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Operator: Ladies and gentlemen, good morning, and welcome to the Angel Oak Mortgage First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, KC Kelleher, Head of Corporate Finance and Investor Relations. Please go ahead, sir.

KC Kelleher: Good morning. Thank you for joining us today for Angel Oak Mortgage REIT’s First Quarter 2024 Earnings Conference Call. This morning, we filed our press release detailing these results, which is available in the Investors section of 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 Chief Investment Officer, 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, www.angeloakreit.com.

Now I will turn the call over to Sreeni.

Sreeniwas Prabhu: Thank you, KC, and thank you to everyone on the call for joining us today.

The first quarter of 2024 reflected a continuation of the upward trajectory that we established last year. Based on the momentum from 2023, we have executed on our strategy to grow and fortify our portfolio’s earnings potential and return profile. The first quarter of 2024 marks our third consecutive quarter of increased net interest income, reflecting our commitment to strategic portfolio expansion and consistent securitization execution in conjunction with sound risk management.

Additionally, distributable earnings, GAAP book value and economic book value all increased versus both the prior quarter and the first quarter of 2023. We have established this positive growth trend despite what continues to be an uncertain and at times, unfavorable macro environment. This underscores the resilience of both our operating model and of the Angel Oak ecosystem, which is market-leading origination and securitization platforms, combined to position the company for continued financial success throughout the remainder of the year and beyond.

In the quarter, we achieved net interest income of $8.6 million, a 26% expansion versus the same quarter last year and the highest level since the third quarter of 2022. This is enabled by our effective securitization strategy and methodical purchases of high-quality current coupon loans on balance sheet. Notably, after quarter end, we led AOMT 2024-4 securitization, which was a $300 million deal, with a weighted average coupon of 7.4%.

We are at work, purchasing newly originated loans with the proceeds on this deal, which we expect to drive further net interest income expansion in the coming quarter. This strong securitization execution and the ability to strategically leverage Angel Oak ecosystem serves as a competitive advantage in the market and further highlights the growth potential of our business model.

As we continue to prioritize long-term value creation, we note that our GAAP book value per share grew to $10.55, a 2.8% increase over the previous quarter. And economic book value per share grew to $13.78, a 1.8% increase over the previous quarter. While our portfolio value is impacted by federal funds rate decisions, interest rate market volatility and the industry impact on fixed income yields, the position of our portfolio in current market coupon loans dampens some of this volatility. Though the magnitude and the timing of potential federal funds rate decreases remains uncertain, we maintain a positive outlook for the remainder of 2024.

As for credit performance, the weighted average 90-plus day delinquency rate across our portfolio of whole loans, securitized loans and RMBS was 1.8% as of quarter end as compared to 2.2% at the end of the fourth quarter of 2023, representing a decrease of approximately 18%. We continue to observe muted delinquency activity and believe that any future upticks in delinquencies would represent a movement towards historical averages as opposed to a large-scale event.

As previously stated, we believe that the credit risk management is a key competitive strength, due to our relationship with the Angel Oak ecosystem’s affiliated mortgage originator, which provides us the ability to adjust credit offerings based on our specific desired characteristics. Credit performance is a risk we choose to own, and we expect our portfolio to continue to perform comparably well.

With that, I’ll turn it over to Brandon, who will walk us through the financial performance for the first quarter in greater detail.

Brandon Filson: Thank you, Sreeni. In the first quarter of 2024, we maintained the consistent upward earnings trend that we have established beginning the third quarter of 2023. The company’s net interest income expanded for the third consecutive quarter, signaling sustained growth and profitability. We are pleased with the progress achieved in recent quarters and maintained an optimistic outlook for 2024, confident in our ability to continue to profitably grow the portfolio.

In the quarter, the company had GAAP net income of $12.9 million or $0.51 per fully diluted common share. Distributable earnings were $2.8 million or $0.11 per share. The difference between GAAP and distributable earnings is primarily driven by unrealized gains in our residential loan and securitized loan portfolios. This quarter, the relationship between GAAP and distributable earnings was more reflective of our long-term expectation for GAAP and distributable earnings to converge in a normalized macro environment.

Interest income for the quarter was $25.2 million and net interest income was $8.6 million, marking a 26% improvement over the first quarter of 2023 and a 33% improvement over the low point of Q2 2023. This growth was driven by our continued purchases of high-quality, current market coupon non-QM loans and our effective securitization strategy. Interest income grew over 6% compared to the year ago quarter, while interest expense decreased nearly 2%. While interest rates on our warehouse financing lines, which are tied to SOFR, have remained stubbornly high over the past year, we’ve been able to achieve sustained net interest income growth, which we expect to continue to do so.

In the first quarter, our operating expenses were $4.7 million, a modest increase from the previous quarter, but a 17% decrease from the first quarter of 2023. This increase versus the prior quarter was driven by 2023 year-end legal and audit fees as well as the inclusion of an estimate for unvested stock-based compensation. When we analyze our expenses, we find it most useful to exclude our noncash stock compensation expenses as well as securitization costs, as stock compensation does not impact our cash returns and costs related to securitization activity costs are directly in line with the execution of our business plan.

Excluding these expenses, our first quarter 2024 operating expense was $3.9 million compared to $4.2 million in the first quarter of 2023. We expect to maintain our current operational expense levels with some potential for further reductions as we work to identify opportunities to further optimize our cost structure.

Focusing on our balance sheet. As of March 31, we had $39.4 million of cash on hand. Our recourse debt-to-equity ratio was roughly 1.8x at the end of the quarter compared to 1.9x as of December 31, 2023. Since quarter end, the maturity of our short-term U.S. treasury assets and corresponding repurchase agreements on April 9, 2024, reduced our recourse debt-to-equity ratio to 1.3x.

Further, the impact of AOMT 2024-4 reduced our recourse debt-to-equity ratio to approximately 0.5x as of today’s date. Note that this will likely increase as we continue to purchase loans, but we expect that our recourse debt-to-equity ratio will remain low in the short term and below 2.5x on a long-term basis.

Our residential whole loan portfolio stood at a fair value of $368 million as of quarter end, financed with $284 million of warehouse debt, $1.2 billion of residential mortgage loans and securitization trust and $463 million of RMBS, including $18 million of investments in majority-owned affiliates, which are included in other assets in our balance sheet.

We are pleased with the execution of AOMT 2024-4 subsequent to quarter end, our first stand-alone securitization of the year, to which we contributed loans with $300 million of scheduled unpaid principal balance at a weighted average coupon of 7.4%. The deal removed approximately $236 million of warehouse debt and allowed us to save approximately 100 basis points on the financing rate of the loans contained within the deal. Notably, this securitization effectively removed the impact of the legacy-aged loans from our portfolio.

We’re deploying the capital released from the deal into high-quality, high coupon loans, primarily from our affiliated non-QM mortgage originator, targeting coupons above 8% in order to further expand our net interest margin on a go-forward basis. Additionally, we’ll use the capital to opportunistically reduce other borrowings in an effort to grow interest income by reducing funding costs.

Following the securitization, we are carrying a smaller unsecuritized loan portfolio balance, which we expect to replenish quickly with high-quality current market coupon loans. We remain confident in our goal to complete one securitization each quarter this year on average.

Moving on, our GAAP book value per share increased 2.8% to $10.55 per share as of March 31, up from $10.26 in the fourth quarter. Our economic book value with fair values all non-recourse securitization obligation was $13.78 per share as of March 31, up 1.8% from $13.54 per share as of the fourth quarter. We estimate that GAAP and economic book value are roughly flat compared to the end of the quarter to today’s date.

We purchased $43.2 million of loans in the first quarter that carried a weighted average coupon of approximately 8.1% and a weighted average LTV of 68.7% and a weighted average FICO of 747. The weighted average coupon for our residential whole loan portfolio as of the end of the quarter was 7.11%, representing an increase of 33 basis points since the end of the fourth quarter.

Loan purchases have accelerated in the second quarter, as origination activity picks up following the slower winter months. And we have increased capital release for the AOMT 2024-4 securitization. Following that securitization, the unpaid principal balance of our whole loan portfolio was approximately $80 million, with a weighted average coupon of 6.5%. Since then, loan purchases and committed loan purchases have increased the weighted average coupon backup to approximately 7%.

Because of the reduced size of the residential loan portfolio post-AOMT 2024-4, the weighted average coupon will increase quickly, with intended continued purchases of current market coupon loans. We remain optimistic in our ability to continue our plans for programmatic loan purchases and remain disciplined in our credit selection for the remainder of the year.

Finally, the company declared a $0.32 per share common dividend, which will be paid on May 31, 2024, to stockholders of record as of May 22, 2024. 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.

Sreeniwas Prabhu: Thank you, Brandon. We are proud of the growth we have achieved from an execution standpoint, and we believe there is a meaningful upside to be captured as we continue to execute on our long-term goals.

Our balance sheet is effectively delevered from a recourse debt-to-equity standpoint as of today. We plan to deploy our capital released from 2024-4 into new loan purchases, reductions in other borrowings and for other accretive purposes. As we look to grow the earnings power of our portfolio further, the company may elect to engage with capital markets.

With that said, we know that any activity would stem from an actionable opportunity with economics that we expect to be directly accretive to our business and results. As we enter the second quarter and look towards the remainder of the year, we look forward to delivering positive returns to our shareholders.

With that, we’ll open up the call to your questions. Operator?

Operator: [Operator Instructions] Our first question is from the line of Doug Harter with UBS.

Douglas Harter: Hoping we could touch on the last point you brought up about accessing capital markets. Can you just talk about how you think about your cost of capital? And kind of how you would define kind of what is accretive to shareholders? And maybe along those lines, kind of what type of instruments you would be looking at?

Brandon Filson: Doug, it’s Brandon. We — I think it’s no real secret, right, with our balance sheet that we’re 100% really financed with common equity. So right now, as we’re looking at capital markets, most likely any kind of raise would be somewhere in the debt space.

Our current securitization execution kind of gets us — pinpoint us back into high teens, low 20% return hurdle. So anything in that, I think, current market. I mean MFA did a deal recently about 9% coupon on a baby bond deal. Some of the senior secured deals have gone up as well. So anything in that range, we think would be very accretive to the common holders and allow us to continue to grow.

But again, like right now, there’s nothing necessarily in the pipe. We’re just — we’re messaging, much like we’ve done in previous quarters, and saying things around, “If we do choose to raise capital, it’s going to be an accretive move for us versus a refinance of debt, especially a refinance of the lower cost of capital debt with a higher cost of capital.”

Douglas Harter: I appreciate that, Brandon. I guess just how do you think about the maturity or the duration of any debt that you could raise versus the duration of the assets you’d be putting on and your comfort with those 2 figures?

Brandon Filson: I think the current securitization execution — again, with the average life of those senior bonds or the bonds we hold, would be somewhere kind of really close to the duration of a typical debt being like a 5-year instrument — 5- to 7-year instrument. So I think it would be a pretty good match in terms of what we issued and then what we would use that capital for.

Operator: [Operator Instructions] Our next question is from the line of Don Fandetti with Wells Fargo.

Donald Fandetti: Can you talk more about your loan acquisition targets for Q2? I mean Q1 was a little light at $43 million. Obviously, some seasonality there. But if you contributed $300 million to the new securitization, the balance of residential whole loans, it’s pretty low. And then you’re talking about raising potentially some debt. I mean are you just originating from Angel Oak? Or would you look at portfolios? Just trying to get a sense on how you’re feeling about the pipeline of new acquisitions.

Brandon Filson: Yes. Our — you’re right. Q1 was a little lighter than we had been in the past, and that was some seasonality. And it was also as we’re preparing and getting into ’24-4, which closed just after quarter end.

Since that deal is closed, we have essentially now used all of that capital to buy loans or to, in the case of reduce some warehouse — sorry, repo debt on some retained bond position. So we’ve essentially used that $40 million of capital already from an unlevered basis. We’ll be working on levering that throughout this quarter to get us in a position where we’ll issue another stand-alone current coupon securitization in most likely Q3 — early Q3.

So I would say, this quarter, we’re targeting $150 million to $200 million worth of acquisitions. And then obviously, we can toggle that back and forth. That number is probably going to be about 1/2 to 2/3 from our affiliated originators, but we’re starting to see decent opportunities in third-party originated loans as well with credit profiles similar to our own origination that we can use to fill the remaining pieces of the bucket.

Donald Fandetti: Okay. And I guess if I just look at NII, minus your expenses, it’s below the dividend. I guess do you feel like you’ll just grow into that?

Brandon Filson: Yes, that’s exactly right. And this quarter was a little lower growth in that metric than it has been in a couple of other quarters since we started buying loans in earnest in Q3 of ’23. This quarter with — again, with ’24-4 going off, we’re saving about 99, 100 basis points off of financing right there.

Buying $40 million already kind of unlevered loan positions, that was worth 8% loans thereabouts. So you can kind of back into the math. And then on the expense side, year-end was a little higher just because as we went through the final audit. It was our first year with SOX compliance.

We had a more expensive audit than it had been in the past and then also just the K and proxy and annual meetings and things like that. Those expenses will go in moderate through Q2, Q3, Q4, et cetera, and we’ll get back a little bit where we were in terms of like a Q4, Q3 expense load as well as continuing to grow that net interest margin.

Operator: [Operator Instructions] As there are no further questions, I would now hand the conference over to Brandon Filson for his closing comments. Brandon?

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 questions at all, please feel free to reach out, and have a great day.

Operator: Thank you. The conference of Angel Oak Mortgage has now concluded. Thank you for your participation. You may now disconnect your lines.