Q2 2024 Angel Oak Mortgage REIT Inc Earnings Call
Speaker Change: Good day and welcome to the Angel Oak mortgage second quarter 2024 earnings call.
Speaker Change: All participants will be in listen-only mode.
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Speaker Change: by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone.
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Speaker Change: 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.
KC Kelleher: Good morning. Thank you for joining us today for Angel Oak Mortgage REITs second quarter 2024 earnings conference call. This morning, we filed our press release detailing these results, which is available in the investor section on our website at angeloakreit.com.
Speaker Change: As a reminder, remarks made on today's conference call may include forward-looking statements.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: This morning's conference call is hosted by Angel Oak Mortgage REITs Chief Executive Officer Sreeni Prabhu, Chief Financial Officer Brandon Filson, and Angel Oak Capital's Chief Investment Officer Namit Sinha.
Speaker Change: Management will make some prepared comments after which we will open the call to your questions.
Speaker Change: Additionally, we recommend reviewing our earnings supplement posted on our website angeloakreed.com. Now I will turn the call over to Sreeni.
Sreeni Prabhu: Thank you, KC, and thank you to everyone on the call for joining us today.
Sreeni Prabhu: AOMR had a very productive first half of the year, continuing an upward trajectory which began in Q3 2023.
Sreeni Prabhu: And we expect to continue to capitalize on going forward.
Sreeni Prabhu: For the fourth consecutive quarter, we increased net interest income by purchasing current coupon loans.
Sreeni Prabhu: while managing and reducing borrowing costs.
Sreeni Prabhu: We led a securization during the quarter, AOMT 2024-4, a $300 million deal.
Sreeni Prabhu: We also had a modest participation in a deal alongside other Angel Oak strategies.
Sreeni Prabhu: These securizations reduce funding costs and freed up capital to rotate into higher yielding assets.
Sreeni Prabhu: We are currently projecting securitization yields in the mid to high teens.
Sreeni Prabhu: which is more aligned to what we observed historically.
Sreeni Prabhu: Additionally, we filed a $750 million shelf to be used for our future capital raises over the next few years.
Sreeni Prabhu: We then immediately used that shelf to issue $50 million in senior unsecured notes.
Sreeni Prabhu: That will be used to fund the next several quarters of growth.
Sreeni Prabhu: Now highlighting some of our results.
Sreeni Prabhu: This is a result of methodical new loan acquisition.
Sreeni Prabhu: Additionally, targeted efforts to judiciously manage our operating cost structure alongside prudent portfolio risk management have led to sustained low operating costs.
Sreeni Prabhu: These efforts are enabled and supported by the Angel Oak ecosystem.
Sreeni Prabhu: With its market-leading origination and securitization platforms, positions the company for continued success.
Unnamed Speaker: 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 purchasing.
Sreeni Prabhu: 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 purchases.
Sreeni Prabhu: Our GAAP book value decreased 3% in the second quarter, which is essentially the impact of our quarterly dividend payment.
Speaker Change: Economic book value decreased 4.5% versus the first quarter, a decrease of 2.2% net offer dividend, which demonstrates the conversion between the gap and the economic book value that we expect to see over time.
Sreeni Prabhu: These accomplishments propel the positive momentum we carried into our $50 million senior unsecured notes issuance in July , which we expect to catalyze the next phase 4 growth for AOMR.
Sreeni Prabhu: With this additional capital, we intend to deliver greater net interest income and earnings
Sreeni Prabhu: facilitated by the purchase of additional high-quality newly originated loans
Sreeni Prabhu: and the continued execution of profitable securitizations.
Sreeni Prabhu: We will continue to maintain our vigilant and methodical capital allocation, credit underwriting and liquidity management strategy.
Sreeni Prabhu: Thank you, Sreeni. In the second quarter, the company had gap 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.
Sreeni Prabhu: The exclusion of unrealized gains on residential loans was the primary driver of the difference between GAAP and distributable earnings.
Sreeni Prabhu: As Sreeni mentioned, the second quarter of 2024 demonstrated continued upward progress in top-line interest income and net interest growth.
Speaker Change: The company's net interest income expanded for the 4th consecutive quarter, growing by nearly 50% compared to Q2 2023.
Speaker Change: Signaling the sustained.
Sreeni Prabhu: and growing strength of the portfolio. We continued our pace of averaging one securitization per quarter and have maintained reduced levels of operating expense.
Sreeni Prabhu: 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.
Sreeni Prabhu: Interest income grew over 9% compared to the year-ago quarter and interest expense decreased 5%.
Sreeni Prabhu: 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.
Sreeni Prabhu: We remain committed to our disciplined approach to loan acquisition and expect net interest income to continue growing in the next few quarters, though we may see a temporary pause in net interest income growth as we deploy proceeds from July's debt issuance.
Sreeni Prabhu: In the second quarter, our operating expenses were $5.5 million, or $3.4 million excluding securitization expense.
Sreeni Prabhu: and non-cash stock compensation. This represents a decrease of $400,000 versus the same metric in the prior quarter and a decrease of $900,000 compared to the same metric in Q2 2023.
Sreeni Prabhu: When we analyze our expenses, we choose to exclude our non-cash stock compensation expense as well as securitization costs.
Speaker Change: Since our cash returns are not impacted by stock compensation, and costs related to securitization activity are directly in line with the execution of our business plan.
Sreeni Prabhu: We are confident we will be able to maintain these low-level operating expenses.
Speaker Change: And while the bulk of these saving efforts are most likely behind us, we will, as always, diligently explore opportunities to optimize our cost structure going forward.
Speaker Change: Turning to the balance sheet, as of June 30th, we had $44 million of cash on hand. Our recourse debt-to-equity ratio was 1.2 times at quarter end compared to 1.8 times as of March 31st, 2024.
Sreeni Prabhu: As of today's date, our recourse debt-to-equity ratio is approximately 0.9 times, reflecting the maturity of our short-term U.S. Treasury assets and corresponding repurchase agreements held at quarter end, as well as our $50 million senior unsecured notes issuance and $20 million share repurchase.
Sreeni Prabhu: As we continue to opportunistically acquire loans, we do expect debt levels to increase. However, we believe that our recourse debt-to-equity ratio will remain below 2.5 times on a long-term basis.
Sreeni Prabhu: Our residential whole loan portfolio stood at a fair value of $159 million as of Q1, financed with $101 million of warehouse debt.
Sreeni Prabhu: We had $1.4 billion of Residential Mortgage Loans and Securitization Trust and $285 million of RMVS, including $19 million of investments in risk retention vehicles, which are included in other assets on our balance sheet.
Sreeni Prabhu: The deal enabled us to save approximately 100 basis points on the financing rate of the loans underlying the deal.
Sreeni Prabhu: Additionally, we participated in AOMT 2024-6 in June , to which we contributed loans with approximately $23 million of scheduled unpaid principal balance.
Sreeni Prabhu: We remain confident in averaging one securitization per quarter going forward, though our next securitization may not be until late third quarter or early fourth quarter as we replenish the portfolio with newly originated loans.
Sreeni Prabhu: We continue to methodically target high-quality loans primarily through our affiliated originator. Furthermore, we are committed to maintaining disciplined daily capital management as part of our operating strategy.
Sreeni Prabhu: We will remain judicious when applying leverage to our assets, ensuring that we continue to maximize earnings while operating with adequate liquidity.
Unnamed Speaker: Looking to book value, our gap book value per share decreased 3% to $10.23 as of June 30th, down from $10.55 in the first quarter.
Sreeni Prabhu: Our economic book value, which fair values all non-recourse securitization obligations, was $13.16 per share as of June 30th, down 4.5% from $13.78 per share as of the first quarter.
Sreeni Prabhu: We expect that rate and spread movements over the course of the last month, as well as a reduction in dividend costs as a result of our share repurchase, have had a positive impact on GAAP and economic book value as of today's date.
Sreeni Prabhu: In the second quarter, we purchased $114.4 million of loans that carried a weighted average coupon of approximately 7.9%, with a weighted average LTB of 70.4%, and a weighted average FICO score of 757.
Sreeni Prabhu: Our residential whole loan portfolio carried a weighted average coupon of 7.71% as of the end of the second quarter, a 60 basis point increase since the end of the first quarter of 2024, and a nearly 300 basis point increase from the second quarter of 2023.
Sreeni Prabhu: As of today's date, and including committed purchases, the projected unpaid principal balance of our unsecuritized loan portfolio is over $200 million.
Speaker Change: These loans and additional purchases will form the next securitization for Mayomar and should be highly accretive to the company and their stockholders.
Speaker Change: Additionally, the pricing spread on our largest warehouse...
Sreeni Prabhu: Finally, the company declared a $0.32 per share common dividend, which will be paid on August 30, 2024, to stockholders of record as of August 22, 2024.
Sreeni Prabhu: For additional information on our financial results,
Sreeni Prabhu: Please review the earnings supplement available on our website. I will now turn it back over to Sreeni for closing remarks.
Sreeni Prabhu: Thank you, Brandon.
Sreeni Prabhu: We are pleased with the significant progress we have made over the past 12 months.
Sreeni Prabhu: Through the continued acquisition of loans, securitization execution, and focused capital allocation.
Speaker Change: 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.
Speaker Change: and increases in the valuation of our existing portfolio.
Speaker Change: While there may also be a reduction in the coupon of newly originated loans,
Speaker Change: We would still expect to see a net benefit as sticky financing costs based on SOFR would decrease with Fed Funds rate cuts.
Unnamed Speaker: and Earnings Prince in the recent days have sparked fears of a potential economic downturn and with that heightened credit risk. We are optimistic that broader economic background will be generally supportive of our outlook. We will now open the call to your questions.
Speaker Change: With that said, weaker employment.
Speaker Change: And earning sprints in the recent days have sparked fears of a potential economic downturn and with that heightened credit risk.
Speaker Change: We believe that credit risk management is a competitive strength of ours.
Speaker Change: Due to our relationship with Angel Oak Ecosystem, which provides us the ability to adjust credit offerings based on our specific desired characteristics.
Speaker Change: Credit is risk we choose to own and we expect our portfolio to continue to perform comparably well.
Speaker Change: We are optimistic that broader economic background will be generally supportive of our outlook.
Speaker Change: and may potentially lead to additional opportunities not only in the non-QM residential mortgage market, but in capital markets as well.
Speaker Change: We will now open the call to your questions.
Speaker Change: Operator.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2.
Speaker Change: Our first question comes from Don Fandetti with Wells Fargo. Please go ahead.
Brendan: Yes, Brendan, can you talk a little bit about, you know, with NII increasing, do you feel like you're in a position to maintain the current dividend level?
Speaker Change: Yes, Brendan can you talk a little bit about you know with NII increasing do you feel like you're in a position to maintain the current dividend level?
Speaker Change: Yeah, hey, hey, Donald.
Brendan: Yeah, absolutely. We've been increasing the NII for now four quarters, you know, I think if you look at it from a net interest margin perspective, less cash expenses, we're up to
Speaker Change: We've probably improved that coverage by about 20% this quarter to 80% coverage of the dividend.
Speaker Change: just from a cash basis. Like I said, we'll probably have a little pause this next quarter as top line grows, but we work to deploy and lever the proceeds for the debt issuance. But then in Q4, we expect a further expansion that, again, I believe will be an effective covering of the dividend.
Speaker Change: You've had a pretty big move in rates. What is your economic book value in July and August ?
Speaker Change: Yeah, that we actually haven't had a chance to put...
Speaker Change: Sreeniwas Prabhu, Brandon Filson, KC Kelleher, Randy Chrisman
Speaker Change: But I think empirically, any of the decreases we had as of June 30th would be now at least flat, if not up.
Speaker Change: Got it. Thanks.
Speaker Change: Our next question comes from Doug Harder with UBS. Please go ahead.
Doug Harder: Thanks. Can you talk about how much growth do you think that the unsecured issuance can provide net of the repurchase that you did?
Unnamed Speaker: Yeah, we think that, you know, this $30 million or so of net proceeds that's left after the repurchase are probably going to, you know, provide us the runway for the next kind of three or four quarters.
Speaker Change: We think that the $30 million or so of net proceeds that's left after the repurchase, they're probably going to provide us the runway for the next three or four quarters of...
Speaker Change: You know, consistent loan acquisition. I mean, just on its face, the first round, that $30 million, we can buy about $200 million of the loans.
Speaker Change: We have then securitized, you know, after that we'll buy another, you know, $180,000 and it kind of steps down from that point forward, but, you know, again, several quarters and probably, you know, we'll be supportive of something like a billion dollars in residential loan purchases over, you know, the next several quarters.
Unnamed Speaker: And then, I guess, given kind of where your, your, you know, recourse leverages, you know, how do you think about the ability to issue additional unsecured debt as you look to kind of be able to continue to scale up the business?
Speaker Change: Given where your recourse leverage is, how do you think about the ability to issue additional unsecureds as you look to continue to scale up the business?
Speaker Change: I mean it's something we'll certainly be looking at. I think we're, you know, 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. You know, we have about...
Speaker Change: Call it $200 million in committed loan purchases that should come in based on the backs of this debt, you know, in short order here in the next, you know, few weeks.
Unnamed Speaker: 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 the pricing a little bit.
Speaker Change: 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 if we did another tranche to tighten in pricing a little bit
Speaker Change: Great. Appreciate it. Thank you.
Speaker Change: And the next question comes from Eric Hagan with the TIG. Please go ahead.
Jake Katsikas: Good morning, this is Jake Katsikas on for Eric. Thanks for taking my questions. 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.
Speaker Change: Good morning, this is Jake Katsikas on for Eric. Thanks for taking my questions.
Jake Katsikis: 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 rate do you think prepayment activity will begin to accelerate more meaningfully? Thank you.
Speaker Change: We've already seen a little bit of a prepayment pickup even before the move in rates. It's one of the reasons why our gap in economic book value were a little bit smaller.
Speaker Change: You know down this quarter compared to where you would otherwise think I mean rates didn't really move the prepayment speeds
Speaker Change: I think there's at least in our portfolio, we have a very, we have the tail of two sides. We've got the 5% coupon portfolio that's going to take a huge moving rate to really move
Unnamed Speaker: prepayments materially and we've got the 8% portfolio which is going to be much more sensitive to prepayments, but you know the thing is if 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. You know those proceeds back into, The assets with a similar or maybe even catch a little tailwind yield, but I know a long way to answer your question. I mean, we've got.
Speaker Change: pre-payments. We've got the 8% portfolio. We're much more sensitive to pre-payments.
Speaker Change: The thing is, if prepayments are increasing because rates are going down, that means our financing costs should be going down.
Speaker Change: And we'll just keep investing that money, those proceeds back into assets with a similar or maybe even a catch a little tailwind yield. But a long way to answer your question.
Speaker Change: KC Kelleher, Randy Chrisman, KC Kelleher, Randy Chrisman, KC Kelleher, Randy Chrisman,
Speaker Change: CPR. That's what we base most of our modeling and assumptions on in the securitization market. Recently that's been much slower than that, you know, like single-digit level. So we are expecting a return
Speaker Change: at 2530 level.
Speaker Change: Over the next several quarters.
Speaker Change: Great, thank you so much.
Speaker Change: Again, if you have a question, please press star and then 1. Our next question comes from Matthew Howlett with B. Riley. Please go ahead.
Matthew Hallett: Hey guys, congrats on a great report. Hey, I know things are, you know, are fluid right now, but with the move here with rates, and, you know, you're putting out coupons around 8%, any sense on what the...
Speaker Change: R.O.E.s will be on retained interests and securitizations going forward. I mean, I'm assuming they're going to be a lot higher than we thought they were a couple quarters ago.
Speaker Change: Well, I think there's a potential, Matt, for...
Speaker Change: A little, what I'll call maybe a...
Speaker Change: Goldilocks Securitization and that will have a higher coupon relative funding cost. We saw that back at 21 right after IPO with 21.4 and 21.7.
Speaker Change: But, you know, long term, meaning next year, really, we'd expect that if rates do come in, stay in, you know, our loan coupons will reduce, our funding costs will reduce, and we'll still be looking at that, you know,
Speaker Change: mid to high teens to low 20% ROE. But there could be a period where the next few securitizations have a little bit higher return hurdle than that if the economic conditions allow.
Speaker Change: Have you started lowering, has the mortgage company started lowering rates?
Matt Sreeni: Hey Matt Sreeni,
Speaker Change: So, you know last I would say before last few days yes, we had been lowering rates because as you notice rates have been going lower over the last few weeks not just last two days and
Speaker Change: But last few days, you know, really the credits, the spreads.
Speaker Change: on the securitization side, and wider. Just from the sympathy of what's happening in the entire market.
Speaker Change: Right now, I would say we have stayed flat on rates, but you should expect the mortgage company, and across the board...
Speaker Change: Sreenivas Prabhu, Brandon Filson, KC Kelleher, Randy Chrisman, KC Kelleher, Randy Chrisman,
Speaker Change: Thank you.
Speaker Change: Just in summary if I can summarize what I heard I mean you could do about a billion of loan acquisition
Speaker Change: Here with the new capital that you raised in July . It'll take you a couple quarters. You'll still do a couple to do one securitization per quarter
Speaker Change: Sreeniwas Prabhu, Brandon Filson, KC Kelleher, Randy Chrisman, KC Kelleher, Randy Chrisman,
Speaker Change: Yeah, that should be what we had, you know, an available fund and then plus the senior unsecured notes will also support, you know, that is a piece of that billion.
Speaker Change: Are you bumping into any competition in a non-QM space, or has this been cleaned out following the last couple of years? You guys are the league leader in it, and we haven't seen much activity, anyone quite the size as you guys, but are you bumping into anybody?
Speaker Change: The guys in the previous past, they have gotten cleaned out, I would say from a consistency of origination to credit management to securitization, we would consider ourselves to be a leader.
Speaker Change: There we are seeing small competition from...
Speaker Change: insurance companies not from the REIT industry from the insurance company but they're very selective about how they get involved and
Speaker Change: You know, as the rates continue to go lower and the securitization bid gets stronger, I think that...
Speaker Change: The insurance companies may be less competitive. Obviously, there will still be buyers, but from what we are trying to achieve, you know, we have enough in what we're doing where we don't feel constrained or stretched.
Speaker Change: We look forward to the next wave of growth in the company.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Brandon Filson for any closing remarks.
Brandon Filson: 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.