Angel Oak Mortgage: Outlook for 12.6%-Yielding REIT Bullish on High Mortgage Rates
February 7, 2025
AOMR Stock Up 8.6% in 2025
Today, I’d like to take a look at Angel Oak Mortgage.
Here’s why.
There have been concerns that possible interest rate cuts would harm mortgage real estate investment trusts (mREITs).
That seems unlikely. Despite a number of interest rate cuts in the back half of 2024, the average 30-year fixed mortgage rates remain near a steep seven percent.
President Donald Trump has said that he will bring mortgage rates down to three percent and “demand” that the U.S. Federal Reserve “drop interest rates immediately.” (Source: “Trump demands Fed cut rates, claims better monetary policy understanding,” Reuters, January 23, 2025.)
But that’s not how it works. Moreover, the president isn’t responsible for setting mortgage rates on homes.
More broadly, the median national home price for 2024 rose 4.7% to a record high of $407,500. This, coupled with elevated mortgage rates, means it’s a great time to look at mREITs such as Angel Oak Mortgage REIT, Inc. (NYSE:AOMR). (Source: “2024 U.S. home sales fell to the lowest level in nearly 30 years as prices and mortgages soared,” PBS, January 24, 2025.)
Angel Oak is focused on acquiring and investing in first-lien, non-qualified mortgage (QM) loans and other mortgage-related assets in the U.S. (Source: “About Angel Oak Mortgage REIT, Inc.,” Angel Oak Mortgage REIT, Inc., last accessed January 29, 2025.)
What are non-QM loans?
Well, non-QM loans are for borrowers who do not meet the traditional lending requirements of a typical qualified mortgage.
Traditional lenders tend to ignore certain kinds of potential homeowners, especially those with a history of bankruptcy or foreclosure, who have debt, no credit, are self-employed, or are even recently divorced. Companies like Angel Oak essentially help people previously frozen out of the mortgage and housing market.
Not all non-QM loans are created equal though. Thanks to Angel Oak’s strict underwriting expertise, it only invests in high-quality, non-QM loans. This helps the mREIT deliver more accurate risk-and-return analysis.
What are the benefits of investing in non-QM loans?
The big benefit is higher interest rates. It’s easier for house hunters to qualify for a non-QM loan than a qualified mortgage, but they are a more expensive way to borrow.
They also typically need to put down a higher down payment. For some non-QM borrowers, the minimum down payment is 15% to 20%. The typical down payment for qualified mortgages is around eight percent, for first-time homebuyers. And, because non-QM loans aren’t bound by the rules of the Consumer Financial Protection Bureau (CFPB), they can’t be purchased by Fannie Mae or Freddie Mac.
The non-QM market is growing fast, too. In 2015, the industry had zero worth. By 2019, it had grown to $25.0 billion and, by 2020, it was worth $50.0 billion. (Source: “The current evolution of the mortgage market,” JPMorgan, last accessed January 29 2025.)
Angel Oak only went public in June 2021, but, since then, it has purchased $3.2 billion in residential mortgage loans and securitized $2.8 billion in residential mortgage loans. (Source: “Fact Sheet,” Angel Oak Mortgage REIT, Inc., last accessed January 29, 2025.)
Angel Oak Mortgage Hits Nearly $265.0 Million in New Loans in Q3
In November, Angel Oak announced that its third-quarter net interest income jumped 22% year over year to $9.0 million. Its year-to-date net interest income was up 31% at $27.1 million. (Source: “Angel Oak Mortgage REIT, Inc. Reports First Quarter 2024 Financial Results,” Angel Oak Mortgage REIT, Inc., November 6, 2024.)
The mREIT reported third-quarter net income of $31.2 million, or $1.29 per share, and a distributable earnings loss of $0.14 per share.
Commenting on the third-quarter results, Sreeni Prabhu, the company’s chief executive officer and president, said, “Our positive third quarter results reflect the strength of our portfolio’s position in what has become a more positive macroeconomic landscape in the second half of the year.”
In the July of its 2024 third quarter, Angel Oak issued $50.0 million in 9.5% senior unsecured notes due in July 2029. According to the company, it will use that injection for general corporate purposes, which, includes the acquisition of non-QM loans and repurchase of approximately 1.7 million shares in common stock.
According to Prabhu, “As of today’s date, the earnings from these investments have exceeded the incremental interest expense associated with the notes issuance and are now driving meaningful net interest income expansion…”
During the quarter, Angel Oak purchased $264.8 million in newly originated non-QM residential loans with a weighted average coupon of 7.74%, weighted average loan-to-value of 70%, and weighted average credit score of 754.
As of September 30, Angel Oak held residential whole loans with a fair value of $428.9 million.
“This, in combination with October’s securitization and the September rate cut, are expected to drive continued portfolio and earnings growth in the fourth quarter and beyond,” said Prabhu.
Quarterly Dividend of $0.32/Share
As a REIT, Angel Oak needs to legally distribute at least 90% of its taxable income to stockholders in the form of a dividend.
In November, it paid a dividend of $0.32 per share, or $1.28 on an annual basis, for a current forward yield of 12.66%. That dividend yield is in line with Angel Oak’s trailing annual dividend yield.
More often than not, a high dividend yield is pegged to a depressed stock. And while AOMR stock trended lower from August to October, it rebounded off a 52-week low after the mREIT reported solid third-quarter results. And the stock has been trending higher since then.
As of January 29, AOMR stock is up:
- 15%, since announcing its Q3 results
- 14% over the last three months
- 8.5% year to date
- 2% on an annual basis
Pretty decent gains, but Wall Street anticipates even better times ahead for AOMR stock. Wall Street analysts have provided a 12-month share price forecast range of $12.21 to $13.50 per share. This points to potential upside of approximately 19% to 34%.
Chart courtesy of StockCharts.com
The Lowdown on Angel Oak Mortgage
Angel Oak Mortgage, Inc. is an mREIT focused on non-QM loans, a lucrative, growing segment of the U.S. mortgage market. The company recently reported solid third-quarter results, including double-digit net investment income growth and net income of $1.29 per share.
The mREIT didn’t provide any guidance, but analysts expect Angel Oak’s full-year earnings to grow from a loss of $1.10 per share in 2023 to earnings of $0.14 per share in 2024, before jumping to $1.25 per share in 2025. (Source: “Angel Oak Mortgage REIT, Inc., (AOMR),” Yahoo! Finance, last accessed January 29, 2025.)
The bullish outlook on the mREIT comes on the heels of an improving macroeconomic environment and Angel Oak’s ability to capitalize on emerging strategic opportunities.
While some investors may think investing in non-QM loans is risky, there are 107 institutions (with a 76.48% stake in AOMR) that believe Angel Oak knows what it’s doing. Some of the biggest institutional holders of the stock include Morgan Stanley, BlackRock Inc, Vanguard Group, and Bank of America Corp.
