Angel Oak(US:AOMR)2023-11-07 16:00Part I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Angel Oak Mortgage REIT, Inc.'s unaudited financial statements as of September 30, 2023, reflect a decrease in total assets to $2.30 billion, a net income of $8.3 million, and a slight decline in stockholders' equity to $231.8 million Condensed Consolidated Balance Sheets Total assets decreased to $2.30 billion as of September 30, 2023, from $2.95 billion at year-end 2022, driven by reduced mortgage loans and RMBS, with total liabilities also decreasing and stockholders' equity slightly declining to $231.8 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,295,600 | $2,946,212 | | Residential mortgage loans - at fair value | $284,383 | $770,982 | | RMBS - at fair value | $579,985 | $1,055,338 | | Cash and cash equivalents | $41,894 | $29,272 | | Total Liabilities | $2,063,798 | $2,709,733 | | Notes payable | $197,797 | $639,870 | | Due to broker | $511,953 | $1,006,022 | | Total Stockholders' Equity | $231,802 | $236,479 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Net income for Q3 2023 was $8.3 million, a significant improvement from an $83.3 million loss in Q3 2022, driven by a $17.3 million net unrealized gain despite a decrease in net interest income to $7.4 million Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $7,410 | $11,740 | $20,661 | $45,110 | | Total Realized and Unrealized Gains (Losses), Net | $5,255 | ($83,565) | $812 | ($198,598) | | Total Operating Expenses | $4,392 | $11,524 | $15,577 | $29,004 | | Net Income (Loss) | $8,273 | ($83,349) | $5,115 | ($179,035) | | Diluted EPS | $0.33 | ($3.40) | $0.20 | ($7.30) | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased from $236.5 million to $231.8 million as of September 30, 2023, primarily due to $23.9 million in common stock dividends, partially offset by net income and unrealized gains Reconciliation of Stockholders' Equity (Nine Months Ended Sep 30, 2023, in thousands) | Description | Amount | | :--- | :--- | | Beginning Equity (Dec 31, 2022) | $236,479 | | Net Income | $5,115 | | Unrealized gain on RMBS and CMBS | $12,955 | | Dividends paid on common stock | ($23,942) | | Stock compensation | $1,195 | | Ending Equity (Sep 30, 2023) | $231,802 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities was $339.1 million for the nine months ended September 30, 2023, a significant shift from prior-year usage, with investing activities using $164.7 million and financing activities using $171.3 million, resulting in a $3.1 million increase in cash Cash Flow Summary (Nine Months Ended, in thousands) | Cash Flow Activity | Sep 30, 2023 | Sep 30, 2022 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $339,087 | ($644,278) | | Net Cash from Investing Activities | ($164,668) | $655,093 | | Net Cash from Financing Activities | ($171,318) | ($33,620) | | Change in Cash and Restricted Cash | $3,101 | ($22,805) | Notes to the Condensed Consolidated Financial Statements The notes detail accounting policies, including Variable Interest Entities, a significant reduction in the residential mortgage loan portfolio, changes in financing, derivative usage, fair value measurement, related party transactions, and subsequent events like dividend declarations - The company's primary strategy is to invest in first lien non-qualified residential mortgage (non-QM) loans, primarily sourced from its affiliate, Angel Oak Mortgage Lending29 - As of September 30, 2023, the company had forward purchase commitments of $113 million for residential mortgage loans, representing off-balance sheet risk124 - Subsequent to the quarter end, on November 8, 2023, the company declared a dividend of $0.32 per share of common stock138 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the high-interest-rate environment's impact, highlighting benefits from reduced volatility and active purchasing of higher-coupon non-QM loans, leading to improved net income, a $2.1 billion portfolio, $0.9 billion in financing capacity, and recent securitization activities Trends and Recent Developments Q3 2023 saw 30-year mortgage rates near 8% due to inflation management, suppressing home sales, prompting the company to focus on purchasing newly-originated, higher-coupon non-QM loans to improve portfolio valuations and securitization - During Q3 2023, the company purchased $78.1 million of newly-originated non-QM residential mortgage loans with a high weighted average coupon of 8.34%155 - The company participated in three securitizations in 2023: AOMT 2023-1 in January, AOMT 2023-4 in June, and AOMT 2023-5 in August156157 Key Financial Metrics Key non-GAAP metrics for Q3 2023 include a Distributable Loss of $8.6 million, a significant decrease from prior-year earnings, with book value per share at $9.29 and Economic Book Value per share at $13.20 as of September 30, 2023 Reconciliation to Distributable Earnings (in thousands) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net income (loss) allocable to common stockholders | $8,273 | ($83,353) | | Adjustments (Net unrealized gains/losses, etc.) | ($16,852) | $104,195 | | Distributable Earnings | ($8,579) | $20,842 | Book Value vs. Economic Book Value per Share | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Book value per share of common stock | $9.29 | $9.49 | | Economic book value per share of common stock | $13.20 | $13.11 | Results of Operations Q3 2023 net interest income decreased to $7.4 million, but a swing from $83.6 million in net losses to a $5.3 million gain resulted in a net income of $8.3 million, with operating expenses also decreasing to $4.4 million - For Q3 2023, the key driver of the net gain was the positive valuation of the residential mortgage loans in securitization trusts, net of the non-recourse securitization obligation182 - Operating expenses for Q3 2023 decreased to $1.4 million from $2.8 million in Q3 2022, attributed to cost-saving actions like in-sourcing accounting functions and lower servicing fees183 Our Portfolio As of September 30, 2023, the company's $2.1 billion portfolio, primarily residential mortgage loans and RMBS, allocated 53.8% of equity to whole loans and 236.4% to investment securities, with the residential loan portfolio having a 5.83% weighted average interest rate and a FICO score of 744, showing geographic concentration in Florida and California Portfolio Allocation as of September 30, 2023 (in thousands) | Portfolio | Fair Value | Collateralized Debt | Allocated Capital | % of Total Capital | | :--- | :--- | :--- | :--- | :--- | | Total whole loan portfolio | $1,483,721 | $1,359,093 | $124,628 | 53.8% | | Total investment securities | $736,229 | $188,101 | $548,128 | 236.4% | | Total Investment Portfolio | $2,234,650 | $1,547,194 | $687,456 | 296.6% | Residential Mortgage Loan Characteristics (Sep 30, 2023) | Metric | Portfolio Weighted Average | | :--- | :--- | | Interest rate | 5.83% | | FICO score at loan origination | 744 | | LTV at loan origination | 69.67% | | Percentage of loans 90+ days delinquent | 2.70% | Liquidity and Capital Resources The company's liquidity relies on principal and interest payments, financing lines, repurchase facilities, and securitizations, with three warehouse loan financing lines totaling $0.9 billion capacity and $660.9 million available as of September 30, 2023, actively managed through extensions, repayments, and recent securitization proceeds - As of September 30, 2023, the company had three warehouse loan financing lines with an aggregate borrowing capacity of up to $0.9 billion267 Financing Line Capacity as of September 30, 2023 (in thousands) | Facility | Borrowing Capacity | Balance Outstanding | Available Financing | | :--- | :--- | :--- | :--- | | Multinational Bank 1 | $600,000 | $189,066 | $410,934 | | Global Investment Bank 2 | $250,000 | $0 | $250,000 | | Global Investment Bank 3 | $8,731 | $8,731 | $0 | | Total | $858,731 | $197,797 | $660,934 | - In 2023, the company completed three securitizations (AOMT 2023-1, 2023-4, and 2023-5), using the proceeds to repay debt and for operational purposes304307309 Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, Angel Oak Mortgage REIT, Inc. is not required to provide the information for this item325 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The company's CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2023327 - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting328 Part II. Other Information Item 1. Legal Proceedings The company reported no legal proceedings during the period - The company has no legal proceedings to report330 Item 1A. Risk Factors There have been no material changes to the company's principal risk factors from those disclosed in its Annual Report on Form 10-K - There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K330 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no issuer purchases or unregistered sales of equity securities during the third quarter of 2023 - There were no issuer purchases or unregistered sales of equity securities during the quarter ended September 30, 2023330331 Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications required by the Sarbanes-Oxley Act