Velocity Commercial Capital plans to raise $175 million in an initial public offering of its stock, a sign that it hopes investors still see money to be made in commercial real estate lending.
The Westlake Village-based firm, which originates and acquires small-balance commercial real estate mortgages, filed documents with the U.S. Securities and Exchange Commission in late August, saying it plans to list its common stock on the New York Stock Exchange.
Velocity plans to use the proceeds from the IPO to originate and buy commercial real estate loans under $3 million, a mortgage market it says is underserved.
Regulations surrounding IPOs mean Velocity is in a quiet period and can’t comment until after the stock offering closes. In SEC documents, it said reluctance by banks and other traditional lenders to make commercial real estate loans presents new opportunities.
“We are one of the few remaining active market participants that focus solely on the [small-balance commercial real estate] lending space in the United States, as many of our competitors did not survive the creditor crisis,” Velocity wrote in its SEC filings. “Our extensive network of mortgage brokers, community banks and other financial institutions provides us with broad insights into the market as well as multiple origination and acquisition channels.”
As banks continue to clear commercial real estate loans off their books, either in an effort to shore up capital, generate liquidity or at the behest of regulators, Velocity thinks it will be able to fill the void.
“We expect this trend to continue, if not accelerate, as many smaller regional and community banks continue to struggle with their credit exposures and lack of available capital,” Velocity said.
It is also interested in scooping up failed bank assets seized by the Federal Deposit Insurance Corp. “FDIC dispositions should create additional opportunities to acquire loans at a discount or with government provided leverage,” the company said.
The IPO market has been up and down all year, starting off strong and hitting a slow patch mid-year, said Tom Hopkins, an attorney in the Santa Barbara office of Sheppard Mullin Richter & Hampton. He is not involved with the Velocity IPO but has worked with many firms going public.
A public offering of a real estate investment trust, or REIT, is a “very different animal” than the more common tech IPOs, Hopkins said. “But there must be a sense that there’s a market for these type of securities. There’s still a desire for new issues,” he said.
Velocity, a 20-employee firm, was founded in 2004. Its management team is a group of industry veterans with deep experience in banking, finance and real estate, but no public-company leadership experience.
Co-founder, CEO and President Christopher Farrar, 44, formed mortgage banking firm Worth Funding, which he grew from a $2 million to a $150 million company before selling it. Farrar also had stints at Weyerhaeuser Mortgage Co. and Namco Capital.
The vast majority of loans in Velocity’s portfolio are 30-year mortgages. Loans are personally guaranteed by borrowers, which means Velocity underwrites both the person and property.
More than half of the loans in its portfolio were made to owner-users. “This added commitment to the property has resulted in generally lower delinquency for the owner-user loans in our portfolio,” the company said in SEC filings.
But Velocity hasn’t seen a profitable year since 2006. It earned $1.1 million that year, followed by a $3.6 million loss in 2007 and $2.4 million losses in both 2008 and 2009.
Almost one third of its loans are in California, a state that has been particularly hard hit by the commercial real estate crash. Velocity says it steers clear of construction loans, undeveloped properties and special-purpose projects such as gas stations and assisted living facilities.
Velocity had total assets of $135.2 million at June 30, including $110.4 million in loans held for investment, $9.9 million in real estate owned and $8.9 million in cash.
New York private equity firm Snow Phipps paid $21 million for 91 percent of the company in 2007.
Hopkins said that in many cases, private equity groups who invested in companies before the economy tanked are now putting pressure on the firms to provide them with an exit, such as a public stock offering. “This could be a driver here as well,” Hopkins said.
Velocity shares will trade on the New York Stock Exchange under the symbol VCC. Credit Suisse, Barclays Capital and UBS Investment Bank are the underwriters for the offering. The company hasn’t said yet what the shares will price or when they’ll hit the market, but Hopkins said the offering is probably a few months away.