We came across a bullish thesis on Velocity Financial, Inc. (VEL) on Substack by Shareholdersunite. In this article, we will summarize the bulls’ thesis on VEL. Velocity Financial, Inc. (VEL)’s share was trading at $19.78 as of March 10th. VEL’s trailing P/E was 10.36 according to Yahoo Finance.
A portfolio of mortgage-backed securities with a magnifying glass, emphasizing the detail of credit risk management.
Velocity Financial (VEL) is a vertically integrated real estate finance company specializing in originating, securitizing, and managing loans backed by 1-4 unit residential rental and small commercial properties. Unlike traditional mortgage lenders, Velocity focuses on serving real estate investors who prioritize certainty of execution over interest rate sensitivity. This allows the company to maintain strong demand even in fluctuating interest rate environments. Operating through a network of independent mortgage brokers and direct borrower relationships, Velocity has built a scalable loan origination platform while ensuring disciplined underwriting standards. Its loan portfolio now exceeds $5 billion in unpaid principal balance, and given its focus on low loan-to-value ratios and consistent credit quality, the company is positioned for continued growth.
Velocity’s revenue model is highly diversified, encompassing net interest income, loan origination fees, gains on loan sales, loan servicing income, and fair value adjustments. A key advantage of its business model is its reliance on securitizations, specifically Real Estate Mortgage Investment Conduits (REMICs), which provide long-term financing stability. By pooling loans and selling bonds to institutional investors, Velocity efficiently recycles capital to fuel new originations. The company also utilizes warehouse lines for short-term funding, but since most of its loans and securitizations are fixed rate, its exposure to interest rate fluctuations remains minimal. This asset-liability matching strategy allows Velocity to operate with a stable cost of capital, insulating it from the volatility that often plagues traditional mortgage lenders.
A crucial strength of Velocity’s business model is its ability to maintain a strong net interest margin. By originating high-yielding loans while keeping funding costs low, the company consistently generates attractive profitability. Additionally, Velocity has a well-established framework for managing non-performing loans (NPLs), an area where it has outperformed many of its peers. Rather than selling delinquent loans to distressed debt buyers at a discount, Velocity works directly with borrowers to resolve issues, ensuring maximum recovery value. The company has demonstrated a strong track record of turning distressed assets into profitable outcomes, which further strengthens its earnings stability. With 90% of non-performing cases in Q4/24 resolved directly with borrowers, Velocity continues to prove its expertise in risk mitigation and asset management.
Management is executing multiple initiatives to drive further growth, including expanding broker relationships, increasing loan volume from existing partners, and leveraging proprietary technology and data analytics to streamline underwriting. The company’s acquisition of Century Health & Housing Capital has expanded its loan offerings into new segments, such as HUD multi-family and healthcare loans, creating additional growth avenues. Velocity’s strong reputation in real estate lending, built over nearly two decades, provides a competitive edge in sourcing high-quality loans. Its ability to acquire loan portfolios that fit its underwriting criteria further enhances its ability to grow profitably, even during periods of market dislocation.
Financially, Velocity is well-positioned with a diverse set of funding sources, including securitizations, warehouse facilities, and corporate debt. The firm’s ability to retain portions of its securitized bonds provides additional liquidity flexibility, allowing it to reinvest in high-yielding assets when opportunities arise. The in-house asset management and special servicing teams play a critical role in maintaining loan performance, reducing credit losses, and supporting long-term profitability. With a strong operational foundation, Velocity remains resilient to economic cycles and continues to generate attractive risk-adjusted returns for shareholders.
Despite these strengths, Velocity remains undervalued, presenting a compelling investment opportunity. The company’s adjusted book value per share stood at $18.73 in Q4/24, significantly above its GAAP book value of $15.70. At a $20 share price, its market cap is approximately $692M, and shares trade at a single-digit price-to-earnings (P/E) ratio based on FY25 EPS expectations of $2.22. With a clean 10%+ free cash flow yield, a steady income stream, and the ability to capture market share as banks retreat from lending in niche real estate segments, the stock offers an attractive risk-reward profile. Given its disciplined approach to underwriting, strong capital position, and continued growth in loan origination, Velocity Financial represents a differentiated real estate finance investment with the potential for significant upside.
Velocity Financial, Inc. (VEL) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 8 hedge fund portfolios held VEL at the end of the fourth quarter which was 10 in the previous quarter. While we acknowledge the risk and potential of VEL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than VEL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.