Angel Oak Mortgage REIT, Inc. — Q3 2023 Form 10-Q
Business and period. Angel Oak Mortgage REIT is an externally managed mortgage REIT focused primarily on first-lien non-QM residential mortgage loans, many sourced through an affiliate. This unaudited quarterly filing covers the three and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are in U.S. dollars.
Financial results and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $23.9m | $30.1m | $71.4m | $87.0m |
| Interest expense | $16.5m | $18.4m | $50.7m | $41.8m |
| Net interest income | $7.4m | $11.7m | $20.7m | $45.1m |
| Realized and unrealized gains (losses), net | $5.3m | $(83.6)m | $0.8m | $(198.6)m |
| Net income (loss) | $8.3m | $(83.3)m | $5.1m | $(179.0)m |
| GAAP diluted EPS | $0.33 | $(3.40) | $0.20 | $(7.30) |
| Distributable Earnings (non-GAAP) | $(8.6)m | $20.8m | $(21.6)m | $80.9m |
The company reported positive GAAP earnings in Q3 and for the first nine months, while non-GAAP Distributable Earnings were negative in both 2023 periods. Net interest income declined, principally reflecting lower average balances of residential loans and RMBS; higher variable rates also contributed to the nine-month increase in interest expense. The Q3 net gain was driven primarily by valuations of loans held in securitization trusts, net of related securitization obligations. Results include material fair-value movements and may be volatile.
September 30 balance sheet: total assets were $2.296bn, total liabilities $2.064bn, and stockholders’ equity $231.8m. Cash and cash equivalents were $41.9m, with restricted cash of $1.1m. Residential loans held directly were $284.4m; loans in securitization trusts were $1.194bn; RMBS were $580.0m; and Treasury securities were $149.9m. GAAP book value was $9.29 per share, versus $9.49 at year-end 2022; economic book value, a non-GAAP measure adjusting certain securitized debt to fair value, was $13.20 per share versus $13.11.
Reported debt included $197.8m of notes payable, $1.161bn of non-recourse securitization obligations, and $188.1m of repurchase agreements. The $512.0m due-to-broker balance related to quarter-end Agency RMBS purchases that settled on October 12, 2023, when the assets were simultaneously sold. Available financing under warehouse lines was $660.9m, but was uncommitted and dependent on eligible collateral and other borrowing conditions.
Cash flow, nine months: operating activities provided $339.1m; investing activities used $164.7m; financing activities used $171.3m. Cash and restricted cash increased $3.1m to $43.0m. Management attributed operating cash inflow largely to residential loans sold into an affiliate’s securitization; investing cash flow reflected the timing of Treasury purchases and maturities.
Material changes versus comparable periods
- Portfolio assets and borrowings contracted from year-end 2022: total assets fell from $2.946bn to $2.296bn, and notes payable from $639.9m to $197.8m. RMBS fair value declined from $1.055bn to $580.0m; the company also held $149.9m of Treasury securities, which were absent at year-end.
- Nine-month net interest income fell to $20.7m from $45.1m, as lower average residential-loan and RMBS balances reduced interest income, while securitization interest expense increased.
- Net income turned positive versus the substantial 2022 loss, largely because the prior-year period included much larger unrealized losses. The company’s 2023 nine-month net realized loss was primarily associated with loan sales into the AOMT 2023-1 and 2023-5 securitizations; related unrealized losses were reversed on sale.
- Management cited cost reductions, including insourcing accounting work, vendor negotiations, and lower loan servicing costs. Total operating expenses for nine months fell to $15.6m from $29.0m.
- New securitizations included AOMT 2023-1, 2023-4, and 2023-5. The company consolidated 2023-4; it derecognized loans sold through 2023-1 and 2023-5 and recorded majority-owned affiliate investments.
Outlook, commentary, and risks
Management described a rate environment in which the Federal Reserve had raised rates by 5.25 percentage points cumulatively since March 2022, mortgage rates approached 8%, and longer-term Treasury yields rose during Q3. Management reported that the weighted-average coupon on directly held residential whole loans was 5.83% at quarter-end and 6.37% as of November 6 after subsequent purchases and commitments. It expects to continue buying newly originated loans, which it believes may improve portfolio valuations and securitization execution. No specific earnings or dividend guidance is provided.
Management stated that available financing sources should meet short- and longer-term liquidity needs, while noting that liquidity depends on market conditions and transaction availability. Key risks include interest-rate and credit-spread volatility, fair-value declines, borrower defaults and recoveries, prepayments, financing availability and margin calls, securitization execution, affiliate conflicts, and the ability to maintain REIT and Investment Company Act status. The company reported $113m in forward loan-purchase commitments and a potential, unrecorded loan-release obligation of up to $0.7m; it reported no unfunded commitments and no known legal claims expected to materially affect financial condition.
After quarter-end, on November 7, the Global Investment Bank 3 facility was converted to a revolving facility with a $200m maximum capacity, a November 2024 maturity, and mark-to-market features. On November 8, the company declared a $0.32-per-share common dividend payable November 30 to holders of record November 22. It had paid $0.32 per share during each of the first three quarters of 2023. Management reported effective disclosure controls and no material changes in internal control over financial reporting; no material changes to previously disclosed principal risk factors were reported.
Investor verification points
- Reconcile GAAP earnings with negative Distributable Earnings and assess the impact of fair-value marks and securitization-related realized losses.
- Review the terms, renewal risks, collateral eligibility, covenants, and margin-call exposure of financing facilities; much of stated unused capacity is uncommitted.
- Confirm the post-quarter settlement and simultaneous sale of the $512.0m Agency RMBS purchase, and the repayment of Treasury-backed repurchase debt following Treasury maturity.
- Assess whether loan purchases, portfolio coupons, credit performance, and securitization execution can support recurring net interest income and the declared dividend.
- Monitor the $113m forward purchase commitments, the potential $0.7m facility release obligation, and affiliate sourcing, management fees, and securitization relationships.