Angel Oak Mortgage Inc
NYSE:AOMR
Earnings Call Analysis
Q4-2023 Analysis
Angel Oak Mortgage Inc
Angel Oak Mortgage REIT (AOMR) concluded 2023 on a positive note, showing an encouraging trend in its financial results, with the inflection point in performance surfacing in the latter half of the year, marked by a significant net interest margin expansion. Over the past year, through strategic decision-making and adaptability, AOMR has strengthened its earnings power and balance sheet, priming itself for growth despite the headwinds from the highest interest rate levels in two decades. This has resulted in a notable increase in GAAP net income to $33.7 million for the full year, bolstered by quarter four's $28.6 million, indicative of a substantial turnaround from the previous year's performance.
The decisive actions taken by AOMR to navigate the challenging economic landscape involved derisking its portfolio and reallocating resources towards more secure assets, chiefly in the form of newly originated current coupon loans. This prudent approach led to a 28% rise in net interest income from the second to the fourth quarter of 2023, with a significant bump in weighted average coupons on its unsecuritized whole loan portfolio. Further, AOMR has maintained strong liquidity and reduced operating costs, which contributed to improving both GAAP and economic book values, the latter jumping by 2.6% from the previous quarter to reach $1,350 per share.
The company demonstrated strategic flexibility, participating in four securitizations, amounting to over $660 million, amidst volatile market conditions. These measures, coupled with definitive credit selection expertise, have paved the way for sustained handling of credit risks and low delinquency rates, with a slight uptrend to 2.2%, mirroring a return to historical norms. The anticipation of a potential easing of monetary policy by the Fed in the second half of 2024 offers a positive outlook for AOMR with prospects of increased earnings stemming from lower financing costs and improved capital markets access.
Looking forward, AOMR aims to persist in expanding net interest income as it continues to deploy capital into high-yielding assets. The ethos of maximizing return on equity (ROE) guides the company's portfolio management, ensuring the capital is wielded for optimal returns. With 'dry powder' on hand and a robust securitization plan in place, AOMR is well-equipped for pursuing fresh loan acquisitions, maintaining the momentum from 2023 into 2024. The journey ahead for AOMR is marked with a clear strategy, predicated on disciplined credit selection and a commitment to astute capital allocation.
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Good morning, and welcome to the Angel Oak Mortgage Fourth Quarter 2023 Earnings Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded. I would now like to turn the conference over to Randy Chrisman. Please go ahead.
Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's Fourth Quarter and Full Year 2023 Earnings Conference Call. This morning, we filed a 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 on 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. Angel finished 2023 with another quarter of improvement in our financial results, carrying forward the momentum the company established earlier in the year. This was demonstrated by the inflection point in our performance during the second half of 2023 and continued in quarter 4 with additional net interest margin expansion.
This was a direct result of the strategic decision-making undertaken over the last 18 months. We continue to increase the earnings power of our portfolio while strengthening our balance sheet for sustainable growth.
2023 represented a pivotal year for AOMR, a year in which we successfully delivered results by reducing our balance sheet risk, improving liquidity and expanding net interest income, which showcased the resilience of our operating model and positioned the company for continued growth.
It is important to detail some key progress that we have made in creating the opportunity for AOMR to deliver these results. As you recall, in the second half of 2022, amid an increasingly challenging economic backdrop, we made the prudent decision to derisk our portfolio.
Over the past 18 months, we've repositioned our whole loan portfolio, strengthened our base of financing, drove out structural operating costs and kept a keen focus on maintaining strong liquidity. We elected to endure some short-term pain in order to better position the company and its portfolio for long-term success.
This has proven to be the correct decision as 2023 saw the continuation of the Fed funds rate hiking cycle and rates rose to the highest level in over 20 years. In spite of this, we returned our business to an attractive position from which to operate going forward. This positioned AOMR to build back the earnings power of the portfolio over the second half of the year while providing us with resources to deploy systematically into attractive opportunities afforded us through our affiliated relationship with Angel Oak mortgage lending.
It is widely anticipated that in the second half of 2024, the Fed will begin easing monetary policy. If this happens, we would expect earnings to increase due to lower financing costs and improved securitization execution.
Additionally, this could reopen areas of capital markets, which may be accretive to AOMR's growth plans. In particular, we demonstrated flexibility in our approach to securitization activity in 2023, showcasing the value of the Angel Oak ecosystem. We participated in 4 securitizations amid a volatile market, keeping our stated goal of averaging one securitization per quarter. We executed both standalone deals and comingled deals alongside Angel Oak entities to securitize over $660 million of high-quality loans, reflecting the different ways that we can bring these to market.
Additionally, these securitizations allowed us to lower financing costs, further improving our earnings power and net interest income. This improved positioning enabled the company to deploy cash strategically towards the acquisition of newly originated current coupon loans, both growing our balance sheet and expanding our net interest income.
In 2023, we purchased a total of $223 million of current market coupon loans. This drove a 28% expansion to our net interest income from the second quarter to the fourth quarter. The weighted average coupons on our unsecuritized whole loan portfolio increased nearly 200 basis points across the year and 95 basis points in the fourth quarter alone.
Our GAAP book value improved to $10.26 per share as of December 31, 2023. This was an increase of 10.4% compared to the previous quarter. Our economic book value of $1,350 per share improved by 2.6% versus the previous quarter.
Credit risk has been a key discussion point across the industry in the recent quarters. Our weighted average 90-plus day delinquency rate across our portfolio of home and securitized loans was 2.2% as of the end of the year as compared to 1.9% at the end of third quarter.
While as expected, this has trended slightly upward, we believe that the retrends are a movement back towards historical averages after sitting at historic lows in the recent years. Credit risk management is a key competitive strength of ours due to our relationship with the Angel Oak ecosystem, which provides us the ability to adjust credit offering based on our specific desired characteristics. Credit is a risk we choose to own, and we expect our portfolio to continue to perform comparatively well. In 2024, we expect to maintain momentum and drive further net interest income growth as we redeploy capital into high-yielding assets. Our portfolio management philosophy is, above all, to focus on maximizing the ROE of our portfolio and ensure that our capital is allocated to its highest and best use.
We currently have dry powder that coupled with expected securitization timing and execution levels will allow us to continue to purchase newly originated loans on a programmatic basis. As always, these efforts are supported by the credit selection expertise I discussed as we firmly believe that we possess a critical strategic differentiator in our ability to evaluate opportunities and allocate capital within our desired risk and return characteristics.
With that, I'll turn it over to Brandon, who will walk us through the financial performance for the year-end and quarter in more detail.
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 in 2024.
For the fourth quarter of 2023, we had GAAP net income of $28.6 million or $1.15 per fully diluted common share. For the full year, we had GAAP net income of $33.7 million or $1.35 per fully diluted common share. This is a significant transformation from last year's results as we continue to demonstrate our ability to execute our earnings growth strategy.
Distributable earnings were negative $6.5 million or a loss of $0.26 per share. The negative distributable earnings this quarter were again driven by the realization of previously unrealized losses when we participate in a comingled securitization like we did in December with AOMT 2023-7.
Interest income for the quarter was $24.6 million and net interest income was $8.2 million, which marks an 11% improvement over the previous quarter and a 28% improvement over the second quarter. For the year, interest income was $96 million and net interest income was $28.9 million.
As Sreeni mentioned, we expect to continue to expand net interest income in the coming quarters as we purchase and securitize new loans. Our operating expenses for the fourth quarter were $4.3 million, representing a modest decline from the previous quarter.
When we analyze our expenses, we find it most useful to exclude our noncash stock compensation expenses as well as securitization costs, as stock compensation does not impact our cash operations and securitization costs are good costs that are part and parcel with our business plan.
For the full year, operating expenses were $19.9 million or $15.7 million, excluding securitization, expenses and stock compensation. This demonstrates a decrease of $7.3 million or nearly 32% reduction compared to the prior year when also adjusted for $1.4 million in severance expense incurred in 2022.
We are continuously assessing our cost structure and plan to maintain reduced expenses going forward while continuing to look for additional savings opportunities. Now digging on to the balance sheet. As of December 31, we had $41.6 million of cash.
As expected, our recourse debt-to-equity ratio increased slightly versus the prior quarter to 1.9x as of the end of the year or 1.3x when reflecting the maturity of short-term U.S. Treasury assets and their corresponding repurchase agreements on January 16, 2024.
The increase versus the third quarter was due to additional whole loan purchases during the fourth quarter as we continue to deploy capital into higher-yielding loans. We have residential whole loans at a fair value of $380 million financed with $291 million of warehouse debt, $1.2 billion of residential mortgage loans and securitization trust and $488 million of RMBS, including $16.2 million of investments in majority-owned affiliates, which are included in other assets on our balance sheet.
We finished the year with undrawn loan financing capacity of approximately $760 million. We are pleased to have delivered consistent securitizations over the course of the year with a combination of both stand-alone and comingled deals. In total, we securitized over $660 million of loans with a weighted average coupon of 4.95% across 4 securitizations.
Near the end of the year, we participated in AOMT 2023-7, which was a $397 million securitization to which we contributed $42 million in loans. We observed improved securitization markets in the fourth quarter and thus far in 2024, and we expect that we'll be able to maintain strong execution in future deals.
GAAP book value per share increased 10.4% to $10.26 as of December 31, 2023, up from $9.29 as of September 30, 2023. Economic book value, which fair values all nonrecourse securitization obligations, was $13.54 per share as of December 31, 2023, up 2.6% from $13.20 per share as of September 30, 2023.
Given recent rate and spread movements, we estimate that our portfolio valuations gave back some of Q4's unrealized gains and that the impact to GAAP book value is approximately 3.5% and the impact to economic book value is approximately 1% as of the end of February, inclusive of our February dividend payment.
Our $223 million of loan purchases this year carried a weighted average coupon of 3.37% and a weighted average LTV of 70% and weighted average FICO of 754. With these new loans, the weighted average coupon of our residential whole loan portfolio as of the end of the year was 6.78%, representing an increase of 95 basis points since the end of the third quarter and nearly 200 basis points since the end of 2022. Including anticipated loan purchases and securitization activity subsequent to year-end, the weighted average coupon of our residential whole loan portfolio is approximately 7.1% as of the end of February.
We look forward to continuing to execute our plans for programmatic loan purchases this year, and we'll continue to be diligent in our approach to credit selection. Consistent with our portfolio management philosophy, as Sreeni discussed, we believe that maintaining our purchasing discipline and continuing a methodical securitization process will be the best course of action to maintain organic growth of the earnings power of the portfolio.
Additionally, we have the embedded earnings growth of purchases made in 2023 that have not yet been held for a full quarter, which we estimate will represent an approximately $1.2 million of interest income.
Finally, as previously communicated, the company declared a $0.32 per share common dividend, which was paid on February 29, 2024. This implies an annualized dividend rate of $1.28 per share or a yield of over 12% as of the closing price on March 1, 2024.
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. 2023 was a year of strategic execution for AOMR in which we delivered increasingly positive results despite the ongoing challenges seen across the marketplace.
While we are certainly proud of the position we are in and the growth that we have achieved, we believe we have just gotten started. Our net interest margin will continue to grow with the increased coupons and values of our unsecuritized loans. As always, we'll maintain our focus on managing expenses and liquidity. We look forward to continuing to grow our business and delivering attractive, stable returns to our shareholders.
I do like to thank the entire Angel Oak team for their hard work and contributions over the last year as we seek to build long-term value for our shareholders.
With that, we'll open up the call to your questions. Operator?
Thank you. We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause monetarily to assemble our roster. And today's first question comes from Doug Harter with UBS.
I was hoping you could give a little more clarity by what you mean about programmatic purchases of new loans, if you could help size that.
Yes. I think it's something kind of on the pace that we have been doing in 2023. So call it, $100 million or so plus or minus 25.
And then how are you thinking about kind of the range for recourse leverage, kind of where you want to operate?
I think that's going to -- that has ticked up a little bit as we've been purchasing loans. But we don't really expect to go over about 2x recourse debt to equity ratio, excluding at the end of the quarter, if we had to buy any treasuries on short-term reco, that may tick us up a little bit higher than that. But if you look at us long term, our whole loan and reco on any retained bonds would be about 2x.
And our next question today comes from Chris Kotowski with Oppenheimer.
Yes, I'm looking at Page 6 of the presentation and looking at the weighted average coupon. And it's good to see it rising nicely. But I'm wondering, just is there a way for us to gauge and quantify how much of kind of the below market mortgages you still have left? Or has that inventory been cleaned out more or less?
Yes, we've got -- as far as our age loans, the total of the $380 million, we're looking at just over $100 million of those loans left, which again, we expect to clear those out kind of short order here recently.
So we've moved that down from $1.4 billion about a year ago down to just over $100 million today.
Okay. So -- and then, I mean, conceivably, could that be cleared out in the next securitization?
Probably not the next securitization, but the one after that, they'll be completely gone.
Our next question today comes from Matt Howlett with B. Riley Securities.
This is Michael Schafer on for Matt. I'm curious, could you talk kind of in the context of credit normalization, as you said in the portfolio, how are you thinking about underwriting during the fourth quarter versus the third quarter and now how that's potentially changing to date?
Yes. It's Sreeni here. Clearly, as we've gone through the last couple of years, we have gone up in credit generally. I wouldn't say that we went that much up in credit from the third quarter to the fourth quarter.
But I think in thinking about it, just up in credit, I think that the boxes that we focus on, which is bank statement loans -- fully underwritten bank statement loans -- versus we also do single-family rental kind of loans. And what you have to be focused on is more of the rental values and how that can affect your underwriting. So we've been very cautious on how we underwrite single-family rental homes.
We also have gone up in credit just because you have to protect yourself against discontinued home price appreciation and could that go the other direction. So that's been a consistent theme for us probably for the last 2 years. So I wouldn't say it has gone that much different from third quarter to fourth quarter, but that's definitely on our mind.
And our next question is a follow-up from Doug Harter at UBS.
You mentioned in your prepared remarks that securitization markets have continued to improve into the first quarter. Can you just talk about what types of spreads you're seeing on new purchases of loans versus securitization execution?
Yes. So the new purchases of loans are between 8% and 8.5% right now. And the securitization markets are actually pretty good. I think we've been tighter 15 to 20 basis points at this point from the beginning of the year, maybe a little more, but the new coupons are trending from spread securitization spreads, and I'm just saying AAAs between 140 and 150. So substantially tighter than where we saw late last year.
And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any 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. Have a great day.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.