Velocity Financial, Inc. (NYSE:VEL) is a vertically integrated real estate finance company that primarily originates and manages investor loans secured by 1-4 unit residential rental and small commercial properties. The company has demonstrated impressive financial performance, reporting annual net income of $52,273,000, annual revenue of $338,547,000, annual operating cash flow of $61,054,000, and annual free cash flow of $60,874,000.

Business Overview

Velocity's Business Model and Competitive Advantages

Velocity operates a unique business model that sets it apart in the highly fragmented investor real estate loan market. The company originates loans nationwide through an extensive network of independent mortgage brokers, allowing it to maintain a wide geographical presence and a nimble operating infrastructure. This broker-driven origination strategy enables Velocity to react quickly to changing market environments and pursue opportunities where banks have pulled back.

Furthermore, Velocity's vertically integrated platform allows it to control the entire loan lifecycle, from origination to servicing and asset management. This vertical integration, combined with the company's proprietary technology and specialized expertise, enables Velocity to originate loans efficiently and effectively, driving attractive risk-adjusted returns for its shareholders.

Financials

Impressive Financial Performance

Velocity's financial performance has been exceptional, with the company reporting strong growth in both loan originations and its overall loan portfolio. In the first quarter of 2024, the company originated $378.7 million in loans, a 75% increase compared to the same period in the prior year. This robust origination volume, coupled with a weighted average coupon of 11.1% on new loans, has contributed to the growth of Velocity's loan portfolio, which stood at $4.3 billion as of March 31, 2024, a 19% increase year-over-year.

The company's net interest margin (NIM) has also been impressive, averaging 3.35% in the first quarter of 2024, up 12 basis points from the same period in the prior year. This strong NIM, combined with the company's disciplined approach to credit and expense management, has enabled Velocity to deliver impressive profitability, with a pre-tax return on equity of 20.8% and a net income of $17,333,000 in the first quarter of 2024.

Diversified Loan Portfolio and Prudent Risk Management

Velocity's loan portfolio is well-diversified, with the largest property type (investor 1-4 loans) accounting for 54.6% of the total portfolio as of March 31, 2024. The company's geographic exposure is also diversified, with the largest state (California) representing 21.6% of the portfolio. This diversification helps mitigate concentration risk and enhances the stability of Velocity's earnings.

Velocity's underwriting and risk management practices have also been a key driver of its success. The company's weighted average loan-to-value ratio was 67.6% as of March 31, 2024, reflecting its conservative approach to lending. Additionally, the company's nonperforming loan rate of 10.1% as of the same date is well-managed, and its special servicing team has demonstrated the ability to resolve nonperforming loans favorably, with an average recovery rate of over 102% on resolved nonperforming loans in the first quarter of 2024.

Liquidity

Robust Funding and Liquidity Position

Velocity has a strong funding and liquidity position, which supports its growth initiatives. As of March 31, 2024, the company had total liquidity of $79 million, comprising $35 million in cash and cash equivalents and $44 million in available liquidity and unfinanced collateral. Additionally, the company had $529 million in available warehouse line capacity as of the same date, with a maximum line capacity of $885 million.

Velocity has also been active in the securitization market, completing two securitizations in the first half of 2024 totaling $505 million in securities issued. The company's ability to access the securitization market at attractive terms underscores the strength of its loan portfolio and the confidence that investors have in Velocity's business model.

Outlook

Velocity's management team is optimistic about the company's future prospects, citing a healthy market environment and strong demand for its products. The company's pipeline of new loan applications remains robust, with a record $2 billion worth of letters of intent issued in April 2024 and $400 million in combined UPB of new applications received during the same period.

Furthermore, Velocity's recent $75 million senior secured note issuance in February 2024 provides additional capital to support the company's growth initiatives, with the goal of increasing the loan portfolio to $5 billion in UPB by 2025.

Risks and Challenges

While Velocity has demonstrated impressive performance, the company is not without risks. The investor real estate loan market is highly competitive, and Velocity faces the risk of increased competition from other lenders. Additionally, the company's performance is closely tied to macroeconomic conditions, and a potential economic downturn could impact the credit quality of its loan portfolio.

Velocity also faces the risk of changes in interest rates, which could affect the cost of its funding and the yields on its loan portfolio. The company's ability to manage these risks through its underwriting practices and funding strategies will be crucial to its continued success.

Conclusion

Velocity Financial, Inc. is a well-positioned player in the investor real estate loan market, with a unique business model, strong financial performance, and a robust funding and liquidity position. The company's vertically integrated platform, disciplined underwriting, and specialized expertise have enabled it to deliver attractive risk-adjusted returns for its shareholders. While the company faces some risks, its management team's optimism and the company's growth opportunities suggest that Velocity is well-poised to continue its impressive performance in the years to come.