Angel Oak posts third consecutive quarterly loss amid non-QM headwinds

Real estate investment trust Angel Oak Mortgage reported a third-straight quarterly loss as a turbulent non-QM environment raises industry-wide concerns about liquidity and loan-portfolio values.  

The Atlanta-based buyer and investor of first-lien non-QM mortgages lost $83.3 million, or $3.40 per diluted share, for the quarter ending Sept. 30, representing a decline of almost 60% from its net loss of $52.1 million posted three months earlier. In the same time period of 2021, Angel Oak had squeezed out a profit of $6.3 million in its first full quarter as a publicly traded company.

“Given the current market, AOMR shifted to a more defensive strategy in Q3, managing liquidity while protecting our capital structure so that we are in a position to grow once markets and economic activity stabilize,” Angel Oak Mortgage CEO and President Sreeni Prabhu said during the company’s earnings call. 

“We purchased fewer loans than in previous quarters,” Prabhu said in his first earnings announcement as leader of Angel Oak Companies’ REIT operation since the ouster of Robert Williams in September. 

While market conditions have impacted the entire mortgage industry in 2022, the weight of interest rate volatility and tightening credit has left an acute mark in the non-QM space, causing greater uncertainty about valuation of loans by secondary market investors. It also has forced multiple companies specializing in non-QM to close entirely, including First Guaranty, Sprout Mortgage and Athas Capital.

But as one of several companies within the greater Angel Oak holding company that also includes Angel Oak Capital Advisors, the REIT entered the current down cycle “in a much better place,” Prabhu said.

“Obviously, we always have the partnership with the asset manager, which helps raise the money, as we always said that we are not an originate-to-sell model. We originate to own credit,” he said.

But industry headwinds are also not leaving lending operations within the Angel Oak family of businesses, such as non-QM wholesale originator Angel Oak Mortgage Solutions and retail operator Angel Oak Home Loans, unscathed either, causing a trickle-down effect to the REIT’s bottom line. Both lenders are among dozens that have reported layoffs within the last few months.

“Just like any other mortgage company, we had to shrink workforce over there, shrink what we do, but our focus on non-QM has not shifted,” Prabhu said. 

“The mortgage REIT has to be prudent on how it deploys cash in an environment where the rates are going up fast and furious. And so we tactfully slowed down originations in the mortgage company, because we wanted to preserve the cash in our funds along with the REIT,” he said.

Available liquidity amid the current slowdown has also become a rising source of concern, but Chief Financial Officer Brandon Filson affirmed the company “remained committed to a sound liquidity-management strategy.” While targeting to get securitizations out regularly, Filson said a potential sale of loans was also on the table as part of a two-pronged strategy.

“We are looking at selling a portion of the loans to move ahead and that would free up a lot of liquidity that we can easily turn into significantly higher coupons as soon as that’s done,” Filson said.

“What we want to do is optimize our balance sheet for liquidity and also to play some offense,” Prabhu added. 

“We don’t want to give up all that optionality by just selling the loans because we want to retain them [to be placed] into a securitization, which I believe is our best execution. But we’ll look at everything and optimize it over this quarter.”

Angel Oak finished the third quarter with undrawn loan financing capacity of $695 million. Its overall total current capacity stands at $1.4 million, Filson said, and consists of facilities with six institutions. Filson also said the company plans to evaluate new facilities.

After deciding not to securitize mortgages in the second quarter due to heightened rate volatility, the company issued a securitization in July, which included 407 loans at a weighted average coupon of 5.22%, an average credit score of 730, loan-to-value mark of  75.1% and a debt-to-income ratio of 32.1%.

Of the few loans Angel Oak purchased during the third quarter, Prabhu said the average coupon rate was over 7%, while recent locks came in over 8.5% at one of the REIT’s sister mortgage companies. 

“Over the coming quarters, we plan to reposition our portfolio to be more reflective of these current rates and to resume our methodical process of purchasing and securitizing newly originated high-coupon loans,” Prabhu said.