Angel Oak Mortgage REIT, Inc. annual report, FY2023

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Angel Oak Mortgage REIT, Inc. — 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. This is an annual filing; it does not provide a standalone fourth-quarter income statement. Angel Oak Mortgage REIT (NYSE: AOMR) is an externally managed mortgage REIT focused primarily on first-lien non-QM residential loans, many sourced from affiliated Angel Oak Mortgage Lending.

Financial performance and position

  • Income: GAAP net income was $33.7 million, or $1.36 per basic share, versus a net loss of $187.8 million, or $7.65 per share, in 2022. The improvement chiefly reflected a $63.5 million net unrealized gain, compared with a $201.8 million net unrealized loss in 2022.
  • Interest income and margin: Interest income was $96.0 million and interest expense was $67.1 million, producing net interest income of $28.9 million, down from $52.5 million in 2022. Management attributed the decline to lower residential loan and RMBS balances and higher floating-rate funding costs. The filing does not provide a clearly stated net interest margin percentage.
  • Distributable Earnings: The company reported non-GAAP Distributable Earnings of negative $28.1 million, compared with positive $19.4 million in 2022; return on average equity was negative 11.68%, versus positive 5.46%. This measure is not a substitute for GAAP earnings or taxable income.
  • Cash flow: Operating activities provided $306.4 million, investing activities used $194.1 million, and financing activities used $107.7 million. Cash and restricted cash together increased $4.6 million to $44.5 million. Operating cash flow reflects mortgage-loan and securitization activity and should not be read as a proxy for recurring earnings.
  • Assets and equity: Total assets were $2.31 billion, down from $2.95 billion; stockholders’ equity was $256.1 million, up from $236.5 million. GAAP book value was $10.26 per share, versus $9.49, and non-GAAP economic book value was $13.54 per share, versus $13.11.
  • Debt and liquidity: Recourse debt was approximately $484.3 million: $290.6 million in loan-facility borrowings and $193.7 million in repurchase borrowings. Non-recourse securitization obligations were $1.17 billion. Cash and cash equivalents were $41.6 million, with $2.9 million of restricted cash. The company reported $759.4 million of available capacity under $1.05 billion of uncommitted loan lines, subject to eligible collateral and other conditions.
  • Portfolio and credit: The company reported approximately $2.1 billion of target assets. Direct residential loans had a 6.78% weighted-average coupon, 69.4% weighted-average origination LTV, and 0.9% more-than-90-day delinquency rate. Loans in securitization trusts had a 4.7% weighted-average coupon and 1.0% more-than-90-day delinquency rate. Non-QM and mortgage-credit exposures remain significant.

Material changes versus 2022

  • Residential whole-loan and RMBS balances declined, while loans held in securitization trusts increased. Total assets fell by about $638 million.
  • Net interest income declined by $23.6 million. Higher floating rates increased interest expense despite lower notes-payable and repurchase-facility borrowings.
  • Valuation conditions improved from 2022: net realized and unrealized gains were $26.0 million, versus losses of $210.5 million. This mark-to-market reversal was the principal reason GAAP results moved to profit.
  • Book value per share increased during 2023, while Distributable Earnings turned negative. The differing measures reflect, in part, the exclusion of specified unrealized items from Distributable Earnings.
  • The company purchased $222.7 million of newly originated loans during 2023 and completed or participated in four securitizations. It also acquired $392.4 million of Agency RMBS late in December; the related $392.0 million payable to the broker was settled when the trade settled on January 16, 2024, and the securities were simultaneously sold.

Outlook, risks and unusual items

  • Management described a more constructive fixed-income backdrop late in 2023 and anticipated continued purchases of newly originated loans. The filing provides no quantified earnings, book-value, acquisition or dividend guidance. Management’s market outlook is subject to changing rate expectations.
  • Major risks include interest-rate and credit-spread volatility, borrower delinquencies and defaults, fair-value uncertainty, short-term and uncommitted funding, margin calls, and the ability to execute securitizations profitably. Most recourse debt bears floating rates; hedges may not fully offset rate exposure.
  • The strategy relies substantially on affiliated loan sourcing and an external manager. Related-party sourcing, fee arrangements, allocation of investment opportunities, and reliance on affiliated personnel may create conflicts of interest.
  • At year-end, the company had $28 million of forward loan-purchase commitments. It reported no unfunded commitments, no material legal claims known to it, and no material cybersecurity incident experienced as of the filing date.
  • Distributions were $0.32 per share in each of the four 2023 payment periods ($1.28 in total). A $0.32-per-share dividend declared in February 2024 was paid February 29. Future distributions remain subject to board discretion, liquidity, covenants and REIT requirements.
  • Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Valuation of residential mortgage loans was identified as a critical audit matter because it relies on pricing services and assumptions including prepayments, defaults, loss severity and discount rates.

Important facts for investors to verify

  • Whether the $392.0 million year-end broker payable and simultaneous January 2024 Agency RMBS sale settled as described, and the resulting effect on cash, leverage and reported portfolio exposure.
  • How much of the GAAP profit came from unrealized fair-value gains, and whether loan-sale and securitization economics support a recovery in Distributable Earnings.
  • The status, renewal terms and collateral requirements of uncommitted financing lines, including facilities extended only through May or June 2024, and the company’s capacity to meet margin calls.
  • Current delinquency, default and loss trends in the non-QM portfolio and retained, subordinate securitization interests, including any change from year-end figures.
  • Whether the quarterly dividend is supported by cash generation and taxable income, given negative 2023 Distributable Earnings and REIT distribution obligations.