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Q1 2024 Angel Oak Mortgage REIT Inc Earnings Call

Participants

KC Kelleher; Head of Corporate Finance and Investor Relations; Angel Oak Mortgage REIT Inc

Sreeniwas Prabhu; President, Chief Executive Officer; Angel Oak Mortgage REIT Inc

Brandon Filson; Chief Financial Officer, Treasurer; Angel Oak Mortgage REIT Inc

Doug Harter; Analyst; UBS

Don Fandetti; Analyst; Wells Fargo & Company

Presentation

Operator

Ladies and gentlemen, good morning and welcome to the Angel Oak Mortgage first quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.
And it is now my pleasure to introduce your host, KC Kelleher, Head of Corporate Finance and Investor Relations. Please go ahead, sir.

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KC Kelleher

Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's first quarter 2024 earnings conference call. This morning, we filed our press release detailing these results, which is available in the Investors section of 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 Chief Investment Officer, 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, www.angeloakreit.com. Now I will turn the call over to Sreeni.

Sreeniwas Prabhu

Thank you, KC, and thank you to everyone on the call for joining us today. First quarter of 2024 reflected a continuation of the upward trajectory that we established last year. Based on the momentum from 2023, we have executed on our strategy to grow and fortify our portfolio's earnings potential and return profile.
The first quarter of 2024 marks our third consecutive quarter of increased net interest income, reflecting our commitment to strategic portfolio expansion and consistent securitization execution in conjunction with sound risk management. Additionally, distributable earnings, GAAP book value and economic book value all increased versus both the prior quarter and the first quarter of 2023.
We have established this positive growth trend despite what continues to be an uncertain and at times unfavorable macro environment. This underscores the resilience of both our operating model and of the Angel Oak Ecosystem, which is market-leading origination and securitization platforms combined to position the Company for continued financial success throughout the remainder of the year and beyond.
In the quarter, we achieved net interest income of $8.6 million, a 26% expansion versus the same quarter last year and the highest level since the third quarter of 2022. This is enabled by our effective securitization strategy and methodical purchases of high-quality current coupon loans on balance sheet. Notably, after quarter-end, we led AOMT 2024-4 securitization, which was a $300 million deal with a weighted average coupon of 7.4%. We are work purchasing newly originated loans with the proceeds from this deal, which we expect to drive further net interest income expansion in the coming quarters. This strong securitization execution and our ability to strategically leverage Angel Oak Ecosystem serves as a competitive advantage in the market and further highlights the growth potential of our business model as we continue to prioritize long-term value creation.
We note that our GAAP book value per share grew to $10.55, a 2.8% increase over the previous quarter. And economic book value per share grew to $13.78 a 1.8% increase over the previous quarter, while our portfolio value is impacted by federal funds rate decisions, interest rate, market volatility and then the impact on fixed income yields the position of our portfolio in current market coupon loans dampens some of this volatility, though the magnitude and the timing of potential federal funds rate decreases remains uncertain. We maintain a positive outlook for the remainder of 2024.
As for credit performance, the weighted average 90-plus day delinquency rate across our portfolio for loans, securitized loans and RMBS was 1.8% as of quarter end as compared to 2.2% at the end of the fourth quarter of 2023, representing a decrease of approximately 18%. We continue to observe muted delinquency activity and believe that any future upticks in delinquencies would represent a movement towards historical averages as opposed to a large-scale event. As previously stated, we believe that the credit risk management is a key competitive strength due to our relationship with the Angel Oak Ecosystems affiliate mortgage originator, which provides us the ability to adjust credit offerings based on our specific desired characteristics. Credit performance is a risk we choose to own, and we expect our portfolio to continue to perform comparably well.
With that, I'll turn it over to Brandon, who will walk us through the financial performance for the first quarter in greater detail.

Brandon Filson

Thank you, Sreeni. And the first quarter of 2024, we maintained a consistent upward earnings trend that we have established beginning the third quarter of 2023 company's net interest income expanded for the third consecutive quarter, signaling sustained growth and profitability. We are pleased with the progress achieved in recent quarters and maintain an optimistic outlook for 2024 confident in our ability to continue to profitably grow the portfolio in the quarter.
The company had GAAP net income of $12.9 million or $0.51 per fully diluted common share. Distributable earnings were $2.8 million or $0.11 per share the difference between GAAP and distributable earnings is primarily driven by unrealized gains in our residential loan and securitized loan portfolios. This quarter, the relationship between GAAP and distributable earnings was more reflective of our long-term expectation for GAAP industrial earnings to converge in a normalized macroenvironment.
Interest income for the quarter was $25.2 million and net interest income was $8.6 million, marking a 26% improvement over the first quarter of 2023 and a 33% improvement over the low point of Q2 2023. This growth is driven by our continued purchases of high-quality current market coupon, non-QM loans and our effective securitization strategy. Interest income grew over 6% compared to the year ago quarter, while interest expense decreased nearly 2%, while interest rates on our warehouse financing lines, which are tied to so far have remained stubbornly high.
Over the past year, we have been able to achieve sustained net interest income growth, which we expect to continue to do so. In the first quarter, our operating expenses were $4.7 million, a modest increase from the previous quarter, but a 17% decrease from the first quarter of 2023. This increase versus the prior quarter was driven by 2023 year-end legal and audit fees as well as the inclusion of an estimate for unvested stock-based compensation.
When we analyze our expenses, we find it most useful to exclude our non-cash stock compensation expenses as well as securitization costs. Stock compensation does not impact our cash returns and costs related to securitization activity. Costs are directly in line with the execution of our business plan Excluding these expenses, our first quarter 2024 operating expenses to $3.9 million compared to $4.2 million in the first quarter of 2023. We expect to maintain our current operational expense levels with some potential for further reductions as we work to identify opportunities to further optimize our cost structure.
Focusing on our balance sheet as of March 31, we had $39.4 million of cash on hand. Our recourse debt to equity ratio was roughly 1.8 times at the end of the quarter compared to 1.9 times as of December 31, 2023. Since quarter end, the maturity of our short-term US treasury assets and corresponding repurchase agreements on April 9, 2024, reduced our recourse debt to equity ratio to 1.3 times. Further, the impact of AOMT 2024-4 reduced our recourse debt to equity ratio to approximately 0.5 times as of today's date. Note that this would likely increase as we continue to purchase loans, but we expect that our recourse debt to equity ratio will remain low in the short term and below 2.5 times on a long-term basis.
Our residential whole loan portfolio stood at a fair value of $368 million as of quarter end, financed with $284 million of warehouse debt, $1.2 billion of residential mortgage loans and securitization trusts, and $463 billion of RMBS, including $18 million of investments in majority owned affiliates, which are included in other assets in our balance sheet. We are pleased with the execution of AOMT 2024-4 subsequent to quarter end, our first stand-alone securitization of the year to which we contribute loans with 300 million of scheduled unpaid principal balance and a weighted average coupon of 7.4%. The deal removed approximately $236 million of warehouse debt and allowed us to save approximately 100 basis points on the financing rate of the loans contained within a deal.
Notably, this securitization effectively remove the impact of the legacy H wells from our portfolio we're deploying the capital released from the deal to high quality high coupon loans, primarily from our affiliated non-QM mortgage originator targeting coupons above 8% in order to further expand our net interest margin on a go-forward basis.
Additionally, we'll use the capital to opportunistically reduce other borrowings in an effort to grow net interest income by reducing funding costs following the securitization we are carrying a smaller unsecuritized loan portfolio balance, which we expect to replenish quickly with high-quality current market coupon loans. We remain confident in our goal to complete one securitization each quarter this year on edge.
Moving on our GAAP book value per share increased 2.8% to $10.35 per share as of March 31, up from $10.26 in the fourth quarter. Our economic book value with fair values all non-recourse securitization obligations. It was $13.78 per share as of March 31, up 1.8% from $13.54 per share as of the fourth quarter. We estimate that GAAP and economic book value are roughly flat compared to the end of the quarter to today's date.
We purchased $43.2 million of loans in the first quarter that carried a weighted average coupon of approximately 8.1% and a weighted average LTD of 68.7% and a weighted average FICO of 747. The weighted average coupon for residential whole loan portfolio as of the end of the quarter was 7.11%, representing an increase of 33 basis points since the end of the fourth quarter. Loan purchases have accelerated in the second quarter as origination activity picks up following the slower winter months. And we have increased capital release for the AOMT 2024-4 securitization.
Following that securitization. The unpaid principal balance of our whole loan portfolio was approximately $80 million with a weighted average coupon of 6.5%. Since then, loan purchases and committed loan purchases have increased the weighted average coupon back up to approximately 7% because of the reduced size of the residential loan portfolio post AOMT 2024-4, the weighted average coupon will increase quickly with intended continued purchases of current market coupon loans. We remain optimistic in our ability to continue our plans for programmatic loan purchases and remain disciplined in our credit selection for the remainder of the year.
Finally, the company declared a $0.32 per share common dividend, which will be paid on May 31, 2024, to stockholders of record as of May 22, 2024. For additional color on our financial results, please review the earnings supplement available on our website, and I will now turn it back to Sreeni for closing remarks.

Sreeniwas Prabhu

Thank you, Brandon. We are proud of the growth we have achieved from an execution standpoint, and we believe there's a meaningful upside to be captured as we continue to execute on our long-term goals. Our balance sheet is effectively delevered from a recourse debt to equity standpoint as of today. We plan to deploy capital release from 2024-4 into new loan purchases, reductions in other borrowings and for other accretive purposes.
As we look to grow the earnings power of our portfolio further, the company may elect to engage with capital markets. That said, we know that any activity would stem from an actionable opportunity with economics that we expect to be directly accretive to our business and results as we enter second quarter and look towards the remainder of the year, we look forward to delivering positive returns to our shareholders. And with that, we'll open up the call to your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions)
Doug Harter, UBS.

Doug Harter

Thanks, and good morning. Hoping we could touch on the last point you brought up about access and capital markets. Can you just talk about how you think about your cost of capital and kind of how you would define kind of what is accretive to shareholders and maybe along those lines, kind of what type of instruments you would be looking at?

Brandon Filson

Yes, good morning, Doug, it's Brandon. And yes, we I think it's no real secret right with our balance sheet that we're 100% really financed with common equity. So right now, as we're looking at capital markets, most likely any kind of raise would be somewhere in the debt space. I feel that our current securitization execution kind of gets us pencils those back into high-teens, low 20% return hurdles. So anything in that, I think current market.
I mean, MFA did a deal recently about 9% coupon on a baby bond deal. Some of the senior secured deals have gone off as well. So anything in that range, we think would be very accretive to the common holders and allow us to continue to grow. But again, like rate right now, there's nothing necessarily in the pipe we're just we're messaging much like we've done in previous quarters and saying things you know around if we do choose to raise capital is going to be an accretive move for us versus a refinance of debt, especially a refinance of a lower cost of capital debt with a higher cost of capital.

Doug Harter

I appreciate that, Brandon. I guess just how do you think about the maturity or the duration of any debt that you could raise versus the duration of the assets you'd be putting on and your comfort with what those two figures.

Brandon Filson

I think the current securitization execution, again, with the average life of those senior bonds or bonds we hold would be somewhere kind of really close to the duration of a typical debt being like a five-year instrument five-to-seven-year instrument. So I think it would be a pretty good match in terms of what we issued and then what we would do use that capital for.

Doug Harter

Great. Thank you.

Operator

(Operator Instructions)
Don Fandetti, Wells Fargo. Please go ahead.

Don Fandetti

Hi. Can you talk more about your loan acquisition targets for Q2? I mean Q1 was a little light at $43 million. Obviously, some seasonality there. But you know, if you contributed $300 million to the new securitization, the balance of residential whole loans, it's pretty low. And then you're talking about raising potentially some debt. I mean, are you just originating from Angel Oak or would you look at portfolios? Just trying to get a sense on, you know, how you're feeling about the pipeline of new acquisitions?

Brandon Filson

Yeah, our -- you're right, Q1 was a little lighter than we had been in the past, and that was some seasonality, and it was also as we're preparing and getting into '24-4 which closed just after quarter end. Since that deal has closed, we have essentially now used all of that capital to buy loans or two in the case of reducing warehouse are sorry, repo debt on some retained bond positions. So we've essentially use that $40 million of capital already from an unlevered basis. We'll be working on levering that throughout this quarter to get us in a position where we'll issue another stand-alone current coupon securitization.
You know, in most likely Q3 early Q3. So I would say this quarter, we're targeting $150 million to $200 million worth of acquisitions. And then obviously we can toggle that back and forth that that number is probably going to be about one half to two thirds from our affiliated originators, but we're starting to see decent opportunities and third party originated loans as well with the -- your credit profiles similar to our own origination that we can use to fill the remaining pieces of the bucket.

Don Fandetti

Okay. And I guess, you know, if I just look at NII minus your expenses on it's below the dividend. I guess, do you feel like you'll just grow into that?

Brandon Filson

Yeah, that's exactly right. And this quarter was a little lower growth in that metric than it has been in a couple of other quarters that since we started buying loans in earnest in Q3 of '23. This quarter, with again with '24-4 going off, we're saving about 99 hundred basis points off of financing rate. They're buying $40 million already kind of unlevered loan positions. Those were 8% loans thereabouts. So you kind of back into the math.
And then on the expense side, year-end was a little higher just because as we went through the final audit was our 1st year with SOX compliance. We had a more expensive on it than it had been in the past. And then also just the K and proxy and annual meetings and things like that those those expenses will go in moderate through Q2, Q3, Q4, et cetera. And we'll get back a little bit to where we were in terms of like a Q4, Q3 expense load as well as continuing to grow that net interest margin.

Don Fandetti

Thanks.

Operator

(Operator Instructions)
As there are no further questions. I would now hand the conference over to Brandon Filson for his closing comments. Brandon?

Brandon Filson

Yeah. 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 at all, please feel free to reach out. Have a great day.

Operator

Thank you for the conference of Angel Oak Mortgage has now concluded. Thank you for your participation. You may now disconnect your lines.