Velocity Financial Inc (VEL) 2022 Q2 法說會逐字稿

Good day. And welcome to Velocity Financial Inc second quarter 2022 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Chris Oltmann, Treasurer and Director of Investor Relations. Please go ahead.

Thanks, Andrew. Hello, everyone, and thank you for joining us today for the discussion of Velocity Financial's Second Quarter 2022 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 second quarter 2022 press release and the accompanying presentation which are available on our Investor Relations website.

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 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. And finally, today's call is being recorded and will be available on the company's website later today. And with that, I'll now turn the call over to Chris Farrar.

Thanks, Chris. And welcome, everybody, to our second quarter earnings call. Before we dive in, I want to recognize Mark, our CFO Mark Szczepaniak's recent award from the Los Angeles Times as CFO of the Year. Anyone who's worked with Mark knows he's a true leader and a genuinely great person. His commitment and work ethic permeates our culture, and we're very fortunate to have Mark on our team. So congratulations, Mark, on a well-deserved award.

In terms of our results, we reported another outstanding quarter in an obviously uncertain time. Our unique portfolio approach continues to generate stable earnings with limited volatility. Originations moderated this quarter as our recent coupons increased to the mid 8% range. And fortunately, we're continuing to see healthy loan submissions at those levels. We're currently in the market with our fifth securitization of the year. And we're pleased with the strong support we've seen from our investor base. For seasoned loans, our delinquency continues to normalize and our special servicing team consistently delivers impressive results. We're beginning to see a cooldown in the real estate markets, which we think is healthy and there are still plenty of loan opportunities for us to invest in.

Due to the recent market volatility, we're also being shown some interesting opportunities to acquire good assets from distressed operators. We intend to capitalize on those situations as they develop in the second half of this year. From a liquidity perspective, we're in the strongest position we've had in many years. Due to our stable portfolio earnings, we can be patient in deploying our capital, and we'll manage our liquidity carefully as the market evolves over the next 6 to 12 months. Despite the recent headwinds we are very confident in our ability to grow and deliver strong returns for our shareholders.

With that, I'll turn over to the presentation materials, starting on Page 3. Looking at the second quarter from an earnings perspective, nice strong earnings, $10.6 million, both on a core and GAAP basis, healthy increase year over year, down a touch from the first quarter on a core basis, and that's mainly driven by fewer loan sales. We made more loan sales in the first quarter and in second quarter decided to securitize more assets. And we've said over times, we'll be opportunistic when we make those sales.

From a net interest income perspective, up almost 25% year over year. So very, very good strong net interest income growth as the portfolio grew and an exceptional quarter from the NPL recovery rate of 111% over above accrued interest and outstanding UPB. We saw some really nice pickups there from some older, seasoned loans that had been unresolved for a long time and a couple of REO gains. So just great performance there.

In terms of production, you can see year over year up about 74%. So very nice growth on a quarterly basis. And then for the first 6 months of the year, over $1 billion, which is more than twice the amount that we had done in the prior year. So fantastic growth across the platform.

Ended the quarter with $3.1 billion in terms of UPB. And as we've come out of COVID and started to see borrowers get back on their feet, we've seen that nonperforming rate reduced dramatically as borrowers care and NPLs get resolved. From a financing and capital perspective, we completed three securitizations during the quarter. I think that speaks to our strength out there in the track record and the history that we've had of bringing good deals to market. And so we're proud to be able to continue to execute in choppy times. One of those transactions was a refinance of deal that we've done during the heart of COVID, and we had a tremendous amount of capital tied up in that transaction. So that freed up a lot of liquidity for us, probably in my mind, one of the most important highlights of the quarter is, we're sitting on $134 million of liquidity in the end of the quarter, which really puts us in a good position to not only take advantage of interesting opportunities, but also just patiently watch and see how markets develop.

Lastly, here, we did increase warehouse capacity, another $100 million during the quarter. And as a reminder, all, but one of those facilities is non-mark-to-market. So we've eliminated that risk almost entirely across the portfolio with securitization and non-mark-to-market facilities.

Turning to page 4, you can see book value per share $11.26, I think this this slide just highlights our unique portfolio approach of building book value and trying to maximize shareholder return with limited volatility. So a number of our peers are seeing big marks just based on market volatility in our sort of approach in accounting methods, I think eliminate a lot of that. So I'm proud how the business has performed. And with that, I'll turn it over to Mark to handle the rest.

Thanks, Chris, and good afternoon, good evening, everyone. And thank you, Chris, for the kind words. Of course, I had to pay him enough to say all those things, but that's a different story.

On slide 5, the loan production, as Chris mentioned, we have very strong loan production for the first half of this year, a little over $1 billion compared to about $489 million for the 6 months of 2021, which is 110% increase in production. We only had $1.3 billion fundings for all 12 months of last year, so we're at $1 billion for six months. We are still seeing very strong demand for our product. We have $445 million funded in Q2. And as we'll see in a little bit, we've been raising on our WACs on our loans or new loan applications to kind of keep up with the interest rates that we're seeing on the finance side to maintain that spread, we'll see that in just a moment. So even after raising our WACs and actually our Q2 production, new originations on Q2 our weighted average coupons were up 145 basis points from the new originations we had in Q1. So we've been aggressively raising rates and still seeing good strong production coming in in Q2. And again, in the first six months of the year. So very happy to see that.

On slide 6, when the production comes in strong, the loan portfolio is growing accordingly because we're putting most of that into our in-place portfolio with our lot spread. Our total loan portfolio at the end of June was $3.1 billion. That's up 7% from $2.9 billion as of the end of Q1 and up 49% year over year compared to June of last year. Again, just showing the very, very strong demand for our product. On the weighted average coupon, it was 7.53%, and that's up from 7.50% for the first quarter. So again, we're raising the rates, getting the coupon up to offset the rising interest rates on the financing side and still getting in the volume and able to grow the portfolio significantly.

On slide 7, the net interest margin, what we're seeing is more of a return to normalized levels on our NIM. If you go back to second quarter of last year, you can see on the page, it was up at 4.83%, and we have said in some previous calls that debt margin was kind of inflated. We're getting higher margins because we're getting a lot of the default interest prepayment penalties as we were bringing the NPL rate consistently down. So the yield coming through is not a sustainable yield over the long haul. And we normally run like a lot of four points margin and then you see we're normalizing back to kind of our normal run rate margins. We feel really good about that. And as our nonperforming loans are resolved, the default interest and prepayment fees have kind of started to normalize because our NPL rate has come significantly down and we will take a look at that.

But while we're doing that, we're still maintaining enough spreads. If you look at the right hand side, the portfolio yield and cost of funds, you can kind of see go back to Q2 of last year when interest rates were higher. We were charging more on the loans. And of course, our debt costs are a lot higher at 4.81%. You can see as Q1 came into play as rates came down in the second half of 2021 into the first quarter 2022, we lowered the WAC on the loans, still maintain that spread, and we've been very aggressive now going into Q2 and through Q2 as interest rates have gone back up on the financing side. Again, as I said, we've increased the WACs almost immediately to keep that yield on our loans still maintaining that spread throughout.

On page 8, the asset resolution activity continue to see strong resolutions on our NPLs. NPL resolutions for Q2 is $50 million in UPB for a $5.7 million gain. That's on a 11 point gain on a resolution. So historically, we've run about 3.5-point, 4-point gain on our resolutions of NPL loans, and we're at 11 point gain for Q2. And as Chris mentioned, so I think, in there in Q2, we did sell a couple large REOs that probably brought in about $1 million gain. And then if you look at the resolution activity, if the long term loan side up in the top, you see paid in full for Q2 is up $17 million UPB paid in full for a $3.3 million gain, where Q2 of last year, so it was $21 million. But even though smaller gain. And the reason that's happening is some of those, as Chris mentioned, some of those loans that were in foreclosure in the judicial states where it takes about 1.5 to 2 years to settle those loans. Some of those are now finally coming through. And remember, we've got that four points default interest tacked on and that's accruing the whole time. It's in the foreclosure process.

So as these borrowers are now paying off those loans because we're getting the point we can foreclose on the properties that allow those properties as are paying off these loans, they have to pay it off. They have to come up with all that default interest too. And that's why you're seeing a lot of those big [gains] coming through. And one thing to point out on this slide, with the growth in production, the growth, the in-place portfolio and maintaining that spread, we're seeing great core diluted earnings per share. You saw it was $0.31 for Q2 year to date, which was not on the slide, year to date our core diluted EPS of $0.67 a share versus $0.45 a share for the first six months of 2021. So year over year or six months over six months, you've seen a 50% increase in net core diluted earnings per share.

On the next slide, the loan investment portfolio performance. And as I mentioned, with all that strong resolutions that we're doing, the NPL rate continues to come down. We ended Q2 at an 8.2% nonperforming rate. Year over year comparison that compares to 15.3% when were at Q2 of 2021. If you remember, at the end of 2020, we were as high as 17.1%. So we feel very, very good about the way we've been able to get these loans performing again or to resolve the loans by having them pay down or pay current at the same time, still making a 4-point or even you saw 11 points in Q2 gain on those resolutions. And that's mainly because of our own in-house special servicing department that allows us to take charge of those nonperforming assets, really work with the borrowers and getting very, very successful resolutions and that kind of in-house strategy really pays off. And you can kind of see the results here.

In terms of our loan loss reserve and CECL reserve, it remains very consistent in terms of basis points of reserve on UPB. That's in the bottom left-hand chart, you can see we were at 19 bps back in Q2 of 2021. We kind of had additional reserves on there, not knowing uncertainties of COVID. And now we're kind of evening out right around the 16, 17 basis points. In terms of total dollars, we ended the quarter at $4.9 million, which is a 5.2% increase from Q1 and a 24% increase from June of last year. And that's really as a result of just the growth of the portfolio. As our in-place portfolio grows and you're maintaining a 16, 17 basis points spread, dollars of the reserve are going to grow accordingly.

But the key point is on the right-hand side, the bottom you see our charge-offs. The charge-offs has been running consistently low and that's historical too. If you just look at the last four quarters, the average charge-offs, loan charge offs have been about $168,000 a quarter with this most recent quarter coming in at under $38,000. So again, strong resolutions, NPL rate coming down, very low charge-offs, very good gain and kind of maintaining our margin in a very kind of widely moving interest rate environment. So we kind of feel very good about our results and where we're headed so far this year.

On page 11, durable funding, liquidity strategy, Chris, I think hit most of the high points there. We did four securitizations already in 2020 to think about. We did four all of last year and we've done four during six months. Three of those securitizations were in Q2. So we actually did securitizations in April, May and June, which again, just goes to show the investor demand for the product that's out there. We're having no problem getting the securitization done at a pretty likely moving market. So we feel really good about that. We did $896 million worth of securitizations issued this year, of which $623 million almost was in Q2.

And we see a couple of things with these securitizations. One, we're able to collapse a couple of older deals, one deal is as far back as 2015, which was the old -- sequential structure or -- yeah, the sequential structure and a sequential structure as it pays down, gets more expensive. So that was a higher yield feel. We had to collapse that and we securitized it in our full pro rate structure and actually at lower cost.

And then the old MC-1, the old mixed collateral deal that we did back in July of 2020, kind of in the heat of COVID to get the securitization and liquidity was only at a 65% advance rate. So we had a lot of equity and collateral tied up in that deal and we -- as it paid down, our equity just went up because all the payments was a turbulent right to the bondholders, take them down and our equity just kind of kept growing.

We're able to re-leverage that almost like a 75% advance rate and generate quite a bit of liquidity, as Chris mentioned. So we're able to -- doing those deals ending of the second quarter with $134 million in available liquidity, $46 million of that being the cash that you see on the balance sheet and another $88 million in loans that are unfinanced that we can put online at any time and draw liquidity off of. So we feel really good about our liquidity position ending the quarter. As Chris mentioned, we raised the maximum capacity of our warehouse lending from five from $650 million to $750 million. So there is a $100 million capacity, as we again see the production growing the portfolio growing.

So with that, I'll turn it back to Chris to go over the economic value of equity.

Thanks, Mark. Appreciate it. On Slide 12, we've shown this slide a few quarters in a row now so I won't spend a tremendous amount of time on it. Want to make the point that most of our peers, you know, mark their balance sheet to fair value. And if we believe it, if we were to do something like that, we would see a much higher mark than then you see just looking at the face of the financial statements, and that's largely driven by the locked in spread embedded gain in the portfolio. So we think from a value perspective, we're undervalued based on where our stock's trading today and want to try to highlight that, we think there's a lot future value that's yet to be realized.

On 13, just kind of talking about the outlook. We mentioned that we are still seeing good demand from a credit perspective. We feel very, very safe there. There's been a lot in the press about what's going to happen and what may happen. But so far, we think things are good and expect it to continue that way. We do plan to do two more securitizations this year. And I think from an earnings perspective, we just want to continue to focus on managing the portfolio, providing that stable spread and looking for unique opportunities to grow both organically and strategically.

So with that, I will turn it back over to Andrew. We can see if there are any questions.

We will now begin the question and answer session. (Operator Instructions) Arren Cyganovich, Citi.

Thank you. On the production side, obviously a solid quarter, a little bit lower, and it sounds like you're able to pass through some of the increases in price, which slowed down the production, what level of production are you expecting in the second half of the year relative to, I guess maybe you could talk about how the cadence happened throughout the quarter?

Yes, hi, Arren. Good question. I mean, I think the right guidance is with the second quarter level. We feel good and we're going to be able to deliver that for the next few quarters. So I think that's a good run rate.

Okay. That's good. And then on the securitizations that you did recently, how have those been pricing relative to some of your earlier securitizations?

Yes. So they're definitely pricing a lot wider than certainly 2021. 2021 was a banner year for us, and we were getting some incredible pricing there so -- and I would say they're pricing a little wider than even before 2021. Margins aren't as strong on the most recent deals as probably they have been historically. But I think on a go-forward basis, we feel like we've caught the pipeline up now, and I think we'll be there and obviously depends a lot on where the market goes from here, but we're feeling like we're back in line from a spread perspective now.

And that would be around that 4% type of NIM? That's the expectation?

Yes, that's right.

Okay, right. Thanks a lot.

You're welcome.

(Operator Instructions) Steve DeLaney, JMP Securities.

Thanks. Hey, guys. Congrats on a really strong quarter in obviously a very challenging market. And Mark, congrats to you from another former public company CFO. It's a tight stuff work man, so, great job.

Thank you.

Chris, you talked about the stress situations and seeing some things out there, boy, we have seen some shops shut down. And just this morning, I saw a mortgage REIT write-off over $20 million of a pref equity investment in an originator who had ceased operations. So we know those kind of things are out there. I'm just curious, as you look at those opportunities, is it a matter of just looking at loan collateral that may be sitting on warehouse somewhere? Or is there any interest in infrastructure and any product expansion opportunities there? Thanks.

Sure. Thanks, Steve. Appreciate it. Yes. We've seen both asset opportunities and strategic opportunities. And so nothing huge yet. But I feel like it's the beginning of probably a larger opportunity set on the asset side. I think you're largely seeing assets that are probably home either on a warehouse line or maybe some scratch-and-dent characteristic or something like that, where we would obviously be looking to pick those up at a discount. And then I think strategically, we've seen a couple of platforms that we've looked at, nothing compelling yet, and we haven't seen anything in terms of new products, but we're open to that. And so my gut tells me, over the next 6 months we may see something like that.

Okay. Well, that's -- the last year or so it's been just a matter of keeping things straight in your own kitchen. But right, you guys have really gotten yourself squared away and you've got a strong position to take advantage. I'm just curious where you're pricing today. I mean, I assume we're probably up to something near an eight handle and how the demand is looking at that type of a coupon?

Yeah. So we're -- the more recent production is kind of -- 8.5 to nineish coupon and yeah, just in the last few weeks, submissions have been very strong. So I think there's what I call the kind of the sensitivity period where customers and clients, borrowers are kind of adjusting to things and there's a hold back or a lull if you will. And then people start to realize this is the new reality and they transact. We -- there was a little bit of an adjustment period there for sure but I'm very pleased to see how strong submissions have been.

Great. Thank you for the comments. Appreciate it.

Thank you, Steve.

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

I just want to say thanks again for everybody for participating and all of your support. And we're grateful for the years of support that we've seen from everyone. So that'll conclude our call and thank you.

Thank you.

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