Angel Oak(AOMR) - 2024 Q4 - Annual Report

Asset Management and Investment Strategy - As of December 31, 2024, the company's portfolio of target assets was approximately $2.2 billion, predominantly consisting of residential mortgage loans, securitization trusts, and RMBS[67]. - The investment strategy focuses on credit-sensitive investments in newly-originated first lien non-QM loans, primarily sourced from Angel Oak Mortgage Lending[61]. - The company aims to generate attractive risk-adjusted returns through cash distributions and capital appreciation across interest rate and credit cycles[61]. - The investment guidelines allow for flexibility in strategy and target assets, adapting to changing market conditions[65]. - The company is focusing on acquiring and investing in first lien non-QM loans in the U.S. mortgage market, with a significant concentration in California, Florida, Texas, and Georgia, where more than 5$230.1 million of debt outstanding, including $129.5 million under uncommitted loan financing lines with a borrowing capacity of up to$1.1 billion[221]. - The company’s substantial indebtedness could limit its ability to obtain additional financing on acceptable terms, affecting its liquidity and operational flexibility[222]. - Current market conditions may hinder the company's access to debt capital markets, affecting its ability to refinance short-term borrowings[225]. Management and Operational Risks - The company is externally managed by Falcons I, LLC, which provides access to proprietary non-QM loans and underwriting transparency[59]. - The company has no employees; all executive officers are provided through its Manager or affiliates[74]. - The company is highly dependent on its Manager and key personnel from Angel Oak, with no assurance of suitable replacements if the Management Agreement is terminated[79]. - The management fee structure may not align incentives properly, potentially leading to riskier investments that do not optimize returns for stockholders[90]. - The effectiveness of third-party servicers is critical; failures in servicing could lead to higher default rates and negatively impact investment values[185]. Market and Economic Risks - The company is subject to competition from various institutional investors, which may affect its ability to generate satisfactory returns[72]. - The company may face challenges in sourcing non-QM loans due to competition and economic factors, which could limit investment opportunities[100]. - The company anticipates that rising interest rates could adversely affect asset values, increase interest expenses, and lead to a decrease in the volume of target assets available for acquisition[120]. - Changes in fair values of assets and liabilities can significantly impact the company's earnings and book value, with volatility driven by interest rates and market conditions[122][123]. - Natural disasters and climate change pose risks to the value of real estate investments, potentially leading to increased foreclosures and credit losses[111]. Regulatory and Compliance Risks - The company has elected to be taxed as a REIT since December 31, 2019, and intends to maintain compliance with REIT requirements[58]. - The company is subject to U.S. Risk Retention Rules, requiring it to retain a 5% interest in securitizations, which may contribute to asset illiquidity[175]. - The company intends to maintain its exclusion from regulation as an investment company under the Investment Company Act, which imposes significant limitations on its operations and investment strategies[214]. - The company may incur significant costs to comply with new or existing regulatory requirements, which could materially affect its operations[211]. - Legislative actions aimed at preventing foreclosures may reduce the value of mortgage loans and affect the company's returns[186]. Investment Performance and Risks - Non-QM loans may experience higher rates of delinquencies and defaults due to less stringent underwriting guidelines, impacting the company's portfolio performance[102]. - The performance of RMBS investments is influenced by principal payment rates and the timing of those payments, which can be affected by various economic factors[133]. - Investments in distressed or non-performing residential and commercial mortgage loans could increase the company's risk of loss, especially if LTVs exceed 100%[164]. - The company may invest in CRT securities that transfer a portion of the risk associated with credit losses within pools of conventional residential mortgage loans to investors[151]. - The company may face litigation risks related to inaccuracies in disclosure documentation for securitization transactions, which could lead to financial liabilities[239]. Technology and Cybersecurity Risks - The company is highly dependent on information systems, and any failure or cyber-attack could significantly disrupt business operations, potentially leading to material adverse effects[206]. - Cybersecurity breaches pose a significant risk, potentially leading to reputational damage and material costs associated with data breaches[200]. - The financial services industry is experiencing rapid technological changes, and the company's future success will depend on its ability to effectively implement new technology-driven products and services[205]. General Economic Conditions - Future pandemics or public health crises could significantly impact the economy and the company's financial performance[180]. - Changes in the conservatorship of Fannie Mae and Freddie Mac could significantly impact the company's operations and the residential mortgage market[196]. - Fluctuations in benchmark interest rates by the U.S. Federal Reserve could adversely affect the value of the company's investments and overall financial performance[197].