(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of Angel Oak Mortgage, Inc. The following should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto. References herein to "the Company," "we," "us," or "our" refer to Angel Oak Mortgage, Inc. and its subsidiaries unless the context requires otherwise.
Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "anticipate," "estimate," "will," "should," "expect," "believe," "intend," "seek," "plan" and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our prospectus dated June 16, 2021, filed with the Securities and Exchange Commission (the "SEC") on June 21, 2021 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the "Securities Act") (the "Prospectus"), which is part of a registration statement on Form S-11, as amended (File No. 333-256301) (the "Registration Statement"), under the caption "Risk Factors." Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-K, 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Factors that could have a material adverse effect on future results and performance relative to those set forth in or implied by the related forward-looking statements, as well as on our business, financial condition, liquidity, results of operations and prospects, include, but are not limited to:
the effects of adverse conditions or developments in the financial markets and the economy upon our ability to acquire non-QM loans sourced from Angel Oak's proprietary mortgage lending platform, Angel Oak Mortgage Lending, and other target assets;
the level and volatility of prevailing interest rates and credit spreads;
changes in our industry, interest rates, the debt or equity markets, the general economy (or in specific regions) or the residential real estate finance and the real estate markets specifically;
changes in our business strategies or target assets;
general volatility of the markets in which we invest;
changes in the availability of attractive loan and other investment opportunities, including non-QM loans sourced from Angel Oak Mortgage Lending platforms;
the ability of Falcons I, LLC ("the Manager") to locate suitable investments for us, manage our portfolio, and implement our strategy;
our ability to obtain and maintain financing arrangements on favorable terms, or at all;
the adequacy of collateral securing our investments and a decline in the fair value of our investments;
the timing of cash flows, if any, from our investments;
our ability to profitably execute securitization transactions;
the operating performance, liquidity, and financial condition of borrowers;
increased rates of default and/or decreased recovery rates on our investments;
changes in prepayment rates on our investments;
the departure of any of the members of senior management of our Company, our Manager, or Angel Oak;
the availability of qualified personnel;
conflicts with Angel Oak, including our Manager and its personnel, including our officers, and entities managed by Angel Oak;
events, contemplated or otherwise, such as acts of God, including hurricanes, earthquakes, and other natural disasters, pandemics, acts of war and/or terrorism and others that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investments;
impact of and changes in governmental regulations, tax laws and rates, accounting principles and policies and similar matters;
the level of governmental involvement in the U.S. mortgage market;
future changes with respect to the Government Sponsored Entities in the mortgage market and related events, including the lack of certainty as to the future roles of these entities and the U.S. Government in the mortgage market and changes to legislation and regulations affecting these entities;
effects of hedging instruments on our target assets and our returns, and the degree to which our hedging strategies may or may not protect us from interest rate volatility;
our ability to make distributions to our stockholders in the future at the level contemplated by our stockholders or the market generally, or at all;
our ability to qualify and maintain our qualification as a real estate investment trust (a "REIT") for U.S. federal income tax purposes; and
our ability to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act").
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and in the Prospectus. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management's views only as of the date such statements are made. The risks summarized under "Risk Factors" in the Prospectus could cause actual results and performance to differ materially from those set forth in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us.
Through our relationship with the Manager, we benefit from Angel Oak's vertically integrated platform and in�house expertise, providing us with the resources that we believe are necessary to generate attractive risk�adjusted returns for our stockholders. Angel Oak Mortgage Lending provides us with proprietary access to non�QM loans, as well as transparency over the underwriting process and the ability to acquire loans with our desired credit and return profile. We believe our ability to identify and acquire target assets through the secondary market is bolstered by Angel Oak's experience in the mortgage industry and expertise in structured credit investments. In addition, we believe we have significant competitive advantages due to Angel Oak's analytical investment tools, extensive relationships in the financial community, financing and capital structuring skills, investment surveillance capabilities, and operational expertise.
We have elected to be taxed as a REIT for U.S. federal income tax purposes. We believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue
Code of 1986, as amended (the Code"). Our qualification as a REIT, and maintenance of such qualification, will depend on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our stock. We also intend to operate our business in a manner that will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act. Our common stock commenced trading on the New York Stock Exchange of June 17, 2021.
We expect to derive our returns primarily from the difference between the interest we earn on loans we make and our cost of capital, as well as the returns from bonds, including risk retention securities, that are retained after securitizing the underlying loan collateral.
Key Financial Metrics
As a real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Distributable Earnings Return on Average Equity and book value per share.
Distributable Earnings is a non�GAAP measure and is defined as net income (loss) allocable to common stockholders as calculated in accordance with GAAP, excluding (1) unrealized gains and losses on our aggregate portfolio, and realized gains (losses) on derivatives, (2) impairment losses, (3) extinguishment of debt, (4) non-cash equity compensation expense, (5) the incentive fee earned by our Manager, (6) realized gains or losses on swap terminations and (7) certain other nonrecurring gains or losses. We believe that the presentation of Distributable Earnings provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations. We believe Distributable Earnings as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. As a REIT, we are required to distribute at least 90% of our annual REIT taxable income and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that stockholders invest in our common stock, generally we intend to attempt to pay dividends to our stockholders in an amount equal to our REIT taxable income, if and to the extent authorized by our Board of Directors. Distributable Earnings is one of a number of factors considered by our Board of Directors in declaring dividends and, while not a direct measure of REIT taxable income, over time, the measure can be considered a useful indicator of our dividends. Distributable Earnings should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings may not be comparable to similar measures presented by other REITs.
Distributable Earnings were approximately $4.9 million and $3.6 million for the three months ended September 30, 2021 and 2020, respectively, and $11.8 million and $(1.9) million for the nine months ended September 30, 2021 and 2020, respectively.
The table below sets forth a reconciliation of net income allocable to common stockholder(s), calculated in accordance with GAAP, to Distributable Earnings for the three and nine months ended September 30, 2021 and 2020:
Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 (in thousands) Net income (loss) allocable to common stockholder(s) $ 6,340 $ 4,238 $ 18,045 $ (6,277) Adjustments: Net other-than-temporary credit impairment losses - - - - Net realized and unrealized (gains) losses on derivatives 3,837 (101) 6,130 75 Net unrealized (gains) losses on residential loans (6,157) (429) (13,112) 2,410 Net unrealized (gains) losses on commercial loans 43 (86) (221) 1,884 Net unrealized (gains) losses on financial instruments at fair value - - - 10 (Gains) losses on extinguishment of debt - - - - Non-cash equity compensation expense 833 - 924 - Incentive fee earned by the Manager - - - - Realized gains (losses) on terminations of interest rate swaps - - - - Total other non-recurring (gains) losses - - - - Distributable Earnings $ 4,896 $ 3,622 $ 11,766 $ (1,898)
Distributable Earnings Return on Average Equity
Distributable Earnings Return on Average Equity is a non-GAAP measure and is defined as annual or annualized Distributable Earnings divided by average total stockholders' equity. We believe that the presentation of Distributable Earnings Return on Average Equity provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations. Additionally, we believe Distributable Earnings Return on Average Equity provides investors with additional detail on the Distributable Earnings generated by our invested equity capital. We believe Distributable Earnings Return on Average Equity as described above helps evaluate our financial performance without the impact of certain transactions but is of limited usefulness as an analytical tool. Therefore, Distributable Earnings Return on Average Equity should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP. Our methodology for calculating Distributable Earnings Return on Average Equity may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings Return on Average Equity may not be comparable to similar measures presented by other REITs. Set forth below is our computation of Distributable Earnings Return on Average Equity for the three months and nine months ended September 30, 2021 and 2020:
Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 ($ in thousands) Annualized Distributable Earnings $ 4,896 $ 3,622 $ 11,766 $ (1,898) Average total stockholders' equity $ 498,895 $ 254,690 $ 361,673 $ 197,556 Distributable Earnings Return on Average Equity 3.93 % 5.69 % 4.34 % (3.84) %
Book Value per Share The following table sets forth the calculation of our book value per share as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 (in thousands except for share and per share data) Total stockholders' equity $ 501,062 $ 248,309 Preferred stock (101) (101) Stockholder(s)' equity, net of preferred stock $ 500,961 $ 248,208 Number of shares outstanding at period end 25,405,544 15,724,050 Book value per share $ 19.72 $ 15.79
Results of Operations
Our results of operations presented herein for the three and nine months ended September 30, 2021 and the comparable periods ended September 30, 2020 do not reflect the expenses typically associated with being a public company, including the payment of increased directors' fees for our independent directors and the expenses incurred in complying with the reporting and other requirements of the Securities Exchange Act of 1934, the payment of a base management fee and an incentive fee to the Manager as a result of differences in the way fees and expense reimbursements are calculated under the Management Agreement as compared to the pre-IPO management agreement as described in our Prospectus, full periods of equity compensation expenses, and increased legal and accounting fees. Additionally, pursuant to the Management Agreement, we will be required to reimburse the Manager for its operating expenses, including third�party expenses, incurred on our behalf; and the Manager will also be entitled to reimbursement for costs of the wages, salaries, and benefits incurred by the Manager for our dedicated Chief Financial Officer and Treasurer and a proportionate amount of the costs of the wages, salaries, and benefits of our Chief Executive Officer and President (who, upon completion of the IPO, has dedicated a substantial majority of his business time to us) based on the percentage of his business time spent on our matters, and any other dedicated or partially dedicated employees based on the percentage of each such person's working time spent on matters related to us.
Three Months Ended September 30, 2021 and 2020 The following table sets forth a summary of our results of operations for the three months ended September 30, 2021 and 2020: Three Months Ended Three Months Ended September 30, 2021 September 30, 2020 (in thousands) INTEREST INCOME, NET Interest income $ 15,587 $ 9,387 Interest expense 2,599 788 NET INTEREST INCOME 12,988 8,599 REALIZED AND UNREALIZED GAINS (LOSSES), NET Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans (7,144) (3,102) Net unrealized gain on derivative contracts and mortgage loans 6,821 616 TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (323) (2,486) EXPENSES Operating and investment expenses 3,830 347 Operating expenses incurred with affiliate 645 566 Securitization costs - - Management fee incurred with affiliate 1,846 958 Total operating expenses 6,321 1,871 NET INCOME 6,344 4,242 Preferred dividends (4) (4) NET INCOME ALLOCABLE TO COMMON STOCKHOLDER(S) $ 6,340 $ 4,238 Other comprehensive income 1,818 5,171 TOTAL COMPREHENSIVE INCOME $ 8,158 $ 9,409
Net Interest Income The following table sets forth the components of net interest income for the three months ended September 30, 2021 and 2020: Three Months Ended Three Months Ended September September 30, 2021 30, 2020 (in thousands) Interest income / Interest income / Interest income expense expense Residential mortgage loans $ 6,601 $ 461 Residential mortgage loans in securitization trust 2,592 - Commercial mortgage loans 112 593 RMBS 5,684 8,309 CMBS 595 - U.S. Treasury bills - 34 Other interest income 3 (10) Total interest income 15,587 9,387 Interest expense Notes payable 1,873 682 Non-recourse securitization obligation, collateralized by residential mortgage loans 642 - Repurchase facilities 84 106 Total interest expense 2,599 788 Net interest income $ 12,988 $ 8,599
Net interest income for the three months ended September 30, 2021 and 2020 was $13.0 million and $8.6 million, respectively. Net interest income increased due to the additional average portfolio balance in the three months ended September 30, 2021 as compared to the same period in 2020, primarily due to the composition of the portfolio during September 30, 2021 having a higher average balance of loans and financing facilities, which increased the interest expense associated with borrowings.
Total Realized and Unrealized Gains (Losses) The components of total realized and unrealized gains (losses), net for the three months ended September 30, 2021 and 2020 are set forth as follows: Three Months Ended Three Months Ended September 30, 2021 September 30, 2020 (in thousands) Realized gain (loss) on RMBS, net $ 353 $ (2,945) Realized loss on CMBS (250) - Realized gain on interest rate futures 39 - Realized and unrealized loss on TBAs (4,074) - Realized and unrealized gain on residential mortgage . . .
Dec 03, 2021
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