Angel Oak Mortgage REIT (NYSE:AOMR) Q3 2026 Earnings Call

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7:04 Thank you for watching. Good day and welcome to the Angel Oak Mortgage REIT's third quarter 2026 earnings call. Please note, this event is being recorded.

7:55 I would now like to turn the conference over to Mr. Randy Chrisman. Please go ahead.

8:02 Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's third quarter 2026 earnings conference call. This morning, we filed our press release detailing these results, which is available in the investor sections on our website. at www.angelookreit.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.

8:54 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. Now, I will turn the call over to Sreeni.

9:33 Thank you, Randy, and thank you all for joining us today. During the quarter, non-QM and the fixed income market became more challenging as higher rate and a shift upward in the yield curve pressured asset valuations and compressed financing spreads across mortgage credit market. While this environment negatively impacted book values across the landscape as expected, Angel Oak's underlying credit performance of our portfolio remains stable and continue to perform in line with our expectations. We believe this distinction is important as the valuation pressure We experience reflects broader market environments rather than deterioration in credit quality or performance of our underlying loans.

10:25 Notably, we completed two secularizations early in the period ahead of the more pronounced increase in rates during August and September. Additionally, despite less favorable conditions, we completed a third secularization in October to mitigate potential further Interest Rate Risk. This consistent access to securitization markets provides us with an important tool to manage financing risk, recycle capital, and support the long-term return profile of the portfolio across varying interest rate levels. We also renewed and extended several financing facilities as reduced spreads during the quarter reflecting our continued focus on actively managing funding costs, although higher underlying interest rates have offset that near-term benefit.

11:22 While broader non-QM origination volumes have declined and the higher rate environment has temporarily compressed current returns on new investments, we continue to source and purchase loans that meet our credit and return criteria. Our structure and position within the Angel Oak organization will continue to be a comparative advantage in a competitive market. We remain deliberate in pacing of our capital deployment across loan vintages and disciplined in maintaining underwriting standards that are central to our strategy rather than extending risk and pursuing incremental returns at the expense of long-term credit performance. We believe that this prudent approach will serve us and our shareholders well and will continue to provide its value through pockets of volatile and challenging interest rate environments.

12:19 Looking ahead, our priorities remain consistent. We will continue to focus on disciplined credit underwriting, thoughtful capital deployment, and maintaining access to securitization markets while positioning the portfolio to perform across a range of market environments. We remain confident in the underlying credit performance, offer investments, and in the strength of the Angel Oak platform. With that, I'll turn it over to Brandon, who will walk us through our third quarter financial performance in greater detail.

12:55 Thank you, Srini. During the quarter, the upward pressure on shorter-term yields negatively impacted reporting book value as expected. That being said, the underlying portfolio performed in line with our expectations with low levels of delinquencies and continued growth in the target asset portfolio. For the third quarter, we reported a gap net loss of $16.7 million, or $0.72 per diluted common share, compared with gap netted costs of $11.4 million, or $0.46 per diluted common share in the third quarter of 2025. The primary driver of the loss was a $24.4 million net realized and unrealized net loss related to our securitization portfolio. This was largely attributable to the previously mentioned unrealized valuation declines during the last quarter. Notably, distributable earnings for the quarter were $6.4 million, or $0.28 per diluted common share, compared with half a million, or $0.02 per diluted common share in a prior period.

13:57 The primary drivers of the difference between distributable earnings and gap-knit income for the third quarter of 2026 were adjustments to exclude unrealized losses from our residential loans, The residential loans held in securitization trust, non-recourse securitization obligations, and derivative portfolios. During the quarter, we completed two securitizations with $1.8 million of securitization costs reflected in this distributable earnings metric. Interest income for the quarter was $42.5 million, while net interest income was $10.2 million. This compares favorably with interest income of $36.7 million and net interest income of $10.2 million in the third quarter of 2025. Interest income increased 16% while net interest income remained relatively flat.

14:44 We generated $5.8 million greater interest income for Q3 compared to the comparable period of 2025, driven by increases in the amount of our target assets. Operating expenses for the third quarter were $2.1 million. Our operating expenses increased marginally compared to the comparative period due to increases in loan diligence fees and valuation costs associated with a larger overall balance in our target asset portfolio. Loan purchases during the quarter totaled $233.1 million. The weighted average coupon of loans purchased during the quarter was 7.21%, with a weighted average CLTV of 71.8%, and a weighted average credit score of 758. These purchases continue to be well in line with the credit and return parameters we have discussed as our targets in prior quarters.

15:35 Current mortgage locks average approximately a 7.9% coupon, reflecting the recent increase in rates as it flows through the mortgage origination process. At the beginning of Q3, we executed the AOMT 2026-3 securitization, where the sole contributor to the deal which had $280 million unpaid principal balance and a weighted average coupon of 6.9%, weighted average non-zero credit score of 757, and a weighted average CLTV of 69%. The AAA rated senior bonds priced at 130 basis points spread over the treasury yield curve. Additionally, we participated in AOMT 2026 HB1, a $221 million commingled HELOC securitization to which we contributed $71 million to loans.

16:26 Loans underlying the deal had a weighted average coupon of 9.79%, weighted average non-zero credit score of 744, and a weighted average CLTV of 64.8%. Securitization markets have remained constructive amid market uncertainty, and we continue to expect to execute roughly one securitization per quarter or four per year. We also closed AOMT 2026-6 in late October 2026, which had a $250 million unpaid principal balance, a weighted average coupon of 7.25%, weighted average non-zero credit score of 754, and a weighted average CLTV of 71.6%. Additionally, we remained active on the financing front during the period.

17:14 We renewed and rolled several financing facilities during the quarter at lower spreads. While the higher underlying base rates offset much of the immediate benefit, the lower spreads have improved the economics of those facilities and reflect our continued focus on actively managing financing costs. This will remain particularly important as we manage the portfolio through the existing range environment. As of the quarter end, gap book value per share was $8.97, down 11.5% from $10.13 at the end of the second quarter. Economic book value per share, which fair values all non-recourse securitization obligations, was $11.45 per share, down 6.5% from $12.24 at the end of Q2.

17:59 The change in book value during the quarter was primarily driven by non-cash mark-to-market valuation declines across the portfolio, higher rates, and the upward shift in the yield curve pressured asset values, partially offset by earnings generated during the quarter. As Sreeni noted, these valuation movements did not reflect the deterioration in the underlying credit performance of the portfolio. Our balance sheet has remained well-positioned with $49 million in cash and a recourse debt-to-equity ratio two times. We ended the quarter with unsecuritized residential whole loans at a fair value of $294 million, financed with $255 million of warehouse debt, $2.3 billion of residential loans and securitization trusts, and $203 million of RMBF. We also maintain approximately $1 billion of undrawn loan financing capacity across four lending partners.

18:52 Credit performance remains solid during the quarter with portfolio-wide 90-day plus delinquency of approximately 2.1% flat compared to the end of the second quarter. Three-month prepayment speeds for our non-QM RMBS securitized loan portfolios were 11.2% at the end of the quarter compared with 15.2% at the end of the second quarter. We continue to model our investments using historical average prepayment assumptions of approximately 20 to 30%. Lastly, the company declared a 32 cent per share common dividend payable on November 30th, 2026 to common stockholders of record as of November 23rd, 2026. For additional detail on our financial results and portfolio composition, please refer to the earnings supplement available on our website.

19:42 Thank you, Brandon. The proven, well-established AngelLock origination, purchase, and securitization platform provides us with the confidence to perform well in a variety of macro environments. The fundamental backdrop for our business is positive, and while risk remains, we will continue to focus on what we can control. Expansion of earnings, consistent securitization market activity, and disciplined credit selection and management. With that, we will open the call for your questions. Operator. Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.

20:27 A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please. while we poll for questions. Your first question comes from Doug Harder with BTIG. Please go ahead.

20:53 Thanks and good morning. In the press release, you talked about kind of the near-term impact on returns from higher rates. Wondering if you could quantify that and then kind of how You know, how you think about what gets you back to kind of the historical normalized level that you have talked about? Yes. Hey, good morning, Doug.

21:24 Yeah, right now there's just as rates rose and we're buying loans, you know, the locks take 30, 60 days to run through the process. Current returns are not quite as good as we expect that 15 to 20% level. However, they're starting to recover with new locks coming in at around 8%. That's going to pull that back up a little bit lower than our target. I expect if this rate environment stays the way it is in the next set of locks we get over the next month, that we'll be back to the 15 to 20 level, provided that the interest rate environment stays similar to what it is today.

22:10 That is helpful. And I guess, can you just talk about, I guess, as you go through periods of volatility, what is the hedging? What is the forward commitment and ways that you look to protect yourself from this volatility?

22:32 Really what we do, we're hedging the securitization institution on the base rate side. We're not hedging the spread. So over the last quarter, obviously we had hedging making up some of the losses we would have had in terms of securitization proceeds. But we don't, we're not hedging our book value, you know, the securitized product out there or the retained bond positions once they're securitized.

23:05 Got it. And just remind us what, you know, You know, is there any mismatch, you know, in the fund, you know, in the fundamentals of the cash flows of those retained pieces? Or is that more market-to-market risk, you know, versus, you know, actual change in expected cash flows?

23:29 Yeah, that's really market-to-market risk. We have to have some kind of credit Thank you. The next question comes from Marisa Lobo with UBS. Please go ahead. Thanks and good morning.

23:41 Just to follow up on the book value question.

24:04 How much of that was due to rate moves versus non-QM spread widening and also on the retained interest? Is that just mainly driven from rate mark to market or is it also some spread widening in that?

24:19 Yeah, I mean, I would say this quarter is kind of everything. If you just look at what spreads did on our product, you know, early in the quarter, 26.3 priced at the AAA at 130 over. Then 26.6, which closed just a few days ago, was 160 over on the AAA. And then, of course, you know, the two and the five-year also moved up, shifted up. So it's really kind of a bit of both driving it. It's probably almost equal share between the two.

25:02 And that's captured in third quarter book value? Yes. Okay. So can you give us the sense of where book value is tracking so far in 4Q?

25:12 Yeah, I think book value has probably made a couple point recovery as of today. Been a little bit more favorable environment, but, you know, nothing. I mean, I would say, you know, again, like about a two-point recovery.

25:29 Got it. That's helpful. On competition last quarter, you noted there's some weaker programs that AOMR was unwilling to pursue. How is that looking currently, and is it showing up more in pricing or on credit metrics?

25:50 Not sure I got that question, Marissa.

25:53 I'm sorry.

25:54 I just wanted to understand the competitive environment, if you're seeing that show up more in credit underwriting slipping or more competitive pricing.

26:07 Yeah, so this is Sreeni here. So I think if the spreads are widening out, what we're seeing is weaker underwriting is getting priced even wider. So there's been a little bit of weakness in that from a competitive perspective. and that will show up in whole loan tapes selling at slight discounts to market, which we are seeing. We're not seeing that in big proportion, to be fair. We're seeing that in small waves, but we're definitely seeing that. What will show up in, if you continue to see spreads being wider, what it will show up in is that those weaker programs will essentially slow down because there will be no exit in the capital markets.

26:55 So yet to be seen from a competitor, but I would like to think that we are seeing that in terms of AAA spreads or other shelves. I hope I answered that question.

27:09 Okay, thank you. Thank you. Once again, if you have a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. The next question comes from Timothy D'Agostino with V Riley Securities. Please go ahead.

27:34 Yeah, hi. Thanks for taking the questions this morning. I guess just on liquidity and capital allocation, just trying to think through how you all are thinking about it. Does the board look at a share repurchase program? is the dividend kind of, you know, the key, you know, return of capital shareholders. And then obviously much longer dated, but, you know, the 2029 notes became callable in July. So I just want to understand, you know, how you think about the liquidity position generally in capital allocation going forward.

28:11 Yeah. Yeah. Hey, Timothy. I think our liquidity position is pretty strong today. I mean, again, we've got consistent access and securitization markets, you know, freeing up. I mean, the last securitization we did gave us about 20, just over $20 million in proceeds, which provides a good amount of runway in terms of buying things back. I mean, yeah, you mentioned the 29 notes. Today, you know, they are theoretically callable, but not And then, you know, share repurchase programs. I mean, we've done kind of targeted repurchases here and there, you know, Post-IPO, we had a program. Then we had a couple of targeted ones with Davidson Kettner buying back at what we thought at the time opportunistic levels.

29:17 But obviously, we're very sensitive on the overall size of the balance sheet, what we could do with the capital, and what the forecast is. And right now, like I mentioned before, the returns are a little bit compressed, not too far off from even our dividend yield at today's pricing. But there's an opportunity here where they'll wipe back out and be where we should keep the capital in the vehicle versus spending the money to repurchase shares and reduce the size, reduce the flow to the stock.

29:53 Okay, great. Thank you. And I guess just a second question if I can ask here. Just on loan purchases in the quarter, I guess maybe I missed it, but could you break out or maybe just directionally kind of give us some color on non-QM versus HELOC. It would be great to hear maybe what the appetite of the market is. Are you seeing more HELOC volume now, or are you continuing to see more non-QM?

30:29 Yeah, I think from our perspective, the non-QM market's strong. I mean, we personally, this AOMR, once we did HV1 or participated in HV1, we pulled back a little bit on the HELOC purchasing for the quarter. So we didn't really purchase too many in the quarter, but that's a switch in a valve that we can turn on and off very easily and source assets out there. I think as rates go up, there's a bit of more HELOC demand than when rates are going down. as people have much more propensity to take a little bit of incremental borrowing cost on top of their existing mortgage. But I would think that both volumes are consistent, even in a higher rate environment that we had at the end of last quarter. I mean, our mortgage company is about the same size as it was before.

31:26 You know, there's been no real drop-off in demand, nor any real increase.

31:34 Okay, thank you so much for taking the questions this morning. Thank you. There are no further questions at this time. I will now transfer the conference over to Brandon Filson. Please go ahead, sir.

31:49 Well, good morning. Thank you, everybody, for joining us today. We look forward to connecting with you again next quarter. Have a great day. Thank you. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines. Music Music Music Music Music