Angel Oak(AOMR) - 2022 Q3 - Quarterly Report

Part I - Financial Information This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, reflecting a net loss primarily due to unrealized mortgage portfolio losses Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, reflecting a net loss primarily due to unrealized mortgage portfolio losses Condensed Consolidated Balance Sheet Summary (in thousands) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $3,305,762 | $2,577,929 | | Residential mortgage loans (at fair value) | $1,069,476 | $1,061,912 | | Residential mortgage loans in securitization trusts | $1,062,585 | $667,365 | | RMBS (at fair value) | $1,068,672 | $485,634 | | Total Liabilities | $3,040,805 | $2,086,539 | | Notes payable | $906,321 | $853,408 | | Non-recourse securitization obligation | $1,048,953 | $616,557 | | Due to broker | $1,005,231 | $0 | | Total Stockholders' Equity | $264,957 | $491,390 | Condensed Consolidated Statements of Operations Summary (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $11,740 | $12,988 | $45,110 | $32,486 | | Total Realized & Unrealized Gains (Losses), Net | $(83,565) | $(323) | $(198,598) | $(3,505) | | Total Operating Expenses | $11,524 | $6,321 | $29,004 | $10,925 | | Net Income (Loss) | $(83,349) | $6,344 | $(179,035) | $18,056 | | Net Income (Loss) Allocable to Common Stockholders | $(83,353) | $6,340 | $(179,046) | $18,045 | | Basic Earnings (Loss) per Common Share | $(3.40) | $0.25 | $(7.30) | $0.94 | Condensed Consolidated Statements of Cash Flows Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(644,278) | $(883,722) | | Net Cash Provided By (Used In) Investing Activities | $655,093 | $(408,479) | | Net Cash Provided By (Used In) Financing Activities | $(33,620) | $1,298,498 | | Change in Cash and Restricted Cash | $(22,805) | $6,297 | Note 1. Organization and Basis of Presentation The company operates as a REIT, externally managed by Falcons I, LLC, specializing in acquiring and investing in non-qualified residential mortgage loans - The company is a real estate finance company focused on acquiring and investing in first lien non-qualified residential mortgage (non-QM) loans and other mortgage-related assets[30] - The company is externally managed by Falcons I, LLC and has elected to be taxed as a Real Estate Investment Trust (REIT) starting from the taxable year ended December 31, 2019[34] Note 2. Variable Interest Entities (VIEs) The company uses VIEs for securitization to obtain non-recourse financing, consolidating their results, which reported a net loss primarily from unrealized mortgage loan losses - The company utilizes VIEs for securitizing whole mortgage loans to obtain long-term non-recourse financing, acting as the primary beneficiary of certain securitization trusts and consolidating their financial results[44] Assets and Liabilities of Consolidated VIEs (in thousands) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Residential mortgage loans in securitization trusts - at fair value | $1,062,585 | $667,365 | | Total non-recourse securitization obligations, net | $1,048,953 | $616,557 | - For the nine months ended September 30, 2022, the consolidated VIEs generated a net loss of $72.6 million, primarily from a $152.9 million unrealized loss on mortgage loans held in the trusts[50] Note 3. Residential Mortgage Loans This note details the residential mortgage loan portfolio, including fair value, unpaid principal balance, weighted average interest rate, and delinquency status Residential Mortgage Loan Portfolio (in thousands) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Fair Value | $1,069,476 | $1,061,912 | | Unpaid Principal Balance | $1,189,162 | $1,022,461 | | Weighted Average Interest Rate | 4.72% | 4.49% | - As of September 30, 2022, there were 5 mortgage loans 90 or more days past due and 5 loans in foreclosure, with a combined recorded investment of $4.6 million[57] Note 6. Notes Payable This section outlines the company's notes payable, including total facility limits, drawn amounts, and active management of credit facilities and interest rate benchmarks Lines of Credit Summary (in thousands) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Facility Limit | $1,900,000 | - | | Total Drawn Amount | $906,321 | $853,408 | - The company actively manages its credit facilities, including increasing a facility with Multinational Bank 1 to $600 million in August 2022 and transitioning interest rate benchmarks from LIBOR to SOFR across several agreements[74][75][76] Note 8. Securities Sold Under Agreements to Repurchase This note details the company's outstanding repurchase agreements, categorized by collateral type, as of September 30, 2022, and December 31, 2021 Repurchase Agreements Outstanding (in thousands) | Collateral | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | RMBS | $67,454 | $360,501 | | U.S. Treasury Bills | $0 | $248,750 | | Total | $67,454 | $609,251 | Note 9. Derivative Financial Instruments The company utilizes derivative instruments, such as interest rate futures and TBAs, as economic hedges to manage interest rate and prepayment risk on its investments - The company uses derivative instruments, including interest rate futures and To-Be-Announced (TBA) securities, as economic hedges to manage interest rate and prepayment risk on its whole loan investments[83] Notional Exposure of Derivatives (in thousands) | Derivative Type | September 30, 2022 (Short Exposure) | December 31, 2021 (Short Exposure) | | :--- | :--- | :--- | | Interest rate futures | $1,019,600 | $1,043,800 | | TBAs | $1,062,100 | $523,938 | Note 11. Related Party Transactions This note details transactions with related parties, including mortgage loan purchases from affiliates, management fees paid to the external manager, and a severance charge for the former CEO - For the nine months ended September 30, 2022, the company purchased $567.3 million in residential mortgage loans from affiliated entities[107][108] - The company pays its external manager a management fee of 1.5% per annum of the company's Equity (as defined in the Management Agreement), with the manager also entitled to a potential incentive fee[114][115] - A severance charge of approximately $1.4 million was recorded in Q3 2022 in connection with the departure of the former Chief Executive Officer and President, Robert Williams[117] Note 14. Subsequent Events This note discloses significant events occurring after the reporting period, including new repurchase agreements and a declared quarterly dividend - On October 4, 2022, the company entered into master repurchase agreements with two affiliated institutional investors for financing of approximately $168.7 million[123] - On November 8, 2022, the company declared a quarterly dividend of $0.32 per share of common stock[124] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the challenging macroeconomic environment, detailing the net loss from unrealized mark-to-market losses, presenting non-GAAP metrics, and reviewing portfolio composition, securitization, and liquidity Trends and Recent Developments This section highlights the challenging macroeconomic environment, including rising interest rates and inflation, which led to significant unrealized losses on the whole loan portfolio, alongside recent loan purchases and securitization activities - The macroeconomic environment in 2022 has been challenging due to sharp increases in interest rates and persistent inflation, leading to heightened recessionary risks[138] - The Federal Reserve's aggressive rate hikes have widened interest rate spreads, negatively affecting the valuation of the company's whole loan portfolio and making securitization more difficult[139] - The company's non-QM whole loan portfolio experienced significant unrealized losses due to mark-to-market adjustments, which are reflected in net income, partially offset by realized gains on interest rate futures and TBAs[142] - During the nine months ended September 30, 2022, the company purchased $995.2 million in residential whole loans and completed two securitizations totaling approximately $722.3 million[45][143] Key Financial Metrics (Non-GAAP) This section presents key non-GAAP financial metrics, including a reconciliation to Distributable Earnings and a comparison of Book Value and Economic Book Value per share Reconciliation to Distributable Earnings (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net income (loss) allocable to common stockholders | $(83,353) | $(179,046) | | Adjustments (Net unrealized losses, non-cash comp, etc.) | $104,195 | $259,986 | | Distributable Earnings | $20,842 | $80,940 | Book Value and Economic Book Value per Share | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Book value per share of common stock | $10.63 | $19.47 | | Economic book value per share of common stock | $12.94 | $19.52 | Results of Operations This section analyzes the company's operating results, detailing changes in net interest income, significant net losses from unrealized gains/losses on the mortgage portfolio, and increased operating expenses - For Q3 2022, net interest income was $11.7 million, a slight decrease from $13.0 million in Q3 2021, as higher interest income from a larger portfolio was offset by significantly higher interest expense[165] - A net loss of $83.6 million from realized and unrealized gains/losses in Q3 2022 was primarily driven by unrealized losses on the mortgage loan portfolio due to widening interest rate spreads[167][168] - Total operating expenses for Q3 2022 were $11.5 million, up from $6.3 million in Q3 2021, largely due to a $1.4 million severance accrual and a $2.6 million accelerated stock compensation expense related to the former CEO's departure[170][172] Portfolio Analysis This section provides a detailed analysis of the company's investment portfolio composition, including fair value, allocated capital, and key characteristics of its residential mortgage loans Portfolio Composition as of September 30, 2022 (Fair Value, in thousands) | Asset Type | Fair Value | Allocated Capital | % of Total Capital | | :--- | :--- | :--- | :--- | | Residential mortgage loans | $1,069,476 | $163,155 | 61.6% | | Residential mortgage loans in securitization trust | $1,062,585 | $13,632 | 5.1% | | RMBS | $1,068,672 | $1,001,218 | 377.9% | | Commercial mortgage loans & CMBS | $18,411 | $18,411 | 6.9% | | Total Investment Portfolio | $3,219,144 | $1,196,416 | 451.6% | - The residential mortgage loan portfolio had a weighted average FICO score of 739 and a weighted average loan-to-value (LTV) of 70% at origination as of September 30, 2022[201] Liquidity and Capital Resources This section discusses the company's liquidity and capital resources, outlining primary financing sources, available borrowing capacity, and the sufficiency of cash to meet obligations - Primary financing sources include payments from the investment portfolio, unused borrowing capacity under loan financing lines and repurchase facilities, and securitizations[250] - As of September 30, 2022, the company had seven warehouse loan financing lines with an aggregate borrowing capacity of up to $1.9 billion[253] - The company's cash balance decreased during the nine months ended September 30, 2022, primarily due to margin calls on financing facilities, but management believes cash is sufficient to meet liquidity covenants and potential future margin calls[304][305] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide this information[313] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - Based on an evaluation as of the end of the period, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[314] - There were no changes in the company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[315] Part II - Other Information This section covers other required information, including legal proceedings, risk factors, and details on unregistered sales of equity securities and use of proceeds Item 1. Legal Proceedings The company reports no material legal proceedings requiring disclosure for the period - None[317] Item 1A. Risk Factors The company reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K[317] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchases under its expired 10b5-1 plan and confirms no unregistered sales of equity securities during the quarter Issuer Purchases of Equity Securities (Q3 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1-31, 2022 | 63,498 | $13.63 | | August 1-31, 2022 | 0 | N/A | | September 1-30, 2022 | 0 | N/A | | Total | 63,498 | $13.63 | - The company's Stock Repurchase Plan expired on July 18, 2022, and has not been renewed, with a total of 706,011 shares purchased under the plan at an average price of $16.34[320]