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spk00: Greetings. Welcome to Angel Oak Mortgage REIT third quarter 2021 earnings call. At this time, 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. Please note this conference is being recorded. I will now turn the conference over to Randy Chrisman, Chief Marketing Officer. Thank you. You may begin.
spk04: Good afternoon. Good afternoon. Thank you for joining us today for Angel Oak Mortgage REIT's third quarter 2021 earnings conference call. This afternoon, we filed our press release detailing our third quarter results, which is available in the investor section 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 conference 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 the call to your questions. I will turn the call over to Robert.
spk01: Thank you, Randy, and thank you everyone for joining us today. I'll begin with an overview of our performance and third quarter investment activity, and then I'll turn it over to Brandon to discuss our financial results. After that, we'll open up the call to questions. We continue to see terrific opportunities in the non-QM market, supported by strong, sustained housing fundamentals. While interest rates have risen somewhat, and refinance volumes have pulled back, we're still seeing very robust origination volumes through our proprietary origination channels. Not only are originations strong, but the credit quality remains excellent. As a result, we continue to have very positive portfolio performance, and our securitization strategy continues to provide attractive long-term funding. Beginning with our investment activity, in the third quarter, we purchased $543 million of mortgages and grew our whole loan portfolio to $1 billion as of quarter end. As a reminder, we primarily source our loans through our affiliated mortgage companies. Our affiliates have vast and experienced mortgage retail and wholesale origination networks, which allow us to tailor our targeted asset characteristics as the market evolves, managing our exposure or adjusting to emerging risk as needed. Angel Oak Mortgage Lending's national platform, which has over $10 billion in total non- QM origination allows us to serve customers across America, and as a result, our diversification has typically been superior to other originators in the market. The demand for housing continues to be strong, leading to solid origination volumes. Home price appreciation remains very strong across markets, and forbearance rates continue to decline. On top of that, consumer credit remains very strong, with continuing positive employment trends underlying the credit quality of our portfolio. Furthermore, As the Fed commences to tapering the agency MBS purchases, our target non-agency assets are well positioned to outperform other mortgage-related assets. Beyond these positive entry-wide origination fundamentals, the main reason we choose to focus on non-QM loans is that there is a high barrier of entry. To serve our customer base requires a specialized skill set, which Angel Oak is uniquely suited. We have invested substantial time and capital over many years to develop systems of underwriting and origination, and all loans originated by the Angel Oak franchise are underwritten by the Angel Oak credit team. This allows us to identify and adjust borrow characteristics in order to tailor our portfolio to meet the desired asset profile. Our objective is to minimize interest rate and liquidity risk while driving superior turns, properly underwriting, and properly pricing credit risk. Our business to a large extent is collateralized lending supported by qualified borrowers and quality assets. Our track record prior to becoming a public company serves to illustrate this. During the height of the market and economic disruptions resulting from COVID, the delinquency of our portfolio never rose above 16% and continues to improve to our historical average of 2% to 4%. This performance speaks to our strong underwriting criteria, which includes loans, with mid-70 LTVs, low debt to income, and mid-700 FICO scores. With the level of home price appreciation that has occurred over the last year, our borrowers generally have significantly more equity in their home now, making this very attractive collateralized lending. In addition to our extensive history in underwriting and aggregating non-QM loans, Angel Oak has also completed 27 securitizations. In August, we completed our first non-QM securitization since going public, with a total value of $317 million. Brandon will go into further detail on this securitization and our securitization process, but I want to emphasize that this is a very attractive financing which locks in long-term funding for our company. In addition to loan portfolio growth, another key drive of earnings will be our ability to continue lowering our cost of capital. Last quarter, we expanded our financing lines. adding $450 million of capacity to bring our total to $1.25 billion. Our ability to achieve advantageous financing terms is supported in part by our strong balance sheet. As stated, because non-QM loans carry a meaningful spread to conventional mortgage rates, we can achieve superior returns while using lower leverage than many of our peers. The result of all of this is that we believe we can achieve meaningful portfolio growth over time while continuing to pay attractive dividends. Our dividend yield of 7.8% as of November 5th represents a highly compelling value in today's low interest rate environment, especially we've considered the credit quality and risk protections we have in place. Before I turn it over to Brandon, I'd like to summarize our 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 11 years and gives shareholders access to scarce proprietary assets. with attractive returns to support a very attractive dividend. Second, we have unparalleled access to this market through Angel Oak Mortgage Lending, which has been the single largest non-bank originator of non-QM loans. We have more than 750 employees in our credit and lending organization, which serves as a reminder that there is a significant barrier of entry to building this credit and origination organization. Third, we have a programmatic access to capital markets through Angel Oak capital securitization platform with a strong investor following and a low cost of funding. These resources are within Angelo Capital, and this functional area has been built over a seven-year period. So to summarize, we believe we have a very unique company that has been built over an 11-year period, and AOMR provides investors access to the best-in-class business model. With that, I'm pleased to turn it over to Brandon.
spk07: Thanks, Robert, and thanks, everyone, for joining us. For the third quarter of 2021, we had net income of $6.3 million, or 25 cents per share, and distributable earnings of $4.9 million. This is an increase from our first quarter as a public REIT with $2.2 million of income and EPS of 13 cents. The increased quarter-over-quarter is due to loan purchases made post-IPO as we're ramping into a fully invested portfolio and an optimal financial and structurally leveraged profile. In the comparable quarter for the prior year, we had net income of $4.2 million, or 27 cents EPS, and distributable earnings of $3.6 million. Gap book value per share increased to $19.72 on September 30th, 2021, including the impact of our dividend paid in August, up from $19.48 on June 30th. The increase in book value was primarily due to net interest margin on the loan and RMBS portfolio as well as additional appreciation on whole loans and our RMBS portfolio, offset by some interest rate hedging losses in the quarter. During the third quarter, we purchased $543 million of non-agency mortgages. Also, as of November 9th, we purchased an additional $338 million in mortgage loans. This purchase volume is ahead of our expectations and should give additional tailwinds to future quarters as we continue to purchase additional loans throughout Q4. and now have the benefit of owning the Q3 purchases for an entire quarter. In August, we completed our first securitization since our IPO, a $317 million securitization, where we placed 96% of the capital structure at 1.12% weighted average cost of funding. The deal included 632 loans with an average credit score of 739, a loan-to-value ratio of 73.8%, and a debt-to-income ratio of 33. The transaction was rated by Fitch and Kroll with the senior tranche receiving a AAA rating. We retain the economics of the credit and interest only bonds. Our strategy for securitizations begin with loan aggregation. We purchase loans and hold them for two to four months on the financing lines that we have in place with a diverse set of banks until we achieve critical mass to execute an efficient securitization, allowing us to lock in term structural financing for the life of the loans. Last quarter, we increased capacity on our financing lines by $450 million to $1.25 billion. $50 million of this additional capacity comes from a new committed facility without a mark-to-market trigger on the loans financed. Importantly, we only rely on our finance lines for a short period of time during the aggregation phase. After securitization, we typically retain the economics from the lower 5% to 10% of the value of securities, which represents the credit and excess interest of the underlying loans. On a run rate basis and based on a number of assumptions, we believe our residential non-QM whole loan portfolio has the potential to generate a 12% to 15% yield, and the RMBS portfolio has the potential to generate a 17% to 20% yield. During the whole loan aggregation phase, we typically employ three turns of financial leverage through our warehouse lines. Once that's converted over to term financing, we're able to use the structural leverage in the securitization rather than relying on financial leverage to generate those returns. Additionally, over the next eight months, three of our legacy securitizations will become callable. Over the past year, the average FICO scores in our underlying loan portfolio and RMBS portfolio have increased approximately 20 points. Debt to income ratios have gone down, and we've been able to achieve attractive returns due to the large spread between the coupons of the loans and the cost of funding in both the warehouse and securitization phase. Turning to expenses, our operating expenses for the third quarter were $6.3 million, which using the average equity for the quarter was 4.8% on an annualized basis. With regard to the balance sheet, as of September 30th, we had $49.2 million of cash and cash equivalents. Our recourse debt to equity ratio was 2.1 times. We have a total of $1 billion in residential hold loans, $622 million of RMBS, and 105 million in retained AOMT securities. We currently have warehouse facilities with six banks with varied maturities, sizes, and counterparty types to manage our exposure to any individual counterparty. With our current unsecuritized loan portfolio of $723 million and future purchase pipeline, we are primed to continue our historical pace of approximately one securitization per quarter. The current securitization market has come off of all-time tight pricing in late summer, which our August securitization benefited from, but the securitization market is still very accretive to our strategy. On November 8th, we declared a $0.36 per share dividend for the third quarter of 2021, payable on November 30th to shareholders of record as of November 22nd. This implies an annualized dividend rate of $1.44 per share, or as Robert noted, a 7.8% yield as of last Friday's closing price. Lastly, our board has authorized a 10B51 stock repurchase plan of up to $25 million, which became active four weeks after our IPO date. In the third quarter, we repurchased approximately 97,000 shares for approximately $1.7 million. I will now turn it back to Robert for closing remarks.
spk01: Thank you, Brandon. In conclusion, we're very pleased with the power of our platforms. We came out of the gate strong with robust investment activity and a highly successful securitization in the third quarter. Our goal is to provide our shareholders with access to scarce and proprietary assets with beneficial diversification characteristics, attractive returns, which produce consistent results to drive stable and growing dividends. Notably, our company generates these results while utilizing less leverage and minimizing liquidity risk. While we intend to distribute most of our earnings, we will retain a portion of earnings to grow equity and book value over time. We look forward to driving continued success through the end of 2021 and beyond. With that, we will open up the call to your questions. Operator?
spk00: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Don Vendetti with Wells Fargo. Please proceed.
spk06: Hi, Robert. I was wondering if you could talk a little bit, you know, around the origination arm. Are you seeing more competition come in for non-QM? And then you may have mentioned it, but could you talk about where yields are today versus, let's say, a quarter or two ago and you know, where could yields go on non QM versus, uh, you know, just agency mortgage.
spk01: Hey, Hey Don. Yes, this is, this is Robert. Uh, yeah, we, we, we haven't seen the competition come in and again, just to contextually, um, when we came out, when we came out of COVID, we were cautiously optimistic again, just to give you some context here in terms of how volumes were going to grow. And, uh, The best way to describe it is it succeeded our expectations. And to a large extent, a lot of our competition really didn't recover. And therefore, we think we've captured a lot bigger portion of the market share. And then just to remind everybody, we just think that there's just a tremendous demand for this type product for the consumers across America. So what ended up happening, and it's been fortuitous, is we went into the ramp of the company where our origination was a lot better than we had forecasted. So we still feel, you know, competition is going to come back into the market. We expect that. And frankly, as competition comes back in, it gives us more depth in the market, more growth, more consumer acceptance, things of that nature. But there's just a tremendous, we think, runway to grow. And again, when you see our numbers, you know, we did $543 million of new volume in the quarter. And what's really notable is we did another $338 million subsequent to that. which again, from a volume perspective is pretty substantial compared to where we were just coming off of COVID. Regarding rates, loan rates, so it depends on the particular program, Don, but we have coupons now between call it five and 6%. And pre-COVID, that range was six to 7%. So when you look at, again, when you look at just the coupon rate on non-QM over the pre-COVID and post-COVID, I think the team here can think about it in that 5% to 7% range. And we have a decent amount of what we call pricing power within that because, again, lack of competition. So I hope that answers your question.
spk06: Yep, all set. Thanks.
spk01: Yeah.
spk00: As a reminder, it's star 1 on your telephone keypad if you would like to ask a question. Our next question is from Chris. Katowice with Oppenheimer. Please proceed.
spk02: Yeah. I mean, I guess the bottom line earnings of 25 cents were well short of the dividend. The distributable earnings were lower than that, and consensus estimates were roughly at the dividend level. And so I guess, you know, how... what did we all get wrong about thinking that earnings would be, you know, at the dividend level? And do you have, can you kind of give us a, a roadmap to your covering the dividend, you know, when and what, what parts of the income statement are going to move to do that?
spk07: Yeah. Well, thanks for the question, Chris. So first off, if you look at, we're kind of in a unique position again, because these are, first quarter going public, full quarter. We're still in the ramp period. So if you just look at the loans that we had purchased in Q3, assume some kind of rateable purchasing throughout that quarter, but now hold them into Q4, you can pick up several additional cents of EPS just from what we have in the portfolio now. We're driving additional volume you know, in purchasing power over the next quarter. And then we've never distributed any money when we were a private REIT before in the pre-COVID period, or sorry, in the pre-public period. So if you look at the distributive earnings cap, we had about $12 million essentially banked in that distributive earnings cap. So our first quarter dividend at 12 cents, you know, paid out approximately $3 million, and now the 36 is going to pay off the 9. So essentially now we've just caught up. to where we would be. So I would expect, again, barring news of some interest rate turmoils or whatnot, Q4, just with the loans we essentially have booked today, will be a very strong quarter.
spk02: I mean, if the securitization that you did in August had been in place for the full quarter, what would the impact of that have been on earnings?
spk07: If it was in place, I'd have to calculate exactly what that would be. But it would, you know, you'd pick up essentially the difference between 80% leverage at 3.5% cost of funds that, you know, the weighted average coupon of those loans is five and a quarter. And so if you think about it for the full quarter, it would be five and a quarter percent on the coupon, but the weighted average cost of funds would be 1.12%. So you could, you know, back into some math there.
spk02: okay and then uh i guess the 723 million um that of of uh whole loans that you had on the balance sheet um you know that seems like as well in excess of you know what your normal securitizations are and just wondering uh you know, why he didn't take advantage of conditions to securitize more during the quarter?
spk07: Well, again, we did that securitization on August 21st, and we're always in the market looking for, you know, another securitization to go across. So I'd expect us to, you know, execute a securitization in Q4 that'll be, you know, reasonable size and take that down a little bit. But the real fact pattern of why that's so high is because of our purchase volume increasing so much. You look at what we did in Q2, we had bought just over $300 million for the quarter. Now we did $540 million for Q3 and now another $338 essentially in the first month and a week of Q4.
spk01: Chris, this is Robert. So investor demand. So again, think of us as Again, doing the securitization every quarter. You have investor demand that you have to fill. So we want to be sort of what I call steady Eddie in terms of our securitization plan. And the good news is, back to Don's original point, was our volume was a lot more substantial than we had originally forecasted. And we got our one securitization off. So you'll see us do another securitization in the fourth quarter. Again, loan volume could continue to be pretty robust. And our balance sheet will be a little bit bigger than we would historically carry, given those two dynamics.
spk02: Okay. That's it for me. Thank you.
spk01: Okay. Thank you.
spk00: Our next question is from Matthew Hallett with B. Riley. Please proceed.
spk03: Hey, guys. Thanks for taking my question. Just on the home prices, a lot has been made about the trajectory of non-QM home prices. Can you just talk about how they're trending? you know, your execution, your synergies with angelic mortgage lending?
spk07: Yeah, no, I agree. So hold on prices in general have gone up, you know, in the post COVID period printing, you know, relatively high prices we do with our affiliated origination arms. We are getting a little bit of a discount from what you could probably source mortgage pools for in the open market. just based on the fact that we're not really in a competitive bid situation. And, you know, all the Angel Oak franchises on the asset management side stand ready to absorb all of the mortgage companies' origination. So we get a little bit of a discount there. But, you know, we've seen some of that pricing moderate over the quarter from a market perspective. You know, we're seeing post-COVID 108 trades. Now they're more 106, 107 trades of whole pool our whole loan assets in the non-QM space.
spk01: And, Matt, this is Robert. Matt, what was moving that around a little bit was that securitization execution. So, you know, we saw securitization execution on the AAAs really drive that price up, where Brandon's point was that securitization execution was coming off with those triples that, you know, where they were pricing it. last quarter was driving that price up to 108. We've seen that moderate a little bit where the triples are going off at a little bit wider spread. And then that's impacting the price on the non-QM loan back, as Brandon just pointed out, closer to that 106 kind of area on the securitization execution. So that's what's sort of moving that around, if you will, Matt.
spk03: Gotcha. So bottom line, no change in sort of what you're modeling for retained interest in securitizations.
spk07: No, I mean, not on a long-term basis. What we have is really what was in my prepared remarks. I mean, again, if you look at that late summer period, those returns were a bit north of what we've discussed. But again, those really weren't sustainable, I think, from a market perspective. Things have normalized a little bit back to historical norms to give us the retained portfolio being something like a 17% to 20% yield. Gotcha.
spk03: Okay, and then just a final question. Robert, you're talking about operating with a bigger balance sheet. If we roll forward to the next securitization, you're going to free up capital. But then you look at sort of the balance sheet, looking out to the new year, in terms of accessing new capital, your appetite for new capital, what would you look to to keep the acquisition pace going? Or are those legacy securitizations, is that going to free up capital? Can you go over sort of capital planning, you know, looking beyond next year?
spk01: Yeah, yeah, absolutely. Happy to give you that sort of thesis. So again, as we ramp here, we're in pretty good shape. Remember we're ramping into this and we'll, we're using roughly half of the leverage that our competition utilized. So we've got a little headroom on our, via our financing facilities, Matt, to continue to ramp before we, again, our, our capital constraint or liquidity constraints. So we feel pretty good about that. Then as we think about, you know, forecasting out next year, we think we want to be steady Eddie just in terms of ramping, building the balance sheet, getting on a steady beat of doing securitizations, steady Eddie around the dividend, and you see increased book value. So if we do that, we think we see a nice trajectory on the dividend. Hopefully we'll see a nice trajectory in the stock price. Then at that juncture, what we'll probably do, Matt, is we'll go out and get a credit rating at the beginning of the year. That credit rating will give us some flexibility to either do preferred or debt. So we'll have that in the toolbox and one of the terrific advantages of being a public company, we can have a little bit more tools in the toolbox to manage our debt and our capital position. So we'll do that and then we'll thoughtfully see where we are in share price. We'll thoughtfully see where we are in terms of volumes and we'll make a decision on what tool we use to, again, continue to grow the balance sheet and continue to grow our capital base.
spk03: Well, great. Well, that's interesting. I mean, credit rating, are we talking about double B or investment grade? I mean, any sort of sense on what you'd look at?
spk01: Hard to tell. You know, we'll go out and sort it out, but we think it'll be an investment grade credit rating. We'll go to one or two folks to get that credit rating. We'll, you know, utilize some support from, you know, our banking community and And again, that just gives us a different tool in the toolbox. We might choose and choose not to use that, but we think it's important to get that. But yeah, we think we'll do that beginning early next year.
spk03: Well, we've seen very cheap access to the preferred market recently with investment rates. So we certainly look forward to that. I appreciate it, Robert. Thanks, Brian. Thank you for the comment.
spk01: Yeah, yeah. Again, just contextually, if you look at it, Matt, you're exactly right. By getting that credit rating, we think we'll be in pretty good shape after Again, two quarters to get a good credit rating. We'll be able to have a decent dialogue with the rating agencies. We think we get a decent credit rating. And to your point, that gives us another tool in the toolbox to issue either preferred or corporate. So preferreds really help us on the capital side, and corporate debt just improves our liquidity profile. So remember, we came out of it. This is an important thing culturally. A lot of our team came out of running large, regulated financial institutions. So we came out of managing... you know, a capital structure and liquidity managers, that's part of our core DNA. So having a very efficient capital structure and having a very efficient and conservative liquidity profile is core to our strategy.
spk03: Well, if you could issue at 5%, you know, we're seeing five to seven-year preferred and debt go off, and that would be, you know, very accretive to, you know, high teens, low 20% returns. Would it not? Am I thinking about it the right way?
spk01: That's exactly the math. So, you know, you issue a preferred, and I'm using this to illustrate you preferred in the range you just described, and you deploy that capital and the returns that Brandon just framed it up in a secretive.
spk03: Great. We look forward to that. Thank you, Robert.
spk00: Thanks, Matt. Our next question is from Brock Vander Lee with UBS. Please proceed.
spk05: Oh, hey. Thanks for the question. I jumped on late. I just Wanted to confirm the securitization was done in August.
spk07: Is that correct? Yeah, that's correct. That's the AONT 21-4 closed on August 21st.
spk05: Okay. And were there any expenses for that? It didn't look like there were in the income statement or they rolled into another one.
spk07: So because we were the sole contributor to that securitization and we We tinkered with it a little bit and kept those loans on the balance sheet and did it as a financing. That cost is netted against that non-recourse securitization liability. It will be amortized over the call period of the securitization.
spk05: Got it. Okay. And separately, it's sounding like the agencies are going to raise the conforming loan limit. Some chatter about what level that is, but it sounds pretty significant. Do you, you know, how do you view that in terms of, you know, eating into your addressable market or just not, totally not relevant because these loans really don't check the check the agency box to begin with. So it's just not that relevant at all.
spk07: Yeah, it's definitely the loans we have. So two points there. First is what we're generally originating don't really check the agency box to begin with. They're bank statement loans for small business owners. They're investor cash flow loans. So long-term rental, things like that. And then also, our average size of our loans as well. I mean, honestly, it's under the current conforming loan limit, you know, on average. So we don't really see anybody being pulled out of our origination based on that loan size, you know, versus, you know, maybe some other guys that are doing a lot more of the prime jumbo space or something might have some loan loss, but we don't have, again, we're heavily centered 70, 80% of that bank statement investor cashflow loan.
spk05: Yep. Okay. And do you see any, you know, very large originator kind of household name types entering the space in terms of non-QM or speculation about others entering, or is it a pretty stable set of peers?
spk01: Yeah, that's the point we were making. I mean, one of the things that we've created here is it's a huge barrier of entry. I mean, again, to find that consumer from a bank statement perspective or investor property, whatever the particular case is, and underwrite that consumer, I mean, you have to have a very different mortgage company, a very different culture. So you have to have a culture of identifying that consumer, and then you have to have a culture of underwriting that consumer and serving that consumer correctly. It's almost like a bank versus a classic mortgage originator. So what Angel Loca's built is that culture, and that's the 750 people. Again, just to remind you, we're underwriting every loan that comes through the Angel Oak platform, and we have our own underwriting team embedded in Angel Oak to underwrite that loan. And then we have a completely different origination model to go out and find that consumer and serve that consumer correctly. That's difficult to build. I mean, it takes a long time to build that culture. It takes a long time to build that network. It's a vast amount of investment up front to get to the point to drive the kind of volume we're driving. So when your classic private equity looks at trying to build this model, they go, wait a minute, I've got a three-year run rate here before I do any substantial volume. I've got a significant investment. Hard to get into that. So it's a huge barrier of entry around this business because of that dynamic.
spk05: Got it. Okay. That's great, Keller. Thank you.
spk00: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
spk01: Yeah, thank you very much. I want to mention one thing, too, that we prepared an earnings supplemental that's about a dozen pages that's intended to provide investors more information and details of what we discussed here in our queue. That's on our website, so you can take a look at that on our website. I think it's very helpful. It's intended to, again, describe the business. And really, I think when you dig into the numbers, I think you'll see it becomes a little bit clearer how this strategy is very, very differentiated. And then what it really calls out in that supplemental is the credit quality of the business model and hopefully the uniqueness of the business model. And it helps you pencil out the details in terms of economic details that we're trying to describe here. So take a look at that supplemental. You'll see us add to that and advance that as we progress each quarter. Let me stop and thank everyone for your time and interest in Angel Oak Mortgage REIT. You can tell we're very excited about the opportunities in front of us. We look forward to connecting with you next quarter. In the meantime, if you have any questions, just reach out and contact us, and everybody have a great evening.
spk00: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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