Angel Oak Mortgage REIT, Inc.

Hello and welcome to Angel Oak Mortgage REIT's second quarter earnings conference call. All participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Randy Christman, Chief Marketing and Corporate Investor Relations Officer. You may begin.

Good afternoon. Thank you for joining us today for Angel Oak Mortgage REIT's second quarter 2021 earnings conference call. This afternoon, we have filed our press release detailing our second quarter results, which is available in the investor sections on our website at www.angelokereit.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 also 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 afternoon's call is hosted by Angel Oak Mortgage REIT's Chief Executive Officer, Robert Williams, and Chief Financial Officer, Brandon Filson. Management will make some prepared comments, after which we will open up the call to your questions. Now, I will turn the call over to Robert.

Thank you, Randy, and thank you, everyone, for joining us today. I'll begin with an overview of our strategy and market opportunity. Then I'll turn it over to Brandon to discuss the second quarter financial results. After that, we'll open up the call for your questions. We completed our IPO in June of this year after operating nearly three years as a private REIT. We believe our strategy has been tested and validated, and that we are uniquely positioned to benefit from the robust housing market. We have a distinct product focus, extensive management experience, proprietary access to the Angel Oak platform, which possesses a proven and lengthy track record of asset management and origination success that we can leverage. Let me begin with what makes the opportunity compelling. Angel Oak's affiliated mortgage companies, which collectively comprise Angel Oak Mortgage Lending, have a focus on non-QM loans, a large but underserved section of the consumer mortgage market, providing an opportunity to generate attractive, risk-adjusted returns. Let me emphasize that our borrowers are not inferior credit. In fact, the credit metrics are solid, including prime to near-prime FICO scores, mid-70% loan-to-value, and low debt to income ratios, but largely for documentation reasons fall outside traditional GSE underwriting requirements. They may be self-employed borrowers without required W-2 documentation, or they may be purchasing an investment property, or they may be in a category we call just misprime. Our performance during the COVID pandemic highlights the resilience of the asset type and borrow group. Looking at our performance March through June of 2020, was obviously a challenging time period for everyone managing credit or loans. Our delinquencies peaked in the summer of 2020. The delinquency rate never rose above 16% of our portfolio, and it's now improving back to a historical average of 2% to 4% delinquencies. This performance speaks to our strong underwriting criteria, which includes loans in the mid-70% LTVs, low debt to income, and mid-700 FICO scores. Bars are heavily incented to perform as they have significant equity in these homes. To break that down further, our average loan size is around $400,000, meaning these bars have on average over $100,000 in equity in the home at loan origination. With home prices appreciation that occurred over the last year, our bars generally have significantly more equity in the home now, making this very attractive collateralized lending. Our underwriting of residential non-QM loans requires a specialized skill set for which Angel Oak has invested substantial time and capital, and therefore honed over many years. We mainly source our loans through Angel Oak's robust mortgage, retail, and wholesale origination network, which allows us to tailor our products as the market evolves, managing our exposure or adjusting to emerging risk as needed. Angel Oak's national platform, which recently surpassed $10 billion in total non-QM origination, allows us to cast a wider net, and as a result, we think our diversification has typically been superior to other originators in the market. Because non-QM lending requires a unique combination of sourcing and underwriting expertise, non-QM loans carry a meaningful spread to conventional mortgage rates, with a typical spread over agency loans currently over 200 basis points. While these attractive returns would be expected to draw competitors, the fact is it remains a large moat around our industry, and the barriers to entry are substantial. For starters, this is a market where large banks do not compete, primarily as a result of regulation. Non-QM is dominated by non-bank lenders, and the single largest non-bank originator of non-QM mortgages since 2017 is Angel Oak Mortgage Lending. Our relationship with these affiliated lenders affords us a proprietary pipeline of loan supply underwritten by a team within Angel Oak Franchise. This is a key competitive advantage, securing quality assets with proper collateral value and fair and attractive pricing. Therefore, we do not depend on third-party originated assets and are not subject to buying the widest possible credit at the highest possible price as many of our competitors are. Having this consistent access to targeted assets means that we can spend less time sourcing mortgages and more time on asset management and securitization strategies. where we can generate substantial value. Our advantage within the non-QM market is our ability to identify and underwrite particular borrow characteristics, which allow us to calibrate our risk and tailor our portfolio to meet a desired asset profile. We also have the advantage of minimal financial leverage compared to our peers, with a debt to equity ratio of 2.2 times as of June 30th, 2021. As part of maintaining low leverage, we also seek to achieve low volatility, which we believe will contribute to a consistent dividend and stable growth over time. Our objective is to minimize interest rate and liquidity risk while driving superior returns by properly underwriting and properly pricing credit risk. Regarding the future market opportunity, we believe there's a large and growing pool of borrowers. There are approximately 15 million self-employed borrowers, another 59 million freelance workers who are potential fits for our products. The Bureau of Labor Statistics estimates there's a number of self-employed borrowers will continue to rise significantly over the next five years as a result of structural shifts in the U.S. economy and labor market. Over the years, we have done a large amount of borrower education in order to make people aware that our products exist. As a result, Our affiliates at Angel Oak Mortgage Lending have now become the single largest non-bank originator in the country. Before I turn it over to Brandon, I'd like to summarize the opportunity with the following points. First, this is a business, not a trade. This is an investment in an operating business that has been built over several years. This REIT gives shareholders access to a scarce and proprietary asset. We believe there's a long runway for continued growth with minimal competition and an opportunity to earn meaningful spreads over agency mortgages and other assets, driving better bottom line results with less financial leverage. Second, we have an unparalleled access to the market through Angel Oak Mortgage Lending, which has been the single largest non-bank originator of non-QM loans. Third, we have a programmatic access to capital markets through Angel Oak's securitization platforms with a strong investor following, a low cost of funding, and we have participated in five securitizations to date, which Brandon will discuss in more detail shortly. With that, I'm pleased to turn it over to Brandon.