Velocity Financial Q1 2024 Earnings Call Transcript

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May 2, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the Velocity Financial Incorporated First Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Chris Altman, Treasurer. Please go ahead.

Speaker 1

Thanks, Danielle. Hello, everyone, and thank you for joining us today for the discussion of Velocity's Q1 2024 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer and Mark Zukaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our Q1 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 everyone 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.

Speaker 1

For a discussion of some of the risks and other factors that could affect results, please see the risk factors and other cautionary statements made in our communications with shareholders, including the risk factors disclosed in our filings with the Securities and Exchange Commission. Please 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. Finally, today's call is being recorded and will be available on the company's website later today.

Speaker 1

And with that, I will now turn the call over to Chris Farrar.

Speaker 2

Thanks, Chris, and welcome everyone to our Q1 earnings call. I'd like to start out by thanking all my team members as we had a tremendous first quarter as reflected in the results we released after the close. Origination volumes were almost 75% higher than the previous year and reflects strong demand in our niche, especially since the Q1 is typically lighter in terms of new volume. Our team continues to originate target assets in a disciplined way while controlling expenses to drive increased earnings and higher returns on equity. Markets are adjusting to the new interest rate realities and we see healthy activity across the U.

Speaker 2

S. In our lending segment as we step in with favorable terms where banks have pulled back. The securitization market remains very supportive as we saw spreads tighten more than the rise in base rates this year for improved execution of our second deal in April versus the January securitization. Moreover, participation was broad with 27 different investors purchasing bonds and the deal was many times oversubscribed. Our tremendous performance has produced a healthy investor base that believe in our program and we've worked hard to earn their loyalty.

Speaker 2

In terms of our portfolio, we continue to execute well by resolving delinquent assets favorably and our special servicing team has done a great job of driving positive results. We see plenty of fresh money available to purchase the real estate securing our loans when priced appropriately and values are holding up well. In terms of capital, we placed $75,000,000 in new corporate debt in February to fuel our goal of increasing the portfolio to $5,000,000,000 in UPB by 2025. Importantly, as you saw in the press release, we have plenty of liquidity to meet those targets as we grow. Speaking of growth, we issued a company record $2,000,000,000 worth of LOIs in the month of April and received the most new applications we've had in over 2 years at just under $400,000,000 in combined UPV.

Speaker 2

Obviously, our pipeline is strong and customers are responding to our offering. The team is excited and engaged to persist in taking market share and our strategy of retaining earnings, growing book value and redeploying capital into high returning assets will continue to drive earnings growth and shareholder value into the future. That concludes my prepared remarks and we'll turn over to the presentation starting on Page 3. Obviously, great results from an income perspective. The core EPS of $5.1 a share is an all time high for the company driven largely by the fair value the fair

Speaker 3

value gains from new

Speaker 2

originations and the net interest margin coming off the portfolio. The 3rd bullet point there you can see the NIM up nicely year over year and all of those combined to drive higher pretax ROEs, which represent ROEs on a pretax basis as any of our comparable companies are not taxpayers. In terms of production and the loan portfolio, again very strong production for the Q1 continued into April as I mentioned and the pipeline is very healthy. Portfolio is up nicely year over year. NPLs are manageable at just around 10%.

Speaker 2

And most importantly for that metric, we continue to see positive gains in the resolutions. From a financing and capital perspective, I mentioned the January securitization and also completed the April securitization. Those markets are very, very strong right now. We've got plenty of liquidity and warehouse capacity. And as I mentioned, we issued those new notes to fuel our growth.

Speaker 2

Turning to Page 4, on the left hand side is a reconciliation of our core adjustments related to stock transactions. And then on the right hand side is a walk up in book value as we continue to retain our earnings and grow the book value as I mentioned. On the far right, we added 2 bars there to try to give folks a sense of the embedded gains in the amortized cost portfolio and if they were to be brought into book value, want to make the point that there's we think there's significant unlocked value there. And as we move forward as a firm over time and move the whole balance

Speaker 3

and move the whole balance sheet to the fair value

Speaker 2

option, we think that there will be much higher book value for all shareholders. With that, I'll turn it over to Mark to start on Page 5.

Speaker 4

Thanks, Chris. Hi, everyone. Our Q1 of the year started out the year, as Chris mentioned, on a positive note with strong loan originations and a healthy securitization market. On Page 5, loan production for the Q1 was almost $379,000,000 in UPB, that's 7.5% increase from $352,000,000 in Q4 of last year. And I think, as Chris mentioned, almost a 75% increase year over year.

Speaker 4

The strong production growth during Q1 was achieved with the new weighted average coupon on originations at 11.1% for the quarter. And the weighted average coupon on our originations has averaged 11% for the last 5 quarters. The growth in originations in Q1 was also at tighter credit levels, with the weighted average loan to value for the quarter at just under 64%, The strong Q1 production growth at the high weighted average coupon and the low LTV further demonstrates the continued borrower demand for our product. As a result of the strong growth in production, on Page 6 shows a similar growth in Q1 for our overall loan portfolio. The total loan portfolio as of March 31 was almost $4,300,000,000 That's a 5.1% increase from Q4 of last year and over a 19% increase year over year.

Speaker 4

The weighted average coupon on our total portfolio as of March 31 was 9.07 percent, 19 basis points higher than at the end of last year and 92 basis points higher year over year. The portfolio weighted average loan to value ratio declined slightly to 67.6% as of March 31 compared to 67.8 as of the end of the year last year and 68.1 as of Q1 'twenty three. So again, generating strong production at high weighted average coupons with still low weighted average loan to value ratios. On Page 7, as Chris mentioned, our Q1 NIM decreased 17 basis points from Q4 and increased 12 basis points year over year as our portfolio yield remained relatively flat quarter over quarter, but increased year over year by 71 basis points, while our cost of funds increased 18 basis points quarter over quarter and 60 basis points year over year. The quarter over quarter slight decrease in NIM was mainly driven by the timing of NPL interest, which is recorded as it's received on a cash basis.

Speaker 4

While short term base financing rates increased during Q1, we continue to see an improvement in the overall securitization market and the strong growth in originations coupled with the healthy NIM is reflected in our Q1 earnings. On page 8, our non performing loan rate at the end of Q1 10.1% compared to 9.7% for Q4 of last year and 8.7% for Q1 year over year. The ongoing strong collection efforts by our special servicing department has resulted in continued resolutions of our NPL loans if favorable gains. And the table on Page 9 highlights this continued success of our NPL resolution efforts. In Q1, we resolved almost $55,000,000 worth of UPB of NPL loans and REOs for a net gain of $1,300,000 or 2.3%.

Speaker 4

We've averaged about 2.5% gain on NPL resolutions over the last 5 quarters. And again, that's a gain over and above collecting all of the contractual principal interest. Page 10 presents our CECL loan loss reserve and net loan charge off scenario activity. The CECL reserve as of March 31 was $5,300,000 or 19 basis points of our outstanding non fair value loans held for investment portfolio. And our CECL reserve is within our expected range of 15 to 20 basis points.

Speaker 4

The CECL loan loss reserve, as a reminder, does not include loans being carried at fair value. The table to the right of the page shows our net gain loss from charge offs and REO related activities during the quarter. For Q1, we had a net loss on charge offs and REO related activities of $800,000 compared to a net loss of $300,000 for Q4 'twenty three. Page 11 shows our durable funding and liquidity position at the end of Q1. Total liquidity as of March 31 was almost $79,000,000 comprised of about $35,000,000 in cash and cash equivalents and another $44,000,000 in available liquidity on unfinanced collateral.

Speaker 4

We did issue, as Chris mentioned, 1 securitization in Q1. In January, we issued the 20 20 four-one secondurity, totaling just under $210,000,000 of securities issued. Our available warehouse line capacity as of March 31 was $529,000,000 with a maximum line capacity of 85. In February, we entered into a $75,000,000 5 year senior secured note at a fixed rate of $9,875,000 to support continued growth of the company. And then subsequent to quarter end, in April, we completed our 2nd securitization of the year, totaling $295,000,000 of securities issued.

Speaker 4

With that, I'd like to now turn the presentation back to Chris for an overview of Velocity's outlook on key business drivers. Chris?

Speaker 2

Thanks, Mark. Yes, I think as we look forward, the market seems healthy and values are holding up, as I mentioned. We think it's good employment levels and the economy seems to be doing well. Capital perspective as I mentioned, the securitization markets are a tailwind for us right now and we're very fortunate to take advantage of that. And from an earnings perspective, obviously, we're seeing the benefits pick up there and expect to continue to grow our earnings going forward.

Speaker 2

So, all in all, very positive and very optimistic about the future. And that wraps up our prepared presentation. We'll open it up for call or for questions,

Operator

sorry. We will now begin the question and answer session. The first question comes from Stephen Laws from Raymond James. Please go ahead.

Speaker 5

Hi, good afternoon. Congrats on a great start to the year. Chris, I wanted to touch on a few things with regards to your production. April, obviously, it started off where you're kind of on pace to meet or exceed Q2, but noticed the LTV on new originations continues to drop. So it seems like you're sacrificing volumes to improve credit while you're able to maintain the coupon.

Speaker 5

And just wanted you to touch on that and what you're seeing in the market and what that should do longer term. Should we eventually

Speaker 3

and more conservative level on collateral? Yes.

Speaker 5

I think to more conservative level on collateral?

Speaker 2

Sure, Stephen. Good questions. I think we are as we said before, we are seeing better opportunities at lower LTVs. So we are taking advantage of those, but we are very protective of our margins. We want to deploy capital efficiently and make sure we earn the return and to us the way we look at it risk reward is very important.

Speaker 2

So we're not the kind of firm that's going to just do volume to do volume. We want to do it at healthy margins. So that's really what's driving those decisions. I do think that delinquency is going to largely just depend on the overall economy and how things go going forward. I would expect with lower LTVs, we continue to see very positive resolutions and our sort of forecast for those resolutions remains the same.

Speaker 2

We still think we'll end up with positive outcomes there. So we like the credit dynamics that we're seeing and hope to continue to grow there.

Speaker 5

Great. And one follow-up question, kind of looking at the mix of loan production, the Investor 1 to 4 rental, kind of looking at the trailing 4 quarter average, 167 sort of right in line with what you've been doing, commercial has grown materially. So is that filling a void? Why are you seeing a better opportunity there? And maybe that points a little more to the competitive landscape, but curious to get your thoughts on kind of a little bit of a

Speaker 2

Yes, Yes, that's good observation. I think that's an uptick as a result of the banks continuing to tighten and pull back. We're definitely seeing more demand there. We sort of set up our program on an agnostic basis where we're happy to do either product and we try to price accordingly. So we haven't made many changes there.

Speaker 2

It's mainly been a market shift where I think they're just banks are being tougher and so we're seeing more share.

Speaker 5

Great. Well, again, congrats on a great start to the year and appreciate your comments this afternoon.

Speaker 2

Thank you. Appreciate it.

Operator

The next question comes from Steve DeLaney from Citizens JMP. Please go ahead.

Speaker 6

Sure. Hello, everyone. Great quarter. Nice to be on with you tonight. Chris, Ash, the growth in the production, and this is spread all over the country.

Speaker 6

Can you just talk for a minute, I know you guys are out in the late LA area and you've your headquarters there. But can you talk a bit about the regional management structure that you have around the country? And how are you using how are you attacking individual targeted geographic markets? So just sort of your management structure underneath you or Jeff on the production side? Thanks.

Speaker 2

Sure. Hi, Steve. So we kind of split the country in 2. We have 2 operation centers, if you will, 1 East Coast, 1 West Coast, just to handle the different time zones.

Speaker 6

Okay, makes sense.

Speaker 2

Yes. And then we have several different sales locations to reach our customers. But from a geography perspective, we try to target the larger MSAs where properties are more liquid and tend to stay away from the rural and tertiary markets where we don't want to be sitting on an asset for a year or 2 trying to sell it in smaller type settings. So those are the 2 things that drive our portfolio strategy. And we've been if you look at the portfolio, we're pretty highly concentrated in the coasts and then along kind of the Texas area as well.

Speaker 1

That's helpful.

Speaker 6

And your contact with the borrowers, I assume you use the Internet. Are you also working, coordinating, working through local market mortgage brokers?

Speaker 2

Yes, that's our primary source of business.

Speaker 6

I thought it would

Speaker 2

be. Yes. Yes, we call them lead generators and so they basically bring us the transaction and we take over from there. And that's primarily how we market and educate

Speaker 6

a origination strategy. That's right. Not surprised that you're using that. Can you share with us, have you been growing these broker relationships? Can you comment on how many you have?

Speaker 6

And over the last year or 2, is that increasing your number of touch points?

Speaker 2

Yes, we are growing the number of approved brokers. We're also adding sales folks. So by adding sales folks they tend to bringing relationships with them or prior existing contacts. And so we have little over 2,000 approved brokers and we're adding to that list quarterly.

Speaker 3

Very

Speaker 6

helpful. Thank you very much.

Speaker 2

Okay. Thank you, Steve.

Operator

This concludes our question oh, I'm sorry, there's another question. The next question comes from Eric Hagen from BTIG. Please go ahead.

Speaker 7

Hey, thanks. Hope you're well. Thanks for sneaking me in. On the REO sales, can you share how any trends on what sort of led to successfully exiting those assets at a gain and how quickly you might be able to work through the remainder of the REO pipeline?

Speaker 2

Yes, sure. Hi, Eric. We try to price our REOs where they'll move fairly quickly. We are pretty disciplined there and try to avoid kind of the perception of a kind of distressed lender bank kind of blowout. So oftentimes we will put a little TLC into our REOs to get them ready for market.

Speaker 2

So I think we probably take a little longer than most folks to sell REOs, but it shows up in the recovery rates and you can see in the actual final resolutions, we typically sell them for a little better or right where we had them marked. So, our team is pretty good at trying to figure out where that property will transact. And fortunately we see a lot of buyers show up at either foreclosure sales or after the fact once we get the property on the market. So I would say it's going to take us time to work through those REOs and I think that we still have new ones coming on. So I would say we'll stay at this level probably for the rest of the year kind of on a net basis as new ones come on and old ones come off?

Speaker 7

Yes, that's helpful. Thank you. Hey, so looking at

Speaker 4

Eric, this is Mark. I think one other thing just to note is that over 95% of our non performing loans are resolved by either paying off or paying current, less than 5% ever even make it to foreclosure of the REO process.

Speaker 7

Yes. No, that's definitely helpful. Thanks for flushing that out. Looking at the liquidity position, it's around $80,000,000 How comfortable do you feel there? Any kind of minimum level of liquidity you feel like you have to run with with your leverage at this level?

Speaker 7

And then are there any opportunities to call and maybe relever any of the securitized debt that you have in the stack? Thank you.

Speaker 2

Sure, absolutely. So yes, from a liquidity perspective, we feel very good there. By retaining our earnings, that's also additional fuel and capital as we go forward. So we just continue to recycle that capital. So we've got very strong visibility well into next year from that perspective.

Speaker 2

And then in terms of collapse opportunities, we do have 2 securitizations out there that one of them is sort of done it on all of our delinquent assets from prior collapse deals. There's a significant amount of equity locked up there that will roll off sometime next year. And then there's one other transaction that we have an opportunity to pull some capital out of as it ultimately pays off or call it away. Combined that's in excess of probably $75,000,000 The rest of the transactions are structured as pro rata pay downs. So we did that intentionally because we own this risk.

Speaker 2

And so it kind of works nicely that we're really not incented to call those deals away because our cost of funds are staying very stable whereas in a sequential structure those cost of funds tend to spike near the end of their lives. They stay very stable for us. So by and large, most of the deals we probably won't call or collapse until near the very end because of that stable fixed rate financing.

Speaker 7

That's great. Thank you guys so much. Appreciate it.

Speaker 2

Welcome. Thank you, Eric.

Speaker 4

Thanks, Eric.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Chris Farrar for closing remarks.

Speaker 2

Thanks again for everybody on the call taking the time to hear our story and we look forward to catching up with everyone again next quarter.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Velocity Financial Q1 2024
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