Earnings Call Transcript - VEL Q1 2025

Chris Oltmann, Treasurer

Good day, and welcome to Velocity Financial, Inc's First Quarter 2025 Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Chris Oltmann, Treasurer. Please go ahead. Thanks, Kaley. Hello, everyone, and thank you for joining us today for the discussion of Velocity's first quarter 2025 results. Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer; and Mark Szczepaniak, Velocity's Chief Financial Officer. Earlier this afternoon, we released our first quarter results, and you can find the press release and the accompanying presentation, we will refer to during this call on our Investor Relations website at www.velfinance.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. For a discussion of the 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. And with that, I will now turn the call over to Chris Farrar.

Chris Farrar, CEO

Thanks, Chris, and we appreciate everyone joining our first quarter earnings call. The strong momentum we experienced in 2024 carried into the first quarter of this year as we originated $640 million in new loans, an increase of 69% versus the prior year, which drove a 27% increase in net revenue and a 17% increase in core pretax earnings. Our team grew production and remained disciplined by preserving our spreads and credit standards. We continue to see increased demand for all property types with a more recent tilt towards commercial loans versus the investor 1-4 residential loans and robust margins in both products. Looking forward, our pipeline is strong and growing across the board. With respect to the portfolio, we continue to realize a consistent net interest income and healthy cash flows, and our special servicing team is doing a great job of resolving delinquent assets favorably. Our real estate markets remain healthy with plenty of dry capital ready to deploy in reasonably priced assets. From a capital markets perspective, we've been very busy this year with four successful debt transactions already completed. And we issued three new securitizations, paid down debt and collapsed one of our re-REMICs and also sold new shares through our ATM program. Despite the recent volatility, we are very encouraged to see healthy investor demand and participation in our offerings. We appreciate all our partners that have supported our platform for so many years. Although the markets are choppy, our team is well prepared to operate in this environment, and we believe we offer a great platform for investors to earn consistent compelling returns. I want to congratulate all Velocity team members on another fantastic quarter. And as always, we'll continue to work hard to deliver shareholders value. With that, I'll turn over to the today's presentation, starting on Slide 3. As I mentioned, strong net income, core earnings of $0.55 a share, up from $0.51 a share a year ago. And our second best quarterly earnings in the company's history, just a little bit below what we did in Q4 of last year. I mentioned the production. On a net basis, the portfolio is up 27% and nonperforming loans continue to be relatively stable at 10.8%. Most importantly there, NPA resolutions, again in the quarter of 102.4% above par resolutions continue, which is great. In the financing and capital section, I mentioned the first securitization we completed with a weighted average rate of 6.7%, collapsed the re-REMIC, which freed up $52.6 million of retained securities that are available to us to do with whatever we want. We issued 1.6 million common shares, just under $29 million of proceeds, and those shares were accretive to book value. In terms of our liquidity and warehouse capacity, you can see we're in great shape there. On Page 4, one of the other securitizations we did in early April was a short term, backed by our short-term loans and that was another successful transaction. And the third one listed here on this page was the second deal that we did, and I highlight this one for a very important reason, it priced April 8, and that was in the heart of all of the disruption in the market. And as you can see, our weighted average rate actually was 30 basis points better than our first deal in the first part of the year. So again, although there's all this volatility, we continue to see strong support from our investors, and we're very pleased with the execution we've seen so far this year. On Page 5, I will walk you through just the simple adjustments that we make to get to core earnings. And then on the right, we have a bridge showing the buildup in book value. And to the far right, we make an adjustment if GAAP allowed us to adjust all of our held-for-cost loans to fair value, we would be reporting an adjusted book value of $18.50 a share. That is reflective of all of the assets that are in place and on the balance sheet at 3/31. So you can see we've been getting nice growth in book value as we retain our earnings and execute on our strategy. And with that, I'll turn the presentation back over to Mark to continue.

Mark Szczepaniak, CFO

Thanks, Chris, and good afternoon, everyone. In the first quarter, as Chris mentioned, we saw continued strong production, actually setting a record for the company for a single quarter's production of approximately $640.4 million for the quarter, which is a 13.7% increase from Q4 last year. We had 1,500 loans funded in the first quarter. That was an increase of almost 18% on the loan count basis over the previous quarter. The strong production growth included the weighted average coupon and new health investment originations continuing to be strong at 10.5% and the weighted average coupon on our held-for investment originations for the last 5 quarter average trend was at 10.8%. The growth originations in Q1 also continued the tight credit levels with the weighted average loan to value fee just being under 63%, 62.6% and the last 5 quarter average trend at 63.4%. So the strong Q1 production and record growth, a healthy WAC, and low LTV continues to show borrower demand for our products through all different market cycles and environments. If we go to Page 7. As a result of the continued growth in production, Page 7 shows the growth in Q1 for our overall loan portfolio at the end of the quarter. Total loan portfolio as of March 31 was just under $5.5 billion in UPB, and that's a 7.8% increase from year-end 2024 and a 27.3% increase year-over-year. Its weighted average coupon portfolio at the end of the quarter was just under 9.6%, at 9.59% which is a 6 basis points increase from the WAC at the end of the year and a 52 basis points increase from the same time in the first quarter last year. The total portfolio weighted average loan-to-value remained consistently low at 66.1% at the end of the quarter. Going to Page 8. Our Q1 portfolio NIM was 3.35%, representing one of our more normalized NIMs compared to Q4 of '24. Q4 of 2024, it was a little bit higher NIM due to cash interest received on non-performing loans. We saw the cash interest on non-performing loans consistently and fairly lumpy, and that can cause some spikes in the NIM. Our Q1 NIM was consistent on a year-over-year basis. Our portfolio yield for Q1 of this year decreased by 23 basis points quarter-over-quarter, again, due to the high cash nonperforming loan interest received in Q4, but an increase year-over-year by 40 basis points, while our cost of funds increased by 9 quarter-over-quarter and increased by 30 basis points year-over-year. On Page 9, our nonperforming loan rate at the end of Q1, as Chris mentioned, was 10.8%. That's been relatively flat. It was 10.7% at the end of 2024, and it's been consistent for the last 5 quarters at an average of about 10.5%. We continue to see strong efforts by our special servicing department that resulted in favorable gain resolutions of our NPA assets by NPA assets with our NPL loans as well as the REO assets. The table on Page 10 shows the continued positive results of our in-house NPA resolution efforts. Our Q1 NPA resolution gains were $1.9 million or 2.4% of the $76.4 million in overall UPB resolved. And on a trend basis, we've been averaging about a 3.3% quarterly NPL NPA resolution gain over the last 5 quarters. Page 11 presents on the left-hand side, our CECL loan loss reserve and on the right-hand side, our net loan charge-off gain loss on REO activities. The CECL reserve at the end of the quarter was $5 million or 22 basis points of our outstanding amortized cost health investment portfolio. The CECL reserve at the end of Q1 was slightly above our expected normal range of 15 to 20 basis points, and that is due to the latest national economic forecast. CECL requires you to do a macroeconomic forecast using a modeling system and the outside model that we use given all the kind of uncertainty and the movement around in Q1 in the markets, it just had a little more severe step on the macroeconomic forecast, it's only 2 basis points, so instead of 20 basis points at year-end, it's 22 basis points. The CECL loan loss reserve number does not include our loans being carried at fair value, just amortized costs. And then in the table to the right of this page shows our net gain loss from both loan charge-offs and REO-related activities during the quarter. And for Q1, the gain on REO activities offset the net loan charge-offs. Page 12 shows our durable funding and liquidity position at the end of the quarter. Total liquidity as of March 31 was $75.6 million, that is comprised of $51.7 million in cash and cash equivalents and another $23.9 million in available liquidity on our unfinanced collateral. In addition, the available warehouse line capacity at the end of the quarter was $238 million, with the maximum line capacity of $810 million. As Chris mentioned previously, in Q1, we issued our first securitization of 2025 for $342.8 million in securities issued. And then subsequent to first quarter, in April, we issued our second long-term securitization, 2025-2, and we also issued a short-term securitization, 2025-RTL-1 as the securitization of our short-term loans. And remember the very first short-term securitization we ever did was in 2023. So in 2025, we simultaneously collapsed the 2023-RTL-1 short-term securitization and issued the 2025-RTL-1 securitization. And the RTL-1 securitization, I only want to add about that is it includes $59 million in UPB from the old 2023 securitization that was freed up when it was collapsed and it will go to the RTL-1 for 2025. That concludes my first quarter financial recap. I'll turn the presentation back to Chris now for an overview of our '25 outlook.

Chris Farrar, CEO

Thank you, Mark. I think from a market perspective, you can see that we're seeing very strong healthy demand. Real estate markets are functioning well. So we feel good there. Our credit perspective is still seeing very good positive resolutions. I think, it remains to be seen what happens with all of the tariff talk and those types of things. But from our perspective, we don't think it's going to have an impact on our business materially. In terms of capital, we've been very active there, and markets are supportive of us. In terms of earnings, we feel very good about the future and the rest of this year. And I'm excited to continue on our path. So with that, that concludes our prepared remarks, and we'll open it up for questions.

Operator, Operator

Our first question comes from Don Fandetti with Wells Fargo.

Don Fandetti, Analyst

Just wanted to clarify, it sounds like the NIM is more normalized now. So would you think Q2 would be sort of in the same range as Q1?

Chris Farrar, CEO

Don, I think that's right. I mean we generally target around 3.5%. So 3.35% to 3.50% right in there is what we would say is pretty normal.

Don Fandetti, Analyst

Got it. And then also on new origination yields. They've been steady, ticked down a little bit. Are you thinking that we hold in this range as we go through 2025?

Chris Farrar, CEO

Yes, I think that's correct. We reduced coupons slightly to align with the decrease in our borrowing costs. This adjustment has allowed us to maintain our spreads, which is why the coupon went down. Ultimately, our pricing is tied to 3- to 4-year treasury rates. As those rates fluctuate, we will adjust our spread accordingly. However, we anticipate that these rates should remain relatively stable, with the potential to decrease later in the year if the Federal Reserve continues to cut rates, though that is yet to be determined.

Operator, Operator

The next question comes from Eric Hagen with BTIG.

Eric Hagen, Analyst

You noted some more commercial demand, I think, in your opening remarks. We know that transaction volume for the market is down, right? So are you guys seeing more demand because borrowers are being shut out of other channels? And on maybe like a related note, is there a level that you expect for overall origination volume through, call it, the end of the year? And then maybe like at this point, what would maybe catalyze your origination volume to be meaningfully higher than whatever you're currently projecting?

Chris Farrar, CEO

Eric, thank you for your questions. We launched a small commercial division focused on commercial lending about a year and a half ago. The main driver of our growth has been the increase in production from this new channel, which primarily caters to owner-occupied commercial real estate. While we have seen fluctuations between residential and small commercial lending, we are comfortable with both segments. This channel's growth is largely due to our direct efforts. Regarding our production run rate, we believe the current pace is sustainable, which is a positive indicator for the rest of the year. A significant increase in volumes would likely require a substantial drop in interest rates similar to what we experienced during the COVID period. However, I do not anticipate that happening; if it did, it would provide a significant boost to our volumes.

Eric Hagen, Analyst

Okay. That's good color. I appreciate that. Can you say what you did with the capital that you raised? Like was it to deleverage a little bit? And then when you come in to maybe raise additional capital from here, is there an expectation for what you plan to maybe do with that capital?

Chris Farrar, CEO

Yes. So we just used it to continue to make more loans. I think any capital that we do raise will be solely for the purpose of growing the portfolio. We take, as you know, all of our earnings and retain them and put them back in. So that marginal return on capital is very attractive, and we're seeing very high ROEs there. So we think the smartest thing to do is allocate capital back to new assets. And we have a number of levers we can pull there, and we'll just continue to support the growth.

Eric Hagen, Analyst

Yes. That's good to hear. Sorry if this is a naive question, but when you look at gain on the REO sales, does that include the back interest from like the borrower initially defaulted? Or is it just a gain relative to the UPB of your cost basis?

Mark Szczepaniak, CFO

Yes. When we look at the gain on the REO, we're showing those resolution tables and all that will just be the gain not only of the back interest to keep that kind of REO that back interest has already been taken out of the financials. It's more of a reverse, right, so when the loan goes nonperforming, we take all the accrued interest at that point, and we reverse it and back it out. So that interest kind of hits, so to speak, as it has already been taken out. So probably in every quarterly interest. So then we show the REO being disclosed in any gain over and above anything else we already back on.

Chris Farrar, CEO

Yes. And I would add the same thing happens on the gain on transfer when that loan first transfers to REO, same concept.

Operator, Operator

And the next question comes from Steve Delaney with Citizens JMP.

Steve Delaney, Analyst

Congrats on a great start to 2025. Chris, what is your current total headcount in terms of employees?

Chris Farrar, CEO

We're 323.

Steve Delaney, Analyst

323, okay. And how many office locations do you have folks sitting in around the country?

Chris Farrar, CEO

So we have 5 office locations. We kind of have a hybrid model. So how many folks are sitting in those office locations is a wildcard, Steve, but...

Steve Delaney, Analyst

You can't see who's there anyway.

Chris Farrar, CEO

Right.

Steve Delaney, Analyst

It may come across as a virtual business, but I'm trying to understand the overall presence. Considering growth in relation to execution, you've been performing exceptionally well at the start of 2025. As you discuss this with the Board, I'm looking for a clearer picture of where you envision the company in the next 3 to 5 years. Apart from achieving significant profitability and successful performance, do you have a vision for the company's future direction in that timeframe?

Chris Farrar, CEO

Yes, we aim to have the portfolio reach $10 billion within five years, and we expect continued growth. This will necessitate additional headcount, primarily focused on the East and West Coasts, and we may consider expanding to the Midwest or Texas. We're making extensive use of technology to scale the business without significantly increasing staff levels. While some headcount growth is inevitable, our average balance funded per loan officer or account executive is increasing, indicating that our existing team is becoming more productive, which is beneficial since it reduces the need for hiring. However, we will still need to enhance backend support with credit and other functions. I anticipate adding a few hundred employees over the next five years, but we will strive to leverage technology as much as possible to keep that number low.

Steve Delaney, Analyst

Sure. And you do all your servicing in-house, don't you?

Chris Farrar, CEO

So we do all of our special servicing in-house. The primary servicing is outsourced to bill collection, the payments, the insurance, and the administration, all of that is outsourced. We just manage delinquent assets because we own that risk, and we think we're the best people to resolve those risks.

Steve Delaney, Analyst

Great. Well, look, thanks for those comments. I just want to get kind of a picture of what the company looks like on the way you are planning to go with that. I appreciate it, Chris.

Operator, Operator

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

Chris Farrar, CEO

Thanks again, everyone, for joining the call, and we appreciate your support. We'll talk to you again after the second quarter. Thank you.

Operator, Operator

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