Angel Oak Mortgage Inc

NYSE:AOMR

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to the Angel Oak Mortgage Third Quarter 2023 Earnings Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Randy Chrisman. Please go ahead.

[Randy Chrisman, executive]

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's Third 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. 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, Sreeni Prabhu; Chief Financial Officer, Brandon Filson and Angel Oak Capital's Co-CIO, Namit Sinha. 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 at www.angeloakreit.com.

Now I will turn the call over to Sreeni.

[Sreeniwas Prabhu, executive]

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. 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 third quarter, 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 third quarter, we drove a step change improvement in net interest margin due to our strategic securitization activity and purchases of newly originated current coupon loans. As we stated in our second quarter earnings call, the reduction in interest expense driven by the AOMT 2023-4 securitization was demonstrated in our third quarter results. We have remained nimble in our securitization activity, completing 2 commingled deals alongside other Angel Oak entities in addition to a stand-alone AOMR deal.

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 [indiscernible] net interest income despite lower unsecuritized loan balances. The weighted average coupon of our whole loan portfolio grew 99 basis points in the third quarter and including purchases and commitments to purchase since quadrant currently sits at approximately 6.37%, a further increase of 54 basis points since quarter end for context, these average coupons compared to 4.63% 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 higher yields. This effort will be supported by our ability to evaluate opportunities within our desired risk and returns characteristics and actively acquired high-quality loans and attractive coupon rates. As for the recent quarters, we have remained focused on managing our expenses to maximize the operating effectiveness of AOMR.

Throughout the first half of the year, we made significant progress reducing our operating expenses. In the third quarter, we captured additional savings, reducing operating expenses, excluding securitization by 12.5% versus the second 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 1.5x to 2x the average nominal size of our securitization transaction expectations. 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. We feel we are in a great position to continue to grow earnings while keeping our focus on adequate liquidity and a low expense profile, establishing a very powerful earnings engine based on stable, resilient portfolio.

I will now turn the call over to Brandon.

[Brandon Filson, executive]

Thank you, Sreeni. In the third quarter, 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 positioned from a risk and liquidity standpoint, especially given the current market environment. For the third quarter of 2023, we had GAAP net income of $8.3 million or $0.33 per diluted common share. Distributable earnings were negative $8.6 million or a loss of $0.35 per share. The key difference between net income and distributable earnings is that distributed earnings do not include the offsetting unrealized gain on the AOMT 2023-5 securitization. Excluding the accounting impact of the 2023-5 securitization, distributable earnings would have been $4.3 million.

Interest income for the quarter was $23.9 million, and net interest margin was $7.4 million, reflecting a $1 million expansion versus the second quarter of 2023. As Sreeni 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 reduced our warehouse debt. Total operating expenses were $4.4 million or $3.5 million, excluding securitization costs and noncash stock compensation. This represents a savings of $3.5 million versus Q3 2022 and $800,000 versus the prior quarter. Year-to-date, we have achieved operating expense, excluding securitization costs and stock compensation savings of $8.6 million versus the first 9 months of 2022. The largest factor driving our operating expense reduction efforts in the third quarter was lower D&O insurance premiums and other vendor and resource management.

Turning to the balance sheet. As of September 30, 2023, we had $41.9 million 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 the dry powder for sustained loan purchases that will grow net interest income, improve cash flows and support securitization execution. Additionally, we have over $120 million in unlevered assets on the balance sheet that we can prudently use to increase leverage to drive additional net interest margin. Recourse debt-to-equity ratio as of September 30 was 1.7x. As of today's date, our recourse debt to equity ratio is 1x, which reflects the maturity of repurchase obligations from short-term retest trade that matured in early October. This is a decrease of 0.2x versus the comparable 1.2x recourse debt-to-equity ratio as of last quarter's earnings call and is down from 2.9x at the end of 2022.

As we purchase additional loans, we are expecting this leverage to begin to increase but to remain below 2.5x in future periods. We have $307 million of UPB residential whole loans that have a fair value of $284.4 million financed with $197.8 million of warehouse debt, $1.2 billion of residential mortgage loans and securitization trust and $75.3 million of RMBS from retained AOMT securities from off-balance sheet securitizations. 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 million.

In August, we participated in the 2023-5 securitization alongside other Angel Oak entities, contributing loans with an approximately $94 million unpaid principal balance and releasing $63.5 million of debt from our highest cost financing facility. In total, AOMT 2023-5 consist of 530 loans with a scheduled unpaid principal balance of $260.6 million. The securitization has an average original credit score of 735, original average loan-to-value ratio of 71.9% 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. New purchases supported the valuation of our whole loan portfolio and decreases in the valuation of our securitized loan portfolio were offset by decreases in the fair value of their corresponding liability.

Similarly, economic book value, which fair values all the company's nonrecourse 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 movements because 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 4.63% as of the end of the first quarter 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%, representing an increase of over 150 basis points.

Our loan purchases this year carry a weighted average coupon of 8.31%, a weighted average LTV of 70.2% and a weighted average FICO score of 752. We expect this increase 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 website.

I will now turn it back to Sreeni for closing remarks.

[Sreeniwas Prabhu, executive]

Thank you, Brandon. Before turning the call over to the operator for Q&A, I would like to conclude with some brief remarks. We are pleased with our financial performance for the third quarter as this is the first quarter that truly demonstrated the earnings impact of strategic actions that we have taken this past year. We have a strong balance sheet and a 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. 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.

[Operator Instructions] Our first question comes from Don Fandetti with Wells Fargo.

[Donald Fandetti, analyst]

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 continued to be very good. Do you have any thoughts or concerns around the credit outlook based on what you're seeing in the economy and mortgage rates so high?

[Namit Sinha, executive]

This is Namit. So on the credit side, as we mentioned, the credit performance looks very, very good, and we haven't seen any evidence of any deterioration there. Obviously, anecdotally, there are certain sectors that we have heard about where there are increases in delinquency and loss results, et cetera. But it is important to realize that the portfolio that we run is close to 740 average credit score and low 70s loan to value. That's not a credit profile that is the first to get impacted even in a slowdown or a recessionary environment.

Like if we do go into a slowdown or a recession, you're going to start seeing the impact more on the subprimish part of the portfolio mix, which we really do not do much of. So our overall portfolio delinquencies are expected to be muted even under a more successful environment. But given that what we have seen so far, we have had a very, very good credit backdrop, our 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.

[Donald Fandetti, analyst]

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

[Brandon Filson, executive]

Yes. Don, we use commingled versus stand-alone opportunistically in our thought process. Right now, I'd expect us to come out with about one more smaller commingled 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.

[Operator]

Our next question comes from Chris Kotowski with Oppenheimer.

[Christoph Kotowski, analyst]

Brandon, you mentioned another distributable earnings calculation of, I think, $4.3 million 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?

[Brandon Filson, executive]

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 eliminate unrealized gains and losses, but keeps in any realized gain or loss. So this quarter, when we did 2023-5 securitization, there was about a $13 million 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 and the delta between GAAP earnings and distributable earnings is that one particular thing, and that's just a one-off transactional base thing.

So I wanted to highlight that because if you look at net interest margin, less cash expenses, the quarter, that widened out about $1.8 million. And then what we have in the bank so far from new loan purchases we mentioned to taking our coupon up to almost 6.4% is around another $1 million kind of in the bank as of today for this coming quarter.

[Christoph Kotowski, analyst]

When you say another $1 million in the bank, you mean like if you're thinking about your all-in net interest income of like $7.4 million that the base level going into the fourth quarter is like 8.4%?

[Brandon Filson, executive]

That's right.

[Christoph Kotowski, analyst]

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

[Brandon Filson, executive]

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

[Operator]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Brandon Filson for any closing remarks.

[Brandon Filson, executive]

Yes. 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 additional questions, feel free to reach out to us. Have a great day.

[Operator]

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