Angel Oak Mortgage, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Angel Oak Mortgage is an externally managed REIT focused primarily on first-lien non-QM residential loans, mortgage-backed securities and related assets. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $29.7m | $12.1m | $56.8m | $22.2m |
| Interest expense | $13.3m | $1.8m | $23.4m | $2.7m |
| Net interest income | $16.4m | $10.3m | $33.4m | $19.5m |
| Realized and unrealized gains (losses), net | $(61.3)m | $(5.4)m | $(115.0)m | $(3.2)m |
| Net income (loss) attributable to common stockholders | $(52.1)m | $2.2m | $(95.7)m | $11.7m |
| GAAP diluted earnings (loss) per share | $(2.13) | $0.13 | $(3.90) | $0.72 |
| Distributable Earnings, non-GAAP | $22.8m | $2.0m | $60.1m | $6.9m |
Net interest income grew with the larger average loan and RMBS portfolio, but was more than offset by significant fair-value losses. Management’s non-GAAP Distributable Earnings excludes unrealized portfolio gains and losses and other specified items; it is not a substitute for GAAP earnings or a direct measure of REIT taxable income.
Balance sheet, liquidity and capital
- Total assets were $3.285bn at June 30, versus $2.578bn at December 31, 2021. The investment portfolio included $1.279bn of residential loans held directly, $982.6m in securitization trusts, and $922.9m of RMBS.
- Total liabilities were $2.917bn, including $1.102bn of notes payable, $949.4m of non-recourse securitization obligations and $128.4m of securities sold under repurchase agreements. Stockholders’ equity was $367.3m.
- Cash and cash equivalents were $16.1m, with $5.8m restricted. Management reported that cash remained sufficient for financing-facility liquidity covenants, but described unrestricted cash at quarter-end as lower than usual following margin calls. It said available cash had returned to more normalized levels by August 12.
- Six-month operating cash flow was $(635.8)m; investing cash flow was $502.5m and financing cash flow was $102.9m. Cash and restricted cash declined $30.4m to $21.9m.
- Book value per common share fell to $14.73 from $19.47 at year-end 2021; economic book value per share, a non-GAAP measure adjusting certain securitized debt to fair value, was $16.05 versus $19.52.
- The filing does not provide a clear net interest margin figure.
Material changes and notable items
- Higher rates and widening mortgage-credit spreads drove substantial loan valuation losses. Six-month net unrealized losses on loans, securitization positions and derivatives were a major contributor to the reported loss; hedging gains on futures and TBAs partially offset losses.
- Management cited U.S. inflation of 9.1% year over year in June, recession concerns and sharply higher mortgage rates. It said slower prepayments supported interest income on some retained junior and interest-only securitization bonds, but did not offset valuation losses.
- The company bought $932.8m of residential whole loans in the first half and completed the AOMT 2022-1 securitization, involving approximately $537.6m unpaid principal balance. It consolidated the securitization, retaining the loans and related financing obligation on its balance sheet.
- At quarter-end, $720.4m due to broker related to a whole-pool RMBS trade-date purchase. The cash settled July 14, when the securities were simultaneously sold; the purchase was excluded from reported cash flows as a noncash transaction.
- Quarter-end repurchase-agreement borrowings were $128.4m, down from $609.3m at year-end. These facilities are subject to collateral marks and potential margin calls. Notes payable carry floating rates, exposing funding costs to rate increases.
- Post-quarter, RBC extended its facility to January 20, 2023 and increased its limit to $600m; the Nomura facility was extended to October 5, 2022. The company reported total maximum financing-facility availability of $1.9bn after the RBC increase. A further securitization of $184.7m unpaid principal balance closed July 13.
- On August 9, the company declared a $0.45-per-share common dividend, payable August 31 to holders of record August 22. It repurchased 189,941 shares during Q2 under its 10b5-1 plan; that plan expired July 18 and was not renewed.
- No material legal claims or unfunded commitments were reported at June 30. Management said it believed short- and long-term liquidity needs could be met, while noting that funding depends on market access and conditions. No formal earnings guidance was provided.
Outlook, risks and investor verification points
Management expects quarter-to-quarter GAAP earnings volatility, particularly from fair-value changes. Key risks include further rate and spread volatility, loan and securities markdowns, margin calls, refinancing and facility-renewal risk, securitization-market access, borrower credit performance and prepayment changes. The filing also identifies related-party sourcing and management arrangements, REIT qualification, and the ability to maintain Investment Company Act exclusion as risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
- Verify the drivers, duration and potential cash realization of the large unrealized losses, and compare GAAP results with the assumptions behind Distributable Earnings.
- Monitor unrestricted cash, margin requirements, covenant headroom and collateral values, especially following market moves or changes in financing terms.
- Track near-term facility maturities and extensions, including Barclays’ September 20, 2022 termination date and the Nomura extension through October 5, 2022.
- Assess the economics and accounting of securitizations, retained tranches and the quarter-end RMBS trade that settled and was sold after quarter-end.
- Evaluate whether higher funding costs, portfolio growth and the declared dividend are sustainable alongside declining book value per share.