Angel Oak Mortgage REIT, Inc. 2026 Q2 Earnings Call

Please go ahead. Good morning, and thank you for joining us today for Angel Oak Mortgage REIT's Second Quarter 2026 Earnings Conference Call.

This morning, we filed our press release detailing these results, which is available in the Investors section of our website at www.angeloakreit.com. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, we will be discussing certain non-GAAP financial measures.

More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our earnings release and SEC filings. This morning's conference call is hosted by Angel Oak Mortgage REIT's Chief Executive Officer, Srini Prabhu, and Chief Financial Officer, Brandon Filson. Management will make some prepared comments, after which we will open up the call to your questions. Additionally, we recommend reviewing our earnings supplement posted on our website. I will turn the call over to Srini.

Thank you, Casey, and thank you all for joining us today. While the macroeconomic outlook remained unclear in the second quarter, AOMR responded with a balanced approach of strategic value-driven decision making and operating excellence to strengthen the return profile and the long-term durability of our portfolio. We saw continued demand for well-structured non-QM credit, but markets also moved through periods of caution as investors weighed the path of inflation, Federal Reserve policy, and broader global uncertainty throughout the quarter. Against that backdrop, our focus was on staying disciplined in capital deployment, preserving flexibility, and executing on opportunities to expand upon the earnings and the operating improvements we have achieved over the past several quarters. Our platform demonstrated resilience with solid year-over-year growth in net interest income, stable book value, and durable credit performance.

Notably, we took several strategic actions to strengthen the portfolio, including monetization of de-levered legacy retained bonds, the repurchase of common stock from a pre-IPO investor at accretive return levels, and successfully negotiated a significant spread reduction on our largest warehouse financing facility. These opportunistic, prudent actions are designed to fortify the strength and the return profile of our portfolio over the short term and long term. We continue to source loans that fit our credit and return criteria. Though we did not have a securitization in the second quarter, we executed AOMT 2026-3 and 2026-HB1 following the end of the quarter. We expect to continue a pace of roughly one securitization per quarter. Importantly, we are not simply focused on issuing transactions. We are focused on issuing transactions that strengthen the durability of our balance sheet, reduce financing uncertainty, and support long-term earnings power.

As we move in the back half of the year, our priorities are clear. While we cannot control macroeconomic conditions or day-to-day valuation changes, we can continue to make thoughtful, value-driven decisions to maintain a business that is both robust and flexible. We will continue to originate and purchase selectively, maintain a conservative approach to leverage, and use securitization as a strategic funding tool rather than volume-driven objective. We believe this approach positions AOMR to navigate uncertain markets while continuing to build value for shareholders over time. With that, I will turn it over to Brandon, who will walk us through our second quarter financial performance in greater detail.

Thank you, Srini. Our second quarter results were reflective of a strong operating foundation that we built despite offset stemming from unrealized mark-to-market valuation decreases in our unsecured securitized loan portfolio. Notably, as Srini mentioned, consistent with our focus on controlling what we can control, we took several strategic actions during the quarter to further strengthen our portfolio going forward. We sold our retained bonds from the AOMT 2020-3 securitization and have reinvested those proceeds into purchases of newly originated loans with higher modeled yields. We repurchased $15 million of common equity from a pre-IPO investor at accretive return levels, and we reduced the interest rate spread on our largest warehouse financing provider by 35 basis points.

We expect to realize the positive impacts of these actions in the coming quarters and years. In the second quarter, we had GAAP net income of $3.4 million, or $0.14 per diluted common share. The result was driven by healthy net interest income and maintained operating expense levels, partially offset by unrealized mark-to-market losses. Comparatively, in the second quarter of 2025, we had GAAP net income of $800,000, or $0.03 per diluted common share. Distributable earnings for the quarter were $9 million. Our securitized loan portfolio and our residential loan portfolio combined for $3.6 million of unrealized losses, and our derivative portfolio drove $2.4 million of unrealized loss, driving the difference between GAAP net income and distributable earnings. In the second quarter of 2025, distributable earnings were $2.6 million. Interest income for the quarter was $41.4 million, and net interest income was $10.7 million.

This compares to interest income of $35.1 million and net interest income of $9.9 million in Q2 2025, showcasing 18% and 8% growth respectively. For the first six months of 2026, interest income and net interest income grew by 21% and 14% respectively versus the first six months of 2025. The non-QM coupon rates have come down compared to the first half of 2025. Performance has been supported by targeted asset purchases, decreased warehouse spreads, and consistent access to securitization markets. Operating expenses for the second quarter were $3.6 million. Excluding non-cash stock compensation expenses, second quarter operating expenses were $3.2 million. The small increase compared to a year ago was due to increased loan diligence fees associated with larger target asset balances. Going forward, we expect to maintain similar operating expense levels and will continue to be as efficient as possible with our expense structure.

Loan purchases during the quarter totaled $204 million and continued to reflect conservative credit profiles, moderate loan-to-value ratios, and current market coupons that we believe remain attractive on a risk-adjusted basis. The weighted average coupon of loans purchased during the quarter was 7.34%. The weighted average CLTV was 70.5%, and the weighted average credit score was 759. Our credit underwriting metrics have continued to reflect our desired credit and return profile. As of the end of the quarter, our loans and securitization trust portfolio carry a weighted average coupon of 6.04% with a weighted average funding cost of approximately 4.5%. We intend to continue to access securitization markets through our disciplined, methodical securitization strategy. As mentioned, we executed the AOMT 2026-3 securitization just after the end of the quarter.

We're the sole contributor to the deal, which had $280 million of unpaid principal balance and a weighted average coupon of 6.9%, weighted average non-zero credit score of 757, and a weighted average CLTV of 69%. The AAA-rated senior bonds priced at 130 basis point spread over the Treasury yield curve. Additionally, we recently priced AOMT 2026-HB1, $221 million commingled HELOC securitization, to which we contributed $71 million of loans. Loans underlying the deal had a weighted average coupon of 9.79%, weighted average non-zero credit score of 744, and a weighted average CLTV of 64.8%. Securitization markets have remained constructed amid market uncertainty, and we continue to expect to execute roughly one securitization per quarter or four per year. As of quarter end, GAAP book value per share was $10.13. Economic book value, which fair values all non-recourse securitization obligations, was $12.24.

Compared to the end of first quarter 2026, GAAP book value per share decreased 1.7%, and economic book value decreased 0.3%. Changes in book value during the quarter were reflective of operating income, offset by a quarterly dividend payment and aforementioned market-driven unrealized valuation changes within the portfolio. While the market continues to display volatility tied to macroeconomic and geopolitical factors, we estimate that as of today, book value has remained relatively flat since the end of second quarter. Our balance sheet remained well-positioned with cash of $48.6 million and recourse debt-to-equity ratio of 2.3 times. As such, following the AOMT 2026-3 and AOMT 2026-HB1 securitizations, recourse debt to equity decreased to approximately one time. We aim to maintain liquidity and available financing capacity to provide flexibility to respond to changing market conditions.

We ended the quarter with unsecuritized residential whole loans at a fair value of $439 million, financed with $365 million of warehouse debt, $2.1 billion of residential mortgage loans and securitization trusts, and $334 million of RMBS, including $26 million of investment in commingled securitization entities, which are included in other assets on our balance sheet. We finished the quarter with undrawn loan financing capacity of approximately $900 million with four high-quality lending partners. Credit performance continued to be solid with portfolio-wide 90-day plus delinquencies at approximately 2.8%, which is inclusive of our residential loan, securitized loan, and RMBS portfolios. This represents an increase of approximately nine basis points from Q1 2026. Performance across the Angel Oak shelf remains strong, and we believe that the performance of our collateral relative to the non-QM securitization market is a key differentiator for our platform.