Business context and reporting period
Angel Oak Mortgage REIT, Inc. is an externally managed mortgage REIT focused primarily on first-lien non-QM residential loans, many sourced through affiliated originators, as well as mortgage-backed securities and related assets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless otherwise noted.
Financial performance and condition
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Interest income | $23.8 million | $47.5 million |
| Interest expense | $17.3 million | $34.3 million |
| Net interest income | $6.5 million | $13.3 million |
| Realized and unrealized net gains (losses) | $(3.8) million | $(4.4) million |
| Net income (loss) | $(3.7) million; $(0.15) per share | $(3.2) million; $(0.13) per share |
| Distributable Earnings (non-GAAP) | $(3.9) million | $(13.0) million |
| Operating cash flow | Not separately presented in the supplied text | $280.6 million provided |
At June 30, total assets were $2.414 billion, total liabilities $2.181 billion and stockholders’ equity $232.7 million. Cash and cash equivalents were $59.1 million, with $9.6 million restricted. Debt included $1.211 billion of non-recourse securitization obligations, $340.7 million of repurchase borrowings and $234.0 million of notes payable. The company also reported $390.4 million due to broker for agency RMBS trades scheduled to settle July 13, when the securities were simultaneously sold.
Book value was $9.34 per share, down from $9.49 at December 31, 2022; economic book value, a non-GAAP measure, was $13.16 per share versus $13.11. The company paid common dividends of $0.32 per share during Q2 and declared another $0.32 per share on August 8, payable August 31.
Material changes versus prior comparable periods
- Q2 net interest income fell to $6.5 million from $16.4 million; six-month net interest income declined to $13.3 million from $33.4 million. Management attributed the decline to lower average balances of residential loans and RMBS, alongside higher floating-rate borrowing costs.
- Q2 net loss narrowed to $3.7 million from $52.1 million; the six-month net loss narrowed to $3.2 million from $95.7 million. Prior-year results included substantially larger fair-value losses amid market volatility.
- Total assets fell to $2.414 billion from $2.946 billion at year-end. Direct residential mortgage loans and RMBS declined substantially, while loans in securitization trusts increased to $1.242 billion from $1.027 billion.
- Notes payable declined to $234.0 million from $639.9 million, while repurchase borrowings rose to $340.7 million from $52.5 million. Net six-month cash from operations was primarily associated with residential loans sold into an affiliate securitization.
- Accumulated other comprehensive loss improved to $6.6 million from $21.1 million at year-end, reflecting $14.6 million of six-month other comprehensive income.
Outlook, commentary, risks and unusual items
No formal earnings or return guidance is provided. Management said it expects to continue buying newly originated loans at current market rates and believes this should improve portfolio valuations and securitization execution. It stated that identified financing sources should be adequate for short- and longer-term liquidity needs, while noting that funding availability and market conditions may change.
Management described the quarter’s environment as shaped by persistent inflation, higher interest rates and wider spreads. It noted Treasury yield increases during Q2 and an estimated 100–125 basis-point decline in weighted-average prices for residential whole loans and loans in securitization trusts. Newly purchased Q2 non-QM loans had an 8.25% weighted-average coupon, 72.11% weighted-average LTV and 748 weighted-average credit score. The company’s overall direct residential loan portfolio weighted-average coupon was 4.84% at quarter-end.
In June, the company completed AOMT 2023-4, a roughly $285 million securitization, which it consolidated. In January, it participated in AOMT 2023-1 and derecognized the contributed loans; management said the realized sale loss was less than the prior unrealized loss. A commercial loan with $4.3 million principal, in foreclosure at quarter-end, was sold July 3 for $4.6 million, including accrued costs and fees. The Multinational Bank 1 financing facility was renewed after quarter-end through January 25, 2024, with a 2.10% pricing spread.
Key risks include interest-rate and credit-spread volatility; borrower defaults, prepayments and collateral-value changes; access to financing and margin calls; execution of securitizations; and dependence on affiliated loan sourcing and an external manager. The company reported no material changes to previously disclosed principal risks, no material legal claims known at June 30, and no unfunded commitments. A facility-related loan release obligation has a maximum potential liability of $1.1 million, but was not recorded because the actual liability was not determinable. Management reported effective disclosure controls.
Important facts for investors to verify
- Whether improving asset yields and new loan purchases can offset higher floating-rate funding costs and restore net interest income.
- How the $390.4 million agency RMBS purchase-and-sale settlement affected liquidity and whether similar quarter-end transactions recur.
- Availability and terms of financing facilities, including uncommitted capacity, the December 2023 static-pool facility expiry, and potential collateral or margin requirements.
- Credit performance, delinquencies and foreclosure trends: direct residential loans 90-plus days delinquent were 2.3% of UPB, versus 0.91% at year-end; one commercial loan was in foreclosure before its July sale.
- Dividend sustainability given six-month negative Distributable Earnings, and the distinction between this non-GAAP measure, GAAP earnings and REIT taxable income.
- Fair-value assumptions and securitization accounting, including the material gap between amortized cost and fair value disclosed for certain non-recourse obligations.