Angel Oak Mortgage, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Angel Oak is an externally managed mortgage REIT focused on first-lien non-QM residential loans and related mortgage assets, with substantial sourcing from affiliates.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $30.1 million | $15.6 million | $87.0 million | $37.8 million |
| Net interest income | $11.7 million | $13.0 million | $45.1 million | $32.5 million |
| Realized and unrealized gains (losses), net | $(83.6) million | $(0.3) million | $(198.6) million | $(3.5) million |
| Net income (loss) | $(83.3) million | $6.3 million | $(179.0) million | $18.1 million |
| Basic and diluted EPS | $(3.40) | $0.25 | $(7.30) | $0.94 basic |
| Distributable Earnings, non-GAAP | $20.8 million | $4.9 million | $80.9 million | $11.8 million |
Q3 net interest income declined despite higher interest income as funding costs rose sharply. The principal earnings pressure was fair-value losses on mortgage loans and securitizations amid widening spreads and market volatility; gains on futures and RMBS partially offset these losses. Distributable Earnings excludes unrealized portfolio gains and losses and is not a substitute for GAAP income.
- Balance sheet at September 30: Assets were $3.31 billion, liabilities $3.04 billion, and stockholders’ equity $265.0 million. Residential loans and loans in securitization trusts were each about $1.06 billion at fair value; RMBS were $1.07 billion.
- Debt and liquidity: Notes payable were $906.3 million, non-recourse securitization obligations $1.049 billion, and repurchase borrowings $67.5 million. Cash and cash equivalents were $20.5 million; restricted cash was $9.0 million. Management said cash met financing covenants and believed liquidity was adequate, while noting cash was historically low and margin calls had reduced available cash.
- Book value: GAAP book value per common share was $10.63, down from $14.73 at June 30 and $19.47 at December 31, 2021. Economic book value per share, a non-GAAP measure that adjusts certain securitized debt to fair value, was $12.94.
- Cash flows, nine months: Operating activities used $644.3 million; investing activities provided $655.1 million; financing activities used $33.6 million. Cash and restricted cash declined $22.8 million to $29.5 million.
Material changes and notable items
- Net interest income rose year over year for the nine-month period, reflecting a larger average loan portfolio, but higher borrowing costs limited the benefit. Nine-month interest expense increased to $41.8 million from $5.3 million.
- The company completed AOMT 2022-1 and AOMT 2022-4 securitizations, consolidating the loan assets and related obligations. Portfolio fair values and securitized assets grew, while common equity and book value fell substantially.
- At quarter-end, the company recorded a $1.0 billion “due to broker” liability for whole-pool RMBS purchased on trade date. The securities settled October 13, 2022 and were simultaneously sold; the transaction was noncash at September 30.
- CEO and President Robert Williams left on September 28; Sreeniwas Prabhu was appointed to the role. The company recorded about $1.4 million of severance accrual and $2.6 million of one-time stock-compensation expense related to expected accelerated vesting.
- Common dividends paid were $0.45 per share in Q3. On November 8, the company declared a subsequent $0.32-per-share dividend, payable November 30 to shareholders of record November 22.
Outlook, risks and contingencies
No numerical earnings or portfolio guidance is provided. Management described elevated inflation, rapid Federal Reserve rate increases, widening spreads, market volatility, and slowing mortgage origination and refinancing activity. Higher rates and spread widening pressured loan valuations; slower prepayments may support interest income on certain retained junior and interest-only securitization bonds. Management cautioned that securitization volume may remain below normal until rates and markets stabilize.
Key exposures include fair-value and credit risk, changing prepayment and default rates, rising floating-rate funding costs, margin calls, collateral valuation changes, and availability or renewal of financing. Two warehouse lines expired after quarter-end; management reported that financed loans were moved to other facilities. On October 4, the company entered into short-term repurchase agreements for approximately $168.7 million of loan financing. A $7.6 million lender margin-collateral balance was released after quarter-end.
The filing identifies an August 2022 SEC settlement involving the company’s manager affiliate, Angel Oak Capital, and a former portfolio manager regarding delinquency disclosures in a 2018 securitization. The affiliate and former portfolio manager paid fines of $1.75 million and $75,000, respectively, and neither admitted nor denied the findings. The filing states the order did not allege fraudulent intent. The company reported no material legal claims known to it at September 30 and no unfunded commitments. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported loss reflects fair-value marks versus realized credit or sale losses, and how those marks may affect future earnings or collateral requirements.
- Current unrestricted liquidity, margin-call headroom, and the availability, terms, and maturity profile of replacement financing after line expirations.
- The economic exposure and accounting treatment of securitized loans and obligations, including the difference between GAAP book value and economic book value.
- Whether the $1.0 billion quarter-end RMBS trade settled and was sold as disclosed, and the resulting cash and portfolio impact.
- The sustainability of positive Distributable Earnings and the declared dividend, given the large GAAP loss, falling book value, and management’s stated market risks.
- Any continuing business, compliance, or reputational implications from the SEC order involving the manager affiliate.