Angel Oak Mortgage REIT Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Angel Oak Mortgage Third Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Randy Christmann.

Operator

Please go ahead.

Speaker 1

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's 3rd quarter 2023 earnings conference call. This morning, we filed a press release detailing these results, which is available in the Investors section on our website at www angeloakreit.com. As a reminder, remarks made on today's conference call may include forward looking statements. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today.

Speaker 1

We do not undertake any obligation to update our forward looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, we will be discussing certain non GAAP financial measures. More information about these non GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our earnings release and SEC filings. This morning's conference call is hosted by Angel Oak Mortgage REIT's Chief Executive Officer, Srini Prabhu Chief Financial Officer, Brandon Filson and Angel Oak Capital's Co CIO, Naved Sinha.

Speaker 1

Management will first lead off the call by making some prepared comments, after which we will open up the call to your questions. Additionally, we recommend reviewing our earnings supplement posted on our website atwww.angeloakreap.com. Now, I will turn the call over to Srini.

Speaker 2

Thank you, Randy, and thank you, everyone, for joining us today. Angel Oak started off the second half of the year very strong With our results demonstrating the positive growth and the momentum we have built throughout the first half of the year. Late last year and at the beginning of this year, we set out to reposition our portfolio to reduce risk and increase liquidity. We accomplished that and our emphasis then shifted to growth. You can see in this quarter's results that we are on our way to accomplishing this goal as well.

Speaker 2

Our focus is on optimizing the earnings levers that we can control, such as growing net interest margin and reducing operating expenses, while managing risk and maintaining liquidity. To that end, during the Q3, we continue to pursue selective loan purchases at attractive rates and made further progress on reducing interest and operating expenses as we continue to grow the overall Earnings Power of our portfolio. In the 3rd quarter, we drove a step change improvement in net interest margin Q2 our strategic securitization activity and purchases of newly originated current coupon loans. As we stated in our Q2 earnings call, the reduction in interest expense driven by The AOMT 2023-four seconduritization was demonstrated in our 3rd quarter results. We have remained nimble in our securitization activity, completing 2 co mingle deals alongside other Angel Oak entities in addition to a standalone AOMRD.

Speaker 2

The Angel Oak ecosystem affords us the ability to pursue securitization structures that provide the best strategic fit for the REIT. Current coupon loans purchased during the quarter buoyed net interest income Despite lower unsecuritized loan balances, the weighted average coupon of our whole loan portfolio grew 99 basis points and the 3rd quarter and including purchases and commitments to purchase since quarter end, currently sits at approximately 6.37%, a further increase of 54 basis points since quarter end. For context, these average coupons compared to 4.6 3% as of the end of Q1 2023. We are proud of the strategic progress we have made and we feel we can maintain the momentum and drive further NIM growth in the following quarters as we redeploy capital into assets with significantly high News. This effort will be supported by our ability to evaluate opportunities within our desired risk and quarter.

Speaker 2

As with the recent quarters, we have remained focused on managing our expenses to maximize the operating effectiveness of AUMR. Throughout the first half of the year, we made significant progress reducing our operating expenses. In the Q3, we captured additional savings, reducing operating expenses excluding securitization by 12.5% versus the 2nd quarter. We have also made efforts to optimize our financing In order to decrease our weighted average rate on our funding cost, while there are signs that the Fed is near the end of the interest rate hike, Mortgage applications and originations continue to be muted with rates remaining elevated relative to recent years. Our non QM loan origination volumes have been a bit more resilient than the GSE loans, but given general market uncertainty, We'll continue to manage our whole loan position and expect that our nominal value in whole loans will not exceed more than 1 and a half to two times the average nominal size of our securitization transaction expectations.

Speaker 2

We are proud to have reduced our overall warehouse debt by 69% this year and 82% since the high point of June 2022. We are committed to maintaining liquidity while redeploying capital into high quality, high yield assets. We are proud of our earnings growth. We have achieved this quarter. And though we are still dealing with elevated levels of market uncertainty, We believe that we have direct comparative advantage in our ability to assess and select where to allocate risk.

Speaker 2

We feel we are in great position to continue to grow earnings while keeping our focus on adequate liquidity and a low expense profile, establishing a very Earnings Engine Based on Stable Resilient Portfolio. I will now turn the call over to Brandon. Bench.

Speaker 3

Thank you, Srini. In the Q3, we were able to showcase our ability to grow the earnings power of our portfolio As seen through the strong NIM and net income results, we feel there is more room for growth and we are happy with how our portfolio is position from a risk and liquidity standpoint, especially given the current market environment. For the Q3 of 2023, we had GAAP net income of 8 point $3,000,000 or $0.33 per diluted common share. Distributable earnings were negative $8,600,000 or a loss of $0.35 per share. The key difference between net income and distributable earnings is that distributable earnings do not include the offsetting unrealized gain on the AOMT 2023-five seconduritization.

Speaker 3

Excluding the accounting impact of the 2023-five seconduritization distributable earnings would have been $4,300,000 Interest income for the quarter was $23,900,000 and net interest margin was $7,400,000 reflecting a $1,000,000 expansion versus the Q2 of 2023. As Srini mentioned, net interest margin should continue to expand in the coming quarters as we grow our current coupon loan book with consistent purchases and future securitizations reduce our warehouse debt. Total operating expenses were $4,400,000 or $3,500,000 excluding securitization and Non Cash Stock Competition. This represents a savings of $3,500,000 versus Q3 2022 $800,000 versus the prior quarter. Year to date, we have achieved operating expense excluding securitization costs and stock compensation savings of $8,600,000 versus the 1st 9 months of 2022.

Speaker 3

The largest factor Driving our operating expense reduction efforts in the 3rd quarter was lower D and O insurance premiums and other vendor and resource management. Turning to the balance sheet. As of September 30, 2023, we had $41,900,000 in cash or about 18% of our total equity base. Our strong cash position in the trailing 9 months showcases our focus on maintaining healthy liquidity levels and expanding cash flow from increasing yields, lower overall funding costs and reduced expenses. This additional liquidity provides us with a dry powder for sustained loan purchases that will grow net interest income, improve cash flows and support securitization execution.

Speaker 3

Additionally, we have over $120,000,000 in unlevered assets on the balance sheet which we can prudently use to increase leverage to drive additional net interest margin. Recourse debt to equity ratio as of September 30 was 1.7 times. As of today's date, our recourse debt to equity ratio is 1x, which reflects the maturity of repurchase obligations from short term retest trades that matured in early October. This is a decrease of 0.2 times versus the comparable 1.2 times recourse debt to equity ratio as of last quarter's earnings Call and is down from 2.9 times at the end of 2022. As we purchase additional loans, we are expecting this leverage to begin to increase but to remain below 2.5 times in future periods.

Speaker 3

We have $307,000,000 of UPB Residential Whole Loans that have a fair value of $284,400,000 financed with $197,800,000 of warehouse debt, $1,200,000,000 of residential mortgage loans and securitization trust and $75,300,000 of RMBS from retained AOP securities from off balance sheet securitization. 90 plus day delinquencies have remained low at 1.9% across these portfolios with a weighted average LTV of 69.5%. These rates are slightly more favorable than in Q2 and To date, we have not seen any material change in credit performance of our loan or underlying securities portfolio. We finished the quarter with undrawn warehouse financing capacity of approximately $661,000,000 In August, we participated in the 2023-five seconduritization alongside other Angel Oak entities In total, AOMP 2023-five consists of 530 loans with a scheduled unpaid principal balance $260,600,000 The securitization has an average original credit score of 735, original average loan to value ratio of 71.9 percent and a non zero debt to income ratio of 32.9%. GAAP book value per share was nearly flat at $9.29 as of September 30, 2023 compared to $9.34 as of June 30, 2023.

Speaker 3

New purchases supported the valuation of our whole loan portfolio and decreases in the valuation of our securitized loan portfolio Economic book value, which fair values all the company's non recourse securitization obligations, was $13.20 per share as of September 30, 2023, compared to $13.16 per share as of June 30, 2023, an increase of $0.04 As with last quarter, we expect valuation changes resulting from interest rate and spread movement that caused GAAP and economic book Value to fluctuate supplemented by growth in net interest margin. The weighted average coupon of our whole loan portfolio increased 99 basis points to 5.83% as of the end of the third quarter. This is also up from a low point in our portfolio of 4 point 3% as of the end of the Q1 this year. Including loan purchases and commitments since the end of the third quarter, our whole loan portfolio weighted average coupon is Approximately 6.37 percent, representing an increase of over 150 basis points. Our loan purchases this year carry a weighted average coupon of 8.31%, weighted average LTV of 70.2% and a weighted average FICO score of 752.

Speaker 3

We expect these increases to continue as additional loan purchases occur over the coming quarters. Finally, the company has declared a $0.32 per share common dividend payable on November 30, 2023 to shareholders of record as of November 22, 2023. This implies an annualized dividend of $1.28 per share or a yield of 14% to 15% as of the closing price on November 6, 2023. For additional color on our financial results, please review the earnings supplement available on our Web I will now turn it back to Srini for closing remarks.

Speaker 2

Thank you, Brandon. Before turning the call over to the operator for Q and A, I would like to conclude with some brief remarks. We are pleased with our financial performance for the Q3 as this is the 1st quarter that truly demonstrated the earnings impact of strategic actions that we have taken this past year. We have a strong balance sheet liquidity position and we are confident in what the future holds for our portfolio and its earnings generating ability. Additionally, the credit performance of our assets remains strong.

Speaker 2

Our focus on creating a resilient portfolio that generates growing and reliable earnings is evident. We are proud of what we have achieved despite headwinds from muted mortgage activity and rate volatility, and we expect to continue to grow earnings while maintaining our liquidity position and risk profile.

Operator

We will now begin the question and answer session. Our first question comes from Don Fandetti with Wells Fargo. Please go ahead.

Speaker 4

Yes. It seems like the core business is kind of moving back to modest growth phase. You've improved the funding profile significantly. I guess on credit, it's continued to be very good. Do you have any thoughts on or concerns around The credit outlook based on what you're seeing in the economy and with mortgage rates so high.

Speaker 5

Yes. Hi, this is Naved. So on the credit side, as we mentioned, the credit performance looks very, very good and we haven't Any evidence of any deterioration there. Obviously, anecdotally, there are certain sectors that we have heard about where there are increases in delinquency and losses of etcetera. But it is important to realize that the portfolio that we run is close to 7 40 average credit score and low 70s loan to value.

Speaker 5

That's not a credit profile that is the first to get impacted Even in a slowdown or recessionary environment like if we do go into a slowdown or a recession, You're going to start seeing the impacts more on the subprime ish part of the portfolio mix, which we have which we really do not do much of. So our overall portfolio delinquencies are expected to be muted even under a more stressful environment. But given that what we have seen so far, We have had a very, very good credit backdrop. Home prices have been very resilient, and the economy has held up generally, really well. So our portfolio credit performance has been pretty much spot on.

Speaker 4

Got it. And in terms of future securitizations, Do you plan on participating with other Angel Oak entities or more standalone or does it just depend on kind of how the market develops?

Speaker 3

Yes. Hey, Don. We use commingled versus standalone opportunistically in our thought process. Right now, I'd expect us to come out with about one more smaller commingle deal at some point in the future. And then after that, we'll probably be back to a standalone deal only once we get that deal out.

Speaker 4

Got it. Thanks.

Operator

Our next question comes from Chris Kotowski with Oppenheimer. Please go ahead.

Speaker 6

Yes. Good morning and thank you. Brandon, you mentioned another distributable earnings calculation of I think $4,300,000 you said. Can you take us through a little bit in detail exactly what that was and how it was calculated and how it Differs from the distributable earnings that you've always reported.

Speaker 3

Yes. No, what I was trying to do is I was just trying to add clarity of The bridge between the GAAP net income and distributable earnings. And as you know, distributable earnings eliminates unrealized gains and losses, but keeps in any realized gain or loss. So this quarter when we did 2023-five seconduritization, There was about a $13,000,000 recovery of a previously recognized unrealized loss that's included in GAAP net income, But it's excluded from distributable earnings. And with that, that's the big driver in the delta GAAP earnings and distributable earnings is that one particular thing and that's just a one off transactional based thing.

Speaker 3

So I wanted highlight that because if you look at net interest margin less cash expenses the quarter, that widened out About $1,800,000 and then what we have in the bank so far from new loan As we mentioned, taking our coupon up to 6 point almost 6.4 percent is around another $1,000,000 kind of in the bank as of today or this coming quarter.

Speaker 6

When you say another $1,000,000 in the bank, you mean like if you're thinking about your all in net interest income of like $7,400,000 that The base level going into the 4th quarter is like 8.4?

Speaker 3

That's right. Okay. All right.

Speaker 6

And presumably it improves a bit if there's another securitization before year end?

Speaker 3

Well, it could improve with the securitization And really additional loan purchases for the last 2 months of the year. Okay.

Speaker 6

All righty. That's it for me. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Brandon Filson for Any closing remarks?

Speaker 3

Yes. Thank you, everyone, for your time and interest in Angel Oak Mortgage REIT. We look forward to connecting with you again next quarter.

Speaker 1

Conference Call.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Angel Oak Mortgage REIT Q3 2023
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