Angel Oak Mortgage, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. The company is an externally managed REIT focused primarily on first-lien non-QM residential mortgage loans and mortgage-related assets, with loans sourced largely through affiliated lending platforms. It completed its IPO on June 21, 2021, so public-company expenses and the post-IPO management arrangement applied for only part of the quarter.
Financial highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest income | $12.1m | $12.9m | $22.2m | $22.5m |
| Net interest income | $10.3m | $9.2m | $19.5m | $15.9m |
| Net income (loss) | $2.2m | $26.2m | $11.7m | ($10.5m) |
| GAAP diluted EPS | $0.13 | $1.67 | $0.72 | ($0.67) |
| Distributable Earnings (non-GAAP) | $2.0m | $2.2m | $6.9m | ($5.5m) |
| Operating cash flow | Not presented separately | Not presented separately | ($382.1m) | $75.0m |
Balance sheet at June 30: Total assets were $1.601bn, versus $509.7m at December 31, 2020. Stockholders’ equity was $496.8m, and book value per share was $19.48, up from $15.79. The investment portfolio was approximately $1.546bn, including $529.3m of residential mortgage loans, $723.4m of RMBS, and $275.0m of U.S. Treasury securities.
Debt and liquidity: Notes payable were $315.1m and repurchase borrowings were $787.2m, or $1.102bn in total. Cash and cash equivalents were $28.9m; restricted cash was $4.1m. Repurchase borrowings had a weighted-average rate of 0.14% and remaining maturity of 21 days. Management said identified funding sources should meet short- and long-term liquidity needs, while noting liquidity depends on financing availability and market conditions.
Changes and operating results
- Net interest income rose year over year in both the quarter and six-month period. Management attributed the increase to a larger average portfolio and lower interest expense associated with the timing and use of financing.
- Q2 net income fell sharply from 2020, when a securitization and recovery in residential-loan valuations contributed to large gains. Q2 2021 instead recorded $5.4m of net realized and unrealized losses, including realized losses on RMBS and derivatives. For the first half, net losses narrowed substantially from 2020.
- Operating expenses were $2.7m in Q2, versus $4.2m a year earlier; 2020 included $2.1m of securitization costs, while no securitization occurred in the 2021 quarter. Affiliate operating expenses and management fees increased.
- Operating and investing cash outflows reflected substantial loan and securities purchases; financing inflows included $136.8m of IPO proceeds, $40.0m from a concurrent private placement, and increased borrowings. Cash and restricted cash declined by $12.9m in the first half.
- The IPO and private placement expanded equity and funded portfolio growth. The new post-IPO management agreement sets a base fee at 1.5% annually of defined company equity and provides for an incentive fee based on performance criteria.
Outlook, risks, and unusual items
- No quantified earnings or portfolio guidance was provided. The stated objective is to generate risk-adjusted returns through distributions and capital appreciation; management expects to use loan financing pending securitization and anticipates fixed-rate term securitization funding as assets accumulate.
- Key exposures include interest-rate, credit, liquidity, prepayment, and extension risk; volatility in fair-value estimates; borrower defaults; and dependence on continued access to warehouse and repurchase financing. Lenders may mark collateral to market and require additional collateral or cash.
- Residential loans 90 or more days past due totaled $5.1m across 11 loans, down from $10.9m across 22 loans at year-end; nine loans were in foreclosure, with $3.6m recorded investment. Management uses third-party valuation models with significant unobservable assumptions for some loans.
- Purchases from affiliated lenders were $335.2m for the first half. The company is externally managed and disclosed potential conflicts with its manager and affiliates. Management says affiliate loan purchases are subject to internal review procedures.
- After quarter-end, the company declared a $0.12-per-share common dividend, payable August 31, 2021. As of August 13, it had repurchased 22,673 shares under its repurchase plan. The Nomura financing line was amended in August to extend its stated maturity to August 2022.
- The filing reported no unfunded commitments and no known legal claims expected to materially affect financial condition as of June 30. It reported no material changes to previously disclosed principal risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Reconcile reported GAAP earnings with Distributable Earnings, a company-defined non-GAAP measure that excludes specified realized and unrealized items.
- Review short-term repo rollover, collateral valuation, margin-call and covenant risks, including the 21-day weighted-average repo maturity.
- Assess whether portfolio growth, loan performance, delinquencies, prepayments, and fair-value assumptions support recurring earnings and the declared dividend.
- Review the economics and governance of affiliate-sourced loan purchases, management fees, expense reimbursements, and potential conflicts.
- Consider that the filing provides no forward earnings guidance, and that 2021 results and expenses reflect a changing portfolio and the June IPO; prior-period comparisons may not represent ongoing public-company economics.