Velocity Financial, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Velocity originates and manages investor real estate loans secured by residential rental and commercial properties across the United States. It earns primarily from the spread between loan yields and portfolio funding costs, using securitizations, warehouse facilities, corporate debt and equity. At quarter-end, its loan portfolio was about $2.9 billion of unpaid principal across 45 states and the District of Columbia. The company acquired an 80% interest in FHA multifamily lender and servicer Century Health & Housing Capital in December 2021; its servicing income and mortgage-servicing-rights valuation contributed to Q1 results.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Interest income | $52.0 | $40.7 |
| Portfolio-related net interest income | $28.5 | $19.9 |
| Net interest income, after corporate debt interest | $11.4 | $12.5 |
| Provision for loan losses | $0.7 | $0.1 |
| Other operating income | $5.6 | $2.8 |
| Operating expenses | $12.3 | $10.6 |
| Income before tax, consolidated | $4.0 | $4.6 |
| Net income, consolidated | $3.2 | $3.4 |
| Net income attributable to Velocity | $3.1 | $3.4 |
| Basic / diluted EPS | $0.10 / $0.09 | $0.11 / $0.10 |
Interest income rose 28% as average loans increased, while annualized portfolio yield fell to 7.76% from 8.41%. Portfolio-related net interest margin was 4.25%, versus 4.10%; total-company reported margin was 1.69%, versus 2.59%. Q1 corporate debt interest expense included $7.7 million of debt-cost write-offs and $5.1 million of prepayment fees from refinancing. Excluding these one-time charges, management reported total-company net interest margin of 3.60% and net income of approximately $12.4 million.
Operating cash flow was $11.8 million; investing cash outflow was $293.7 million, principally from loan originations; financing cash inflow was $281.7 million. Cash, cash equivalents and restricted cash totaled $47.5 million at quarter-end, including $36.6 million unrestricted cash and $10.8 million restricted cash.
At March 31, 2022, total assets were $3.11 billion, total liabilities $2.76 billion and equity $347.9 million. Carrying balances included $2.04 billion of securitizations, $424.7 million of warehouse and repurchase facilities, and $209.0 million of secured financing, net. The new $215 million corporate term loan bears fixed interest at 7.125% and matures in March 2027. Warehouse borrowings were $427.0 million, with $223.0 million of stated available capacity; the company reported compliance with debt covenants.
Material changes versus comparable periods
- Portfolio UPB grew to $2.88 billion from $1.99 billion a year earlier; Q1 originations were $581.4 million, up 149.5% year over year.
- Portfolio-related net interest income increased $8.6 million, driven by a larger portfolio, recoveries and lower portfolio funding costs. The total-company net interest result was pressured by the $12.8 million refinancing charges.
- Nonperforming loans were $275.5 million, or 9.8% of held-for-investment loans, down from $335.0 million, or 16.8%, at March 31, 2021. The allowance for credit losses was $4.7 million, compared with $5.9 million a year earlier.
- Operating expenses rose $1.6 million, including higher servicing, professional and other costs; net REO expense improved to income of $0.2 million.
- The company completed a $273.6 million securitization in February and a further $252.6 million securitization after quarter-end on April 8, 2022.
Outlook, risks and unusual items
The filing provides no specific numerical earnings or origination guidance. Management said it expects securitizations and other financing sources to support working-capital needs and portfolio growth, and did not expect the transition from LIBOR to a replacement index to materially affect funding costs or results.
Management identifies uncertainty from COVID-19, inflation, supply-chain disruption and the Russia-Ukraine war; competition; real estate and credit conditions; and the availability and cost of financing. The loan-loss estimate used a severe-stress economic scenario. The COVID-19 forbearance portfolio was $260.7 million UPB, of which 20.8% was nonperforming/nonaccrual. Funding facilities are collateralized and contain covenants; defaults could permit lenders to demand repayment or require collateral sales. The company also has loan-sale repurchase obligations; the related liability was $0.4 million. Management said pending legal matters were not expected to have a material effect. No material control issues were reported.
Important facts for investors to verify
- Whether portfolio growth and originations can be sustained without weakening underwriting or loan yields.
- Credit performance, recoveries and resolution of nonperforming loans, including COVID-19 forbearance loans and REO.
- Funding availability and costs, warehouse capacity and covenants, and execution of future securitizations.
- The recurring earnings impact of the new fixed-rate corporate debt after excluding Q1’s refinancing charges.
- Century’s contribution to servicing revenue and earnings, and any future dilution under the ATM program or outstanding warrants.