Non Agency Securitization Tailwinds And Non QM Demand Will Drive Strong Future Performance

Catalysts

About Angel Oak Mortgage REIT

Angel Oak Mortgage REIT focuses on originating, purchasing and securitizing non-agency residential mortgage loans to generate attractive risk adjusted income for shareholders.

What are the underlying business or industry changes driving this perspective?

• Ongoing tightening in securitization spreads, combined with an active, deep investor base, is enhancing execution on new deals. This should support higher net interest income and expand earnings as more loans are term financed at attractive coupons.
• Consistent access to low cost warehouse and unsecured funding, alongside an estimated 1 times recourse debt to equity ratio, positions the company to prudently add leverage as opportunities arise. This may potentially accelerate portfolio growth and drive higher revenue and distributable earnings.
• Growing demand for specialized non-QM and HELOC products, where Angel Oak has a scaled origination and purchase platform, supports healthy volume at attractive yields. This should sustain elevated asset coupons and bolster net interest margins.
• Programmatic calling and resecuritization of delevered legacy deals is systematically rotating capital from mid single digit retained yields into double digit return opportunities. This directly lifts portfolio returns and supports long term earnings power.
• Disciplined credit posture, including higher average FICO scores, low combined loan to value ratios and outperformance of the AOMT shelf in delinquency metrics, is expected to limit loss content over the cycle. This supports book value stability and improves the durability of net margins.

Assumptions

This narrative explores a more optimistic perspective on Angel Oak Mortgage REIT compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Angel Oak Mortgage REIT's revenue will grow by 16.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 50.4% today to 65.5% in 3 years time.
• The bullish analysts expect earnings to reach $36.2 million (and earnings per share of $1.39) by about December 2028, up from $17.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, up from 12.5x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 13.2x.
• The bullish analysts expect the number of shares outstanding to grow by 6.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.17%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The business model is structurally dependent on a deep, liquid securitization market with tight spreads. If investor demand for non agency RMBS normalizes lower or spreads widen over the long term, future securitizations could become less accretive, constraining portfolio growth and pressuring revenue and earnings.
• Low current prepayment speeds relative to the long term 20 to 30% assumption are supporting elevated asset yields today. A sustained decline in mortgage rates that materially accelerates refinancings would shorten asset duration, compress net interest margins and reduce net interest income over time.
• Economic book value per share declined even as GAAP book value rose, highlighting structural exposure to changes in the fair value of legacy securitization liabilities. If rates or credit spreads move in an unfavorable direction over the cycle, mark to market volatility could erode book value and dampen reported earnings.
• The strategy relies on leverage and warehouse funding capacity to recycle capital from called and delevered deals into higher yielding assets. In a less benign credit or funding environment, tighter warehouse terms or reduced unsecured debt access could limit balance sheet expansion and slow revenue and earnings growth.
• Competition in non QM and HELOC lending is increasing as more players enter the space. Over the long term, sustained competitive pressure could force weaker pricing or looser underwriting to maintain volumes, which would either compress net margins if pricing is cut or raise tail credit risk that could ultimately impact earnings and book value.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Angel Oak Mortgage REIT is $13.5, which represents up to two standard deviations above the consensus price target of $11.55. This valuation is based on what can be assumed as the expectations of Angel Oak Mortgage REIT's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $13.5, and the most bearish reporting a price target of just $9.75.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $55.2 million, earnings will come to $36.2 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $8.8, the analyst price target of $13.5 is 34.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.