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Angel Oak Mortgage, Inc. (AOMR)

Q2 2023 Earnings Call· Sun, Aug 13, 2023

$9.17

+0.11%

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Transcript

Operator

Operator

Good day. And welcome to the Angel Oak Mortgage REIT Second Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would like now to turn the conference over to Randy Chrisman, Chief Marketing and Corporate Investor Relation. Please go ahead.

Randy Chrisman

Analyst

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT’s second quarter 2023 earnings conference call. This morning, we filed our press release detailing these results, which is available on the Investors 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 more most recent SEC filings. 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 first lead off the call by making 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 will turn the call over to Sreeni.

Sreeni Prabhu

Analyst

Thank you, Randy, and thank you everyone for joining us today. We were proud to see the work we have done over the previous quarters we demonstrated in our second quarter results. In the second quarter, we began purchasing newly originated loans, securitize a pool of low coupon loans and build upon the work we have done to reduce expenses. Since quarter end, we have increased the pace of our loan purchases, are actively working towards our next securitization and have taken additional expense savings actions. In a period of time marked by continued uncertainty in the broader economy and rising rates, we believe we have demonstrated the strength and resilience of our business model and its unique competitive advantages. During the second quarter, interest rates and spreads continue to widen, which negatively impacted mark-to-market valuations of our portfolio and drew down earnings and book value. However, market volatility dampened compared to prior guidance several quarters and expectations are that the Fed is at or near the end of interest rate hike cycle. While mortgage originations and applications have suppressed, we are experiencing some modest but encouraging recovery to demand, supporting our view that our business is well positioned to capitalize and drive growth. We continue to progress through the year with optimism and a number of key strategic successes under our belt. We have returned our focus towards our execution of our growth strategy. We captured additional value by securing our second securitization of the year during the quarter. AOMT 2023 Dashboard enhanced our liquidity position and supported our ability to purchase newly originated high yielding loans from our affiliated loan originator, which allows us to tailor the credit quality and the characteristics of the loans we purchase. The securitization also strengthened our balance sheet by reducing our warehouse…

Brandon Filson

Analyst

Thank you, Sreeni. We are pleased with our results in the second quarter. In particular, we are proud of the current position of the portfolio, both from a growth and risk management perspective. I will go through the details of our financial results and will provide some additional color and context as we look to the second half of the year. For the second quarter of 2023, we had a GAAP net loss of $3.7 million or $0.15 per diluted common share. Distributable earnings were negative $3.9 million or a loss of $0.16 per common share. The key driver of our GAAP net loss was $4.8 million unrealized loss on loans, securitization trust, and the corresponding liability due to mark-to-market valuations. Note that although these assets are marked at a discount, principal payments are received apart. Interest income for the quarter was $23.8 million and net interest margin was $6.5 million, which will remain compressed due to higher variable rate interest expense. As Sreeni mentioned, we expect net interest margin to expand in coming quarters as the AOMT 2023 Dashboard securitization and subsequent securitizations reduced financing costs and interest income grows in line with new loan purchases. Total operating expenses were $5.6 million or $4.5 million excluding securitization costs. This represents a savings of $2.8 million versus Q2 of 2022 and a year-to-date savings of $6.2 million versus the first half of 2022. We are pleased with our sustained operating expense reductions and are actively working to achieve additional savings in the coming quarters. Turning to the balance sheet. As of June 30, 2023, we had $59.1 million in cash, representing an increase of $30 million from Q4 of 2022. Our strong cash position in the trailing six months showcases our focus on maintaining healthy liquidity level. This additional liquidity…

Sreeni Prabhu

Analyst

Thank you, Brandon. Before turning the call over to the Operator for Q&A, I do like to conclude with some brief remarks. We are excited to have done our focus to growth as we head into the second half of the year. While the market and rate volatility is likely, not completely in the rearview mirror, the current composition of our portfolio has a strong foundation with flexibility to respond as market conditions evolve. Credit risk remains on the radar for the industry. However, we feel that credit risk management is one of our key competitive strengths. By leveraging the engine of ecosystem, we have the ability to adjust credit offerings based on certain characteristics. Credit selection is a risk we like to own and we have the ability to select profitable loans with sound credit. Credit performance of the portfolio has been strong and we expect it to continue to perform comparably well. We believe our results in the first half of the year have demonstrated the strength and the resilience of our business model and we look forward to demonstrating our good potential in the second half of the year. As always, I would like to thank the entire Angel Oak team for their hard work and contribution, as we seek to build long-term value for our shareholders. With that, we will open up the call to your questions. Operator?

Operator

Operator

Thank you. [Operator Instructions] The first question with Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti

Analyst

Yes. It sounds like NII is heading higher due to the -- for the higher coupons on loans and more efficient funding and then there’s some expense saves. Do you think you can grow into the dividend over time or do you feel like maybe at some point it makes sense to trend that?

Brandon Filson

Analyst

Yeah. No. Thanks for the question, Don. Yeah. No. Net interest margin should start to increase next quarter. I mean, one of the things that we did with the securitization is we went off of our most expensive warehouse financing over a 9% cash paying rate to securitization debt, which was a significantly lower amount and then with the new loan purchases. We also should see, like you mentioned, the additional cost savings. So we believe over the next few quarters, we are going to grow into that dividend to the point where we are adequately covering, not just from a cash flow basis, but from a true net earnings perspective.

Don Fandetti

Analyst

Okay. Great. That’s all I have. Thanks.

Operator

Operator

Thank you. The next question comes with Matthew Howlett with B. Riley. Please go ahead.

Matthew Howlett

Analyst

Okay. Thanks. My question is just on you are in the market in this position, like, I’d like to hear an update on which spreads are on 2023 forward and where the -- I think they have been tightening, where they are now up-to-date? And then just give us a -- these coupons are tremendous going into the securitization trust now. When you look at what you are retaining off the securitization, what type of IRR or ROE should we look, should we be thinking about and are you still selling down to the rated bonds? Just give us a little update on the securitization market today and how you foresee the next few deals going?

Namit Sinha

Analyst

Sure. This is Namit. So from a securitization spreads standpoint, you are right, like from second quarter end to today we have seen meaningful tightening in spreads, not just for non-QM but across the Board tightening and the risk overall in the market. And so we have seen the benefits of that as well, which is likely going to show up, if it doesn’t reverse itself over the rest of the quarter, potentially in the next quarter. We have seen meaningful spread tightening for current coupon deals that have been securitized in the market over the last month unchanged and the rates market have generally been sort of unchanged in a little bit of a volatile manner. So, overall, we see a benefit to that spread tightening to our portfolio. And then to your question around the NIMs -- around the new coupons, so when we create these loans at 8.25, 8.5 coupon, generally speaking the gross returns for securitization on the retained portfolio is high-teens and so that is what we generally penciled in for the marginal loans that come in at these higher coupons. Obviously, they get mixed up with the lower coupons and bring the coupons higher. So that is an element of securitization that comes with a blended pool of these higher coupons versus the lower coupon loans. But on the margin, these loans are accretive to the portfolio and post-securitizations carry high-teens IRR.

Matthew Howlett

Analyst

When you talk about high-teens IRR, I think, equity investors get really excited and these are -- that incorporates like a loss adjusted and every…

Namit Sinha

Analyst

It incorporates -- yeah. It incorporates the cost of funds as we see in the market today and it incorporates reasonable assumptions around prepayments, delinquencies and defaults down the line. Obviously, those are to the base case scenario and there’s, obviously, stressors you can run that bring the returns down. But to the base case, high-teens is what we usually see at these higher coupons and if you think of these coupons as maybe a slightly elevated speed assumption down the line, it probably brings it down to mid-teens.

Matthew Howlett

Analyst

Okay. And the next question most people would ask would like, how much can you add -- how much can you grow that, your loan portfolio, securitization portfolio today with the existing capital base of the company in the ups you paid down your REPO lines, you freed up a lot of capital. Given where advanced rates are on securitization market, I don’t if they have changed or not, how much can we grow -- how much can you grow here in the next into full capacity?

Brandon Filson

Analyst

Yeah. We -- hey, Matt. It’s Brandon. We have probably enough capacity for three to four good sized securitizations with new coupon loans before we either have to wait and get principal payments back in to keep growing or look to the capital markets at that time to grow.

Matthew Howlett

Analyst

Will you perform securitization by around, say, around $300 million, $400 million, something like that?

Brandon Filson

Analyst

Yeah. Exactly. Somewhere, $1 billion, call it, maybe $1.5 billion worth of loans that goes through the system a few times, a few cycles.

Matthew Howlett

Analyst

Great. We will look forward to that. Congrats on getting back to growth. Thank you.

Brandon Filson

Analyst

Thanks, Matt.

Operator

Operator

[Operator Instructions] The next comes from Derek Hewett with Bank of America. Please go ahead.

Derek Hewett

Analyst

Good morning, everyone. Could you provide an update in terms of where spreads have trended quarter-to-date and then how that impacts the book value per share?

Namit Sinha

Analyst

Yeah. So on quarter-to-date since the end of second quarter, we have seen senior AAA spreads come in somewhere between 15 basis points and 25 basis points. It is very -- because historically in the non-QM space, pretty much all securitizations would happen at the same coupon which would be the current coupon. One sell versus the other was easily transportable. But when you look at the landscape today, there are 8.5 deals -- 8.5 coupon deals, 7.5 coupon deals, 6.5 coupon deals and so and so forth. So there’s a little bit of a basis there. But generally speaking, we have seen about 15 basis points to 25 basis points of spread tightening in the new issue space for AAAs and come in directly down at the capital structure.

Derek Hewett

Analyst

Okay. And then do you have like an update in terms of quarter-to-date book value either as of the end of July or through early August?

Brandon Filson

Analyst

No. Nothing right now, Derek.

Derek Hewett

Analyst

Okay. All right. Thank you.

Operator

Operator

Ladies and gentlemen, and with that, we have finished our question-and-answer session. I would like to turn it over to Mr. Brandon Filson, CFO of the company. Please go ahead.

Brandon Filson

Analyst

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

Operator

Operator

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. Have a good day.