Executive Summary / Key Takeaways

• Specialized Niche, Consistent Growth: Angel Oak Mortgage REIT (AOMR) leverages its vertically integrated platform and expertise in non-qualified mortgage (non-QM) loans to drive consistent net interest income growth, with a 5% increase in Q2 2025 year-over-year and an 11% increase year-to-date.
• Strategic Capital Recycling Fuels Returns: AOMR's methodical securitization strategy, including two deals in Q2 2025, consistently frees up capital for new, accretive loan purchases, targeting a 15-20% levered return on equity (ROE) and enhancing dividend coverage.
• Credit Discipline Outperforms Peers: Despite broader market concerns, AOMR's diligent credit selection and underwriting have led to a decrease in 90+ day delinquency rates to 2.35% in Q2 2025, with its securitization shelf demonstrating superior performance compared to rivals.
• Operational Efficiency and Future Expansion: Proactive cost management has reduced operating expenses by 15% year-over-year in Q2 2025, while management anticipates continued net interest income expansion in coming quarters through new capital deployment and potential preferred equity raises.
• Resilient in Volatility, Poised for Opportunity: AOMR's focused approach and strong relationships position it to capitalize on the expanding non-QM market, even amidst macroeconomic uncertainty and increased competition, aiming for long-term shareholder value.

A Specialized Foundation in a Dynamic Mortgage Landscape

Angel Oak Mortgage REIT (AOMR) operates as a distinct player in the U.S. real estate finance market, primarily focused on acquiring and investing in first lien non-qualified residential mortgage (non-QM) loans and other mortgage-related assets. Established in 2018 and publicly traded since 2021, AOMR's core strategy centers on making credit-sensitive investments in newly-originated non-QM loans. These loans are predominantly sourced from its affiliate, Angel Oak Mortgage Lending, a key component of the broader Angel Oak platform. This vertically integrated model, encompassing origination, underwriting, and securitization, is foundational to AOMR's ability to generate attractive risk-adjusted returns for its stockholders through cash distributions and capital appreciation across varying interest rate and credit cycles.

The non-QM market itself is undergoing significant expansion, projected to exceed $100 billion in 2025, up from approximately $80 billion in 2024. This growth is partly fueled by traditional agency lenders shifting focus as agency volumes contract, bringing more participants into the non-QM space. While this has led to a more commoditized market, AOMR's long-standing presence and deep relationships with brokers provide a crucial competitive advantage, allowing it to consistently source high-quality loans without solely competing on price. The company's REIT status, elected in 2019, further enhances its financial flexibility by enabling tax-efficient distributions.

The Technological Edge: Integrated Platform and Data-Driven Credit

AOMR's competitive moat is not built on a single, patented hardware or software, but rather on its sophisticated, vertically integrated operational platform and data-driven credit selection methodology. This "technology" represents a cohesive system that provides several tangible benefits. The proprietary mortgage lending platform of Angel Oak Mortgage Lending offers AOMR proprietary access to non-QM loans, ensuring a consistent supply pipeline. This access comes with transparency over the underwriting process, a critical advantage that allows AOMR to acquire loans with its desired credit and return profile.

The platform leverages Angel Oak's analytical investment tools and extensive relationships in the financial community, enhancing its ability to identify and acquire target assets, including through the secondary market. This integrated approach translates into diligent credit selection, which is a core differentiator. For instance, the AOMT securitization shelf has consistently distinguished itself among peers with regards to delinquency performance, a direct reflection of this expertise. This operational technology enables AOMR to maintain tighter underwriting standards and achieve better loan performance, contributing directly to its financial performance through reduced credit losses and more stable asset valuations. While specific R&D initiatives for new "hard" technologies are not detailed, the continuous refinement of its credit selection and underwriting processes, along with the strategic introduction of new products like Home Equity Lines of Credit (HELOCs), represents an ongoing commitment to innovation within its operational framework. This integrated technological advantage is paramount for investors, as it underpins AOMR's ability to generate superior risk-adjusted returns and maintain its competitive edge in a specialized, yet increasingly competitive, market.

Financial Performance: A Story of Growth and Resilience

AOMR's financial performance in recent quarters underscores the effectiveness of its specialized strategy and integrated platform. In the second quarter of 2025, the company reported net interest income of $9.94 million, marking a 5% increase compared to Q2 2024. This growth was driven by an expansion in both the volume and yields of its target assets, which successfully outpaced the rise in interest expense, including that from new debt issuances. Year-to-date for Q2 2025, net interest income reached $20.03 million, an 11% improvement over the first half of 2024, primarily due to increased balances in its residential mortgage loans in securitization trusts.

The company has also demonstrated strong operational efficiency. Operating expenses, excluding non-cash stock compensation and securitization costs, decreased by 15% in Q2 2025 compared to the prior year's quarter, and a notable 22% for the first six months of 2025 compared to the same period in 2024. These savings are attributed to proactive measures such as in-sourcing accounting functions and vendor contract negotiations. Management expects to maintain similar operating expense levels going forward, which should continue to support profitability.

AOMR's loan portfolio continues to evolve strategically. In Q2 2025, the company purchased $146.6 million of newly-originated non-QM residential mortgage loans, Closed-End Seconds, and HELOCs. These loans carried a weighted average coupon of 8.68%, a combined loan-to-value ratio (CLTV) of 68.4%, and a FICO score of 757. The weighted average coupon of the overall residential whole loan portfolio expanded to 8.37% by the end of Q2 2025, an 82-basis point increase from Q1 2025, largely due to the higher-coupon HELOCs (averaging nearly 11%). This strategic shift towards higher-yielding assets, combined with efficient securitization, is designed to maximize returns.

Book value per share has experienced some volatility. GAAP book value decreased 3.1% to $10.37 in Q2 2025, and economic book value (which fair values all non-recourse securitization obligations) decreased 3.3% to $12.97. This decline was primarily due to unrealized losses on the unsecuritized portfolio and dividend payments. However, management expects book value to be approximately flat as of early Q3 2025, indicating a stabilization. The company's recourse debt-to-equity ratio stood at a manageable 1.1x at the end of Q2 2025, down from 2.3x at the end of Q1 2025 following a significant securitization.

Strategic Initiatives and Future Outlook: Compounding Value

AOMR's forward strategy is built on a disciplined and repeatable playbook designed to compound value for shareholders. A key pillar is its methodical securitization strategy. In Q2 2025, the company completed two securitizations: AOMT 2025-4, a $284.3 million deal where AOMR was the sole contributor, and AOMT 2025-6, a $349.7 million securitization to which AOMR contributed $87.2 million. These transactions are crucial for capital recycling, freeing up cash (e.g., $24.7 million from AOMT 2025-4 and $9.2 million from AOMT 2025-6) that is immediately redeployed into new, accretive loan purchases. Management targets one securitization per quarter, typically ranging around $300 million, with the next one anticipated by the end of Q3 2025.

The company's capital deployment strategy is expected to drive further net interest income expansion. The net proceeds of approximately $40.6 million from the $42.5 million 9.75% Senior Notes due 2030, issued in May 2025, are being deployed into non-QM loans and other target assets. Management explicitly states that this new issuance is expected to be accretive to earnings within the next quarter. AOMR also plans to continue purchasing mid-$200 million of loans per quarter. While senior unsecured debt issuance is currently considered "tapped out," the company is actively evaluating opportunities in the preferred equity markets for future growth capital, noting recent successful issuances by peers. Additionally, AOMR is exploring the resecuritization of older, delevered pre-IPO securitizations (2019/2020 vintages) as a "releveraging exercise" to free up capital and "juice up the returns," aiming for an effective levered ROE of 15-20% on its securitized assets.

AOMR's credit performance continues to be a highlight. The 90+ day delinquency rate decreased to 2.35% in Q2 2025, down from 2.79% in Q1 2025. This normalization, particularly in the 2023 and 2024 securitizations, is seen as a direct result of AOMR's diligent credit selection. Management believes the AOMT securitization shelf will continue to outperform peers in delinquency performance, leading to fewer defaults and lower losses. Prepayment speeds, while accelerating slightly to 11.1% in Q2 2025, remain "well below historical and assumed rates of 20% to 30%." Management anticipates that a significant drop in mortgage rates (100-200 basis points) would be needed to trigger a meaningful increase in prepayments for its current portfolio.

Competitive Positioning and Market Dynamics

AOMR operates in a competitive landscape alongside larger, more diversified mortgage REITs such as Annaly Capital Management (NLY), AGNC Investment Corp. (AGNC), Starwood Property Trust (STWD), and Blackstone Mortgage Trust (BXMT). AOMR's core strength lies in its specialized niche in non-QM residential mortgages, contrasting with NLY's broader agency and non-agency portfolio, AGNC's agency-focused strategy, and STWD's and BXMT's commercial real estate emphasis. This specialization allows AOMR to develop deep expertise and agility in a segment often underserved by larger players.

Quantitatively, AOMR's TTM Net Profit Margin of 34.94% compares favorably to STWD's 18% and significantly outperforms BXMT's negative margin, though it trails NLY's 80% and AGNC's 89% (which benefit from different asset classes and scale). AOMR's Debt/Equity ratio of 0.84 is lower than NLY (1.70), STWD (1.40), and BXMT (4.15), indicating a more conservative leverage profile relative to its equity base. This balanced approach to leverage, combined with its operational efficiencies, positions AOMR to sustain profitability.

The company's vertically integrated platform, which provides proprietary access to loans and transparent underwriting, is a key competitive advantage. This allows for diligent credit selection, leading to the AOMT securitization shelf's notable outperformance in delinquency rates compared to peers. This operational excellence helps AOMR mitigate risks inherent in the non-QM space and maintain strong asset quality. While the non-QM market is becoming more commoditized with new entrants, AOMR's long-standing broker relationships and consistent execution enable it to secure desirable loan volumes.

Navigating the Headwinds: Risks and Mitigation

Despite a generally constructive outlook, AOMR faces several pertinent risks. Macroeconomic uncertainty, particularly surrounding international trade, tariff activity, and the timing and extent of Federal Reserve interest rate cuts, remains a significant concern. These factors can introduce interest rate volatility, which directly impacts portfolio valuations. AOMR mitigates this through its fixed-rate term securitization funding, which locks in funding costs, and by maintaining a diversified portfolio of loans with varying coupons.

Credit performance is an ongoing focus. While 90+ day delinquency rates have shown normalization and AOMR's portfolio is outperforming peers, management acknowledges a return to a "more normalized level of 2% to 3%." The company's strategy of "moving up in credit" for loan originations and purchases, coupled with portfolio-wide low loan-to-value ratios and diligent underwriting, is designed to build protection against potential credit stress. Increased scrutiny around certain loan types, such as DSCR loans, also requires continuous vigilance in underwriting.

Limited capital raise options for senior unsecured notes, as management indicates being "tapped out" at current equity levels, could constrain growth if alternative capital sources like preferred equity do not materialize favorably. However, the company's substantial undrawn loan financing capacity of $931 million as of Q2 2025, along with its continuous capital recycling through securitizations, provides ample liquidity for near-term growth. The potential for California wildfires, as seen in January 2025, poses a localized risk, but AOMR's requirement for property insurance on all loans is expected to substantially mitigate financial losses.

Conclusion

Angel Oak Mortgage REIT presents a compelling investment thesis rooted in its specialized focus on non-QM residential mortgages, underpinned by a robust, vertically integrated operational platform. The company's consistent net interest income growth, driven by strategic capital deployment and efficient securitization, demonstrates its ability to generate attractive returns even in a dynamic market. AOMR's disciplined credit selection and underwriting have resulted in superior delinquency performance compared to its peers, a testament to its operational technology and expertise.

Looking ahead, AOMR is well-positioned to capitalize on the expanding non-QM market. Management's clear guidance for continued net interest income expansion, sustained operational efficiency, and methodical securitization activity points to a resilient and growth-oriented future. While macroeconomic uncertainties and interest rate volatility remain factors, AOMR's proactive risk management, conservative leverage, and commitment to high-quality loan acquisitions reinforce its long-term value proposition. For discerning investors, AOMR offers a unique opportunity to participate in a specialized, high-yield segment of the mortgage market, backed by a proven execution model and a clear path to compounding shareholder value.