Angel Oak posts 2Q loss due to non-QM market uncertainty

Real estate investment trust Angel Oak Mortgage recorded its second consecutive quarterly loss as continued economic upheaval affected its operations.

Angel Oak Mortgage lost $52.1 million for the second quarter, compared with a $43.5 million loss for the first quarter and profits of $2.2 million for the second quarter last year. The REIT went public on June 17, 2021.

“We again observed an extremely volatile and uncertain fixed income market in the second quarter, as the Fed continues to increase interest rates exerting downward pricing pressure on our mark-to-market assets,” Robert Williams, president and CEO of Angel Oak Mortgage said on the second quarter earnings call. “This impact was partially offset by our interest rate hedging strategy.”

However, Angel Oak Mortgage does not hedge credit spread risk and because those widened significantly during the quarter, it resulted in material short-term pressure on the company’s book value,” Williams continued.

The volatility resulted in Angel Oak Mortgage electing not to securitize any mortgages during the second quarter. But changing market conditions enabled Angel Oak Mortgage to issue one in July.

“While the securitization will not have the absolute return generation of some of our previous securitizations, it’s still an important step in fixing liquidity and funding costs through the life of the loan,” said Brandon Filson, chief financial officer and treasurer. “This securitization deal freed up additional cash, reduced loan financing facilities by over $150 million and helped to clear out lower coupon loans to be replaced with loans over 7% in weighted average coupons.”

Both executives indicated Angel Oak Mortgage might not be done with third quarter securitization activity.

“We’ll continue to monitor the securitization market daily,” Williams said. “Securitization of current loan production is generating attractive returns with potential upside, which that book value will stabilize over the next few quarters.”

Being a part of the broader Angel Oak ecosystem allows the REIT aggregator “to effectively customize our desired loan characteristics as markets evolve, which includes the ability to adapt to and capitalize on higher mortgage rates,” Williams continued.

While the target is to do one securitization per quarter, “we could have a quarter with more than one securitization or in this securitization market may decide to commingle our loans with loans from other Angel Oak affiliates to ensure that we’re taking advantage of the securitization market in a focused and diligent way,” Filson said.

But a favorable securitization market could change on a whim when data such as the Consumer Price Index report comes out, noted Namit Sinha, co-chief investment officer of Angel Oak Capital. (The call took place after the market closed on Aug. 9, and the CPI was released the following morning.)

After investors were reluctant to enter the market for the past three-to-four months, in recent weeks more deals are coming out that are “multiple times oversubscribed,” Sinha said.

Sinha was asked about how Angel Oak is positioned in light of the failure of non-QM competitors First Guaranty Mortgage and Sprout Mortgage.

Noting that others are also likely struggling, Sinha commented “in that kind of an environment we do expect Angel Oak to cement its leadership position and take advantage from a market share standpoint. Obviously, it’s not all clear by any means and given where we are in the macro, there are certain events that could happen starting from the CPI [release], that could make the environment even tougher going forward, or it could improve over time.”