Q3 2023 Angel Oak Mortgage REIT Inc Earnings Call
Participants
Randy Chrisman; Chief Marketing & Corporate Investor Relations Officer; Angel Oak Mortgage REIT, Inc.
Sreeni Prabhu; Angel Oak Mortgage REIT, Inc.; CEO and President
Brandon Filson; Angel Oak Mortgage REIT, Inc.; CFO and Treasurer
Namit Sinha; Chief Investment Officer; Angel Oak Mortgage REIT, Inc.
Don Fandetti; Analyst; Wells Fargo Securities, LLC
Chris Kotowski; Analyst; Oppenheimer & Co, Inc.
Presentation
Operator
Good morning and welcome to the Angel Oak Mortgage third-quarter 2023 earnings call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Randy Chrisman. Please go ahead.
Randy Chrisman
Good morning. Thank you for joining us today for Angel Mortgage REIT third-quarter 2023 earnings conference call. This morning, we filed a press release detailing these results, which is available on 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 Capitals' co-CIO, Namit Sinha. Management will first lead off the call by making 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. Angel Oak's charter of the second-half of the year very strong, with the results demonstrating the positive growth and the momentum we have built throughout the first-half of the year. Late last year and at the beginning of this year, we set out to reposition our portfolio to reduce risk and increase liquidity. We accomplished that and our emphasis then shifted to growth.
You can see in this quarter's results that we are on our way to accomplishing this goal as well. Our focus is on optimizing the earnings levers that we can control, such as growing net interest margin and reducing operating expenses, while managing risk and maintaining liquidity. To that end, during the third quarter, we continue to pursue selective loan purchases at attractive rates and made further progress on reducing interest and operating expenses as we continue to grow the overall earnings power of our portfolio.
In the third quarter, we drove a step-change improvement in net interest margin due to our strategic securitization activity and purchases of newly originated current coupon notes. As we stated in our second quarter earnings call, the reduction in interest expense, driven by the AOMD 2023 dashboard securitization was demonstrated in our third-quarter results. We have remained nimble in acquisition activity, completing two co-mingled deals alongside other Angel Oak entities.
In addition to a stand-alone AOMRD, the Angel Oak ecosystem affords us the ability to pursue securitization structures that provide the best strategic fit for the REIT. Current coupon loans purchased during the quarter buoyed net interest income, despite lower unsecuritized loan balance. The weighted average coupon of our whole loan portfolio grew 99-basis-points in the third quarter and including purchases and commitments to purchase since quarter-end, currently sits at approximately 6.37, a further increase of 54-basis-points since quarter-end. For context, these average coupons compare to 4.63% as of the end of Q1 2023.
We are proud of the strategic progress we have made and we feel we can maintain the momentum and drive further NIM growth in the following quarters, as we redeploy capital into assets with significantly high yield. This effort will be supported by our ability to evaluate opportunities within our desired risk and return characteristics and actively acquire high quality loans and attractive coupon rates. As through the recent quarters, we have remained focused on managing our expenses to maximize the operating effectiveness of AOMT. Throughout the first-half of the year, we made significant progress reducing our operating expenses.
In the third quarter, we captured additional savings through reducing operating expenses, excluding securitizations, by 12.5% versus the second quarter. We have also made efforts to optimize our financing in order to decrease our weighted average rate on our funding costs. While there are signs that the [Fed] is near the end of the interest-rate hike, mortgage applications and originations continue to be muted, with rates remaining elevated relative to recent years. Our non-QM loan origination volumes have been a bit more resilient than the GSE loans, but given general market uncertainty, we'll continue to manage our whole loan position and expect that a nominal value in whole loans will not exceed more than 1.5 to 2 times the average nominal size of a securitization transaction expectations.
We are proud to have reduced our overall warehouse debt by 69% this year and 82% since the high point of June 2022. We are committed to maintaining liquidity while redeploying capital into high quality, high yield assets. We are proud of the earnings growth we have achieved this quarter, and though we are still dealing with elevated levels of market uncertainty, we believe that we have direct comparative advantage in our ability to assess and select where to allocate risk. We feel we are in great position to continue to grow earnings, while keeping our focus on adequate liquidity and a low expense profile, establishing a very powerful earnings engine based on stable resilient portfolio. I will now turn the call over to Brandon. Brandon?
Brandon Filson
Thank you, Sreeni. In the third quarter, we're able to showcase our ability to grow the earnings power of our portfolio, as seen through the strong NIM and net income results. We feel there is more room for growth, and we are happy with how our portfolio is positioned from a risk and liquidity standpoint, especially given the current market environment. For the third quarter of 2023, we had GAAP net income of $8.3 million or $0.33 per diluted common share. Distributable earnings were negative$ 8.6 million or a loss of $0.35 per share.
The key difference between net income and distributable earnings is that distributable earnings do not include the offsetting unrealized gain on the AOMT 2023-5 securitization. Excluding the accounting impact of the 2023-5 securitization, distributable earnings would have been $4.3 million. Interest income for the quarter was $23.9 million and net interest margin was $7.4 million, reflecting a $1 million expansion versus the second quarter of 2023. As Sreeni mentioned, net interest margin should continue to expand in the coming quarters, as we grow our current coupon loan book with consistent purchases and future securitizations reduce our warehouse debt.
Total operating expenses were $4.4 million or $3.5 million, excluding securitization costs and non-cash stock compensation. This represents a savings of $3.5 million versus June 3, 2022, and $800,000 versus the prior quarter. Year-to-date, we have achieved operating expense, excluding securitization costs and stock compensation savings of $8.6 million versus the first nine months of 2022. The largest factor driving our operating expense reduction efforts in the third quarter was lower D&O insurance premiums and other vendor and resource management.
Turning to the balance sheet. As of September 30, 2023, we had $41.9 million in cash or about 18% of our total equity base. Our strong cash position and the trailing nine months showcases our focus on maintaining healthy liquidity levels and expanding cash flow from increasing yields, lower overall funding costs, and reduced expenses. This additional liquidity provides us with the dry powder for sustained loan purchases that will grow net interest income, improved cash flows, and support securitization execution.
Additionally, we have over $120 million in unlevered assets on the balance sheet, which we can prudently use increased leverage to drive additional net interest margin. Recourse debt to equity ratio as of September 30, was 1.7 times. As of today's date, our recourse debt to equity ratio is 1 time, which reflects the maturity of repurchase obligations from short-term retail trade that matured in early October. This is a decrease of 0.2 times versus the comparable 1.2 times recourse debt to equity ratio as of last quarter's earnings call and is down from 2.9 times at the end of 2022.
As we purchase additional loans, we are expecting this leverage to begin to increase, but to remain below 2.5 times in future periods. We have $307 million of UPB residential whole loans that have a fair value of $284.4 million, financed with $197.8 million of warehouse debt. $1.2 billion of residential mortgage loans on securitization trust, and $75.3 million of RMBS from retained AOMT securities from off-balance sheet securitization. 90-plus day delinquencies have remained low at 1.9% across these portfolios, with a weighted average LTV of 69.5%.
These rates are slightly more favorable than in Q2, and to date, we have not seen any material change in credit performance of our loan or underlying securities portfolio. We finished the quarter with undrawn warehouse financing capacity of approximately $661 million. In August, we participated in the 2023 dash-five securitization, alongside other Angel Oak entities, contributing loans with an approximately $94 million unpaid principal balance and releasing $63.5 million of debt from our highest cost financing facility. In total, AOMT 2023-5 consist of 530 loans, with the scheduled unpaid principal balance of $260.6 million.
The securitization has an average original credit score of 735, original average loan to value ratio of 71.9%, and a non-zero debt to income ratio of 32.9%. GAAP book value per share was nearly flat at $9.29 as of September 30, 2023, compared to $9.34 as of June 30, 2023. New purchases supported the valuations of our whole loan portfolio and decreases in the valuation of our securitized loan portfolio, were offset by decreases in the fair value of their corresponding liability. Similarly, economic book value, which fair values all the company's nonrecourse securitization obligations of $13.20 per share as of September 30, 2023, compared to $13.16 per share as of June 30, 2023, an increase of $0.04.
As with last quarter, we expect valuation changes resulting from interest rate and spread movement that cause GAAP and economic book value to fluctuate, supplemented by growth in net interest margin. The weighted average coupon of our whole loan portfolio increased 99-basis-points to 5.83% as of the end of the third quarter. This is also up from a low point in our portfolio of 4.63% as of the end of the first quarter this year, including loan purchases and commitments. Since the end of the third quarter, our whole loan portfolio weighted average coupon is approximately 6.37%, representing an increase of over 150-basis-points.
Our loan purchases this year carry a weighted average coupon of 8.31%, weighted average LTV of 70.2% and a weighted average FICO score of 752. We expect this increases to continue as additional loan purchases occur over the coming quarters. Finally, the company has declared a $0.32 per share common dividend, payable on November 30, 2023, to shareholders of record as of November 22, 2023. This implies an annualized dividend of $1.28 per share or a yield of 14% to 15% as of the closing price on November 6, 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. Before turning the call over to the operator for Q&A, I'd like to conclude with some brief remarks. We are pleased with the financial performance for the third quarter as this is the first quarter that truly demonstrated the earnings impact if strategic actions that we have taken this past year. We have a strong balance sheet and a liquidity position, and we are confident in what the future holds for our portfolio and its earnings generating abilities. Additionally, the credit performance of our assets remains strong.
Our focus on creating a resilient portfolio that generates growing and reliable earnings is evident. We are proud of what we have achieved despite headwinds from muted mortgage activity and rate volatility, and we expect to continue to grow earnings while maintaining our liquidity position and risk profile.
Question and Answer Session
Operator
(Operator Instructions) Don Fandetti, Wells Fargo.
Don Fandetti
Yes. You know, it seems like the core business is moving back to modest growth phase. You've improved the funding profile significantly, I guess on credit, it's continued to be very good. Do you have any thoughts on or concerns around the credit outlook based on what you're seeing in the economy and with mortgage rates so high?
Namit Sinha
Yeah, hi, this is Namit. So on the credit side, as we mentioned, the current performance looks very, very good. And we haven't seen any evidence of any deterioration there. Obviously, anecdotally, there are certain sectors that you have heard about where there are increases in delinquency and loss results, et cetera.
But it is important to realize that the portfolio that we run is close to 740 average credit score and low 70s loan to values. That's not a credit profile, that is the first to get impacted even in a slowdown or recessionary environment. Like, if we do go into a slowdown or a recession, you're going to start seeing the impact more on the subprime-ish as part of the portfolio mix, which -- we really do not do much. So our overall portfolio delinquencies are expected to be muted even under a more stressful environment.
But given that what we have seen so far, we have had a very, very good credit backdrop, home prices have been very resilient, and the economy has held up generally really well. So our portfolio credit performance has been pretty much spot-on.
Don Fandetti
Got it. And in terms of future securitizations, do you plan on participating with other Angel Oak entities or more standalone? Or does it just depend on how the market develops?
Brandon Filson
Yeah, hey, Dan. We use of co-mingle versus standalone opportunistically in our thought process. Right now, I'd expect us to come out with about one more smaller co-mingled deal at some point in the future. And then after that, we'll probably be back to a standalone deal only once we get that deal out.
Don Fandetti
Got it. Thanks.
Operator
Chris Kotowski, Oppenheimer.
Chris Kotowski
Yes, good morning and thank you. Brandan, you mentioned another distributable earnings calculation of I think $4.3 million you said. Can you take us through a little bit in detail exactly how what that was and how it was calculated and how it differs from the distributable earnings that you've always reported?
Brandon Filson
Yeah. No, what I was trying to do is I'm just trying to add clarity of the bridge between the GAAP net income and distributable earnings. And as you know, distributable earnings eliminates unrealized gains and losses, but keep in any realized gain or loss. So this quarter, when we did 2023-5 securitization, there was about a $13 million recovery of a previously recognized unrealized loss that's included in GAAP net income, but it's excluded from distributable earnings. And with that, that's the big driver and the delta between GAAP earnings and distributable earnings is that one particular thing, and that's just a one-off transactional base things.
So I wanted to highlight that. Because if you look at net interest margin, less cash expenses, the quarter, that widened out about $1.8 million. And then what we have in the bank so far from new loan purchases, we mentioned to taking our coupon up to almost 6.4% is around another $1 million in the bank as of today for this coming quarter.
Chris Kotowski
When you say another $1 million in the bank, you mean like if you're thinking about your all in net interest income of like $7.4 million, that the base level going into the fourth quarter is like $8.4 million?
Brandon Filson
That's right.
Chris Kotowski
Okay. All right. Great. And presumably, it improves a bit if there's another securitization before year-end?
Brandon Filson
Well, it could improve with the securitization and really additional loan purchases for the last few months of the year.
Chris Kotowski
Okay. All righty, that's it for me. Thank you.
Operator
(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over Brandon Filson for any closing remarks.
Brandon Filson
Thank you, everyone, for your time and interest in Angel Oak Mortgage REIT. We look forward to connecting with you again next quarter. In the meantime, if you have any additional questions, feel free to reach out to us. Have a great day.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
