Q4 2023 Angel Oak Mortgage REIT Inc Earnings Call
Participants
Randy Chrisman; Chief Marketing & Corporate IR; Angel Oak Mortgage REIT, Inc.
Sreeni Prabhu; Managing Partner and Co-CEO Chief Investment Officer; Angel Oak Mortgage REIT, Inc.
Brandon Filson; CFO, Treasurer; Angel Oak Mortgage REIT, Inc.
Doug Harter; Analyst; UBS Economics
Chris Kotowski; Analyst; Oppenheimer & Co., Inc.
Michael Schafer; Analyst; B. Riley Securities
Presentation
Operator
Good morning and welcome to the age of Angel mortgage Q4 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to Randy Christmann. Please go ahead.
Randy Chrisman
Good morning. Thank you for joining us today for Angels mortgage rates Fourth Quarter and Full Year 2023 earnings conference call. This morning we filed our press release detailing these results, which is available in the Investors section on our website at w. w. w. dot Angelo green.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 on 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 mortgage reach, Chief Executive Officer, Srini Prabhu, Chief Financial Officer, Brandon Pilsen in Asian capitals, Co-CEO. Non-us enough 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 w. w. w. dot Angel green.com.
Now I will turn over the call to Sri.
Sreeni Prabhu
Thank you, Randy, and thank you, everyone, for joining us today, and we'll finish 2022 with another quarter of improvement in our financial results going forward.
The momentum the company established earlier in the year. This was demonstrated by the inflection point in our performance during the second half of 2023 and continued in Q4 with additional net interest margin expansion. This was a direct result of the strategic decision making undertaken over the last 18 months, we continue to increase the earnings power of our portfolio while strengthening our balance sheet for sustainable growth. 2023 represented a pivotal year for AO and by a year in which we successfully delivered results by reducing our balance sheet risk, improving liquidity and expanding net interest income. We showcased the resilience of our operating model and position the Company for continued growth. It is important to detail some key drivers that we have made in creating the opportunity for a remark to deliver these results as you recall in the second half of 2022, amid an increasingly challenging economic backdrop, we made the prudent decision to de-risk our portfolio over the past 18 months. We've repositioned our whole loan portfolio, strengthened our base of financing, drove out structural operating costs and kept a keen focus on maintaining strong liquidity. We elected to endure some short-term pain in order to better position the company and its portfolio for long-term success. This has proven to be the correct decision as 2023 saw a continuation of the Fed funds rate hiking cycle and rates rose to the highest level in over 20 years. In spite of this, we return our business to an attractive position from which to operate going forward. This position Aramark to build back the earnings power of the portfolio over the second half of the year, while providing us the resources to deploy systematically into attractive opportunities afforded us through our affiliated relationship with Angel Oak mortgage lending. It is widely anticipated that in the second half of 2024, the Fed will begin easing monetary policy. And this happens, we would expect earnings to increase due to lower financing costs and improved securitization execution. Additionally, this could reopen areas of capital markets, which may be accretive to AIR MILES growth plans in particular we demonstrated flexibility in our approach to securitization activity in 2023, showcasing the value of the Angel Oak ecosystem. We participated in four securitizations amid a volatile market, keeping our stated goal of averaging one securitization per car. We executed both standalone deals and common new deals alongside Angelo entities to securitize over $660 million of high-quality loans, reflecting the different ways that we can bring these to market. Additionally, this securitizations allowed us to lower financing costs, further improving our earnings power and net interest income. This improved positioning enabled the Company to deploy cash strategically towards the acquisition of newly originated current coupon loans, both growing our balance sheet and expanding our net interest income. In 2023, we purchased a total of $223 million of current market coupon loans. This drove a 28% expansion to a net interest income from the second quarter to the fourth quarter. The weighted average coupons on our unsecured as for loan portfolio increased nearly 200 basis points across the year and 95 basis points in the fourth quarter alone. Our GAAP book value improved to $10.26 per share as of December 31st, 2023. This was an increase of 10.4% compared to the previous quarter and our economic book value of $13.54 per share improved by 2.6% versus the previous quarter.
Credit risk has been a key discussion point across the industry. In the recent quarters, our weighted average 90 plus day delinquency rate across our portfolio of home and securitized loans was 2.2% as of the end of the year as compared to 1.9% at the end of Q3. While as expected, this has trended slightly upward. We believe that the trends, extreme trends or movement back towards historical averages after sitting at historic lows in the recent years. Credit risk management is a key competitive strength of ours due to our relationship with the Angel ecosystem, which provides us the ability to adjust credit offering based on a specific design characteristics, credit risks we choose to own, and we expect our portfolio to continue to perform comparatively well in 2024, we expect to maintain momentum and drive further net interest income growth as we redeploy capital into high yielding assets.
Our portfolio management philosophy is about we are focused on maximizing the ROE of our portfolio and ensure that the capital is allocated to its highest and best use. We currently have dry powder that coupled with expected securitization timing and execution levels will allow us to continue to purchase newly originated loans on a programmatic basis. As always, these efforts are supported by the credit selection expertise I discussed as we firmly believe that we possess a critical strategic differentiator in our ability to evaluate opportunities and allocate capital within our desired risk and return characteristics.
With that, I'll turn it over to Brian, who will walk us through the financial performance for the year, end and quarter in more detail.
Brandon Filson
Thank you, Srini. 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 in 2024.
For the fourth quarter of 2023, we had GAAP net income of $28.6 million or $1.15 per fully diluted common share. For the full year, we had GAAP net income of $33.7 million or $1.35 per fully diluted common share, but this is a significant transformation from last year's results as we continued to demonstrate our ability to execute our earnings growth strategy. Distributable earnings were negative $6.5 million or loss of $0.26 per share negative distributable earnings this quarter were again driven by the realization of previously unrealized losses when we participate in a co-mingled securitization like we did in December with AOMT. 2023 debt net interest income for the quarter was $24.6 million and net interest income was $8.2 million, which marks an 11% improvement over the previous quarter and a 28% improvement over the second quarter. For the year, interest income was $96 million and net interest income was $28.9 million. As Srini mentioned, we expect to continue to expand net interest income in the coming quarters as we purchase and securitize new loans. Our operating expenses for the fourth quarter were $4.3 million, representing a modest decline from the previous quarter. When we analyze our expenses, we find it most useful to exclude our non-cash stock compensation expenses as well as securitization costs as stock compensation does not impact our cash operations and securitization costs are good costs that are part and parcel with our business plan. For the full year, operating expenses were $19.9 million or $15.7 million, excluding securitization expenses and stock compensation. This demonstrates a decrease of $7.3 million or nearly 32% reduction compared to the prior year when also adjusted for $1.4 million severance expense incurred in 2022. We're continuously assessing our cost structure and plan to maintain reduced expenses going forward while continuing to look for additional savings opportunities.
Now taking onto the balance sheet. As of December 31st, we had $41.6 million of cash. As expected, our recourse debt to equity ratio increased slightly versus the prior quarter to 1.9 times as of the end of the year, a 1.3 times when reflecting the maturity of short term U.S. treasury assets and their corresponding repurchase agreements. On January 16, 2024. The increase versus the third quarter was due to additional whole loan purchases during the fourth quarter as we continue to deploy capital into higher yielding loans. We have residential whole loans at a fair value of $380 million, financed with $291 million of warehouse debt, $1.2 billion of residential mortgage loans and securitization trusts and $488 million of RMBS, including $16.2 million of investments in majority owned affiliates, which are included in other assets on our balance sheet. We finished the year with undrawn loan financing capacity of approximately $760 million. We are pleased to have delivered consistent securitizations over the course of the year with a combination of both standalone co-mingled deals. In total, we securitized over $660 million of loans with a weighted average coupon of 4.95% across four securitizations. During the end of the year, we participated in a IoT 2023 Dash seven, which is a $397 million securitization to which we contributed $42 million of loans. We observed improved securitization markets in the fourth quarter and thus far in 2024. And we expect that we'll be able to maintain strong execution in future deals.
Gaap book value per share increased 10.4% to $10.26 as of December 31, 2023, up from $9.29 as of September 30th, 2023, economic book value, which fair values all nonrecourse securitization obligations was $13.54 per share as of December 31st, 2023, up 2.6% from $13.20 per share as of September 30th, 2023. Given recent rate and spread movements, we estimate that our portfolio valuations give back some of Q4's unrealized gains and that the impact to GAAP book value is approximately 3.5% and the impact to economic value is approximately 1% as of the end of February, inclusive of our February dividend payment, our $223 million of loan purchases this year carried a weighted average coupon of 3.37% and a weighted average LTV of 70% weighted average FICO of 754. With these new loans, the weighted average coupon of our residential whole loan portfolio as of the end of the year was 6.78%, representing an increase of 95 basis points since the end of the third quarter and nearly 200 basis points since the end of 2022, including anticipated loan purchases and securitization activity. Subsequent to year end, the weighted average coupon of our residential whole loan portfolio was approximately 7.1% as of the end of February. We look forward to continuing to execute our plans for programmatic loan purchases this year and will continue to be diligent in our approach to credit selection. Consistent with our portfolio management philosophy that Srini discussed, we believe that maintaining our purchasing discipline and continuing and methodical securitization process will be the best course of action to maintain organic growth for the earnings power of the portfolio.
Additionally, we have the embedded earnings growth purchases made in 2023 that have not yet been held for a full quarter, which we estimate will represented approximately $1.2 million of interest income. Finally, as previously communicated, the Company declared a $0.32 per share common dividend, which was paid on February 29th, 2024. This implies an annualized dividend rate of $1.28 per share or a yield over 12% as of the closing price on March first, 2024. For additional color on our financial results, please review the earnings supplement available on our website.
I will now turn it back to Srini for closing remarks.
Sreeni Prabhu
Thank you, Braden. 2023 was a year of strategic execution for AMR, in which we delivered increasingly positive results despite the ongoing challenges seen across the marketplace. While we are certainly proud of the position we are in and the growth that we have achieved, we believe we have just gotten started and our net interest margin will continue to grow with the increased coupons and values of our unsecuritized loans. As always, we'll maintain our focus on managing expenses and liquidity. We look forward to continuing to grow our business and delivering attractive, stable returns to our shareholders. I do like to thank the entire Angelo team for their hard work and contributions over the last year as we seek to build long-term value for our shareholders.
With that, we'll open up the call to your questions. Operator?
Question and Answer Session
Operator
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. If your question has already been addressed, you'd like to remove yourself from queue. Please press star then two, at this time, we will pause momentarily to assemble our roster.
And today's first question comes from Doug Harter with UBS. Please go ahead.
Doug Harter
Thanks. I was hoping you could give a little more clarity by what you mean about programmatic programmatic purchases of new loans, if you could help size?
Brandon Filson
Yes. I think it's something kind of on the pace that we have been doing in 2023. So call it $100 million dollars or so plus or minus a quarter.
Doug Harter
Great. And then thank you for that. And then how are you thinking about them? Can you kind of the range for recourse recourse leverage kind of where you want to operate?
Brandon Filson
I think that's going to that has ticked up a little bit as we've been purchasing loans. But in reality, we don't really expect to go over about two times recourse debt to equity ratio. That ratio excluding you at the end of the quarter. If we had to buy any treasuries, all short-term repo, that may tick us up a little bit higher than that. But if you look at us long term with our whole loan and the repo on the any retained bonds would be about two.
Doug Harter
Great. Thank you. Perfect.
Operator
Thank you. And our next question today comes from Chris Kotowski with Oppenheimer. Please go ahead.
Chris Kotowski
I I'm looking at page 6 of the presentation and the looking at the weighted average coupon, and it's good to see it rising nicely. But I'm wondering just is there a way for us to gauge and quantify how much of kind of the below Morton market mortgages you still have left? Or are there has that inventory been cleaned out more or less?
Brandon Filson
Yes, we've got done as far as our eight loans in the total of the $380 million, we're looking at just over $100 million of those loans left, which could we expect to clear those out kind of short order here recently? So we've moved that down from $1.4 billion about a year ago, it's down to just over $100 million today.
Chris Kotowski
Okay. So and then I mean, conceivably, could that be cleared out in the next securitization?
Brandon Filson
Probably not the next securitization, but the one after that will be completely gone.
Chris Kotowski
Okay, great. And that's it for me. Thank you.
Operator
Thank you. And as a reminder, if you'd like to ask a question please press star then one at this time for our next question today comes from Matt Howlett with B. Riley Securities. Please go ahead.
Michael Schafer
More. Aaron, this is Michael Schafer on for on for. I'm curious, could you talk kind of in the context of a credit normalization, as you said in the portfolio, how are you thinking about underwriting during the fourth quarter versus the third quarter? And now how potentially changing today?
Sreeni Prabhu
Yes, Srini here, I believe in as we go into the as we've gone through the last couple of years, we are now gone up in credit. Generally, I wouldn't say that we went that much up in credit from the third quarter to the fourth quarter. But and I think instead of thinking about it just up in credit. I think that the boxes that we focus on, which is bank statement loans fully underwritten bank statement loans versus We also do single-family rental or kind of loans and what do you what do you have to be focused on is more of the rental values and how that can affect your underwriting?
So we've been very cautious on how we underwrite single-family rental homes. We also have gone up in credit just because you have to protect yourself against discontinued home price appreciation and could that go the other direction. So that's been consistent theme for us probably for the last two years. So I wouldn't say it has gotten that much different from Q3 to Q4, but that's definitely our online store.
Michael Schafer
Thank you. Appreciate it.
Sreeni Prabhu
Yes.
Operator
Thank you. And our next question is a follow-up from Doug Harter, UBS.
Doug Harter
Sure. And thanks. You mentioned in your prepared remarks that securitization markets have continued to improve into the first quarter. Can you just talk about what types of spreads you're seeing on net new purchases of loans versus securitization execution?
Sreeni Prabhu
Yes. So the new new purchases of loans are between 8% and 8.5% right now. And the securitization is actually market's actually pretty good. I think we are even tighter 15 basis points to 20 basis points at this point from the beginning of the year, maybe a little more. But the new coupons are trending from spread securitization spreads. And I'm just saying to replace between $140 million and $150 million. So substantially tighter than where we saw late last year.
Doug Harter
Great. Thank you.
Operator
Thank you. And ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to management team for any closing remarks.
Sreeni Prabhu
Thank you, everyone, for your time and interest in Engility mortgage Re. We look forward to connecting with you again next quarter. In the meantime, if you have any questions, please feel free to reach out to us. Have a great day.
Operator
Thank you. This concludes today's conference call. 1We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
