Business Overview and History
Angel Oak Mortgage REIT, Inc. (AOMR) is a leading real estate finance company focused on acquiring and investing in first lien non-qualified residential mortgage (non-QM) loans and other mortgage-related assets in the U.S. mortgage market. The company's strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to higher-quality non-QM loan borrowers and primarily sourced from the proprietary mortgage lending platform of its affiliate, Angel Oak Mortgage Solutions LLC.
Angel Oak Mortgage REIT was incorporated in Maryland on March 20, 2018. The company is externally managed and advised by Falcons I, LLC, a registered investment adviser and an affiliate of Angel Oak Capital Advisors, LLC. Angel Oak Mortgage REIT has elected to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2019.
On February 5, 2020, the company formed Angel Oak Mortgage Operating Partnership, LP, a Delaware limited partnership, through which substantially all of its assets are held and operations are conducted. This structure allows for more efficient management and operation of the company's assets.
The company's objective is to generate attractive risk-adjusted returns for its stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles. Angel Oak Mortgage REIT achieves this by investing in first lien non-QM loans and other mortgage-related assets, primarily sourced from its affiliated mortgage lending platform.
In June 2021, the company completed its initial public offering, raising $230 million in gross proceeds. The IPO proceeds were used to acquire target assets, including non-QM loans, RMBS, and other mortgage-related investments, as well as for general corporate purposes. Prior to the IPO, the company's capital came from capital contributions from its investors.
Since its inception, Angel Oak Mortgage REIT has utilized variable interest entities (VIEs) to securitize whole mortgage loans in order to obtain long-term non-recourse financing. The company evaluates its interest in each VIE to determine if it is the primary beneficiary and consolidates the VIEs for which it is the primary beneficiary on its financial statements.
In 2023, the company faced challenges related to the economic impacts of the COVID-19 pandemic, which led to increased delinquencies in its loan portfolio. However, Angel Oak Mortgage REIT was able to navigate this challenge by requiring all of its collateral to be adequately insured and closely monitoring its portfolio.
Since its IPO, Angel Oak Mortgage REIT has demonstrated strong growth and financial performance. The company has steadily expanded its loan portfolio, completed multiple securitizations, and maintained prudent risk management practices. As of December 31, 2024, the company had total assets of $2.05 billion, including $1.88 billion in whole loan investments and $333 million in notes payable.
Financial Performance and Key Metrics
Angel Oak Mortgage REIT has reported consistent improvements in its financial performance over the past several years. For the fiscal year 2024, the company reported:
- Net Income: $28.8 million - Earnings per Diluted Share: $1.17 - Net Interest Income: $36.9 million, up 28% year-over-year - Interest Income: $110.4 million, up 15% year-over-year - Distributable Earnings: $7.0 million
The company's loan portfolio has also grown steadily, with $684 million in loan purchases during 2024 at a weighted average coupon of 7.64%. Angel Oak Mortgage REIT has also been active in the securitization market, completing 5 securitizations totaling $855 million in scheduled unpaid principal balance during the year, exceeding their target of 1 per quarter.
As of December 31, 2024, the company had a GAAP book value per share of $10.17 and an economic book value per share of $13.10. The company's recourse debt-to-equity ratio was 1.0x at the end of the year.
For the most recent quarter ending September 30, 2024, the company reported:
- Revenue: $0 - Net Income: -$15,056,000 - Operating Cash Flow: -$212,394,000 - Free Cash Flow: -$212,394,000
The decrease in net income, operating cash flow, and free cash flow in the most recent quarter was primarily due to unrealized losses on the company's residential mortgage loan portfolio as a result of rising interest rates.
As of September 30, 2024, AOMR's portfolio of residential mortgage loans had a fair value of $428.91 million, making up 36.2% of the company's total investment portfolio. The loans had a weighted average interest rate of 7.73% and a weighted average remaining maturity of 30 years. The portfolio consisted of loans with unpaid principal balances ranging from $75,000 to $3.4 million, with an average unpaid principal balance of $481,000. The FICO scores of the borrowers ranged from 628 to 823, with a weighted average of 754, and the loan-to-value (LTV) ratios at origination ranged from 7.1% to 90%, with a weighted average of 70.6%.
Additionally, AOMR held $1.45 billion in residential mortgage loans that were securitized and held in securitization trusts, representing 37.4% of the total investment portfolio. These securitized loans had a weighted average interest rate of 5.12% and a weighted average LTV of 67% at origination. The geographic distribution of the underlying collateral for these securitized loans was diversified across the country, with the highest concentrations in California (21.4%), Florida (16.2%), and Texas (13.4%).
In addition to residential mortgage loans, AOMR's investment portfolio includes RMBS and other mortgage-related assets. As of September 30, 2024, the company held $283.11 million in RMBS, representing 86.7% of its total investment securities. This RMBS portfolio included $88.74 million in AOMT RMBS, which were either retained from the company's own securitization transactions or purchased in the secondary market, as well as $194.36 million in whole pool agency RMBS.
AOMR also held $49.97 million in U.S. Treasury securities and $18.72 million in investments in majority-owned affiliates, which primarily consist of risk retention securities from the company's securitization transactions.
Dividend and Capital Allocation
Angel Oak Mortgage REIT is committed to returning capital to shareholders through quarterly dividends. The company declared a $0.32 per share common dividend, payable on February 28, 2025. This dividend represents a payout ratio of approximately 109% of 2024 distributable earnings.
The company's capital allocation strategy focuses on prudent balance sheet management and accretive investment opportunities. Angel Oak Mortgage REIT has demonstrated the ability to raise capital opportunistically, as evidenced by its $50 million senior unsecured notes offering in July 2024, which was accretive to earnings within one quarter.
Liquidity
Angel Oak Mortgage REIT maintains a strong liquidity position to support its operations and investment activities. The company's liquidity sources include cash on hand, undrawn credit facilities, and the ability to securitize loans. As of September 30, 2024, the company had:
- Cash and Cash Equivalents: $42,050,000 - Available Credit Line: $716,960,000 in unused borrowing capacity across three active financing facilities - Debt/Equity Ratio: 0.500 (Unsecured Senior Notes Due 2029)
This liquidity position provides ample resources for near-term operations and investment opportunities.
Risks and Challenges
While Angel Oak Mortgage REIT has delivered strong performance, the company faces several risks and challenges:
1. Interest Rate Risk: The company's portfolio valuations are susceptible to changes in interest rates and market spreads, which can impact the company's book value and earnings.
2. Credit Risk: As the company continues to grow its loan portfolio, there is a risk of increased delinquencies or defaults, which could impact the company's financial results.
3. Competitive Landscape: The non-QM mortgage market is becoming increasingly competitive, which could pressure the company's margins or make it more difficult to source attractive investment opportunities.
4. Regulatory Environment: Changes in the regulatory landscape, particularly related to the GSEs or the non-QM market, could adversely affect the company's business model and operations.
5. Reliance on Affiliated Entities: Angel Oak Mortgage REIT's strong performance is, in part, dependent on its relationship with its affiliated mortgage lending platform and other Angel Oak entities. Any disruption to these relationships could impact the company's ability to source and manage its investments.
Outlook and Conclusion
Despite the risks, the long-term outlook for Angel Oak Mortgage REIT remains positive. The company's focus on prudent risk management, efficient capital recycling, and disciplined execution has positioned it well to navigate the evolving non-QM mortgage market. The company's strong relationships with its affiliated entities, coupled with its proven securitization strategy, provide a clear path for continued growth and value creation for shareholders.
Looking forward, AOMR expects interest income to continue to grow as they purchase accretive loans, employ sound portfolio management, and leverage effective securitization execution. The company plans to continue accessing the securitization market via their methodical securitization strategy, as the market remains active and receptive with tight spreads.
AOMR anticipates delinquencies to return to a more normalized level of 2-3% 90-day delinquencies in their loan book, as some of their securitized loans from IPO are now getting more aged. The company's capital deployment strategy will remain adaptive and flexible, aligning with evolving market dynamics in order to maximize returns. AOMR's approach to raising capital remains opportunistic, seeking to raise funds when it provides additional earnings and maintains flexibility.
As Angel Oak Mortgage REIT continues to execute on its strategy, investors should closely monitor the company's ability to maintain its competitive advantage, manage interest rate and credit risks, and capitalize on the expanding non-QM mortgage market opportunity.