Angel Oak Mortgage REIT, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Angel Oak Mortgage REIT is an externally managed mortgage REIT focused primarily on first-lien non-qualified residential mortgage loans and related assets. This unaudited report covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022, and operating results are compared with Q1 2022.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable period / December 31, 2022 |
|---|---|---|
| Interest income | $23.7 million | $27.1 million in Q1 2022 |
| Interest expense | $16.9 million | $10.2 million in Q1 2022 |
| Net interest income | $6.8 million | $16.9 million in Q1 2022 |
| Net realized and unrealized loss | $0.7 million | $53.8 million loss in Q1 2022 |
| GAAP net income (loss) | $0.5 million; $0.02 per diluted share | $43.5 million loss; $1.77 loss per diluted share in Q1 2022 |
| Distributable Earnings (non-GAAP) | $9.1 million loss | $37.3 million earnings in Q1 2022 |
| Cash from operating activities | $265.1 million | $606.4 million used in Q1 2022 |
| Cash from investing activities | $409.5 million used | $261.4 million provided in Q1 2022 |
| Cash from financing activities | $162.2 million provided | $388.6 million provided in Q1 2022 |
| Cash and restricted cash | $57.6 million at quarter-end | $39.9 million at December 31, 2022 |
| Total assets | $2.60 billion | $2.95 billion at December 31, 2022 |
| Stockholders’ equity / book value per share | $244.4 million / $9.80 | $236.5 million / $9.49 at December 31, 2022 |
| Economic book value per share (non-GAAP) | $13.39 | $13.11 at December 31, 2022 |
Quarter-end liabilities included $439.3 million of notes payable, $1.013 billion of non-recourse securitization obligations, and $442.2 million of repurchase agreements. An additional $447.6 million due to broker related to agency RMBS trades scheduled to settle after quarter-end; those securities were simultaneously sold upon settlement. This payable should be distinguished from ongoing financing debt.
Material changes versus prior periods
- Net interest income fell about 60% year over year as lower average residential loan and RMBS balances reduced interest income, while higher floating rates increased borrowing costs.
- GAAP results improved substantially from Q1 2022’s large fair-value-driven loss. Q1 2023 included a net unrealized gain, primarily from improved residential loan valuations, partly offset by derivative losses; total realized and unrealized results remained slightly negative.
- Distributable Earnings were a $9.1 million loss despite positive GAAP net income. The company cited the effects of excluding unrealized portfolio and hedge marks under its non-GAAP definition. The company cautions that this measure is not GAAP income or a direct measure of taxable income.
- Assets declined from year-end, including residential loans held directly ($544.4 million versus $771.0 million) and RMBS ($522.9 million versus $1.055 billion). The company held $399.6 million of U.S. Treasury securities at quarter-end; they matured April 11, 2023, and related repo debt was repaid at maturity.
- The company made no whole-loan purchases during Q1. It participated in AOMT 2023-1, a securitization with an approximately $580.5 million scheduled-principal pool, contributing loans with approximately $241.3 million UPB. It reported a 41.21% interest in a majority-owned affiliate that holds risk-retention bonds.
- Direct residential-loan balances more than 90 days past due were 0.9% of UPB at March 31, versus 0.91% at year-end. In securitization trusts, the reported 90-plus-day delinquency rate was 0.6%, versus zero at year-end.
Outlook, management commentary, risks and unusual items
- Management described Q1 markets as showing some stabilization but remaining volatile, with uncertainty around Federal Reserve policy, recession and unemployment concerns, and regional-bank failures affecting rates and securitization markets. It reported that Treasury yields rallied and weighted-average prices of residential whole loans and loans in securitization trusts rose approximately 50–100 basis points.
- After quarter-end, the company said it resumed sourcing and purchasing newly originated, higher-coupon loans. It provided no numerical earnings or portfolio guidance.
- The Multinational Bank 1 loan facility was extended after quarter-end through October 25, 2023, with its pricing spread reduced to 2.15%. At March 31, available capacity across facilities was reported as $689.5 million, but most was uncommitted and depended on eligible collateral and other conditions. The static-pool facility had no unused capacity and its spread increases by 50 basis points every three months under its terms.
- Liquidity and financing risks include floating-rate funding costs, short-term repo maturities, collateral valuation and margin calls, facility renewal and covenant requirements, and restricted cash. Of $20.8 million restricted cash, $15.4 million was held for the benefit and under the control of Global Investment Bank 3, which may draw on it at its discretion.
- Fair values rely in part on estimates and unobservable assumptions, including credit losses, defaults and prepayments; management warns that estimates may change materially. Market, borrower-credit, prepayment, securitization, funding, hedging, REIT qualification and external-manager-related risks remain relevant. Management said there were no material changes to previously disclosed principal risk factors.
- The board declared a $0.32-per-share common dividend on May 4, payable May 31, 2023 to holders of record May 22. The same amount per share was paid for Q1. Management said quarter-end cash was sufficient for financing covenants and expressed a belief that identified funding sources would meet short- and long-term liquidity needs; this is not a guarantee of future liquidity.
- The company reported no unfunded commitments, no material legal claims known to it, no legal proceedings, and effective disclosure controls. Q1 operating cash flow was substantially affected by loan sales into the affiliate securitization and should not be treated as recurring operating earnings.
Most important facts for investors to verify
- Whether renewed loan purchases and future securitizations can restore recurring net interest income, and how funding costs compare with asset yields.
- The economic meaning and sustainability of the gap between positive GAAP net income and negative Distributable Earnings, including the company’s non-GAAP adjustments.
- Liquidity available after distinguishing unrestricted cash from restricted cash and uncommitted borrowing capacity; monitor facility renewals, repo maturities, covenant headroom and margin requirements.
- Settlement and disposition of the $447.6 million quarter-end agency RMBS trade payable, and the effects of the Treasury maturity and related repo repayment.
- Credit performance, delinquency trends and fair-value assumptions in the directly held loan portfolio, securitization trusts and retained risk-retention investments.
- Whether dividends remain supported by cash generation and taxable income; the filing does not provide forward dividend or earnings guidance.