Q4 2024 Velocity Financial Inc Earnings Call

Good day, and welcome to the velocity financial fourth quarter and full year 'twenty 'twenty four conference call. All participants will be in listen only mode. Do you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask question you asked.

Operator: Good day and welcome to the Velocity Financial fourth quarter and full year 2024 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded.

Question You May Press Star then one on you touched on phone withdraw. Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Chris Altman Doctor.

Christopher Oltmann: I would now like to turn the conference over to Chris Oltmann, Director of Investor Relations. Thanks, Asha. Hello, everyone, and thank you for joining us today for the discussion of Velocity's fourth quarter and for your 2024 results.

Speaker Change: Investor Relations. Please go ahead.

Speaker Change: Thanks, Ross Yeah.

Speaker Change: Hello, everyone and thank you for joining us today for the discussion of velocity at fourth quarter and for your 2024 results. Joining me today are Chris Ferrara philosophy, as President and Chief Executive Officer, and Mark the Penny.

Christopher Oltmann: Joining me today are Chris Farrar, Velocity's President and Chief Executive Officer, and Mark Szczepaniak. is Chief Financial.

Speaker Change: Philosophy as Chief Financial Officer earlier. This afternoon, we released our fourth quarter results.

Christopher Oltmann: Earlier this afternoon, we released our fourth quarter results. and you can find the press release and accompanying presentation we will refer to during this call on our investor relations website at www.bellfinance.com.

Speaker Change: And you can find the press release and accompanying presentation, we will refer to during this call on our Investor Relations website at Www Dot <unk> Dot com.

Christopher Oltmann: 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 of the risk 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.

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.

Speaker Change: For a discussion of some of the 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.

Speaker Change: Please also note that the content of this conference call contains time sensitive information that is accurate only as of today and.

Christopher Oltmann: 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.

Speaker Change: And we do not undertake any duty to update forward looking statements.

We may also refer to certain non-GAAP measures on this call.

Speaker Change: 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.

Christopher Oltmann: And finally, today's call is being recorded and will be available on the company's website later today.

Christopher Farrar: And with that, I will now turn the call over to Chris Farrar. Thanks, Chris, and welcome, everyone, to our fourth quarter earnings call. Our team is proud to announce another record quarter and year-end results. In short, the Velocity engine was firing on all sides. We have strong tailwinds supporting our business and we're capitalizing. by lending to both residential and commercial real estate investors. Our customers tell us that banks are limiting their lending. to allow, that will allow us to capture. We saw a very strong demand from our borrowers. and that momentum.

Speaker Change: And with that I'll now turn the call over to Chris Shaw.

Chris Shaw: Thanks, Chris.

Chris Shaw: Everyone to our fourth quarter earnings call.

Chris Shaw: Our team is proud to announce another record quarter and year end results for 2024.

Chris Shaw: In short the velocity engine was firing on all cylinders last year, we have strong tailwind supporting our business and we're capitalizing on the unmet needs in our niche of the market.

Chris Shaw: By lending to both residential and commercial real estate investors, we can serve a larger base of customers and provide capital to underserved people.

Chris Shaw: Our customers tell us our banks are limiting their lending and our target niches and we believe that we will continue to allow that will allow us to capture market share.

Chris Shaw: We saw a very strong demand from our borrowers in 'twenty 'twenty four as evidenced by our 64% increase in originations in.

Chris Shaw: And that momentum has carried into the new year.

Christopher Farrar: Importantly, we remain Portfolio Growth. to a 37. Our pre-tax ROE was an impressive... In terms of our portfolio, our special... did a great job resolving NPLs and REOs for NET. nimble, hands-on approach.

Chris Shaw: Importantly, we remain disciplined in our credit process, while preserving our risk adjusted margins at lower loan to values.

Chris Shaw: Our portfolio growth led to a 37% increase in net revenue in Q4 pre tax ROE was an impressive 26, 8%.

Chris Shaw: In terms of our portfolio our special servicing team did.

You did a great job resolving npls and Oreo is for net gains in our nimble hands on approach consistently contributes to our earnings.

Christopher Farrar: Most of you know.

Chris Shaw: As most of you know we prefer to lend in larger more liquid msas and we still see healthy demand for the types of real estate, we lend on.

Christopher Farrar: More somber note. We recently Devastating Wildfires. Business Perspective All Velocity. safe and healthy, and we will do our part.

Chris Shaw: On a more somber note, we recently experienced devastating wildfires in southern California, and all of us extend our deepest sympathies and concern for everyone impacted.

Chris Shaw: From the business perspective, we were fortunate that only two of the properties backing our loans were destroyed and fully insured.

Chris Shaw: So we expect no impact financially on a more positive note all velocity team members are safe and healthy.

Chris Shaw: And we will do our part to help those affected recover.

From a capital markets perspective, we saw significant improvement post the presidential election, as evidenced by tighter spreads for our Securitizations and increased investor participation, which enable us to achieve high ROE on our invested capital.

Christopher Farrar: Post-Presidential Election. tighter spreads for our securitization. as we've explained before. far less. and other mortgages. Much energy is spent by others prognosticating future Fed for much-needed capital. important differentiator as we successfully originated loans over the last 20 years in both higher Looking forward. We expect another strong year of growth and our team is engaged.

Chris Shaw: As we've explained before our business is far less rate sensitive than other mortgage segments and while much energy is spent by others prognosticating future fed moves we simply continued to deliver much needed capital to underserved borrowers.

Chris Shaw: This is an important differentiator as we successfully originated loans over the last 20 years in both higher and lower rate environments.

Chris Shaw: Looking forward, we can expect another strong year of growth and our team is engaged and proud to provide solutions for real estate investors nationwide as we look to create long term shareholder value.

Christopher Farrar: We are proud to provide solutions for real estate investors nationwide as we look to create long-term shareholder value.

Chris Shaw: With that that concludes my prepared remarks, and we'll turn it over to the presentation materials, starting with page three.

Mark Szczepaniak: prepared remarks and we'll turn over to the presentation. Obviously, from an earnings perspective, a fantastic year, 60 cents of core earnings in Q4 and a full year core earnings of 203, so, you know, fantastic earnings across all Tutte from Production. Polio Perspective, and others. Portfolio's just over $5 billion now. On the financing and capital side, I mentioned the securitization market and we did a couple of deals in the fourth quarter that went off extremely well. over $7 million in new equity through the ATM program and the strategy. And from a capital and liquidity perspective, really great year-end, almost $96 million of liquidity.

Chris Shaw: Obviously from an earnings perspective, our fantastic here 60.

Chris Shaw: 60 cents of core earnings in Q4, and our full year core earnings of two or three so fantastic earnings across.

All of the different segments of the business from protect from production and a portfolio perspective.

Chris Shaw: Another great quarter of $563 million and U P b.

Chris Shaw: 18%.

Chris Shaw: Increase sequentially over last quarter, and 60% year over year.

Chris Shaw: The portfolio was just over $5 billion now.

Chris Shaw: Our nonperforming loans is pretty steady with where it was from the last quarter.

Chris Shaw: And impressively in the fourth quarter from an NPL resolution perspective, we had.

Chris Shaw: Just over $5 $5 million of gains from resolved delinquent assets.

Chris Shaw: On the financing and capital side mentioned, the securitization market and we did a couple of deals in the fourth quarter that went off extremely well.

Chris Shaw: We also issued.

Chris Shaw: Little over $7 million of new equity through the ATM program and the strategy. There is really just to continue to increase float and broaden out our investor base as best we can.

Chris Shaw: From a capital and liquidity perspective really great year.

Chris Shaw: And 90% almost $96 million of liquidity, so we've got plenty of.

Mark Szczepaniak: So we've got plenty of capital to fund future growth.

Chris Shaw: Capital to fund future growth.

Chris Shaw: Turning to page four.

Chris Shaw: We outlined our strategy here just a bit.

Mark Szczepaniak: We outline our strategy here just a bit. Okay. Yeah. on the upper right hand. of Consciousness. take our gap book value at 1231 and adjust. call adjusted book value, and that's simply to reflect. all of the assets.

Chris Shaw: Turning to retain earnings and building book value and.

Chris Shaw: You can see the bridge from from 930 to 12 31 there.

Chris Shaw: As we retain earnings and grow the book value.

Chris Shaw: Uh huh.

Chris Shaw: On the upper right hand corner.

Chris Shaw: We have two bars that.

Chris Shaw: Take our GAAP book value at 12 31.

Chris Shaw: And adjust to what we call adjusted book value and that's simply to reflect.

Chris Shaw: The all of the assets that are carried at amortized cost if GAAP allowed us to mark those assets to fair value.

Mark Szczepaniak: We think if GAP allowed us to mark those assets to fair value, we think that adjusted book value would be about $1,873 a share, so there's tremendous value we think still in the platform that doesn't show up from a GAP perspective.

Chris Shaw: We think that adjusted book value would be about $18 73, a share so there's tremendous value.

Chris Shaw: Still in the platform that doesn't show up from a from a GAAP perspective.

Mark Szczepaniak: And with that, I will turn the presentation over to Mark on page five. Thanks, Chris. Hi, everybody. Well, another year is in the books, and Velocity has really ended the year strong. We're also starting 25, kind of where we left off in 24. If we take a look at page five, the total loan production for Q4, as Chris mentioned, was $563.5 million in UPB. That's an 18.2 percent increase over Q3, which was $476.8 million. There were over 1,200 loans funded in the fourth quarter. The strong production growth during Q4 included the weighted average coupon, a new health investment originations continuing strong at 10.8 percent.

Chris Shaw: <unk>.

Chris Shaw: I will turn the presentation over to Mark Kaufmann page five.

Mark Kaufmann: Thanks, Chris.

Mark Kaufmann: Hi, everybody.

Mark Kaufmann: The other years in the books and velocity is really ended the year strong and we're also starting 25 kind of where we left off 24.

Mark Kaufmann: Take a look at page five total loan production for Q4, as Chris mentioned was $563 5 million in U P V to.

Mark Kaufmann: 18, 2% increase over Q3.

Mark Kaufmann: One 8 million.

Mark Kaufmann: There were over 1200 loans funded in the fourth quarter.

Mark Kaufmann: Strong production growth during Q4, we have a weighted average coupon of new health investment originations continuing strong.

Mark Kaufmann: 8%.

Mark Szczepaniak: The whack on HFI originations for the last five-quarter average trend has been at 11%, so great weight average coupons over the last five quarters. The growth and originations in Q4 also continued at tight credit levels, with the weighted average loan-to-value for the quarter at just under 63%, at 62.9. The last five-quarter average trend has been at 63.9% LTV.

Mark Kaufmann: The WAC on H by originations for the last five quarter average trend it's been at 11%. So some great.

Mark Kaufmann: Over the last five quarters.

Mark Kaufmann: Gross originations in Q4 also.

Tight credit levels with the weighted average loan to value for the quarter and just under 63% at 62 flowing nicely.

Mark Kaufmann: The last five quarter average trend has been at 63.

Mark Kaufmann: L T D.

Mark Szczepaniak: So the strong Q4 production growth, the healthy WAC, the low LTV, tight credit, that still demonstrates, as Chris mentioned, the consistent borrower demand for our product in different market cycles and environments. And in 2025, so far 2025, year-to-date loan production through February was $429.4 million. So again, continuing where we left off in 2024. As a result of the continued strong growth in production, page six shows a similar growth in Q4 for overall loan portfolio. Total loan portfolio is, on September 31st, was 5.1 billion dollars in UPV. That's a 6.4 percent increase in Q3 and over a 24 percent increase year-over-year.

Mark Kaufmann: So the strong Q4 production growth.

Mark Kaufmann: If you ask the low LTV high credit.

Mark Kaufmann: <unk> demonstrates as Chris mentioned, the consistent borrower demand for our products in different market cycles.

Mark Kaufmann: In 2025, so far 2025 year to date loan productions from February.

Mark Kaufmann: For $29 4 million so again.

Mark Kaufmann: And where we left off in 2024.

Mark Kaufmann: Sure.

Mark Kaufmann: As a result of the continued strong growth.

Mark Kaufmann: Growth in production eight six shows a similar growth in Q4 for overall loan portfolio.

Mark Kaufmann: Our loan portfolio is December 31 was $5 $1 billion and you can see it's a six 4% increase in Q3 and over a 24% increase year over year.

Mark Szczepaniak: The weighted average coupon on our total portfolio at the end of the year was 9.53%. That's a 16 basis points increase from Q3 and a 65 basis point increase in yield year over year. And again, the total weighted average loan, the value ratio on the portfolio at the end of the year remained low at about 66.6%. Page 7, our Q4 portfolio net interest margin was 3.70%. an increase of 10 basis points, and then looking at Q3, and 18 basis points year over year. As our portfolio yield over to the right of the table, portfolio yield increased 16 basis points quarter over quarter, 64 basis points year over year, while our cost of funds actually decreased by one basis point quarter over quarter, and increased only 39 basis points year over year, mainly due a lot to that tighter spreads that we're seeing in the securitization market that Chris previously mentioned.

Mark Kaufmann: Weighted average coupon on our total portfolio ended the year was 95, 3% up 16 basis points increase from Q3, and 65 basis point increase in yield year over year and again, the total weighted average loan to value ratio of the portfolio at the end of the year remained low.

Mark Kaufmann: About 66, 6%.

Mark Kaufmann: Page seven our Q4 portfolio net interest margin was three 7%.

Mark Kaufmann: An increase of 10 basis points, and then looking at Q3, and 18 basis points year over year.

Mark Kaufmann: As our portfolio yield over to the right at the table portfolio yield increased 16 basis points quarter over quarter 64 basis points year over year, while our cost of funds actually decreased by one basis point quarter over quarter and increased only 39 basis points year over year.

Mark Kaufmann: Mainly due a lot tighter.

Mark Kaufmann: Tighter spreads that we're seeing in securitization markets previously mentioned.

Mark Szczepaniak: The quarter-over-quarter increase in NIB was mainly driven by strong loan production in the quarter at the healthy spreads, the higher loan coupons coupled with the continued favorable execution in the securitization market and the debt financing side.

Mark Kaufmann: Quarter over quarter increase in NIM was mainly driven by strong loan production in the quarter with healthy spreads higher loan coupons, coupled with continued favorable execution.

Mark Kaufmann: <unk> market with debt financing.

Mark Kaufmann: Right.

Mark Kaufmann: Going over to page eight our nonperforming loan rate at the end of Q4 was 10, 7% relatively flat compared to 10, 6% for Q3 and our nonperforming loan rate has remained consistent for the last five quarters at an average of about 10, 3%.

Mark Szczepaniak: Going over to page 8, our non-performing loan rate at the end of Q4 was 10.7. It's relatively flat compared to 10.6% for Q3, and our non-performing loan rate has remained consistent for the last five quarters at an average of about 10.3%. We continue to see very strong collection efforts by our special servicing department, and it resulted in favorable gain resolutions for MPL loans. The table on page nine highlights the NPL resolution efforts. In Q4, the NPL resolution gains were 5.6 million, or 7% of a little bit over $79 million in UPB results. On a trend basis, we've been averaging 3.3% quarterly NPL resolution gains over the last five quarters.

Mark Kaufmann: We continue to see very strong collection efforts are searching apartments.

Mark Kaufmann: <unk> and favorable gain resolutions for NPL loans.

Mark Kaufmann: The table on page nine highlights NPL resolution efforts in Q4, the NPL resolution gains were $5 6 million or 7%.

Mark Kaufmann: But over $79 million and UPC results.

Mark Kaufmann: Trend basis, we've been averaging 3.3% quarterly NPL resolution gains over the last five quarters.

Mark Szczepaniak: It's not here on this table, if you look at all of 2024, our NPL resolution gains were 10.2 million for the year, and over $283 million of UPB results.

Mark Kaufmann: It's not here on this table.

Mark Kaufmann: 2020, or NPL resolution gains were $10 2 million for the year and over $283 million of UPC results.

Mark Kaufmann: Yeah.

Mark Kaufmann: Page 10 shows our seasonal reserves.

Mark Szczepaniak: Page 10 shows our CECL reserve and also our loan charge-offs and our net gain loss and our relativity. On the left-hand kind of corner, the CECL reserves of December 31st was $4.2 million. That's 17 basis points of our outstanding non-fair value HFI portfolio. Our CECL reserve remains within our expected range of between 15 and 20 basis points. Keep in mind that CECL loan loss reserve does not include our loans being carried to fair value. Over to the right, the table shows our net gain loss from loan charge-offs and also REO-related activities during the quarter. For Q4, we had a net gain on the combination of loan charge-offs and REO-related activities of $2.9 million, which is the net of the $700,000 in charge-offs you see in the table, netted with the $3.6 million gain on REO activities.

Mark Kaufmann: And also our low charge offs and our net gain loss on Oreo activity on the left hand corner of the Cecil reserves at December 31 was $4 2 million.

Mark Kaufmann: 70 basis points of our outstanding <unk> portfolio.

Mark Kaufmann: So the reserve remains within our expected range between 15, and 20 basis points to.

Mark Kaufmann: Keep in mind that sees a loan loss reserve does not include our loans being carried at fair value.

Mark Kaufmann: Over to the right table shows our net gain was from loan charge offs and also our REO related activities during the quarter for Q4 getting net gain on the combination of loan charge offs and a related activities of $2 $9 million, which is net of the $700000 charge offs you see in the table getting what.

The $3 6 million gain on Oreo activities.

Mark Szczepaniak: For a full year of 2024, the net charge-offs, between the net charge-offs and the area activity gain was $5.1 million.

Mark Kaufmann: For full year, 'twenty, 'twenty, four and net charge offs between the desktop charge offs with arrow gain was $5 $1 million.

Mark Kaufmann: Page 11 shows our durable funding and liquidity position at the end of Q4 total liquidity was just under $96 million comprised of almost $50 million in actual cash and cash equivalents and another $46 million that are available.

Mark Szczepaniak: Page 11 shows our durable funding and liquidity position at the end of Q4 total liquidity was just under 96 million dollars comprised of almost 50 million dollars in actual cash and cash equivalents and another 46 million in our available liquidity on Unfinanced Collateral. In addition, our available warehouse line capacity at the end of the year was 435 million and we have a maximum line capacity of 785 million. In Q4, as Chris mentioned, we issued two securitizations. We issued one in October, the 2024-5, and one in December, 2024-6. Combined, those two securities hit over $586 million in securities issued.

Mark Kaufmann: As collateral.

Mark Kaufmann: In addition, our available they're applying capacity at the end of the year was $435 million.

Mark Kaufmann: Maximum line capacity of 780 <unk>.

Chris Shaw: In Q4, as Chris mentioned, two Securitizations, we issued.

Speaker Change: One of October 2025, and one in December of 2026.

Speaker Change: Buying the two securities and over $586 million Securities issued and then already in 2025 at February we issued our first security with a little over $351 million in securitization.

Mark Szczepaniak: And then, already in 2025, in February, we issued our first security with a little over $351 million in securities.

Speaker Change: So with that that concludes my 2024 financial recap now.

Christopher Farrar: So with that, that concludes my 2024 financial recap, and I'll turn the presentation back to Chris for his overview on Velocity's 2025 Key Business Drivers. Thanks, Mark. On slide 12, you can see our outlook. market perspective, we still think everything remains healthy and very positive. Credit Side. mentioned rates higher for longer is good for us, and we expect to continue to resolve NPVLs favorably, so we're very positive there. Capital Perspective, The Strong Securities And then lastly, from an earnings perspective.

Speaker Change: I'll turn the presentation back to Chris' overview on velocities 2025 key business drivers Chris.

Chris: Thanks Mark.

Speaker Change: <unk>.

Speaker Change: On Slide 12, you can see our outlook here from the market perspective, we still think everything remains healthy and very positive.

Speaker Change: On the credit side.

We'd mentioned rates higher for longer is good for us.

Speaker Change: We expect to continue to resolve and P. V also favorably so.

Speaker Change: We're very positive there.

Speaker Change: From a capital perspective, the strong securitization market is a definitely a tailwind for us in helping us.

Speaker Change: Execute on our plan.

Speaker Change: And then lastly from an earnings perspective, we expect to grow not only production, but earnings as well and feel good about the future. So that wraps up our presentation and we will open it up for questions.

Christopher Farrar: Center.

Christopher Farrar: So that wraps up our presentation.

Speaker Change: Thank you we will now be.

Christopher Farrar: Thank you.

Operator: We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.

Speaker Change: And the question and answer the question you ask a question you May Press Star then one on you touched on corn.

Speaker Change: Using a speakerphone please pick up your handset before pressing the key.

Speaker Change: Anytime Youre question has been addressed and we would like to Italia question. Please press Star then two.

Stephen Laws: Our first question comes from Stephen Laws for Dwayne & Dane. Please go ahead. Hi, good afternoon. Wow, you know another fantastic quarter. Congrats on a really strong I guess close to 24, and Mark, from your comments on January and February, volume seems like 25 is off to a continued strong start. So maybe on that point, can you talk about production expectations for this year? I think you said $430 million through January and February.

Stephen Laws: Question comes from Stephen laws with Raymond James.

Speaker Change: Go ahead.

Stephen Laws: Hi, good afternoon.

Speaker Change: Wow, you know another fantastic quarter, congrats on a really strong.

Speaker Change: We have close to 24 and Mark from your comments on January February volumes seems like 'twenty five is off to a continued strong start so.

Speaker Change: Maybe on that point can you talk about production expectations for this year I think you said 430 million through January and February.

Speaker Change: Kind of is there a stabilized run rate are you know on the production front that you think you're reaching a quarterly level, where things plateau or.

Mark Szczepaniak: Is there a stabilized run rate on the production front that you think you reach on a quarterly level, or things plateau, or how much incremental volumes on a quarterly basis do you think you can put through the system?

Speaker Change: How much of incremental volumes on a quarterly basis do you think you can.

Speaker Change: Put through the system.

Speaker Change: Hi, Steven Thanks for the comments.

Mark Szczepaniak: Hi, Steven. Yeah, thanks. good to us as a forecast for the rest of the year. Demand. I don't, we're not. Forecast. bookends on it, I just think current run rate is definitely a good, you know, forward forecast.

Speaker Change: We you know what I would say you know the current run rate feels good to us as a forecast for the rest of the year, we are growing and we see increasing demand so.

I don't we're not we don't formally forecast what that would look like and I don't want to put any sort of limits or bookends on it I just think.

Speaker Change: Our current run rate is it's definitely a good you.

Speaker Change: Forward forecast, but.

Speaker Change: Probably with a little bit of upward slope to that because we're seeing really good demand.

Speaker Change: I appreciate that and maybe to try to not read too much into the numbers on a one quarter basis, but certainly noticed the average loan balance.

Mark Szczepaniak: Appreciate that and maybe to try to not read too much into numbers on a one-quarter basis, but certainly notice the average loan balance just shy of $450,000, a little bit bigger than kind of a $380,000 to $390,000 or $400,000 the last year. Is that due to entering markets more traction with larger loans? Is it more of a due to the shift in mix with a higher commercial component if those carry higher balances? Can you talk about the mix of the production and impact that might be having on average loan size?

Speaker Change: Shy of 450000, you know a little bit bigger than kind of the 380 to 390 or 400 the last year.

Speaker Change: Is that due to to doing market you know entering markets more traction with larger loans is it more of them are due to the shift in mix with a higher commercial component of those carry higher balances can you talk about the.

Speaker Change: The mix of the production and an impact that might be having an average loan size.

Speaker Change: Sure Yeah, I think it's the latter not the former I think that.

Mark Szczepaniak: Yeah.

Mark Szczepaniak: I think it's the latter. We definitely did see an uptick in the second half. Commercial Assets, which, as you mentioned... They have larger balances, definitely still. You see the banks being very tight. So, we see great opportunities. little bit larger balance there, and that's really. Appreciate those comments.

Speaker Change: We definitely did see an uptick in the second half of the year and the commercial assets, which as you mentioned rightfully that.

Speaker Change: They have larger balances definitely still continue to see the banks being very tight there.

Speaker Change: So we see great opportunities.

Speaker Change: Come to us all the time with a little bit larger balance there.

Speaker Change: That's really driven the average up.

Speaker Change: I appreciate those comments and one last one if I may from a capital standpoint, you know with with the retained earnings and then a little bit of proceeds from from ATM issuance.

Mark Szczepaniak: And one last one, if I may, from a capital standpoint, you know, with retained earnings and then a little bit of proceeds from ATM issuance, you know, is that enough capital to support and feed the growth of the business? Do you think you'll need to look for ways to tap bigger chunks of additional equity as you grow? Kind of how do you think about managing your capital base? Yeah, that's a great question. Based on, you know, kind of current run rates. Good shape. really start to accelerate even more. Additional Growth Practices. We have over $75 million of retained.

Speaker Change: Is that enough capital to support and feed the growth of the business do you think youll need to to look for ways to put that bigger.

Speaker Change: Chunks of additional equity as you grow kind of how do you think about managing your capital base, Yeah. That's a great question.

Speaker Change: Based on kind of current run rates, where we're in good shape, yes, if we.

Speaker Change: Really start to accelerate even more I could see somewhere down the road, where we might need additional growth capital.

Speaker Change: We have over $75 million of retained bonds that we can sell at any time.

Mark Szczepaniak: that we can sell. fund some of that future growth. as you mentioned. issuance. So current levels were fine, it really is just...

Speaker Change: Two to fund some of that future growth and then also as you mentioned some of the ATM issuance. So.

Speaker Change: At the current levels. We're fine it really is just going to depend on how much growth we experience in.

Speaker Change: That could drive some some marginal capital down the road.

Mark Szczepaniak: that could drive some marginal capital down the road and our view is we would do it on a balanced level, meaning a little bit of equity, a little bit of debt, just to try to keep our debt-to-equity ratio in line. Great.

Speaker Change: Our view is we would do it on a kind of a balanced.

Speaker Change: Level, meaning you.

Speaker Change: A little bit of equity a little bit of debt just to try and keep our debt to equity ratio.

Speaker Change: In line with where it is right now.

Speaker Change: Great I appreciate the comments this afternoon and again congrats on a very nice into 'twenty four thanks Steven.

Stephen Laws: Appreciate the comments this afternoon. And again, congrats on a very nice end to 24. Thanks.

Steve DeLaney: Our next question comes from Steve Delaney with <unk> capital markets. Please go ahead.

Steve DeLaney: The next question comes from Steve DeLaney with Citizen Capital Markets. Please go ahead. Hi Chris and everyone and congrats on just a great close to the year. Thanks, Steve.

Speaker Change: Hi, Chris that everyone and congrats on getting it right.

Speaker Change: <unk> closed the year.

A year.

Speaker Change: Thanks, Steve.

Speaker Change: Yep.

Steve DeLaney: So, look, as you talk about your borrowers, when we think about this volatility and what's been going on in the 10-year and what's been going on in mortgage rates, I guess I just naturally think of homebuyers and how they're so fickle, and one month they're a buyer, one month they're not. your bars and clients. must have a much different mindset about what they're out there doing. It's as simple as that their focus is to buy and manage properties, and the rates are just sort of something you deal with that's kind of like noise, but their focus is on the properties and acquiring and managing those properties, kind of regardless of and across whatever the rate cycle is.

Speaker Change: So look.

Speaker Change: Can you talk about your borrowers when we think about this volatility and what's been going on in the 10 year and what's been going on in mortgage rates and I guess I'd, just naturally think of homebuyers and how theyre still fickle in one month, thereby or one month or not.

Speaker Change: Your mind your borrowers and Clos.

Speaker Change: It's.

Speaker Change: That must have a much different mindset about what they're out there doing is it as simple as that day.

Speaker Change: Their focus is to is to buy and manage properties and the rates are just sort of something you deal with that kind of like noise, but their focus is on the properties and acquiring and managing those properties kind of regardless of the oven and across whatever the right spot rates.

Speaker Change: Cycle is.

Christopher Farrar: I guess whenever we're talking to a mortgage company, it's so different, Chris, than what we normally hear about borrowers' sensitivity to rates, so a little color, it would be helpful. Yeah, sure. No, it's a good question, and it's definitely something that's unique to our business model. I think you summed it up well, you know, these folks need access to capital and they're willing to pay for it. They're very smart, they're opportunistic, and they're doing creative things. come to us and we execute with certainty. We give them some duration. You know, we write a 30-year fixed-rate mortgage, which is very unusual.

Speaker Change: I guess whenever what we're talking to a mortgage company, it's so different Chris and what we we normally hear about borrowers sensitivity to rates.

Speaker Change: Yeah.

Speaker Change: Little color Yeah sure Yeah sure no. It's a good question and it's definitely something that's unique to our business model.

Speaker Change: I think you summed it up well.

Speaker Change: Folks need access to capital and they're willing to pay for it.

Speaker Change: We they're very smart and they are opportunistic and they are doing creative things and then they need capital to manage their real estate portfolio in and they come to us and we execute with certainty and we give them. Some duration, we write a 30 year fixed rate mortgage which is very unusual so.

Christopher Farrar: Some of their alternatives might be very expensive, shorter-term capitals. All coming at them maybe in 6 or 12 months. optionality that they have with our product. You're absolutely right, unlike... And like most mortgage lenders, the first question or the first concern is not rate with our borrowers, it's certainty of execution. Got it. Yeah, because I'm Property that has to close by a certain date, and that kind of thing. to access capital in their balance sheet for some other. Right. And they need a quick answer from you, right? Right. That's right.

Speaker Change: Some other alternatives might be very expensive shorter term capital. It really is a bullet coming at them maybe in six or 12 months. So I think they like.

Speaker Change: Some of the Optionality that they have with our products, but mhm.

Speaker Change: You're absolutely right. Unlike Ah I.

Speaker Change: I mean, unlike most mortgage lenders to the first question or the first concern is not not right with her borrowers it's it's certainty of execution.

Speaker Change: Got it yeah, because they're not.

Speaker Change: Property that has to close by a certain date.

Speaker Change: Right.

Speaker Change: Alright.

Speaker Change: They need to.

Speaker Change: Excess capital in their balance sheet for some other opportunity.

Speaker Change: Right and they need a quick answer from you right right that's right.

Christopher Farrar: Not an extended, you know, got to get a loan committee three times over six to eight weeks. Right. That's right.

Speaker Change: What you got to get a loan committee three times over six to eight weeks right.

Steve DeLaney: The NPL resolutions are certainly remarkable. talk about that, you know, when you're you have gains of 5.6 million on 79 million in 4Q. Are you, in these cases, are... That's the resolutions in the fourth quarter. But is this a matter of you taking back, taking title to properties and then actually. selling them? Or in some cases, are you working with Stress, Debt, Bias, Relaxation. actually being able to, are there buyers for your delinquent loans that you can offset your loans to another, quote, credit investor that's not a public. I'm curious what the resolutions look like.

Speaker Change: The NPL resolutions are are certainly remarkable.

Speaker Change: Well talk about that when you're.

Speaker Change: <unk> gains of $5 6 million on 79 billion in <unk>.

Speaker Change: Are you in any cases are you.

Speaker Change: That's the resolutions in the fourth quarter, but this is just a matter of you taking back taking title to properties and then actually reselling them or in some cases are you working with distress.

Speaker Change: Distress debt buyer.

Speaker Change: Okay.

Speaker Change: Actually being able to are there buyers for your delinquent loans that you can you can offset your loans to another quote credit investor.

Speaker Change: That's not a public company.

Speaker Change: Sure.

Speaker Change: With the resolution look like as the foreclosure or notes sale.

Christopher Farrar: Is it foreclosure or is it no foreclosure? Yeah, I mean, all those resolutions that you see are either us taking back a property and selling it for a gain or Delinquent loans resolving sort of at the foreclosure steps, if you will. Maybe it may be a different investor comes in and buys that, but we can only bid. Associated with that and so we get satisfied there's often times I'm sure there are probably distressed buyers out there.

Speaker Change: Yeah, I mean, all of those resolutions that you see are either us taking back a property and selling it for a gain right.

Speaker Change: Or you know.

Speaker Change: Delinquent loans resolving sort of at the foreclosure steps. If you will maybe it may be a different investor comes in and buys it out but you know we can only bid up to the total amount that we're doing all of the costs and fees associated with that and so we get satisfied there is often times as well but.

Speaker Change: I'm sure there are probably distressed buyers out there we've never sold assets to anyone like that so I don't know, but that's not our desktop or our strategy.

Christopher Farrar: We've never sold assets to anyone like that, so I don't know, but that's not our strategy. Hi, I think another thing to kind of keep in mind is, you know, the resolutions are resolutions of our non-performing loan UPB, right? So in many cases, those never make it to the REO property, to your point, selling REO. So over 90% of all of our non-performing loan resolutions, like that $79 million in software Q4, probably over 90% of that are the borrowers either paying current, paying the loan current with default interest, which is part of the game, or they refinance, or they have capital somewhere else, and they pay off the loan, and we get the default interest, and depending on if it's still in the prepayment window, we get prepayment fees.

Mark.

Speaker Change: Steve at this March I think another thing to kind of keep in mind as you know the resolutions are resolutions of our nonperforming loan <unk> right. So in many cases those never make it to the Oreo property to your point selling Oreo so over 90% of all of our nonperforming loan resolutions like that $79 million off of Q4, but probably.

Speaker Change: With 90% of that are the borrowers either paying current paying the loan current listing of default interest.

Speaker Change: As part of the game or they come they refinance their capital somewhere else and they pay off the loan and we get the default interest and depending on if it's still a prepayment window, we get prepayments fees. So that's as much as 90% of those NPL resolutions as he original borrower paid current or paying off the one and then the other 8% to 10% or whatever.

Christopher Farrar: So keep in mind, so 90% of those NPL resolutions is the original borrower either paying current or paying off the loan. And then the other, you know, 8% to 10% or whatever, that goes to foreclosure, to Chris's point, that can either get to the foreclosure or sales steps, or we take possession of the REO and then sell the REO. But 90% of it is the borrower resolving it themselves.

Speaker Change: What's the foreclosure, Chris Chris's point that can easily get to the foreclosure sale steps or we take those actually are REO and then selling an hour ago.

Speaker Change: 90% of it is the borrower, resulting in some shots.

Steve DeLaney: Oh, that's fabulous.

Speaker Change: Fabulous.

Steve DeLaney: Thank you both so much for the... for the comments, and again, congrats on just a fantastic. Thanks, Steve. Appreciate it.

Thank you both so much for the.

Speaker Change: For the comments and again congrats on a just a fantastic year. Thanks, Steve I appreciate it.

Yes.

Speaker Change: Once again, if you have a question. Please press Star then one the next question comes from Eric Hagen with B T. I D. Please go ahead.

Operator: Once again, if you have a question, please press star then one.

Eric Hagen: The next question comes from Eric Hagen with BTID. Please go ahead. Hey, thanks. Hope you guys are well.

Eric Hagen: Hey, Thanks Hope you guys are well a couple of follow ups here.

Eric Hagen: A couple follow-ups here. a couple of follow-ups here. Do you guys see any response in the CNBS market so far related to the broader market volatility recently? And maybe how does your expected ROE change if spreads were wider?

Eric Hagen: A couple of follow ups here do you guys see any responsiveness the MBS market, so far related to the broader market volatility.

Eric Hagen: Recently, and maybe how does your expected ROE a change if spreads were wider and then a follow up you know just kind of like a follow up on the NPL resolutions I mean, how do you gain visibility into that pipeline in other words like how do you go about predicting the benchmark or the trajectory that you might.

Eric Hagen: And then a follow-up, you know, just kind of like a follow-up on the NPL resolutions. I mean, how do you gain visibility into that pipeline? In other words, like, how do you go about predicting the benchmark or the trajectory that you might... to see their under different scenarios. Like, do you eventually not expect to have any gains, or how does that even factor into the asset valuation and so forth? Thanks, guys.

Eric Hagen: See there under different scenarios.

Like do you eventually not expect to have any gains or how does that factor into the asset valuation and so forth. Thanks, guys sure. Thanks, Eric I appreciate it.

Christopher Farrar: Sure. Thanks, Eric. Appreciate it. Um, let's see. So, on the first question, we're not seeing... Volatility on our securitization.

Eric Hagen: See so on the first question.

Eric Hagen: We're not seeing that.

Eric Hagen: Volatility on this on our our Securitizations that maybe you're referring to in larger see MBS. So.

Christopher Farrar: to a larger CMBS. Thank you. of America. Thank you. are typically to like a non-QM RMBS execution. wider there. So... relative value basis, I think we represent a very good alternative for a lot of those investors. feel good about our execution there.

Eric Hagen: No impact there.

Eric Hagen: Yeah.

Eric Hagen: R R.

Eric Hagen: <unk>, probably for most bond and trust the investors get Comped more typically to like a non QM RMB S execution, and we usually print little wider there so.

Eric Hagen: Thank you.

Eric Hagen: On a relative value basis, I think we represent a very good.

Eric Hagen: Alternative for a lot of those investors so we.

Eric Hagen: We feel good about our execution there going forward.

Christopher Farrar: The second point... NPL resolutions are near impossible to predict, they're extremely lumpy. You know, obviously we had a big resolution in Q4. One of those REOs happened to be a very large resolution. That's two and a half, a little over two and a half million dollars. We certainly don't expect to get 107. And you can see historically we haven't, but if you look back over the last. 15 years of doing this. We think it's very fair to expect a two to three point gain. on an average basis. Sometimes it will be higher, sometimes it will be lower, but because there's so much equity in the real estate here.

Eric Hagen: The second point.

Eric Hagen: NPL resolutions are near impossible to predict they're extremely lumpy you.

Eric Hagen: You know obviously, we have a big resolution in Q4, one of those oreos happened to be a very large resolution. So almost two and a half is a little over two and a half million dollars. So.

Eric Hagen: We certainly don't expect to get 107 every every quarter and you can see historically, we haven't but if you look back over the last.

Eric Hagen: 15 years of us.

Eric Hagen: Doing this.

Eric Hagen: We think it's very fair to expect a two to three point gain.

Eric Hagen: On an average basis and.

Eric Hagen: Sometimes it'll be higher sometimes it'll be lower but because theres so much equity in the real estate here.

Eric Hagen: We've just historically always seem positive resolutions there. So we think that's a.

Christopher Farrar: just historically always seen positive resolutions there, so we think that's... durable source of part of our total overall return. Yeah, that's helpful. Okay, great.

Eric Hagen: Durable source of part of our our total overall return.

Speaker Change: Yeah. That's helpful. Okay, Great Alright, I realize the focus of the portfolio as the single family loan, but how about the other assets like the mixed use.

Christopher Farrar: All right, I realize the focus of the portfolio is the single family loan, but how about the other assets like the mixed use, you know, plus the retail is now, you know, 20% of the portfolio. Are those borrowers looking for valuation improvement? This is a shorter term leverage that they're sourcing. And then, you know, relatedly, I mean, is the REO mostly single family?

Speaker Change: Plus the retailers now you know 20% of the portfolio are those borrowers looking for valuation improvement and this is a shorter term leverage that their sourcing and then relatedly I mean is the Oreo, mostly single family and how do we how do we reserve for liquidity in the single family versus the commercial yeah sure absolutely.

Christopher Farrar: And how do we, how do we reserve for liquidity in the single family versus the commercial? Yeah, sure. Absolutely. So on the first part, we did see an uptick in the commercial assets for sure, the portfolios almost 50-50 between one to four rental. A small commercial on the other side. There's a wide array of reasons why borrowers are coming to us. Purchasing Assets that are having a hard time finding financing for their refinance. other assets they own to buy something else. I mean, it's across the board, so I can't give you just sort of a list of all of them.

Speaker Change: So on the first part.

Speaker Change: We did see an uptick in the commercial assets for sure. The portfolio is almost 50 50 between one to four rentals and then what we would call a small commercial on the other side.

Speaker Change: There's a wide array of reasons why borrowers are coming to us there are purchasing assets than maybe they they're having a hard time finding financing for the refinancing.

Speaker Change: Other assets stay on to buy something else there.

<unk> properties and fixing them up and re tenant income there I mean, it's across the board. So I can't give you just sort of one little bucket there but.

Christopher Farrar: Bucket Therapy. These are all smart, sophisticated, small investors that know how to, you know, see opportunity in real estate and Max. and I think.

Speaker Change: You know these are all smart sophisticated small investors that know how to see.

Speaker Change: See opportunity in real estate and maximize it.

And I think you know.

Christopher Farrar: on a go-forward basis when we, in terms of. the REO. We've got definitely more REO from the 1-to-4 side than the small commercial side.

Speaker Change: On a go forward basis, when we when in terms of.

The RVO.

Speaker Change: We've got definitely more Oreo from the one to four side than the <unk>.

Speaker Change: In the small commercial side, there's there's been I would say more delinquency and that's in the one to four space and.

Christopher Farrar: System. At today's event the Sandbox Global Summit is brought back in to life, we'll be noticing More REO there. That REO tends to be very, very liquid. Relatively easy to sell because even though it's that way, but it also could be occupied by an owner or a consumer that wants to live there. Those markets tend to be very deep and very liquid, and they're relatively... Liquid and Cell. as you know, all of the loans that are carried at fair value. representation of the fair value. So there's no loss provisioning on any of those assets.

Murari: Murari over there.

Murari: That Oreo tends to be very very liquid and relatively easy to sell because even though it's a.

Murari: Rented as an investment property.

Murari: It could continue to be used.

Murari: We used that way, but it also could be occupied by an owner or a consumer that wants to live there. So those markets tend to be very deep and very liquid and they're relatively easy to liquidate and sell.

Murari:

Murari: As you know.

Murari: All of the loans that are carried at fair value.

Murari: Already Mark those assets to what we believe would be.

Murari: Some.

Murari: Representation of the fair value. So theres no loss provisioning on any of those assets. So as we continue to morph the balance sheet into a completely.

Christopher Farrar: So as we continue to morph the balance sheet into a completely fair value. Classification I think you're going to continue to see that loan loss reserve shrink and run off, and in a couple of years, we won't even talk about CECL.

Murari: Fair value type of.

Murari: Classification.

Murari: I think youre going to continue to see that loan loss reserve shrink in run off and you know a couple of years.

Speaker Change: We won't even talk about Cecil.

Speaker Change: Yep great.

Eric Hagen: Great stuff, always appreciate the color from you guys. Thank you. You're welcome.

Great stuff always appreciate the color from you guys. Thank you Youre welcome. Thank you.

Eric Hagen: Thank you, Eric. You're welcome. Thank you, Eric.

Speaker Change: Yes.

Speaker Change: Yeah.

Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Christopher Maher for any closing remarks. Please go ahead.

Operator: This concludes the question and answer session.

Christopher Farrar: I would like to turn the conference back over to Christopher Farrar for any closing remarks. Please go ahead. Thank you all for taking the time to listen to our story, and we appreciate your support, and we'll speak to you again. Thank you, everybody. Appreciate your time.

Speaker Change: Thank you all for taking the time to listen to our story and we appreciate your support and we will heart of chicken.

Speaker Change: Right.

Speaker Change: Thank you everybody appreciate your time.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Operator: The conference is now concluded. Thank you for attending today's presentation.

Operator: You may now disconnect. © BF-WATCH TV 2021

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