Item 2.02 Results of Operations and Financial Condition.
On January 21, 2021, we issued a press release and provided preliminary
financial and operational information for our fourth quarter and fiscal year
ended December 31, 2021. We are scheduled to release our fourth quarter 2021
results after the market close on March 10, 2022. Our executive management team
will host a conference call and webcast to review our financial results at 2:00
p.m. Pacific Time / 5:00 p.m. Eastern Time on the same day.
Fourth Quarter Securitizations
In October and December 2021, we completed the securitizations of $204.2 million
and $319.1 million, respectively, of investor real estate loans, measured by
UPB. The December 2021 securitization included a portion of investor real estate
loans that were previously included in our securitizations issued through
Velocity Commercial Capital Loan Trust 2014-1, Velocity Commercial Capital Loan
Trust 2016-2 and Velocity Commercial Capital Loan Trust 2017-1, and in
connection with the December 2021 securitization those three earlier
securitizations were collapsed. The total UPB of loans for the 2014-1, 2016-2
and 2017-1 trusts was approximately $109.1 million, outstanding bond balances
were approximately $90.8 million and carried an average coupon of 7.25%. We
issued approximately $86.0 million in new bonds for the transferred loans and
reduced our coupon to approximately 3.2% in the December 2021 securitization,
resulting in an approximate four percentage point reduction in the coupon rate.
Preliminary Estimates for the Year Ended December 31, 2021
We expect to report total loan originations of approximately $1,328.0 million
for the year ended December 31, 2021, compared to total loan originations of
$435.0 million for the year ended December 31, 2020, and $1,012.7 million for
the year ended December 31, 2019. We expect to report originations for the three
months ended December 31, 2021 of approximately $497.8 million, our largest
volume of originations in a single quarter and a 46% increase over originations
in the prior quarter.
We expect to report total loans held for investment, as measured by unpaid
principal balance, of approximately $2,500 million as of December 31, 2021,
compared to total loans held for investment, as measured by unpaid principal
balance, of $2,271.3 million as of September 30, 2021, and $1,931.9 million as
of December 31, 2020. We expect to report nonperforming loans between 10.3% and
10.8% of total loans, as measured by unpaid principal balance, as of December
31, 2021, compared to 12.70% as of September 30, 2021, and of 17.11% as of
December 31, 2020. Nonperforming loans includes all loans that are 90 or more
days past due, in bankruptcy or in foreclosure.
We expect to report net income between $29.1 million and $29.5 million for the
year ended December 31, 2021, compared to net income of $17.8 million for the
year ended December 31, 2020, and $17.3 million for the year ended December 31,
2019. We expect to report earnings per common share, on a diluted basis, between
$0.85 per share and $0.87 per share for the year ended December 31, 2021. We
expect to report non-GAAP core net income between $33.0 million and
$33.5 million for the year ended December 31, 2021, or between $0.97 and $0.98
per diluted share. Non-GAAP core net income for the year ended December 31, 2021
is calculated as net income for such period with adjustments, applied for the
nine months ended September 30, 2021, of $(1.0) million, or approximately
$(0.03) per diluted share, for recovery of COVID-19-related loan loss provisions
and approximately $3.3 million, or approximately $0.10 per diluted share, for
nonrecurring debt amortization, plus additions for the three months ended
December 31, 2021 of approximately $0.6 million, or approximately $0.02 per
diluted share, in respect of expenses related to the Century acquisition and
approximately $1.1 million, or approximately $0.03 per diluted share, in respect
of the amortization of deal costs related to the three securitizations that were
collapsed as part of creation of the December 2021 securitization described
above.
We expect to report stockholders' equity between $344.3 million and
$344.7 million as of December 31, 2021, compared to stockholders' equity of
$242.2 million as of September 30, 2021, and of $219.6 million as of December
31, 2020. The estimated range of stockholders' equity as of December 31, 2021
includes the impact of the conversion of our outstanding Series A Convertible
Preferred Stock, with a liquidation preference of $90 million as of September
30, 2021 and December 31, 2020, into 11,688,310 shares of common stock on
October 8, 2021. We expect to report stockholders' equity per common share
between $10.83 per share and $10.84 per share as of December 31, 2021.
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The foregoing estimated amount of loans originated and estimated range of net
income, net income per diluted share, non-GAAP core net income and non-GAAP core
net income per diluted share for the year ended December 31, 2021 and estimated
amount of total loans and estimated ranges of nonperforming loans and
stockholders' equity as of December 31, 2021 are preliminary and subject to
completion of financial and operating closing procedures for the year ended
December 31, 2021. We have begun our normal annual closing and review procedures
for the year ended December 31, 2021; however, given the timing of these
estimates, the actual amounts of such measures may differ materially, including
as a result of our year-end closing procedures, review adjustments and other
developments that may arise between now and the time our audited financial
results for the year ended December 31, 2021 are finalized. Therefore, you
should not place undue reliance on these estimates.
These estimates have been prepared by, and are the responsibility of, our
management and have not been reviewed or audited or subject to any other
procedures by our independent registered public accounting firm. Accordingly,
our independent registered public accounting firm does not express an opinion or
any other form of assurance with respect to these estimates.
Non-GAAP Financial Measures
To supplement our financial information presented in accordance with United
States generally accepted accounting principles (GAAP), we consider non-GAAP
core net income and non-GAAP core net income per diluted share, which are
financial measures that are not prepared in accordance with GAAP.
Non-GAAP core net income and non-GAAP core net income per diluted share are
non-GAAP financial measures that represent our net income (loss) and net income
(loss) per diluted share, adjusted to eliminate the effect of certain costs
incurred from activities that are not normal recurring operating expenses, such
as COVID-stressed charges and recoveries of loan loss provision, nonrecurring
debt amortization, the impact of operational measures taken to address the
COVID-19 pandemic and workforce reduction costs, and costs associated with
acquisitions. To calculate non-GAAP core net income per diluted share, we use
the weighted-average number of shares of common stock outstanding that is used
to calculate net income per diluted share under GAAP.
We have included non-GAAP core net income and non-GAAP core net income per
diluted share because they are key measures used by our management to evaluate
our operating performance, generate future operating plans, and make strategic
decisions, including those relating to operating expenses and the allocation of
internal resources. Accordingly, we believe that non-GAAP core net income and
non-GAAP core net income per diluted share provide useful information to
investors and others in understanding and evaluating our operating results in
the same manner as our management and board of directors. In addition, they
provide useful measures for period-to-period comparisons of our business, as
they remove the effect of certain items that we expect to be non-recurring.
These non-GAAP financial measures should not be considered in isolation from, or
as a substitute for, financial information prepared in accordance with GAAP.
These non-GAAP financial measures are not based on any standardized methodology
prescribed by GAAP and are not necessarily comparable to similarly titled
measures presented by other companies.
Item 7.01 Regulation FD Disclosure.
We are providing in this report the following information, which is intended to
illustrate the advantages that management sees in growing our business and
contributing to pre-tax net income through long-term securitizations.
We believe the securitization market offers the prospect of attractive marginal
returns on equity. As a hypothetical illustration, based on assumptions drawn
from our recent experience with interest rates and related costs in the
securitization market, our portfolio and our operations as reported in our
results for the nine months ended September 30, 2021, we believe a hypothetical
securitization of a $100 million portfolio of investor real estate loans could
potentially result in marginal pre-tax net operating income to our business of
as much as $1.2 million in the first year of the securitization, which would
reflect marginal pre-tax return on our equity in such securitization of 24%. The
assumptions in this hypothetical illustration are: securitization debt
securities issued for 95% of the UPB of the relevant portfolio, with us
retaining 5%, which is a common structure for securitizations; net interest
margin of 3.70%, which is consistent with the net interest margin we estimate is
attributable to newly originated loans included in our most recent
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securitization in December 2021 based on scheduled loan interest payments,
without assuming any loan prepayments and related foregone future interest
payments, or any receipt of prepayment penalties from loan borrowers or default
interest; annual loan losses of 0.07% of UPB, a hypothetical illustrative figure
based on the 12.7% of our loans that were nonperforming as of September 30, 2021
multiplied by our annualized charge-off rate as of September 30, 2021 of 0.53%
of average nonperforming loans; annual servicing expense of 0.28% of UPB, a
hypothetical illustrative figure based on our loan servicing fees for the nine
months ended September 30, 2021 as a percentage of an averaged calculation for
our portfolio UPB over such period; annual marginal compensation expense of
1.39%, a hypothetical illustrative figure based on a management estimate of
operational and sales costs associated with our loan originations for the nine
months ended September 30, 2021; and marginal non-compensation expense of 0.77%
of UPB, a hypothetical illustrative figure based on a management estimate of
other cash loan production expenses for our business for the nine months ended
September 30, 2021. The figures included in this hypothetical illustration are
presented in order to permit a concrete illustration of the principal factors
that tend to bear on the marginal contribution to equity return of a new
securitization transaction, as considered by management in assessing such
opportunities, and such figures are not intended as a prediction or a forecast
of performance for any existing or future securitization, or as a reflection of
market conditions that would obtain at any particular time for a securitization
or its associated initial or ongoing costs. The interest margin for any actual
securitization depends on prevailing interest rates in the mortgage and
securitization markets, which fluctuate constantly and often dramatically. The
figures included in this hypothetical illustration are based in part on certain
categories of costs for our business in the aggregate for a specified recent
period, involve the exercise of judgment in their identification and estimation,
and fluctuate over time; and the loan portfolios in individual securitizations
can and do have loan losses, servicing costs and marginal compensation and other
expenses that vary from our business as a whole. Moreover, the return on equity
experienced by holders of our common stock is based on the performance of our
business in the aggregate, which includes various types of costs not addressed
in this hypothetical illustration. This hypothetical is offered to illustrate,
in a general way, management's confidence in the strategic advantage of growing
our business through long-term securitizations. We could have reasonably
illustrated this point using different numerical assumptions.
* * *
The information furnished pursuant to this Current Report on Form 8-K under Item
2.02, and 7.01, including any accompanying exhibits, shall not be deemed "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or otherwise subject to the liabilities under that Section
and shall not be deemed to be incorporated by reference into any of our filings
under the Securities Act of 1933, as amended (the "Securities Act") or the
Exchange Act.
Forward-Looking Statements
This Current Report on Form 8-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 as contained in
Section 27A of the Securities Act and Section 21E of the Exchange Act, which
reflect management's current views and estimates regarding the prospects of the
industry and our prospects, plans, business, results of operations, financial
position, future financial performance and business strategy. These
forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "should," "expect," "intend," "will,"
"would," "estimate," "anticipate," "believe," "predict," "prospect,"
"potential," "continue" or "illustrative" or the negatives of these terms or
variations of them or similar terminology. Forward-looking statements include
our expectations regarding our financial and operational information as of and
for the fiscal year ended December 31, 2021 after the completion of our closing
procedures. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot provide any assurance that
these expectations will prove to be correct. The following factors are among
those that may cause actual results to differ materially from the forward
looking statements: the continued impact of the coronavirus, COVID-19, or an
outbreak of another highly infectious or contagious disease; conditions in the
real estate markets, the financial markets and the economy generally; failure of
a third-party servicer or the failure of our own internal servicing system to
effectively service our portfolio of mortgage loans; the high degree of risk
involved in loans to small businesses, self-employed borrowers, properties in
transition, and certain portions of our investment real estate portfolio;
additional or increased risks if we change our business model or create new or
modified real
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estate lending products; possibility of receiving inaccurate and/or incomplete
information from potential borrowers, guarantors and loan sellers; deficiencies
in appraisal quality in the mortgage loan origination process; competition in
the market for loan origination and acquisition opportunities; risks associated
with our underwriting guidelines and our ability to change our underwriting
guidelines; loss of our key personnel or our inability to hire and retain
qualified account executives; any inability to manage future growth effectively
or failure to develop, enhance and implement strategies to adapt to changing
conditions in the real estate and capital markets; risks associated with our
ability to successfully identify, acquire, and integrate companies and assets;
operational risks, including the risk of cyberattacks, or disruption in the
availability and/or functionality of our technology infrastructure and systems;
any inability of our borrowers to generate net income from operating the
property that secures our loans; costs or delays involved in the completion of a
foreclosure or liquidation of the underlying property; lender liability claims,
requirements that we repurchase mortgage loans or indemnify investors, or
allegations of violations of predatory lending laws; economic downturns or
natural disasters in geographies where our assets are concentrated;
environmental liabilities with respect to properties to which we take title;
inadequate insurance on collateral underlying mortgage loans and real estate
securities; use of incorrect, misleading or incomplete information in our
analytical models and data; failure to realize a gain upon disposal of portfolio
assets; any inability to successfully complete additional securitization
transactions on attractive terms or at all; the termination of one or more of
our warehouse facilities; interest rate fluctuations or mismatches between our
loans and our borrowings; legal or regulatory developments related to
mortgage-related assets, securitizations or state licensing and operational
requirements; our ability to maintain our exclusion under the Investment Company
Act of 1940, as amended; fiscal policies or inaction at the U.S. federal
government level, which may lead to federal government shutdowns or negative
impacts on the U.S. economy; cyber-attacks and our ability to comply with laws,
regulations and market standards regarding the privacy, use, and security of
customer information; the influence of certain of our large stockholders over
us; adverse legislative or regulatory changes; and other factors described under
"Risk Factors" in our Quarterly Report on Form 10-Q filed with the SEC on
May 14, 2020, as well as other cautionary statements we make in our current,
periodic and other filings with the SEC. Our filings are accessible on the SEC's
website at www.sec.gov. You should not rely upon forward-looking statements as
predictions of future events. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
that the future results, levels of activity, performance and events and
circumstances reflected in the forward-looking statements will be achieved or
occur. Except as required by applicable law, we undertake no obligation to
update publicly any forward-looking statements for any reason after the date of
this Current Report on Form 8-K to conform these statements to actual results or
to changes in our expectations.
Item 9.01 Financial Statements and Exhibits.
Exhibit
Number Description
99 Press Release dated January 21, 2021
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
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