Angel Oak Mortgage, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Angel Oak is an externally managed mortgage REIT focused primarily on first-lien non-QM residential loans. It completed its IPO and a concurrent private placement in June 2021, making year-over-year comparisons affected by a substantially larger portfolio and public-company costs.
Financial highlights
| Metric | Q3 2021 / September 30, 2021 | Comparable period / prior year-end |
|---|---|---|
| Interest income / expense | $15.6 million / $2.6 million | Q3 2020: $9.4 million / $0.8 million |
| Net interest income | $13.0 million | Q3 2020: $8.6 million |
| Net income allocable to common stockholders | $6.3 million; diluted EPS $0.25 | Q3 2020: $4.2 million; diluted EPS $0.27 |
| Nine-month net income (loss) allocable to common stockholders | $18.0 million; diluted EPS $0.93 | Nine months 2020: $(6.3) million; diluted EPS $(0.40) |
| Distributable Earnings, non-GAAP | Q3: $4.9 million; nine months: $11.8 million | Q3 2020: $3.6 million; nine months 2020: $(1.9) million |
| Total assets / stockholders’ equity | $1.836 billion / $501.1 million | December 31, 2020: $509.7 million / $248.3 million |
| Book value per share | $19.72 | December 31, 2020: $15.79 |
| Cash and restricted cash | $52.3 million combined | Cash and cash equivalents: $49.2 million; restricted cash: $3.1 million |
| Borrowings and securitization obligation | $550.8 million notes payable; $489.3 million repo debt; $290.5 million non-recourse securitization obligation | December 31, 2020: $81.9 million notes payable and $178.3 million repo debt; no securitization obligation shown |
Q3 total realized and unrealized losses were $0.3 million, versus losses of $2.5 million a year earlier. For the first nine months, such losses narrowed to $3.5 million from $23.1 million. Other comprehensive income was $1.8 million in Q3 and $5.4 million year to date. No operating margin or conventional net interest margin value is reported.
Operating cash flow was $(883.7) million and investing cash flow was $(408.5) million for the first nine months, primarily reflecting loan and securities purchases. Financing cash flow was $1.298 billion, including IPO/private-placement proceeds and increased borrowings; cash and restricted cash increased $6.3 million. These cash-flow figures reflect portfolio deployment and financing activity, rather than earnings alone.
Material changes and notable items
- Portfolio scale expanded sharply: residential mortgage loans at fair value rose to $723.1 million from $142.0 million at year-end; RMBS rose to $621.7 million from $149.9 million. The company reported a $1.764 billion investment portfolio including Treasury bills.
- Q3 consolidated the AOMT 2021-4 securitization, with about $316.6 million unpaid principal balance of loans, $319.8 million of loan assets at fair value, and a $290.5 million non-recourse obligation. The company reported retaining $55.8 million cash from the transaction for further investment and financing uses.
- Six whole-loan financing lines had $1.25 billion of stated aggregate facility limits and $550.8 million drawn at quarter-end. Separately, securities repo borrowings were $489.3 million, at a 0.11% weighted-average rate and 14-day weighted-average remaining maturity. Repo lenders may require additional collateral or cash following declines in collateral value.
- Management attributed higher net interest income to the larger average portfolio. Higher operating costs reflected public-company insurance, loan acquisition diligence and loan administration; management fees also rose with average equity. The post-IPO management agreement provides for a 1.5% annual base fee on defined equity and an incentive fee subject to performance criteria; no incentive fee was recorded for the periods shown.
- The company repurchased 97,452 shares in Q3 under a plan authorizing up to $25 million of purchases. A November 8, 2021 dividend declaration provided for $0.36 per common share, payable November 30 to holders of record November 22.
Outlook, risks and contingencies
The filing provides no numerical earnings, revenue or portfolio guidance. Management said identified financing sources were expected to meet short- and longer-term liquidity needs, while noting that actual financing transactions depend on market conditions and investment opportunities. The company expects to use warehouse/loan financing while accumulating assets and securitizations for longer-term funding.
Key risks include interest-rate and credit-spread movements, borrower defaults and recoveries, prepayments and extensions, asset valuation and fair-value estimation, availability and renewal of financing, repo margin calls, securitization execution, affiliate conflicts, and maintaining REIT tax status and investment-company-law exclusion. The company noted that GAAP earnings may be volatile because of fair-value changes. It reported no unfunded commitments and no known legal claims expected to materially affect financial condition as of September 30; ordinary-course litigation may nonetheless arise. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Reconcile leverage and available liquidity across whole-loan facilities, securities repos, the securitization obligation, cash and restricted cash; review covenant headroom, maturities and collateral/margin-call terms.
- Assess portfolio credit quality, delinquency trends and securitization exposures. Direct residential loans were 1.39% 90+ days delinquent by UPB; loans underlying AOMT securitizations showed differing, in some cases higher, delinquency rates.
- Review fair-value assumptions for Level 3 loans, including default, prepayment and loss-severity estimates, and the sensitivity of earnings and book value to those assumptions.
- Evaluate the effect of IPO-related share issuance, ongoing repurchases, restricted-stock compensation and affiliate management fees on per-share returns and distributable earnings.
- Confirm that the declared $0.36 dividend is supported by future taxable income, cash generation and financing access; Distributable Earnings is a non-GAAP measure and is not the same as REIT taxable income.