Business context and reporting period
Velocity Financial, Inc. filed an unaudited Form 10-Q for the quarter ended March 31, 2021. It originates and manages investor real estate loans, principally secured by residential rental and small commercial properties, and earns most revenue from loan interest. Unless stated otherwise, amounts below are in millions of dollars.
Financial results and position
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Interest income | $40.7 | $44.6 |
| Net interest income | $12.5 | $15.4 |
| Provision for loan losses | $0.1 | $1.3 |
| Other operating income | $2.8 | $1.6 |
| Operating expenses | $10.6 | $12.1 |
| Net income | $3.4 | $2.6 |
| Net earnings attributable to common stockholders / EPS | $2.1 / $0.11 basic, $0.10 diluted | $2.6 / $0.13 basic and diluted |
- Portfolio yield was 8.41%; portfolio-related net interest margin was 4.10%, compared with 8.57% and 4.18%, respectively, in Q1 2020. Reported total-company net interest margin was 2.59%; excluding refinancing charges, management reported 3.52%.
- Operating cash flow was $10.4 million, investing cash outflow $53.7 million, and financing cash inflow $50.2 million. Cash, cash equivalents and restricted cash increased $6.9 million to $27.2 million; unrestricted cash was $20.4 million.
- At March 31, total assets were $2.165 billion and total liabilities $1.851 billion. Loans held for investment, net, were $2.009 billion. Debt carrying amounts comprised $129.7 million secured financing, $1.453 billion securitizations and $203.3 million warehouse and repurchase facilities.
- The new corporate term loan had $139.1 million gross principal outstanding at quarter-end. Warehouse borrowings were approximately $204.6 million gross, with $148.2 million of reported available capacity. Management said the company was in compliance with debt covenants.
Material changes versus comparable periods
- Net income increased 31.7% year over year despite lower interest income and net interest income. The $1.2 million lower loan-loss provision and $1.4 million reduction in operating expenses partly offset weaker portfolio earnings.
- Q1 2021 corporate-debt interest expense included $2.9 million of debt-issuance-cost write-off and $1.6 million of prepayment fees related to refinancing and repayment of the prior term loan. Excluding those items, management reported net income of $6.7 million and return on equity of 12.1%, versus reported net income of $3.4 million and ROE of 6.1%.
- Loan originations were $233.0 million, down 5.9% from Q1 2020 but up 22.4% from Q4 2020. Total loan UPB was $1.991 billion, versus $1.903 billion a year earlier. Nonperforming loans were $335.0 million, or 16.8% of the portfolio, versus $151.1 million, or 7.9%, a year earlier.
- Operating cash flow improved from $1.4 million in Q1 2020; total cash including restricted cash moved from a $15.4 million decrease to a $6.9 million increase.
Outlook, risks, contingencies and unusual items
- The filing gives no quantified earnings or origination guidance. Management described continued uncertainty from COVID-19, including the duration and spread of the pandemic, new variants, vaccination outcomes and effects on borrowers and the economy.
- COVID-19 forbearance loans had $363.7 million UPB at quarter-end, down from $392.1 million at year-end 2020. Of these loans, 20.4% were nonperforming/nonaccrual, compared with 16.4% at year-end. Overall nonperforming loans include $74.3 million of forbearance loans placed on nonaccrual.
- The allowance for credit losses was $5.9 million, or 0.30% of relevant UPB. Management’s estimate weighted COVID adverse and severe stress scenarios equally; the estimate depends on uncertain economic assumptions.
- In February 2021, the company entered a five-year $175 million term-loan agreement, bearing interest at one-month LIBOR plus 8.00% with a 1.00% floor. The remaining $35 million delayed draw was received in April. After quarter-end, it also entered a $100 million term repurchase facility, and a previously disclosed IPO-related class action was dismissed on January 25, 2021.
- Series A preferred stock is presented as $90 million of mezzanine equity and carries conversion, redemption and change-of-control provisions. Warrants cover up to approximately 3.0 million common shares. These securities can affect common-stock dilution and potential cash obligations.
- The company reported ordinary-course legal matters that management did not expect to have a material effect. It reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether forbearance loans cure, repay or migrate into nonaccrual, foreclosure or REO, and how recoveries compare with the allowance.
- Whether portfolio yield, funding costs and margins improve, especially after excluding the one-time refinancing charges.
- Availability and cost of warehouse and securitization funding, covenant headroom, and repayment terms for the new corporate debt.
- Potential dilution and redemption or change-of-control obligations associated with preferred stock and warrants.
- Loan and geographic concentrations: investor 1–4 loans were 49.5% of UPB; New York and California represented 22.9% and 22.5%, respectively.