A small-balance commercial mortgage lender active nationwide may be turning to the public capital markets to help it grow. If the marketplace is receptive to its proposed initial public offering, privately held Westlake Village, Cal.-based direct portfolio lender Velocity Commercial Capital would become publicly traded Velocity Capital Management Inc.
Velocity's registration statement didn't specify the dollar amount it expects to raise, but the registration fees it paid translate to $175 million. Given that Velocity pursues loans of $3 million and under - its average size is less than $400,000 - the fresh capital would help fund a lot of transactions.
It's uncertain what kind of reception the proposed IPO will get on Wall Street. But if successful, it would make Velocity pretty much the only publicly traded mortgage REIT specializing in small-balance commercial real estate lending.
If management opts not to go through with the public offering, it still has access to a warehouse credit line - the capacity of which was at $17.4 million at mid-year, according to the registration statement.
While president/CEO Chris Farrar and some close associates founded Velocity in 2004, it is now almost entirely (96.9 percent) owned by Snow Phipps Group, a New York investment firm, which has invested some $75 million into the company since 2007. Board chairperson Joy Schaefer also invested in the company.
Velocity's brain trust sees solid opportunities ahead to build the portfolio as the economy slowly emerges from recession. The small-balance lending arena has traditionally been quite fragmented, even more so after losing several big competitors during the financial melt-down. And, should this arena rebound to anything approaching the $140 billion in annual originations that research firm Boxwood Means, Inc. recorded during the market's apex mid-decade, Velocity could be a prime beneficiary.
The firm originates mostly long-term, fully amortizing loans through a nationwide network of broker relationships - and also plans to increase its secondary market loan purchasing activities going forward.
Well over 90 percent of Velocity's loans are structured to amortize fully over 30-year terms, with nearly all subject to full borrower recourse as well. And well over half of its loans are associated with collateral held by owner-users. Loan-to-value ratios at origination are 60 to 70 percent.
Management also cites the team's expertise in understanding "unique" small properties - and in special servicing loans if property owners run into trouble. Velocity, which maintains and East Coast office in Stamford, Conn., contracts out primary servicing through Litton Loan Servicing and KeyBank.
The team has endeavored to blend residential and commercial underwriting and lending practices in efficient fashion. Hence the focus is on the property and market as well as the borrower; Velocity's average at-origination borrower credit score is 711.
The registration statement further describes the strategy: "Our underwriting process evaluates cash flows from the property, the value of the underlying real estate, market conditions, comparable sales and recent market trends. In addition, we evaluate the borrower and/or guarantor in terms of credit history, assets and net worth, business history, debt burden and operating experience to determine credit worthiness."
Nevertheless under a very challenging business environment, Velocity has recorded losses for a couple of years.
When its loans have gone sour, Velocity has managed to keep the average loss severity at a respectable rate below 13 percent (based on the $1.9 million in principal losses recorded via 34 foreclosures). But delinquencies have mounted, with only 73.1 percent of the portfolio characterized as "current" at mid-year. About 11 percent were 90 or more days past due, up from 7.3 percent at the end of the first quarter.
Velocity actually shifted its general strategy significantly after the initial Snow Phipps investment, opting to hold loans it originates in its investment portfolio (and buy more) rather than looking to sell them in the secondary market.
Indeed Velocity management has been happy with the risk-adjusted returns from its attractively priced acquisitions of performing loans over the past couple years. Last year the company bought loans totaling $5.1 million in principal balances for a total of $3.4 million. It had invested 15 times that amount in loan acquisitions the previous year - perhaps hinting at a motivation for the IPO.
Going forward the Velocity team sees attractive opportunities to purchase and special-service portfolios of loans (distressed and otherwise) from banks, and regulators in some cases, that are looking to dispose of these assets.
The firm has reviewed nearly $780 million (outstanding balance) in loans for potential acquisition over the past two years, less than half of them formally marketed. It bid on loans with balances of nearly $400 million, acquiring $69 million worth.
On the originations side, the company anticipates earning "compelling risk-adjusted yields" even while lending "at conservative LTV ratios."