post the call, we can take you to the different pieces to see where it stands.

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

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

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. In Q4, we did warn about the impairments. We said these 2023 vintages will be behind us with no future expected material and we strongly be relieved. We're delivering that today. In the beginning of the year, we set two goals, cashflow 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 point improvement in FRLPC. That is $130 million more profit on our $10 billion of volume. On operating leverage in 2Q, we took action and delivered $25 million of annualized savings with core operating expenses as a percent of FRLPC 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 million 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 billion in forward flow programs and a robust pass-through program as well. In addition, we optimized our ABS structure. All of that basically led to cash required to fund our volume down by 200 basis points versus 4Q 2023. That is a 200 million less cash required per $10 billion 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 Elavon. We also launched new products. We expanded existing relationships into new asset classes. 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 are here again to deliver. Thank you very much for joining us today.

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