Q2 2023 Angel Oak Mortgage REIT Inc Earnings Call
Good day and welcome to the Angel Oh mortgage REIT second quarter, 2023s conference call.
All participants will be in a listen only mode.
Should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.
So it's Joel your question. Please press Star then two.
Please note this event is being recorded.
I would like now, let's turn the conference over to Randy Krishnan, Chief marketing and corporate Investor Relations. Please go ahead.
Good morning, Thank you for joining us today for Angel mortgage REIT second quarter 2023 earnings conference call.
This morning, we filed a press release detailing these results which is available on the investors section on our website at Www Dot Angel Oak REIT Dot 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.
A more detailed discussion of the factors there.
May affect the Companys results. Please refer to our earnings release for this quarter and to our 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 mornings conference call is hosted by Angel of mortgage Reits, Chief Executive Officer for any problem, Chief Financial Officer, Brandon Filson, and Angel Capitals co CIO knowledge Center.
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 Dot Angelo greet dot com.
Now I will turn the call over to screening.
Thank you Randy and thank you everyone for joining us today.
We were proud to see the work you've done over the previous quarters be demonstrated in our second quarter results.
In the second quarter.
We began purchasing newly originated loans.
Secret out of the pool of low coupon loans.
Built upon the work we've done to reduce expenses.
Since quarter end.
You have increased the pace of loan purchases.
Actively working towards the 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've demonstrated the strength and the 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 drawing down earnings book value, however, market volatility dampened compared to prior several quarters and expectations are that the fed is at or near the end of interest rate hike cycle.
While mortgage originations that applications are suppressed.
Experiencing some modest but encouraging recovery.
Demand.
Supporting our view that our business is well positioned to capitalize and drive growth.
We continue to progress through the year.
The optimism.
And with a number of key strategic successes under our belt, we have return their focus towards our execution of our growth strategy.
We captured additional value by executing our second securitization of the year during the quarter.
M D 2023, dashboard enhanced our liquidity position and supported our ability to purchase newly originated higher yielding loans from our affiliated loan origination, which allows us to tailor the credit quality and the characteristics of the loans repurchase.
<unk> also strengthened our balance sheet by reducing our warehouse debt and converting it to nonrecourse term structural leverage.
Additionally, the loans contributed to <unk> 2020 three dashboard that previously.
Previously carried on our most expensive, especially while the new loan purchases will be placed on lower cost facilities.
To that end, our current whole loan portfolio is equivalent to the size.
Roughly one securitization transaction and although.
Warehouse that is expected to increase as we continue purchasing newly originated loans.
We don't expect to reach a whole loan position more than one and a half to two times the estimated value of a single securitization.
On the debt side, we are proud to have reduced our warehouse debt by over 63% since the beginning of the year.
The positive impact of this reduction was partially offset by the effect of continued interest rate increases that compressed net interest margins.
With that said.
We are proud to have accelerated purchases of newly originated high coupon loans this quarter.
These loans carry a significantly higher coupons than our current whole loan portfolio.
And we believe we can continue purchasing loans and at attractive mid 8% range.
As a result, we expect net interest margin to expand in the coming quarters.
Especially as we continue to execute securitizations consisting of loans from the legacy portfolio. In addition.
The immediate impact of net interest income expansion of high coupon in the whole loan portfolio will improve future securitization execution as well.
Going into the second half of the year.
Expect continued rotation of our portfolio into newly originated a higher coupon loans do.
We increasingly are demonstrated in our results.
We plan to continue with quarterly securitization.
Which will support both our growth and our liquidity it goes.
While the risk continues to remain in the market.
We are focused on prudently assuming those risks.
We feel that we have competitive and competitive advantage.
We believe that our ability to tailor the credit characteristics of all loans is and will continue to be a differentiator.
We are proud of the flexibility, we have achieved with our capital structure and.
And we are confident in our ability to adapt and capitalize on opportunities in the second half of the year.
I will now turn the call over to Brian .
Thank you sure Annie 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'll go through the details of our financial results I 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 <unk> 15 cents per diluted common share distributable earnings were negative $3 9 million or a loss of <unk> 16 per common share.
The key driver of our GAAP net loss was $4 8 million unrealized loss on loans.
Securitization trust and their corresponding liability due to mark to market valuations.
Note that although these assets are marked at a discount principal payments are received a part.
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.
<unk> mentioned, we expect net interest margin to expand in coming quarters as the <unk> 2023 dash for securitization and subsequent securitizations reduced financing cost.
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, 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 32023, we had $59 $1 million in cash representing an increase of $30 million from Q4 2022.
Our strong cash position and the trailing six months showcases our focus on maintaining healthy liquidity levels. This additional liquidity provides us with the dry powder for sustained loan purchases that will grow net interest income improved cash flows and support securitization execution.
Our recourse debt to equity ratio as of June 30 was two five times as of today's date, our recourse debt to equity ratio was one two times, which reflects the maturity of repurchase obligation from short term trades that matured in early July .
This is a decrease of.
Eight times versus the comparable recourse debt to equity ratio as of the last earnings call of two times.
We have residential whole loans at fair value of $296 million financed with $234 million of warehouse debt.
The $1 $2 billion of residential loans in securitization trust and $71 $9 million of RMB S from retained <unk> securities from off balance sheet Securitizations. Additionally.
Additionally, we held $388 million of whole pool, our MBS as of quarter end.
We finished the quarter with Undrawn warehouse financing capacity of approximately $695 million as of today, we have a total of approximately $230 million of warehouse debt, representing a decrease of approximately 48% over the previous quarter.
We were pleased with the a M. T 2023 dash for securitization, which had a weighted average loan coupon of four 5%. This lower coupons deal helped improve the weighted average coupon rate of our remaining whole loan portfolio with subsequently improves our future securitization pipeline.
We have executed on our goal of one securitization per quarter and we expect it to continue to do so heading into the second half of the year.
GAAP book value per share decreased to $9.34 as of June 32023 from $9.80 as of March 31 2023.
The previously mentioned Mark to market impact of our loans in securitization trust and corresponding liability, which are the loans underlying securitizations for which the cost of funding has been fixed drove 19 sense of the total 46 cent decrease in GAAP book value.
Economic book value, which fair values, all nonrecourse securitization obligations was $13 16 per share as of June 32023 down 23 cents from Q1, driven by a 32 cent quarterly dividend.
As with last quarter, we expect valuation changes, resulting from interest rate and spread movements to Cogs GAAP and economic book value to fluctuate in the near term.
The weighted average coupon rate of our whole loan portfolio was $4 six 3% as of the end of the first quarter and increased 21 basis points to 484% as of the end of second quarter. Since the end of the second quarter, we have purchased and locked for purchase approximately $40 million of additional loans.
Our loan purchases this year carry a weighted average coupon rate of eight 4%.
Weighted average LTV of 72% and a weighted average FICO score of 754 with these new loans the weighted average coupon of our residential whole loan portfolio is approximately $5, one 7% representing an increase of over 50 basis points since the end of the first quarter.
The increase in the weighted average coupons will continue as additional loans are purchased.
Finally, the company has declared a <unk> 32 cents per share common dividend payable on August 31, 2023 to shareholders of record as of August 22023. This implies an annualized dividend of $1 28 per share or a yield of approximately 14% as of the closing price on August seven 2000.
23.
For additional color on our financial results. Please review the earnings supplement available on our website I will now turn it back for screening for closing remarks.
Thank you Brendan.
Before turning the call over to the operator for Q&A.
I do like to conclude with some brief remarks.
We are excited to act on their focus to grow.
As we head into the second half of the year.
One 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 under the radar for the industry.
However, we feel that credit risk management is one of our key competitive strengths by.
By leveraging the Angel of ecosystem, we have the ability to adjust credit offerings based on certain characteristics.
Selection is risk we'd like dawn.
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.
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 a good potential in the second half of the year.
As always.
I would like to thank the entire angel team for their hard work and contributions.
As we seek to build long term value for our shareholders.
With that we'll open up the call to your questions operator.
Thank you well now begin the question and answer session.
To ask a question you May press Star then one on your kitchen phone.
If we are 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'll pause momentarily to assemble our roster.
Yeah.
Yes.
Yeah.
Okay.
The first question comes with Don <unk> with Wells Fargo. Please go ahead.
Yes it.
It sounds like NII is heading higher due to the sort of 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.
Do you feel like maybe at some point it makes sense, but it's a trend that.
Yeah no. Thanks for the question Dan Yes, no net interest margins should start to increase next quarter I mean, one of the things that you know with the securitization as we were.
We went off of our most expensive warehouse financing over 9% cash paying right.
Securitization debt, which is it was a significantly lower amount and then with the new loan purchases.
We also should see like you mentioned that the additional cost savings. So we believe over the next few quarters.
We're going to grow into that dividend to the point, where we're adequately covering not just from a cash flow basis, but from a true net earnings perspective.
Okay, Great. That's all I had thanks.
Thank you. The next question comes from Matthew Howlett with B Riley. Please go ahead.
Oh, hey, thanks.
My question is just on.
When you're on the Mark <unk>, Mark I'd like to hear an update on AAA spreads are on.
'twenty going forward.
I think we have been tightening.
Where they are now up to date.
Just give us a little squeezed coupons are tremendous going into the securitization trusts now when you look at what you're retaining optus creation whats type of IRR. You are a week 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.
Yes coordination market today, and how you foresee in the next few deals going.
Sure.
So.
From a securitization specs standpoint youre right.
From from second quarter and through today, we have seen meaningful tightening in spreads.
Not just for non QM, but across the board tightening and in the risk on 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 it tenants or the rest of the quarter.
Potentially in the next quarter we.
We have seen meaningful spread tightening for current coupon deals.
That has been securitized in the market over the last month.
Change in the rates the rates market have generally been.
[noise] sort of unchanged.
A little bit of a volatile manner. So overall, we see a benefit will that spread tightening to our portfolio.
And then Oh.
A question around the names around the new coupons. So then when we clear these loans at eight and a quarter to eight and a half coupon generally speaking the grocer tons post securitization on the retained portfolio is high teens.
And so that is what we generally penciled in for the marginal loans that come in and these high coupons, obviously, they get mixed up with the loan coupons and bring the coupons higher so that has an element of.
Securitization that comes with.
Our blended pull off these higher coupons versus the lower coupon loans, but on the margin of these loans are accretive to the portfolio and.
Post securitization Scotty a high teens IRR.
When you talk about high teens, I think equity investors get really excited these are that incorporate cycle off suggested in that.
It gives them confidence yes. It incorporates the cost of funds as we see in the market today.
And it incorporates a reasonable assumptions around prepayments delinquencies and defaults down the line obviously the those out to the base case scenario then there's obviously stress as you can run that bring the returns down but the base case.
High teens is what we usually see at these higher coupons in if you will.
If you think of these coupons as maybe a slightly elevated speed assumption down the line.
It probably brings it down to mid teens.
Okay and then the next question that most people would ask what like how much can.
Can you add how much can you grow that.
Your loan portfolio securitization portfolio today with the existing capital base of the company and the gaps you paid down your repo lines, you freed up a lot of capital and given where advance rates Orange coordination Mark I don't know if they've changed or not how much can only grow how much can you grow here the next CEO .
Full capacity.
Yes.
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 a.
Look to the capital markets at that time to grow.
Let me just one more switching somebody right.
You see around three 400 or something like that.
Yeah, so exactly somewhere call.
Call. It maybe 1 billion $5 worth of loans that goes through the system a few times a few cycles.
Great well look we look we look forward to that congrats on.
Getting to back to growth. Thank you.
Okay.
Once again if at all.
To ask a question. Please press Star then one.
The next question comes from.
Derek Hewett with Bank of America. Please go ahead.
Good morning, everyone could you provide an update in terms of where spreads have trended.
Quarter to date, and then kind of how that impacts the book value per share.
Yeah. So.
Quarter to date since the end of second quarter.
Have seen senior.
Senior AAA spreads come in.
Somewhere between 15 and 25 basis points.
It does vary because historically in the non QM space pretty.
Pretty much all Securitizations would happen at the same coupon, which would be the current coupon.
One shell versus the other was easily transportable.
When you look at the landscape today that our <unk> optical.
Optical bonding seven and a half coupon deals six and a half coupon data and so on so forth. So there's a little bit of a basis that but generally speaking we have seen about 15 to 25 basis point of spread tightening.
In the new issue space for AAA then.
And come in typically down the capital structure.
Okay, and then do you have that.
I can update in terms of quarter to date book value either as of the end of July or or through.
Through early August .
No nothing nothing right now there.
Yes.
Alright, thank you.
Okay.
Okay.
Yeah.
Ladies and gentlemen, with that we have finished.
And answer session I would like to turn it over to Mr. Brendan Nelson CFO of the company. Please go ahead.
Thank you everyone for your time and interest and Angel Oak mortgage REIT, we look forward to connecting with you.
With you shortly in the meantime, if you have any questions. Please feel free to reach out to us and have a great day.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yeah.
[music].
Yes.
[music].
Sure.
Yes.
Sure.
Yes.
[music].
Yes.
Uh huh.
Sure.
[music].