Velocity Financial, Inc. (NYSE:VEL) Q4 2023 Earnings Call Transcript
Velocity Financial, Inc. (NYSE:VEL) Q4 2023 Earnings Call Transcript March 8, 2024
Velocity Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to Velocity Financial's Fourth Quarter 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.
Chris Oltmann : Thanks, Ed. Hello, everyone, and thank you for joining us today for our discussion of Velocity's Fourth quarter and full year 2023 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 and full year 2020 results, and you could find the press release and accompanying presentation we will refer to during this call on our Investor Relations website at www.velfinance.com. I want to remind everyone 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 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 will now turn the call over to Chris Farrar.
Chris Farrar: Thanks, Chris, and we appreciate everyone joining our fourth quarter earnings call. First off, I'd like to congratulate my teammates as we delivered another record quarter to finish 2023 as our best year in the history of the company. Our execution was outstanding across all segments of the business. We consistently grew originations and expanded our platform capabilities to deliver products that our customers need and want. Banks continue to be constrained in extending credit, which has allowed us to grow our portfolio with compelling risk-adjusted spreads. While there continues to be stress in some segments of the larger commercial real estate markets, our single-family rental and small neighborhood-serving commercial properties continue to perform well.
We see healthy demand with limited supply in our niche, which continues to drive modest price appreciation for these types of assets. The most significant development impacting us in Q4 was the change in fed policy. As everyone knows, the bond markets responded quickly and favorably as the fed signaled the likely end of rate hikes. We saw an immediate improvement in the securitization market as our first deal in 2024 benefited from lower base rates and tighter spreads where we realized more than a 100 basis point decrease in our cost of funds. We continue to see very healthy execution for new issuance and believe there is more demand than supply available to our bond investor base. In terms of credit, our portfolio is performing well, and we remain disciplined in following our credit process without sacrificing margin.
As a result, we improved our margins throughout the year by increasing yields and controlling expenses, which drove a 43% increase in our annual pretax ROE. While delinquency remained stable in the fourth quarter, our asset management team resolved just over $70 million of NPLs favorably, and they deserve credit for an outstanding job. Looking forward, we have great momentum heading into 2024, and we're focused on our 5x25 objective to grow the portfolio to at least $5 billion by 2025. Our entire team is committed to delivering value to our customers and shareholders, and we're excited to continue building upon our success. With that, I'll turn over to our presentation materials and start with Page 3. Obviously, a great quarter of core net income, up 77% from the prior year.
Great performance in terms of NIM, as well improved in the fourth quarter, up 18 basis points sequentially, maintaining our strong production growth. I mentioned pretax ROE. And you can see in the fourth quarter, we had a very healthy increase versus the prior quarter. Turning to production and the portfolio, $350 million of new UPB. Exceptional growth there as we continue to execute on our plan and did a great job of maintaining the coupon. In terms of the total portfolio, we're now over $4 billion, and as I mentioned, headed to $5 billion. From a nonperforming loan perspective, as I mentioned, those assets remain stable, and we continue to recognize positive gains of a little over 102% in the fourth quarter. In terms of financing and capital, we mentioned the securitization market continues to be very strong, closed a deal in the fourth quarter and 1 in early January.
You also probably saw our press release that we issued $75 million of new growth capital to continue expanding the portfolio and putting on new assets in an accretive way. Turning to Page 4. Walking through book value and adjusted book value. We highlight on the left some of the core adjustments that we made. There's sort of a onetime tax liability that offset some of our GAAP earnings and bought the core results down a touch for the quarter. But again, very strong results that we're very proud of. You can see the book value growth in the upper right section of this slide. We show the bar chart growing to book value of $13.49 a share. We added 2 new columns on this slide from our previous presentation, and I want to kind of walk folks through what this represents and why we put this here.
The green bar that says adjustment in $3.32 per share is -- represents the fair value mark on our -- all of our assets and liabilities that are carried at cost. If we were allowed under GAAP to mark all of those assets to fair value, you'll see, in our financial statement footnotes, this is the math that gets us to fair value. Many of our comparable sets and peers that we get compared to carry their assets at fair value. As you folks know, we made the election in Q4 of last year to move to fair value accounting, so we wanted to show everyone that we believe the true value that we've created is actually much higher than the GAAP book value. And so this far right column of $16.81 is a reflection of that potential gain if we were, under GAAP, allowed to mark everything to fair value, we come up with an adjusted book value of $16.81 a share.
So this is where the company is heading in the next 4 to 5 years. We expect almost the entire portfolio to be held at fair value. So we thought it'd be helpful to walk folks through kind of how we get from where today's book value is, where we think fair value sits and where we expect it to go in the future. With that, I'll turn the presentation over to Mark to take over on Slide 5.
Mark Szczepaniak: Thanks, Chris. Hi, everyone. Our fourth quarter capped a very successful 2023 that further advanced Velocity's strategic growth initiative. On Page 5, our loan production ended the year strong, as Chris mentioned. Our Q4 production was a little bit over $352 million in UPB. That was a 21% increase from the $290 million in Q3 and almost a 27% increase in production year-over-year. Our strong production growth during 2023 was achieved with weighted average coupon for new originations for all 4 quarters during the year, remaining constant at 11%. The growth in the originations in the second half of '23 was also at higher credit levels with the weighted average LTV for the last 6 months of the year at 65%. The strong 2023 production growth at the higher weighted average coupons demonstrates the continued borrower demand that we've had for our product.
As a result of this strong growth in production, Page 6 shows a similar growth in our loan portfolio. Total loan portfolio at the end of the year was $4.1 billion. As Chris mentioned, it's the first time in our history that our loan portfolio itself has been at a $4 billion threshold. That's a 5% increase from Q3 and a 16% increase in the loan portfolio year-over-year. The weighted average coupon on our total portfolio, as of December 31, was 8.88%, a 25 basis points increase from Q3 and a 93 basis points year-over-year. And the portfolio loan-to-value ratio actually declined slightly to 67.8% as of December 31, compared to 68% at both Q3 and end of year 2022. And again, that was predicated based on, again, the last 6 months of 2023 coming into a 65% tighter credit spread LTV.
On Page 7, our Q4 NIM increased by 18 basis points from Q3 and 68 basis points year-over-year as our portfolio yield increased quarter-over-quarter by 32 basis points and year-over-year by 119 basis points, while our cost of funds only increased by 12 basis points for over a quarter and 52 basis points year-over-year. The strong growth in originations, coupled with the widening NIM is reflected in our 2023 earnings. On Page 8, our nonperforming loan rate at the end of the year decreased to 9.7% compared to 10.1% at the end of Q3. Once again, the ongoing strong collection efforts by our special servicing department results in continued resolutions of our NPL loans at very favorable gains. If you look at Page 9, it highlights the continued success of our NPL resolution efforts.
In Q4, we resolved almost $71 million UPB of NPL loans and REOs for a net gain of $1.5 million or 2.2%. 2023 in total, we resolved a little over $225 million UPB of NPL loans and REOs for a gain for the year of $5.5 million or 2.5%. Page 10 presents our CECL loan loss reserve and our net loan charge-off and REO activity. On the left-hand side, the CECL reserves of the end of the year was $4.8 million, or 17 basis points of our outstanding non-fair value loans held for investment portfolio. Our CECL reserve has been consistent at 15 to 17 bps over, like the last 5 quarters. Remember, the CECL loan loss reserve does not include any loans being carried at fair value as they are not subject to the CECL reserve. The table to the right on Page 10 is a new presentation that shows our net gain loss from loan charge-offs and REO activities during the year.
Management feels this presentation provides an enhanced view of our loan resolution valuation activities from the time the loan is charged off and converted to REO through the REO sales process. U.S. GAAP requires separate accounting and separate presentation in the financial statements for loans and REOs because they consider different type of instruments. But operationally, management views the REO for closure and related sale valuation activities as an integral part of the entire loan resolution process. For 2023, we had a net gain on loan charge-offs and REO valuation activities of $2 million, and in 2022, a net gain of $5.5 million, further kind of demonstrating the strong resolution activities from kind of a loan to a disposal process.
Page 11 shows our durable funding and liquidity position at the end of the fourth quarter -- at the end of the year. Total liquidity at the end of the year was $63 million. That's comprised of about $41 million in cash and cash equivalents. Another $22 million in available liquidity that we have on unfinanced collateral. We did issue on securitization in Q4. In November, we issued, as Chris mentioned, a 2023-4 security totaling just under $203 million of securities issued. Our billable warehouse line capacity at the end of the year was $554 million with an overall maximum line capacity of $860 million. Subsequent to year-end, we completed our first securitization in 2024, totaling just under $210 million of securities issued. And again, as Chris mentioned, in February of '24, we issued $75 million of 5-year fixed rate senior secured notes to support the continued growth of the company.
With that financial recap, I'd like to now turn the presentation back to Chris for his overview of Velocity's outlook on its key business drivers. Chris?
Chris Farrar : Thank you, Mark. Looking forward, we think the market is in a good position, particularly in our niche. Expect to see strong demand there and continued favorable asset resolutions. Credit, I think, remains tight, certainly from the banks and the credit unions and other institutions like that. So we think that's potentially a strong tailwind for us. Capital. We're in a good position, and the securitization markets are definitely helping us right now, and we're very hopeful about future issuances in the market looking forward. And then from an earnings perspective, we think there's significant growth opportunities here as we continue to build out our strategy, develop new products and grow the portfolio. So overall, we look very favorably into '24 and excited to continue to grow the firm. With that, that prepares our -- sorry, concludes our prepared presentation, and we'll open it up for questions.
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