8-K: Angel Oak Mortgage REIT Amends Management Agreement, Clarifies Roles and Responsibilities

Angel Oak Mortgage REIT has amended its management agreement to clarify the roles of dedicated personnel and update entity names.

Summary

• Angel Oak Mortgage REIT, along with its operating partnership and external manager, Falcons I, LLC, have amended their management agreement.
• The amendment clarifies which officers and employees provided by the manager will be fully or partially dedicated to the company.
• It also details the reimbursements to the manager for salaries and benefits of these personnel, subject to Compensation Committee approval.
• The agreement updates the names of various entities and includes other minor updates.
• The original management agreement was dated June 21, 2021.
• The amended agreement is effective as of May 1, 2024.

Sentiment

Score: 7

Explanation: The document reflects a routine update to a management agreement, which is generally a neutral event. The clarification of roles and responsibilities is positive, but the potential for termination fees and conflicts of interest are minor concerns.

Positives

• The amended agreement provides clarity on the roles and responsibilities of the manager's personnel.
• The agreement ensures that the company's dedicated CFO will spend all of their time on the affairs of the company.
• The agreement includes a process for renegotiating the manager's compensation if deemed unfair by the independent directors.
• The company has the ability to terminate the agreement if the manager's performance is unsatisfactory or the compensation is deemed unfair.

Negatives

• The company is responsible for reimbursing the manager for a wide range of operating expenses.
• The termination fee could be a significant cost if the company decides to terminate the agreement without cause.
• The manager has the ability to assign its responsibilities to its affiliates, which could potentially lead to conflicts of interest.

Risks

• The manager's performance could be unsatisfactory, leading to termination of the agreement.
• The compensation payable to the manager could be deemed unfair by the independent directors.
• The company could be required to pay a significant termination fee if it terminates the agreement without cause.
• The manager's ability to assign responsibilities to affiliates could lead to conflicts of interest.
• The company is reliant on the manager for day-to-day operations and investment decisions.

Future Outlook

The amended agreement is intended to provide a clearer framework for the management of the REIT's operations and investments. The agreement will continue in operation until the third anniversary of the closing date of the IPO and will automatically renew for additional one-year periods unless terminated.

Management Comments

• The company, the operating partnership and the manager desire to amend and restate the original agreement.
• The manager will provide the company with a dedicated Chief Financial Officer and Treasurer, who shall spend all of his or her time on the affairs of the company and the subsidiaries.

Industry Context

This amendment is a standard practice for REITs that utilize external management structures. It reflects the ongoing relationship between the REIT and its manager and ensures that the terms of the agreement are up-to-date and aligned with the company's needs.

Comparison to Industry Standards

• The base management fee of 1.50% is within the typical range for externally managed mortgage REITs.
• The incentive fee structure, based on distributable earnings exceeding a hurdle rate, is also a common practice in the industry.
• The termination fee, while potentially significant, is also a standard provision in management agreements to protect the manager's interests.
• Companies such as AGNC Investment Corp. and Annaly Capital Management also use external management agreements with similar fee structures.

Related Party Transactions

• The acquisition of any Target Assets by the Company or any Subsidiary from Angel Oak Mortgage Lending or other Affiliate of the Manager shall require the approval of the Affiliated Transactions and Risk Committee.

Stakeholder Impact

• Shareholders will benefit from the clarity provided by the amended agreement.
• Employees of the manager who are dedicated to the company will have their roles and responsibilities clearly defined.
• The company's creditors will be impacted by the company's ongoing financial performance and the terms of the management agreement.

Next Steps

• The company will continue to operate under the amended management agreement.
• The Compensation Committee will approve the reimbursements to the manager for personnel costs.
• The Board of Directors will continue to monitor the manager's performance and compliance with the investment guidelines.

Key Dates

Keywords

management agreement, mortgage REIT, external manager, base management fee, incentive fee, personnel, reimbursement, termination fee, Falcons I, LLC, Angel Oak Mortgage REIT