VEL - NYSE

Good day, and welcome to the Velocity Financial, Inc. Fourth Quarter and Full Year 2024 Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chris Oltmann, Director of Investor Relations. Please go ahead.

Thanks, Tasha. Everyone, and thank you for joining us today for the discussion of Velocity Financial, Inc.'s fourth quarter and full year 2024 results. Joining me today are Chris Farrar, Velocity Financial, Inc.'s President and Chief Executive Officer, and Mark Szczepaniak, Velocity Financial, Inc.'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.velocityfinancial.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, please refer to our communications with shareholders, including the risk factors disclosed in our filings with the Securities and Exchange Commission. 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 later today. With that, I will now turn the call over to Chris Farrar.

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, and we believe that will allow us to capture market share. We saw 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. Importantly, 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%. In terms of our portfolio, our special servicing team did 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 we lend on. On a more somber note, we recently experienced devastating wildfires in Southern California, and all of us extend our deepest sympathies and concern for everyone impacted. From a 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 Financial, Inc. team members are safe and healthy, and we will do our part to help those affected recover. 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 enabled 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. While much energy is spent by others prognosticating future Fed moves, we simply continue to deliver much-needed capital to underserved borrowers. This is an important differentiator as we successfully originated loans over the last twenty years in 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 nationwide as we look to create long-term shareholder value. With 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, $0.60 of core earnings in Q4 and a full year core earnings of $2.03. So, you know, fantastic earnings across all the different segments of the business. From a production and portfolio perspective, another great quarter, $563 million PB, an 18% increase sequentially over last quarter and 60% year over year. The portfolio is just over $5 billion now. Nonperforming loans are pretty steady with where it was from the last quarter. Impressively, in the fourth quarter from an NPL resolution perspective, we had just over $5.5 million of gains from resolved delinquent assets. On the financing and capital side, I mentioned the securitization market, and we did a couple of deals in the fourth quarter that went off extremely well. We also issued below $7 million in new equity through the ATM program, and the strategy there is really just to continue to increase float and broaden out our investor base as best we can. From a capital and liquidity perspective, really great. If your end is almost $96 million 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. You can see the bridge from 9/30 to 12/31 there as we retain earnings and grow the book value. On the upper right-hand corner, we have two bars that take our GAAP book value at 12/31 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, we think that adjusted book value would be about $18.73 a share. So there's tremendous value, we think, still in the platform that doesn't show up from a GAAP perspective. With that, I will turn the presentation over to Mark Szczepaniak on page five.

Thanks, Chris. Hi, everybody. Another year is in the books, and Velocity Financial, Inc. has really ended the year strong. We're also starting 2025 kind of where we left off in 2024. Take a look at page five, total loan production for Q4, as Chris mentioned, was $563.5 million in UPB. That's an 18.2% increase over Q3, which was $476.8 million. There were over 1,200 loans funded in the fourth quarter. Strong production growth during Q4 included the weighted average coupon new health investment originations continuing strong at 10.8%. The WAC on HFI originations for the last five-quarter average trend has been at 11%, so great weighted average coupons over the last five quarters. The growth in originations in Q4 also with the way that our loan-to-value for the quarter at just under 63%, 62.9%. The last five-quarter average trend has been at 63.9% LTV. So the strong Q4 production growth at the healthy WAC, the low LTV type credit, that still demonstrates, as Chris mentioned, the consistent borrower demand for a product in different market cycles and borrowers. In 2025 so far, 2025 year-to-date, low production through February is $429.4 million. So, again, continuing where we left off in 2024. As a result of the continued strong growth and production, page six shows a similar growth in Q4 for our overall loan portfolio. Total loan portfolio ends on December 31st with $5.1 billion in UPB. That's a 6.4% increase in Q3 and over a 24% increase year 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 from Q3 and a 65 basis point increase in yield year over year. Again, the total weighted average loan-to-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 3.70%, an increase of 10 basis points quarter over quarter 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 over 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 Chris previously mentioned. The quarter over quarter increase in NIM mainly driven by strong loan production in the quarter at healthy spreads, higher loan coupons coupled with the continued favorable execution in the securitization market and 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. 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. Our special servicing department has resulted in favorable gain resolutions for NPL loans. The table on page nine highlights the NPL resolution efforts. In Q4, the NPL resolution gains were $5.6 million or 7% of a little bit over $79 million in UPB resolved. 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 $10.2 million for the year, over $283 million of UPB resolved. Page ten shows our CECL reserve and also our loan charge-offs and our net gain/loss and our REO activity. In the left-hand corner, the CECL reserves, December 31st, was $4.2 million, with 17 basis points of our outstanding non-fair value HFI portfolio. Our CECL reserve remains within our expected range of between 15 and 20 basis points. Keep in mind that CECL loan loss reserve does not include our loans being carried at fair value. Over to the right, the table shows our net gain/loss from loan charge-offs and also REO-related activities during the quarter. For Q4, getting net gain on the combination of loan charge-offs and our related activities was $2.9 million, which is net of the $700,000 in charge-offs. See in the table. Netting with the $3.6 million gain on REO activities. For the full year 2024, the net charge-offs between the net charge-offs and the REO activity gain was $5.1 million. Page eleven shows our durable funding and liquidity position. At the end of Q4, total liquidity was just under $96 million, comprised of almost $50 million in actual cash and cash equivalents and another $46 million in our available liquidity on unfinanced collateral. In addition, our available underlying capacity at the end of the year was $435 million. We have a maximum line capacity of $785 million. In Q4, as Chris mentioned, in Q2 securitizations, we issued one in October, the 2024-5, and one in December, 2024-6. Combined, those two securities hit over $586 million in securities issued. Then early in 2025, in February, we issued our first security, a little over $351 million in security. So with that, that concludes my 2024 financial recap. I'll now turn the presentation back to Chris for his overview on Velocity Financial, Inc.'s 2025 key business drivers, Chris.

Thanks, Mark. On slide twelve, 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 NPLs favorably, so we're very positive there. From a capital perspective, the strong securitization market is definitely a tailwind for us in 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. At any time, your question has been addressed and you would like to withdraw your question, please press star then two. Our first question comes from Stephen Laws with Raymond James. Please go ahead.

Hi. Good afternoon. Wow. You know, another fantastic quarter. Congrats on a really strong, I guess, close to 2024. And, Mark, from your comments on January and February volumes, it seems like 2025 is off to a continued strong start. So, you know, maybe on that point, can you talk about production expectations for this year? I think you said $430 million through January and February. You know, is there a stabilized run rate, you know, on the production front that you think you reach on a quarterly level where things plateau or, you know, how much incremental volumes on a quarterly basis do you think you can, you know, through the system?

Hi, Stephen. Yeah. Thanks for the comments. We, you know, I would say, you know, 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 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 the 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 good demand.

Appreciate that. And maybe to try to not read too much into numbers on a one-quarter basis, but certainly notice the average loan balance just shy of $450,000, you know, a little bit bigger than kind of the $380,000 to $390,000 or $400,000 the last year. Now, is that due to doing more, you know, entering markets, more traction with larger loans? Is it more due to the shift in mix with a higher commercial component if those carry higher balances? Can you talk about the, you know, the mix of the production and impact that might be having on average loan size?

Sure. Yeah. 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 rightfully, they have larger balances. Definitely still continue to see the banks being very tight there. So we see great opportunities come to us all the time with a 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 the retained earnings and then a little bit of proceeds from ATM issuance, is that enough capital to support and feed the growth of the business? Do you think you'll need to look for ways to have bigger chunks of additional equity as you grow? Kind of how do you think about managing?

Yeah. That's a great question. Based on, you know, kind of current run rates, we're in good shape. If we really start to accelerate even more, I could see somewhere down the road where we might need additional growth capital. We have over $75 million of retained bonds that we can sell at any time to 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 on how much growth we experience, and that could drive some marginal capital down the road. Our view is we would do it on a kind of a balanced level, meaning, you know, a little bit of 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 then again, congrats on a very nice end of 2024.

Thanks, Stephen.

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

Hi, Chris and everyone, and congrats on the great progress. We're close to the year.

Yep. So, look, 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 with mortgage rates, 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 about what they're out there doing. Is it as simple as that they their focus 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 kind of regardless of and across whatever the rate cycle is. It's just it's I guess, it's whenever we're talking to a mortgage company, it's so different, Chris, than what we normally hear about borrowers. Some color would be awesome.

Yeah. Sure. No. It's a good question and definitely something that's unique to our business model. I think you summed it up well. You know, these folks need access to capital, and they're willing to pay for it. They're very smart, and 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. You know, we write a thirty-year fixed-rate mortgage, which is very unusual. Some of their alternatives might be very expensive shorter-term capital that, you know, 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, but you're absolutely right. Unlike most mortgage lenders, the first question or the first concern is not rate with our borrowers. It's certainty of execution.

Got it. Yeah. Because they might have a property that has to close by a certain date and, you know, and that's right.

That's right. Or they need to 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 extended, you know, let's go to loan committee three times over six to eight weeks. Not gonna work. That's right.

The NPL resolutions are certainly remarkable. Talk about that, you know, when you have gains of $5.6 million on $79 million 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 being able to are there buyers for your delinquent loans that you can offset your loans to another quote, credit investor, that's not a public company? Yeah. What the resolutions look like. Is it foreclosure or is it note sale?

Yeah. I mean, all those resolutions that you see are either us taking back a property and selling it for a gain or, you know, delinquent loans resolving sort of at the foreclosure steps, if you will. Maybe a different investor comes in and buys that, but, you know, we can only bid up to the total amount that we're due and all of the costs and fees 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.

Yeah. And Steve, this is Mark. I think another thing to kind of keep in mind is, you know, the resolutions are resolutions of our non-performing loan UPB. Right? So in many cases, those never make it to the REO property, to your point, selling REO. So over 90% of all of our non-performing loan resolutions, like that $79 million solved for Q4, probably over 90% of that are the borrowers either paying current, paying the loan current with, you know, default interest, which is part of the gain, or they come, they refinance, so they have capital somewhere else, and they pay off the loan. We get the default interest. And depending on if it's still in the prepayment window, we get a prepayment fee. So keep in mind that 90% of those NPL resolutions is the original borrower either paying current or paying off the loan. And then the other, you know, 8 to 10% or whatever, that goes to foreclosure, Chris's 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 borrower resolving.

Oh, that's fabulous. Right. Well, thank you both so much for the comments. And, again, congrats on just a fantastic year.

Thanks, Steve. Appreciate it.

Appreciate it.

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

Hey, thanks. Hope you guys are well. A couple of follow-ups here. Do you guys see any response in the CMBS market so far related to the broader market volatility recently, and maybe how does your expected ROE change if spreads were wider? 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 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 factor 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 no impact there. Our 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, you know, 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. You know, obviously, we had a big resolution in Q4. One of those REOs happened to be a very large resolution. It's almost two and a half million dollars. So we certainly don't expect to get one zero seven every quarter, and you can see historically we haven't. But if you look back over the last fifteen years of us doing this, you know, we think it's very fair to expect a, you know, two to three-point gain on an average basis, and, you know, sometimes it'll be higher, sometimes it'll be lower, but because there's so much equity in the real estate here, we've just historically always seen positive resolutions there. So we think that's a durable source of part of our total overall return.

Yep. That's helpful. Okay. Great. I realize 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, you know, shorter-term leverage that they're sourcing. And then, you know, relatedly, I mean, is the REO mostly single-family, and how do we reserve for liquidity in the single-family versus the?

Yeah. Sure. Absolutely. So on the first part, we did see an uptick in the commercial assets for sure. The portfolio's almost fifty-fifty between one to four rentals and then what we would call a small commercial on the other side. There's a wide array of reasons why borrowers are coming to us. They're purchasing assets that maybe they're having a hard time finding financing for. They're refinancing other assets they own to buy something else. They're buying properties and fixing them up and retenanting them there. I mean, it's across the board. I can't give you just sort of one little bucket there, but, you know, these are all smart, sophisticated, small investors that know how to, you know, see opportunity in real estate and maximize it. And I think, you know, on a go-forward basis, in terms of the REO, we've gotten definitely more REO from the one to four side than the small commercial side. There's been, I would say, more delinquency in the one to four space and more REO there. That REO tends to be very, very liquid and relatively easy to sell because even though it's 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 tend 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 mark those assets to what we believe would be, you know, some representation of the fair value. So there's no loss provisioning on any of those assets. So as we fair value type of classification, I think you're going to continue to see that loan loss reserve shrink in runoff, and, you know, a couple of years, we won't even talk about CECL.

Yep. Great stuff. I always appreciate the color from you guys. Thank you.

You're welcome. Thank you, Eric.

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

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

Thank you, everybody. Appreciate your time.