Q2 2021 Velocity Financial Inc Earnings Call
Good afternoon, and welcome to the velocity financial incorporated conference call.
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I would now like to turn the conference over to Mr. Chris Altman, Chief Accounting Officer. Please go ahead.
Thank you Melanie.
Hello, everyone and thank you for joining us today for the discussion on velocity financial second quarter 2020 on results.
Joining me today are Chris Ferrara velocity, as President and Chief Executive Officer.
And mark depending on velocity as Chief Financial Officer.
Earlier. This afternoon, we released our second quarter 2021 press release and the accompanying earnings presentation, 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 other 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.
Residential real estate market's remains strong and we're seeing a healthy recovery our segment of the commercial real estate market as well invest.
Investor demand for our type of real estate is real and growing.
He's market conditions have helped us resolve N P L and I want to congratulate our special servicing team on another great quarter.
With respect to financing, we recently added another warehouse lending relationship and just launched our second securitization of the year earlier today cop.
Capital markets continue to search for yield and we're seeing robust demand for securitized products as some of our older older deal season in.
In the future we plan to collapse them and take advantage of these lower rates.
From an equity perspective later in the presentation will provide some new insight into how we think about the value of our business and introduce a new non-GAAP measure demonstrating the economic value of our equity our goal there is to impart a simple understanding of the real value embedded in our platform.
[noise] team is very proud of the business. We built in the results. We've delivered we plan to take full advantage of the great opportunities that lie ahead and we appreciate every I appreciate everyone who supports us in pursuing those goals.
That concludes my prepared remarks, and with that we'll turn it over to the presentation materials and and start the presentation on page 3 of the P. D F.
Above the contractual principal and interest so again still.
Making money off of delinquent assets, which obviously is a very unique.
From a financing and capital perspective.
We did complete our our 2021.
Securitization earlier in the year with a weighted average rate of 1 of 1.73 per cent.
Obviously those those costs of funds are very helpful to driving strong are always in good margins.
Also.
Earlier in the quarter, we're very excited to see that we were added to the Russell 2003 thousand industries. So that was a nice little.
Boost for US and then subsequent to the end of the quarter, we added the fifth.
Warehouse line that day I had mentioned earlier in our calls so we've got a very broad.
Base of good partners that will help us grow and and fund future growth.
On page for.
Just kind of walk you through core income quickly and where book value sits.
Or income of 8 and a half million excludes obviously the million dollar loan loss provision that we released as a part of our Cecil.
Reserve process.
[noise] included in GAAP net income was almost $7 million of.
<unk> realized contractual interest default interest in prepayment fees 59 per cent increase from the first quarter. So again very strong performance there on the resolutions.
And then Ah nice pick up in in book value per share. So ended the quarter nicely, there and and obviously very pretty pleased with the majority of the the pick up here and just kind of portfolio earnings coming off of.
Off of.
All of the assets, so that kind of wraps up my 2 slides and I'll turn it over to Mark to take you through the next several slides mark.
Thanks, Chris Good afternoon, and good evening, everybody on page 5 the deck.
Really shows how the loan production momentum has continued to build and going from 179 million in queue for 233 to over 256 million per cute too. So 10 per cent quarter over quarter from Q1, 2 Q to increase in our production volume and that's driven by both an increase in our long term product that was up.
About 4 per cent quarter over quarter and also in queue too. We reintroduced are short term product. When we first started resuming loans back and forth where last year, we were holding back on the short term products. So we we reintroduce that in Q2 and you can see a refunder just under $15 million in our short term product and I've had very good demand and applications coming in.
On that product year to date were just under 490 million in production. So I think we're well on our way to hitting a billion dollars for the year. So again continued great momentum and growth coming out of the the COVID-19 environment and as a point of reference in July we funded $104 million and loves so again very <unk>.
Good momentum on our loan portfolio.
Page 6.
We have that type of production coming through if it continues to grow our overall portfolio. Because he said we have a a portfolio with a locked and spread on the other securitization and you see the portfolio ended the quarter at 2 billion O 7 to just under 2.1 billion. So nice growth now for 2021 and that portfolio and.
And at the same time, while we're growing the portfolio, we're continuing to hold our loan to value ratio is low at about 66 per cent L. T V. So nice strong growth coming through and holding that L. T V consistent.
On page 7.
Portfolio type of margin is a generating off the queue to have generated a 4.83 per cent net interest margin that was an increase of 73 basis points from the 410 in Q1 is Chris alluded to that was mainly driven by the interest is mainly driven by the strong N P. L resolution activity of 7.
Dollars in cash non-performing interest comprised of prior contractual interest that came in default interest as well as prepayments day, so very strong resolution month.
And coming into the quarter brings us to the 483 that is lumpy, it's not something that's predictable every quarter because it's a book on a cash basis, but.
But it was very strong for for Q2.
Take a look at the bottom right and you can see that we also had a decrease in our cost of funds. So if you look at it overall or yield went up from 841.890 on on the loans due to that M. P. L resolution strength in queue too, but at the same time or cost of funds decreased 20 basis points from 5 O 1 or 81 largely impacted by the security.
Jason that we did in Q2 at a low fixed rate of 1.73 per cent.
On page 8.
We take a look at our nonperforming portfolio non-performing portfolio has been trending downward since the end of 2020. So we're actually down almost 2 per cent from where we ended up 2020th 17.2 per cent non-performing and a Q2. This year at 15.3 per cent. So we had we had said that we were gonna continuously try to bring.
<unk> non-performing write down who would take some time wasn't gonna happen overnight, but with this special servicing department, we have low L. T V on the loans and strong resolution resolution activity that we're seeing where can continuing trying to bring that non-performing right down and that's what we've seen so far during 2021 coming down almost 2 per cent.
Page 9 in terms of the resolution activity. Just gives you the income to break out between a longterm on short term product for Q1, and Q2 of 2021 on the N. P. L resolutions very very strong resolutions for the year. He added up both quarters, we had resolved over.
$108 million of U P. B for an overall 3.6 million dollar game, which translates into a 3.4 per cent gang on these MPL resolutions for 2021 over and above the contractual principal and interest. So we previously indicated that going back 6.7 years.
A trend or M. P. L resolutions, we've always been very strong we normally realize around a 3 point game and coming out of the pandemic for 21 right right on track at a 3.4 per cent gain for the first 6 months of this year.
Paige turns are Cecil reserve.
With Chris had mentioned the seats are reserved we took it down from 5.8 million at the end of Q1, 2 just about 4 million 3 million 963 at the end of Q2, it was mainly driven by the macro economic forecast.
Under the sea. So reserved is comprised of a baseline reserved which looks at your historical loss rate.
Then under the new system requirements, you have to do a forward projection.
Ah just being that baseline reserve by a macro economic forecast looking forward and we've been using a COVID-19 stress macklin economic forecast, we've been using that sense I think second quarter of last year. When the pandemic broke out in our modeling system, we're continuing to use at COVID-19 stress central forecast the distress forecast because of the improvement in the U S. A.
<unk> the stress forecast for Q2 showed an improvement in reserve needed on a go forward basis by about $900000 versus where it was in Q1, so a nice pick up because the improvement in the economy.
And where were sit at the end of June you can see is 19 basis points of reserve based on total U P. B outstanding kind of as a point of reference as of 12.31 19 Prepandemic.
We were at 12 basis points of reserve on about a building a portfolio, so even though I'm, bringing that reserve down where still more than 50 per cent higher in terms of a right on outstanding you Phoebe now at the end of Q2, and we were at the end of the 2019 year prior to the pandemic. So we feel very good about that reserve and given the M. P. L Route bezel.
Lucian that we just went through resolving over 90, 394% of our nonperforming loans with a 3.4% gang, we feel very good with the reserve that we have.
The other on the bottom right to page 10, the charge offs for the quarter 986000.
Joshua were higher than Q1. Other 98.6000, there was 1 lone that had a 420000 dollar charge off so 1 loan at 420, which accounted for less than a little bit less than half of that total for the quarter and that low on the 420000 that was already reserved for back in Q1, So that was already part of our loan.
Reserve did not hit P&L on the 420, a Q2 is already part of a reserve we knew about it we had reserved so on a run rate basis.
Look at the 6 months of 2021 on a run rate, we're still looking at about 5 basis points, a total outstanding U P. D. In terms of charge offs and that's right on top of what our historical run rate has been for the last 6.7 years has been like 4.8 basis points. A total you P. B for 6 months. This year is 5 basis points. So we're still right on top of our Ah run.
Right for charge offs and I feel really good we're at on that.
Yeah.
First I'll turn it back to you for the outlook on velocity is business.
Alright, Thank you Mark appreciate it.
On 11.
Kinda mentioned, we're seeing improvement in the economy and she signs that we expect that to continue into the second half of this year.
The real estate market. So as I mentioned are doing very well and there's been a lot of chatter about the government assistance coming out for landlords and renters.
I think most of it is still working its way through the system, but we are.
Trying to help as many landlords and borrowers and renters is we can just disseminating information and getting the info out to them to to let them know that debt.
Assistance is available. So we think that will also be helpful. As we move forward hearing people figure out how to how to access those resources.
In terms of net interest income in the portfolio.
We're we're growing earnings obviously my growing the portfolio, we say good demand across all product types.
Stock trading weeks back to be able to do that.
So that that gives you the first base a component here the middle section of the Orange section.
Is just a simple discounted N P V of all of the earnings we expect to make off of all of our retained interest in Securitizations. So we're calling that an embedded gain in the securitized portfolio.
And so what we did is take all of those projected cash flows with the C. P. R. As the C D r's.
And all of the you know relevant assumptions use the 10 per cent discount rate brought that back to today. It's N P V in and got $222 million.
And then thirdly on.
On top of that and just in talking with various investment bankers and capital markets folks, we're seeing a number of platforms trade in the private side.
And and they're telling us that typical premiums for platforms are are running in the 10 to 15 per cent of of annual run rate originations.
[noise] origination volumes. So we took kind of the lower end of that and said if we did a billion dollars a year and 10 per cent of that would imply $100 million of platform value. So.
Yeah. Those all up you can see you know in our eyes.
You're you're north of $19 of of economic value per share fully diluted.
And so you know we think that is an important thing to communicate to the market and help everyone understand it.
Not only do we have a great earnings story, but there's a there's a real solid.
Book value story here as well so we think that's that's under pressure under appreciate it and hope that the market will will start to recognize.
Recognize that value as we illuminated so.
That wraps up all of our our presentation here so.
I'll turn it back to Melanie for any questions.
Thank you.
We will now begin the question on our profession.
Good question he may Pressburg on 1 on your telephone keypad.
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The first question comes from Steve Delaney K M. P security. Please go ahead.
Hello, everyone, I hope, you're doing well and staying safe great great quarter blood to see the progress that you're making [noise] gosh, a lot to unpack here, maybe first just if I could start with the reintroduction of the short term bridge loans.
Chris or should we view those as you know loans held for sale and whole loan format and I think he did about 15 was $15 million in the first quarter. Historically, what did you realize in terms of a premium gain on sale and is is that in fact, the way they would be sold rather than some.
[noise] securitization. Thank you.
Sure. Thank Steve good to hear from your home [noise].
So we are holding those on the balance sheet is held for investment right now cause we do little Okay. We've got Ah Ah Ah securitization exit in the in the works for those we Sergei could sell them on a whole loan basis.
And when we did that in the past what we were where typically doing was was taking like a participating interest and so we were making a couple of points upfront and then on the back and we were making an interest spread so I mean, all in if you wanted to figure something you could probably figure like a 1 O 3 and a half to 1 on.
For a price.
Okay.
But but our hope is that where we're gonna be able to execute on the securitization strategy and just earn the spread over time, which we think could actually be more meaningful. So we do have the flexibility to do either 1 but in terms of modeling, where we're gonna plan to hold it.
Okay great.
And the the NIM, obviously, 7 true Rebase 73 basis points on a quarter. You know to 43 is is a big quarterly moving Mark explained a lot of that I think with with the M. P. L and some of the recoveries and in your mind. If you model it out and I don't know if mark is built sort of Ah Ah 20, twenty-two Ah models.
Yet, but do you have any sense for.
Looking at the the alone yields seem crazy sticky you know at least your you know your legacy stuff everything's like 7 and 8 per cent [noise] and so it doesn't sound like you're going to get all that much compression from on the loan yield side and you're going to pick up on the financing, but any sense of.
How much further improvement there isn't the NIM from the the forty-three in the second quarter do you have a target.
Yeah. Thank you I I think you know we don't we're not you know kind of putting out official guidance, but we think that the right number to use is probably what well you know it's somewhere between Q on in queue too I think okay. Cute too is is a little elevated and again you you know if we get <unk>.
5 or 6 loans that cure that it's been delinquent for 15 months you get all this interest in 1 yeah right. So yeah. That's why we were kinda trying to warn lumpy lumpiness yeah. Yeah. So I think that's somewhere between the those 2 I mean, if I would probably say punch them more towards like the 4.4 and a quarter.
A range.
Okay, where will my model on them now that's before the the corporate debt. That's just on the on the Port Oh sure that's portfolio ports without everything else yeah, yeah, Okay, great well, thanks for the I'll <unk> I'll leave some other stuff for the rest of the guys on the line, but thanks for your comments. Thank you Steve.
[noise]. Thank you.
Our next question comes from Stephen line.
With Raymond James.
He's got a home.
Hi, Good afternoon Christmas Mark Steve.
You said right here from you and you can congrats you guys are really accomplished a lot in the last 15 months from earlier and think about a year ago.
Really you know positive outlook I think Steve covered a good bit on the origination side with the and then the prepared remarks, you maybe spend a little more time on the cost of funds.
You know it seems like you know big opportunity there I know you're looking at collapses on a couple of deals so can.
Can you try to quantify that force in overtime, where shall we see that cost of funds trend and and you know how.
How quickly we will get there and is there some inflection point in 6 or 9 months, where it will accelerate lower.
Yeah, Mark Mark do you Wanna try to get that 1.
Where do you want some of the older I I, even by the way. They said time on again some of the older Securitizations that are close to being able to be collapsed are currently running probably somewhere in you know 5% to 6% overall cost of funds handle and we think with refinancing releveraging. These.
In new Securitizations that we could bring that cost of funds into somewhere in the to handle so pretty nice to pick up on it.
Thanks for that color and you know I'm thinking about the origination business you know.
Mentioned in the prepared remarks about a bill on pace kind of training for about 1 billion a year at 104 in July.
With your current platform and and scale.
Work on that number go is there still significant opportunity on the upside as far as a monthly volume or are we kind of have a good pace now to feed the business.
Yeah I think.
I I think there's there's definitely room to go we Wanna grow you know smart.
Smartly, so we don't Wanna get over our skis and go too aggressive, but but there's definitely more run room, there's more demand.
So we we think those volumes will continue to grow as we cause we add more people and and expand more relationships.
So yeah, we definitely think there's expect.
Higher volumes next year, and and think that there's there's plenty of room to to run there.
Great things from the comments because I appreciate your time is that true.
[noise] welcome to in N y.
It's neither 1 thing to keep in mind is we hit the $1 billion in 2019 that was offering the short term product pretty much most of the year and we're all we're already almost halfway to $1 billion. The first 6 months of this year. We just started offering the short term product you on me introducing it the last quarter. So.
I've been with the company in terms of nonperforming resolution cash and it's very hard to predict because we don't book it until we get the cash.
We work hard to resolve most of our loans, we get a 3% gain on them, but we just never know when we're going to get that resolution on when that gain is going to come through on cash and book it on a cash basis, its really hard to predict predict that.
Yes.
I understand that.
Helpful.
The other question I had was on.
On new nonperforming loan formation.
Clearly you've resolved quite a few loans for the quarter, but you also had some some new additions.
Or is the New addition, there the pace of new additions that are coming in nonperforming are beginning to slow or what are you what are your views on that side.
Yeah.
We do see that slowing.
The majority of those loans are.
Folks that were in some type of Covid forbearance arrangement and their vendor sailing, they're just not making it.
So.
From that perspective.
We're encouraged that it's not new new originations or newer borrowers it mostly driven by.
Folks that are already struggling so.
I think that's why you see the offsetting and that's why we've been telling everyone. That's going to take time to kind of work through this.
This whole backlog and as these borrowers.
Deal with their their reality and figure out how to how to get resolved. So it's mostly a debt forbearance loans that were in court.
The Covid program.
Okay alright, thank you.
Yep. Thank you.
Right.
Once again, if you wish to ask a question. Please press Star then 1.
Your next question comes from Don Vendetti with Wells Fargo. Please go ahead.
Hi, guys.
Couple of questions 1 Chris just checking in on.
The competitive dynamic it sounds it seems like your business is largely been very fragmented smaller private lenders.
Or is that still the case coming out of Covid and are there any strategic.
Structure as you've looked at like doing more JV and things of that nature down the road.
Yeah, Hi debt.
Youre right that your characterization is right, it's highly fragmented and we continue to we think take share from.
Smaller private lenders.
We have looked in the past it's on some JV is we do have a couple in the works right now with some.
And 1 I can think on particular zone as a private REIT debt has been aggressively.
Acquiring <unk>.
Assets and so we agreed to meet their financial partner, but not necessarily a JV with another institution, but.
Hum.
By and large from the majority of the business is still still coming through our brokers and and that's really where we're seeing the growth.
Okay and then.
The production in the quarter versus Q1.
There was more commercial I was just curious if you could touch upon that and if you expect.
That to grow faster than the other investor 1 for rental.
Yeah, I think our view was that we were we were somewhat cautious on it.
So when we when we restart it back in the fall last year. So.
We were just a little tougher on that product just to make sure where COVID-19 went in and if it's business as we're gonna be allowed to reopen and how long that was going to take so I attribute most of that 2.2.
Our improved outlook on those borrowers on those types of assets, but I think going forward.
I would expect the growth to be pretty balanced between the 2 product types.
Got it okay. Thanks, I'm all set.
Sure.
This concludes our question and answer session I would like to turn the conference back over to Chris <unk> for any closing remark.
Thank you all for joining the call. We're obviously very pleased to present the results today and I appreciate everyone, taking the time to listen to our presentation and look forward to speaking to you again soon so thank you all.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
[music].