Angel Oak Mortgage, Inc. (NYSE:AOMR) Q4 2022 Earnings Call Transcript
Angel Oak Mortgage, Inc. (NYSE:AOMR) Q4 2022 Earnings Call Transcript March 9, 2023
Operator: Greetings and welcome to Angel Oak Mortgage Fourth Quarter Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Randy Chrisman, Chief Marketing Officer. Thank you, and you may...
Randy Chrisman: Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's fourth quarter and full year 2022 earnings conference call. This morning, we filed our press release detailing these results, which is available in the Investors Section on 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 Co-CIO, 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 at www.angeloakreit.com. Now, I will turn the call over to Sreeni.
Sreeni Prabhu: Thank you, Randy, and thank you, everyone for joining us today. As you all know, 2022 was a very challenging year as we battle rising inflation, heightened market volatility, and spread widening across most asset classes. The Fed approved and unprecedented seven increases to the Fed funds rate over the course of the year beginning in March. These increases took the benchmark interest rate from 0.25%, as of December 31, 2021 to 4.75% as of December 31, 2022. Marking its highest level in 15 years. Mortgage rates rose in kind more than doubling and peaking about 7% in October. At the same time, non-QM mortgages approached 9%. Additionally, the securitization markets were extremely challenging especially in the second half of the year.
However, as we mentioned in our last earnings call, we commenced a strategic plan in the fourth quarter to reduce warehouse financing risk and increase liquidity. Over the last several months, we have made tremendous progress, including three key accomplishments. First, in November, we sold residential mortgage loans with gross weighted coupon of approximately 4.5%, reducing financing risk and releasing incremental liquidity. This was a calculated decision and we found that the price that we received was commensurate with the lack of liquidity in the securitization markets at that time. Second, in December and early January, we converted approximately $286 million of mark-to-market debt from non-mark-to-market financing for continually performing loans, further reducing financing risk.
This facility was with one of our existing large bank counterparties, which also speaks to our strong partnerships with global banks. Finally, we participated in an AOMT 2023-1 securitization subsequent to year-end. This was the first Angel Oak securitization in which we participated alongside other Angel Oak entities since our initial public offering. We retained our pro rata share of bonds and the proceeds from the deal. As a result of this accomplishment, as of today, we have reduced our whole loan warehouse debt by over 50% and mark-to-market percentage of total warehouse debt by over 60% since the end of Q3 2022. Additionally, it is important to note that we have not taken on any corporate debt or preferred equity and that we own the call rights to all our dealers, which gives us tremendous flexibility in the future.
The goal of this strategy was not only to reduce risk and create liquidity but to also restart our growth engine. And to that end, we intend to resume purchases of newly originated loans at market interest rates. With respect to the current mortgage landscape, there are a couple of dynamics that I'd like to reiterate. First, there remains a meaningful shortage in supply of quality housing across the country. While mortgage rate increases have slowed down demand for home purchases, this underlying constraint should help support a baseline level of mortgage activity. Second, credit performance remained strong. Delinquencies remain low. Foreclosures are exceedingly rare and loss severities are near zero. Additionally, there has been a significant home price appreciation since many of these loans were originated, lowering LTVs and limiting losses in the rare event of default.
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Even if we factor in a slight to moderate decrease in home prices this year, we still expect meaningful growth versus where loans were originated. Finally, the volatility of this past year has resulted in even higher barriers to entry for the non-QM mortgage origination business. This reinforces the competitive advantage of our relationship with Angel Oaks well-established and streamlined non-QM origination platform. Over the coming quarters, we plan to rotate our portfolio into high coupon mortgage loans and other high yielding mortgage assets and sustain a methodical securitization process, all while continuing to stress liquidity management and protect the balance sheet. With that, I'll turn it over to Brandon.
Brandon Filson: Thank you, Sreeni. First, I would like to talk through the details of our financial results and then provide some additional context around our current position and where we're headed. For the fourth quarter of 2022, we had a GAAP net loss of $8.8 million or $0.36 per share. The loss was driven by the November loan sale, which drove roughly $19 million of incremental loss or $0.77 per share. Distributable earnings were negative $61.5 million or a loss of $2.50 per share. The November loan sale contributed approximately $63 million of realized loss or $2.56 per share in distributable earnings. The loans sold carried an unrealized loss of approximately $44 million as of the end of Q3, all of which were realized upon the sale in addition to the $19 million incremental loss.
Interest income for the quarter was $28.4 million and net interest margin was $7.4 million, which compressed due to higher variable borrowing costs. Our operating expenses for the fourth quarter were $4.3 million, representing a decrease of over $7 million from Q3. Excluding securitization and severance expenses, operating expenses were $2 million lower than Q3, which was approximately $1 million lower than Q2, demonstrating continued progress in scaling our operations. Now digging into our balance sheet. As of December 31, we had $29.3 million of cash. Our recourse debt to equity ratio decreased to 2.9 times versus 3.7 times at the end of the third quarter. We have residential whole loans at a fair value of $771 million. Finance was $640 million of warehouse debt.
$1 billion of residential mortgage loans and securitization trust, and $1.1 billion of RMBS, including $62 million and retained AOMT securities from the pre-IPO securitizations. We finished the year with undrawn loan financing capacity of $573 million. And as of today, our capacity is approximately $767 million. This difference is driven by our participation in January's AOMT 2023-1 securitization, which released approximately $190 million of mark-to-market warehouse debt. As of today, we have approximately $440 million of warehouse debt, only $155 million of which is subject to mark-to-market risk. We were pleased to reenter the securitization market in January of this year. The AOMT 2023-1 securitization was an approximately $580.5 million securitization and we contributed approximately $241 million scheduled principal balance of loans.
Additionally, we retained bonds with base value of $26.6 million and a fair value of $21.8 million while releasing $15.9 million in cash. We expect these retained bonds to yield between 10% and 15%. GAAP book value per share declined 10.7% to $9.49 as of December 31, 2022, down from $10.63 as of September 30, 2022. This includes a $0.76 impact from the November loan sale as well as the impact of our $0.32 per share common dividend paid in November. Excluding these impacts, GAAP book value was relatively flat for the quarter. Economic book value, which fair values all non-recourse securitization obligations was $13.11 per share as of December 31, 2022, up 1.3% from $12.94 per share as of September 30, 2022. The fair value of the bonds underlying our securitization obligations declined as rates increased and duration expectations lengthened, driving the increase in economic book value.
Assuming that loan and security pricing has remained relatively flat so far in 2023, with January's rally being offset by a retreat in February. We estimate our GAAP and economic book value as of the end of February to be fairly flat as well, inclusive of the known impact of the dividend payment to be made in March. Looking forward, we plan to resume purchases of newly originated loans. We'll do this selectively and we'll continue to emphasize liquidity throughout the process. Recent rate locks on the mid-8% range with average LTVs of 72% and FICO scores of 752. We believe that purchasing these loans and maintaining a methodical securitization process is the best way to organically grow the earnings potential of the portfolio. Finally, the company has declared a $0.32 per share common dividend payable on March 31, 2023 to shareholders of record as of March 22, 2023.
For additional color on our financial results, please review the earnings supplement available on our website. I will now turn it back to Sreeni for closing remarks.
Sreeni Prabhu: Thank you, Brandon. 2022 was a year of unique challenges for the market. We're set with rising inflation, higher interest rates and recession concerns. While Angel Oak was not immune to these challenges, we acted decisively to ensure the strength of our capital structure and have positioned ourselves to restart our growth programs. As always, I do like to thank the entire Angel Oak team for their hard work and the contributions as we seek to build long term value for our shareholders. With that, we'll open up the call to your questions. Operator?
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