Non-QM Origination Will Climb While Securitization Concerns Loom

Key Takeaways

• Demographic trends and tight housing supply drive sustainable loan demand, stable collateral values, and mitigate credit risk for ongoing earnings stability.
  
• Angel Oak's expertise in non-QM loans and robust securitization platform support efficient capital use and margin expansion through active deal flow and favorable market conditions.
  
• Heavy exposure to non-qualified mortgages and securitization market risks, combined with competition and market volatility, threaten asset growth, earnings, and share price stability.

Catalysts

A real estate finance company, focuses on acquiring and investing in first lien non- qualified mortgage loans and other mortgage-related assets in the United States mortgage market.

• Growing origination volumes in the non-QM loan market, supported by demographic tailwinds such as millennial and Gen Z household formation, underpin a sustainable demand pipeline, suggesting the company can expand its loan portfolio and drive ongoing revenue growth.
  
• Angel Oak's specialization in non-QM loan origination and its proven securitization platform enable efficient capital recycling and higher-yield asset deployment, providing potential for net interest margin expansion and increased earnings as securitization opportunities remain robust.
  
• Tight housing supply and upward pressure on home prices are strengthening collateral values and mitigating default risk, which supports lower credit losses, more stable earnings, and preserved book value in the loan and securities portfolio.
  
• Reduced delinquency rates and outperformance of recently securitized loans demonstrate the effectiveness of Angel Oak's data-driven credit management, likely leading to improved net margins and lower provisions for loan losses.
  
• Industry-wide preference for yield and continued institutional participation in non-QM securitization markets support active deal flow and favorable pricing, enhancing revenue potential and market liquidity for Angel Oak's growing asset base.

Angel Oak Mortgage REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Angel Oak Mortgage REIT's revenue will decrease by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 64.6% today to 63.2% in 3 years time.
• Analysts expect earnings to reach $27.5 million (and earnings per share of $1.35) by about August 2028, down from $37.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, up from 6.1x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 13.5x.
• Analysts expect the number of shares outstanding to grow by 1.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.99%, as per the Simply Wall St company report.

Angel Oak Mortgage REIT Future Earnings Per Share Growth

Risks

• Heavy concentration in non-qualified mortgage (non-QM) loans exposes Angel Oak Mortgage REIT to higher credit risk, as a downturn in the housing market or macroeconomic environment could increase delinquencies and defaults, potentially reducing net earnings and threatening dividend sustainability.
  
• Reliance on securitization markets and ongoing capital recycling for portfolio growth leaves Angel Oak vulnerable to adverse shifts in securitization demand, tightening capital markets, or rising funding costs, which could constrain asset growth and compress net interest margins over time.
  
• Book value per share declined in the most recent quarter, and unrealized losses on the unsecuritized portfolio as well as mark-to-market impacts from market volatility pose ongoing risks to long-term book value stability and thus the company's share price performance.
  
• Rising industry competition from both existing mortgage REITs allocating more capital to non-QM origination and potential new entrants could compress spreads, lower pricing power, and diminish revenue growth prospects for Angel Oak over the long term.
  
• Potential increases in prepayment speeds if interest rates decline or capital market conditions change could adversely affect the yield on Angel Oak's portfolio and reduce projected net interest income and earnings growth.

Valuation

• The analysts have a consensus price target of $11.917 for Angel Oak Mortgage REIT based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $10.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $43.5 million, earnings will come to $27.5 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 9.0%.
• Given the current share price of $9.54, the analyst price target of $11.92 is 19.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.