Angel Oak Mortgage REIT Inc (AOMR) 2022 Q4 法說會逐字稿

Greetings and welcome to the Angel Oak Mortgage fourth-quarter earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Randy Chrisman, Chief Marketing Officer.

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Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's fourth quarter and full-year 2022 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; Chief Financial Officer, Brandon Filson; and Angel Oak Capital's co-CIO, Namit Sinha. 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 at www.angeloakreit.com.

Now I will turn over the call to Sreeni.

Thank you, Randy, and thank you, everyone, for joining us today. As you all know, 2022 was a very challenging year as we battled rising inflation, heightened market volatility, and spread widening across most asset classes. The Fed approved an unprecedented seven increases to the Fed funds rate over the course of the year beginning in March. These increases took the benchmark interest rate from 0.25% as of December 31, 2021, to 4.75% as of December 31, 2022, marking its highest level in 15 years.

Mortgage rates rose in kind, more than doubling and peaking about 7% in October. At the same time, non-QM mortgages approach 9%. Additionally, the securitization markets were extremely challenging, especially, in the second half of the year. However, as we mentioned in our last earnings call, we commenced a strategic plan in the fourth quarter to reduce warehouse financing risk and increase liquidity.

Over the last several months, we have made tremendous progress integrating three key accomplishments. First, in November, we sold residential mortgage loans with gross weighted coupon of approximately 4.5%, reducing financing risk and releasing incremental liquidity. This was a calculated decision and we found that the price that we received was commensurate with the lack of liquidity in the securitization markets at that time.

Second, in December and early January, we converted approximately $286 million of mark-to-market debt from non-mark-to-market financing for continually performing loans, further reducing financing risk. This facility was with one of our existing large bank counterparties, which also speaks to our strong partnerships with global banks.

Finally, we participated in an AOMT 2023-1 securitization subsequent to yearend. This was the first Angel Oak securitization in which we participated alongside other Angel Oak entity since our initial public offering. We retained our pro-rata share of bonds and the proceeds from the deal. As a result of this accomplishment, as of today, we have reduced our whole loan warehouse debt by over 50%, and mark-to-market percentage of total warehouse debt by over 60% since the end of Q3 2022.

Additionally, it is important to note that we have not taken on any corporate debt or preferred equity and that we own call rights to all our deals which gives us tremendous flexibility in the future. The goal of this strategy was not only to reduce risk and create liquidity, but to also restart our growth engine. And to that end, we intend to resume purchases of newly originated loans at market interest rates.

With respect to the current mortgage landscape, there are a couple of dynamics that I would like to reiterate. First, there remains a meaningful shortage in supply of quality housing across the country. While mortgage rate increases have slowed down demand for home purchases, this underlying constraint should help support a baseline level of mortgage activity.

Second, credit performance remained strong, delinquencies remain low, foreclosures are exceedingly rare, and loss severities are near zero. Additionally, there has been a significant home price appreciation since many of the loans were originated, lowering LTVs and limiting losses in the rare event of default. Even if we factor in a slight to moderate decrease in home prices this year, we still expect meaningful growth versus where loans were originated.

Finally, the volatility of this past year has resulted in even higher barriers to entry for the non-QM mortgage origination business. This reinforces the competitive advantage of our relationship with Angel Oak's well established and streamlined non-QM origination platform. Over the coming quarters, we plan to rotate our portfolio into higher coupon mortgage loans and other high-yielding-mortgage assets and sustain a methodical securitization process, all while continuing to stress liquidity management and protect the balance sheet.

With that, I'll turn it over to Brandon.

Thank you, Sreeni. 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.

For the fourth quarter of 2022, we had a GAAP net loss of $8.8 million or $0.36 per share. The loss was driven by the November loan sale, which drove roughly $19 million of incremental loss or $0.77 per share. Distributed earnings were negative $61.5 million or a loss of $2.50 per share. The November loan sale contributed approximately $63 million realized loss or $2.56 per share in distributable earnings.

The loans sold carried an unrealized loss of approximately $44 million as of the end of Q3, all of which were realized upon the sale, in addition to the $19 million incremental loss. Interest income for the quarter was $28.4 million and net interest margin was $7.4 million, which compressed due to higher variable borrowing costs. Our operating expenses for the fourth quarter were $4.3 million, representing a decrease of over $7 million from Q3. Excluding securitization severance expenses, operating expenses were $2 million lower than Q3, which was approximately $1 million lower than Q2, demonstrating continued progress in scaling our operations.

Now, digging into our balance sheet. As of December 31, we had $29.3 million of cash. Our recourse debt-to-equity ratio decreased to 2.9 times versus 3.7 times at the end of the third quarter. We have residential whole loans at a fair value of $771 million, financed with $640 million of warehouse debt, $1 billion of residential mortgage loans and securitization trusts, and $1.1 billion of RMBS, including $62 million in retained AOT securities from the pre-IPO securitizations.

We finished the year with undrawn loan financing capacity of $573 million, and as of today, our capacity is approximately $767 million. This difference is driven by our participation in January's AOMT 2023-1 securitization, which released approximately $190 million of mark-to-market warehouse debt. As of today, we have approximately $440 million of warehouse debt, only $155 million of which is subject to mark-to-market risk.

We were pleased to reenter the securitization market in January of this year. The AOMT 2023-1 securitization was an approximately $580.5 million securitization, and we contributed approximately $241 million scheduled principal balance of loans. Additionally, we retained bonds with base value of $26.6 million and a fair value of $21.8 million, while releasing $15.9 million in cash. We expect these retained bonds to yield between 10% and 15%.

GAAP book value per share declined 10.7% to $9.49 as of December 31, 2022, down from $10.63 as of September 30, 2022. This includes a $0.76 impact from the November loan sale as well as the impact of our $0.32 per share common dividend paid in November. Excluding these impacts, GAAP book value was relatively flat for the quarter. Economic book value, which fair values all non-recourse securitization obligations, was $13.11 per share as of December 31, 2022, up 1.3% from $12.94 per share as of September 30, 2022.

The fair value of the bonds underlying our securitization obligations declined as rates increased and duration expectations lengthen, driving the increase in economic book value. Assuming that loan and security pricing has remained relatively flat so far in 2023, with January's rally being offset by a retreat in February, we estimate our GAAP and economic book value as of the end of February to be fairly flat as well, inclusive of the known impact of the dividend payment to be made in March.

Looking forward, we plan to resume purchases of newly originated loans. We'll do this selectively and will continue to emphasize liquidity throughout the process. Recent rate locks in the mid 8% range, with average LTVs of 72% and FICO scores of 752. We believe that purchasing these loans and maintaining a methodical securitization process is the best way to organically grow the earnings potential of the portfolio.

Finally, the company has declared a $0.32 per share common dividend, payable on March 31, 2023, to shareholders of record as of March 22, 2023. 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. 2022 was a year of unique challenges for the market. Beset with rising inflation, high interest rates, and recession concerns. While Angel Oak was not immune to these challenges, we acted decisively to ensure the strength of our capital structure, and that positioned ourselves to restart our growth programs. As always, I do like to thank the entire Angel Oak team for their hard work and their contributions as we seek to build long-term value for our shareholders.

With that, I'll open up the call to your questions. Operator.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Chris Kotowski, Oppenheimer.

Good morning. Thanks for taking my question. I guess just given the large number of moving parts with the sale and the securitization and so on, and given that we're 68 days into a 90-day quarter, I wonder if you could give some guidance on expectations for net interest income in say, the first and or second quarter, if you can see that far out?

What we're seeing, we haven't added much things to the portfolio with the securitization going out. The top-line NIM will go down slightly. I'd expect with that securitization that the net interest margin should stay slightly compressed due to higher borrowing costs. But as we've moved another $240 million off to fixed securitization cost, we'll see some of that bleed through in NIM.

And you mean that in dollar terms, relative to the $7.4 million?

In dollar terms.

Okay. And then -- okay, that's very helpful. And then, presumably in the coming quarters, it'll be a function of when and if you had to -- the balance sheet overall, and I know it's a very fluid environment, but any guesses to the likely balance sheet trends over the course of the year?

Yeah, we expect to get another securitization out much like we did in January. That would be probably a little bit smaller than the one we did, but reducing the whole loan balance, securitizing more loans. And then, very soon, start purchasing newly originated loans which I think Sreeni mentioned in his section, are approaching 9% coupons.

So that, as we build that balance sheet, the loan balance will come up some where we won't go as high as we did in Q1 of '22. But as we buy those market coupon loans, you'll see both top line and bottom line NIM, our interest widen out.

Okay. And then, on the expenses, they had been in the $4 million to $5 million range and $1.8 million this quarter. Any thought on what one should expect there?

Yeah, well, the $8 million includes a decent amount of securitization cost. Going forward over the next year, looking at management fees will be decreasing. Our management fee that we pay the manager is based on distributable earnings, so as we had distributed earnings loss this quarter, that's going to reduce.

Run rate's come down about $1 million there. And then, you know, as some of the other things happening, we're doing a lot of analysis and we've brought in some services that we previously outsourced that have good cost savings. You should see another, call it, million dollars in savings on a normalized basis.

I'm sorry, you said $8 million? I was looking at the.

$1 million, so a $1 million less on management fee, and then, $1 million on operating expenses.

And that's relative to the $1.79 million this quarter on OpEx?

It's -- yes. But that's -- yeah, the $1.8 is a quarter, I'm saying annually saving us about $1 million on OpEx and $1 million on management fee.

Ah, okay. Those are annual numbers though?

That's right.

Okay. All right. Thank you. That's it for me.

Don Fandetti, Wells Fargo.

Yes, can you talk a little bit about the securitization markets? Obviously, you had a little wind down in January, but has that shot, do you think another deal can get done in this type of environment? And how do you feel generally speaking about liquidity? I mean, the Fed still raising rates, still uncertain time. Does it make sense to start originating and growing? Or should you continue to just really hunker down here?

Hey Don, Srini here. So I'll give you a broader -- but there's two-door to the franchise. We are securitizing two different vehicles. Obviously, the REIT was able to take advantage of a good January, we had the securitization markets, but we're consistently in the markets and we follow it.

I will tell you we have done another securitization here in February to our other vehicles. And the difference between the markets today, as of right now, Don, markets are getting fickle, but as of right now, what we're seeing is these are getting done. They obviously, they'll widen out as the markets get volatile, but we are not in a we're not in a situation of in August, September, October, November of last year when there was absolute illiquidity in the system.

And also remember, there's not a lot of new originations that have been done, so if a buy-side guys want to buy bonds of non-QM shelf, they got to buy now. There's not much supply that's going to be out there. I mean, if you look at the REITs, we don't, literally unknown, nothing left anymore after one or two more securitizations.

So the markets are behaving, spreads have to widen when stuff happens, but we did a very large securitization in February. We intend to go back to the market in March, we are already working on that, and we could have some loans in that. It could change, but right now we're not seeing that.

In terms of your other question of liquidity, and look, we went through a lot of these iterations last year as you guys know. But where we are, if you think about the launch we have in a non-mark-to-market facility, we have a little bit over $100 million in a mark-to-market facility, which will -- which is not significant risk. So they're not going to go out and just double down and use all of liquidity and buy loans. That's why, as Brendan was saying, even if we look to buy loans, by the time the loans get locked, loans get closed, we're looking at putting money to work next month or the following month.

And we will do it very thoughtfully, relative to risk and relative to securitization markets. So for example, in March, if the securitization markets don't behave, that we may slow down even more to buy new loans. So we feel we're in a good position to do both now, and that's what we are focused. So yeah, please don't expect us to just go double down and buy every single 9% coupon out there.

What is the plan in terms of a sustainable dividend level?

Yeah, that, we -- like we said last quarter, when we did a cut from $0.45 to $0.32, we thought when we looked out at the opportunity set for 2023, that $0.32 would have been a sustainable level that we could maintain comfortably throughout, at least throughout the 12-month period. Always subject to review and analysis, but we are still comfortable with that as well. Like I said, when we did this last securitization, it will function like our pre-IPO deals where we just retained bonds and those bonds themselves that we retained, you have a go-forward expected yield of between 10% and 15%. So the discount that we inherently had because of the loans marking down is basically behind us, and now it's going to be a good return.

Then, as we start buying the new loans, building back that NIM, it looks relatively good on the out couple of quarters this year. Especially like Sreeni said, we're almost through a lot of the lower coupon loans. The risk of margin calls is significantly reduced, we just put some numbers around it.

Sreeni mentioned we have about $140 million on our mark-to-market facility, but that's down for about $1.1 billion Q1 of '22. So the risk is not zero, but it's significantly less than it has been in a year.

Got it. Thanks.

(Operator Instructions) Matthew Howlett, B. Riley.

Hello, thanks. Good morning, everybody. Thanks for taking my questions.

The first, could you address the potentially opportunities to repurchase stock here at 50% of economics, but I recognize you're paying down the warehouse line and the focus on liquidity. Maybe you could give us the unrestricted cash position today but in terms of looking at buying new loans going forward versus buying back the stock, how do you feel -- how do you look at that analysis?

Yeah, no, I think we are looking at that analysis. We've continued to look at that analysis there, nothing has been decided today on that. We believe at this point where we have and look at future returns, there's obviously, we have a point in time today that looks like you've got a large dividend yield. You take an immediate return, if you will, because you repurchase shares, but at the same time, that is going to shrink the size of this company.

We've had -- we've gone from about $500 million in equity capital base to $235 million today, so we don't want to necessarily shrinking anymore. Also, keep the float up in the stock to help with trading. But again, we're evaluating that, and we'll see where it goes.

So unrestricted cash today is about $30 million, but that is -- and then, we also have about another $60 million of unlevered assets, bonds that are easily convertible. And then about $18 million of unlevered loans that we could either lever or sell pretty easily.

You did a great job getting into the warehouse line, paying it down, and certainly, look forward for the next securitizations, great to hear that success. Two, it's a big step.

And on that note, could you just address, you talked about credit in the embedded HPA, but I think for investors, non-QM is getting a lot of press and the people are, it's always this area that people are cautious about just in '23. And I know non-QM is a broad factor, and could you just talk about where your non-QM is in terms of credit versus maybe, the overall industry and why you feel that it's going to hold up better than just generic non-QM?

Yeah, Matt, I'll take this one, and Namit, jump in if you want to add to it. But we've always told people that in a non-QM of today is not the subprime of 2007, and in a combination of full underwriting of credit in our loan to values in the 70s, in our true appraisals, et cetera, et cetera. When you originate a loan and you have all these qualities that you're underwriting, your risk of default goes low.

Now, that being said, look, if we are going to go in a hard recession, we're not naive to think that there will be delinquencies and defaults. That's going to happen to a cycle, right? It's just a matter of when and how it happens.

But the new originations that we have, by the way, just so you know, we have gone really up in credit, and not just in the read across our franchise, we are very almost slowed down our investor cash flow loans. We are not doing high LTV loans at all. We are very, very conservative in terms of what we originate as of right now, but so we are clearly conscious that even though we think that the credit is good, you definitely need to tighten your credit even more going into a potential recession. We know that, and we'll talk full about that. But let me get you more details on that, because you talk to the mortgage company about credit almost daily.

Yeah, so to Sreeni's point, there is an aspect in mortgage credit of the quality of loans that you originate, so when we talk about our average FICO scores being 740 plus, and our average loan to values in the low 70s, these are attribute that looks similar to agency originations. Quite different from the historical non-agency originations that used to happen in the pre-global-financial-crisis period. And these loans have performed really, really well, they've hardly had any losses in the last seven, eight years of our originations. Now, if we do go into a bumpy macro environment, as Sreeni mentioned, we do expect some increase in delinquency.

But if you have a book with whether delinquency numbers are running with a 1% handle, and we go into a recession, and that delinquency goes up like 50%, you're still talking about a delinquency that is close to 2%. And that is not a huge detraction from the return potential of these loans, especially when you think of the loan coupons that are being originated. We are talking about the 9% coupon being originated with a 740 plus FICO and a 70 LTV. And if you have -- and because of the current market spreads, these loan prices have remained very suppressed, so if your delinquencies go from 1% to 2%, it does not take much.

I mean, if you do the rough math around it and let's say that marginal extra 1% loans default at a 50% rate, so now you have an extra 50 basis points of default. You apply 50 severity, you have an extra 25 basis points of loss, spread over three years, that's an 8 basis-point reduction in loan yield. That's hardly anything when you look at the current coupon on these loans.

So yes, in any macro environment, which goes into a recessionary period, no matter what the quality of the loans, you're going to see a percentage increase in delinquencies. But given the platform, given the loan underwriting, given the quality of these loans, that number is not expected to be where were some of the earlier non-agency programs used to go to in prior tough periods.

Certainly see the disconnect between what you're seeing, what the market is anticipating. Last question, just a quick update on Angel Oak Mortgage, the mortgage company, do you feel like you've right sized the platform? Do you feel like it's in position to grow on '23?

Yeah, I'll take that one. There's a lot of conversations about the Angel Oak Mortgage company. Just to reiterate, we had two mortgage companies. So one is important for this discussion, one was just a business venture, we had.

So we had a retail mortgage originator, which was largely an agency mortgage originator, and that's where we had some of the licenses. And that's the business that we dramatically reduced because that was a non-core function. We made good amount of money in 2021 and market got really tough in 2022, and that was not the business we really wanted to be in.

On terms of non-QM, which really came from our wholesale mortgage originator, which is mortgage solutions, really, the majority of infrastructure is exactly the same, it's not any different. We made -- obviously, every mortgage company has gone through cost cuttings, but we really have not much risk on balance sheet. The originating volume here and flowing through coupons are approaching 9% as we speak, but volumes have dropped, they're probably going to end up being half of what they were early last year.

But what we're focused on right now in the mortgage company is not volume, it's more volume and credit. And that's what we're focused on, but not many changes from that perspective.

Great. Thanks, everyone.

Thank you. There are no further questions at this time. I'd like to turn the call back to management for closing remarks. Thank you.

Thank you, everyone, for your time and interest in Angel Oak Mortgage REIT. We look forward to connecting with you again next quarter. Please feel free to reach out to us, and we invite you to our offices anytime you guys would love to come and sit down with us. Thank you so much. Bye.

Thank you very much. Ladies and gentlemen, this does conclude today's call. Thank you very much for your time. You may now disconnect your lines.