Q4 2023 Angel Oak Mortgage REIT Inc Earnings Call

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Welcome to chorus call. Please hold and operator will be with you shortly.

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No.

Of course call what conference would you like.

Okay I'll join you and at this time.

Thank you.

Okay.

Both joined our balance sheet and expanding net interest income.

In 2020, we purchased a total of.

$223 million of current market coupon loads.

This drove a 28% expansion to our net interest income from the second quarter to the fourth quarter.

Weighted average coupons on our unsecured as full loan portfolio have increased nearly 200 basis points across the year and 95 basis points in the fourth quarter alone.

Our GAAP book value improved to 10 26 per share.

As of December 31st 2023.

This was an increase of 10, 4% compared to the previous caller.

Our economic book value of $30 54 per share improved by two 6% versus the previous quarter.

Okay.

Credit risk has been a key discussion point across the industry in the recent quarters.

Our weighted average 90, plus day delinquency rate.

Across our portfolio of home and securitized loans was two 2% as of the end of the year as compared to one 9% at the end of third quarter.

While as expected decided trended slightly upward we believe that the trend presents a movement back.

Towards historical averages after.

After sitting at historic lows in the recent years.

Credit risk management is a key competitive strength of us due to our relationship with the Angels ecosystem, which provides us the ability to adjust credit offering.

Based on our specific desired characteristics.

<unk> is the risk we choose to own and we expect our portfolio to continue to perform comparably well.

In 2024, we expect to maintain momentum and drive further net interest income growth as we redeploy capital into high yielding assets.

Portfolio management philosophy is above all to focus on maximizing the Aro <unk> our portfolio.

And ensure that our capital is allocated to its highest and best use.

Currently have dry powder that coupled with expected securitization timing and execution levels will allow us to continue to purchase newly originated loans on a programmatic basis.

As always these efforts are supported by the credit selection expertise I've discussed.

As we firmly believe that we possess.

Critical strategic differentiator in our ability to evaluate opportunities and allocate capital within our desired risk and return characteristics with that.

Turn it over to Brandon, who will walk us through the financial performance for the year end and quarter in more detail.

Thank you sure Annie.

First I would like to talk through the details of our financial results and then provide some additional context around our current position and where we're headed in 2024 for.

For the fourth quarter of 2023, we had GAAP net income of $28 6 million or $1 15 per fully diluted common share for the full year. We had GAAP net income of $33 7 million or $1 35 per fully diluted common share.

This is a significant transformation from last year's results as we continued to demonstrate our ability to execute our earnings growth strategy.

Distributable earnings were negative $6 5 million or a loss of 26 cents per share the.

The negative distributable earnings this quarter were again driven by the realization of previously unrealized losses, when we participate in a co mingled securitization like we did in December with <unk> $2023 seven.

Interest income for the quarter.

It was $24 6 million and.

Net interest income was $8 2 million.

Which marks an 11% improvement over the previous quarter and.

And a 28% improvement over the second quarter for.

For the year interest income was $96 million and net interest income was $28 9 billion extremely mentioned, we expect to continue to expand net interest income in the coming quarters, as we purchased and securitized new loans.

Our operating expenses for the fourth quarter were $4 3 million.

Representing a modest decline from the previous quarter.

We analyze our expenses, we find it most useful to exclude our noncash stock compensation expenses as well as securitization costs.

Our stock compensation does not impact our cash operations and securitization costs are good costs that are part and parcel with our business plan.

For the full year operating expenses were $19 $9 million or $15 $7 million, excluding securitization expenses and stock compensation.

This demonstrates a decrease of $7 $3 million or nearly 32% reduction compared to the prior year. When also adjusted for $1 4 million in severance expense incurred in 2022.

We are continuously assessing our cost structure and plan to maintain reduced expenses going forward, while continuing to look for additional savings opportunities.

Now digging onto the balance sheet as of December 31, we had $41 $6 million of cash as expected our recourse debt to equity ratio increased slightly versus the prior quarter to one nine times as of the end of the year of one three times when reflecting the maturity of short term U S treasury assets and the corresponding.

Repurchase agreements on January 16, 2024.

The increase versus the third quarter was due to additional whole loan purchases during the fourth quarter as we continue to deploy capital into higher yielding loans.

We have residential whole loans at fair value of $380 million financed with $291 million of warehouse debt.

$1 2 billion of residential mortgage loans in securitization trust and $488 million of RMB <unk> <unk>.

Including $16 $2 million of investments in majority owned affiliates.

Which are included in other assets on our balance sheet.

We finished the year with Undrawn loan financing capacity of approximately $760 million.

We're pleased to have delivered consistent securitizations over the course of the year with a combination of both Standalone commingled deals.

In total we securitized over $660 million of loans with a weighted average coupon of 495% across four securitizations.

Near the end of the year, we participated in two.

2023, dash, seven which is a $397 million securitization to.

Which we contributed $42 million of loans.

We observed improved securitization markets in the fourth quarter and thus far in 2024, and we expect that we'll be able to maintain strong execution and future deals.

GAAP book value per share increased 10, 4% to $10 26 as of December 31, 2023.

Up from $9 29 as of September 32023.

Economic book value, which fair values, all nonrecourse securitization obligations was $13 54 per share as of December 31, 2023.

Up two 6% from $13 20 per share as of September 32023.

Given recent rate and spread movements, we estimate that our portfolio valuations give back some of Q4's unrealized gains and that the impact to GAAP book value is approximately three 5% and the impact.

Economic book value is approximately 1% as of the end of February.

Inclusive of our February dividend payments.

Our $223 million of loan purchases. This year carried a weighted average coupon of 837% and a weighted average LTV of 70%.

Weighted average FICO of 754 with.

With these new loans, the weighted average coupon of our residential whole loan portfolio as of the end of the year was $6 seven 8% representing.

An increase of 95 basis points since the end of the third quarter and nearly 200 basis points since the end of 2022.

Including anticipated loan purchases and securitization activity subsequent to year end the weighted average coupon of our residential whole loan portfolio was approximately seven 1% as of the end of February.

We look forward to continuing to execute our plans for programmatic loan purchases. This year and we will continue to be diligent in our approach to credit selection.

<unk> with our portfolio management philosophy as Screamy discussed, we believe that maintaining our purchasing discipline and continuing and methodical securitization process will be the best course of action to maintain organic growth of the earnings power of the portfolio.

Additionally, we have the embedded earnings growth.

<unk> has made in 2023, but have not yet been held for a full quarter, which we estimate will represented approximately $1 2 million of interest income.

Finally, as previously communicated the company declared a <unk> 32 per share common dividend.

Which was paid on February 29 2024.

This implies an annualized dividend rate of $1 28 per share our yield over 12% as of the closing price on March one 2024.

For additional color on our financial results. Please review the earnings supplement available on our website I will now turn it back to screening for closing remarks.

Thank you Brendan 2023 was a year of strategic execution for AOS and.

In which we delivered increasingly positive results.

Despite the ongoing challenges seen across the marketplace.

While we are certainly proud of the position we're in and the growth that we've achieved.

We believe we have just gotten started.

Our net interest margin will continue to grow with the increase coupons and values of our unsecured loans.

As always we will maintain our focus on managing expenses and liquidity.

We look forward to continuing to grow our business and delivering attractive stable returns to our shareholders.

I do like to think that Angel team for their hard work and contributions over.

Last year 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.

I'll now begin the question and answer session.

If you would like to ask a question. Please press Star then one on your telephone keypad.

Thanks for the question has already been addressed I would like to remove yourself from Hugh Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

And so the first question comes from Doug Harter with UBS. Please go ahead.

Thanks, I was hoping you could give a little more clarity by what you mean about programmatic programmatic purchases.

New loans.

Could help size that.

Yes, I think it's something kind of on the pace that we've been doing in 2023. So.

Call, it $100 million, or so plus or minus a quarter.

Great and then thank you for that and then how are you thinking about.

Kind of the range for recourse recourse leverage.

Kind of where you want to operate.

I think.

That's going to that it's ticked up a little bit as we've been purchasing loans, but.

We don't really expect to go over about two times recourse debt to equity.

Ratio excluding at the end of the quarter, if we had to buy any treasuries. All short term repo that may take us up a little bit higher than that but if you look at us long term.

Our whole loan repo onto any retained bonds would be about two times.

Great. Thank you.

Thank you and our next question today comes from Chris Kotowski Kotowski with Oppenheimer. Please go ahead.

Yes, Im looking at page six of the presentation and looking at the weighted average coupon.

And.

It's good to see it rising nicely, but I'm wondering just.

Is there a way for us to gauge and quantify how much of kind of the.

Hello.

Market mortgages, you still have left or has that inventory been.

Cleaned out more or less.

Yes, we've got.

As far as our AG loans.

Total of the $380 million, we're looking at just over $100 million of those loans left.

We expect to clear those out kind of short order.

Here recently, so we've moved that down from $1 4 billion about a year ago.

Down to just over $100 million today.

Yes.

Okay. So and then I mean conceivably could that be cleared out in the next securitization.

Probably not the next securitization, but the one after that there'll be completely gone.

Okay great.

Is it for me thank you.

Thank you and as a reminder, if you'd like to ask a question. Please press Star then one at this time.

Our next question today comes from Matt Howlett with B Riley's Securities. Please go ahead.

Good morning, everyone. This is Michael Schafer on flora on for Matt I'm curious could you talk kind of in the context of <unk>.

Normalization as you said in the portfolio how are you thinking about underwriting during the fourth quarter.

Versus the third quarter, and now how that potentially changing to date.

Yes.

Yes.

It's <unk> here.

And as we go into the as we've gone through the last couple of years.

Gone up in credit generally I wouldn't say that we've been that much up in credit from the third quarter to the fourth quarter, but.

I think instead of thinking about it just up in credit I think that the boxes that we focus on which is bank statement loans fully underwritten bank statement on <unk> versus <unk>.

We also do single family rental or kind of loans.

And what do you have what you have to be focused on is more of the rental values.

And how that can affect your underwriting so we've been very cautious on how we underwrite.

Family rental homes, we also have gone up in credit just because you have to protect yourself against.

This continued home price appreciation and could that go the other direction. So that's been consistent theme for us.

Probably for the last two years.

So I wouldn't say it has gone.

What's different from third quarter to fourth quarter, but that's definitely on.

On our mind.

Sure. Thank you I appreciate it.

Yes.

Yes.

Thank you and our next question is a follow up from Doug Harter of UBS. Please go ahead.

Thanks, Steve.

You mentioned in your prepared remarks that securitization markets.

Continued to improve into the first quarter.

Can you just talk about what types of spreads youre seeing.

On new purchases of loans versus securitization execution.

Yes, so the new new purchases of loans between eight and eight 5% right now.

And the Securitizations AG market is actually pretty good I think we are.

We've been tighter.

15 to 20 basis points at this point from the beginning of the year, maybe a little lower but the new coupons that trending from spread securitization spreads in I'm, just saying took place between $1 40, and $1 50 substantially tighter than where we saw.

Yes.

Late last year.

Great. Thank you.

Thank you Len.

Gentlemen, this concludes the question and answer session.

To turn the conference back over to management for any closing remarks.

Thank you everyone for your diamond interest in inkjet of mortgage REIT.

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 have a great day.

Thank you. This concludes today's conference call.

Thank you all for attending today's presentation.

You may now disconnect your lines and have a wonderful day.

Okay.

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Yes.

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