AOMR - NYSE

Good day, and welcome to the Angel Oak Mortgage REIT Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. KC Kelleher. Please go ahead.

Good morning, and thank you for joining us today for Angel Oak Mortgage REIT's Third Quarter 2025 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; and Chief Financial Officer, Brandon Filson. 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.

Thank you, KC, and thank you all for joining us today. Our third quarter performance reflected another period of disciplined execution and strategic progress for AOMR. We continue to execute both operationally and strategically in a constructive market environment. We capitalized on a couple of strategic opportunities to reallocate capital into high-yielding assets, improve our loan financing funding costs and diversify our lender base. And as always, our team continued to focus on deploying capital into high-quality income-accretive opportunities, supporting both portfolio growth and underlying earnings quality while maintaining vigilance on credit. Our results this quarter were in line with our expectations. This was highlighted by our 13% growth in net interest income compared to third quarter of 2024 and a 2% increase compared to second quarter of the year. GAAP book value per share increased by over 2% compared to the second quarter, driven by increases in valuations across our portfolio. Cash flow dividend coverage increased and is expected to continue its growth trend as demonstrated over the last 2 years. This is driven by earnings from assets purchased during and post quarter end as well as the resecuritization of some pre-IPO deals, which will rotate capital into high-yield uses. Credit continues to perform well, both in aggregate and relative to our peers, and our earnings generation engine continues to strengthen. As I mentioned, we executed on several key initiatives during the quarter. First, we successfully called and retired 2 legacy vintage deals, which is something we have been opportunistically monitoring for the last several quarters. Retiring these deals allowed us to release and reinvest capital into new attractive opportunities and further optimize the yield on our investment portfolio. Second, we added new warehouse credit facility and extended another facility at attractive funding rates, which combined with decreases in SOFR are expected to improve margins while also diversifying our lender base. These actions, along with our continued focus on efficient capital recycling and securitization, emphasize the reliability and the repeatability of our strategy. We are encouraged by the strength and stability in the securitization market as well as the constructive environment for portfolio growth. Securitization spreads continue to tighten and the market continues to function efficiently with new and traditional participants active in the marketplace. The market backdrop has become more positive as the year has progressed and the interest rate trajectory and the efficient securitization execution have supported valuation and earnings growth for AOMR. While the competition in the space has increased, we see this as an indication of solid demand in an area where we have demonstrated expertise. Further, our differentiated platform and dynamic approach to capital deployment and portfolio management positions us to capitalize on opportunities. As we look ahead, we remain committed to continued execution of our strategies, delivering strong results for shareholders and building on our solid historical track record. With that, I'll turn it over to Brandon, who will walk us through our third quarter financial performance in greater detail.

Thank you, Sreeni. Third quarter operating results were in line with our expectations with 13% net interest income growth versus the third quarter of 2024, an expansion versus the second quarter of this year, demonstrating a positive return on May's senior unsecured debt issuance within 1 quarter. Year-to-date, net interest income increased 11% compared to 2024. Operating expenses, excluding securitization costs and stock compensation expense were 13% lower than in the third quarter of 2024 and 5% lower than the second quarter of 2025. Year-to-date, operating expenses, excluding securitization costs and stock compensation were 19% lower than in 2024 as we continue to push hard on cost rationalization and key expense saving initiatives. Valuations were a tailwind during the third quarter as we observed increases in valuations across the portfolio. As of today, we expect that our book value has grown moderately compared to the end of the third quarter alongside the recent rate rally. For the third quarter of 2025, we had GAAP net income of $11.4 million or $0.46 per diluted common share. Distributable earnings for the second quarter were $529,000. The primary driver of the difference between GAAP net income and distributable earnings were the impacts of $4.3 million of unrealized gains on our residential loan portfolios and $5 million of unrealized gains on hedge contracts. Interest income for the third quarter was $36.7 million and net interest income was $10.2 million, marking a 34% improvement in interest income and a 13% improvement in net interest income compared to the third quarter of 2024. Compared sequentially to the second quarter of 2025, interest income increased by 4% and net interest income increased by 2%. For the first 9 months of the year, interest income was $104.6 million and net interest income was $30.2 million, which translates to increases of 33% and 12%, respectively, compared to the first 9 months of 2024. As we previously noted, we expect our net interest income to continue its growth trend with earnings generated from accretive loans purchased throughout the year and our securitization activity in Q4. Our $238 million of loan purchases in the quarter carried a weighted average coupon of 7.74% with a weighted average combined loan-to-value ratio of 69.4% and a weighted average FICO score of 759. Our total residential whole loan portfolio had a weighted average coupon of 7.98% as of the end of the quarter. The non-QM portion of our whole loan portfolio carried a weighted average coupon of 7.37% and HELOCs carried 11.03% weighted average coupon. As of today, our current weighted average coupon is approximately 8.7%, reflecting the 2025-10 securitization, which closed in October. As of the end of the quarter, our loans in the securitization trust portfolio carried a weighted average coupon rate of 5.8% with a weighted average funding cost of approximately 4.2%. As Sreeni mentioned, the securitization market remains active, and we intend to continue leveraging this strength through our disciplined methodical securitization strategy. As mentioned earlier, we called and retired our retained bonds from AOMT 2019-2 and AOMT 2019-4 securitizations in the third quarter. These deals have become delevered over time, and the [ call ] released $19 million of capital to be reinvested into higher-yielding new loan purchases and other earnings accretive uses. Additionally, in October, we executed the AOMT 2025-10 securitization. This securitization was a $274 million deal that enabled us to pay down $237 million of warehouse financing and released $22 million of cash for redeployment. The execution of this deal was strong with the senior bonds issued at a spread of 125 basis points over treasuries. Operating expenses for the third quarter were $3.2 million. Excluding noncash stock compensation expenses and securitization costs, third quarter operating expenses were $2.8 million. This represents a 13% decrease compared to the same metric in the third quarter of 2024. For the first 9 months of the year, operating expenses were $11.3 million. Excluding noncash stock compensation expenses and securitization costs, operating expenses for the first 9 months of the year were $8.5 million, representing a decrease of 19% compared to the first 9 months of 2024. Going forward, we expect to maintain similar operating expense levels and will continue to be as efficient as possible with our expense structure. Looking at our balance sheet. As of the end of the quarter, we had $51.6 million of cash and our recourse debt-to-equity ratio was 1.9x. As of today's date and factoring in the October securitization, we estimate our recourse debt-to-equity ratio to be approximately 1x. GAAP book value per share increased 2.2% to $10.60 per share as of September 30, 2025, from $10.37 as of June 30, 2025. Economic book value, which fair values all nonrecourse securitization obligations was $12.72 per share as of September 30, 2025, down 1.9% from $12.97 per share as of June 30, 2025. The increase in GAAP book value was driven primarily by the aforementioned valuation increases across our portfolio and valuations of the sold bonds from our 2021-4 and 2021-7 securitizations are included as a liability in our economic book value calculation and the markup of these bonds drove the directional difference between GAAP and economic book value. We ended the quarter with unsecuritized residential whole loans at fair value of $425.8 million financed with $342.6 million of warehouse debt, $1.9 billion of residential mortgage loans and securitization trust and $256.2 million of RMBS, including $21.2 million of investments in commingled securitization entities, which are included in other assets on our balance sheet. We finished the quarter with an undrawn loan financing capacity of approximately $707.4 million. Now looking at credit. We ended the quarter with a total portfolio weighted average percentage of loans 90-plus days delinquent at 2.2%, inclusive of our residential loan, securitized loan and RMBS portfolios, which represents a decrease of 15 basis points from the second quarter of 2025. The AOMT securitization shelf continues to demonstrate outperformance relative to other non-QM shelves in terms of delinquency. We expect that throughout the credit cycle, this outperformance will lead to fewer defaults and lower credit losses than comparable non-QM securitization platforms. This expectation is borne out of our intentional effort to move up in credit for our loan originations and purchases over the past couple of years, which continues to provide us with the confidence that we will deliver consistently amid periods of potential volatility. Additionally, we expect our portfolio-wide low LTV, diligent underwriting standards and inherent credit selection to mitigate losses throughout a cycle if credit becomes an issue. 3-month prepayment speeds for our RMBS and securitized loan portfolios were 9.4% to end the quarter, reflecting a marginal decrease compared to the second quarter of 2025. As a reminder, we model our returns on historical average prepayment speed of 20% to 30%. We continue to expect that mortgage rates would need to fall meaningfully in order to drive a significant uptick in refinances and prepayment speeds in our portfolio. Finally, the company declared a $0.32 per share common dividend, which will be paid on November 26, 2025 to common shareholders of record as of November 18, 2025. 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.

Thank you, Brandon. I would like to thank the entire Angel Oak team for their hard work towards building what we believe is the best non-QM loan origination, purchase and securitization platform. We look forward to continuing to build long-term value for our shareholders in the coming quarters and years. With that, we'll open up the call to your questions. Operator?

[Operator Instructions] First question comes from Matthew Erdner with JonesTrading.

I'd like to touch on kind of the calling of the old securitizations there. One, get your thoughts going forward? And two, how much incrementally were you guys able to pick up on the margin there in terms of cost of funds kind of coming in as a result of calling the securitizations? And then expectation going forward as to what other calls would do to that cost of funds.

Yes. Thanks, Matt. Yes, 19-2,19-4, those were our very first securitizations that we did even before this vehicle was a public REIT. They're very delevered, the point, I mean, the factors were down to very, very low levels where effectively our retained interest was earning, the weighted average coupon of the deals are in some cases even a bit less. So 6%, 7% kind of retained yields on those bond positions. The $19 million in cash would be then immediately reinvested into whole loans that would at least lever -- earn that unlevered yield today with leverage 12% to 14%. And then once we securitize a 15% to 20% kind of return. So you can think of 8% of our capital over the next couple of quarters going from earning a 6% to a 14% at a base case level. As we look at other deals, I mean, we do have 19-6 securitization and 2020-3 securitization out there that we're evaluating what to do with them as they delever. It all depends on what the execution price and where we are in terms of the cycle, but I'd expect us to be looking hard at that over the next year.

Yes. Got it. That's helpful there. And then you guys mentioned competition earlier on the call. I'd like to touch on this given the amount of people that have entered the space are starting to come in. How are you guys able to go out there and kind of source the loans that you find attractive, opportunistic and whatnot and kind of beat out that competition, so to speak?

Yes. I think we -- with our affiliation with Angel Oak Mortgage Solutions and the Angel Oak platform in general, we've had a very consistent non-QM program over the past many years. Our rate sheets are similar. We're always buying. We're a surety of closing deals. So when we go out, we think we are able to pull in good demand versus maybe the new guys entering the space that may not be there tomorrow, that may change their mind and they're just coming in and out based on a trade item. Again, we said many times, this is a business for us, not a trade. So we have great relationships, again, with our affiliated originators and other third-party originators where they will show us the loans that we want with the rates we want and the prices we want because they know that we'll be able to execute and close those loans.

The next question comes from Doug Harter with UBS.

Hoping you could touch on your outlook for growth in the investment portfolio, I guess, given a combination of the resecuritization opportunities plus maybe adding some more leverage to the balance sheet.

Yes. No, I think we have -- we did our senior unsecured notes offering, second one this last summer. That -- those proceeds have effectively been deployed, maybe not fully. I mean it takes several cycles of securitization to get 100% deployed in terms of capital. We released the securitization from the 19-2, 19-4 deals. You'll also see in the filings and whatnot that we also took back at interest in a vehicle that holds some of the nonperforming loans from those deals. It would be about $7 million that -- those proceeds should also be coming in today, literally. Then 25-10 released over $20 million in capital. So we have kind of a very good runway for growth in terms of what we're looking at in terms of purchasing volume. We like to be consistent in the space. We've been buying $200 million to $300 million a quarter really over the past year of loans. We're also looking at -- we have about $75 million worth of HELOCs in our portfolio. We're looking at doing a securitization in that regard here in the coming quarter that should release additional capital and continuing to grow. So we -- and then as you mentioned, we're going to be looking at the 19-2 and then the 2020-3 securitizations to resecuritize and call if and when that time and opportunity comes up. 19-6, sorry, if I said 19-2.

Great. I appreciate that. And then I know in the prepared remarks, you did walk through some of the difference between GAAP and economic book value in the quarter. But if you could just kind of give a little more detail on just how we might think about the drivers of change as we go forward on those metrics?

Yes. So the genesis of economic book value was the 21-4 and 21-6 (sic) [ 21-7 ] securitizations that we did immediately post IPO. Those were the deals that were in the Goldilocks phase of the market when interest rates were 0 and the securitization market was incredibly accretive. So they had one of them, 21-4, the coupon on the senior bond was just over 1%. So literally very little funding cost. We made the election at that time, if you recall, to hold those liabilities for those sold bonds at amortized cost, meaning that as obviously, rates sold off over the next couple of years, they stayed at par when in reality, the fair value of those bonds or the fair value of the liability would have been significantly below par. As we're in this cycle now where real rates are starting to decline, securitization market getting better, things are getting tighter. There's a lot of demand for these products. And again, real rates are declining. Those bonds are starting to mark back up, which doesn't happen under GAAP book value. And that's why you see the divergence or the decrease in economic book value quarter versus the increase in GAAP book value because from a GAAP book value perspective, if you think about those 2 securitizations, we effectively have an unhedged asset with several hundred million dollars in loans in it. And then from an economic book value, then we effectively then hedge that back down as that liability is starting to increase in value. And that liability value is based on the value of those sold bonds.

[Operator Instructions] The next question comes from Timothy D'Agostino with B. Riley Securities.

Just one for me. Regarding the size of securitizations, just looking back to prior quarters, it seems like in 2024, securitizations were slightly above $300 million. So far in '25, they've kind of hovered around $280 million. I was just kind of wondering if we could see future securitizations kind of get back to that $300 million level or if you guys are comfortable with kind of the size you're doing now?

Yes. We've made the conscious decision to be hitting the securitization market very programmatically and consistently, right, and not waiting in this rate environment to get to a $300 million, $400 million level. That was something we did use to do. And now we found it better, especially with all the supply coming on the market to be a very consistent issuer. That's why this year, we're already up to 10, 11 real non-QM securitizations. We've done the resecuritization. And then earlier in the year, we had our first HELOC securitization. I say we here as AOMT or Angel Oak itself. So we're consistently in the market, and we find that has helped tighten up our spreads and keep our risk low on our balance sheets as we move to term out that funding cost.

Okay. Great. And just a quick follow-up. Could we see you investing more in HELOCs going forward? Or are you going to continue to just like majority focus on non-QM?

We're majority focused on non-QM, and we consider our HELOCs non-QM adjacent. A lot of times, they look a lot and they feel a lot like a non-QM loan from what we're doing. They're just -- especially in today's environment, they're very attractive in terms of their yield profile. Like you can see from some of the disclosures, the weighted average coupon on those are just north of 11% currently versus new originated non-QM loans, 7.25% to 7.5%. The funding cost is similar between the two, so you can get a lot of extra margin on those. I would imagine that over the coming quarters, we'll keep it kind of where we are today, which is, call it, $75 million to $150 million worth of HELOCs in the portfolio, and then we'll securitize them off.

This concludes our question-and-answer session. I would like to turn the conference back over to Brandon Filson for any closing remarks.

All right. Thank you, everyone, for your time and interest in Angel Oak Mortgage REIT. We look forward to connecting with you again for year-end. In the meantime, if you have any questions, feel free to reach out to us, and have a great day.