Good day, and welcome to the Angel Oak Mortgage Second Quarter 2024 Earnings Call. All participants’ will be in 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 now like to turn the conference over to KC Kelleher, Head of Corporate Finance and Investor Relations. Please go ahead.

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's second quarter 2024 earnings conference call. This morning, we filed our press release detailing these results, which is available in the Investors section on our website at 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 Prabu; Chief Financial Officer, Brandon Filson; and Angel Oak Capital's Chief Investment Officer, Namit Sinha. Management will make some prepared comments, after which we will open the call to your questions. Additionally, we recommend reviewing our earnings supplement posted on our website, angeloakreit.com. Now I will turn the call over to Sreeni.

Thank you, KC, and thank you to everyone on the call for joining us today. AOMR had a very productive first half of the year, continuing an upward trajectory, which began in Q3 2023, and we expect to continue to capitalize on going forward. For the fourth consecutive quarter, we increased net interest income by purchasing current coupon loans while managing and reducing borrowing costs. We led a securitization during the quarter, AOMT2024-4, a $300 million deal. We also had a modest participation in a deal alongside other Angel Oak strategies. These securitizations reduced funding costs and freed up capital to rotate into higher-yielding assets. We are currently projecting securitization yields in the mid to high-teens, which is more aligned to what we observed historically. Additionally, we filed a $750 million shelf to be used for our future capital raises over the next few years. We then immediately used that shelf to issue $50 million in senior unsecured notes that will be used to fund the next several quarters of growth. Now highlighting some of our results. The second quarter marked our fourth consecutive quarter of net interest income growth with sizable improvements on a quarterly year-to-date and year-over-year basis. This is a result of methodical new loan acquisition, diligent management of capital and financing costs and efficient securitizations. Additionally, targeted efforts to judiciously manage our operating cost structure alongside prudent portfolio risk management have led to sustained low operating costs. These efforts are enabled and supported by the Angel Oak ecosystem with its market-leading origination and securitization platforms positions the company for continued success. Looking ahead to second half of 2024, while origination dynamics continue to reflect a variable and high interest rate environment, we remain optimistic and believe we are well prepared to capitalize on additional accretive loan…

Thank you, Sreeni. In the second quarter, the company had GAAP net loss of $0.3 million or a loss of $0.01 per common share. Distributable earnings results were a loss of $2.3 million or $0.09 per common share. The exclusion of unrealized gains on residential loans was the primary driver of the difference between GAAP and distributable earnings. As Sreeni mentioned, the second quarter of 2024 demonstrated continued upward progress in top line interest income and net interest growth. We saw sizable gains in net interest income over the course of the past quarter and year-over-year, which marks an annualization of our return to growth after taking a defensive stance through much of 2022 and the first half of 2023. The company's net interest income expanded for the fourth consecutive quarter, growing by nearly 50% compared to Q2 2023, signaling the sustained and growing strength of the portfolio. We continued our pace of averaging one securitization per quarter and have maintained reduced levels of operating expense. We believe that our progress in recent quarters serves as a precursor to future quarters when we expect the deployment of the proceeds from July's senior unsecured notes issuance to catalyze the next phase of growth for AOMR. Interest income for the quarter was $25.9 million and net interest income was $9.5 million, marking a nearly 50% improvement over the second quarter of 2023 and a 10% improvement over the first quarter of 2024. Interest income grew over 9%, compared to the year-ago quarter and interest expense decreased 5%. While interest rates have remained elevated, net interest margin has expanded by over 250 basis points from the first quarter. Growth has been driven by accretive loan purchases, pragmatic securitizations and focused capital allocation. We remain committed to our disciplined approach to loan acquisition and…

Thank you, Brandon. We are pleased with the significant progress we have made over the past 12 months and believe that we are well positioned to begin the next phase of growth for our shareholders. Powered by newly raised capital, we plan to increase our investment into the business through the continued acquisition of loans, securitization execution and focused capital allocation. From a rate perspective, the consensus is that we are likely entering into a more accommodative environment. All else being equal, a declining rate environment would have a positive impact on our business in general, primarily because we would expect to see financing cost reductions and increases in the valuation of our existing portfolio. While there may also be a reduction in the coupon of newly originated loans, we would still expect to see a net benefit and sticky financing costs based on SOFR would decrease with Fed funds rate cuts. With that said, weaker employment and earnings trends in the recent days have sparked fears of a potential economic downturn and with that heightened credit risk. We believe that credit risk management is a competitive strength of ours due to our relationship with Angel Oak ecosystem, which provides us the ability to adjust credit offerings based on our specific desired characteristics. Credit is the risk we choose to own, and we expect our portfolio to continue to perform comparably well. We are optimistic that broader economic background will be generally supportive of our outlook and may potentially lead to additional opportunities not only in the non-QM residential mortgage market, but in capital markets as well. We will now open the call to your questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Don Fandetti with Wells Fargo. Please go ahead.

Yes. Brandon, can you talk a little bit about with NII increasing, do you feel like you're in a position to maintain the current dividend level?

Don, yes, absolutely. We've been increasing the NII for now 4 quarters. I think if you look at it from a net interest margin perspective, less cash expenses were up to -- we probably improve that coverage by about 20% this quarter to 80% coverage of the dividend just from a cash basis. We -- like I said, we probably have a little pause this next quarter as top line grows, but we work to deploy the -- and lever the proceeds from the debt issuance. But then in Q4, we expect a further expansion that, again, will -- I believe, will be an effective covering of the dividend.

Got it. And then you've had a pretty big move in rates. What is your economic book value in July and August?

Yes, that we actually haven't had a chance to put pen to paper on since it's been so dramatic. I mean there's the rate move and then there's also a spread component which we need to see it spreads in our business kind of widened out to meet the decrease in rates at least temporarily. But I think empirically any of the decreases we had in -- as of June 30 would be now at least flat, if not up.

Got it. Thanks.

Our next question comes from Doug Harter with UBS. Please go ahead.

Thanks. Can you talk about how much growth do you think that the unsecured issuance can provide kind of net of the repurchase that you did?

Yes. We think that this -- the $30 million or so of net proceeds that's left after the repurchase, you're probably going to provide us the runway for the next kind of 3 or 4 quarters of consistent loan acquisition. I mean just on space, the first round, the $30 million we can buy about $200 million worth of loans. We could then securitize. After that, we'll buy another $180 million, and it kind of steps down from that point forward. But again, several quarters and probably will be supportive of something like $1 billion in residential loan purchases over the next several quarters.

And then I guess, given kind of where your recourse leverages, how do you think about the ability to issue additional unsecured as you look to kind of be able to continue to scale up the business?

I mean, it's something we'll certainly be looking at. I think we're -- we want to -- we don't want to just grow at any cost. We just raised this money, and we're just putting it to work. We have about, call it, $200 million in committed loan purchases that should come in based on the backs of this debt very -- in short order here in the next few weeks. But we -- I mean, we think that the balance sheet could hold more. We just want to make sure we're going to do it at the right time. And obviously, maybe with the latest rate moves if we did another tranche to tighten in pricing a little bit.

Great, appreciate it. Thank you.

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

Hey, this is Jake Katsikas on for Eric. Thanks for taking my questions. Just talking about prepayment activity, are you expecting a pickup in prepayment activity as a result of the recent interest rate moves? And at what level of rates do you think prepayment activity will begin to accelerate more meaningfully? Thank you.

Yes. We've already seen a little bit of a prepayment pickup even before the move in rates at why our GAAP and economic book value were a little bit down this quarter compared to where you would otherwise think. I mean rates didn't really move but prepayment speeds did move up slightly. I think there's -- at least in our portfolio, right, we have a very -- we have a tail of two sides, right? We've got the 5% coupon portfolio that's going to take a huge move in rates to really move prepayment speeds up materially, and we've got the 8% portfolio, which is going to be much more sensitive to prepayments. But the thing is that the prepayments are increasing because rates are going down, that means our financing costs should be going down, and we'll just keep investing that money, those proceeds back into the assets with a similar or maybe even catch a little tailwind yield. But a long way to answer your question, I mean, we've got quite a bit of, I think, protection in our performance in case the prepayment speeds increased by 10 points. Remember, non-QM historically has like a 25 to 30 CPR. That's what we base most of our modeling and assumptions on the securitization market. Recently, that's been much slower than that, like single-digit level. So we are expecting a return 25% to 30% level over the next several quarters.

Great. Thank you so much.

[Operator Instructions] Our next question comes from Matthew Howlett with B. Riley. Please go ahead.

Hey, guys. Congrats on a great report. I know things are fluid right now, but with the move herein rates and you're putting on coupons around 80%, any sense on what the ROEs will be on retained interest with securitizations going forward? I mean I'm assuming they're going to be a lot higher than we you thought they were a couple of quarters ago.

Yes. Well, I think there's a potential, Matt, for a little, what I'll call, maybe a Goldilock securitization that will have a higher coupon relative to funding cost. We saw that back in '21 right after our IPO with 21-4 and 21-7. But long-term, so -- I mean long-term meaning next year, really, we'd expect that if rates do come in, stay in, our loan coupons will reduce, our funding costs will reduce, and we'll still be looking at that mid to high-teens to low 20% ROE. But it could be -- there could be a period where the next few securitizations have a little bit higher return hurdle than that if the economic conditions allow.

Have you started lowering -- has the mortgage company started lowering rates?

Matt, Sreeni here. So last -- I would say before the last few days, yes, we have been lowering rates because as you noticed, rates have been going lower over the last few weeks, not just last two days. But last two days, really the credit -- the spreads on the securitization side have widened just from the sympathy of what's happening in the entire market. So right now, I would say we have stayed flat on rates, but you should expect the mortgage company or -- and across the board, people to lower rates. And to answer your question before also on that side, part of that is you will see if we keep rates high, you're going to see prepayment activity pick up too. So I think the industry as a whole will lower rates here.

So just in summary, if I can summarize what I heard. I mean you could do about $1 billion of loan acquisition here with the new capital that you raised in July will take you a couple of quarters, you still do a couple to do one securitization per quarter, but you think you can grow that kind of non-recourse leverage up pretty good with the access securitization market. And that's going to have a huge impact on your NII probably way above the dividend, and I don't know if I put those words in your mouth, but I mean it's about $1 billion of loan acquisitions. Did I hear you right in the next few quarters?

Yes. That should be what we had an available fund and then plus the senior unsecured notes will also support that is a piece of that $1 billion.

Absolutely incredible. I guess just the last question is, I mean, are you seeing you bumping into any competition in a non-key WIM space? I mean -- or has this been sort of cleaned out following the last couple of years. And you guys are the league leader in it and we haven't seen much activity. I mean anyone, it's quite the size of you guys, but are you bumping in anybody?

No. Yes, the guys in the previous batch, they've gotten cleaned out. I would say, from a consistency of origination to credit management securitization, we would consider ourselves to be a leader. We are seeing small competition from insurance companies, not from the REIT industry from the insurance company, but they're very selective about how they get involved. And as the rates continue to go lower and the securitization bid gets stronger, I think that the insurance companies may be less competitive. Obviously, there'll still be buyers. But from what we are trying to achieve, we have enough in what we're doing, where we're not -- we don't feel constrained or stretched.

Right. Exactly. Well, certainly, we look forward to the next wave of growth of the company. Appreciate it.

Thank you.

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

All right. 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.

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