Angel Oak Mortgage REIT, Inc. Q2 FY2025 Earnings Call

Good morning, and thank you for joining us today for Angel Oak Mortgage REIT's Second Quarter 2025 Earnings Conference Call. This morning, we filed our press release detailing these results, which is available in the Investors section on 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, www.angeloakreit.com. Now I will turn the call over to Sreeni.

Thank you, KC, and thank you all for joining us today. The second quarter of 2025 was highlighted by our securitization and capital markets activity as we continue to execute towards our earnings growth goals. We completed 2 securitizations during the quarter and issued $42.5 million of unsecured debt. The capital released and raised by these transactions was deployed into high-quality loans that are expected to drive incremental earnings. Similar to senior unsecured notes we issued in 2024, we expect the new issuance to be accretive to earnings within the next quarter as the earnings from newly purchased assets make their way into the portfolio. This is a strategic playbook we have used successfully in the past, and it continues to be a vital growth catalyst for us and the performance of our investment portfolio. Results for the quarter were in line with expectations with 5% growth in net interest income compared to Q2 2024 and a slight contraction compared to the first quarter due to the added expense of the new senior unsecured notes. Despite the decrease versus the last quarter, we have generated strong expansion in year-to-date net interest income compared to the first half of 2024, which Brandon will detail further. Book value declined slightly compared to the first quarter on a per share basis driven by net decrease in valuations and the payment of our dividend. Cash flow and dividend coverage remain relatively stable and are expected to resume their respective growth trends demonstrated over the last 2 years, driven by earnings from assets purchased during and after the quarter. On credit, notably, 90+ day delinquency rates decreased at the portfolio-wide level compared to the past 2 quarters, driven by a reduction in delinquency rates for loans securitized in the past 2 years. The AOMT shelf has begun to distinguish itself among its peers with regards to delinquency performance, which is a direct reflection of our expertise as credit managers. Despite continued uncertainty surrounding international trade and tariff activity, our mortgage rates have been relatively stable, and we continue to purchase loans in the mid- to high 7% range. Securitization markets have remained active and accretive amid the uncertainty with both traditional and new participants being active in the market. We have ample opportunities to recycle capital and continue growing our target asset portfolio. Our capital deployment strategy will remain adaptive and flexible aligning with evolving market dynamics in order to maximize expected returns for our shareholders. Moving forward, our focus remains on executing our business strategy and delivering positive outcomes for our shareholders while positioning our balance sheet to be an active buyer of high-quality non-QM loans. 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. Second quarter operating results were in line with expectations with 5% net interest income growth versus the second quarter of 2024 and a slight contraction compared to the first quarter of 2025, owing to the increased interest expense associated with May's senior unsecured notes issuance. Year-to-date, net interest income increased 11% compared to 2024. Operating expenses, excluding securitization costs and stock compensation expense were $500,000 or 15% lower than in the second quarter of 2024 and relatively flat compared to the first quarter of 2025. Year-to-date operating expenses, excluding securitization costs and stock compensation were 22% lower than in 2024. Valuations were a slight headwind during the second quarter as increases in valuations for our loans and trust portfolio were offset by increases in the valuation of our nonrecourse securitization obligation. As of today, we expect that our book value is approximately flat compared to the end of the second quarter. For the second quarter of 2025, we had GAAP net income of $767,000 or $0.03 per diluted common share. Distributable earnings for the second quarter were $2.6 million or $0.11 per diluted common share. The main driver of the difference between GAAP net income and distributable earnings is the realization of unrealized gains on residential loans that were securitized during the second quarter. For the second quarter, we had $1.6 million of unrealized loss on our securitized and residential loan portfolios. Interest income for the second quarter was $35.1 million and net interest income was $9.9 million, marking a 35% improvement in interest income and a 5% improvement in net interest income compared to the second quarter of 2024. Compared to the first quarter of 2025, interest income increased by 6.8% and net interest income decreased by 1%. For the first 6 months of the year, interest income was $68 million and net interest income was $20 million, which translates to an improvement of 33% and 11%, respectively, compared to the first 6 months of 2024. Our $147 million of loan purchases in the quarter, inclusive of HELOCs and closed and second mortgages carried a weighted average coupon of 8.68% and a weighted average combined loan-to-value ratio of 68.4% and a weighted average FICO score of 757. The weighted average coupon of our residential whole loan portfolio as of the end of the quarter was 8.37%, representing an expansion of 82 basis points versus the end of the first quarter and 66 basis points versus the same period 2024. As of today, our current weighted average coupon is approximately 8.4%. Current loan production in locks have had stable rates for the past several quarters. We completed 2 securitizations in the second quarter, where their sole contributor to AOMT 2025-4, contributing $284.3 million in loans. The deal paid down $242.4 million of warehouse debt and released $24.7 million of cash, which was used to purchase new loans and reduce outstanding repurchase debt on our retained bond portfolio to reduce financing risk. Additionally, we participated in AOMT 2025-6 alongside other Angel Oak entities, contributing $87.2 million of the total $349.7 million scheduled unpaid principal balance. AOMT 2025-6 paid down outstanding debt of approximately $73.1 million and retained bonds with a value of $8.1 million in addition to releasing $9.2 million of cash, which was also used to purchase new loans. As of the end of the quarter, our loans and securitization trust portfolio carried a weighted average coupon rate of 5.8% with a weighted average funding cost of approximately 4.1%. As Sreeni mentioned, the securitization market remains active, and we intend to continue leveraging it through our disciplined, methodical securitization strategy. Operating expenses for the second quarter were $5.1 million. Excluding noncash stock compensation expenses and securitization costs, second quarter operating expenses were $2.9 million. This represents a 15% decrease compared to the same metric in the second quarter of 2024. For the first 6 months of the year, operating expenses were $8.1 million. Excluding noncash stock compensation expenses and securitization costs, operating expenses for the first 6 months of the year were $5.7 million, representing a decrease of 22% compared to the first 6 months of 2024. Going forward, we expect to maintain similar operating expense levels. Looking at our balance sheet. As of the end of the quarter, we had $40.5 million in cash, and our recourse debt-to-equity ratio was 1.1x. GAAP book value per share decreased 3.1% to $10.37 as of June 30, 2025, from $10.70 as of March 31, 2025. Economic book value which fair values all nonrecourse securitization obligations was $12.97 per share as of June 30, 2025, down 3.3% from $13.41 per share as of March 31, 2025. The decrease in book value was driven primarily by the aforementioned unrealized losses on our unsecuritized portfolio and our Q2 dividend payment, offset by operating earnings generated by our portfolio. We ended the quarter with unsecuritized residential whole loans at a fair value of $200.7 million financed with $118.6 million of warehouse debt, $1.9 billion of residential mortgage loans and securitization trust and $383 million of RMBS, including $21 million of investments in co-mingled securitization entities, which are included in other assets on our balance sheet. We finished the quarter with undrawn loan financing capacity of approximately $931 million. Now looking at credit, we ended the quarter with a total portfolio weighted average percentage of loans 90+ days delinquent at 2.35%, inclusive of our residential loan, securitized loan and RMBS portfolio representing a decrease of 44 basis points from the first quarter of 2025. This decrease was observed notably in the loans underlying our 2023, 2024 securitizations, which had been the primary drivers of the increases in the 90+ days delinquent in prior quarters. As expected, it appears performance in these securitizations have begun to normalize. The AOMT securitization shelf has started to demonstrate outperformance relative to other non-QM shelves in terms of delinquencies. We expect that through a credit cycle, this outperformance will lead to fewer defaults and lower losses than other non-QM securitization platforms. This expectation is borne out of our intentional effort to move up in credit for our loan originations and purchases over the past couple of years and continues to provide us with the confidence we will deliver amid potential periods of volatility. Additionally, we expect our portfolio-wide LTV, diligent underwriting standards and inherent credit selection to mitigate losses throughout the cycle if credit becomes an issue. 3-month prepayment speeds for our RMBS and securitized loan portfolios were 11.1% in the quarter, reflecting an increase compared to the first quarter of 2025. The increase stems primarily from an acceleration in speed on securitizations within the past 2 years, as the loans underlying our older securitizations are still significantly below current mortgage rates. While speeds have accelerated, they are still well below historical and assumed rates of 20% to 30%, which is what we model our returns on. Finally, the company has declared a $0.32 per share common dividend, which will be paid on August 29, 2025, to common shareholders of record as of August 22, 2025. For additional color on our financial results, please review the earnings supplement available on our website. I will now turn it back to Sreeni for closing remarks.

Thank you, Brandon. I would like to thank the entire Angel Oak team for their hard work towards building what we believe is the best non-QM loan origination, purchase and securitization platform by focusing on diligent credit selection, consistent securitization execution and value-driven decision-making. We look forward to continuing to build long-term value for our shareholders in the coming quarters and years. With that, we'll open up the call to your questions.

The first question will come from Doug Harter with UBS.

I was hoping you could talk a little bit about your pathway for continuing to grow the portfolio, whether that's through additional unsecured issuance, continued recycling of the portfolio? Just help us understand how you see the capacity for further balance sheet growth from here?

Yes. No, Doug, I think this past week, we've seen a little bit of life in the preferred equity markets with Annaly coming out of their deal that priced inside of 9%. I mean, certainly, we would be a little bit higher pricing than that, but that's something we're looking at as far as an immediate growth trajectory and a different piece of the capital structure we haven't utilized yet. I believe that at least in our current common equity base, we're probably more or less tapped out on senior unsecured notes issuance. So there's potential if the stock starts trading well, we can do a little ATM issuance, but nothing really that material for us. So really, we'd be looking at new capital in the preferred market, especially if we think it's open now that Annaly has hit the market. Really, it's recycling. We have some additional leverage we can apply from the $42 million that we're continuing to apply over time. If you look at our unsecured portfolio right now, it's about 50% leverage. We have additional leverage we can apply there to keep buying loans and keep our cash balance about the same. So we have several more securitizations in the pipeline that should free up capital that we'll be able to continue purchasing loans and really much like we did last fall. You should see or we're expecting next quarter to really grow the net interest margin again to continue to improve dividend coverage from a cash flow basis.

And in the past, you've talked about potentially relevering, I guess, calling and reissuing some of the older securitizations as a way to free up capital. Can you just talk about how the economics look on that today?

Yes. I mean that's still something that's in flight and really what we'll be talking there is some of our pre-IPO securitizations. So we have 3 securitizations, like a 2019 vintage, and 1 securitization in 2020 vintage from a true funding cost perspective, when the funding cost today looks very similar to what they did in 2019. So really, it's just a releveraging exercise there. And that's something that we're looking at. And so far, the go-no-go decision has trended a little bit on the no-go decision just based on if we're spending incremental dollars on that, it's not quite as accretive as new loan purchases, especially as we've started to buy some HELOCs, which have a much higher coupon and the current issue securitization market continues to get tighter and stronger in the non-QM space.

The next question is from Randy Binner with B. Riley.

So just in the commentary on book value, did you give an indication of where book value is quarter-to-date?

Yes. We believe. Yes. No worries. I mean I think there's been a lot of movement in the last couple of days. It's flat to slightly up right now.

Okay, that's helpful. I'm interested in your purchasing strategy. You mentioned that you're buying at a mid-7% coupon, while the average weighted coupon in your books is approximately 8.5%. Could we discuss this further? Specifically, how do you foresee your purchasing options evolving over the next month or the rest of the year? Also, if the Fed decides to cut rates, how might that affect the coupons you are purchasing?

Yes. When we mention our mortgage rates are around 7.5% or in the mid-7s, that refers to our traditional non-QM product. Currently, our portfolio is in the low to mid-8s because we have acquired approximately $75 million worth of home equity lines of credit after the $42 million debt issuance. This is a relatively new product for us; we had a few in the portfolio at the end of Q1 and purchased additional pools. These have similar credit profiles, like mid-700 FICOs and combined LTVs in the 60s, but with average coupons close to 11%, sometimes even higher. This has contributed to the increase. We plan to separate these into a different securitization structure when we proceed, which will involve other Angel Oak entities. We appreciate the product, but we have now slowed down purchases to ensure that we have enough traditional non-QM loans back on the balance sheet for a securitization in the coming months.

Okay. That was the related question. It seems like you're aiming to complete one securitization before the end of the third quarter.

Yes, that's the plan.

The next question is from Matthew Erdner with Jones Trading.

I'm going to follow up a little on that last one. Just kind of on the HELOCs and second liens. Where are you guys seeing the most opportunity right now in the acquisition market when you're out there buying loans? And then just kind of following up on the securitization question. Should we kind of expect that towards the end of the quarter?

Yes, we are aiming to target September for the securitization deal, but it depends on our loan pipeline progress. We have over $100 million in committed loan purchases, although some take time to transition from a lock position to a loan position. If these close sooner, we can move things up; otherwise, we need to wait until we reach critical mass, as our current securitizations are in the high $200 million to low $300 million range. In terms of incremental purchase volume, origination volume has been fairly strong, with stable rates in the market despite some volatility. This reflects the strength of our securitization market, where we are pricing deals in the low 140 range for AAA, which is competitive with agency bonds and features tight spreads. The current market is robust, mitigating some of the volatility we've experienced, regardless of rising or falling rates. If the Fed cuts rates, I don't foresee significant changes in prepayment speeds since a large portion of our portfolio consists of current market coupon loans. Even if the Fed reduces rates from 7.5% to around 7.375% or 7.25%, we don't expect considerable movement. Many of our loans are still underwater or not advantageous for refinancing at the 5% coupon level. We do expect an increase in speed, but not back to historical levels in non-QM, around 25 to 30 CPR. Currently, new deals are in the low 20s, while older ones are in the low 10s. A decline in rates will lead to a book value change as financing costs will likely decrease on the warehouse side, resulting in an increase in book value, especially for those 5% loans we originated in 2021 and 2022.

The next question is from Eric Hagen from BTIG.

We've seen some more of the mortgage rates to allocate more capital to their origination platforms. I mean, do you guys see that maybe changing the competitive dynamic in the market at all? And just any general perspectives on what that kind of that capital allocation kind of means for our market?

Yes. I mean, we are seeing a lot of mortgage REITs actually invest in the non-QM side, especially when in other sectors and the mortgage market don't seem to be giving that kind of returns. To be perfectly honest with you, we haven't seen from our mortgage company side. I mean, the market is getting bigger, right? The overall size of the market is getting bigger just because there's more education out there. So that's necessarily not a bad thing. So I would not say that it's eating into other originations. The overall pot is growing, which is exciting for the overall market. From our origination, we had a team over to our offices, the mortgage company team in offices yesterday, and our pipelines are growing. So that's healthy for the market. We are not seeing that much creep in credit standards from even other guys. So that's also a good thing, right? Because that's a worrisome trend. You've seen that the delinquencies of some of the other originators have gone up. But generally, I would say that even the new guys coming in are guys investing in origination companies, the credit seems to be still on a good path. So yes, we are seeing more people enter, but it hasn't pushed on the fact that it's eating into our origination or I don't think it's eating into other originations.

Got it. That's really helpful. Historically, you have been a fixed-rate lender. But do you think we will eventually see more demand for hybrid ARMs to refinance these high coupon borrowers if the long end of the yield curve remains high, but the Fed cuts rates? From your perspective, are you able to supply that kind of credit? What are your thoughts on that?

It's funny. We haven't seen hybrids in a long, long time. But you've talked about it; to be honest with you, the curve will have to steepen a lot. But I don't know. That's a good question. I think all of us will have to get to that point. And I do think those conversations will happen if the longer rates stay higher and you start seeing the front end because that environment hasn't happened in a long time. But as of today, it's not efficient, and we really haven't discussed it in great detail.

This concludes our question-and-answer session. I would like to turn the conference back over to Brandon Filson for closing remarks.

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.