Angel Oak Mortgage REIT - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered strong net interest income ($9.9M, +20% YoY) but a GAAP net loss of $(15.1)M due to late-quarter rate and spread moves driving unrealized losses; Distributable Earnings (DE) were positive at $9.9M, covering 90% of the dividend on a cash basis per management commentary.
• Book value per share fell to $10.17 (GAAP) and $13.10 (economic) at year-end, reflecting unrealized marks; management noted book value recovered ~3% net of dividend by Feb 28, 2025, as spreads improved, a positive near-term catalyst.
• Capital deployment and securitization execution were robust: five deals in FY24 totaling $855M UPB; Q4 included AOMT 2024-10 ($316.8M, 7.79% WAC) and participation in AOMT 2024-13 ($167.2M contributed; $288.9M total, 7.37% WAC).
• Management guided to continued net interest margin expansion and maintained reduced OpEx levels in 2025 amid flexible capital markets participation; recourse debt-to-equity expected to remain below 2.5x, supporting disciplined growth.

What Went Well and What Went Wrong

What Went Well

• Net interest income increased to $9.9M (+20% YoY; +9% QoQ) as loan purchases and methodical securitizations widened net interest margin; “we expect [NII] to continue to grow throughout ’25”.
• Securitizations surpassed cadence guidance (five in FY24, exceeding one-per-quarter), with Q4 AOMT 2024-10 lowering funding costs by >110 bps and recycling capital for accretive loan purchases.
• Operating discipline persisted: OpEx excluding stock comp and securitization fell ~16% YoY in Q4; management emphasized “maintenance of reduced operating expense levels” and disciplined, accretive capital allocation.

What Went Wrong

• GAAP net loss of $(15.1)M and book value decline (GAAP $10.17; economic $13.10) driven by unrealized losses amid a late Q4 selloff and spread widening; management expects recoupment over time via paydowns or tighter spreads.
• 90+ day delinquencies rose to 2.4% from 1.85% in Q3, consistent with normalization; CPR held low at 8.4%, dampening near-term BV convergence to economic book without a larger rate decline.
• Warehouse leverage and balance sheet mix continue to require active securitization and capital recycling to sustain dividend coverage; dividend paid $0.32 while DE was $0.42/diluted share in Q4, indicating progress but dependence on ongoing execution.

Transcript

Operator (participant)

Good day and welcome to the Angel Oak Mortgage REIT Q4 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 is being recorded. I would now like to turn the conference over to KC Kelleher, Head of Corporate Finance and Investor Relations. Please go ahead.

KC Kelleher (Head of Corporate Finance)

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's Q4 and full year 2024 earnings conference call. This morning, we filed our press release detailing these results, which is available in the investors' section of our website at www.angeloakreit.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, Chief Financial Officer, Brandon Filson, and Angel Oak Capital's Co-CIO, Namit Sinha. 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 will turn the call over to Sreeni.

Sreeni Prabhu (CEO)

Thank you, KC, and thank you all for joining us today. We closed out 2024 with another quarter of net interest margin expansion reflecting solid financial and operational performance. Our continued progress, increasing cash flow and dividend coverage, is a direct result of the company's disciplined execution of a proven and repeatable management model designed to drive consistent, sustainable growth. Our focus remains on prioritizing long-term earnings accretion, methodical decision-making, managing risk, and creating value for our shareholders. With this commitment, we have continued to perform in line with our growth expectations quarter after quarter throughout 2024. Unfortunately, rates were not kind to our portfolio valuation during Q4, and we saw a decline in book value during the quarter. Interest rate levels and volatility are a key driver to the valuation of our portfolio and change according to the latest macroeconomic data points.

We may continue to experience these ups and downs from a valuation perspective as long as the rate paths remain uncertain. The advancements we have made in the past year continue to underscore the strength of our differentiated operating model. At its core is prudent risk management and efficient capital recycling, with credit selection serving as a key competitive advantage. We have continued to deliver sequential improvements driven by intelligent loan portfolio management, a consistent securitization strategy, and disciplined execution. In 2024, we completed five securitizations, exceeding our target of one per quarter, which in turn enhanced our capital flexibility, increased portfolio yield, and funded further loan portfolio growth. The long-term backdrop of our business remains constructive, and we are encouraged by our portfolio's trajectory.

Interest rates appear to have moderated from their peak in December, though further rate cuts seem more elusive now than they were in the prior quarter. We have not seen consistent momentum in one direction or other in terms of mortgage rates. We observed increased activity along with improved execution and securitizations in 2024, particularly in the non-QM space. This drove tightening spreads throughout the year as well. We view the current environment as active and deep, offering up ample opportunities 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 returns. Regarding raising capital, our approach remains to raise funds opportunistically and when it provides additional earnings. This allows us to maintain flexibility and ensure that the investment decisions are accretive and value-driven over near-term and long-term.

We demonstrated the success of this approach with our senior unsecured note issuance this year, which was accretive to earnings within one quarter of issuance and continues to add to net interest margin with further loan purchases and securitization activity. As we move forward, our focus remains on continuing to execute against our earnings generation model and delivering positive outcomes for our shareholders, while positioning our balance sheet to capitalize on emerging accretive opportunities as they arise. With that, I'll turn it over to Brandon, who will walk us through our Q4 and full year financial performance in greater detail.

Brandon Filson (CFO)

Thank you, Sreeni. Q4 operating results followed expectations and a positive trend established throughout the year as we saw a 9% net interest income growth versus the third quarter, accompanied by the maintenance of reduced operating expense levels and supported by active loan purchasing and securitization activity. As Sreeni mentioned, rates sold off and spreads widened, which were a headwind for portfolio valuation during the Q4. The valuation decrease was almost exclusively driven by unrealized losses in our securitized loan portfolio. I will point out that the loans in our securitized loan portfolio continue to perform well and that these unrealized losses will be recouped as the loans pay off and/or rates and spreads decline. For the Q4 of 2024, we had a GAAP net loss of $15 million, or $0.65 per common share.

For the full year, we had GAAP net income of $28.8 million, or $1.17 per diluted common share. Distributable earnings for the Q4 were $9.9 million, or $0.42 per diluted common share. As mentioned previously, the driver of the difference between GAAP net income and distributable earnings is the removal of unrealized gains and losses, primarily on our securitized and unsecuritized loan portfolios. In the Q4, we had $24.4 million of unrealized losses on our residential and securitized loan portfolios. For the full year, distributable earnings were $7 million. The difference between GAAP net income and distributable earnings was driven by the removal of $21.9 million of unrealized gains on our residential and securitized loan portfolios.

Interest income for the Q4 was $31.9 million, and net interest income was $9.9 million, which marked a 30% improvement in interest income and a 20% improvement in net interest income compared to the Q4 of 2023. Compared to the third quarter of 2024, interest income increased by 16% and net interest income increased by 9%. For the full year, interest income was $110.4 million, and net interest income was $36.9 million, which marks an improvement of 15% and 28%, respectively, compared to 2023. We expect interest income to continue to grow as we purchase accretive loans, employ sound portfolio management, and leverage effective securitization execution. Our $684 million of loan purchases this year carried a weighted average coupon of 7.64%, a weighted average loan-to-value ratio of 70.2%, and a weighted average FICO score of 749.

The weighted average coupon of our residential whole loan portfolio as of the end of the year was 7.39%, representing an increase of 61 basis points since the end of 2023. Including loans purchased subsequent to the end of 2024, our weighted average coupon is approximately 7.5%. We are pleased to have executed five securitizations over the course of the year, outpacing our stated goal of one securitization per quarter through a combination of both standalone and co-mingled deals. In total, we securitized $855 million in scheduled unpaid principal balance across these five securitizations. In the Q4, we completed Uncertain as the sole contributor, contributing a balance of $316.8 million in loans. Additionally, near the end of the year, we closed AOMT 2024-13, which was a $289 million securitization, to which we contributed $167 million in loans.

As of the end of the year, our securitized loan portfolio carried a weighted average coupon rate of 5.6%, with a weighted average funding cost of approximately 4%. The securitization market remains active and receptive with tight spreads, and we plan to continue to access it via our methodical securitization strategy. Operating expenses for the Q4 were $5.5 million. Excluding non-cash stock compensation expenses and securitization costs, Q4 operating expenses were $3.1 million. This represents a 16% decrease compared to the same metric in the Q4 of 2023. For the full year, operating expenses were $19.4 million, or $13.6 million, excluding non-cash stock compensation expenses and securitization cost. This demonstrates an approximately 14% decrease in expenses compared to the prior year.

Looking at our balance sheet as of December 31, we had $40.8 million in cash, and our recourse debt-to-equity ratio was 1.0x at the end of the year. GAAP book value per share decreased 9.8% to $10.17 as of December 31, 2024, down from $11.28 as of September 30, 2024, a nearly flat year-over-year. Economic book value, which fair values all non-recourse securitization obligations, was $13.10 per share as of December 31, 2024, down 6.6% from $14.02 per share as of September 30, 2024, and down 3.3% versus December 31, 2023. The decline in book value was driven primarily by the aforementioned unrealized losses on our securitized and unsecuritized portfolio as a result of interest rate and spread movements toward the end of the year.

We note that the loans in our securitized loan portfolio continue to perform well and that these unrealized losses will be recouped as these loans pay off and rates or spreads decline. We ended the year with residential whole loans at fair value of $183.1 million, financed with $129.5 million of warehouse debt, $1.7 billion of residential mortgage loans and securitization trusts, and $321 million of RMBS, including $20.7 million of investments in co-mingled securitization entities, which are included in other assets on our balance sheet. We finished the year with undrawn loan financing capacity of approximately $920 million. Now looking at credit, we ended the year with a total portfolio weighted average percentage of loans 90 days plus delinquent at 2.4%, inclusive of our residential loan, securitized loan, and RMBS portfolios, an increase from 1.85% as of the end of the third quarter of this year.

As we stated previously, we expect this type of nominal increase and believe it is indicative of a return to normalized historical levels. We continue to expect that our portfolio-wide low LTV, tight underwriting standards, and inherent credit selection to mitigate losses throughout a cycle if credit becomes an issue. Three-month prepay speeds for our RMBS and securitized loan portfolios were 8.4% to end the year, marking a 10 basis point decrease compared to the third quarter. As borrowing rates remain steady, we do not expect prepay speeds to exhibit any meaningful increases on the 2021 to 2023 securitizations. If rates do fall, increasing prepay speeds are securitized loans, and RMBS portfolios are weighted towards loans that are still well below current rates, reducing or eliminating a homeowner's incentive to refinance a non-QM that's historically prepaid at 25% to 20% CPR.

Lastly, we do have the ability to use capital to resecuritize and re-lever securitizations, which will increase the effective yield. On a more somber note, our thoughts and prayers go out to all those impacted by the California wildfires that started in January 2025. We hope that those individuals and their families are able to return to a sense of normalcy soon. As it relates to our portfolio, our exposure was fortunately very small due to our lower exposure to the California mortgage market. We have completed a full set of collateral inspections of all loans in the affected areas, and one loan in our securitized loan portfolio appears to have been damaged. As a reminder, we require property insurance on all of our loans, which we expect to substantially mitigate or eliminate entirely our potential losses.

Finally, as previously communicated, the company declared a $0.32 per share common dividend, which was paid on February 28, 2025. For additional color on our financial results, please review the earnings supplement available on our website. I will now turn it back to Sreeni for closing remarks.

Sreeni Prabhu (CEO)

I would like to thank the entire Angel Oak team for their hard work and contributions over the last year as we seek to build long-term value for our shareholders. With that, we'll open up the call to your questions. Operator.

Operator (participant)

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 our roster. The first question comes from Matthew Erdner with JonesTrading. Please go ahead.

Matthew Erdner (Analyst)

Hey, good morning, guys. Thanks for taking the question. Brandon, thanks for touching on the prepayments there. I kind of have a follow-up to that. It looks like we're shifting into a new environment and rates are heading lower. How insulated are those '21 to '23 vintages, and where do you think rates would kind of need to go to trigger significant prepayments there?

Brandon Filson (CFO)

Yeah. Hey, good morning. Those 8% CPR, as I mentioned in the prepared remarks, I mean, historically, we expect 20-25% CPR in a kind of a stable, normalized environment. At 2021 to 2023 vintage, those weighted average coupons are in the 5% range, 5, 5 and a quarter, somewhere around there. We think that real rates and mortgage rates would have to decline a pretty significant amount as new productions in the mid-sevens, mid to high sevens. We'd probably be looking at 150-200 basis points of move in that rate before someone might decide to cash out some equity or refinance. I think they're pretty well insulated. I do expect over time, as you mentioned, they will go up. They won't stay at 8% forever.

I don't really see, at least right now, a period where they're going to be certainly any more elevated than what we model when we go into a securitization.

Matthew Erdner (Analyst)

Got it. That's helpful there. I appreciate the color. As you kind of look to re-lever some of these down the road, generate that additional yield, how much incremental yield are you guys kind of expecting to get from those kind of resecuritizations?

Brandon Filson (CFO)

I think it depends a lot on which actual securitizations you're talking about. If you're talking about our pre-IPO securitizations we had, so we'll call it the 2019 vintages out there, those securitizations have de-levered. The weighted average coupon of those loans now are in the high sixes. We don't necessarily have too much leverage on them, so call it an 8% levered yield remaining on those deals. If we call them and either resecuritize or flip collateral into new collateral, we'll lever that back up to the 12% or so during the whole loan aggregation phase and 15% with the securitized once securitized.

Matthew Erdner (Analyst)

Got it. Thank you. I apologize if I missed it, but did you provide book value quarter to date?

Brandon Filson (CFO)

Yeah. We did not provide it at the time. We wanted to get the most up-to-date information. It is looking like as of February 28, or you can call it as of today, we would be looking up, excluding the dividend, just over 6%, and then net of the dividend, about 3% up.

Matthew Erdner (Analyst)

Got it. Thank you. From that 14 or 13-10 level?

Brandon Filson (CFO)

Yeah. Right. As of December 31.

Matthew Erdner (Analyst)

Okay. That's helpful. Thank you.

Operator (participant)

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

Donald Fandetti Fandetti (Analyst)

Brandon, can you talk a little bit about the pluses and minuses for thinking about NII in terms of the next quarter? And then I assume you feel like the pipeline's strong enough to where you can just continue to grow NII each quarter as we progress through 2025. Is that a fair assumption?

Brandon Filson (CFO)

Yes. That's right. I think that we've obviously made some pretty big progress on NII over the last year, going up to where if you look at it from a cash use basis, I think the Q4, we're somewhere around 90% covered on the dividend. If you look just at the end of the year, we are effectively covered on the dividend. I think that's going to continue to increase over the next several quarters as we're always working on another securitization. We have one that we're looking at now that'll happen hopefully by the end of the first quarter, if not into Q1 or into Q2. That'll obviously then free up a bunch more capital that we can put into additional loan purchases. The pipeline from our mortgage company continues to be strong.

We have kind of as much product as we want to buy at the pace we want to buy, and rates are still holding at, like I said, high sevens, mid-seven range. We are pretty confident that NII will continue to grow throughout 2025.

Donald Fandetti Fandetti (Analyst)

Got it. As you look at the new administration and you think about non-QM and what might happen with the GSEs, how are you feeling about the non-QM market as you look out over the next few years, just given potential changes on the regulatory side?

Brandon Filson (CFO)

I think if we look at maybe what Trump was trying to do in his first term and think about what he might try to do in the second term, I think it could be positive for non-QM in terms of shaking loose some loans that used to be sitting with the GSEs and moving them out into non-QM or creating a little bit more of a market. Obviously, that's going to be fluid, and it could, much like the first term, nothing really ever happened with that. The way this one's going so far, maybe tomorrow everything could change. I think in general, I would be willing to bet that non-QM would be expanding, if anything is done this term.

Donald Fandetti Fandetti (Analyst)

Okay. Thank you.

Operator (participant)

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

Eric Hagen (Analyst)

Hey, thanks. Good morning. Good to hear from you guys. When we look at accretive opportunities that you guys mentioned in the opening remarks, can you remind us if you consider the GAAP book value or the economic book value as the more relevant benchmark? With respect to completing incremental securitization deals, could you ever consider taking the cash that gets released from completing a deal and repurchase your stock at these valuations, or even whether you see the unsecured market as a possible source of cash for repurchasing stock as well? Thank you, guys.

Brandon Filson (CFO)

I'll take the last. I mean, looking at senior unsecured market, obviously, I think we've shown that it can be accretive to us from our July issuance. It's something we continue to look at and monitor. I think that market's open and available for us when we choose, if we choose to use it. I wouldn't necessarily at this point be very keen on buying back too much stock just because it's our equity base I'd like to build over time. And if you look at just a repurchase profile, incremental capital dollars in right now are earning 15%-20% return on equity versus our dividend yield today sitting around 13%. So it doesn't necessarily make too much sense other than a book value perspective, which I think over this year, obviously, we hit a little bit of a bump in Q4.

The roadmap is really going to be over this year to look more like Q3 of 2024 that had a decent increase in book value as either, again, prepayments continue to come in on some of those earlier deals or rates and spreads tighten up, which did not happen, obviously, in Q4. The first one, when we look at GAAP and economic book value, that is again another complicated question because we believe that economic book value is a real metric that is important to the company. However, if you look at it, there are really two ways that GAAP and economic book are going to converge together, which is going to both take some time. Either rates decreasing pretty dramatically.

I mean, at the limit, it would be something back to 2021 level of effectively zero, or prepayments have to come in on those loans or underlying those securitizations as well, which with an 8% CPR, as we discussed earlier, it's probably not going to happen for a while. As we look at accretive opportunities, we start to trend more toward GAAP book value, thinking as we get to a premium over that or thinking about that level versus economic book.

Eric Hagen (Analyst)

Gotcha. Good explanation. I appreciate that. Shifting over to the portfolio, I mean, what do you guys consider a normalized level of delinquencies? Or maybe what are your expectations looking out over the next year? Do you feel like the mark-to-market or how do you feel like the mark-to-market will respond to any pickup in delinquencies?

Brandon Filson (CFO)

Yeah. I think the 1.8% we had before this quarter was kind of a low point. If you look at our trend lines going back, we're trending back toward a more normalized level of 2-3% 90-day delinquencies in our loan book. Also our loans, some of our securitized loans from IPO are now starting to get more age, so they're kind of self-selecting as well based on paydowns and whatnot. We're right in that range. We haven't seen any kind of overheating of delinquencies trickling in. Yeah, like I said, I think we're right in the sweet spot of where I think it's a healthy level. We've continued to move up credit kind of every quarter.

Again, contemplating that there's going to be, if we get in a period that hasn't happened really since 2007, 2008, of credit stress, we're not going to, we're trying to build in that protection on the new production as well.

Eric Hagen (Analyst)

Okay. It's safe to say that non-QM valuations embed maybe some increase in delinquencies from here, but not a material increase. Is that kind of fair?

Brandon Filson (CFO)

Correct.

Eric Hagen (Analyst)

Okay.

Brandon Filson (CFO)

That's right.

Eric Hagen (Analyst)

Thank you, guys. Appreciate you.

Brandon Filson (CFO)

Thank you, Eric.

Operator (participant)

Again, if you have a question, please press star then one. The next question comes from Jason Stewart with Janney. Please go ahead.

Jason Stewart (Analyst)

Hey, good morning. Thanks. Just to follow up on C question. I mean, obviously, from a FICO and LTV standpoint, the credit quality of the originations look very strong. Was there anything in the Q4 performance from a vintage standpoint where you saw transition or roll rates deteriorate? Maybe if you could just give us a thought on where that's performing quarter to date in 2025 and one Q, just taking seasonality into account.

Brandon Filson (CFO)

Yeah. Again, I think we haven't really seen a trend on a particular vintage doing too much different other than I think you would expect in a period where there's a little bit of economic stress, your later loans are going to have a little bit more of an uptick in delinquencies, again, because that borrower is just not quite as invested in that property. We do see a slight difference in 2024 originated loans versus earlier vintages, excluding the COVID loans, which still have some forbearance and things on a few of them. Nothing, again, that's too much. They're kind of more in the 2.5% range. Sorry, I forgot the second part of your question.

Eric Hagen (Analyst)

I was just curious how the seasonality impacted that and maybe what you're seeing in terms of a reversal of the increase in delinquency so far in 2025.

Brandon Filson (CFO)

Yes. Okay. Yeah. We have seen a little bit more payments come in. Not quite 2.4% today. We are about 10 basis points down on that level as of the latest information, which, again, is a little bit delayed because of just the reporting. Effectively, as of full January payments, we took about 10 basis points back of that delinquency level.

Eric Hagen (Analyst)

Okay. All right. That makes sense. That was it for me. Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to 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. Have a great day.

Operator (participant)

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