Angel Oak Mortgage, Inc. (AOMR) Q2 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to the Angel Oak Mortgage REIT's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] This event is being recorded Tuesday, August 4, 2026. I would now like to turn the conference call over to Mr. KC Kelleher. Please go ahead.

Good morning, and thank you for joining us today for Angel Oak Mortgage REIT's Second Quarter 2026 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; 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. Now I will turn the call over to Sreeni.

Thank you, KC, and thank you all for joining us today. While the macroeconomic outlook remains unclear in the second quarter, AOMR responded with a balanced approach of strategic value-driven decision-making and operating excellence to strengthen the return profile and the long-term durability of our portfolio. We saw continued demand for well-structured non-QM credit, but the markets also moved through periods of caution as investors weighed the path of inflation, Federal Reserve policy and broader global uncertainty throughout the quarter. Against that backdrop, our focus was on staying disciplined in capital deployment, preserving flexibility and executing on opportunities to expand upon the earnings and the operating improvements we have achieved over the past several quarters. Our platform demonstrated resilience with solid year-over-year growth in net interest income, stable book value and durable credit performance. Notably, we took several strategic actions to strengthen the portfolio, including monetization of delevered legacy retained bonds, the repurchase of common stock from a pre-IPO investor at accretive return levels and successfully negotiated a significant spread reduction on our largest warehouse financing facility. These opportunistic prudent actions are designed to fortify the strength and the return profile of our portfolio over the short term and long term. We continue to source loans that fit our credit and return criteria. Though we did not have a securitization in the second quarter, we executed AOMT 2026-3 and AOMT 2026-HB1 following the end of the quarter. We expect to continue a pace of roughly one securitization per a quarter. Importantly, we are not simply focused on issuing transactions. We are focused on issuing transactions that strengthen the durability of our balance sheet, reduce financing uncertainty and support long-term earnings power. As we move in the back half of the year, our priorities are clear. While we cannot control macroeconomic conditions or day-to-day valuation changes, we can continue to make thoughtful value-driven decisions to maintain a business that is both robust and flexible. We will continue to originate and purchase selectively, maintain a conservative approach to leverage and use securitization as a strategic funding tool rather than volume-driven objective. We believe this approach positions AOMR to navigate uncertain markets while continuing to build value for shareholders over time. With that, I'll turn it over to Brandon, who will walk us through our second quarter financial performance in greater detail.

Thank you, Sreeni. Our second quarter results were reflective of the strong operating foundation that we built despite offsets stemming from unrealized mark-to-market valuation decreases in our unsecured securitized loan portfolio. Notably, as Sreeni mentioned, consistent with our focus on controlling what we can control, we took several strategic actions during the quarter to further strengthen our portfolio going forward. We sold our retained bonds from the AOMT 2020-3 securitization and have reinvested those proceeds into purchases of newly originated loans with higher modeled yields. We repurchased $15 million of common equity from a pre-IPO investor at accretive return levels, and we reduced the interest rate spread on our largest warehouse financing provider by 35 basis points. We expect to realize the positive impacts of these actions in the coming quarters and years. In the second quarter, we had GAAP net income of $3.4 million or $0.14 per diluted common share. The result was driven by healthy net interest income and maintained operating expense levels, partially offset by unrealized mark-to-market losses. Comparatively, in the second quarter of 2025, we had GAAP net income of $800,000 or $0.03 per diluted common share. Distributable earnings for the quarter were $9 million. Our securitized loan portfolio and our residential loan portfolio combined for $3.6 million of unrealized losses, and our derivative portfolio drove $2.4 million of unrealized loss, driving the difference between GAAP net income and distributable earnings. In the second quarter of 2025, distributable earnings were $2.6 million. Interest income for the quarter was $41.4 million and net interest income was $10.7 million. This compares to interest income of $35.1 million and net interest income of $9.9 million in Q2 '25, showcasing 18% and 8% growth, respectively. For the first 6 months of 2026, interest income and net interest income grew by 21% and 14%, respectively, versus the first 6 months of 2025. The non-QM coupon rates have come down compared to the first half of 2025, performance has been supported by targeted asset purchases, decreased warehouse spreads and consistent access to securitization markets. Operating expenses for the second quarter were $3.6 million. Excluding non-cash stock compensation expenses, second quarter operating expenses were $3.2 million. The small increase compared to a year ago was due to increased loan diligence fees associated with larger target asset balances. Going forward, we expect to maintain similar operating expense levels and we'll continue to be as efficient as possible with our expense structure. Loan purchases during the quarter totaled $204 million and continue to reflect conservative credit profiles, moderate loan-to-value ratios and current market coupons that we believe remain attractive on a risk-adjusted basis. The weighted average coupon of loans purchased during the quarter was 7.34%. The weighted average CLTV was 70.5% and the weighted average credit score was 759. Our credit underwriting metrics have continued to reflect our desired credit and return profile. As of the end of the quarter, our loans in securitization trust portfolio carried a weighted average coupon of 6.04% with a weighted average funding cost of approximately 4.5%. We intend to continue to access securitization markets through our disciplined methodical securitization strategy. As mentioned, we executed the AOMT 2026-3 securitization just after the end of the quarter. We were the sole contributor to the deal, which had $280 million of unpaid principal balance and a weighted average coupon of 6.9%, weighted average non-zero credit score of 757 and a weighted average CLTV of 69%. The AAA-rated senior bonds priced at 130 basis point spread over the treasury yield curve. Additionally, we recently priced AOMT 2026-HB1, $221 million commingled HELOC securitization, to which we contributed $71 million of loans. Loans underlying the deal had a weighted average coupon of 9.79%, weighted average non-zero credit score of 744 and a weighted average CLTV of 64.8%. Securitization markets have remained constructive amid market uncertainty, and we continue to expect to execute roughly 1 securitization per quarter or 4 per year. As of quarter end, GAAP book value per share was $10.13. Economic book value, which fair values all non-recourse securitization obligations, was $12.24. Compared to the end of first quarter 2026, GAAP book value per share decreased 1.7% and economic book value decreased 0.3%. Changes in book value during the quarter were reflective of operating income, offset by a quarterly dividend payment and aforementioned market-driven unrealized valuation changes within the portfolio. While the market continues to display volatility tied to macroeconomic and geopolitical factors, we estimate that as of today, book value has remained relatively flat since the end of the second quarter. Our balance sheet remains well positioned with cash of $48.6 million and recourse debt-to-equity ratio of 2.3x. This ratio is consistent with what we would expect immediately preceding the securitization. As such, following the AOMT 2026-3 and AOMT 2026-HB1 securitizations, recourse debt-to-equity decreased to approximately 1x. We aim to maintain liquidity and available financing capacity to provide flexibility to respond to changing market conditions. We ended the quarter with unsecuritized residential whole loans at a fair value of $439 million, financed with $365 million of warehouse debt. $2.1 billion of residential mortgage loans in securitization trust and $334 million of RMBS, including $26 million of investment 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 $900 million with 4 high-quality lending partners. Credit performance continued to be solid with portfolio-wide 90-day plus delinquencies at approximately 2.8%, which is inclusive of our residential loan, securitized loan and RMBS portfolios. This represents an increase of approximately 9 basis points from Q1 2026. Performance across the Angel Oak shelf remains strong, and we believe that the performance of our collateral relative to the non-QM securitization market is a key differentiator for our platform. I'll reiterate our expectation that our differentiated credit performance will translate into lower losses and comparable non-QM platforms across the full credit cycle. This view is supported by our proactive migration of the credit spectrum, conservative LTVs and disciplined underwriting approach, which we believe position the portfolio to perform consistently even in more challenging environments. 3-month prepay speeds for our non-QM RMBS securitized loan portfolios were 13.6% to end the quarter compared to 12.5% in the first quarter of 2026. As we have mentioned in previous quarters, we expect prepayment speeds to continue to increase as rates decrease and homeowners are incentivized to refinance. With that said, we model our returns based on historical average prepayment speeds of 20% to 30%. While prepay speeds are likely to tick upward and newly originated coupon rates continue to decrease, the majority of our portfolio still has coupon rates that are below newly originated coupon rates, and we expect that mortgage rates would need to fall meaningfully in order to produce a significant impact to the returns to our portfolio. Lastly, the company declared a $0.32 per share common dividend payable on August 28, 2026, to common shareholders of record as of August 21, 2026. For additional detail on our financial results and portfolio composition, please refer to the earnings supplement available on our website.

Thank you, Brandon. To close, we remain confident in the advantages of the Angel Oak platform. Our access to differentiated origination, our experience in securitization and our emphasis on credit discipline gives us multiple levers to manage through changing market conditions. We are focused on continuing to translate those trends into consistent earnings, thoughtful balance sheet growth and long-term shareholder value. With that, we'll open up the call for your questions. Operator?

[Operator Instructions] And your first question comes from Marissa Lobo from UBS.

Just thinking about the new securitization, how large do you see the HELOC opportunity for AOMR? And what's your target allocation relative to first lien non-QM?

Sreeni here. I'll answer that. So we like the HELOC opportunity. Obviously, it's all about the size and scale and the product -- the credit box that we want to play in. So we think of it as a 10% to 15% allocation of our overall allocation. So we'll still be predominantly non-QM and then selectively we'll look into HELOCs based on our credit boxes.

Got it. And just looking at non-QM composition, seeing that investor loans are largely about 50% of the market. And how does AOMR's collateral compared to that? And to what extent are you growing DSCR exposure?

I think our composition on investor cash flow loans is around that same amount. It's been a good source for growth for us over the past several years, but we still predominantly play in that space and the bank statement borrowing underwriting programs to like small business owners.

And your next question comes from Doug Harter from BTIG.

In your prepared remarks, you mentioned that one of the warehouse -- your warehouse financing facilities improved by 35 basis points. Can you talk about the returns you see sort of during the warehouse period versus the returns you see upon securitization?

Yes. I think during the warehouse period, it will change a little bit because of that spread depending on whatever how we mix our financing. But typically, right now, I think we're seeing about 13% to 14% return in the warehouse phase. And then in securitization, it's that 15% to 20% we often quote depending exactly on where securitizations execute.

Great. And then just a clarifying question. In your supplement, it looks like the cost of the warehouse debt has kind of bounced around the past couple of quarters. Is there any kind of noise in there that we should be thinking about as we calculate that number on a quarterly basis?

Yes. I think it just really depends exactly how levered we are throughout the quarter and exactly how we're financing because obviously, we just closed 2 securitizations. We'll close the HELOC securitization today (AOMT) 2026-3 already closed just after quarter end. We use now -- we have a lot of fresh capital. We'll go and buy loans unlevered and slowly add in the debt where I think last quarter, it was kind of the opposite situation where we had -- in Q2, we had more leverage throughout the quarter than we normally would have because there was no securitization, but you should see that kind of clean up and clean out a little bit into Q3.

[Operator Instructions] And your next question comes from Jason Weaver from JonesTrading.

Just looking at the (AOMT) 2026-3 deal, it looks like we're seeing a fair amount of spread compression there versus the last securitization. With lower collateral WAC and higher spreads on the AAAs, can you talk a little bit about the forward assumptions here if it's still in that high teens range? And if there was anything deal specific that drove that net spread tighter.

Yes. I think that we're still expecting the 15% to 20%. Of course, that can bounce around from time to time. This last one was your portfolio composition was a little lower coupon than what we're currently buying. But now in response to the higher rates, our average mortgage coupons have gone up by 35, 40 basis points on average. And today, we're buying loans closer back to that mid-7s level from a non-QM perspective. And I mean the spreads in the securitization market have been relatively tight. The securitization market is healthy in the non-QM space, lots of buyers, lots of activity. So that is moving in the correct direction. Even in the face of the volatility in rates hasn't really translated into widening or volatile spreads.

Got it. And I wonder, just broadly, if you can talk a bit about what you're seeing on just broad consumer credit trends and non-QM underwriting standards, any more tightness there?

Yes. So broadly, the market obviously is difficult from the origination side, right, because housing affordability slows down, obviously, as rates keep going up. That being said, the non-QM market, amazingly enough over the last 2 years continues to grow. Competitively, it's extremely competitive because you have a whole addition of insurance companies that are stepping in at these higher rates. So you definitely have to be disciplined. In terms of weaker underwriting competitively across the market, there are weak points that are starting to show up in certain programs that we generally don't do what some of our competitors are doing, whether they're in the REIT space or whether they're just across the board in the market. And there's a chart that I think we have that we can send to you, and I don't want to talk about anything individually. But there are a couple of programs that we just don't do that we are starting to see in the marketplace. But that being said, across the board, generally, the underwriting has been prudent and disciplined still in the marketplace, not just Angel Oak, but just generally across the board. On consumer credit, I mean, obviously, HELOCs gets closer to consumer credit from our side. You have to be careful there in terms of what you're underwriting. We're generally trying to underwrite LTV going to 65% combined loan-to-value. That's what we are trying to underwrite and depending on what type of consumer we're going through. So -- and that's what I was mentioning to you before, we don't want to scale that program for the sake of scaling it because obviously, the IRRs are good. You have to be thoughtful about the credit you're underwriting, especially in this peak of the housing price that we are seeing. The general consumer credit that I say consumer ex housing generally is the one that also probably has not gotten any benefit of the equity markets. I think that consumer continues to be weaker. We are in that space through our mutual funds, ETFs and our other funds. So that's where we are being very cautious. But obviously, we don't play that in AOMR.

And your last question comes from Timothy D'Agostino from (B. Riley) Securities.

I guess just on securitizations, obviously, you closed 2 post quarter. And it sounds kind of like the language is changing a little bit so you're not really going towards quantity of securitization. So I was just wondering, how do you think about the 4 non-QM securitizations per quarter and the 2 HELOC securitizations? And does the pipeline for non-QM potentially support a second securitization in the third quarter or no?

Yes. I think our projection is still to have 4 non-QM or on average of 4 a year securitizations in the non-QM space. I think the second HELOC securitization is also pretty likely this year, and there's a decent chance with the pipeline coming that we'll see a second non-QM within Q3. But certainly, if it doesn't squeak into September, it'd probably be October, much like happened now. Of course, all depending on what's happening in the market and things like that, we'll be ready to go by then.

Okay. Great. And then are you -- I guess, staying on the non-QM side, are you still seeing good demand there in terms of what you're able to invest in? Just any color there would be great.

Yes. No, I think there's plenty of non-QM demand. I mean that space is continuing. Our mortgage company continues to put out a good amount of loans. As Sreeni mentioned, there's plenty of buyers on the other side, which drives capital formation in the space. So we think there's plenty of appetite and demand there and should continue throughout the rest of the year.

And there are no further questions at this time. You may proceed with your conference. Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation. You may now disconnect. Have a great day.