Velocity Financial, Inc. (VEL) is a vertically integrated real estate finance company that has carved out a unique niche in the investor real estate loan market. Founded in 2004, the company has steadily built a strong reputation for providing reliable and flexible financing solutions to real estate investors across the United States.
Business Model and History
The company's business model is centered around originating and managing investor loans secured by 1-4 unit residential rental and commercial properties. Velocity has developed a deep understanding of this specialized market, allowing it to effectively serve a customer base that is often overlooked by traditional financial institutions. The company's roots trace back to June 2, 2004, when Velocity Commercial Capital, LLC (VCC) was formed as a California LLC to originate and acquire residential and commercial investor real estate loans. On July 9, 2012, Velocity Financial, LLC was established to acquire all membership units in VCC, marking a significant milestone in the company's evolution.
Corporate Development and IPO
In a major corporate development, Velocity Financial, LLC converted from a Delaware limited liability company to a Delaware corporation on January 16, 2020, changing its name to Velocity Financial, Inc. This conversion resulted in the transformation of Velocity Financial, LLC's Class A and Class D equity units into 11.75 million shares of Velocity Financial, Inc. common stock. Shortly after, on January 22, 2020, the company reached another important milestone by completing its initial public offering. Velocity Financial offered 7.25 million shares of common stock at $13 per share, with an additional 1.09 million shares sold on January 28, 2020, representing the full exercise of the underwriters' option. This successful IPO led to Velocity Financial's stock being listed on The New York Stock Exchange under the symbol VEL.
Resilience and Adaptability
Throughout its history, Velocity has demonstrated resilience and adaptability in the face of changing market conditions. During the COVID-19 pandemic in 2020, the company took proactive measures by implementing a forbearance program to assist borrowers impacted by the crisis. This initiative showcased Velocity's commitment to supporting its clients during challenging times. In December 2021, the company further expanded its capabilities by acquiring an 80% ownership interest in Century Health Housing Capital, LLC. This strategic acquisition broadened Velocity's platform to include government-insured Federal Housing Administration mortgage financing, diversifying its product offerings and revenue streams.
Market Presence and Growth
Over the past two decades, Velocity has established an extensive network of independent mortgage brokers, which has enabled the company to maintain a wide geographical presence and nimble operating infrastructure. This has allowed Velocity to react quickly to changing market environments and consistently deliver on its promises to borrowers.
Velocity's loan portfolio has grown significantly in recent years, reaching $4.8 billion in total unpaid principal balance (UPB) as of September 30, 2024. This represents a 22.6% increase year-over-year, driven by strong origination volumes that totaled $476.8 million in the third quarter of 2024 – a 64.1% increase from the same period in the prior year.
Risk Management
The company's disciplined underwriting and portfolio management practices have contributed to its ability to maintain a relatively low non-performing loan (NPL) rate, which stood at 10.6% as of September 30, 2024. This is a testament to Velocity's commitment to risk management and its specialized expertise in the investor real estate loan market.
Financials
Velocity's financial performance has been impressive, with the company reporting net income of $52.27 million for the fiscal year 2023. For the first nine months of 2024, net income reached $47.8 million, up 36.7% from the same period in 2023. The company's portfolio-related net interest margin (NIM) expanded to 3.6% in the third quarter of 2024, a 26-basis point increase year-over-year, as Velocity continued to benefit from favorable financing conditions and strong loan origination volumes.
In the most recent quarter (Q3 2024), Velocity reported revenue of $35.06 million, representing a 28.1% year-over-year increase. Net income for the quarter was $15.80 million, up 30.8% compared to the same period in the previous year. However, operating cash flow (OCF) and free cash flow (FCF) for the quarter were negative at -$17.57 million and -$17.64 million respectively, primarily due to increased loan originations.
One of the key drivers of Velocity's success has been its ability to access the securitized debt market, which serves as the company's primary source of long-term financing. Since May 2011 through September 30, 2024, Velocity has completed 35 securitized debt transactions, raising over $7.4 billion in gross debt proceeds. This access to the capital markets has allowed the company to efficiently fund its growing loan portfolio and maintain a healthy balance sheet.
The company's typical loan is secured by a first lien on the underlying property with a personal guarantee and has an average balance of approximately $388,500. Based on all loans in the portfolio as of September 30, 2024, the weighted average loan-to-value ratio at origination was 67%, of which the 1-4 unit residential rental loans represented 54% of the UPB. For the three months ended September 30, 2024, the annualized yield on the company's total portfolio was 9.18%.
Strategic Expansion
In addition to its core investor real estate loan business, Velocity has also expanded into the government-insured multifamily and senior housing loan market through its acquisition of Century Health Housing Capital, LLC in 2021. This strategic move has diversified Velocity's revenue streams and provided the company with a new avenue for growth.
Future Outlook
Looking ahead, Velocity remains well-positioned to continue capitalizing on the strong demand for investor real estate financing. The company's robust pipeline of loan applications, which reached a new record of over 900 applications for more than $450 million in UPB in October 2024, underscores the sustained appeal of Velocity's product offerings. The company has expressed confidence in exceeding its portfolio goal of $5 billion in UPB by 2025, indicating strong growth prospects.
Liquidity
Velocity's strong liquidity position, with $93 million in total liquidity and $349 million in available warehouse capacity as of September 30, 2024, provides the company with the necessary resources to fund its future growth and navigate any potential market volatility. The company's cash and cash equivalents stood at $44.09 million as of September 30, 2024.
Velocity has five non-mark-to-market warehouse facilities, one modified mark-to-market warehouse facility, and one mark-to-market warehouse facility with a total maximum capacity of $785 million. These facilities are collateralized primarily by performing loans and bear interest at SOFR plus margins ranging from 1.60% to 4.50%.
The company's debt-to-equity ratio was 9.43 as of September 30, 2024, reflecting its leveraged business model. The current ratio and quick ratio both stood at 0.58, indicating the company's ability to meet its short-term obligations.
Market Position and Industry Trends
Velocity operates in a large and highly fragmented market with substantial demand for financing and limited supply of institutional financing alternatives. The company primarily focuses on 45 states and the District of Columbia within the United States. The investor real estate loan market continues to show strong demand, driven by continued interest in rental properties and commercial real estate investments.
Despite the challenges posed by rising interest rates and broader macroeconomic uncertainties, Velocity has demonstrated its ability to adapt and thrive in the face of changing market conditions. The company's specialized expertise, diversified revenue streams, and prudent risk management practices position it well to continue generating solid financial results and delivering value to its shareholders. With a healthy and growing pipeline, Velocity Financial appears poised for continued success in the dynamic real estate finance market.