Angel Oak Mortgage Stock: 10.3%-Yield mREIT’s Share Price Crushing Broader Market
June 7, 2024
Why AOMR Stock Is Attention-Worthy
Some real estate investment trusts (REITs) have been hammered due to high interest rates. That’s because high interest rates drive up the cost of borrowing capital and cut into margins, which leads to reduced profits and free cash flow (FCF).
And while the Federal Reserve has said interest rate cuts are coming, the exact timing is open for debate. On top of that, when interest rates do start to come down, they’re expected to remain above their pre-pandemic levels.
Not all REITs suffer in a high-interest-rate environment, though; mortgage REITS (mREITs) tend to do well when rates are high. That’s because mREITS earn income from charging interest. They provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities (MBS).
One mREIT that has been doing exceptionally well since the start of 2023 is Angel Oak Mortgage REIT, Inc. (NYSE:AOMR). The company focuses on acquiring and investing in first-lien non-qualified mortgage (non-QM) loans and other mortgage-related assets in the U.S.
Angel Oak Mortgage’s home page says the company is “Investing in the American Dream.” (Source: “Angel Oak, Mortgage REIT,” Angel Oak Mortgage REIT, Inc., last accessed June 4, 2024.)
Non-QM loans are for borrowers who don’t meet the traditional lending requirements for a typical qualified mortgage (QM). Big banks might not lend money to a potential home buyer because they have a history of bankruptcy or foreclosure, have debt, have no credit, are self-employed, or are recently divorced.
What are the benefits of investing in non-QM loans?
The big benefit for lenders is higher interest rates. It’s easier for house hunters to qualify for a non-QM loan than a QM, but non-QM loans are a more expensive way to borrow.
Moreover, non-QM borrowers typically need to pay a higher down payment than QM borrowers. For some non-QM loans, the minimum down payment is 15% to 20%. In comparison, a typical down payment for a QM is about eight percent for first-time home buyers.
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 has been growing fast. In 2015, the non-QM industry was worth zero. By 2020, it was worth $50.0 billion. (Source: “The Current Evolution of the Mortgage Market,” JPMorgan Chase & Co, last accessed June 4, 2024.)
Not all non-QM loans are created equal. Thanks to its strict underwriting expertise, Angel Oak Mortgage REIT, Inc. only invests in high-quality, non-QM loans. This helps the mREIT deliver more accurate risk and return analyses.
Angel Oak Mortgage only went public in June 2021, but since then, it has purchased $2.7 billion worth of residential mortgage loans and securitized $2.4 billion worth of residential mortgage loans. (Source: “Fact Sheet,” Angel Oak Mortgage REIT, Inc., March 31, 2024.)
Strong 1st-Quarter Financial Results
In May, Angel Oak Mortgage reported first-quarter generally accepted accounting principles (GAAP) net income of $12.9 million, or $0.51 per share. That was up significantly from $530,000, or $0.02 per share, in the same period last year. (Source: “Angel Oak Mortgage REIT, Inc. Reports First Quarter 2024 Financial Results,” Angel Oak Mortgage REIT, Inc., May 7, 2024.)
The company’s net interest income advanced 26% to $8.57 million, while its distributable earnings improved from a loss of $9.1 million to a positive $2.8 million, or $0.11 per share.
During the quarter, Angel Oak Mortgage improved its balance sheet while protecting its liquidity and managing its risk. Its book value per share increased by 2.8% to $10.55 per share. Its economic book value per share increased by 1.8% over the prior quarter to $13.78 per share.
At the end of the first quarter, the mREIT held residential mortgage whole loans with a fair value of $368.4 million.
Commenting on the results, Sreeni Prabhu, Angel Oak Mortgage REIT, Inc.’s president and CEO, said, “In the first quarter of 2024 we continued with the positive momentum from 2023, as we achieved increased net interest margin for the third consecutive quarter through consistent loan purchases, securitization execution and continued expense management.” (Source: Ibid.)
In April, the company announced a $300.0-million securitization deal to fund additional loans. The mREIT is looking to grow its portfolio, with a target of $150.0 to $200.0 million in loan acquisitions in the second quarter. It also plans to issue another securitization in the third quarter.
Management Declared Quarterly Dividend of $0.32 Per Share
As a REIT, Angel Oak Mortgage REIT, Inc. legally needs to distribute at least 90% of its taxable income to stockholders in the form of dividends. On May 31, it paid a dividend of $0.32 per share. (Source: “Angel Oak Mortgage REIT, Inc. Common Stock (AOMR) Dividend History,” Nasdaq, last accessed June 4, 2024.)
As of this writing, that translates to a yield of 10.32%.
In many cases, a high dividend yield comes at the expense of a lower share price. That isn’t the case with Angel Oak Mortgage REIT stock, though.
In addition to providing investors with high-yield distributions, the company has been providing share-price appreciation. AOMR stock is up by 22% year-to-date, 83% year-over-year, and 217% since the start of 2023 (as of this writing).
Angel Oak Mortgage stock still has room to run. Trading at $12.27 per share, the stock needs to climb by 8.6% to reach its record high of $13.33 from August 2021.
Chart courtesy of StockCharts.com
The Lowdown on Angel Oak Mortgage REIT, Inc.
As mentioned earlier, Angel Oak Mortgage is an mREIT that’s focused on non-QM loans, a lucrative, growing segment of the U.S. mortgage market.
The outlook is solid for Angel Oak Mortgage stock. The company recently reported strong quarterly financial results, with big gains in net interest income.
It also recently announced a large securitization deal to help facilitate high-quality loan purchases, and it’s looking to grow its loan acquisition portfolio in the second quarter. Angel Oak Mortgage REIT, Inc. has plans for another securitization in the third quarter.
Furthermore, there are expectations that the mREIT will increase its net interest income, which would help cover its expenses and AOMR stock’s high-yield dividends.
