What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-15 compared with 2021-08-13 · 188 added, 147 removed, 548 unchanged (38% of the section changed)

14 unchanged sentences

• the severity and duration of the COVID-19 pandemic, actions that have been taken and may be taken in the future by governmental authorities to contain the COVID-19 outbreak, including variants and resurgences thereof, or to mitigate its impact and the adverse impacts that the COVID-19 pandemic has had, and may continue to have, on the global economy and on our business, financial results and performance;

• the effects of adverse conditions or developments in the financial markets and the economy, including the impact of the COVID-19 pandemic, upon our ability to acquire non-QM loans sourced from Angel Oak’s proprietary mortgage lending platform, Angel Oak Mortgage Lending, and other target assets;

• the effects of adverse conditions or developments in the financial markets and the economy upon our ability to acquire non-QM loans sourced from Angel Oak’s proprietary mortgage lending platform, Angel Oak Mortgage Lending, and other target assets;

• the level and volatility of prevailing interest rates and credit spreads;

14 unchanged sentences

• conflicts with Angel Oak, including our Manager and its personnel, including our officers, and entities managed by Angel Oak;

• events, contemplated or otherwise, such as acts of God, including hurricanes, earthquakes, and other natural disasters, pandemics such as COVID-19, acts of war and/or terrorism and others that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investments;

• events, contemplated or otherwise, such as acts of God, including hurricanes, earthquakes, and other natural disasters, pandemics, acts of war and/or terrorism and others that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investments;

• impact of and changes in governmental regulations, tax laws and rates, accounting principles and policies and similar matters;

18 unchanged sentences

Our objective is to generate attractive risk-adjusted returns for our stockholders, through cash distributions and capital appreciation, across interest rate and credit cycles.

We are externally managed and advised by our Manager, a registered investment adviser under the Investment Advisers Act and an affiliate of Angel Oak Capital, a leading alternative credit manager with market leadership in mortgage credit that includes asset management, lending and capital markets.

Angel Oak Capital was established in 2009 and had approximately $13.0 billion in assets under management as of June 30, 2021 across its private credit strategies, public funds, and separately managed accounts, including $7.6 billion of mortgage‑related assets.

Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of June 30, 2021, had originated over $10.4 billion in total non‑QM loan volume since its inception in 2011.

We are externally managed and advised by the Manager, a registered investment adviser under the Investment Advisers Act of 1940 and an affiliate of Angel Oak Capital, a leading alternative credit manager with market leadership in mortgage credit that includes asset management, lending and capital markets.

Angel Oak Capital was established in 2009 and had approximately $13.3 billion in assets under management as of September 30, 2021 across its private credit strategies, public funds, and separately managed accounts, including approximately $8.0 billion of mortgage‑related assets.

Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of September 30, 2021, had originated over $11.6 billion in total non‑QM loan volume since its inception in 2011.

Angel Oak is headquartered in Atlanta and has over 850 employees across its enterprise.

Through our relationship with our Manager, we benefit from Angel Oak’s vertically integrated platform and in‑house expertise, providing us with the resources that we believe are necessary to generate attractive risk‑adjusted returns for our stockholders.

Through our relationship with the Manager, we benefit from Angel Oak’s vertically integrated platform and in‑house expertise, providing us with the resources that we believe are necessary to generate attractive risk‑adjusted returns for our stockholders.

Angel Oak Mortgage Lending provides us with proprietary access to non‑QM loans, as well as transparency over the underwriting process and the ability to acquire loans with our desired credit and return profile.

3 unchanged sentences

federal income tax purposes.

We believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended (the Code”).

We believe that we have been organized and operated, and we intend to continue to operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue

Code of 1986, as amended (the Code”).

Our qualification as a REIT, and maintenance of such qualification, will depend on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our stock.

2 unchanged sentences

We expect to derive our returns primarily from the difference between the interest we earn on loans we make and our cost of capital, as well as the returns from bonds, including risk retention securities, that are retained after securitizing the underlying loan collateral.

Recent Developments

We completed our Initial Public Offering

On June 21, 2021, the Company completed its initial public offering (the “IPO”) of 7,200,000 shares of common stock, $0.01 par value per share (“common stock”), at an initial public offering price of $19.00 per share for total proceeds of approximately $136.8 million, excluding the underwriting discounts and commissions and offering expenses of the IPO, each of which was paid by Angel Oak Capital, pursuant to the Registration Statement filed with the SEC under the Securities Act.

The common stock of the Company trades on the New York Stock Exchange under the ticker symbol “AOMR”.

Concurrently with the completion of the IPO, the Company sold an additional 2,105,263 shares of common stock to CPPIB Credit Investments Inc.

in a private placement at $19.00 per share, for total proceeds of approximately $40.0 million (the “concurrent private placement”).

Nomura Loan Financing Line

On August 6, 2021, the Company and one of its subsidiaries entered into an amendment to its loan financing line with Nomura Corporate Funding Americas, LLC to, among other matters:

(a) extend the expiration date from December 3, 2021 to August 5, 2022;

(b) add one-month LIBOR as a base interest rate for certain loans;

and (c) change the interest rate spread to 1.70% to 3.50%.

Dividend Declared

On August 12, 2021, the Company declared a dividend of $0.12 per share of common stock, to be paid on August 31, 2021 to common stockholders of record as of August 23, 2021.

Key Financial Metrics

As a real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Distributable Return on Average Equity and book value per share.

As a real estate finance company, we believe the key financial measures and indicators for our business are Distributable Earnings, Distributable Earnings Return on Average Equity and book value per share.

Distributable Earnings

9 unchanged sentences

For information on the fees that are payable to the Manager under the Management Agreement, see “Our Manager and the Management Agreement — The Management Agreement” in the Prospectus.

Distributable Earnings were approximately $2.0 million and $2.2 million for the three months ended June 30, 2021 and 2020, respectively, and $6.9 million and $(5.5) million for the six months ended June 30, 2021 and 2020, respectively.

The table below sets forth a reconciliation of net income allocable to common stockholder(s), calculated in accordance with GAAP, to Distributable Earnings for the three and six months ended June 30, 2021 and 2020:

Three Months Ended Six Months Ended

June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

Distributable Earnings were approximately $4.9 million and $3.6 million for the three months ended September 30, 2021 and 2020, respectively, and $11.8 million and $(1.9) million for the nine months ended September 30, 2021 and 2020, respectively.

The table below sets forth a reconciliation of net income allocable to common stockholder(s), calculated in accordance with GAAP, to Distributable Earnings for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended Nine Months Ended

September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

(in thousands)

7 unchanged sentences

Non-cash equity compensation expense 833 — 924 —

Inventive fee earned by the Manager — — — —

Incentive fee earned by the Manager — — — —

Realized gains (losses) on terminations of interest rate swaps — — — —

8 unchanged sentences

Our methodology for calculating Distributable Earnings Return on Average Equity may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Distributable Earnings Return on Average Equity may not be comparable to similar measures presented by other REITs.

Set forth below is our computation of Distributable Earnings Return on Average Equity for the three months and six months ended June 30, 2021 and 2020:

Three Months Ended Six Months Ended

June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

Set forth below is our computation of Distributable Earnings Return on Average Equity for the three months and nine months ended September 30, 2021 and 2020:

Three Months Ended Nine Months Ended

September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

($ in thousands)

3 unchanged sentences

Book Value per Share

The following table sets forth the calculation of our book value per share as of June 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020

The following table sets forth the calculation of our book value per share as of September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

(in thousands except for share and per share data)

5 unchanged sentences

Results of Operations

Our results of operations presented herein for the three and six months ended June 30, 2021 and the comparable periods ended June 30, 2020 do not reflect the expenses typically associated with being a public company, including the payment of increased directors’ fees for our independent directors and the expenses incurred in complying with the reporting and other requirements of the Exchange Act;

the payment of a base management fee and an incentive fee to our Manager as a result of differences in the way fees and expense reimbursements are calculated under the management agreement as compared to the pre-IPO management agreement as described in our Registration Statement, full periods of equity compensation expenses, and increased legal and accounting fees.

Additionally, pursuant to the management agreement, we will be required to reimburse our Manager for its operating expenses, including third‑party expenses, incurred on our behalf;

and our Manager will also be entitled to reimbursement for costs of the wages, salaries, and benefits incurred by our Manager for our dedicated Chief Financial Officer and Treasurer and a proportionate amount of the costs of the wages, salaries, and benefits of our Chief Executive Officer and President (who has dedicated a substantial majority of his business time to us upon the completion of our IPO) based on the amount of his business time spent on our matters, and any other dedicated or partially dedicated employees based on the percentage of each such person’s working time spent on matters related to us.

Three Months Ended June 30, 2021 and 2020

The following table sets forth a summary of our results of operations for the three months ended June 30, 2021 and 2020:

Three Months Ended June 30, 2021 Three Months Ended June 30, 2020

Our results of operations presented herein for the three and nine months ended September 30, 2021 and the comparable periods ended September 30, 2020 do not reflect the expenses typically associated with being a public company, including the payment of increased directors’ fees for our independent directors and the expenses incurred in complying with the reporting and other requirements of the Securities Exchange Act of 1934, the payment of a base management fee and an incentive fee to the Manager as a result of differences in the way fees and expense reimbursements are calculated under the Management Agreement as compared to the pre-IPO management agreement as described in our Prospectus, full periods of equity compensation expenses, and increased legal and accounting fees.

Additionally, pursuant to the Management Agreement, we will be required to reimburse the Manager for its operating expenses, including third‑party expenses, incurred on our behalf;

and the Manager will also be entitled to reimbursement for costs of the wages, salaries, and benefits incurred by the Manager for our dedicated Chief Financial Officer and Treasurer and a proportionate amount of the costs of the wages, salaries, and benefits of our Chief Executive Officer and President (who, upon completion of the IPO, has dedicated a substantial majority of his business time to us) based on the percentage of his business time spent on our matters, and any other dedicated or partially dedicated employees based on the percentage of each such person’s working time spent on matters related to us.

Three Months Ended September 30, 2021 and 2020

The following table sets forth a summary of our results of operations for the three months ended September 30, 2021 and 2020:

Three Months Ended September 30, 2021 Three Months Ended September 30, 2020

(in thousands)

5 unchanged sentences

Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans (7,144) (3,102)

Net unrealized gain (loss) on derivative contracts and mortgage loans 4,813 24,009

Net unrealized gain on derivative contracts and mortgage loans 6,821 616

TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (323) (2,486)

7 unchanged sentences

NET INCOME ALLOCABLE TO COMMON STOCKHOLDER(S) $ 6,340 $ 4,238

Other comprehensive income (loss) 3,085 (944)

Other comprehensive income 1,818 5,171

TOTAL COMPREHENSIVE INCOME $ 8,158 $ 9,409

Net Interest Income

The following table sets forth the components of net interest income for the three months ended June 30, 2021 and 2020:

Three Months Ended June 30, 2021 Three Months Ended June 30, 2020

The following table sets forth the components of net interest income for the three months ended September 30, 2021 and 2020:

Three Months Ended September 30, 2021 Three Months Ended September 30, 2020

(in thousands)

1 unchanged sentence

Residential mortgage loans $ 6,601 $ 461

Residential mortgage loans in securitization trust 2,592 —

Commercial mortgage loans 112 593

5 unchanged sentences

Notes payable 1,873 682

Non-recourse securitization obligation, collateralized by residential mortgage loans 642 —

Repurchase facilities 84 106

1 unchanged sentence

Net interest income $ 12,988 $ 8,599

Net interest income for the three months ended June 30, 2021 and 2020 was $10.3 million and $9.2 million, respectively.

Net interest income increased due to the additional average portfolio balance in the three months ended June 30, 2021 as compared to the same period in 2020, primarily due to the composition of the portfolio during June 30, 2021 having a lower average balance of loan and repurchase financing facilities, due to the timing of the use of those financing facilities, which decreased the interest expense associated with borrowings.

Net interest income for the three months ended September 30, 2021 and 2020 was $13.0 million and $8.6 million, respectively.

Net interest income increased due to the additional average portfolio balance in the three months ended September 30, 2021 as compared to the same period in 2020, primarily due to the composition of the portfolio during September 30, 2021 having a higher average balance of loans and financing facilities, which increased the interest expense associated with borrowings.

Total Realized and Unrealized Gains (Losses)

The components of total realized and unrealized gains (losses), net for the three months ended June 30, 2021 and 2020 are set forth as follows:

Three Months Ended June 30, 2021 Three Months Ended June 30, 2020

The components of total realized and unrealized gains (losses), net for the three months ended September 30, 2021 and 2020 are set forth as follows:

Three Months Ended September 30, 2021 Three Months Ended September 30, 2020

(in thousands)

Gain on securitization $ — $ 1,813

Realized loss on RMBS, net (4,834) (1,523)

Realized gain (loss) on RMBS, net $ 353 $ (2,945)

Realized loss on CMBS (250) —

Realized loss on interest rate futures (2,546) (3,127)

Realized gain on interest rate futures 39 —

Realized and unrealized loss on TBAs (4,074) —

Realized and unrealized gain on residential mortgage loans 3,454 360

Realized and unrealized gain on commercial mortgage loans 74 254

Realized and unrealized loss on U.S.

Treasury bills — (5)

Realized and unrealized gain (loss) on commercial mortgage loans (43) 86

Unrealized appreciation on interest rate futures 198 13

Total realized and unrealized gains (losses), net $ (323) $ (2,486)

For the three months ended June 30, 2021 and 2020, total realized and unrealized gains (losses), net were $(5.4) million and $21.2 million, respectively.

In the three months ended June 30, 2020, we securitized a substantial amount of residential loans, which allowed us to recover a significant amount of unrealized losses from residential loan valuation, which had previously experienced significant decreases in market value due to the financial effects of the onset of the COVID‑19 pandemic.

The three months ended June 30, 2021 presented a less volatile market environment as substantially all the credit and asset valuation issues related to the financial effects of the COVID-19 pandemic had lessened.

For the three months ended September 30, 2021 and 2020, total realized and unrealized gains (losses), net were $(0.3) million and $(2.5) million, respectively.

In the three months ended September 30, 2020, we experienced market volatility in our residential mortgage-backed securities (“RMBS”) portfolio due to the COVID-19 pandemic.

The three months ended September 30, 2021 presented a less volatile market environment as substantially all the credit and asset valuation issues related to the financial effects of the COVID-19 pandemic had lessened.

During the three months ended September 30, 2021, we entered into “To Be Announced” forward-settling of mortgage-backed securities trades (“TBAs”), the losses of which were partially offset by realized and unrealized gains on residential mortgage loans.

Operating and Investment Expenses

For the three months ended June 30, 2021 and 2020, our operating and investment expenses were $0.9 million and $0.7 million, respectively.

The increase in operating expenses in the three month period ended June 30, 2021 was primarily due to an increase in whole loan acquisition diligence costs, as we purchased more whole loans in the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

For the three months ended September 30, 2021 and 2020, our operating and investment expenses were $3.8 million and $0.3 million, respectively.

The increase in operating expenses in the three month period ended September 30, 2021 was due to several factors, including an increase in insurance costs due to being a public company.

Additionally, whole loan acquisition diligence costs increased over the comparative period as we purchased more whole loans in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

Lastly, we also experienced an increase in loan administration costs, as we held more loans during that same comparative period.

Operating Expenses Incurred with Affiliate

For the three months ended June 30, 2021 and 2020, our operating expenses incurred with affiliate were $0.5 million and $0.3 million, respectively.

The increase in these expenses was primarily due to an increase in the allocated time of partially dedicated employees’ compensation being reimbursed by us during 2021.

Securitization costs

For the three months ended June 30, 2021, we did not incur any securitization costs, as we did not participate in any securitization transactions during this period.

For the three months ended June 20, 2020,we incurred securitization costs of $2.1 million.

During the three months ended June 30, 2020, we had participated in one securitization transaction.

For the three months ended September 30, 2021 and 2020, our operating expenses incurred with affiliate were $0.6 million and $0.6 million, respectively.

These expenses were primarily due to the allocated time of partially dedicated employees’ compensation being reimbursed by us, which remained stable during the comparative periods.

Securitization expenses

For the three months ended September 30, 2021, we did not incur any securitization expenses, as we were the sole participant in a securitization of a consolidated VIE during this time period which required capitalization of securitization costs, which are included as a contra-liability to the financing obligation recognized on our condensed consolidated balance sheet as of September 30, 2021.

This contra-liability amortizes over a two-year period, and the amortization for the three months ended September 30, 2021 was de minimis.

For the three months ended September 30, 2020, we did not participate in any securitization transactions.

Management Fee Incurred with Affiliate

We are required to pay our Manager, in cash, a management fee pursuant to certain management agreements, including the pre-IPO management agreement and the post-IPO management agreement.

The management fee payable under the pre-IPO management agreement was calculated based on the Actively Invested Capital of the limited partners in Angel Oak Mortgage Fund (as defined in the limited partnership agreement of Angel Oak Mortgage Fund), which we believe is reflective of a typical management fee payable by a private investment vehicle.

The pre-IPO management agreement terminated on completion of our IPO, the concurrent private placement and our formation transactions, and we and our operating partnership subsequently entered into the management agreement with our Manager effective as of the completion of our IPO.

Pursuant to the management agreement, our Manager will be entitled to a base management fee, which will be calculated based on our Equity, and an incentive fee based on certain performance criteria, as well as a termination fee in certain cases and reimbursement of certain expenses as described in the management agreement.

See “Our Manager and the Management Agreement — The Management Agreement” in our Prospectus for additional information regarding the fees that will be payable to our Manager under the management agreement subsequent to the date of our IPO on June 21, 2021.

For the three months ended June 30, 2021 and 2020, our management fee incurred with affiliate was $1.3 million and $1.0 million, respectively.

The increase is due to the increase in our average equity for the three months ended June 30, 2021 as compared to the same period in 2020.

Six Months Ended June 30, 2021 and 2020

The following table sets forth a summary of our results of operations for the six months ended June 30, 2021 and 2020:

Six Months Ended

June 30, 2021 Six Months Ended

June 30, 2020

Prior to the completion of the IPO, we were required to pay the Manager, in cash, a management fee pursuant to a pre-IPO management agreement among us, the Manager and Angel Oak Mortgage Fund, LP (“Angel Oak Mortgage Fund”), our sole common stockholder prior the IPO (the “pre-IPO management agreement”).

The management fee payable under the pre-IPO management agreement was calculated based on the Actively Invested Capital (as defined in the pre-IPO management agreement) of the limited partners in Angel Oak Mortgage Fund, which we believe is reflective of a typical management fee payable by a private investment vehicle.

The pre-IPO management agreement terminated on the completion of the IPO, and we and the Operating Partnership subsequently entered into the Management Agreement with the Manager effective as of the completion of the IPO.

Pursuant to the Management Agreement, the Manager is entitled to a base management fee, which is calculated based on our Equity (as defined in the Management Agreement), and an incentive fee based on certain performance criteria, as well as a termination fee in certain cases and reimbursement of certain expenses as described in the Management Agreement.

See “Our Manager and the Management Agreement - The Management Agreement” in the Prospectus for additional information regarding the fees that are payable to our Manager under the Management Agreement.

For the three months ended September 30, 2021 and 2020, our management fee incurred with affiliate was $1.8 million and $1.0 million, respectively.

The increase is due to the increase in our average equity for the three months ended September 30, 2021 as compared to the same period in 2020.

Nine Months Ended September 30, 2021 and 2020

The following table sets forth a summary of our results of operations for the nine months ended September 30, 2021 and 2020:

Nine Months Ended

September 30, 2021 Nine Months Ended

September 30, 2020

(in thousands)

18 unchanged sentences

Net Interest Income

The following table sets forth the components of net interest income for the six months ended June 30, 2021 and 2020:

Six Months Ended June 30, 2021 Six Months Ended June 30, 2020

The following table sets forth the components of net interest income for the nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020

(in thousands)

1 unchanged sentence

Residential mortgage loans $ 13,962 $ 13,906

Residential mortgage loans in securitization trust 2,592

Commercial mortgage loans 469 1,839

5 unchanged sentences

Notes payable 4,332 6,672

Non-recourse securitization obligation, collateralized by residential mortgage loans 642

Repurchase facilities 303 782

1 unchanged sentence

Net interest income $ 32,486 $ 24,475

Net interest income for the six months ended June 30, 2021 and 2020 was $19.5 million and $15.9 million, respectively.

Net interest income increased due to the additional average portfolio balance in the six months ended June 30, 2021 as compared to the same period in 2020, while interest expense decreased due to the timing of the use of loan and repurchase financing facilities, which decreased the interest expense associated with borrowings during the six months ended June 30, 2021 as compared to 2020.

Net interest income for the nine months ended September 30, 2021 and 2020 was $32.5 million and $24.5 million, respectively.

Net interest income increased due to the additional average portfolio balance in the nine months ended September 30, 2021 as compared to the same period in 2020, while interest expense decreased due to the timing of the use of loan and repurchase financing facilities, which decreased the interest expense associated with borrowings during the nine months ended September 30, 2021 as compared to 2020.

Total Realized and Unrealized Gains (Losses)

The components of total realized and unrealized gains (losses), net for the six months ended June 30, 2021 and 2020 are set forth as follows:

Six Months Ended June 30, 2021 Six Months Ended June 30, 2020

The components of total realized and unrealized gains (losses), net for the nine months ended September 30, 2021 and 2020 are set forth as follows:

Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020

(in thousands)

10 unchanged sentences

Total realized and unrealized gains (losses), net $ (3,505) $ (23,086)

For the six months ended June 30, 2021 and 2020, total realized and unrealized gains (losses), net were $(3.2) million and $(20.6) million, respectively.

In the six months ended June 30, 2020, we experienced significant decreases in market values of the assets including whole loans, residential mortgage-backed securities (“RMBS”), and interest rate futures due to the financial effects of the onset of the COVID‑19 pandemic.

For the nine months ended September 30, 2021 and 2020, total realized and unrealized gains (losses), net were $(3.5) million and $(23.1) million, respectively.

In the nine months ended September 30, 2020, we experienced significant decreases in market values of the assets including whole loans, RMBS, and interest rate futures due to the financial effects of the onset of the COVID‑19 pandemic.

months ended September 30, 2021 presented a less volatile market environment as substantially all the credit and asset valuation issues related to the financial effects of the COVID-19 pandemic had lessened.

During the nine months ended September 30, 2021, realized and unrealized gain on residential mortgage loans was partially offset by realized and unrealized losses on TBAs.

Operating and Investment Expenses

For the six months ended June 30, 2021 and 2020, our operating and investment expenses were $1.5 million and $1.6 million, respectively.

The relatively flat operating expenses in the six month period ended June 30, 2021 as compared to 2020 was primarily due to relatively stable operating expenses incurred during the comparative six month periods.

For the nine months ended September 30, 2021 and 2020, our operating and investment expenses were $5.3 million and $2.0 million, respectively.

The increase in operating expenses in the nine month period ended September 30, 2021 was due to several factors, including an increase in insurance costs due to being a public company.

Additionally, whole loan acquisition diligence costs increased over the comparative period as we purchased more whole loans in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Lastly, we also experienced an increase in loan administration costs, as we held more loans during that same comparative period.

Operating Expenses Incurred with Affiliate

For the six months ended June 30, 2021 and 2020, our operating expenses incurred with affiliate were $1.0 million and $0.5 million, respectively.

The increase in these expenses was primarily due to an increase in the allocated time of partially dedicated employees’ compensation being reimbursed by us during 2021.

Securitization costs

For the six months ended June 30, 2021, we did not incur any securitization costs, as we did not participate in any securitization transactions during this period.

For the six months ended June 20, 2020,we incurred securitization costs of $2.1 million.

During the six months ended June 30, 2020, we had participated in one securitization transaction..

For the nine months ended September 30, 2021 and 2020, our operating expenses incurred with affiliate were $1.6 million and $1.1 million, respectively.

The increase in these expenses was primarily due to an increase in the allocated time of partially dedicated employees’ compensation being reimbursed by us during the comparative nine month period in 2021.

Securitization expenses

For the nine months ended September 30, 2021, we did not incur any securitization expenses, as we were the sole participant in a securitization of a consolidated VIE during this time period which required capitalization of securitization costs, which are included as a contra-liability to the financing obligation recognized on our condensed consolidated balance sheet as of September 30, 2021.

This contra-liability amortizes over a two year period, and the amortization for the nine months ended September 30, 2021 was de minimis.

For the nine months ended September 30, 2020, securitization costs of approximately $2.1 million were incurred in a single securitization in an unconsolidated VIE in which we participated along with certain affiliates.

Management Fee Incurred with Affiliate

We are required to pay our Manager, in cash, a management fee pursuant to certain management agreements, including the pre-IPO management agreement and the post-IPO management agreement.

For the six months ended June 30, 2021 and 2020, our management fee incurred with affiliate was $2.2 million and $1.5 million, respectively.

The increase is due to the increase in our average equity for the six months ended June 30, 2021 as compared to the same period in 2020.

For the nine months ended September 30, 2021 and 2020, our management fee incurred with affiliate was $4.0 million and $2.5 million, respectively.

The increase is due to the increase in our average equity for the nine months ended September 30, 2021 as compared to the same period in 2020.

Our Portfolio

As of June 30, 2021, our portfolio consisted of approximately $1.3 billion of residential mortgage loans, RMBS, and other target assets.

As of September 30, 2021, our portfolio consisted of approximately $1.7 billion of residential mortgage loans, RMBS, and other target assets.

“Target assets” is defined as the total investment portfolio excluding U.S.

Treasury bills.

The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of June 30, 2021:

The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of September 30, 2021:

Fair Value Collateralized Debt Allocated Capital % of Total Capital

1 unchanged sentence

Residential mortgage loans $ 723,139 $ 550,232 $ 172,907 34.5 %

Residential mortgage loans in securitization trust 319,812 290,529 $ 29,283 5.8 %

Commercial mortgage loans 7,936 520 7,416 1.5 %

7 unchanged sentences

Cash 49,177 — 49,177 9.8 %

Other assets 24,047 — 24,047 4.8 %

Other assets and liabilities 18,547 — 18,547 3.7 %

Total $ 1,831,630 $ 1,330,568 $ 501,062 100.0 %

15 unchanged sentences

Cash 43,569 — 43,569 17.5 %

Other assets 6,713 — 6,713 2.7 %

Other assets and liabilities 6,713 — 6,713 2.7 %

Total $ 508,505 $ 260,196 $ 248,309 100.0 %

Residential Mortgage Loans

The following table sets forth additional information on the residential mortgage loans in our portfolio as of June 30, 2021:

The following table sets forth additional information on the residential mortgage loans in our portfolio as of September 30, 2021:

Portfolio Range Portfolio Weighted Average

19 unchanged sentences

Percentage of loans 90+ days delinquent (based on UPB) N/A 10.70%

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of June 30, 2021:

The following table sets forth the information regarding the underlying collateral of our residential loans held in securitization trust as of September 30, 2021:

($ in thousands)

Number of loans 609

Weighted average loan coupon 5.19%

Average loan amount 496

Weighted average LTV at loan origination and deal date 74%

Weighted average credit score at loan origination and deal date 740

Current month CPR 42.1

Percentage of loans 90+ days delinquent (based on UPB) 0.27

The following chart illustrates the geographic distribution of the underlying collateral of our residential loans held in securitization trust as of September 30, 2021:

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of September 30, 2021:

The following charts illustrate the distribution of the credit scores and interest rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2020:

The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of June 30, 2021, based on the product profile, borrower profile and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

Characteristics of Our Residential Mortgage Loans as of June 30, 2021:

(1) No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of June 30, 2021.

The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of September 30, 2021, based on the product profile, borrower profile and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

Characteristics of Our Residential Mortgage Loans as of September 30, 2021:

(1) No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of September 30, 2021.

The following charts illustrate additional characteristics of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2020, based on the product profile, borrower profile and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

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Commercial Mortgage Loans

The following table provides additional information on the commercial mortgage loans in our portfolio as of June 30, 2021:

The following table provides additional information on the commercial mortgage loans in our portfolio as of September 30, 2021:

Portfolio Range Portfolio Weighted Average

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LTV at loan origination 38.6% - 75.0% 54.7%

The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of June 30, 2021 and December 31, 2020 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Our Commercial Mortgage Loans as of June 30, 2021:

The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of September 30, 2021 and December 31, 2020 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Our Commercial Mortgage Loans as of September 30, 2021:

Geographic Diversification of Our Commercial Mortgage Loans as of December 31, 2020:

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We received bonds from AOMT 2020‑3 with a fair value of approximately $66.5 million, including approximately $23.0 million in horizontal risk retention securities (representing 5% of the fair value of the securities and other interests issued as part of the transaction).

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of June 30, 2021, unless otherwise stated:

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of September 30, 2021, unless otherwise stated:

AOMT 2019-2 AOMT 2019-4 AOMT 2019-6 AOMT 2020-3

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(3) Represents the average size of the subordinate securities we own as investments in each securitization relative to the average overall size of the securitization.

The following table provides certain information with respect to our RMBS portfolio received in AOMT securitization transactions and acquired from other third parties as of June 30, 2021:

The following table provides certain information with respect to our RMBS portfolio received in AOMT securitization transactions and acquired from other third parties as of September 30, 2021:

RMBS Repurchase Debt Allocated Capital

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Total $ 124,332 $ 25,604 $ 149,936 $ 28,673 $ — $ 28,673 $ 95,659 $ 25,604 $ 121,263

The following table sets forth information with respect to our RMBS ending balances, at fair value, as of June 30, 2021:

The following table sets forth information with respect to our RMBS ending balances, at fair value, as of September 30, 2021:

Senior Mezzanine Subordinate Interest Only Whole Pool Total

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Ending fair value $ 18,297 $ 2,207 $ 97,614 $ 31,818 $ 149,936

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of June 30, 2021 (percentages are based on the aggregate unpaid principal balance of such loans):

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of September 30, 2021 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Loans Underlying Our Portfolio

of RMBS Issued in AOMT Securitization Transactions

(as of June 30, 2021)

(1) No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of June 30, 2021.

(as of September 30, 2021)

(1) No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of September 30, 2021.

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2020 (percentages are based on the aggregate unpaid principal balance of such loans):

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In November 2020, we participated in a securitization transaction of a pool of small balance commercial mortgage loans consisting of mortgage loans secured by commercial properties pursuant to which we contributed to AOMT 2020-SBC1 commercial mortgage loans with a carrying value of approximately $31.2 million that we had accumulated and held on our balance sheet, and we received bonds from AOMT 2020-SBC1 with a fair value of approximately $8.9 million.

Certain information regarding the commercial mortgage loans underlying our portfolio of commercial mortgage-backed securities “CMBS” issued in the AOMT 2020-SBC1 securitization transaction is shown below as of June 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

($ in thousands)

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Weighted average LTV at loan origination and deal date 62.6 % 62.3 %

The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of June 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020

The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital

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Description of Existing Financing Arrangements

As of June 30, 2021, we were a party to four loan financing lines, which permitted borrowings in an aggregate amount of up to $800.0 million.

As of September 30, 2021, we were a party to six loan financing lines, which permitted borrowings in an aggregate amount of up to $1.3 billion.

Borrowings under these agreements may be used to purchase whole loans for securitization or loans purchased for long‑term investment purposes.

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We and our subsidiary are also required to pay certain customary fees to Goldman and to reimburse Goldman for certain costs and expenses incurred in connection with Goldman’s structuring, management and ongoing administration of the agreement.

The following table sets forth the details of our financing lines as of each of June 30, 2021 and December 31, 2020:

Line of Credit Facility Limit Base Interest Rate Interest Rate Spread June 30, 2021 December 31, 2020

Veritex Financing Line.

On August 16, 2021, we and our subsidiaries entered into a non-mark-to-market $50.0 million committed financing facility with Veritex Community Bank (“Veritex”) through the execution of a Loan and Security Agreement (the “Loan and Security Agreement”) and a Promissory Note (the “Promissory Note” and together with the Loan and Security Agreement, the “Facility Documents”) among those subsidiaries and Veritex.

Pursuant to the Facility Documents, Veritex agreed to make one or more advances to one or more of the subsidiaries of the Company (together, the “Borrowers”) secured by mortgage loans, notes and related collateral (the “Veritex Financing Line”).

The Veritex Financing Line expires, and amounts outstanding under the Veritex Financing Line will mature, on August 16, 2023, subject to certain exceptions.

The amount advanced by Veritex for each eligible loan is based on the unpaid principal balance of the loan, the loan-to-value ratio of the loan and the FICO score of the borrower and ranges from 80.00% to 92.50% depending on the type of loan and the aforementioned criteria.

The interest rate on any outstanding balance under the Facility Documents is the greater of (1) the sum of (A) one-month LIBOR and (B) 2.30%, and (2) 3.13%.

The obligations of the Borrowers under the Facility Documents are guaranteed by the Company pursuant to a Guaranty Agreement (the “Guaranty”) executed contemporaneously with the Facility Documents.

In addition, the Company is subject to various financial and other covenants, including, as of the last day of any fiscal quarter:

(1) the Company’s tangible net worth must be at least equal to $150.0 million;

(2) the Company’s ratio of (A) EBITDA to (B) debt service shall be at least equal to 1.25 to 1.0 for such quarter;

(3) the Company’s ratio of total liabilities to total tangible net worth must not exceed 5.5 to 1.0;

and (4) the Company’s liquidity must at least equal $5.0 million.

In addition, the Facility Documents contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction.

The remedies for such events of default are also customary for this type of transaction and include acceleration of the principal amount outstanding under the Facility Documents and Veritex’s right to liquidate the collateral then subject to the Facility Documents.

The Borrowers are also required to pay certain customary fees to Veritex and to reimburse Veritex for certain costs and expenses incurred in connection with Veritex’s management and ongoing administration of the Veritex Financing Line.

Barclays Financing Line.

On September 20, 2021, we and one of our subsidiaries (the “Subsidiary”) entered into a $400.0 million repurchase facility (the “Barclays Financing Line”) with Barclays Bank PLC (“Barclays”) through the execution of a Master Repurchase Agreement (the “Master Repurchase Agreement”) between the Subsidiary and Barclays.

Pursuant to the Master Repurchase Agreement, the Subsidiary may sell certain securities to Barclays representing whole loan assets and later repurchase such securities from Barclays.

The Master Repurchase Agreement expires on September 20, 2022, unless terminated earlier pursuant to the terms of the Master Repurchase Agreement.

The amount expected to be advanced by Barclays is generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, which is a percentage of the unpaid principal balance or market value of the asset depending on the type of underlying asset.

Similarly, the interest rate on any outstanding balance under the Master Repurchase Agreement that the Subsidiary is required to pay Barclays is generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, where the interest rate is equal to the sum of (1) a spread ranging from 1.70% to 3.50%, determined based on the type of underlying asset, and (2) one-month or three-month LIBOR.

Additionally, Barclays is under no obligation to purchase the securities we offer to sell to them.

The obligations of the Subsidiary under the Master Repurchase Agreement are guaranteed by the Company pursuant to a Guaranty (the “Guaranty”) executed contemporaneously with the Master Repurchase Agreement.

In addition, and similar to other repurchase agreements that the Company has entered into, the Company is subject to various financial and other covenants, including those relating to (1) declines in tangible net worth;

(2) a maximum ratio of indebtedness to tangible net worth;

and (3) minimum liquidity.

In addition, the Master Repurchase Agreement and Guaranty contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, insolvency and other events of default customary for this type of transaction.

The remedies for such events of default are also customary for this type of transaction and include the acceleration of the amounts outstanding under the Master Repurchase Agreement and Barclays’ right to liquidate the purchased securities then subject to the Master Repurchase Agreement.

The Subsidiary is also required to pay certain customary fees to Barclays and to reimburse Barclays for certain costs and expenses incurred in connection with Barclays’ management and ongoing administration of the Master Repurchase Agreement.

The following table sets forth the details of our financing lines as of each of September 30, 2021 and December 31, 2020:

Line of Credit Facility Limit Base Interest Rate Interest Rate Spread September 30, 2021 December 31, 2020

($ in thousands)

Barclays Bank PLC (1)

$ 400,000 1 month or 3 month LIBOR 1.70% - 3.50%

$ 104,644 N/A

Nomura Corporate Funding Americas, LLC (2)

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$ 101,210 $ 8,011

Banc of California, National Association (2)

$ 50,000 1 month LIBOR 2.50% - 3.13%

$ 45,259 $ 38,989

Deutsche Bank, AG (3)

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$ 200,000 3 month LIBOR 2.25% $ 194,959 N/A

Banc of California, National Association (2)

$ 50,000 1 month LIBOR 2.50% - 3.13%

$ 38,498 $ 38,989

(1) On June 21, 2021, this facility was amended to extend the expiration date from December 3, 2021 to August 5, 2022, add the one-month LIBOR as a base interest rate for certain loans, and change the interest rate spread to 1.70% (from 1.75%) to 3.50%.

Veritex Community Bank (6)

$ 50,000 1 month LIBOR 2.30% $ 36,889 N/A

Total $ 1,250,000 $ 550,752 $ 81,905

(1) On September 20, 2021, the Company entered into a $400.0 million repurchase facility with Barclays which expires on September 20, 2022.

(2) On August 6, 2021, this facility was amended to extend the expiration date from December 3, 2021 to August 5, 2022, add the one-month LIBOR as a base interest rate for certain loans, and change the interest rate spread to 1.70% (from 1.75%) to 3.50%.

(3) On June 21, 2021, this facility was amended to increase the facility limit from $150.0 million to $250.0 million.

This facility expires on February 11, 2022.

(4) The master repurchase agreement with Goldman was entered into on March 5, 2021, and expires on March 5, 2022.

(5) This agreement expires on March 16, 2022.

(3) On June 21, 2021, the agreement was amended to increase the credit facility from $150.0 million to $250.0 million, and replace the previous sole shareholder as guarantor with the Company and its subsidiaries.

This agreement expires on February 11, 2022.

(4) The master repurchase agreement with Goldman Sachs Bank USA, was entered into on March 5, 2021, and expires on March 5, 2022.

(6) On August 16, 2021, the Company entered into a non mark-to-market committed financing facility with Veritex, which expires on August 16, 2023.

Short‑Term Repurchase Facilities.

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Treasury securities, securities issued by AOMT, Angel Oak’s securitization platform, and other securities we may acquire in accordance with our investment guidelines.

As of June 30, 2021, there was approximately $787.2 million outstanding under these repurchase facilities, with weighted average interest rates ranging from 0.09% to 0.16%.

The following table sets forth certain characteristics of our short-term repurchase facilities as of June 30, 2021 and December 31, 2020:

June 30, 2021

As of September 30, 2021, there was approximately $489.3 million outstanding under these repurchase facilities, with a weighted average interest rate of 0.11%.

The following table sets forth certain characteristics of our short-term repurchase facilities as of September 30, 2021 and December 31, 2020:

September 30, 2021

Repurchase Agreements Amount Outstanding Weighted Average Interest Rate Weighted Average Remaining Maturity (Days)

($ in thousands)

Treasury Bills $ 274,308 0.09 % 22

RMBS 489,287 0.11 % 14

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Q2 2021 787,176 407,486 787,176

Q3 2021 489,287 173,265 489,287

We utilize short‑term repurchase facilities on our RMBS portfolio and to finance assets for REIT asset test purposes.

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Our use of repurchase facilities is generally highest at the end of any particular quarter, as shown in the table above, where the quarter-end balance and the highest month-end balance in each quarter are equivalent.

We may continue to purchase securities for REIT asset test purposes, although it is expected that, in the future, we may need to purchase fewer (or no) securities as we participate in additional securitizations and retain our pro rata share of securities issued in securitization transactions or acquire assets directly into our Operating Partnership.

Securitization Transactions

We did not participate in any securitization transactions for the three and six months ended June 30, 2021.

In August 2021, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non‑QM loans originated by our affiliate mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2021-4 issued approximately $316.6 million in face value of bonds.

We used the proceeds of the securitization transaction to repay outstanding debt of approximately $249.0 million and retained cash of $55.8 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets.

We own and hold the call rights on the XS tranche of bonds, which is the “controlling class” of the bonds.

Given the accounting rules surrounding this type of transaction, we have consolidated the securitization on our consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheet as of September 30, 2021.

In June 2020, we participated in a securitization transaction of a pool of residential mortgage loans, a substantial majority of which were non‑QM loans, secured primarily by first or second liens on one‑to‑four family residential properties.

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Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts, and options.

Six Months Ended

June 30, 2021 June 30, 2020

Nine Months Ended

September 30, 2021 September 30, 2020

(in thousands)

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Net increase (decrease) in cash and restricted cash $ 6,297 $ (2,318)

Operating cash flows of $(382.1) million for the six months ended June 30, 2021 as compared to $75.0 millions for the six months ended June 30, 2020 were primarily due to the purchase of additional residential mortgage loans during the the six months ended June 30, 2021.

Investing cash flows of $(705.9) million for the six months ended June 30, 2021 as compared to $(495.9) million for the six months ended June 30, 2020 were primarily due to the purchase of RMBS during the quarter, along with the purchase of U.S.

Operating cash flows of $(883.7) million for the nine months ended September 30, 2021 as compared to $118.1 million for the nine months ended September 30, 2020 were primarily due to the purchase of additional residential mortgage loans during the nine months ended September 30, 2021.

Investing cash flows of $(408.5) million for the nine months ended September 30, 2021 as compared to $17.7 million for the nine months ended September 30, 2020 were primarily due to the purchase of RMBS during the quarter, along with the purchase of U.S.

Treasury securities, which was partially offset by sales of U.S Treasury securities.

Financing cash flows of $1.1 billion for the six months ended June 30, 2021 as compared to $487.8 million for the six months ended June 30, 2020 were increased primarily due to the contributions received from our former sole stockholder, proceeds received from our private placement concurrent with our IPO, and proceeds received from our IPO.

Financing cash flows of $1.3 billion for the nine months ended September 30, 2021 as compared to $(138.1) million for the nine months ended September 30, 2020 were increased primarily due to the contributions received from our former sole stockholder, proceeds received from our private placement concurrent with the IPO, and proceeds received from the IPO.

Cash Flows - Residential and Commercial Loan Classification

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For additional information on our contractual obligations, see the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commitments” section included in the Prospectus.

As of June 30, 2021, there have been no material changes in our contractual obligations from the information set forth in the Prospectus.

As of September 30, 2021, there have been no material changes in our contractual obligations from the information set forth in the Prospectus.

Off-Balance Sheet Arrangements

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In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates.

In addition to the regular volatility we may experience on a quarterly basis, the ongoing impact of the COVID-19 pandemic on the United States economy, the mortgage finance markets, and the broader financial markets, has caused additional volatility impacting many of our estimates.

It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of the pandemic and respond to its direct and indirect impacts on many aspects of U.S.

economic activity.

Any continued volatility resulting from the economic effects of the COVID-19 pandemic could impact our critical estimates and lead to significant period-to-period earnings volatility.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis