Angel Oak Mortgage REIT Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Angel Oak Mortgage REIT Second Quarter 2023 Conference Call. All participants will be in a listen only After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would like now to turn the conference over to Randy Christmann, Chief Marketing and Corporate Investor Relations. Please go ahead.

Speaker 1

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's 2nd quarter 2023 earnings conference call. This morning, we filed our press release detailing these results, which is available in the Investors section on our website atwww.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. 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 Tilson and Angelo Capital's Co CIO, Namath 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.

Speaker 1

Now I will turn

Speaker 2

the call over to Srini. Thank you, Randy, and thank you everyone for joining us today. We are proud to see the work we have done over the previous quarters we demonstrated in our 2nd quarter results. In the Q2, we began purchasing newly originated loans, securitized a pool of low coupon loans and built upon the work we have done to reduce expenses. Since quarter end, we have increased the pace of our loan purchases, Are actively working towards our next securitization and have taken additional expense savings actions.

Speaker 2

In a period of time marked by continued uncertainty In the broader economy and rising rate, we believe we have demonstrated the strength and resilience of our business model And its unique competitive advances. During the Q2, interest rates and spreads continued to widen, This negatively impacted mark to market valuations of our portfolio and drove down earnings and book value. However, Market volatility dampens compared to prior several quarters and expectations are As the Fed is at or near the end of interest rate hike cycle, while mortgage originations and applications are suppressed, We are experiencing some modest but encouraging recovery to demand, supporting our view that our business is well positioned to capitalize We continue to progress through the year with optimism and with a number of key strategic successes under our belt. We have returned our focus towards our execution of our growth strategy. We captured additional value by executing our second Supported our ability to purchase newly originated high yielding loans from our affiliated loan originator, which allows us to tailor The credit quality and the characteristics of the loans we purchased.

Speaker 2

The securitization also strengthened our balance sheet by reducing our warehouse debt and converting it to non recourse term structural leverage. Additionally, the loans contributed to AOMC 2023-four We previously carried on our most expensive warehouse facility, while the new loan purchases will be placed on lower cost facilities. To that end, our current whole loan portfolio is equivalent to the size of roughly one securitization transaction. And although Our warehouse debt is expected to increase as we continue purchasing newly originated loans. We don't expect to reach our whole loan position More than 1.5 to 2 times the estimated value of a single securitization.

Speaker 2

On the debt side, we are proud to have reduced our warehouse debt by over 63% since the beginning of the year. So the positive impact of this reduction was partially offset by the effect of continued interest rate increases that compressed net interest margins. With that said, we are proud to have accelerated purchases of newly originated high coupon loans this quarter. These loans carry significantly higher coupons than our current whole loan portfolio, and we believe we can continue purchasing loans And at attractive mid-eight percent range. As a result, we expect net interest margin to expand in the coming quarters, especially as we continue to execute securitizations consisting of loans from the legacy portfolio.

Speaker 2

In addition, The immediate impact of net interest income expansion, a higher coupon to the whole loan portfolio will improve future securitization execution as well. Going into the second half of the year, we expect continued rotation of our portfolio into newly originated higher coupon loans We increasingly demonstrated in our results. We plan to continue with quarterly securitization, which will support both our growth and our liquidity goals. While the risk continues to remain in the market, We are focused on prudently assuming those risks where we feel that we have competitive and competitive advantage. We believe that our ability to tailor the credit characteristics of our loans is and will continue to be a differentiator.

Speaker 2

We are proud of the flexibility we have achieved with our capital structure and we are confident in our ability to adapt and capitalize on opportunities in the second half of the year. I will now turn the call over to Brandon.

Speaker 3

Thank you, Srini. We are pleased with our results in the Q2. In particular, we are proud of the current position of the portfolio, both from a growth and risk management perspective. I'll go through the details of our financial results and we'll provide some additional color and context as we look to the second half of the year. For the Q2 of 2023, we had a GAAP net loss of $3,700,000 or 0 point Distributable earnings were negative $3,900,000 or a loss of $0.16 per common share.

Speaker 3

The key driver of our GAAP net loss was $4,800,000 unrealized loss on loans in securitization trust and their correspondent liability due to mark to market valuations. Note that although these assets are marked at a discount, principal payments are received at par. Interest income for the quarter was $23,800,000 and net interest margin was $6,500,000 which remain compressed due to higher variable rate interest expense. As Srini mentioned, we expect net interest margin to expand in coming quarters As the AOMT 2023-four seconduritization and subsequent securitizations reduce financing costs And interest income grows in line with new loan purchases. Total operating expenses were $5,600,000 $4,500,000 excluding securitization costs.

Speaker 3

This represents a savings of $2,800,000 versus Q2 2022 And a year to date savings of $6,200,000 versus the first half of twenty twenty two. We are pleased with our sustained operating expense reductions and are actively working to achieve additional savings in the coming quarters. Turning to the balance sheet. As of June 30, 2023, we had $59,100,000 in cash, representing an increase of $30,000,000 from Q4 2022. Our strong cash position in the trailing 6 months showcases our focus on maintaining healthy liquidity levels.

Speaker 3

This additional liquidity provides us The dry powder for sustained loan purchases that will grow net interest income, improve cash flows and support securitization execution. Our recourse debt to equity ratio as of June 30 was 2.5 times. As of today's date, Our recourse debt to equity ratio is 1.2 times, which reflects the maturity of repurchase obligations from short term trades that matured in early July. This is a decrease of 0.8 times versus the comparable recourse debt to equity ratio as of the last earnings call of 2 times. We have residential whole loans at fair value of $296,000,000 financed with $234,000,000 of warehouse debt $1,200,000,000 of residential loans and securitization trust and $71,900,000 of RMBS retained AOG securities from off balance sheet securitizations.

Speaker 3

Additionally, we held $388,000,000 of Wholespool RMBS as of quarter end. We finished the quarter with undrawn warehouse financing capacity of approximately $695,000,000 As

Speaker 2

of today, we have a

Speaker 3

total Approximately $230,000,000 of warehouse debt, representing a decrease of approximately 48% over the previous quarter. We were pleased with the AMT 2023-four seconduritization, which had a weighted average loan coupon of 4.5%. This lower coupon deal helped improve the weighted average coupon rate of our remaining whole loan portfolio, which subsequently improves our future securitization pipeline. We have executed on our goal of 1 securitization per quarter and we expect to continue to do so heading into the second half of the year. GAAP book value per share decreased to $9.34 as of June 30, 2023 from $9.80 as of March 31, 2023.

Speaker 3

The previously mentioned mark to market impact of our loans and securitization trust and Corresponding liability, which are the loans underlying securitizations for which the cost of funding has been fixed, drove $0.19 of the total $0.46 Decrease in GAAP book value. Economic book value, which fair values all non recourse securitization obligations, Was $13.16 per share as of June 30, 2023, down $0.23 from Q1, driven by our $0.32 quarterly dividend. As with last quarter, we expect valuation changes resulting from interest rate and spread movements This call's GAAP and economic book value to fluctuate in the near term. The weighted average coupon rate of our whole loan portfolio was 4.63% As of the end of the Q1 and increased 21 basis points to 4.84% as of the end of second quarter. Since the end of the Q2, we have purchased and locked for purchase approximately $40,000,000 of additional loans.

Speaker 3

Our loan purchases this year carry a weighted average rate of 8.4%, weighted average LTV of 72% and a weighted average FICO score of 754. With these new loans, the weighted average coupon of our residential whole loan portfolio is approximately 5.17%, representing an increase of over 50 basis points Since the end of the Q1, the increase in the weighted average coupons will continue as additional loans are purchased. Finally, the company has declared a $0.32 per share common dividend payable on August 31, 2023 To shareholders of record as of August 22, 2023, this implies an annualized dividend of $1.28 per share or a yield of approximately 14% as of the closing price on August 7, 2023. For additional color on our financial results, Please review the earnings supplement available on our website. I will now turn it back to Srini for closing remarks.

Speaker 3

Thank you, Brandon.

Speaker 2

Before turning the call over to the operator for Q and A, I do like to conclude with some brief remarks. We are excited to have turned our focus to growth as we head into the second half of the year. While market and rate volatility is likely Not completely in the rearview mirror, the current composition of our portfolio has a strong foundation With flexibility to respond as market conditions evolve, credit risk remains on the radar for the industry. However, we feel that credit risk management is one of our key competitive strengths. By leveraging the Angel Oak ecosystem, We have the ability to adjust credit offerings based on certain characteristics.

Speaker 2

Credit selection is risk we like to own And we have the ability to select profitable loans with sound credit. Credit performance of the portfolio has been strong and we expect it to continue to perform comparably well. We believe our results in the first half of the year have demonstrated the strength and resilience Our business model and we look forward to demonstrating our growth potential in the second half of the year. As always, I would like to thank the entire Angel Oak team for their hard work and contributions as we seek to build long term value for our shareholders. With that, we'll open up the call to your questions.

Speaker 2

Operator?

Operator

Thank you. We will now begin the question and answer At this time, we will pause momentarily to assemble our roster. The first question comes with Don Fonetti with Wells Fargo. Please go ahead.

Speaker 4

Yes. It sounds like NII is heading higher due to the sort of higher coupons on loans and more efficient funding. And then there's some expense saves. Do you think you can grow into the dividend over time? Or do you feel like maybe at some point it makes sense To trend that?

Speaker 3

Yes. No, thanks for the question, Don. Yes, no, net interest margin should start to increase next quarter. I mean, one of the things that with the securitization as we went off of our most expensive warehouse financing over a 9% cash paying rate to securitization debt, With a significantly lower amount and then with the new loan purchases. We also should see, like you mentioned, the additional cost savings.

Speaker 3

So we believe over the next 2 quarters, we're going to grow into that dividend to the point where we're adequately covering not just from a cash flow basis, but from a True net earnings perspective. Okay, great.

Speaker 4

That's all I have. Thanks.

Operator

Thank you. The next question comes with Matthew Hallead with B. Riley. Please go ahead.

Speaker 5

Okay, thanks. My question is just on you're in the market and excruciation market. I'd like to hear an update on what supply spreads are on 23 Forward, I think they've been tightening where they are now up to date. And then just give us those these coupons are tremendous going into the When you look at what you're retaining of discretization, what type of IRR or ROE Should we be thinking about and are you still selling down to the rated bonds? Just give us a little update on the securitization market today and how you foresee the next few deals going?

Speaker 6

Sure. This is Namit. So from a securitization spread standpoint, you're right. Like From Q2 end to today, we have seen meaningful tightening in spreads, not just for NonQM, but across the board tightening mode. And the risk on overall in the market.

Speaker 6

And so we have seen the benefits of that as well, which is likely going to show up. If it doesn't reverse itself over the rest of the quarter, potentially in the next quarter. We have seen Meaningful spread tightening for current coupon deals that have been securitized in the market over the last Month and change in and the rates market have generally been sort of unchanged In a little bit of a volatile manner. So overall, we see a benefit to that spread tightening to our portfolio. And then to your question around the names around the new coupons.

Speaker 6

So when we create these loans at 8.25, 8.5 Coupons, generally speaking, the gross returns post securitization on the retained portfolio is high teens. And so that is what we generally For the marginal loans that come in at these higher coupons, obviously, they get mixed up with the lower coupons and bring the coupons higher. So that is an element of securitization that comes with a blended pool of these higher coupons versus the lower coupon loans. But on the margin, these Loans are accretive to the portfolio and post securitizations carry a high teens IRR.

Speaker 5

When you talk about high teens, I think equity investors get really excited. These are that incorporates like a loss adjusted and

Speaker 6

It incorporates yes, it incorporates the cost of funds as we see in the market today, and it incorporates Reasonable assumptions around prepayments, delinquencies and defaults down the line. Obviously, those are to the base case scenarios and there's obviously Stresses you can run that bring the returns down, but to the base case, high teens is what we usually see At these higher coupons, if you think of these coupons as maybe a slightly elevated speed assumption down the line, it probably brings it down to

Speaker 5

Look, I think the next question most people would ask is like how much can you add, how much can you grow that Your loan portfolio, securitization portfolio today with the existing capital base of the company and the ups you paid down in repo lines, you freed up A lot of capital given where advanced rates are in securitization market, I don't know if they've changed or not. How much can we grow? How much can you grow here the next until you get to

Speaker 3

Yes. We hey, Matt, it's Brandon. We have probably enough capacity for 3 to 4 good sized with new coupon loans before we either have to wait and get Principal payments back in to keep growing or lift to the capital markets at that time to grow?

Speaker 5

3 to 4 more securitization by around you see around $300,000,000 $400,000,000 in size, something like that?

Speaker 3

Yes. So exactly. Somewhere, call it maybe $1,500,000,000 worth of loans that goes through the system a few times, a few cycles.

Speaker 5

Great. Well, look, we look forward to that. Congrats on getting back to growth. Thank you.

Operator

The next question comes from Derek Hewitt with Bank of America. Please go ahead.

Speaker 7

Good morning, everyone. Could you provide an update In terms of where spreads have trended quarter to date and then kind of how that impacts the book value per share?

Speaker 6

Yes. So, on quarter to date since the end of second quarter, we have seen Senior AAA spreads come in somewhere between 15 and 25 basis points. It is very because historically in the non QM space, pretty much all securitizations would happen at the same coupon, which would be the current coupon. One shelf versus the other was easily transportable, but when you look at the landscape today, There are 8.5 deals, 8.5 coupon deals, 7.5 coupon deals, 6.5 coupon deals and so on and so forth. So there's a little bit of a basis there.

Speaker 6

But generally speaking, we have seen about 15 to 25 basis points of spread tightening in the new issue space for And comment directly down the capital structure.

Speaker 7

Okay. And then, do you have Like an update in terms of quarter to date book value either as of the end of July or through early August?

Speaker 3

No, nothing right now, Derek. Okay. All right. Thank you.

Operator

Ladies and gentlemen, and with that, we have finished our I would like to turn it over to Mr. Brandon Filson, CFO of the company. Please go ahead.

Speaker 3

Thank you everyone for your time and interest in Angel Oak Mortgage REIT. We look forward to connecting with you shortly. In the mean

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Earnings Conference Call
Angel Oak Mortgage REIT Q2 2023
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