Angel Oak bets on non-QM in volatile Q2 report

Angel Oak Mortgage REIT eked out a profit in the second quarter but missed Wall Street expectations partially due to a note offering. 

The non-qualified mortgage player Tuesday reported net income of $767,000 for the period, well below an S&P Capital IQ consensus mean estimate of $6.34 million. The real estate investment trust's quarterly results have see-sawed in recent quarters, from a $273,000 loss the same time a year ago, to a $20.5 million profit at the end of March. 

Angel Oak's busy spring included two securitizations and the purchase of $147 million in loans including home equity lines of credit. The company in May also closed a $42.5 million offering of 9.750% senior notes due 2030, and proceeds covered non-QM acquisitions and general corporate purposes.

The note offering added to interest expenses, and largely counterbalanced a 35% year-over-year increase in interest income to $35 million. The firm's $9.9 million in net interest income was relatively flat in recent quarters. 

Executives weigh non-QM activity

Company leaders in Tuesday morning's earnings call said securitization markets remain accretive despite larger economic uncertainty. More mortgage REITs are also entering the non-QM space and the competition is healthy, CEO Sreeni Prabhu suggested.

"We are not seeing that much creep in credit standards from even other guys," he said. "So that's also a good thing, right, because that's a worrisome trend."

Prabhu also mulled an analysts' question on whether demand for hybrid adjustable-rate mortgages would emerge to refinance high-coupon borrowers, if long-term rates remain elevated. 

"I do think those conversations will happen if the longer rates stay higher and you start seeing the front end, because that environment hasn't happened in a long time," he said. "But as of today, it's not efficient."

Executives also weighed the impact of a future rate cut by the Federal Reserve, after the central bank stood pat last week. Although Angel Oak noted a slight uptick in prepayment speeds in the past quarter, Treasurer and Chief Financial Officer Brandon Filson said he doesn't expect much movement in his company's portfolio.

"So much of our portfolio is also still significantly underwater or out of the money from a refinance decision at the 5% coupon range," he said. 

Angel Oak's second quarter at a glance

The REIT reported earnings per share of $0.03 in the second quarter, also missing a consensus estimate of $0.27. In the first quarter, that mark was $0.87; it was negative $0.01 the same time a year ago. The company also reported $1.6 million of unrealized loss on its securitized and residential portfolios. 

Angel Oak completed two securitizations over the spring, which paid down a combined $315.5 million in debts and released a combined $33.9 million in cash to purchase new loans. 

At the end of June, the firm had an undrawn loan financing capacity of $931 million. Its residential loan portfolio had an average weighted coupon of 8.37%, up 82 basis points from the first quarter and up 66 basis points from the same time last year. 

The company also reported a falling delinquency rate, with its total portfolio weighted average percentage of loans 90 days or more past-due falling 44 basis points from the first quarter to 2.35%. Most of those improvements came from securitizations in 2023 and 2024, which were poorer performers in previous quarters.

The company's stock fell 7% Tuesday morning following the earnings releases, and sat around $8.75 a share by midday.