Velocity Financial Inc (VEL) 2021 Q4 法說會逐字稿

Welcome to the Velocity Financial, Inc. fourth-quarter and full-year 2021 results earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Chris Oltmann. Please go ahead.

Thank you, Vish. Hello, everyone, and thank you for joining us today for the discussion of Velocity Financial's fourth-quarter and full-year 2021 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 fourth-quarter 2021 press release and the accompanying presentation, which are on our -- 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 in our Investor Relations website.

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

Thanks, Chris. And I'd like to thank everyone for joining our fourth-quarter earnings call today. We obviously had another terrific quarter to finish off the year on a high note. Our year-over-year growth was impressive, and we successfully managed our costs to drive increased operating leverage as we grew the portfolio by just over $500 million on a net basis. Originations were another record in Q4, up significantly over the third-quarter level.

COVID-related delinquencies continue to decline as we recognize strong recoveries and resolve delinquent loans; issued two securitizations during the fourth quarter and successfully financed some of our older, more expensive deals on significantly better terms. Demand for new loans was very strong in the fourth quarter and we continue to see that demand carry into this year.

From macro perspective, the economy is strong. We're seeing great borrowers come to us for financing, and the real estate markets are still rising due to a demand/supply imbalance. Fed, obviously, signaled during the fourth quarter that they're planning to increase short rates this year. And the two- and three-year swap rates, which we price our securitizations from, increased about 70 to 80 basis points from December to today.

Closed our first securitization of the year on February 15, with a coupon just under 4%, which was higher than the December deal based mainly on the underlying move in base rates and saw good demand for the securitization with some spread widening. Our 10-year track record and strong credit performance helped us execute in a choppy capital markets environment.

As we look forward, we expect originations to grow this year and NIM to normalize around the 4% area as the increased yield from delinquent loan resolutions stabilizes, and older, higher rate loans are replaced with lower coupons. We've already increased rates this year to offset the underlying move I mentioned in swaps and expect to realize strong growth in our portfolio this year. We remain optimistic about our future and look forward to delivering another record year for our shareholders.

With that, I'll turn it over to the presentation and go to slide 3. In the handout there on slide 3, you can see, for 2021, just an overview of the year with great performance in all areas: net income up 64%, loan production up 200%, through the portfolio almost 30% on a net basis after payoffs. I mentioned the NIM and expand from that delinquent interest we picked up on the COVID loans. And finally, on the bottom right, you can see charge-offs decreasing year-over-year as we continue to see favorable resolutions.

On slide 4, net income of $8.4 million, core income of $10.1 million, a new high for us. That core EPS growth was 25% from the third quarter, and that's driven obviously by the increased volume as well as some loan sales that we did during the fourth quarter.

From an interest income perspective, that grew also nicely 5% from the third quarter, which to me is very strong and very healthy; again, driven by record loan production volume. The fourth-quarter NIM was down at 4.27%, part of that is driven by a onetime write-off of some deferred deal cost expenses with the securitization collapse. But, I think, the larger point that we've made -- I made in my opening remarks is that we expect NIM to normalize around that 4% area.

From production and portfolio perspective, again, 46% increase in volume quarter-over-quarter, very impressive. And then, I think, just as impressive as carry through into this year, we've already -- we've done $358 million for the -- through the first two months of the year, and that's up about 2.5 times what we did last year, so we're seeing very strong production continue.

Mentioned the increase in the portfolio and up to about $2.5 billion now, and then, also, continue to see very favorable improvement in our delinquent loan performance down to 10.9%. Getting to that area that we tell folks is kind of normal for the business, 8% to 10%, so we're real close to stabilizing into sort of pre-COVID levels.

Lastly, on page 4, from a financing and capital perspective, outlined here the two different deals that we did. The second deal was a nice deal for us as we collapsed three older deals and reduced the coupon on those borrowings by about 4%.

Turning to page 5. during the fourth quarter, we converted all of the preferred stock into common shares; that was good to clean that up. And then, as previously announced, we acquired a majority stake, 80% stake in Century; and we're very excited about the opportunity there. It's an interesting business, and we'll address it in more detail on some slides.

Subsequent to the quarter end, I mentioned, in February, we priced our securitization on February 15. (technical difficulty) issue out in the capital markets.

Turning to page 6, core income and book value per share. You can see the costs that were made up in the core, in net income add-backs, mostly related to the non-cash write-offs from the securitizations and some of the legal expenses (technical difficulty) for the Century acquisition. So we got a more normalized book value per share driven largely by the stock conversion obviously.

Turning to page 7. In terms of production, we saw good increases across both products, both the 1-4 product, up 45% quarter-over-quarter and the traditional commercial up 55% Q-over-Q. So both products participating -- small portion in the short-term products, and again, the majority of our business driven, as we've said in the past, on the longer-term type product.

Good, impressive numbers in terms of new broker additions, up 21% quarter over quarter. And we're seeing a lot of broker activity in our Internet portal at the beginning of the year as well, so I see a lot of good broker demand. As we've said in the past, we think as the sort of a paper consumer refinance opportunities go away, we tend to see brokers show more interest in our products and our programs as they find new ways to generate income, and we're seeing very healthy demand from those brokers.

On page 8, we've got a little more detail around the Century acquisition. Most of this was already released in our press release, so I don't want to overdo it here, but it's a very simple, straightforward fee for service business. We don't take any credit risk. We (technical difficulty) money originating these loans and then building a servicing strip. There's a little over $500 million in servicing portfolio rights at the end of the year, and we look to grow that going forward.

In terms of a contribution to earnings, you can see that the pre-tax income for last year was $2.3 million. We own 80% of that now on a go-forward basis; we'd expect that to be somewhere in that level for this year. And really hope that the different growth initiatives that we're going to undertake this year will start to show up in next year's results.

On 9, I'll turn it over to Mark and let him handle the rest of the presentation.

Thanks, Chris. Good afternoon, and good evening, everyone. On slide 9, loan portfolio, as Chris mentioned, our production growth was very robust for '21 and especially Q4, and that transcends into our in-place portfolio as we hold the majority of those loans in our portfolio. So we ended the year just under $2.6 billion in UPB, which is almost a 14% quarter-over-quarter increase from the third quarter and a very good increase over the $1.9 billion that we ended last 2020 with.

So we've done a really good job in building up that loan portfolio. And as you see, the LTVs in the meantime remaining very consistent, right around that 66%, 67% level. The weighted average coupon did reduce slightly, and that's -- again, as Chris mentioned, you get sort of higher coupon, older loans paying off, we get some lower coupon and newer loans coming on. So that's just the rate reduction in the market, as well as all the strong-loan production activity that we had during the year.

On page 10, on the net interest margin. Our portfolio net interest margin Q2 went from 4.97% to Q3 to 4.27%. And part of that, again, 4.97% -- remember, we said -- was we went from Q4 through the first three quarters of '21. And we ended 2020 with a 17% non-performing, and we ended 2021 with a 10.9%. So almost a 6.5 point improvement in our non-performing rates. And as we're doing that for the first three quarters, as we're successfully resolving those non-performing loans, we've always said that we resolve them. We usually collect default interest pre-payment fees, so we made about a 4 point gain on average on resolutions.

And so, you see a lot of that in the higher NIM for Q3 as we are getting a lot of that extra income coming in. And now, we're starting to see NPL rates coming back to more of a normal level for us. We're starting to see that NIM start to normalize as well. What we said on a run rate, around a 4 point NIM is what we strive to hit and we're coming back to that for Q4 on a normal level.

And, also, on Q4, the 4.27% does have some deal cost write-offs in there as Chris mentioned. When we did our December securitization, we had collapsed three older deals and included the loans in that. We re-leveraged them in the new December deal. Those three older deals were running on average about a 7.25% interest, and we're able to put it in a new deal at closer to, say, 3.25% or 3.5%.

So we picked up almost 4 points of betterment on the interest expense, but there were some deferred unamortized costs on those three older deals, so we collapsed it. We had to take the write-off on those. If you adjusted that Q4 NIM to exclude that one-time deal cost write off, it would have come in closer to around 4.50.

On the portfolio yield and cost of funds. On the right-hand side, again, you can see our yield portfolio of 8.21% on the loan side. And on the debt side, you see the 4.58%, and again, the 4.58% is up a little bit from Q3 because, again, the same thing, those deal costs. Those deal costs go with the interest expense, which has inflated the deal costs a little bit on an adjusted basis. The Q4 debt cost would be closer to 4.29% if you exclude that one-time write-off on those three deal costs.

On page 11, the loan investment portfolio performance. We just mentioned this. If you go back to 12/31/2020 and you look at where we ended up 2021, you can see went from 17% down to 10.9%. So we had good, strong resolutions all throughout 2021 as we've continued to work on those non-performing loans that were created under the COVID pandemic and bring those down to more of our normalized level.

Page 12 ties it together with Page 11. As we brought those non-performing rates down, we still maintained that 4 point gain. You can see for both third and fourth quarters, the second half of the year, we are right around 3.5, 4 points of overall gain. You see a breakout between short-term and long-term; they are very consistent.

You look in total in the second half of '21, we resolved about $104 million worth of UPB, of which $102 million or 98% of that $104 million resolve was resolved by the loans paying off or paying current, generating that 4 point gain that you see. So you only have about 2% of all those resolutions that ever even made it to REO. And overall, it generated about a $3.8 million gain in the last half of the year just on the NPL resolutions.

Page 13, looking at our overall loan loss reserve, our CECL reserve stayed pretty consistent with Q3. Remember, the end of 2020 -- in Q4 2020, it was going to -- it inflated reserve. We were using a severely COVID stress economic scenario. That brought the reserve up at the time to $5.8 million, that same type of stress scenario now is more tempered given where the COVID pandemic has leveled out. Things are getting more back to normal. So we are now at a $4.3 million reserve, roughly, at the end of the year or about 17 basis points. We feel that's a good, sufficient reserve for us.

Our actual charge-off levels are running actually lower than that on a lifetime basis for the loan. So we actually feel that 70 basis points is a good reserve. You can see the charge-offs on the right-hand side. Q4 '20, again, as we are resolving some of these loans and almost $300,000. But then you can see for the last two quarters, our charge-offs have only been about an average $150,000 a quarter, or roughly around 2 to 3 basis points. So our charge-offs continue to remain low. We feel the reserve is sufficiently reserved for the portfolio that we have given our history of resolutions on that portfolio.

On Page 14, if we look at our overall financing and funding capacity, these are outstanding debt balances at the end of the year, it was about $2.4 billion. We ended the year with five warehouse repurchase facilities and four of those five warehouse lines are fully non-mark-to-market. One is a modified mark-to-market. They have staggered maturities.

So we feel on our warehouse financing capacity, we really have a good risk mitigation in place given that four out of five are non-mark-to-market. We can't get margin calls or anything on that. And with the staggered maturities, we think we have done a good job of mitigating any risk on the short-term financing with the warehouse lines.

Chris already said that we have done well on the securitization of the long-term financing structure. We just did another deal February of this year in kind of a turbulent market and we had good demand for that deal. And you can see at the end of the year, on the right-hand side, we have about $349 million of available financing capacity and maximum capacity on all five lines is $650 million. So I think we are well positioned for the aggregation on the short-term side to take us over to securitization.

With that, I'll turn it back to Chris to give us an outlook in 2022 for some of our key business drivers.

Great. Thank you, Mark. Hitting the highlights here for 2022 in terms of demand, we see very healthy demand and expect to have another increase in overall volume for the year. Credit remains healthy. We think there is a good macroeconomic backdrop as well as a strong real estate market, so we feel very confident there.

In terms of capital, we are going to see more securitizations this year. We are going do at least five or six deals (technical difficulty) row. We are shortening the time between deals, and we are going to be out there frequently issuing. That's one of the ways we manage our interest rate risk is just by being in the market frequently and often.

From an earnings perspective, we do expect to (technical difficulty) earnings growth this year even though the NIM will be burning back to a pre-pandemic level, we still think we will have very good earnings growth driven by higher loan balances. So very optimistic about where we are headed for all of 2022.

On 16, we have done this slide a couple of times now, again, just a look at economic value of equity. We don't fair value our assets. We hold them at cost. And so, we think folks compare us to other comps out there. We want to try to give a look at how we might stack up against them.

Short answer here, we think that's valued and that there is an embedded healthy value that we've created in the platform and in the portfolio that hopefully over time folks recognize and realize our back of the envelope here in value. So we think there is tremendous value that we have created and as we continue to grow and deliver on our results, we think folks will start to realize that. So we think the stock is undervalued significantly.

That concludes our prepared presentation and remarks, and we will open it up for questions.

(Operator Instructions) Stephen Laws, Raymond James.

Hi. Good evening. Chris, Mark, nice quarter. You guys continue to sequentially really improve the metrics here. You talked about outlook for production growth. Can you maybe quantify that? The quarterly production is really grown quite a bit the last two quarters. So when you think about where does that growth plateau and reach a consistent quarterly run rate and what level do you think that is?

Yes. Hi, Stephen. Thanks for the question. We really don't think about where it plateaus. We think there's a lot of room out there for us to grow. Probably more importantly for us is just maintaining credit quality, not growing too fast. And the real limiter there is just the people, just getting qualified people that know what they're doing and can be trained into our system.

So we think that there's a lot of room to continue to expand and grow. We probably will be somewhat cautious here for the next couple of months, while all of these geopolitical things shake out. But really, we think a tremendous amount of upside here. But we just have to grow smartly and not go too fast.

Thanks for those comments. When you think about the other two legacy securitizations, and apologies if I missed a comment around this, but the [15.1 and the 16.1] deal, what are the thoughts around collapsing that and how -- when that may occur?

Yes. So we're in the process of working on both of those now. I would expect -- getting my deals confused. I think we're going to do 15.1 first, and then 16.2. I could have them flipped, I'm not positive. But I think we'll do one of them this quarter and probably the other one the following quarter.

Great. Appreciate the comments. [I'll see you again]. Thank you.

Sure.

Arren Cyganovich, Citi.

Thanks. Yes. The production you mentioned partly has been rising because of an increase in the number of brokers that are -- that you've been putting into your system. What's the outlook for that and how much of those new brokers have been driving some of this impressive growth you have here?

Yes. Thanks, Arren. Appreciate the question. Yes, it's significant because, as I mentioned, a lot of the new growth that we've seen are folks that are reaching out to us, looking for alternative products to offer to their customers. So, I don't have an exact quantification for you in terms of how much of that drove the volume for Q4, but it's meaningful.

I still think there are hundreds of thousands of loan officers that we haven't reached yet with our product, so we have a lot of room to reach out to people and educate them about what we're doing. But just looking at web traffic and some of the marketing that we're doing, we're seeing new (technical difficulty) come in all the time.

Brokers tend to send us one or two deals a month type of thing. This isn't a product where they're sending us 15 or 20 or 30 deals a month. So adding a new broker doesn't drive things through the roof, so to speak, but it's good to just get new customers and they bring us a deal or two. And so at the margin, it's not massive pickups, but overall, when we add hundreds of brokers each quarter, cumulatively it's driving some of that growth for sure.

Okay. And then on the financing side, we've seen some volatility in the capital markets recently. Is that going to put off any near-term securitization plans? And could you just remind investors how you are better positioned today from a liquidity standpoint versus where we were in 2020?

Yes, sure. So yes, we're watching the capital markets. We've been talking to our investment bankers. Deals are getting done, they're pricing, it's taking longer. And most of the widening has been in, as I mentioned, the underlying base rates a little bit of spread widening, but not anything serious. So we will be looking to do a deal either in April or May, depending on just how the whole deal comes together.

So we have to stay on a pretty consistent pattern there just based on our volume to continue to turn things over if you will. And so I think we feel like we've adjusted for those market conditions. And as I mentioned, raised our rates and still see good demand. So we expect to stay on that consistent every two to three months in terms of issuance.

And just from a standpoint of liquidity, I believe you have financing that's better structured in the case of further capital markets getting a little bit more out of whack?

Yes. Sorry, I forgot that about your second half of the question. Yes. So yes, just renewed one of our other big facilities for a year. With having the non-mark-to-market features, we feel much more comfortable, yes, if there was some kind of dislocation that we're not going to be facing margin calls or liquidity crunch. And that yes, we got the balance sheet in very good shape to ride through any kind of storm that could come down the horizon here.

Okay. Thank you.

Welcome.

Steve DeLaney, JMP Securities.

Hello, everyone, and congratulations on an outstanding year following a tough year in 2020. Just picking up on your comments, Chris, in Arren's question, we're hearing a lot and, frankly, I'm hearing more on the CMBS and CLO side on the commercial than I am on the RMBS side, and I guess that's where you fall in somewhere in between.

But it sounds like what you're saying to me in your conversation with your bankers that, yes, there's been widening and frankly in the markets I mentioned there's been spread widening, not just rate widening. But I guess I'd like to say two things.

It sounds like to me that from your conversations with your bankers and capital markets that you're operating as if the markets are open, that you can continue to originate aggressively, aggregate and find an execution that works for your parameters. First, I mean, am I correct in that? And have you had to increase your rates on your products to your borrowers say in the last three or four months to kind of accommodate what you're seeing in the capital markets? Thanks.

Sure. Steve, thank you for the comments. And yes, the short answer to both of your questions is yes. We do think we can continue to issue regularly; deals are pricing, they are pricing wider. And as a result, we have increased our rates to offset that for that widening. We can't move the pipeline as quickly as the markets move. So there's a little bit of a lag there. It'll take a month or two for that to catch up.

But the work, as I said, we're frequently in the markets and really can't time this thing perfectly to try to get the best execution every month. But overall, when you look at a year, some deals you get unbelievable pricing, most of the time you get typical pricing, and then, other times you get not so great pricing. But on a blended basis, we're very confident that we'll be able to maintain our spreads and our NIMs this year even with the higher rates and the expected continued higher rates from the Fed.

Great. It sounds like your borrowers with more business purpose focus are probably less rate sensitive than we would see in the straight owner occupied resi market?

Yes. That's for sure. That's always been the case with us. Yes, we've been in lots of different rate environments and they've always had a need for capital.

So one final just clean up thing on -- great job on series A conversion. I think having that complexity in the balance sheet and in your book value is a real plus especially for people, new eyeballs, looking at the stock.

So now that that's off the balance sheet, other than the warrants, does that open you -- the opportunity up for you to look at unsecured corporate debt or a straight preferred capital vehicle such as that that would allow -- to the extent that you need additional capital to grow your balance sheet? Are those types of sources of capital something that you would consider?

Yes, absolutely. We definitely think all those things are on the table. And as we manage volume going forward, we'll see how things play out this year and how much volume we see. But we absolutely think that all those things are going to be accessible to us to -- it'll be a finance 101 type thing, just what's the smartest way for us to raise additional growth capital and make sure that it's accretive to earnings and book value.

All right. I appreciate the comments, Chris. Thank you.

Okay. Thank you, Steve.

(Operator Instructions) Don Fandetti, Wells Fargo.

Thank you. So the weighted average coupon went down a good bit quarter-over-quarter. Can you talk a bit more about that? What's driving it and where do you think yields on new originations could go this year?

Yes. Sure, Don. That's a good question. So yes, it's a combination of the fact that the Fed did lower rates last year. So we maintained our spread and lowered originations -- coupons, if you will. So that's probably a big part of it. As Mark had mentioned as well, some of the older loans that are paying off from three, four years ago were written at higher rates. So the combination of those two lead to it.

I think that we're expecting for the year that we will be in the 7.5 to 7.75 range, which is -- obviously, a lot depends on what the Fed does. But we completely expect to be able to maintain our spread and our NIM based on where the forward curve is right now.

If things got crazy and really went vertical, maybe that might not be the case. But our expectation, just based on where the Fed's indicating they're going to go, we should be able to maintain that yield. So it would probably go down a little in the first two quarters, and then I would expect it to start rising in the second half of the year.

Got it. Thank you.

Yes. Sure.

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

Great. Thank you all for investing your time and listening to our story. We are excited about what we've been up to and looking forward to 2022 and continuing to deliver great results. So, thank you all.

Thank you, everybody.

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