Executive Summary / Key Takeaways

• Differentiated Business Model & Consistent Growth: Velocity Financial, Inc. (VEL) operates as a vertically integrated real estate finance company, specializing in investor loans for 1-4 unit residential rental and small commercial properties. Its C-corp structure allows for earnings retention and reinvestment, driving consistent book value and earnings growth, a strategy management views as unique among mortgage lenders.
• Robust Financial Performance & Portfolio Expansion: The company has demonstrated strong financial momentum, achieving record loan production of $739 million in Q3 2025 and growing its total loan portfolio to nearly $6.3 billion, a 32% year-over-year increase. This growth is supported by disciplined underwriting, low average loan-to-value ratios (65.5% in Q3 2025), and a stable portfolio net interest margin (NIM) targeting 3.5%.
• Effective Asset Management & Credit Quality: VEL's in-house special servicing team consistently resolves non-performing assets (NPAs) with positive gains, averaging 3.3% to 3.8% quarterly resolution gains over the last five quarters. This active management, coupled with significant borrower equity in properties, provides robust protection against credit losses.
• Diversified Funding & Capital Markets Strength: The company leverages a strong securitized debt market, complemented by warehouse facilities and strategic partnerships, including its first single counterparty securitization in Q3 2025. This diversification ensures ample liquidity and capital for continued portfolio expansion.
• Technological Edge & Operational Efficiency: VEL is investing in a 12-18 month technology program to enhance productivity across its operations, aiming to scale the business more efficiently. Early implementations, such as in the post-closing department, have shown significant productivity gains, reinforcing its competitive advantage.

A Specialized Niche in Real Estate Finance

Velocity Financial, Inc. (VEL) stands as a vertically integrated real estate finance company, carving out a specialized niche in the U.S. market by originating and managing investor loans secured by 1-4 unit residential rental and small commercial properties. Established in 2004 as Velocity Commercial Capital, LLC, the company evolved into its current corporate structure in 2020, completing an initial public offering to fuel its growth trajectory. This foundational history underscores its deep expertise in a segment often underserved by traditional institutional lenders.

The company's overarching strategy centers on compounding earnings by reinvesting all retained profits back into its platform and loan portfolio. This C-corp structure, as highlighted by CEO Christopher Farrar, differentiates VEL from many other mortgage lenders, allowing it to consistently grow book value and earnings. Its objective is to become a recognized brand in its core market, leveraging an extensive network of independent mortgage brokers for nationwide loan origination. This broker-centric model provides a wide geographical presence and a nimble operating infrastructure, enabling quick adaptation to changing market environments.

The broader real estate finance industry, particularly the investor segment, is characterized by substantial demand for financing and a limited supply of institutional alternatives. VEL thrives in this fragmented market, where traditional banks are often limiting their lending, creating significant opportunities for market share capture. The company's borrowers are typically sophisticated, opportunistic investors who prioritize certainty of execution and access to capital over minor interest rate differentials, a key distinction from traditional homebuyers. This dynamic allows VEL to maintain attractive risk-adjusted spreads across various interest rate environments, making its business less rate-sensitive than other mortgage segments.

Technological Differentiators and Operational Edge

Velocity Financial is actively enhancing its operational capabilities through strategic investments in technology, a critical differentiator in the competitive real estate finance landscape. The company has embarked on a 12-18 month technology program designed to re-engineer its entire process, seeking to apply technology to improve workflows and boost team productivity. This initiative is not merely about incremental improvements but aims for substantial gains in efficiency.

An early example of this technological impact is the rollout of new technology in the post-closing department, which management reports has made employees "probably 5x more productive than they were with the old process." While specific quantifiable metrics for the overall program's impact are still emerging, the stated goal is to scale the business without a proportional increase in headcount. This focus on internal technological innovation directly contributes to VEL's competitive moat by driving down operational costs, improving processing speed, and enhancing the overall efficiency of its lending platform. For investors, this translates into potential for improved operating margins and a more scalable business model, reinforcing long-term growth prospects.

Robust Performance and Strategic Financial Management

Velocity Financial has demonstrated a compelling track record of financial performance, marked by consistent growth in its loan portfolio and strong profitability metrics. For the nine months ended September 30, 2025, the company reported net income of $70.23 million, a significant increase from $47.66 million in the prior year period. This growth is underpinned by a substantial rise in interest income, which reached $398.43 million for the nine months ended September 30, 2025, up from $293.36 million in 2024. This increase was primarily driven by higher average loan portfolio balances and attractive yields, with the average loan yield standing at 9.54% for the three months ended September 30, 2025.

The company's portfolio-related net interest income, a primary driver of its overall profitability, surged by 34% to $55.20 million for the three months ended September 30, 2025, and by 33.10% to $152.60 million for the nine months ended September 30, 2025, compared to the respective periods in 2024. This reflects a stable portfolio net interest margin (NIM), which was 3.65% in Q3 2025, consistent with management's target of around 3.5%. While NIM can experience quarterly lumpiness due to the timing of collecting cash interest on non-performing loans, management views this level as sustainable.

Operational efficiency is also a key focus. While total operating expenses increased for the three and nine months ended September 30, 2025, largely due to higher headcount, commissions from increased originations, and securitization activities, the company has also seen decreases in professional fees and rent due to lower legal costs and office relocations. This indicates a strategic balance between investing in growth and managing overhead. The company's core pretax return on equity was boosted to an impressive 24% in Q2 2025, demonstrating strong operating leverage.

Liquidity and capital resources remain robust. As of September 30, 2025, total liquidity stood at $143.50 million, comprising $99 million in cash and cash equivalents and $44.50 million in available warehouse capacity on unencumbered loans. An additional $555.80 million in available warehouse capacity brought total liquidity plus available capacity to $699.30 million.

The company's primary long-term funding source is the securitized debt market, where it has an established brand and has completed 44 transactions through September 2025, issuing $9.90 billion in principal amount of securities. A significant development in Q3 2025 was the closing of Velocity's first single counterparty securitization, a strategic partnership aimed at diversifying funding options and reducing transaction costs.

Competitive Positioning and Market Dynamics

Velocity Financial operates in a highly competitive yet fragmented market, where its specialized focus and operational model provide distinct advantages. Compared to broader mortgage lenders like PennyMac Financial Services (PFSI) and Rocket Companies (RKT), VEL's broker-centric approach for investor real estate loans offers a more tailored and relationship-driven service. While PFSI and RKT leverage advanced digital platforms for wider reach and efficiency, VEL's strength lies in its deep niche expertise and personalized guidance through its extensive broker network. This allows VEL to compete effectively for customers seeking certainty of execution and customized financing solutions for rental and small commercial properties.

LendingTree (TREE), an online lending marketplace, represents a different competitive dynamic. While TREE offers broad accessibility to various loan products, VEL's direct origination model and specialized focus allow for deeper expertise in property financing. VEL's in-house special servicing team is a critical competitive advantage, actively managing delinquent assets and consistently achieving positive resolution gains. This contrasts with competitors who might outsource such functions, potentially leading to less favorable outcomes. The company's ability to finance a broad range of property types, from 1-4 unit residential rentals to mixed-use and retail properties, further differentiates it from more narrowly focused lenders.

A key market dynamic favoring VEL is the ongoing constraint on lending by traditional banks in its target niches. This creates a consistent supply of opportunities for Velocity to capture market share. The company's business model is also less susceptible to interest rate volatility compared to other mortgage segments, allowing it to thrive in both higher and lower rate environments. This resilience is a significant competitive edge, particularly when broader market conditions are uncertain.

However, VEL faces vulnerabilities, including its reliance on external brokers, which could potentially lead to higher operational costs compared to competitors with more vertically integrated digital models. The pace of technological innovation by digitally advanced rivals like RKT could also pose a challenge, necessitating VEL's continued investment in its own technology roadmap to maintain efficiency and scalability.

Outlook and Risk Assessment

Velocity Financial's outlook remains highly positive, with management anticipating continued strong growth in both loan production and earnings. The company expects its loan portfolio to reach $10 billion within the next five years, driven by sustained strong demand and its ability to capture market share. The current pace of production is considered sustainable, with potential for further upward momentum. New origination yields are expected to remain stable, with adjustments made to maintain attractive spreads, though a significant drop in broader interest rates could further boost volumes.

Management's guidance is predicated on healthy real estate markets and robust capital markets, particularly on the fixed income side, which are crucial for its securitization activities. The ongoing technology program is expected to yield further operational efficiencies, contributing to improved profitability and scalability. The company's capital allocation strategy prioritizes reinvesting all earnings into new assets, given the attractive marginal return on capital. While current capital levels are sufficient, accelerated growth might necessitate additional capital, which would be raised through a balanced mix of equity and debt to maintain a stable debt-to-equity ratio.

Despite this optimistic outlook, several risks warrant consideration. The company's performance is sensitive to broader macroeconomic conditions, including interest rates, real estate prices, and employment rates. Changes in these factors, as well as geopolitical conflicts and potential government shutdowns, could impact borrower demand and credit performance. The CECL loan loss reserve, while generally stable, can be influenced by severe macroeconomic forecasts, reflecting inherent market uncertainties. Furthermore, while VEL's securitizations have shown resilience, adverse changes in the securitized debt market could limit long-term financing options. The inherent lumpiness of non-performing loan (NPL) resolutions, though historically positive, introduces an element of unpredictability to quarterly earnings.

Conclusion

Velocity Financial, Inc. presents a compelling investment thesis rooted in its specialized focus, vertically integrated model, and commitment to compounding growth. By consistently reinvesting earnings and leveraging its unique broker network and in-house special servicing capabilities, VEL has demonstrated robust financial performance, marked by record loan production and a steadily expanding portfolio. The company's strategic investments in technology are poised to further enhance operational efficiency and scalability, reinforcing its competitive advantages in a fragmented market.

While macroeconomic uncertainties and competitive pressures from digitally advanced lenders persist, VEL's disciplined underwriting, effective asset management, and diversified funding strategy position it for continued success. The company's ability to serve an underserved borrower segment, coupled with its less rate-sensitive business model, provides a durable foundation for long-term value creation. For discerning investors, Velocity Financial offers exposure to a growing niche in real estate finance, driven by a clear strategic vision and a proven track record of execution.