Angel Oak Mortgage REIT - Earnings Call - Q1 2025

Executive Summary

• Q1 delivered GAAP net income of $20.5M ($0.87 diluted EPS), net interest income of $10.1M (+17.6% YoY, +2.3% QoQ), and Distributable Earnings (DE) of $4.1M ($0.17/share); GAAP and economic book value rose to $10.70 and $13.41 per share, respectively.
• EPS vs consensus: Primary EPS came in at $0.17 vs $0.30 consensus (miss); “Revenue” vs consensus: $23.53M vs $10.66M (beat). Management emphasized NII as the core operating metric rather than “revenue” reported by third-party data providers. Values retrieved from S&P Global.*
• Portfolio execution remained disciplined: $259M of non-QM loan purchases in Q1 (7.67% WA coupon, 70% WA LTV, 751 WA FICO), followed by AOMT 2025-4 ($284.3M) post-quarter that reduced warehouse debt by $242.4M and released $24.7M cash; recourse D/E fell to ~1.3x subsequent to quarter end.
• Macro backdrop: mortgage rates stable in the mid-to-high 7% range; tariff-related volatility widened spreads near quarter-end, but securitization markets remained open; management expects continued earnings growth and maintained operating expense savings.
• Near-term catalysts: active securitization pipeline, tightening warehouse spreads, and a 9.75% senior notes due 2030 offering priced May 14 to fund accretive loan purchases and corporate purposes.

What Went Well and What Went Wrong

What Went Well

• Net interest income expanded to $10.1M (+17.6% YoY, +2.3% QoQ), with management citing “continued net interest margin growth driven by accretive newly originated loan purchases [and] maintained operating expense savings”.
• Book value accretion: GAAP BV/share rose 5.2% QoQ to $10.70; economic BV/share rose 2.4% QoQ to $13.41, supported by $18.7M of unrealized gains on securitized and residential loan portfolios.
• Capital discipline and deleveraging: post-quarter securitization freed $24.7M cash and lowered recourse D/E to ~1.3x; warehouse spreads are tightening (down to 165–190 bps over, no SOFR add-on at some lines), improving returns tailwinds.

What Went Wrong

• EPS miss versus consensus: Primary EPS $0.17 versus $0.30 expected as DE excluded unrealized gains that lifted GAAP results; CFO: “the driver of the difference…is a removal of unrealized gains” (Q1 unrealized gains: $18.7M). Values retrieved from S&P Global.*
• Credit normalization continued: 90+ day delinquencies rose to 2.79% portfolio-wide (+35 bps YoY), consistent with a return to historical norms, though management expects relative outperformance versus peers.
• Spread volatility around tariff headlines temporarily widened AAA spreads to ~180 bps, trimming expected securitization yields to ~13–17% versus the typical 15–20% range.

Transcript

Operator (participant)

Good day and welcome to the Angel Oak Mortgage REIT First Quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event has been recorded. I would now like to turn the conference over to Mr. K.C. Kelleher. Please go ahead.

KC Kelleher (Head of Investor Relations)

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's first quarter 2025 earnings conference call. This morning, we filed our press release detailing these results, which is available in the investors' section on our website at www.angeloak.com. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, we will be discussing certain non-GAAP financial measures.

More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our earnings release and SEC filings. This morning's conference call is hosted by Angel Oak Mortgage REIT's Chief Executive Officer, Sreeni Prabhu, and Chief Financial Officer, Brandon Filson. Management will make some prepared comments, after which we will open up the call to your questions. Additionally, we recommend reviewing our earnings supplement posted on our website, www.angeloakreit.com. Now, I'll turn the call over to Sreeni.

Sreeni Prabhu (CEO)

Thank you, K.C., and thank you all for joining us today. Our performance in the first quarter of 2025 was highlighted by continued net interest margin growth driven by accretive newly originated loan purchases, maintained operating expense savings, and valuation tailwinds that buoyed book value growth compared to the end of 2024. Cash flow and dividend coverage continue to expand as a result of our disciplined and value-driven operating model, which enables us to grow the earnings power of the portfolio even in periods of sustained market volatility. Our priority is to drive long-term earnings accretion through our focused operational strategy while appropriately managing risk.

While we did not execute a securitization in the first quarter, we were the sole participant in the AOMT 2025-4 securitization, which we closed shortly after quarter-end, and has provided us with capital to continue to purchase new loans and reduce some repurchase debt associated with our retained bond portfolio, both of which should drive incremental net interest income in the coming quarters. Despite uncertainty surrounding international trade and tariff activity beginning at the end of the first quarter, the foundation of our business model continues to be supportive, and we expect to continue the earnings growth trajectory established over the course of the past year and a half. Interest rates have declined meaningfully from the end of 2024, though the positive impact has likely been at least partially offset by previously mentioned international trade uncertainty, which has widened interest rate spreads.

Mortgage rates have been stable as we continue to see our non-QM loan originations in the mid to high 7% range. Overall, securitization markets have been resilient, with a deep pool of market participants willing to participate in the market. That being said, there have been some variation in execution levels in terms of spreads depending on the timing with data points and/or trade announcements. We have ample opportunities for us to recycle capital and continue growing our target asset portfolio. Our capital deployment strategy will remain adaptive and flexible, aligning with evolving market dynamics in order to maximize expected shareholder returns. With regards to capital raises, we will remain flexible and will continue to evaluate opportunities from the perspective of earnings and value accretion over near and long term, as reflected by our accretive senior unsecured note issuances last year.

As we move forward, our focus remains on executing in line with our earnings-generating model and delivering positive outcomes for shareholders while positioning our balance sheet to be an active buyer of high-quality non-QM loans. With that, I'll turn it over to Brandon, who will walk us through our first quarter financial performance in greater detail.

Brandon Filson (CFO)

Thank you, Sreeni. First quarter operating results were in line with expectations and continued our established earnings growth trend as we saw 18% net interest income growth versus the first quarter of 2024 and over 2% net interest income growth compared to the fourth quarter of 2024. Operating expenses, excluding securitization cost and stock compensation expense, were $1.1 million, or 29% lower than in the first quarter of 2024, and represent a $300,000 decrease compared to the fourth quarter of 2024. As Sreeni mentioned, valuations were a tailwind during the first quarter as rates came down relative to the end of 2024. The valuation increase was primarily observed in the loans underlying our 2021 and 2022 on-balance sheet securitizations.

As of today, we expect that our book value is approximately flat compared to the end of the first quarter as decreases in base rates work to offset slight widening of spreads. For the first quarter of 2025, we had GAAP net income of $20.5 million, or $0.87 per diluted common share. Distributable earnings for the first quarter were $4.1 million, or $0.17 per diluted common share. The driver of the difference between GAAP net income and distributable earnings is the removal of unrealized gains, primarily on our securitized and unsecuritized loan portfolios. In the first quarter, we had $18.7 million of unrealized gains on our securitized and residential loan portfolios. Interest income for the first quarter was $32.9 million, and net interest income was $10.1 million, marking a 30% improvement in interest income and an 18% improvement in net interest income compared to the first quarter of 2024.

Compared to the fourth quarter of 2024, interest income increased by 3%, and net interest income increased by over 2%. We expect interest income to continue to grow as we purchase accretive loans, employ sound portfolio management, and leverage effectively Angel Oak's securitization platform. Our $259 million of loan purchases this quarter carried a weighted average coupon of 7.67%, a weighted average loan-to-value ratio of 70%, and a weighted average FICO score of 751. The weighted average coupon of our residential whole loan portfolio as of the end of the quarter was 7.55%, representing an increase of 44 basis points since the first quarter of 2024. Including loan purchases and securitization activity subsequent to the end of the quarter, our weighted average coupon is approximately 7.6%. Current loan production and locks continue to be in the mid to high 7% range.

Following the fourth quarter of 2024, in which we completed two securitizations, we did not execute a securitization in the first quarter. However, shortly after quarter-end, we completed the AOMT 2025-4 securitization as the sole contributor, contributing $284.3 million in loans. The weighted average coupon of AOMT 2025-4 was 7.5%, with a weighted average LTV of 70.9% and a weighted average credit score of 752. The deal paid down $242.4 million of warehouse debt and released $24.7 million of cash, which was used to purchase new loans and reduce outstanding repurchase debt on our retained bond portfolio to reduce financing risk and costs. As of the end of the quarter, our loans and securitization trust portfolio carried a weighted average coupon rate of 5.6%, a weighted average funding cost of approximately 4.3%.

We expect that following the AOMT 2025-4 securitization, the weighted average coupon rate of our loans and securitization trust portfolio increased to 5.8%. The securitization market remains active, and we plan to continue to access it via our methodical securitization strategy. Operating expenses for the first quarter were $3 million. Excluding non-cash stock compensation expenses and securitization costs, first quarter operating expenses were $2.8 million. This represents a 29% decrease compared to the same metric in the first quarter of 2024 and a 10% decrease compared to the same metric in the fourth quarter of 2024. Going forward, we expect to maintain similar operating expense levels. Looking at our balance sheet as of the end of the quarter, we have $38.7 million of cash, and our recourse debt-to-equity ratio was 2.3 times.

Subsequent to the end of the quarter, the execution of AOMT 2025-4 drove our recourse debt-to-equity ratio down to approximately 1.3 times. GAAP book value increased 5.2% to $10.70 as of March 31st, 2025, from $10.17 as of December 31st, 2024. Economic book value, which fair values all non-recourse securitization obligations, was $13.41 per share as of March 31, 2025, up 2.4% from $13.10 per share as of December 31st, 2024. The increase in book value was driven primarily by the aforementioned unrealized gains on our securitized and unsecuritized portfolio, supported by portfolio earnings growth. We ended the quarter with residential whole loans at a value of $439.5 million, financed with $368.5 million of warehouse debt, $1.7 billion of residential mortgage loans and securitization trusts, and $419 million of RMBS, including $20.8 million of investments in commingled securitization entities, which are included in other assets on our balance sheet.

We finished the quarter with undrawn loan financing capacity of approximately $690 million. Now looking at credit, we ended the quarter with a total portfolio weighted average percentage of loans, 90-plus days delinquent, at 2.79%, inclusive of our residential loan, securitized loan, and RMBS portfolios, an increase of 35 basis points from the first quarter of 2024. As we've stated previously, we expect this type of nominal increase as we return to normalized historical credit performance levels. The AOMT securitization shelf has an exceptional credit performance history and has proven its ability to execute in choppy markets. We've laid a strong foundation by making an intentional effort to move up in credit for our loan originations and purchases over the past couple of years, which provides us with the confidence that we'll continue to deliver amid potential periods of volatility.

Thus, as credit performance normalizes, we expect our credit to outperform relative to peers. Additionally, we expect that our portfolio-wide low LTV, diligent underwriting standards, and inherent credit selection to mitigate losses throughout a credit cycle if credit becomes an issue. Three-month prepay speeds for our RMBS and securitized loan portfolios were 6.6% to end the quarter, reflecting a decrease compared to the end of 2024. As borrowing rates remain steady, we do not expect prepayment speeds to exhibit any meaningful increases on the 2021-2023 securitizations. If rates do fall, increasing prepayment speeds, our securitized loan and RMBS portfolios are weighted towards loans that are well below current rates, reducing or eliminating a homeowner's incentive to refinance as non-QM has historically prepaid at approximately 25%-30% CPR. Lastly, we do have the ability to use capital to resecuritize and re-lever securitizations, which will increase the effective yield.

Finally, the company has declared a $0.32 per share common dividend, which will be paid on May 30th, 2025, to common shareholders of record as of May 22nd, 2025. For additional color on our financial results, please review the earnings supplement available on the website. I will now turn it back to Sreeni for closing remarks.

Sreeni Prabhu (CEO)

Thank you, Brandon. Additionally, and as many of you know, we were pleased to have recently announced a strategic partnership between Brookfield Asset Management and Angel Oak Companies. We are excited for the new growth and innovation opportunities that this partnership can provide across the Angel Oak platform. We do not expect any material changes to the day-to-day management of AOMR as a result of this transaction. I would like to thank the entire Angel Oak team for their hard work towards building what we believe is the best non-QM loan origination, purchase, and securitization platform by focusing on diligent credit selection, consistent securitization execution, and value-driven decision-making. We look forward to continuing to build long-term value for our shareholders in the coming quarters and years. With that, we'll open up the call to questions, operator.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble a roster. The first question comes from Dou Harter with UBS. Please go ahead.

Dou Harter (Senior Equity Research Analyst)

Thanks and good morning. I'm hoping you could talk a little bit about the securitization you did in April, kind of how, kind of what the execution of that looked like in the volatility and how that impacted returns on that versus some of the more recent deals you did.

Brandon Filson (CFO)

Yeah. Hey, good morning, Doug. Yeah, we issued that securitization out right in some of the volatility. We still got good execution because if you look back, think to where we were before, treasury rates were a bit higher than where we issued. We did have to widen out the spread on the AAA really to get it down to like 180 over. That's now tightened back up if we were to do it again today. All in all, I think it was a good deal for us and probably just knocked. We've talked every kind of quarter about 15%-20% expected securitization yield.

That one is probably now like a 13-17% yield, depending on how long things stay outstanding, but still very accretive and freed up the capital for us to continue buying newer loans, which have been relatively stable in terms of coupon, up a little higher than maybe we were purchasing over the last quarter. More like high sevens recently in terms of locks.

Operator (participant)

Thank you. The next question comes from Randy Binner with B. Riley FBR. Please go ahead.

Randy Binner (Managing Director)

Hey, good morning. Thanks. Yeah, I had a couple. I guess picking up on the comments about prepayment speeds and the securitizations, just kind of like on a headline basis, is that would mortgage rates have to be like 5% before that's an issue? I'm kind of looking for a less technical explanation, but is that the kind of the margin you have versus where mortgage rates traveling closer to 7% today is?

Brandon Filson (CFO)

Yeah, I would think there would be. We kind of have a very bar-belled securitized loan portfolio. We've got the 5.5% and under portfolio that was post-IPO and then through kind of 2023 vintage. Twenty-four, twenty-five, those are 7.5% plus coupon. The earlier deals that are in the fives were 200 basis points of moves away on mortgage rates to where you would probably see some speeds click up. I would say that the current coupon, yeah, you probably need 100 basis points to see a meaningful increase. Just to remind you, our portfolio-wide prepayment speed right now is about a 10 CPR. When we do our modeled returns and historically non-QM has been, would prepay in like the 25-30 level. We still have a bit of room for speeds to increase and still have good results.

Randy Binner (Managing Director)

Got it. I had another one. I think this is for Sreeni. Just some commentary about the securitization market being good, but maybe variation in execution and conditions, I guess, when there are off days for the market. Just wondering if I heard that correctly. I mean, it makes sense intuitively, but did that affect you kind of just doing one large and good deal looking back? Because the market volatility kind of started in early April and this one got done, I think, kind of in the first part of April. Yeah, just curious kind of how that is day by day and just to understand how the macro is affecting that.

Sreeni Prabhu (CEO)

Yeah. I mean, across the year, you always have these bouts of volatility. You look for two things. One is the cost of execution, and then the second one is absolute illiquidity. What we saw, even with a lot of the tariff issues and volatility in equity markets and the bond markets, there was no illiquidity. That is number one, right? We could at least do a securitization. It was not like, "Hey, we cannot get anything done and the liquidity has dried up." What we have to do is we have to be consistent in terms of execution. It is all risk management, right? The question at that point we have is, do we widen out spreads to see where execution happens, or do we take the securitization back?

What we have taught to the investment community consistently is we want to be prudent risk managers. One of the things you want to do at that point is see where the liquidity is, where the spreads are, and execute. Spreads probably went from 130, 135 beginning of the year all the way to the first quarter. We were printing, we printed that deal at 180. Spreads have now tightened in the 160s, probably could be even in the 150s. Stuff moves. There was a lot of pain probably for the first two weeks of April. What I would tell you is that not just us, but even our peers, the capital markets were open. That was the most important thing. I hope that answers the question.

Randy Binner (Managing Director)

Yeah, that's perfect. Appreciate it. Thank you.

Operator (participant)

Thank you. Again, if you have a question, please press star, then one. The next question comes from Matthew Erdner with Jones Trading. Please go ahead.

Matthew Erdner (Stock Analyst)

Hey, good morning, guys. Thanks for taking the question. Could you talk a little bit about loan purchases post-securitization and if you've seen any difference in the market there? Kind of as a follow-up to that, you mentioned playing up a little bit more in credit. Are you guys paying a little more for expanded credit there? Just kind of want to get your thoughts on post-securitization loan purchases. Thanks.

Brandon Filson (CFO)

Yeah. Yeah, in the securitization, right, we freed up $24 million of capital, which we'll use. We did earmark some of that to reduce some repurchase debt outstanding, but we'll have enough capital to really go through another, call it $100 million-$150 million in loan purchases over the next couple of quarters. I think you'll be able to see us at that point do some co-mingled securitizations with other Angel Oak entities as well. Like I mentioned a little bit ago, current coupons are back to the high sevens. I expect then with maybe the retrenchment of volatility to go back to the mid-sevens, but we're kind of seeing things range bound well over seven, but under eight is kind of what we're seeing in almost a day-to-day basis of no matter what the volatility or reduction of volatility is.

Matthew Erdner (Stock Analyst)

Got it. That's helpful. Thank you, guys.

Operator (participant)

Thank you. The next question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen (Managing Director)

Hey, thanks. Good morning. Just following up here a little bit. I mean, with the macro being a little bit more sensitive, I mean, how do you expect valuations in the secondary market to differ going forward for the bank statement loans versus the investor DSCR loans? Are you guys, do you have an appetite for one versus the other, maybe a little bit more right now? Thank you, guys.

Sreeni Prabhu (CEO)

Yeah. I mean, good question. I mean, I think one part of the question is also the credit of the borrowers as we enter a new environment. Obviously, what we have seen is other parts of consumer credit ex-housing has weakened considerably over the last probably 9-12 months. We are not seeing that generally in residential credit, but we are seeing some shoots in that. The way I would answer that is if you look at it from a pure returns perspective, DSCR loans obviously do better just because of prepay penalties in there. They are also aligned to rental income, aligned to more investment purposes, etc., versus bank statement loans. Right now, I think we will keep the current mix. We do not plan to increase anything or decrease anything, but we have more scrutiny probably around DSCR loans and the way we are solving it.

This is a bigger question that you can have a chat with Nameet, who's the CIO, because he can go into a lot more detail. Generally, in the DSCR side, you have to be careful about Airbnb or what type of purposes are they using these loans. There has been a little bit more scrutiny. We have obviously gone tremendously up in credit. We can provide you details on that. The mix will not change, but there is more scrutiny, I would say.

Eric Hagen (Managing Director)

That's really helpful detail. Thank you. Following up on the comments around resecuritization, should we think of that as being mostly connected to interest rates potentially falling? In the event that you guys are able to resecuritize, how long should we expect those loans to maybe sit on a warehouse line of funding before you're able to turn them around into securitization? Are you guys seeing any relief on the warehouse funding costs relative to benchmarks like SOFR and stuff? Thank you.

Brandon Filson (CFO)

Yeah. The resecuritization, we almost have two different components, right? We have the pre-IPO securitizations, which honestly, the securitization market and those loans look pretty similar to today, but that's been outstanding now for those securitizations have been outstanding for almost six years. They're massively delevered. Any resecuritization of those would be a releveraging play to free up capital. We do not intend, if we securitize, to take the loans back for a meaningful period of time. We really would like to execute an immediate call and resecuritization. We wouldn't take our fixed funding costs, convert it back to variable, and then have the market risk through that time. If we did it, we would do an effectively a same-day resecuritization or sale of some of the loans underlying those securitizations.

Funding cost, because I think today's funding cost, we're not quite at a point where we look at the funding cost through really any of our deals. It's similar to the old stuff. Post-IPO is very cheap. The new things are coming in. Our new securitization, the funding cost is very similar to the way it was back in 2019. On the warehouse funding side, we are seeing a lot of our warehouse lenders begin to work with us to cut spreads. We've gone from things a little bit earlier. We had facilities at like 210 basis points over with a 20 basis point SOFR adjustment on top. Now those have gone to no SOFR adjustment and a 190. Some of our lines were at 175, and then one of them is at 165 currently.

We have seen a good move back, which provides a little bit more tailwind on the returns as well. I expect it to, as long as the market stays kind of stable here and we keep executing that, we will be able to negotiate a little tighter spreads in the coming periods as well.

Eric Hagen (Managing Director)

Good detail from you guys this morning. I appreciate it. Thank you.

Sreeni Prabhu (CEO)

Thank you.

Operator (participant)

Thank you. The next question comes from Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti (Managing Director)

Hi. Can you talk a bit about the competitive landscape for non-QM currently and then how you're thinking about it long term if the GSE footprint shrinks?

Sreeni Prabhu (CEO)

Yeah. Good question. I would say as rates went up in 2022, a few things happened. I'll talk about the supply and the demand. As the rates went up in 2022, you would think that the overall non-QM mortgage market would shrink as the agency mortgage market shrunk, but that's not what's happened. The non-QM mortgage market has actually grown. We'll probably finish this year at $100 billion plus. Last year, I think we were around $80 billion, plus or minus, depending on who you talk to. On the supply side, what's happened is as the agency volumes have shrunk, you have a lot of guys who would generally do six or seven agency loans that are now doing one or two agency loans. They are more proactive in non-QM. The supply of that has grown.

On the buy side, you have tremendous demand from insurance companies. The market's definitely become decently more commoditized. These are the markets where don't expect Angel Oak from the origination or from the REIT side to try to capture market share. We've just gone up in quality and stood there. It's a relationship with the brokers that we've been doing business. I mean, if you think about all the people that have come in and out of the market over the last eight plus years, I think it's probably us and maybe one more entity that might have been there through the entire ticket end of this. Our relationship with the brokers allows us to get what we want to get relative to the competitive landscape that it is.

If we try to grow it beyond what the market gives us, we'll have to squeeze spreads and increase or widen out our credit box, which we don't intend to do. We're happy where we are, but the market is definitely competitive. Now, when does that change? That changes as rates come down. Interestingly, when the rates come down, from the demand side, insurance company demand may slow down. Don't know. There's a lot of appetite. Let's see how much it comes down. On the supply side, I think the model then reverts back to the agency guys doing more agency loans. There's a lot of 7%, 7.5%, 8% coupons sitting out there in the agency market that'll have to be refinanced. Those guys will refocus back on the agency business, lose focus on the non-QM business.

That is when our business model then becomes even more active. Today we are happy. Our market is getting more commoditized. No doubt about it. Everybody knows it. This is when you stay true to credit. From a relationship perspective, our core relationships, what we have developed in the mortgage company over the last almost 10 years now, is playing out the way we wanted it to play out.

Don Fandetti (Managing Director)

Great. Thank you.

Operator (participant)

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Brandon Filson for any closing remarks.

Brandon Filson (CFO)

Thank you, everyone, for your time and interest in Angel Oak Mortgage REIT. We look forward to connecting with you again next quarter. In the meantime, if you have any questions, please feel free to reach out to us and have a great day.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.