Angel Oak Mortgage, Inc. (AOMR) Q4 2021 Earnings Report, Transcript and Summary

Greetings. Welcome to the Angel Oak Mortgage REIT Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Randy Chrisman, Chief Marketing Officer. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Angel Oak Mortgage REIT’s fourth quarter 2021 earnings conference call. This afternoon, we filed our press release detailing our fourth quarter and full year 2021 results, which is available in the Investor section on 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 afternoon’s conference call is hosted by Angel Oak Mortgage REIT’s Chief Executive Officer, Robert Williams; 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 at www.angeloakreit.com. Now, I’ll turn the call over to Robert.

Thank you, Randy. And thank you everyone for joining us today. 2021 was a foundational year for AOMR. After completing our IPO in June, we came out of the gates and were able to quickly scale our portfolio and demonstrate the strength of the AOMR business model. From our IPO through the end of the year, we purchased $1.4 billion of high quality non-QM loans, doubled our available loan financing capacity, and closed two securitizations. Our quick deployment of capital into our targeted assets, our consistent securitization strategy, and our leadership position in the non-QM mortgage industry all serve as a testament to infrastructure, scale and expertise of the Angel Oak franchise, or as we refer to it, the Angel Oak ecosystem. Angel Oak Mortgage Lending’s national platform has originated approximately $13 billion in non-QM mortgages since its founding. The Angel Oak ecosystem provides access to a vast range of investment opportunities, enables AOMR to tailor our desired loan characteristics. The current non-QM market is supported by strong, sustained demand for housing. Despite rising interest rates, we continue to see growing non-QM volumes through our proprietary origination channels thus far in 2022. Home price appreciation has accelerated across markets and delinquency rates are at near historical lows. The growth has not come at the expense of quality, as our recently originated loans have higher average FICO scores, and a lower average LTV and DTIs than prior years. As the Fed continues to increase target interest rates and tapers agency MBS purchases in the coming months, we believe that our target non-agency assets are well positioned. And 2021 was a pivotal year for Angel Oak Mortgage REIT. I will highlight a few of our accomplishments. We completed our IPO in June, which was the largest residential mortgage REIT IPO by proceeds since 2012. This represented the culmination of many years of effort on behalf of our team. It would not have been possible without the many individuals who helped make it happen. I cannot overstate how tremendously proud I am of our team. Since our IPO, we purchased $1.4 billion in high-quality, non-QM mortgages, demonstrating how quickly we can grow and scale the Company. At December 31st, our total assets were $2.6 billion, a fivefold increase over the prior year. We completed two securitizations for an aggregate of $703.5 million, capitalizing on a favorable securitization market, and locking in term financing for the life of the underlying collateral. Looking forward, we believe we can continue to produce strong results for several reasons. First, the origination of non-QM loans on a large scale requires unique capabilities that takes years to develop and mature. Creating a high barrier to entry. Angel Oak has invested substantial time and capital over 11-plus years to develop systems of underwriting and origination, which cannot be easily replicated. As a reminder, Angel Oak Mortgage Lending is the number one non-bank, non-QM originator, and we believe that non-QM is poised for continued significant growth based on housing fundamentals and consumer demand. Second, Angel Oak Mortgage Lending as a loan originator has the ability to adjust their underwriting standards and origination characteristics as circumstances evolve. Due to our proprietary access to the Angel Oak ecosystem, we can simply purchase loans with our desired characteristics. Importantly, members of the mortgage and portfolio management teams meet daily to discuss credit and current pricing metrics. This allows AOMR to quickly adjust to changing market conditions. Third, we have unmatched experience in aggregating non-QM loans, and executing on securitizations. Over the years Angel Oak has completed 30 securitizations, including two for AOMR in 2021 locking an attractive, long-term financing and net interest margin. Additionally, securitizations reduced our liquidity risk. As stated, because non-QM loans carry a meaningful spread to conventional mortgage rates, we can achieve superior terms with lower leverage than many of our peers. The result of all of this is that we believe we can achieve strong portfolio growth over time, supporting a robust and durable distributable earnings, cash flow and dividends. To highlight this, we’re pleased to declare a fourth quarter 2021 dividends of $0.45 per common share, a 25% increase over the last quarter. With that, I’m pleased to turn it over to Brandon.

Thanks, Robert, and thanks to everyone for joining us. For the fourth quarter 2021, we had GAAP net income of $3.1 million or $0.12 per common share, distributable earnings of $22.3 million or $0.89 per common share. Q4 annualized distributable return on average equity was 18.1%. The increase quarter-over-quarter in distributable earnings is attributable to the scaled investment portfolio as of December 31, 2021. The impact of realized gains on our hedging strategy on our loan portfolio and the add-back of unrealized losses on our loan portfolio incurred during the fourth quarter. Interest income for the full year increased 49% over the prior year, while maintaining net interest margin of over 80%, underscoring our ability to not only quickly, but profitably scale the business. We’re pleased to have achieved these results, improving the business model amid headwinds from a rising rate environment and accelerated prepayment fees on older higher coupon securities. GAAP book value per share was $19.47 on December 31, 2021, including the impact of our $0.36 per common share dividend paid in November, down from $19.72 on September 30th. The decrease in book value was primarily due to a decrease in loan valuations as rates rose in Q4 2021, partially offset by gains from our hedging strategy. Since our IPO, we have grown book value per share from $19.26 to $19.47, while distributing $0.48 in dividends. During the fourth quarter, we purchased $773 million of non-agency mortgages. Also, as of March 10, 2022, we purchased an additional $540 million in mortgage loans. Beginning in November of 2021, in response to rising rates, we began raising the rates -- the loans we purchased. These higher coupon loans are beginning to work their way into our portfolio. Turning now to our securitization activity. Our strategy for securitization begins with loan aggregation. We purchase loans and hold them for two to four months on the financing lines that we have in place with diverse set of banks until we achieve critical mass execute an efficient securitization, which allows us to lock in term structural financing for the life of the loans. To this end, in November, we completed our second post-IPO securitization, a $387 million securitization, where we placed 96.5% of the capital structure at 2.09% weighted average cost of funding. This deal included 944 loans with a weighted average coupon of 4.89%, an average credit score of 738, a loan to value ratio of 72.2 and debt to income ratio of 31.9. The transaction was rated by Fitch with the senior tranche receiving a AAA rating. Subsequent to year-end in February, we completed our third securitization since our IPO, a $538 million securitization, where we placed 96.9% of the capital structure at 3.06% weighted average cost of funding. The deal included 1,138 loans with a weighted average coupon of 4.48%, an average credit score of 744, loan to value ratio of 70.6% and a debt to income ratio of 32.7%. This transaction was also rated by Fitch with a senior tranche receiving a AAA rating. In both of the above securitizations, we retained the economics from the credit and interest-only tranches. It is important to highlight that the characteristics of the recent loan pools have not changed significantly over the last three securitizations, even as rates have risen. And as previously mentioned, the coupon rates for future securitizations will increase as we have been increasing rates on purchase loans, starting in late 2021 and into 2022. For reference, the latest lot coupons are around 5.5% to 6%, up from 4.25% at the end of Q3 2021. Turning to expenses. Our operating expenses for the fourth quarter were $9.7 million. The operating expense increase versus the prior quarter is primarily attributable to fees incurred on loan purchases. For each loan we purchase, we pay a diligence fee to verify key performance characteristics of the loan. Therefore, we saw an increase in these expenses in line with our accelerated loan purchase volume of $773 million in the quarter with a full quarter’s benefit from these loans beginning in the first quarter 2022. With regard to our balance sheet, at December 31st, we had $40.8 million of cash and cash equivalents. Our recourse debt to equity ratio was 3 times. We have a total of $1.7 billion in residential whole loans, $486 million of RMBS, including a $100 million in retained AOMT securities from the pre-IPO securitizations. We currently have warehouse facilities with six banks with varied maturities, sizes and counterparty types to manage our exposure to any individual counterparty. Subsequent to year-end, we extended two of our lines and increased our committed borrowing capacity by $50 million, bringing our total loan financing capacity to $1.3 billion. As of the end of the year, we had $397 million of undrawn loan financing capacity and over $200 million in unencumbered assets. This demonstrates our sound liquidity management strategy with the use of less leverage than most of the industry. With our current unsecuritized loan portfolio and over $500 million already purchased in Q1 2022, we are set up with a significant pipeline for securitizations in the coming year. The current securitization market has come off of all time tight pricing in late summer, which are August and November securitizations benefited from. We were able to close our 2022-1 securitization in February, tighter than comparable non-QM deals in the market at the same time. This is further evidence of the leadership position of Angel Oak on both the non-QM origination front, but also our securitization market leadership. Due to the skilled portfolio and significant distributable earnings coverage, we’ve increased our quarterly dividend by 25% and declared a $0.45 per share common dividend payable on March 31, 2022, to shareholders of record as of March 22, 2022. This implies an annual dividend rate of $1.80 per share, or yield of 12% as of the closing price on March 11, 2022. Lastly, in the fourth quarter, we repurchased approximately 175,000 common shares for $3 million through our 10b5 stock repurchase plan. This plan will run through the one year anniversary of the IPO date and will continue to buy if the stock trades at a discount to book value. For additional color on the financial results, please review the earnings supplement available on our website. I will now turn it back to Robert for closing remarks.

Thank you, Brandon. In conclusion, we are very pleased with our results, benefited from the power of the secure Angel Oak platform. We came out of the gate strong driving record portfolio growth and accretive securitization execution. As a result, we produced excellent results in 2021, supporting strong growth and distributable earnings, cash flow and our dividend. To summarize, I want to reemphasize the opportunity we have as we look to 2022 and beyond with the following points. First, this is a business not a trade. This is an investment in an operating business that has been built for over a decade. That gives shareholders access to scarce proprietary assets with strong returns to support an attractive dividend yield. Investing in Angel Oak ecosystem is an investment in a high-quality asset that has prudent credit and risk-adjusted pricing metrics. Our primary focus on non-QM origination is unique among the 24 mortgage REITs in the residential REIT index and offer significant diversification benefits, with less leverage, less liquidity risk, and less interest rate risk than any of our competitors. As a result, we were pleased to raise our quarterly dividend by 25% to $0.45 per common share, which implies an annualized dividend yield of 12%. Second, we have unparalleled access to high quality loans to Angel Oak Mortgage Lending, which is the single largest nonbank originator of non-QM loans. The Angel Oak ecosystem is unique and provides significant competitive advantages. Alongside the Angel Oak franchise, we have an 11-year-plus history, pioneering many of the tactics we utilize, reinforcing the significant barrier to entry for others to replicate this proprietary experience and knowledge. Third, AOMR is a focused non-QM credit-driven investment that is unique in the public mortgage REIT sector. Strong historical performance of our loans is driven by our in-house independent underwriting process. Angel Oak Mortgage underwrites every loan we fund, resulting in access to a pipeline of high-quality, non-QM loans for AOMR. Fourth, we have programmatic execution in capital markets through Angel Oak Capital’s securitization platform, with a strong investor following and a low cost of funding. Finally, we believe our non-QM products are more insulated from interest rate changes than the agency mortgage loans, with wider spreads and less competition, providing a long runway of growth. We’re excited for opportunities ahead and want to thank all Angel Oak’s 900 plus employees for their hard work and contributions to drive successes. With that we’ll open up the call to your questions. Operator?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Don Fandetti of Wells Fargo. Please proceed with your question.

Hi. Good to see the dividend increase. A couple of quick questions. One, spreads widened in Q1. Can you give us a sense on where book value is tracking, currently?

Yes. So, book value, after quarter end, I mean, I think what we’ll have in Q1 is a book value that will go down slightly, but nothing too drastic, considering our hedging strategy we have in place, much like what happened in Q4.

Okay. And then, as we think about next quarter, in terms of sort of the other income line items and their impact on distributable income, would it look kind of similar where you have kind of a negative, because you’ve got some widening on the loan mark, and not all of it’s offset by the hedges, because some of those are realized?

I think, the things that go in that other income line, like you mentioned, the big driver right now is unrealized gains and losses on the loan portfolio. That is partially -- or mostly offset by our hedging strategy. And then, the other side of that equation is when the legacy IO bonds are paying down their -- the notional decrease goes through that line on there as well. So again, I think, in a perfect world, what you would see there is just -- with a perfectly hedged world, you’ll see just the notion of bleed off of the IO bonds.

Okay. But, given spread widening, you’re obviously just hedging your interest rate risk. So, there would be some negative impact, I would imagine in Q1 from mark-to-market?

Yes.

You kind of clarified that. I guess, there was also some tax expense in the quarter, what’s the story there?

Yes. That’s -- what that is, is the benefit of our, I’ll call it success of our hedging strategy. So, in Q4, we had a large amount of realized gains in our taxable REIT subsidiary, and that’s representing the tax expense for that.

Okay. I mean, why is that? It’s good that you were hedge, but what is that good if you had to pay taxes on it?

Well, I’m saying because if we didn’t have the tax, we wouldn’t have made income in the TRS because we’d be unhedged and...

Got it. Just to clarify, someone asked me this. But, I think I know the answer. The mark-to-market on the loans, it doesn’t matter if they’re loans in securitization or if they’re waiting securitization, right? The loans are marked regardless. Is that correct?

Yes. There’s no difference in the financials.

Okay, great. And then, just one last one, just since there are a lot of moving parts. You still have a fair amount of loans that are not securitized, even though you did your deal on February, but you had good production in Q1. I mean, are you going to just wait out the securitization market, because things are wiped out or do you have risk there? Are you going to slow down loan growth because of what’s going on?

Yes. For that question, I’m going to turn it over to Namit Sinha, our co-CIO who’s in the room with us as well.

Yes. Hi. So, from a securitization standpoint, we generally believe in managing the financing risk in a prudent way, so effectively build up the loan portfolio to critical mass and then be sort of programmatic in taking it to securitization and not picking and choosing the spread at which to securitize somewhat. The market where we are right now is definitely wide to where we were earlier. But as Brandon had mentioned, we’ve also raised loan coupons to reflect that widening. So, over a cycle, you’re going to see that effect kind be mitigated away by the higher loan rates that we’re going to produce, starting within 30 to 45 days.

But, are you going to -- some companies, when this happens where it’s a little less certain securitization market, they slow down because you’re not a bank, you don’t have deposits. Are you making a conscious decision to be a little more careful right now?

I think what we’ll do is we’ll still go out to the securitization market. What we might choose to do is potentially sell down deeper to the -- in the capital structure and effectively utilize the cash release, post-securitization to invest in higher yielding securities or loans down the line.

Got it. Okay. Thanks.

[Operator Instructions] There are no more questions at this time. This completes our question-and-answer session. And I will now turn the call back over to management for closing remarks.

This is Robert. I want to thank everyone for your time and interest in Angel Oak Mortgage REIT. As you can tell, we are excited about the opportunities we have in front of us. We look forward to connecting with you the next quarter. In the meantime, if you have any questions, please reach out to us, and everyone have a great evening.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.