Velocity Financial, Inc. Price & Performance (VEL)

Everyone. Thank you for joining us today for the discussion of Velocity's fourth quarter and full year 2024 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer and Mark Sapamyak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our fourth quarter results and you can find the press release and accompanying presentation we will refer to during this call on our Investor Relations website at www.bellfinance.com.

I'd like to remind everybody that today's call may include forward looking statements, which are uncertain and outside of the company's control, and actual results may differ materially. For a discussion of some of the risks and other factors that could affect results, made in our communications with shareholders, including the risk factors disclosed in our filings with the Securities and Exchange Commission. [indiscernible] Also note that the content of this conference call contains time sensitive information that is accurate only as of today. And we do not undertake any duty to update forward looking statements. We may also refer to certain non GAAP measures on this call. For reconciliations of these non GAAP measures, you should refer to the earnings materials on our Investor Relations website.

And finally, today's call is being recorded and will be available on the company's website with that, I will now turn the call over to Chris Frahr. Thanks, Chris, and welcome everyone to our fourth quarter earnings call. Our team is proud to announce another record quarter and year end results for 2024. In short, the Velocity engine was firing on all cylinders last year. We have strong tailwinds supporting our business and we're capitalizing on the unmet needs in our niche of the market. By lending to both residential and commercial real estate investors, we can serve a larger base of customers and provide capital. To underserved people. Customers tell us that banks are limiting their lending in our target niches. [indiscernible] we believe that we will continue to allow that will allow us to capture market share. So very strong demand from our borrowers in 2024 as evidenced by our 64% increase in originations and that momentum has carried into the new year. We remain disciplined in our credit process while preserving our risk adjusted margins at lower loan to values. Our portfolio growth led to a 37% increase in net revenue and Q4 pretax ROE was an impressive 26.8%.

Terms of our portfolio, our special servicing team a great job resolving NPLs and REOs for net gains. And our nimble hands on approach consistently contributes to our earnings. As most of you know, we prefer to lend in larger, more liquid MSAs and we still see healthy demand for the types of real estate a more somber note, we recently experienced [indiscernible] and all of us extend our deepest sympathies and concern for everyone impacted. The business perspective, we were fortunate that only two of the properties backing our loans were destroyed. And fully insured so we expect no impact financially. On a more positive note, all Velocity team members are safe and healthy. And we will do our part to help those affect [indiscernible] From a capital markets perspective, we saw significant improvement post the presidential election as evidenced by tighter spreads for our securitizations, and increased investor participation which enable us to achieve high ROEs on our invested capital. As we've explained before, our business is far less rate sensitive than other mortgage segments. And while much energy is spent by others prognosticating future Fed moves we simply continued to deliver much needed capital to underserved borrowers.

This is an important differentiator as we successfully originated loans over the last twenty years both higher and lower rate environments. Looking forward, we can expect another strong year of growth and our team is engaged and proud to provide solutions for real estate investors as we look to create long term shareholder value.

What's that? That concludes my prepared remarks and we'll turn over to the presentation materials starting with Page three. Obviously, from an earnings perspective, a fantastic year. 0.6 of core earnings in Q4 and a full year core earnings of $2.00 $3,000,000 So fantastic earnings across All the different segments of the business From production and portfolio perspective, another great quarter of $563,000,000 PB, 18% increase sequentially over last quarter. And 60% year over year.

The portfolio is just over $5,000,000,000 now. [indiscernible] pretty steady with where it was from the last quarter. And impressively in the fourth quarter from an NPL resolution just over $5,500,000 of gains from delinquent assets On the financing and capital side, mentioned the securitization market and we did a couple of deals in the fourth quarter that went off extremely well. We also issued a lower $7,000,000 in new equity through the ATM program and the strategy there is really just to increase float and broaden out our investor base as best we can. From a capital and liquidity perspective, Really great. At year end. $90,000,000 almost $96,000,000 of liquidity. So we've got plenty of capital to fund future growth. Turning to Page four. We outline our strategy here just continuing to retain earnings and building book value.

And you can see the The bridge from from 09:30 to 12:31 there as we retain earnings [indiscernible] grow the book value. On the upper right hand corner, we have two bars that take our GAAP book value at twelvethirty one and adjust to what we call adjusted book value and that's simply to reflect all of the assets that are carried at amortized cost, if GAAP allowed us to mark those assets to fair value, [indiscernible] think that adjusted book value would be about $18.73 a share. So tremendous value, we think still in the platform that doesn't show up from a GAAP perspective. And with that, I will turn the presentation over to Mark on Page five.

Thanks, Chris. Hi, everybody. Another year is in the books and Velocity has really ended the year strong. We're also starting 2025 kind of where we left off in 2024. If we take a look at Page five, total loan production for Q4 Chris mentioned, was 563,500,000.0 in UPB, an 18.2% increase over Q3, which was $476,800,000 there were over 1,200 loans funded in the fourth quarter. Strong production growth during Q4 included the weighted average coupon new health and investment originations continuing strong at 10.8%. The whack on HFI originations for the last May average has been at 11%, so great weight average coupons over the last five quarters. The growth in originations in Q4 also continued to add tight credit levels. With the way there was loan to value for the quarter at just under 63% at 62.9 The last May average trend has been at 63.9% LTV.

So the strong Q4 production growth at the healthy WACC, the low LTV type credit that still demonstrates, as Chris mentioned, the consistent borrower demand for our product different market cycles and environments. In 2025, so far 2025 year to date load production through February was $429,400,000 So again, continuing where we left off in 2024. As a result of the continued strong [indiscernible] Shows a similar growth in Q4 for our overall loan portfolio. Total loan portfolio is December 31, was $5,100,000,000 in UPB That's a 6.4% increase in Q3 and over a 24% increase over year. Weighted average coupon on our total portfolio at the end of the year was 9.53 That's a 16 basis points increase in Q3 and a 65 basis point increase in yield year over year. And again, the total weighted average loan, the value ratio of the portfolio at the end of the year remained low at 66.6%. Page seven, our Q4 portfolio net interest margin was 3.7% an increase of 10 basis points when looking at Q3 and '18 basis points year over year. As our portfolio yield over to the right of the table, portfolio yield increased 16 basis points quarter over quarter 64 basis points year over year while our cost of funds actually decreased by one basis point quarter to quarter and increased only 39 basis points year over year, mainly due a lot to that tighter spreads that we're seeing in the securitization market that Chris previously mentioned.

The quarter over quarter increase in NIM was mainly driven by strong loan production in the quarter at healthy spreads the higher loan coupons coupled with the continued favorable execution in the securitization market on the debt financing side. Going over to Page eight, our non performing loan rate at the end of Q4 was 10.7 relatively flat compared to 10.6% for Q3. And our non performing loan rate has remained consistent for the last five quarters at an average of about 10.3%. We continue to see very strong collection efforts by our special servicing department that have resulted in favorable gain resolutions for MPL loans. Table on Page nine highlights the NPL resolution efforts. In Q4, the NPL resolution gains were $5,600,000 or 7% of a little bit over $79,000,000 in UPB result. On a trend basis, we've been averaging 3.3% quarterly NPL resolution gains over the last five quarters. It's not here on this table. If you look at all of 2024, our NPL resolution gains were $10,200,000 for the year, over $283,000,000 of UPB results.

Page 10 shows our CECL reserve. And also our loan charge offs and our net gain loss and RO activity. In the left hand corner, the CECL reserve at December 31 was four point two million seventeen basis points of our outstanding non fair value HFI portfolio, Our system reserve remains within our expected range of between fifteen and twenty basis Keep in mind that CECL loan loss reserve does not include our loans being carried to fair value. Over to the right, the table shows our net gainloss from loan charge offs and also REO related activities during the quarter. For Q4, getting net gain on the combination of loan charge offs [indiscernible] of $2,900,000 which is net of the $700,000 in charge offs you see in the table, netting with the $3,600,000 gain on REO activities. For full year 2024, the net charge offs between the net charge offs and ARR activity gain was $5,100,000 Page 11 shows our durable funding and liquidity position. At the end of Q4, loan liquidity was just under $96,000,000 comprised of almost $50,000,000 in actual cash and cash equivalents and another $46,000,000 in our available liquidity on unfinance collateral. In addition, our available warehouse line capacity at the end of the year was $435,000,000 with a maximum line capacity of seven eighty five In Q4, as Chris mentioned, in Q2 seconduritizations, we issued one in October, the twenty twenty four-five and one in December, twenty twenty four-six.

Combined those two securities hit over $586,000,000 in in securities issued. And then already in 2025 in February, we issued our first security with a little over $351,000,000 in securities issued. So with that, that concludes my 2024 financial recap. I'll now turn the presentation back to Chris for his overview on Velocity's 2025 key business drivers, Chris? Thanks, Mark.

On Slide 12, you can see our outlook here from the market perspective. We still think everything remains healthy and very positive. On the credit side, mentioned rates higher for longer is good for us and we expect to continue to resolve NPBLs favorably. So we're very positive there. From a capital perspective, the strong securitization market is definitely a tailwind for us and helping us execute on our plan. Lastly, from an earnings perspective, we expect to grow not only production, but earnings as well and feel good about the future. So that wraps up our presentation and we will open it up for questions.

Thank you. We will now begin the question and answer session. First question comes from Steven Laws with Raymond James. Please go ahead.

Hi, good afternoon. Wow, another fantastic quarter. Congrats on a really strong I guess close to 24. And Mark, from your comments on January for your volumes seems like 25 is off to a continued strong start. So maybe on that point, can you talk about production expectations for this I think you said $430,000,000 through January and February. Kind of is there a stabilized run rate on the production front that you think you reach on a quarterly level where things plateau or How much incremental volumes on a quarterly basis do you think you can put through the system?

Hi, Stephen. Yes, thanks for the We I would say the current run rate feels good to us as a forecast for the rest of the year. We are growing and we see increasing demand. So I don't we're not we don't formally forecast what that would look like and I don't want to put any sort of limits or bookends on it. I just think current run rate is definitely a good forward forecast, but probably with a little bit of upward slope to that because we're seeing really [indiscernible] Appreciate that. And maybe to try to not read too much into the numbers on a one quarter basis, but certainly notice the average loan balance just shy of $450,000 a little bit bigger than kind of the $380,000,000 to $3.09 or 400 to last year. Is that due to to doing market entering markets more traction with larger loans? Is it more of a due to the shift in mix with a higher commercial the mix of the production and impact that might be having on average loan size?

Sure. Yes. I think it's the latter, not the former. I think that we definitely did see an uptick in the second half of the year in the commercial assets, which as you mentioned [indiscernible] they have larger balances. [indiscernible] So we see great opportunities come to us all the time with little bit larger balance there and that's really driven the average up Appreciate those comments. And one last one if I may. From a capital standpoint, with with retained earnings and then a little bit of proceeds from from ATM issuance. Is that enough capital to to support and feed the growth of the business? Do you think you'll need to to look for ways to add bigger chunks of additional equity as you grow? Kind of how do you think about managing your capital base?

Yes, that's a great question. Based on kind of current run rates, we're in good shape if we really start to accelerate even more. I could see somewhere down the over $75,000,000 of retained bonds that we can sell at any time to [indiscernible] fund some of that future growth and then also as you mentioned some of the ATM issuance. So At current levels, we're fine. It really is just going to depend how much growth we experience in that could drive some marginal capital down the road. And our view is we would do it on a kind of a balanced [indiscernible] a little bit equity, a little bit of debt just to try to keep our debt to equity ratio in line with where it is right now.

Great. Appreciate the comments this afternoon. And again, congrats on very nice end of twenty twenty four.

Thanks, Steven.

The next question comes from Steve Delaney with Citi Capital Markets. Please go ahead.

Great close to the year.

So what As you talk about your borrowers, when we think about this volatility and what's been going on in the ten year and what's been going on mortgage rates, And I guess I just naturally think of homebuyers and how they're so fickle and one month they're a buyer, one month they're not.

Your borrowers and clients must have a much different mindset [indiscernible] what they're out there doing Is it as simple as that they they their focus is [indiscernible] is to buy and manage properties and the rates are just sort of something you deal with that's kind of like noise but their focus is on the properties and acquiring and managing those properties regardless of and across whatever the rate cycle is. It's just I guess whenever we're talking to a mortgage company, it's so different, Chris, than what we normally hear about borrowers' sensitivity to rates.

Yes. Little color.

Yes, sure. No, it's a good question and definitely something that's unique to our business model. I think you summed it up well. These folks need access to capital and they're willing to pay for it. They're very smart. They're opportunistic. And they're doing creative things and they need capital to manage their real estate portfolio and they come to us and we execute with certainty and we give them some duration. We write a thirty year fixed rate [indiscernible] shorter term capital that really is a bullet coming at them maybe in six or twelve months. So I think they like some of the optionality that they have with our product. You're absolutely right. Unlike I mean unlike most mortgage lenders, the first question or the first concern is not not rate with our borrowers, it's certainty of execution.

Got it. Yes, because property that has to close by a certain date and that's That's right. They need to add access capital in their balance sheet for some other opportunity.

Right. And they need a quick answer from you, right? Right. That's right. Not an got a loan committee three times over six to eight weeks, not going to work.

That's right.

NPL resolutions are certainly remarkable.

Let's just talk about that. When you're You have gains of $5,600,000 on $79,000,000 in 4Q. Are you in these cases are you that's the resolutions in the fourth quarter. But is this a matter of you taking back, taking title to properties and then actually reselling them? Or in some cases are you working with distressed debt buyers? Are you actually actually being able to are there buyers for your delinquent loans that you can offset your loans to another credit investor that's not a public company. Would the resolutions look like? Is it foreclosure or is it note sale?

Yes. I mean, all those resolutions that you see are either us taking back a property and selling it for a gain or delinquent loans resolving sort of at the foreclosure steps if will, maybe a different investor comes in and buys that, but we can only bid up to the total amount that we're due in all of the costs and associated with that. And so we get satisfied there. Oftentimes as well. But I'm sure there are probably distressed buyers out there. We've never sold assets to anyone like that. So I don't know, but that's not our strategy.

Steve, this is Mark.

I think Yes, hi, Steve.

This is Mark.

I think another thing to kind of keep in mind is the resolutions are resolutions of our non performing loan UPB, right? So in many cases those never make it to REO property to your point, selling REO. So over 90% of all of our non performing loan resolutions, like we had 79,000,000 so far Q4, probably over 90% of that are the borrowers either paying current paying the loan current with default interest, which is part of the gain or they come they refinance or they have capital somewhere else and they pay off the loan and we get the default interest and depending on if it's still in the prepayment window, we get prepayment fees. So, if you mind, so 90% of those M and PLL resolutions is the original borrower either paying current or paying off the loan. And then the other 8% to 10% of whatever that puts a foreclosure to Chris' point, that can either get to the foreclosure sales steps or we take possession of the REO and then sell the REO. But 90% of it is the borrower resolving it That's fabulous. Thank you both so much for the for the comments. And again, congrats on a just a fantastic year.

Thanks, Steve. Appreciate it.

The next question comes from Eric Hagen with BTIG. Please go ahead.

Hey, thanks.

Hope you guys are well.

A couple of follow ups here.

Couple of follow ups here. Do you guys see any response in the CMBS so far related to the broader market volatility recently? And maybe how does your expected ROE change if spreads were wider? And then a follow-up, just kind of like a follow-up on the NPL resolutions. I mean, how do you gain visibility into that pipeline? In other words, like how do you go about predicting the the benchmark or the trajectory that you might see there under different scenarios. Like do you eventually not expect to have any gains or how does that even track into the asset valuation and so forth? Thanks guys. Sure.

Thanks, Eric. Appreciate it. So on the first question, we're not seeing the volatility on our securitizations. That maybe you're referring to in larger CMBS. So impact there. Securitizations probably for most bond investors get comped more typically to like a non QM RMBS execution and we usually print a little wider there, so So I think on a relative value basis, I think we represent a very good alternative for a lot of those investors. So we feel good about our execution there going forward. The second point NPL resolutions are near impossible to predict. They're extremely lumpy. Obviously, we had a big resolution in Q4. One of those REOs have to be a very large resolution, it's almost $2,500,000 the lower $2,500,000 So we certainly don't expect to get $107 every quarter and you can see historically we haven't. But if you look back over the doing this, we think it's very fair to expect a two to three point gain on an average basis and sometimes it will be higher, sometimes it will be lower, but because there's so much equity in the real estate here, we've just positive resolutions there. So we think that's durable source of part of our total overall return.

Yes, that's helpful. Okay, great. [indiscernible] the focus of the portfolio is the single family loan, but how about the other assets like the mixed use plus the retail is now 20% of the portfolio? Are those borrowers looking for valuation improvement? This is a shorter term leverage that they're sourcing. And then, relatedly, I mean, is the REO mostly single family and how do we how do we reserve for liquidity in the single family versus the Yes, sure. Absolutely. So on the first part, We did see an uptick in the commercial assets for sure The portfolio is almost fifty-fifty between one to four rentals and what we would call small commercial on the other side. There's a wide array of reasons why borrowers are coming to us purchasing assets that maybe they are having a hard time financing for their refinance [indiscernible] Else. They're buying properties and fixing them up re tenanting them there. I mean, it's across the board. So I can't give you just sort of one little bucket there, but these are all smart sophisticated, small investors that know how to see opportunity in real estate and Mac on a go forward basis, when we in terms of the REO, we've gotten definitely more REO from the one to four side than the small [indiscernible] been, I would say, [indiscernible] delinquency in the one to four space and more REO there.

The That REO tends to be very, very liquid and relatively easy to sell because even though it's a rented as an investment property, it could continue to be used that way, but it also could be occupied by an owner. Or a consumer that wants to live there. So those markets to be very deep and very liquid and they're relatively easy to liquidate and sell. As you know, all of the loans that are carried at fair value we already marked those assets to what we believe would be some representation of the fair value. So there's no loss provisioning on any of those assets. So as we continue morph the balance sheet into a completely fair value type of classification, I think you're going continue to see that loan loss reserve shrink in [indiscernible] a couple of years, we won't even talk about CECL.

This concludes our question and answer session. I would like to turn the conference back over to Chris Ferrer for any closing remarks. Please go ahead.

Thank you all for taking the time to listen to our story, and we appreciate your support and we'll Thank you, everybody. Appreciate your time.

The conference has now concluded. You may now disconnect.