Velocity Financial, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. Unaudited. Unless otherwise stated, dollar amounts below are in millions.
Business context
Velocity is a vertically integrated real estate finance company that originates and manages investor real estate loans, primarily secured by residential rental and commercial properties. It funds its portfolio mainly with securitized debt and warehouse facilities. Its consolidated subsidiary Century originates and services government-insured multifamily and senior-housing loans. The company reported a single operating segment.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Interest income | $90.5 | $70.5 |
| Net interest income | $29.5 | $24.4 |
| Net interest income after loan-loss provision | $28.5 | $23.7 |
| Other operating income | $25.8 | $12.8 |
| Operating expenses | $31.0 | $21.8 |
| Income before taxes | $23.2 | $14.8 |
| Net income attributable to Velocity | $17.3 | $10.6 |
| EPS, basic / diluted | $0.52 / $0.49 | $0.33 / $0.31 |
Interest income increased 28% year over year, reflecting a larger portfolio and higher average yield. Other operating income included a $18.9 million unrealized gain on fair-value loans, partly offset by a $2.3 million unrealized loss on fair-value securitized debt. Operating expenses rose 42%, with higher compensation, professional fees, servicing and real-estate-owned costs among the drivers. The filing does not present a conventional operating-margin measure.
- Margins and funding costs: Annualized portfolio yield was 8.71%, versus 8.00% in Q1 2023. Portfolio-related net interest margin was 3.35%, up from 3.23% year over year but down from 3.52% in Q4 2023. Total-company net interest margin was 2.83%, versus 2.76% a year earlier and 3.10% in Q4. Management attributed the sequential decline primarily to higher corporate-debt expense, including the new 2024 term loan.
- Portfolio and credit: Portfolio unpaid principal balance was $4.282 billion, up from $4.056 billion at year-end. Weighted-average coupon was 9.1% and weighted-average LTV at origination was 67.6%. Nonperforming loans were $432.6 million, or 10.1% of portfolio UPB, versus 9.7% at year-end and 8.6% a year earlier. The allowance for credit losses was $5.3 million, 0.19% of amortized-cost loans excluding fair-value-option loans; quarterly provision was $1.0 million.
- Cash flow and liquidity: Operating cash flow was positive $10.6 million, compared with negative $11.9 million in Q1 2023; investing used $212.4 million and financing provided $199.0 million. Cash, cash equivalents and restricted cash declined $2.9 million to $59.0 million. Management reported $601.9 million of liquidity plus available warehouse capacity: $34.8 million cash, $43.7 million available borrowings against unencumbered loans and $523.3 million unused warehouse capacity.
- Debt and capital: The balance sheet reported $283.8 million secured financing, $2.330 billion securitized debt at amortized cost, $1.074 billion securitized debt at fair value, and $360.2 million warehouse and repurchase facilities. In February 2024, the company issued $75 million of five-year corporate debt bearing 9.875%, due February 2029; its existing $215 million term loan bears 7.125% and matures in 2027. The company reported compliance with debt covenants. Equity was $456.5 million at quarter-end.
Material changes and notable items
- Originations were $378.7 million, compared with $197.9 million of held-for-investment originations in Q1 2023. The loan count rose to 11,013 from 9,147 a year earlier.
- Fair-value-option loans increased to $1.650 billion from $1.306 billion at year-end; their valuation gains contributed materially to reported income. These loans do not carry a CECL allowance.
- Nonperforming loan UPB increased year over year and sequentially. Management said the increase reflected portfolio growth and a decision to move loans into foreclosure earlier in the delinquency process. It stated that historically most nonperforming loans resolve before becoming real estate owned.
- The company completed a $295.1 million-UPB investor-loan securitization on April 11, 2024, after quarter-end. Century purchased a servicing-loan portfolio with $227.6 million UPB for $3.6 million on April 30, 2024.
- Q1 included $2.0 million of after-tax other comprehensive income from cash-flow hedges. The company expects to reclassify an estimated $0.3 million after-tax net unrealized loss from AOCI to earnings over the next 12 months.
Outlook, risks and contingencies
The filing provides no specific earnings, origination or margin guidance. Management described its strategy as continued loan origination and portfolio growth, using securitizations as its primary long-term funding source, with warehouse facilities and corporate debt as additional funding. These statements are forward-looking and are not a quantified forecast.
- Management cited inflation, unemployment, potential recession, real-estate and corporate-debt-market stress, geopolitical conflicts and interest-rate movements as uncertainties that could affect loan performance, funding access and results.
- Funding and liquidity risks include dependence on securitization markets, floating-rate warehouse borrowing, collateral eligibility and facility covenants. Certain warehouse facilities had maturities in May, July and September 2024; the filing does not establish their subsequent renewal or repayment status.
- Credit risks include rising nonperforming loans, collateral values and the performance of loans in forbearance. Of $165.1 million UPB in the COVID-19 forbearance program at March 31, 2024, 27.3% was nonperforming/nonaccrual, compared with 24.2% at year-end.
- Valuation estimates are a notable uncertainty: $1.650 billion of fair-value loans and $9.0 million of mortgage servicing rights were Level 3 measurements using significant unobservable inputs.
- Legal proceedings were described as arising in the ordinary course; management did not expect pending matters to have a material effect. A $3.6 million net employee-retention-credit amount remained deferred in accrued expenses pending resolution of uncertainty over the credit. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the rise in nonperforming loans continues, and how resolution rates, foreclosures, REO balances and realized losses develop.
- How much reported profit depends on unrealized fair-value gains, and the sensitivity of Level 3 loan values to discount, default, prepayment and loss-severity assumptions.
- Whether portfolio yields can continue to offset rising funding costs, particularly the 9.875% corporate borrowing and floating-rate warehouse facilities.
- Whether reported unused warehouse capacity and overall liquidity remain available as facilities mature and collateral requirements change.
- The realized performance and funding impact of the April 2024 securitization and Century’s servicing-portfolio purchase, neither of which is reflected in Q1 results.