Non-QM Opportunities May Support Future Stability, But Debt And Credit Risks Remain

Key Takeaways

• Strategic capital deployment and favorable economic trends could drive significant growth in net interest income and asset growth.
  
• Risk management and operational strategies position the company to capitalize on investment opportunities and improve earnings sustainability.
  
• Heavy reliance on debt financing and Non-QM loans exposes the company to interest rate fluctuations, credit risk, and potential earnings volatility.

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.

• Angel Oak Mortgage REIT is poised to benefit from a favorable macroeconomic cycle and historical economic trends, suggesting potential for significant growth in capital markets activity, thus potentially increasing net interest income and asset growth.
  
• The company's strategic deployment of capital from recent securitizations is expected to drive compounded net interest income, positively impacting future earnings.
  
• Expected funding cost reductions from the federal funds rate cut and improved cost savings on recent securitizations are likely to enhance net interest margins going forward.
  
• The ability to recycle released capital from securitizations into new, high-quality loan purchases provides the opportunity to further enhance the balance sheet and drive shareholder value, increasing potential earnings.
  
• The disciplined focus on risk management and sound operational strategies positions the company to capitalize on non-QM investment opportunities, potentially expanding revenue streams and improving earnings sustainability.

Angel Oak Mortgage REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Angel Oak Mortgage REIT's revenue will decrease by -25.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 76.6% today to 38.5% in 3 years time.
• Analysts expect earnings to reach $15.3 million (and earnings per share of $0.69) by about December 2027, down from $72.3 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 22.8x on those 2027 earnings, up from 3.0x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 10.6x.
• Analysts expect the number of shares outstanding to decline by 1.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.39%, as per the Simply Wall St company report.

Angel Oak Mortgage REIT Future Earnings Per Share Growth

Risks

• The company faced a distribution of loss, attributed to unrealized gains being excluded and realized losses on hedges impacting earnings. This could indicate volatility in net margins and earnings.
  
• Rate volatility after the quarter ended led to a decline in the mark-to-market valuations of the portfolio, potentially impacting the net income and economic book value negatively.
  
• The company has a substantial portion of its portfolio financed through debt, including warehouse debt and securitizations. If the interest rate environment shifts unfavorably, it could increase interest expenses, negatively affecting net interest income and margins.
  
• Credit risk remains a concern with a potential for increasing delinquencies, as exemplified by delinquencies slightly above 2% in certain loan originations. This could lead to increased credit loss provisions, affecting net income.
  
• A significant portion of the company's returns relies on securitizations and investments in Non-QM loans. Any adverse changes in the demand for these products, or deteriorating credit standards, could impact revenues and earnings volatility.

Valuation

• The analysts have a consensus price target of $12.1 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 2027, revenues will be $39.6 million, earnings will come to $15.3 million, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 9.4%.
• Given the current share price of $9.28, the analyst's price target of $12.1 is 23.3% 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.