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Successful securitizer seeks public equity market debut

A real estate financing company can only hope that its proposed initial public offering, expected to price on or about Jan. 16, elicits the same sort of Wall Street reception as its mortgage-backed securitizations.

"We've got a very good name out there, very broadly participated and supported, many times oversubscribed on all of our transactions," Velocity Financial LLC CEO Christopher Farrar said during an online road show about an internal program that has produced two securitizations in the past nine years, most recently the $162.5 million Velocity Commercial Capital Loan Trust 2019-3 in October 2019.

The company originates and manages first-lien mortgages on income-producing one- to four-unit residential investor and small commercial properties. It maintained a $1.93 billion portfolio as of Sept. 30, 2019, which consisted of more than 6,000 loans with an average balance of approximately $319,000 and weighted average loan-to-value ratio of 65.4%. The portfolio is generally funded on a short-term basis through warehouse repurchase facilities wherein the company aggregates loans for future securitizations once its aggregate originations hit somewhere in a range from $175 million to $400 million.

"We're not a gain-on-sale shop," CFO Mark Szczepaniak said during the road show.

Velocity holds small shares of the large markets for its two core products, providing what executives characterized as a substantial opportunity for growth.

Farrar described Velocity's Investor 1-4 program, which accounts for about 51.5% of the loans by unpaid principal balance in the company's portfolio, as targeting a long-term, durable market as evidenced by a home "rentership" rate that has averaged about 35% since 1965.

"This is not a ... recent trade," he said.

While there has been a lot of publicity around ownership in that asset class by institutional investors such as Invitation Homes Inc., Farrar said, the "small mom-and-pop-type investors" Velocity targets own about 93% of the single-family rental homes in the U.S. Velocity's research shows that about 50% of the domestic single-family rentals had been acquired with no mortgage, he added, suggesting a need for the sort of liquidity the company's financing program provides.

Velocity observed that the market for small-balance loans of $5 million or less secured by multifamily, mixed-use and other commercial properties also benefits from strong borrower demand. Boxwood Means LLC research cited by the company shows that commercial banks such as JPMorgan Chase & Co. and Wells Fargo & Co. continue to rank among the leaders in a fragmented market, but they are viewed as "increasingly vulnerable to the lending efforts of a wide variety of alternative or nonbank entities, including specialty finance companies, private lenders, debt funds and online marketplace lenders."

Velocity's securitizations include a mix of its two core products. A Kroll Bond Rating Agency presale report for the company's most recent deal stated that the Investor 1-4 loans represented 45.3% of the underlying collateral, with commercial mixed-use, retail, multifamily, industrial, office and automotive services properties accounting for the balance of the pool.

The IPO will provide Velocity with access to growth capital "when we need it, when an opportunity comes along," Farrar said. It may also open up some financing alternatives for the company, he added.

"We're doing this strategically and intentionally to continue to grow and to build the business," he said. Velocity includes among its potential growth levers opportunistic acquisitions of loan portfolios, the development of new products in the secured real estate financing realm, the further penetration of its existing network of mortgage brokers and the expansion of that network.

The company is offering 7,250,000 common shares in a proposed pricing range of between $14 and $16 per share through book runners Wells Fargo Securities LLC, Citigroup Global Markets Inc. and JMP Securities LLC along with co-manager Raymond James & Associates Inc. There is a 15% overallotment option.

Velocity intends to allocate approximately 75% of the deal's gross proceeds to partially repay outstanding borrowings under a five-year, $153 million corporate debt agreement with Owl Rock Capital Corp. The underlying term loans bear interest at 750 basis points over the one-month London interbank offering rate. The balance of the IPO proceeds would be allocated to general corporate purposes, including the origination or acquisition of investor real estate loans.

Owl Rock Capital was one of three companies under S&P Global Market Intelligence coverage as specialty lenders and/or investment companies that completed IPOs in 2019. A business development company, it joined closed-end management investment company Eagle Point Income Company Inc. and consumer finance company Oportun Financial Corp. in going public.