Angel Oak Mortgage, a real estate investment trust that securitizes non-qualified mortgage, sourced from its sister companies, reported lower net income in the fourth quarter from the prior three-month period.
But company executives touted the strength of its business model in the rising interest rate environment that started during that period, pointing to a rise in distributable earnings, a non-GAAP metric that some other REITs use. This measure takes out unrealized gains and losses on Angel Oak's aggregate portfolio; unrealized gains and losses on derivatives; impairment losses; and incentive fees paid to the REIT's manager, among other items.
Fourth quarter net income was $3.1 million, versus $6.3 million in the third quarter. During the time frame, distributable earnings rose to $22.4 million compared with $4.9 million.
"We're pleased to have achieved these results, and proven the business model against headwinds from a rising rate environment and accelerated prepayment speeds on older higher coupon securities," said Brandon Filson, chief financial officer, during Angel Oak’s conference call.
Full year net income of $21.1 billion was well above the $721,000 profit recorded for 2020.
Angel Oak's pipeline of unsecuritized mortgages on its books includes $500 million in loans already purchased during the first quarter. At year-end it had $2.2 billion in residential mortgages in its portfolio. Since its initial public offering last June, the company has completed three securitizations, including one in February.
"The current securitization market has come off of all-time tight pricing in late summer…[from which] securizations benefitted," Filson said. "We were able to close our 2022-1 securitization in February tighter than comparable non-QM deals in the market at the same time," he added, describing it as proof of Angel Oak's leadership in the business.
The management team at Impac Mortgage Holdings had also noted the effects of rising rates and widening spreads for non-QM in the secondary market on its business during its recent earnings call.
Angel Oak’s securitization strategy is to build up the portfolio to a critical mass and then take a programmatic approach when bringing it to market, added Namit Sinha, its co-chief investment officer.
The company is "not picking and choosing the spread at which to securitize," Sinha said. "The market where we are right now is definitely wide to where we were earlier, but…we also raised loan coupons to reflect that widening."
In the future, Angel Oak may, as part of its securitization strategy, sell tranches deeper in the capital structure and then potentially use the funds to invest in higher-yielding securities, Sinha continued.
Even in a rising interest rate setting, the loans Angel Oak is getting currently have higher average credit scores, along with lower loan-to-value and debt-to-income ratios than in prior years, said Robert Williams, president and CEO.
"As the Fed continues to increase target interest rates and tapers agency MBS purchases in the coming months, we believe that our target non-agency assets are well positioned," Williams continued.
