10-Q: Angel Oak Mortgage REIT Q3 Net Income Falls Amid Valuation Shifts

Angel Oak Mortgage REIT, Inc. reported a significant decrease in net income and EPS for Q3 2025 and the nine months ended September 30, 2025, primarily due to lower net unrealized gains, despite growth in net interest income and portfolio assets.

Summary

• Net income allocable to common stockholders for the three months ended September 30, 2025, was $11.41 million, a decrease from $31.20 million in the prior year period.
• Basic earnings per common share decreased to $0.49 for Q3 2025, compared to $1.31 for Q3 2024.
• Net interest income increased by 12.9% to $10.18 million for Q3 2025, up from $9.02 million in Q3 2024, driven by asset acquisitions and reduced financing costs.
• Total realized and unrealized gains (losses), net, significantly decreased to $4.72 million for Q3 2025, from $28.84 million in Q3 2024, primarily due to lower net unrealized gains on trading securities, mortgage loans, and derivatives.
• Operating expenses decreased to $3.19 million for Q3 2025, down from $3.82 million in Q3 2024, reflecting cost savings and reduced servicing fees.
• Total assets increased to $2.64 billion as of September 30, 2025, from $2.27 billion as of December 31, 2024.
• Residential mortgage loans at fair value grew to $425.78 million as of September 30, 2025, from $183.06 million as of December 31, 2024.
• Book value per share increased to $10.60 as of September 30, 2025, from $10.17 as of December 31, 2024, while economic book value per share decreased to $12.72 from $13.10.
• The company purchased $237.6 million of newly-originated non-QM residential mortgage loans, Closed-End Seconds, and HELOCs in Q3 2025, with a weighted average coupon of 7.74% and FICO score of 759.
• A dividend of $0.32 per share of common stock was declared on November 6, 2025, payable on November 26, 2025.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While core net interest income and expense management show positive trends, the significant decline in net income and EPS due to lower unrealized gains, and a decrease in economic book value per share, indicate challenges in overall profitability and valuation compared to the prior year. Strategic activities like securitizations and new financing are positive, but the bottom-line results are weaker.

Positives

• Net interest income increased by 12.9% for the three months ended September 30, 2025, reaching $10.18 million, indicating improved core earnings from its portfolio.
• Operating expenses decreased by 16.7% for the three months ended September 30, 2025, to $3.19 million, reflecting successful cost savings initiatives and resource efficiencies.
• The company significantly grew its residential mortgage loan portfolio, with fair value increasing to $425.78 million as of September 30, 2025, from $183.06 million at year-end 2024.
• Book value per share increased to $10.60 as of September 30, 2025, from $10.17 as of December 31, 2024.
• Successful securitization activities, including the re-securitization of AOMT 2019-2 and AOMT 2019-4 into AOMT 2025-R1, generated $19.4 million in cash for new loan purchases.
• New financing arrangements were secured, including a $200.0 million repurchase facility with Global Investment Bank 4, expanding borrowing capacity.
• Interest rate pricing spreads on existing loan financing facilities with Global Investment Bank 2 and Global Investment Bank 3 were reduced, lowering borrowing costs.

Negatives

• Net income allocable to common stockholders decreased significantly to $11.41 million for Q3 2025, from $31.20 million in Q3 2024.
• Basic earnings per common share fell to $0.49 for Q3 2025, from $1.31 in Q3 2024.
• Total realized and unrealized gains (losses), net, decreased substantially to $4.72 million for Q3 2025, from $28.84 million in Q3 2024, primarily due to lower net unrealized gains.
• Economic book value per share decreased to $12.72 as of September 30, 2025, from $13.10 as of December 31, 2024.
• The company recorded a net realized loss on mortgage loans, derivative contracts, RMBS, and CMBS of $6.56 million for Q3 2025, slightly higher than the $6.34 million loss in Q3 2024.
• Inflation ticked up from 2.7% to 3.0% from June 2025 to September 2025, contributing to macroeconomic uncertainty.

Risks

• Adverse conditions or developments in the financial markets and the economy, including potential U.S. government shutdowns, could impact the ability to acquire target assets.
• Volatility of prevailing interest rates and credit spreads could negatively affect portfolio valuations and profitability.
• Changes in industry dynamics, inflation, interest rates, and the general economy or residential real estate markets could impact business strategies and asset values.
• The availability of attractive loans and other investment opportunities, particularly non-QM loans, may fluctuate.
• The Manager's ability to locate suitable investments, manage the portfolio, and implement the company's strategy is crucial for performance.
• The ability to profitably execute securitization transactions is essential for long-term financing and returns.
• Obtaining and maintaining financing arrangements on favorable terms, or at all, remains a key risk.
• Declines in the fair value of investments and the adequacy of collateral securing investments could lead to losses.
• Increased rates of default and/or decreased recovery rates on investments pose a credit risk.
• Changes in prepayment rates on investments could affect expected returns.
• The departure of senior management members could disrupt operations and strategy.
• Acts of God, pandemics, acts of war or terrorism, and military conflicts could cause unanticipated performance declines and market disruptions.
• Impact of and changes in governmental regulations, tax laws, and accounting principles could affect financial results.
• The level of governmental involvement in the U.S. mortgage market and future changes with Fannie Mae or Freddie Mac introduce uncertainty.
• The effectiveness of hedging strategies in protecting against interest rate volatility is not guaranteed.
• The ability to make distributions to stockholders at expected levels or at all is subject to various factors.
• Maintaining qualification as a REIT for U.S. federal income tax purposes is complex and critical.
• Maintaining exclusion from regulation as an investment company under the Investment Company Act of 1940 is a continuous requirement.

Future Outlook

The company expects to continue purchasing newly originated loans and HELOCs to support overall portfolio valuations and securitization execution. Current projections anticipate two more interest rate cuts in 2025, although the recent government shutdown introduces uncertainty. The company will continue to utilize loan financing lines to acquire and accumulate mortgage loans pending securitization, and fixed-rate term securitization funding for long-term financing. They may also seek additional capital through public or private offerings of equity or debt securities.

Management Comments

• "We generated a 12.9% increase in net interest income in the third quarter of 2025 as compared to the third quarter of 2024, supported by the continued acquisition of accretive assets and reductions in financing facility pricing."
• "Compared to the second quarter of 2025, net interest income grew by 2.4%, demonstrating that earnings from assets purchased with the proceeds of our May 2025 offering of $42.5 million in aggregate principal amount of our 9.750% Senior Notes due 2030 (the 2030 Notes) outpaced the incremental interest expense and produced a positive return."
• "Our net unrealized gain for the quarter ended September 30, 2025 was primarily due to increases in valuations of our residential mortgage loans and residential mortgage loans in securitization trusts during the quarter."
• "We expect to continue to purchase newly originated loans and HELOCs, which should continue to support overall portfolio valuations and securitization execution going forward."

Industry Context

The macroeconomic environment in Q3 2025 was characterized by resilience despite headwinds and tailwinds related to inflation, consumer spending, and geopolitical tension. Inflation ticked up to 3.0%, leading the Federal Reserve to cut the federal funds rate by 25 basis points in September 2025 (to 4.00%-4.25%) and another 25 basis points in October 2025 (to 3.75%-4.00%). This dovish approach led to decreased mortgage rates, which is a welcome development for prospective homebuyers and is expected to positively impact newly originated asset pricing. Securitization markets showed robust activity and tightening execution spreads. Treasury yields decreased across two, five, and ten-year terms.

Comparison to Industry Standards

• The company's strategy of making credit-sensitive investments primarily in newly originated non-QM loans sourced from its proprietary mortgage lending platform, Angel Oak Mortgage Lending, positions it within a specialized segment of the mortgage REIT industry. Angel Oak Mortgage Lending is noted as a market leader in non-QM loan production.
• The company's ability to generate attractive risk-adjusted returns through cash distributions and capital appreciation across interest rate and credit cycles is a common objective for mortgage REITs, but its focus on non-QM loans differentiates its risk/return profile from REITs focused on agency MBS.
• The use of securitization transactions to obtain long-term non-recourse financing for whole mortgage loans is a standard practice in the non-QM mortgage market, allowing the company to lock in funding costs and manage interest rate risk.

Corporate Governance

Related Party Transactions

• The company has residential mortgage loan purchase agreements with various affiliates, with $119.78 million in loans purchased from affiliates during the nine months ended September 30, 2025.
• The company participates in securitization transactions with other affiliates of Angel Oak Capital.
• The company pays a fixed management fee to its Manager, Falcons I, LLC (an affiliate), equal to 1.5% per annum of the company's Equity.
• The Manager is entitled to an incentive fee based on Distributable Earnings, though no incentive fee has been earned to date.
• The company reimburses the Manager for certain general and administrative expenses, primarily payroll reimbursements.

Stakeholder Impact

• Shareholders: Experience lower EPS and net income year-over-year, but benefit from an increased book value per share and a declared dividend. The decrease in economic book value per share might concern some investors regarding underlying asset valuations.
• Employees (via Manager): The New Management Agreement includes a revision to the CEO's reimbursement, and operating expenses incurred with affiliates (substantially payroll reimbursements) decreased slightly due to resource efficiencies.
• Customers (borrowers): The company's continued acquisition of non-QM loans and HELOCs provides financing options for higher-quality borrowers.
• Creditors/Lenders: New financing facilities and extensions of existing ones, along with reduced interest rate pricing spreads, indicate continued access to capital and favorable terms, strengthening the company's liquidity position.
• Affiliates: Continued residential mortgage loan purchases and participation in securitization transactions with affiliates demonstrate ongoing business relationships and mutual benefit.

Next Steps

• Continue to purchase newly originated loans and HELOCs to support portfolio valuations and securitization execution.
• Utilize proceeds from securitizations and cash released for new loan purchases and operational purposes.
• Monitor and adjust plans in response to changes in market conditions and macroeconomic environment.
• Potentially utilize other types of borrowings or raise additional capital through public or private offerings of equity or debt securities.
• Pay a dividend of $0.32 per share of common stock on November 26, 2025, to stockholders of record as of November 18, 2025.

Key Dates

Recommendation

The company demonstrates strong operational execution with increased net interest income, significant portfolio growth, and effective cost management. However, the substantial year-over-year decline in net income and EPS, primarily driven by lower net unrealized gains on its portfolio, presents a mixed financial picture. While the core business is improving, market valuation changes have negatively impacted the bottom line and economic book value per share. The dividend declaration is positive, but the overall performance warrants a 'Hold' recommendation, suggesting investors monitor how the company navigates market volatility and translates asset growth into consistent, higher net profitability.

Keywords

Residential Mortgage REIT, Non-QM Loans, Mortgage-Backed Securities, Securitization, Real Estate Finance, Interest Rate Risk, Credit Risk, REIT, Financial Performance, Portfolio Management, Capital Markets, Mortgage Lending