Angel Oak Mortgage REIT, Inc. Q1 FY2025 earnings call

• Net interest margin growth driven by accretive newly originated loan purchases, maintained operating expense savings and valuation tailwinds boosting book value growth.
• Cash flow and dividend coverage expanded due to disciplined and value-driven operating model.
• Did not execute securitization in Q1 but completed AOMT 2025-4 securitization shortly after quarter end, providing capital for new loan purchases and reducing repurchased debt.
• International trade and tariff uncertainty affected interest rate spreads but business model foundation supportive, expecting continued earnings growth trajectory.
• Capital deployment strategy adaptive and flexible to align with market dynamics.
• Focus on executing earnings-generating model and positioning balance sheet as active buyer of high-quality non-QM loans.
• Declared a $0.32 per share common dividend, to be paid on May 30, 2025.

First quarter operating results were in line with expectations. Net interest income grew 18% versus Q1 2024 and over 2% compared to Q4 2024. Operating expenses, excluding securitization costs and stock compensation expense, were $1.1 million, 29% lower than Q1 2024 and a $300,000 decrease from Q4 2024. GAAP net income was $20.5 million or $0.87 per diluted common share, and distributable earnings were $4.1 million or $0.17 per diluted common share. Interest income for Q1 was $32.9 million and net interest income was $10.1 million, marking 30% improvement in interest income and 18% in net interest income vs Q1 2024. Loan purchases in Q1 were $259 million with a weighted average coupon of 7.67%, weighted average loan-to-value ratio of 70% and weighted average FICO score of 751. The AOMT 2025-4 securitization contributed $284.3 million in loans with a weighted average coupon of 7.5%, weighted average LTV of 70.9% and weighted average credit score of 752. Loans and securitization trust portfolio had a weighted average coupon rate of 5.6% at quarter end, expected to increase to 5.8% post AOMT 2025-4. Operating expenses for Q1 were $3 million, with noncash stock compensation and securitization costs excluded, it was $2.8 million, 29% lower than Q1 2024 and 10% lower than Q4 2024. GAAP book value increased 5.2% to $10.70 as of March 31, 2025, and economic book value was $13.41 per share, up 2.4% from Q4 2024. Credit-wise, total portfolio weighted average percentage of loans 90-plus days delinquent was 2.79% in Q1 2025, an increase of 35 basis points from Q1 2024. Three-month prepay speeds for RMBS and securitized loan portfolios were 6.6% at quarter end.

• First quarter operating results in line with expectations and continued earnings growth trend.
• Expect interest income to continue growing as purchase accretive loans, employ sound portfolio management and leverage securitization platform.
• Expect to maintain similar operating expense levels.
• Following AOMT 2025-4 securitization, weighted average coupon rate of loans and securitization trust portfolio expected to increase to 5.8%.
• Capital deployment strategy remains adaptive and flexible to maximize shareholder returns; continue to evaluate capital raise opportunities for earnings and value accretion.

• Uncertainty surrounding international trade and tariff activity beginning end of Q1, which widened interest rate spreads.
• Credit performance normalization process with potential volatility; though portfolio-wide low LTV, diligent underwriting and credit selection to mitigate losses if credit issues arise.
• Prepayment speed changes risk; if rates fall, increasing prepayment speeds may affect securitized loan and RMBS portfolios as non-QM historically prepays at ~25 to 30 CPR.
• More scrutiny on DSCR loans regarding purposes like Airbnb, etc.

Q: Talk a little bit about the securitization done in April, kind of how the execution looked in the volatility and how that impacted the returns on that versus some of the more recent deals?

A: Yes. We issued that securitization out right in some of the volatility. We still got good execution because treasury rates were a bit higher than where we issued. We did have to widen out the spread on the AAA really to get it done to like 180. That's now tightened back up if we were to do it again today. But all in all, I think it was a good deal for us and probably just not -- we've talked every kind of quarter about 15% to 20% expected securitization yield, that one is probably now like a 13% to 17% yield, depending on how long things stay outstanding, but still very accretive and freed up the capital for us to continue buying newer loans, which have been relatively stable in terms of coupon up a little higher than maybe we were purchasing over the last quarter. So more like high 7s recently in terms of locks.

Q: Picking up on the comments about prepayment speeds and the securitizations, just kind of like on a headline basis, is that -- is it -- would mortgage rates have to be like 5% before that's an issue? Just like I'm kind of looking for a less technical explanation, but is that the kind of the margin you have versus where mortgage rates traveling closer to 7% today is?

A: Yes, I would think there would be -- we kind of have a very barbelled securitized loan portfolio. We've got the 5.5% under portfolio that was post IPO and then through kind of 2023 vintage, 2024, 2025, those are 7.5-plus percent coupon. The earlier deals that are in the 5s were 200 basis points of moves away on mortgage rates to where you'll probably see some speeds click up. And I'd say the current coupon, yes, you're probably 100 basis points to see a meaningful increase. But then just to remind you, our portfolio-wide prepayment speed right now is about a 10 CPR. When we do our modeled returns, and historically, non-QM has been -- would prepay in like the 25% to 30% level. So we still have a bit of room for speeds to increase and still have good results.

Q: Some commentary about the securitization market being good, but maybe variation in execution and conditions, I guess, when there's like off days for the market. Just wondering if I heard that correctly. I mean, it makes sense intuitively, but did that affect you kind of just doing one large and good deal looking back because the market volatility kind of started in early April and this one got done, I think, kind of in the first part of April. But yes, just curious kind of how that is day by day just to understand how the macro is affecting that.

A: Yes. I mean across the year, you always have these bouts of volatility. So you look for two things, one is the cost of execution and then the second one is absolute illiquidity. And what we saw, even with a lot of the tariff issues and volatility in equity markets and the bond markets, there was no illiquidity. So that's number one, right? We could at least do our securitization. So it was not like, hey, we cannot get anything done and the liquidity has dried up. And what we have to do is we have to be consistent in terms of execution. It's all risk management, right? So the question at that point we have is do we widen our spreads to see where execution happens or do we take the securitization back? And what we have talked to the investment community consistently is we want to be prudent risk managers. So one of the things you want to do at that point is see where the liquidity is, where the spreads are and execute. So spreads probably went from 130, 135 beginning of the year all the way to the first quarter and we were printing -- we printed that deal at 180. Spreads have now tightened in the 160s, probably could be even in the 150. So stuff moves. There was a lot of pain probably for the first two weeks of April. But what I would tell you is that not just us or even our peers, the capital markets were open and that was the most important thing.

Q: Talk a little bit about loan purchases post securitization? And if you've seen any difference in the market there? And then kind of as a follow-up to that, you mentioned playing up a little bit more on credit. Are you guys paying a little more for expanded credit there?

A: Yes. So yes, in the securitization, right, we're freed up $24 million of capital, which we'll use. We did earmark some of that to reduce some repurchase debt outstanding, but we'll have enough capital to really go through another, call it, $100 million, $150 million in loan purchases over the next couple of quarters. And then I think you'll be able to see us at that point do some commingled securitizations with other Angel Oak entities as well. Like I mentioned a little bit ago, current coupons are back to the high 7s. I expect them with maybe the retrenchment of volatility go back to the mid-7s, but we're kind of seeing things range-bound well over 7%, but under 8% is kind of what we're seeing in almost a day-to-day basis of no matter what the volatility or reduction in volatility is.

Q: Could you talk a little bit about the competitive landscape for non-QM currently? And then how you're thinking about it long term if the GSE footprint shrinks?

A: Yes, good question. So I would say as rates went up in 2022, a few things happened. I'll talk about the supply and the demand. So as the rates went up in 2022, you would think that the overall non-QM mortgage market will shrink as the agency mortgage market shrunk. But that's not what's happened. The non-QM mortgage market has actually grown. We'll probably finish this year at $100-plus billion. And last year, I think we were around $80 billion, plus or minus, depending on who you talk to. So the supply side, what's happened is as the agency volumes have shrunk, a lot of guys who would generally do six, seven agency loans that are now doing one or two agency loans and so they are more proactive in non-QM. And so the supply of that has grown. On the buy side, you have tremendous demand from insurance companies. So the market has definitely become decently more commoditized. And these are the markets where don't expect Angel Oak from the origination or from the REIT side to try to capture market share. We've just gone up in quality and stood there. But it's our relationship with the brokers that we've been doing business. I mean, if you think about all the people that have come in and out of the market over the last 8-plus years, I think it's probably us and maybe one more entity that might have been there. So the entire thick and thin of this. So our relationship with the brokers allow us to get what we want to get relative to the competitive landscape that it is. So if we try to grow it beyond what the market gives us, we’ll have to squeeze spreads and increase – or widen out our credit box, which we don’t intend to do. So we are happy where we are, but the market is definitely competitive. Now when does that change? That changes as rates come down because, interestingly enough, when the rates come down, from the demand side, insurance company demand may slow down. Don’t know, there’s a lot of appetite. So let’s see how much it comes down. But on the supply side, I think the model then reverts back to the agency guys doing more agency loans, there’s a lot of 7%, 7.5%, 8% coupons sitting out in the agency market that will have to be refinanced. And so those guys will refocus back on the agency business, lose focus on the non-QM business. And that’s when our business model then becomes even more active. So today, we are happy. Our market is getting more commoditized. No doubt about it, everybody knows it. But this is when you stay true to credit. But from a relationship perspective, our core relationships, what we have developed in the mortgage company over the last almost 10 years now is playing out the way we wanted it to play out.