Lowe's Companies Q2 2024 Earnings Call Transcript

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August 6, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to the Angel Oak Mortgage Second Quarter 20 24 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to KC Kelleher, Head of Corporate Finance and Investor Relations. Please go ahead.

Speaker 1

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's Q2 2024 Earnings Conference Call. This morning, we filed our press release detailing these results, which is available in the Investors section on our website at 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 Angelo Mortgage REIT's Chief Executive Officer, Srini Prabhu Chief Financial Officer, Brandon Filson and Angelo Capital's Chief Investment Officer, Namisenha.

Speaker 1

Management will make some prepared comments, after which we will open the call to your questions. Additionally, we recommend reviewing our earnings supplement posted on our website angeloakreit.com. Now, I will turn the call over to Srini.

Speaker 2

Thank you, Casey, and thank you to everyone on the call for joining us today. AOMR had a very productive first half of the year, continuing an upward trajectory, which began in Q3 2023, and we expect to continue to capitalize on going forward. For the 4th consecutive quarter, we increased net interest income by purchasing current coupon loans, while managing and reducing borrowing costs. We led a securitization during the quarter, AOMT 2024-four, a $300,000,000 deal. We also had a modest participation in a deal alongside other Angel Oak strategies.

Speaker 2

These securitizations reduced funding costs and freed up capital to rotate into higher yielding assets. We are currently projecting securitization yields in the mid to high teens, which is more aligned to what we observed historically. Additionally, we filed a $750,000,000 shelf to be used for our future capital raises over the next few years. We then immediately use that shelf to issue $50,000,000 in senior unsecured notes that will be used to fund the next several quarters of growth. Now highlighting some of our results.

Speaker 2

The Q2 marked our 4th consecutive quarter of net interest income growth with sizable improvements on a quarterly, year to date and year over year basis. This is a result of metharical new loan acquisition, diligent management of capital and financing costs and efficient securitizations. Additionally, targeted efforts to judiciously manage our operating cost structure alongside prudent portfolio risk management have led to sustained low operating costs. These efforts are enabled and supported by the Angel Oak ecosystem with its market leading origination and securitization platforms positions the company for continued success. Looking ahead to second half of twenty twenty four, while origination dynamics continue to reflect a variable and high interest rate environment, we remain optimistic and believe we are well prepared to capitalize on additional accretive loan purchases.

Speaker 2

Our GAAP book value decreased 3% in the 2nd quarter, which is essentially the impact of our quarterly dividend payment. Economic book value decreased 4.5% versus the Q1, a decrease of 2.2% net of our dividend, which demonstrates the conversion between the GAAP and economic book value that we expect to see over time as our early securitizations pay down at par value. When assessing our credit performance in the quarter, the weighted average 90 day delinquency rate across our portfolio of whole loans, securitized loans and RMBS was 1.7% versus 1.8% at the end of the Q1 of this year. Delinquency activity for the quarter remained muted, indicating that our partnership with Angelou's Affiliated Mortgage Originator is a useful tool in management of our credit quality and allows us to maintain a unique advantage relative to other competitors in the marketplace. We continue to display excellent trend performance and are determined to maintain the health of our portfolio in a disciplined and thoughtful manner.

Speaker 2

These accomplishments propel the positive momentum we carried into our $50,000,000 senior unsecured notes issuance in July, which we expect to catalyze the next phase for growth for AOMR. With this additional capital, we intend to deliver greater net interest income and earnings facilitated by the purchase of additional high quality newly originated loans and the continued execution of profitable securitizations. We'll continue to maintain our vigilant and methodical capital allocation, credit underwriting and liquidity management strategy. With that, I'll turn it over to Brandon, who will walk us through the financial performance for the Q2 in greater detail.

Speaker 3

Thank you, Srini. In the Q2, the company had GAAP net loss of $300,000 or a loss of $0.01 per common share. Distributable earnings results were a loss of $2,300,000 or $0.09 per common share. The exclusion of unrealized gains on residential loans was a primary driver of the difference between GAAP and distributable earnings. As Srini mentioned, the Q2 of 2024 demonstrated continued upward progress in top line interest income and net interest growth.

Speaker 3

We saw sizable gains in net interest income over the course of the past quarter year over year, which marks an annualization of our return to growth after taking a defensive stance through much of 2022 and the first half of twenty twenty three. The company's net interest income expanded for the 4th consecutive quarter, growing by nearly 50% compared to Q2 2023, signaling the sustained and growing strength of the portfolio. We continued our pace of averaging one securitization per quarter and have maintained reduced levels of operating expense. We believe that our progress in recent quarters serves as a precursor to future quarters when we expect the deployment of the proceeds from July's senior unsecured notes issuance to catalyze the next phase of growth for AOMR. Interest income for the quarter was $25,900,000 and net interest income was $9,500,000 marking a nearly 50% improvement over the Q2 of 2023 and a 10% improvement over the Q1 of 2024.

Speaker 3

Interest income grew over 9% compared to the year ago quarter and interest expense decreased 5%. While interest rates have remained elevated, net interest margin has expanded by over 2 50 basis points from the first quarter. Growth has been driven by accretive loan purchases, pragmatic securitizations and focused capital allocation. We remain committed to our disciplined approach to loan acquisition and expect net interest income to continue growing in the next few quarters. Though we may see a temporary pause in net interest income growth as we deploy proceeds from July's debt issuance.

Speaker 3

In the second quarter, our operating expenses were $5,500,000 or $3,400,000 excluding securitization expense and non cash stock compensation. This represents a decrease of $400,000 versus the same metric in the prior quarter and a decrease of $900,000 compared to the same metric in Q2 2023. When we analyze our expenses, we choose to exclude our non cash stock compensation expense as well securitization costs. Since our cash returns are not impacted by stock compensation and costs related to securitization activity are directly in line with the execution of our business plan. We are confident we will be able to maintain these low level operating expenses And while the bulk of these saving efforts are most likely behind us, we will as always diligently explore opportunities to optimize our cost structure going forward.

Speaker 3

Turning to the balance sheet. As of June 30, we had $44,000,000 of cash on hand. Our recourse debt to equity ratio was 1.2x@quarterendcomparedto1.8x as of March 31, 2024. As of today's date, our recourse debt to equity ratio is approximately 0.9 times, reflecting the maturity of our short term U. S.

Speaker 3

Treasury assets and corresponding repurchase agreements held at quarter end, as well as our $50,000,000 senior unsecured notes issuance and $20,000,000 share repurchase. As we continue to opportunistically acquire loans, we do expect debt levels to increase. However, we believe that our recourse debt to equity ratio will remain below 2.5 times on a long term basis. Our residential whole loan portfolio stood at a fair value of $159,000,000 as of quarter end, financed with $101,000,000 of warehouse debt. We had $1,400,000,000 of residential mortgage loans and securitization trust and $285,000,000 of RMBS including $19,000,000 of investments in risk retention vehicles, which are included in other assets on our balance sheet.

Speaker 3

In the Q2, we closed AOMT 2024-four, which was our 1st standalone securitization transaction of the year to which we contributed loans with a $300,000,000 of scheduled unpaid principal balance and a weighted average coupon of 7.4%. The deal enabled us to save approximately 100 basis points on the financing rate of the loans underlying the deal. Additionally, we participated in AOMT 20 20 four-six in June to which we contributed loans with approximately $23,000,000 of scheduled unpaid principal balance. These securitizations combined with AOMT 20 20 four-three executed toward the end of the Q1 effectively cleared out our unsecuritized residential loan portfolio and we've been steadily purchasing newly originated loans to work toward our next securitization. We remain confident in averaging 1 securitization per quarter going forward, though our next securitization may not be until late Q3 or early Q4 as we replenish the portfolio with newly originated loans.

Speaker 3

We continue to methodically target high quality loans primarily through our affiliated originator. Furthermore, we are committed to maintaining disciplined daily capital management as part of our operating strategy. We will remain judicious when applying leverage to our assets ensuring that we continue to maximize earnings while operating with adequate liquidity. Looking to book value, our GAAP book value per share decreased 3% to $10.23 as of June 30, down from $10.55 in the Q1. Our economic book value, which fair values all non recourse securitization obligations, was 13 point $1.6 per share as of June 30, down 4.5% from $13.78 per share as of the Q1.

Speaker 3

We expect that rate and spread movements over the course of the last month as well as a reduction in dividend costs as a result of our share repurchase have had a positive impact on GAAP and economic book value as of today's date. In the second quarter, we purchased $114,400,000 of loans that carried a weighted average coupon of approximately 7.9 percent with a weighted average LTV of 70.4% and a weighted average FICO score of 757. Our residential whole loan portfolio carried a weighted average coupon of 7.71% as of the end of the second quarter, a 60 basis point increase since the end of the Q1 of 2024 and a nearly 300 basis point increase from the Q2 of 2023. As of today's date and including committed purchases, the projected unpaid principal balance of our unsecuritized loan portfolio is over $200,000,000 These loans and additional purchases will form the next securitization from AOMR and should be highly accretive to the company and their stockholders. Additionally, the pricing spread on our largest warehouse facility has been reduced by 25 basis points, which should lead to additional net interest income.

Speaker 3

Now to expand on our capital issuance at the end of July. On July 25, we successfully closed an offering of $50,000,000 9.5 percent senior unsecured notes due 2029. We intend for this to be an accretive capital raise that feeds the next phase of growth for AMR. We plan to deploy the majority of the proceeds into high quality newly originated non QM loans, driving further incremental earnings and investment portfolio growth. Additionally, the $20,000,000 of the proceeds repurchased shares from one of our pre IPO investors, which we viewed as an opportunity to reduce our overall cost of capital and drive up economic book value per share.

Speaker 3

Finally, the company declared a $0.32 per share common dividend, which will be paid on August 30, 2024 to stockholders of record as of August 22, 2024. For additional information on our financial results, please review the earnings supplement available on our website. I will now turn it back over to Srini for closing remarks.

Speaker 2

Thank you, Brandon. We are pleased with the significant progress we have made over the past 12 months and believe that we are well positioned to begin the next phase of growth for our shareholders. Powered by newly raised capital, we plan to increase our investment into the business through the continued acquisition of loans, securitization execution and focused capital allocation. From a rate perspective, the consensus is that we are likely entering into a more accommodative environment. All else being equal, a declining rate environment would have a positive impact on our business in general, primarily because we would expect to see financing cost reductions and increases in the valuation of our existing portfolio.

Speaker 2

While there may also be a reduction in the coupon of newly originated loans, we would still expect to see a net benefit as sticky financing costs based on SOFR would decrease with Fed funds rate cuts. With that said, weaker employment and earnings prints in the recent days have sparked fears of a potential economic downturn and with that heightened credit risk. We believe that credit risk management is a competitive strength of ours due to our relationship with Angel Oak Ecosystem, which provides us the ability to adjust credit offerings based on our specific desired characteristics. Credit is risk we choose to own and we expect our portfolio to continue to perform comparably well. We are optimistic that broader economic background will be generally supportive of our outlook and may potentially lead to additional opportunities not only in the non QM residential mortgage market, but in capital markets as well.

Speaker 2

We will now open the call to your questions.

Speaker 4

Operator? We

Operator

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

Speaker 5

Yes. Brendan, can you talk a little bit about with NII increasing, do you feel like you're in a position to maintain the current dividend level?

Speaker 2

Yes. Hey, Don.

Speaker 3

Yes, absolutely. We've been increasing the NII for now 4 quarters. I think if you look at it from a net interest margin perspective, less cash expenses, we're up to we probably improved that coverage by about 20% this quarter to 80% coverage of the dividend, just from a cash basis. We like I said, we'll probably have a little pause this next quarter as top line grows, but we work to deploy the and lever the proceeds from the debt issuance. But then in Q4, we expect a further expansion that again will I would believe will be an effective covering of the dividend.

Speaker 5

Got it. And then you've had a pretty big move in rates. What is your economic book value in July August?

Speaker 3

Yes. That we actually haven't had a chance to put pen to paper on since it's been so dramatic. I mean, there's the rate move and then there's also a spread component, which we need to see if spreads in our business kind of widened out to meet the decrease in rates at least temporarily. But I think empirically, any of the decreases we had in as of June 30 would be now at least flat, if not up.

Speaker 6

Got it. Thanks.

Operator

Our next question comes from Doug Harter with UBS. Please go ahead. Thanks. Can you talk about

Speaker 7

how much growth do you think that the unsecured issuance can provide kind of net of the repurchase that you did?

Speaker 3

Yes. We think that this the $30,000,000 or so of net proceeds that's left after the repurchase, they're probably going to provide us the runway for the next kind of 3 or 4 quarters of consistent loan acquisition. I mean, just on space, the first round, dollars 30,000,000 we can buy about $200,000,000 worth of loans. We have then securitized. After that, we'll buy another $180,000,000 and it kind of steps down from that point forward.

Speaker 3

But again, several quarters and probably will be supportive of something like $1,000,000,000 in residential loan purchases over the next several quarters.

Speaker 7

And then I guess given kind of where your recourse leverage is, How do you think about the ability to issue additional unsecured as you look to kind of be able to continue to scale up the business?

Speaker 3

I mean, it's something we'll certainly be looking at. I think we're we want to we don't want to just grow at any cost. We just raised this money and we're just putting it to work. We have about, $200,000,000 in committed loan purchases that should come in based on the backs of this debt in short order here in the next few weeks. But we I mean, we think that the balance sheet could hold more.

Speaker 3

We just want to make sure we're going to do it at the right time. And obviously, maybe with the latest rate moves, if we did another tranche to tighten in pricing a little bit.

Speaker 7

Great. Appreciate it. Thank you.

Operator

And the next question comes from Eric Hagen with BTIG. Please go ahead.

Speaker 8

Hey, good morning. This is Jake Kedzakis on for Eric. Thanks for taking my questions. Just talking about prepayment activity, are you expecting a pickup in prepayment activity as a result of the recent interest rate moves? And at what level of rates do you think prepayment activity will begin to accelerate more meaningfully?

Speaker 8

Thank you.

Speaker 3

Yes. We've already seen a little bit of a prepayment pickup even before the move in rates. It's one of the things why our GAAP and economic book value were a little bit down this quarter compared to where you would otherwise think. I mean, rates didn't really move, but prepayment speeds did move up slightly. I think there's at least in our portfolio, right, we have a very we have a tale of 2 sides, right?

Speaker 3

We've got 5% coupon portfolio that's going to take a huge move in rates to really move prepayment fees up materially. And we've got the 8% portfolio, which is going to be much more sensitive to prepayments. But the thing is if prepayments are increasing because rates are going down, that means our financing costs should be going down and we'll just keep investing that money, those proceeds back into assets with a similar or maybe even catch a little tailwind yield. But a long way to answer your question, I mean, we've got quite a bit of, I think, protection in our performance in case prepayment speeds increased by 10 points. Remember, NonQM historically has like a 25 to 30 CPR.

Speaker 3

That's what we base most of our modeling and assumptions on in securitization market. Recently, that's been much slower than that, like single digit level. So we are expecting a return at 20 five-thirty level over the next several quarters.

Speaker 8

Great. Thank you so much.

Operator

Our next question comes from Matthew Howlett with B. Riley. Please go ahead.

Speaker 4

Hey guys, congrats on a great report. Hey, I know things are fluid right now, but with the move here when rates and you're putting on coupons around 8%, any sense on what the ROEs will be on retained interest from securitizations going forward? I mean, I'm assuming they're going

Speaker 3

to be a lot higher than where you thought they were a couple of quarters ago. Well, I think there's a potential, Matt, for a little, what I'll call maybe a Goldilocks securitization and that will have a higher coupon relative to funding costs. We saw that back in 2021 right after IPO with 21.4% and 21.7%. But long term, so I mean long term meaning next year really, we'd expect that if rates do come in, stay in, our loan coupons will reduce, our funding costs will reduce, and we'll still be looking at that mid to high teens to low 20% ROE per look. But there could be a period where the next few securitizations have a little bit higher return hurdle than that if the economic conditions allow.

Speaker 4

Have you started lowering as the mortgage company started lowering rates?

Speaker 6

Matsui here. So last I would say before last few days, yes, we had been lowering rates because as you noticed, rates have been going lower over the last few weeks, not just last 2 days. But last 2 days, really the credits the spreads on the securitization side have widened just from the sympathy of what's happening in the entire market. So right now, I would say we have stayed flat on rates, but you should expect the mortgage company and across the board, people to lower rates. And to answer your question before also on that side, part of that is you will see if you keep very high, you're going to see prepayment activity pick up too.

Speaker 6

So I think the industry as a whole will lower rates here.

Speaker 4

Got you. So just in summary, if I can summarize what I heard, I mean, you could do about $1,000,000,000 of loan acquisitions here with the new capital that you raised in July. It'll take you a couple of quarters. You still do a couple to do one securitization per quarter. But you think you can grow that kind of non recourse leverage up pretty good with the access securitization mark and that's going to have a huge impact on your NII, probably you're way above the dividend.

Speaker 4

And I don't want to put those words in your mouth, but it's about $1,000,000,000 loan acquisitions, did I hear you right, in the next few quarters?

Speaker 3

Yes. That should be what we had available funds and then plus the senior unsecured notes will also support that is a piece of that 1,000,000,000 dollars

Speaker 4

Absolutely incredible. I guess just the last question is, I mean, are you seeing you bumping into any competition in a non QM space? I mean, or has this been sort of cleaned out following last couple of years and you guys are the league leader in it and we haven't seen much activity, I mean, anyone is quite the size of you guys, but are you bumping in anybody?

Speaker 6

No. Yes. So the guys in the previous past, they have gotten cleaned out. I would say from a consistency of origination to credit management to securitization, we would consider ourselves to be a leader. We are seeing small competition from insurance companies, not from the REIT industry, from the insurance company, but they're very selective about how they get involved.

Speaker 6

And as the rates continue to go lower and the securitization bid gets stronger, I think that the insurance companies may be less competitive. Obviously, there will still be buyers, but from what we are trying to achieve, we have enough in what we're doing where we're not we don't feel constrained or stretched.

Speaker 4

Right. Exactly. Well, certainly we look forward to the next wave of growth in the company. Appreciate it.

Speaker 6

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

All right. Thank you everyone for your time and interest in Angel Oak Mortgage REIT. We look forward to connecting with you again next quarter. In the meantime, if you have any questions, please feel free to reach out to us and have a great day.

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Earnings Conference Call
Lowe's Companies Q2 2024
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