What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-16 compared with 2021-11-15 · 259 added, 266 removed, 470 unchanged (53% of the section changed)

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Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions.

These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our prospectus dated June 16, 2021, filed with the Securities and Exchange Commission (the “SEC”) on June 21, 2021 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”) (the “Prospectus”), which is part of a registration statement on Form S-11, as amended (File No.

333-256301) (the “Registration Statement”), under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-K, 10-Q and 8-K.

These forward-looking statements are subject to risks and uncertainties, including, among other things, those described under Item 1A.

Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report on Form 10-K”).

Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in other reports we file with the Securities and Exchange Commission (the “SEC”).

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise

Factors that could have a material adverse effect on future results and performance relative to those set forth in or implied by the related forward-looking statements, as well as on our business, financial condition, liquidity, results of operations and prospects, include, but are not limited to:

• 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 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 impact of the ongoing COVID-19 pandemic;

• the effects of adverse conditions or developments in the financial markets and the economy upon our ability to acquire non-qualified residential mortgage (“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;

• changes in our industry, interest rates, the debt or equity markets, the general economy (or in specific regions) or the residential real estate finance and the real estate markets specifically;

• changes in our industry, inflation, interest rates, the debt or equity markets, the general economy (or in specific regions) or the residential real estate finance and real estate markets specifically;

• changes in our business strategies or target assets;

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• changes in the availability of attractive loan and other investment opportunities, including non-QM loans sourced from Angel Oak Mortgage Lending platforms;

• the ability of Falcons I, LLC (“the Manager”) to locate suitable investments for us, manage our portfolio, and implement our strategy;

• the ability of our Falcons I, LLC (the “Manager”) to locate suitable investments for us, manage our portfolio, and implement our strategy;

• our ability to obtain and maintain financing arrangements on favorable terms, or at all;

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• 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, 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, including those resulting from global climate change, pandemics, acts of war or terrorism, escalation of military conflicts (such as the recent Russian invasion of Ukraine), and others that may cause unanticipated and uninsured performance declines, disruptions in markets, 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;

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mortgage market;

• future changes with respect to the Government Sponsored Entities in the mortgage market and related events, including the lack of certainty as to the future roles of these entities and the U.S.

• future changes with respect to the Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac” and collectively with Fannie Mae, the “GSEs”) in the mortgage market and related events, including the lack of certainty as to the future roles of these entities and the U.S.

Government in the mortgage market and changes to legislation and regulations affecting these entities;

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• our ability to make distributions to our stockholders in the future at the level contemplated by our stockholders or the market generally, or at all;

• our ability to qualify and maintain our qualification as a real estate investment trust ( a “REIT”) for U.S.

• our ability to continue to qualify as a real estate investment trust (a “REIT”) for U.S.

federal income tax purposes;

• our ability to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and in the Prospectus.

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and in the Annual Report on Form 10-K.

Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date such statements are made.

The risks summarized under “Risk Factors” in the Prospectus could cause actual results and performance to differ materially from those set forth in or implied by our forward-looking statements.

The risks summarized under Item 1A.

Risk Factors in the Annual Report on Form 10-K could cause actual results and performance to differ materially from those set forth in or implied by our forward-looking statements.

New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us.

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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 Capital was established in 2009 and had approximately $13.4 billion in assets under management as of March 31, 2022 across its private credit strategies, public funds, and separately managed accounts, including approximately $9.1 billion of mortgage‑related assets.

Angel Oak Mortgage Lending is a market leader in non‑QM loan production and, as of March 31, 2022, had originated over $14.4 billion in total non‑QM loan volume since its inception in 2011.

Angel Oak is headquartered in Atlanta and has over 900 employees across its enterprise.

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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”).

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.

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”).

the composition and values of our assets, our distribution levels and the concentration of ownership of our stock.

We also intend to operate our business in a manner that will allow us to maintain our exclusion from regulation as an investment company under the Investment Company Act.

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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.

Trends and Recent Developments

Overall macroeconomic environment and its effect on us

The 2022 macroeconomic environment for the first three months of the year appeared more challenging than that of the 2021 full-year macroeconomic environment.

Major challenges to the U.S.

economy in 2022 involved continued supply chain issues, labor shortages, and an inflationary environment exacerbated by the military conflict between Ukraine and Russia and the economic sanctions related thereto.

Interest rates have increased in 2022, which has resulted in a slowdown of mortgage originations and refinancing activity, as the 30-year mortgage rate average exceeded 5% by the end of March 2022, up from approximately 3% in December 2021.

The availability of housing stock in many areas of the U.S.

has remained low, and supply chain issues continue to constrain home building in many areas of the U.S., as raw materials are, in some cases, unavailable for extended periods of time.

A slowdown in homeowner prepayment activities (including refinancing existing mortgages, as referred to above) may have a positive impact on some of the bonds that we hold from older securitization transactions, as we typically hold the lower junior and XS (interest only) tranches of bonds from a securitization transaction, and the lack of prepayment activity within a securitization transaction results in more interest income available to be allocated to the XS bonds.

On March 16, 2022, the Federal Reserve Bank of the U.S.

(the “Fed”) approved a 25 basis point increase to the federal funds rate, the first increase to the rate in nearly three years.

In addition, the Fed approved a 50 basis point increase to the federal funds rate on May 5, 2022.

An increase in the federal funds rate generally has the effect of increasing borrowing rates for all types of consumer credit, including mortgages.

The Fed has also indicated that it plans to continue to increase interest rates in the near term.

We believe that a further increase in interest rates from the previous historically low levels is unlikely to significantly affect demand for non-QM mortgages;

however, an increase in interest rates generally causes interest rate spreads to widen, which may negatively impact the valuation of our whole loan portfolio, as wider interest rate spreads generally cause a decrease in the value of whole loans originated at lower interest rates.

Our whole loan portfolio was affected in this manner during the first quarter of 2022, with unrealized losses incurred on our whole loan portfolio, with the size of the portfolio magnifying the unrealized loss effect.

These unrealized losses were partially offset by our economic hedges in interest rate futures contracts and “To be Announced” forward-settling of mortgage-backed securities trades (“TBAs”).

Although we currently have unrealized losses in our whole loan portfolio, which may continue as interest rate spreads widen, given the Fed’s planned further interest rate increases, holding whole loans originated at higher interest rates generally has the effect of increasing our net interest income, resulting in prepayment speeds likely slowing for existing securitization transactions, which will also increase our net interest income as we primarily hold junior and interest only tranches of the securitized bonds that we have issued.

Our investment performance

Our non-QM whole loan portfolio experienced unrealized losses on the portfolio during the first three months of 2022, which were driven by mark-to-market losses due to yield spreads widening.

The residential mortgage-backed securities (“RMBS”) portfolio and commercial mortgage-backed securities (“CMBS”) portfolio results also included mark-to-market losses on the valuation of this asset class.

Realized gains on our TBA investments and interest rate futures partially offset these unrealized mark-to-market losses.

The non-QM portfolio unrealized losses and the realized gains of the TBAs and interest rate futures are reflected in net income, while the RMBS and CMBS portfolios’ unrealized losses are reflected in other comprehensive income.

Purchases of whole loans in the first quarter of 2022 and our 2022 securitizations

During the quarter ended March 31, 2022, we purchased $675.6 million in residential whole loans.

On February 11, 2022, we issued one new securitization, AOMT 2022-1, securitizing a total of $537.6 million of unpaid principal balance of seasoned residential non-QM mortgage loans.

The issuance of AOMT 2022-1, along with our 2021 issuances of AOMT 2021-4 and AOMT 2021-7, securitized a total of $1.2 billion of unpaid principal balance of seasoned residential non-QM mortgage loans.

We issued these securitizations as the sole participant in the securitization.

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 these types of transactions, we have consolidated these securitizations on our condensed consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets for the period and year ended March 31, 2022 and December 31, 2021.

Our securitizations prior to 2021 were securitization transactions for which we did not meet the accounting rules to be considered a “primary beneficiary” of the applicable securitization vehicle, and therefore, for these prior securitizations, the bonds retained in the securitization are held on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.

New whole loan financing facilities

On April 13, 2022, we entered into a new financing facility, which afforded us $340.0 million of additional borrowing capacity, for a total capacity of $1.6 billion with which to execute our core strategy of purchasing whole loans and retaining them until securitized.

Key Financial Metrics

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Distributable Earnings

Distributable Earnings is a non‑GAAP measure and is defined as net income (loss) allocable to common stockholders as calculated in accordance with GAAP, excluding (1) unrealized gains and losses on our aggregate portfolio, and realized gains (losses) on derivatives, (2) impairment losses, (3) extinguishment of debt, (4) non-cash equity compensation expense, (5) the incentive fee earned by our Manager, (6) realized gains or losses on swap terminations and (7) certain other nonrecurring gains or losses.

Distributable Earnings is a non‑GAAP measure and is defined as net income (loss) allocable to common stockholders as calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), excluding (1) unrealized gains and losses on our aggregate portfolio, (2) impairment losses, (3) extinguishment of debt, (4) non-cash equity compensation expense, (5) the incentive fee earned by our Manager, (6) realized gains or losses on swap terminations and (7) certain other nonrecurring gains or losses.

We believe that the presentation of Distributable Earnings provides investors with a useful measure to facilitate comparisons of financial performance among our REIT peers, but has important limitations.

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Our methodology for calculating Distributable Earnings 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 may not be comparable to similar measures presented by other REITs.

We also will use Distributable Earnings to determine the incentive fee payable to the Manager pursuant to the management agreement that we and Angel Oak Mortgage Operating Partnership, LP (the “Operating Partnership”) entered into with the Manager upon the completion of the IPO (the “Management Agreement”).

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 $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

We also will use Distributable Earnings to determine the incentive fee payable to the Manager pursuant to the management agreement (the “Management Agreement”) that we and Angel Oak Mortgage Operating Partnership, LP (the “Operating Partnership”) entered into with the Manager upon the completion of our initial public offering (“IPO”) on June 21, 2021.

For information on the fees that are payable to the Manager under the Management Agreement, see the Annual Report on Form 10-K.

Distributable Earnings were approximately $37.3 million and $4.8 million for the three months ended March 31, 2022 and 2021, respectively.

The table below sets forth a reconciliation of net (loss) income allocable to common stockholder(s), calculated in accordance with GAAP, to Distributable Earnings for the three months ended March 31, 2022 and 2021:

Three Months Ended

March 31, 2022 March 31, 2021

(in thousands)

Net income (loss) allocable to common stockholder(s) $ 6,340 $ 4,238 $ 18,045 $ (6,277)

Net (loss) income allocable to common stockholder(s) $ (43,545) $ 9,483

Net other-than-temporary credit impairment losses — —

Net realized and unrealized (gains) losses on derivatives 3,837 (101) 6,130 75

Net unrealized (gains) losses on derivatives (15,326) (1,610)

Net unrealized (gains) losses on residential loans in securitization trusts and non-recourse securitization obligation 30,210 —

Net unrealized (gains) losses on residential loans 64,587 (2,892)

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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 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

Set forth below is our computation of Distributable Earnings Return on Average Equity for the three months ended March 31, 2022 and 2021:

Three Months Ended

March 31, 2022 March 31, 2021

($ in thousands)

Annualized Distributable Earnings $ 149,171 $ 19,356

Average total stockholders’ equity $ 498,895 $ 254,690 $ 361,673 $ 197,556

Average total stockholder(s)’ equity $ 456,415 $ 281,481

Distributable Earnings Return on Average Equity 32.7 % 6.9 %

Book Value per Share

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

The following table sets forth the calculation of our book value per share as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

(in thousands except for share and per share data)

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Preferred stock (101) (101)

Stockholder(s)’ equity, net of preferred stock $ 500,961 $ 248,208

Stockholders’ equity, net of preferred stock $ 421,335 $ 491,289

Number of shares outstanding at period end 25,085,796 25,227,328

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Results of Operations

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

Our results of operations presented herein for the three months ended March 31, 2021 do not reflect the expenses typically associated with being a public company for the reporting period, including increased insurance, legal, and accounting fees, full periods of equity compensation expense, expenses incurred in complying with the reporting and other requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and increased expense of the base management 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 among us, our Manager and Angel Oak Mortgage Fund, LP (“Angel Oak Mortgage Fund”), our sole common stockholder prior the IPO (the “pre-IPO management agreement”).

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

and our Manager is 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, after the 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 March 31, 2022 and 2021

The following table sets forth a summary of our results of operations for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, 2022 Three Months Ended March 31, 2021

(in thousands)

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NET INTEREST INCOME 16,939 9,201

REALIZED AND UNREALIZED GAINS (LOSSES), NET

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

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

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

Operating and investment expenses 3,830 347

REALIZED AND UNREALIZED (LOSSES) GAINS, NET

Net realized gain (loss) on mortgage loans, derivative contracts, RMBS, and CMBS 26,416 (2,288)

Net unrealized (loss) gain on mortgage loans and derivative contracts (80,181) 4,518

TOTAL REALIZED AND UNREALIZED (LOSSES) GAINS, NET (53,765) 2,230

Operating expenses 3,784 523

Operating expenses incurred with affiliate 855 439

Due diligence and transaction costs 770 64

Stock compensation 871 —

Securitization costs 2,019 —

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Total operating expenses 10,172 1,944

NET INCOME 6,344 4,242

INCOME BEFORE INCOME TAXES (46,998) 9,487

Income tax benefit (3,457) —

NET (LOSS) INCOME (43,541) 9,487

Preferred dividends (4) (4)

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

Other comprehensive income 1,818 5,171

TOTAL COMPREHENSIVE INCOME $ 8,158 $ 9,409

NET (LOSS) INCOME ALLOCABLE TO COMMON STOCKHOLDER(S) $ (43,545) $ 9,483

Other comprehensive (loss) income (12,987) 529

TOTAL COMPREHENSIVE (LOSS) INCOME $ (56,532) $ 10,012

Net Interest Income

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

The following table sets forth the components of net interest income for the three months ended March 31, 2022 and 2021:

Three Months Ended

March 31, 2022 March 31, 2021

(in thousands)

Interest income Interest income / expense Interest income / expense

Interest income Interest income / expense Average balance Interest income / expense Average balance

Residential mortgage loans $ 11,981 $ 1,108,704 $ 2,550 $ 182,652

Residential mortgage loans in securitization trust 2,592 —

Residential mortgage loans in securitization trusts 10,418 881,294 — —

Commercial mortgage loans 302 19,061 128 7,552

RMBS 4,108 350,236 6,801 165,588

CMBS 300 10,499 549 10,389

Treasury Bills — 149,998 3 37,499

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Net interest income $ 16,939 $ 9,201

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 September 30, 2021 and 2020 are set forth as follows:

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

Net interest income for the three months ended March 31, 2022 and 2021 was $16.9 million and $9.2 million, respectively.

Net interest income increased due to the additional average portfolio balance in the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to the composition of the portfolio during March 31, 2022 having a higher average balance of residential mortgage loans and residential mortgage loans in securitization trusts, along with a higher RMBS average balance, which increased net interest income.

These average asset balances were partially offset by higher average balances in related liabilities in the three months ended March 31, 2022 as compared to the same period in 2021, which resulted in increased interest expense during the comparative period.

Total Realized and Unrealized (Losses) Gains

The components of total realized and unrealized (losses) gains, net for the three months ended March 31, 2022 and 2021 are set forth as follows:

Three Months Ended March 31, 2022 Three Months Ended March 31, 2021

(in thousands)

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

Unrealized loss on securitization, net of unrealized gain on non-recourse securitization obligation (30,240) —

Realized loss on RMBS, net (5,042) (3,976)

Realized loss on CMBS (42) (227)

Realized gain on interest rate futures 19,684 2,076

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

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

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

Realized and unrealized gain (loss) on TBAs 15,462 (440)

Realized and unrealized (loss) gain on residential mortgage loans (67,112) 2,837

Realized and unrealized (loss) gain on commercial mortgage loans (482) 284

Unrealized appreciation on interest rate futures 14,007 1,676

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

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 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 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

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)

INTEREST INCOME, NET

Interest income $ 37,763 $ 31,929

Interest expense 5,277 7,454

NET INTEREST INCOME 32,486 24,475

REALIZED AND UNREALIZED GAINS (LOSSES), NET

Net realized loss on derivative contracts, RMBS, CMBS, and mortgage loans (19,656) (18,717)

Net unrealized gain (loss) on derivative contracts and mortgage loans 16,151 (4,369)

TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET (3,505) (23,086)

Operating and investment expenses 5,293 1,957

Total realized and unrealized (losses) gains, net $ (53,765) $ 2,230

For the three months ended March 31, 2022 and 2021, total realized and unrealized gains (losses), net were $(53.8) million and $2.2 million, respectively.

During the three months ended March 31, 2022, widening interest rate spreads caused the valuation of residential mortgage loans to decrease, which resulted in an unrealized loss in residential mortgage loans, the losses of which were partially offset by the mark to market of the liability associated with securitized loans held in residential mortgage trusts and realized and unrealized gains on

interest rate futures and TBAs.

In the three months ended March 31, 2021, realized and unrealized gains on residential mortgage loans and interest rate futures were partially offset by realized loss on RMBS, which was primarily due to prepayment speeds on the junior and interest only bonds that we held.

Operating Expenses

For the three months ended March 31, 2022 and 2021, our operating expenses were $3.8 million and $0.5 million, respectively.

The increase in operating expenses in the three month period ended March 31, 2022 was due to an increase in costs due to being a public company, including increased insurance, audit, and legal fees.

We also experienced an increase in loan administration costs, commensurate with an increase in the number of loans in our portfolio during the comparative period.

Operating Expenses Incurred with Affiliate

For the three months ended March 31, 2022 and 2021, our operating expenses incurred with affiliate were $0.9 million and $0.4 million, respectively.

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

Due Diligence and Transaction Costs

For the three months ended March 31, 2022 and 2021, our due diligence and transaction costs were $0.8 million and $0.1 million, respectively.

The increase in these costs was due to whole loan acquisition diligence costs, which increased over the comparative period as we purchased more whole loans during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Stock Compensation

For the three months ended March 31, 2022, our stock compensation expense was $0.9 million.

We did not have any stock compensation expense for the three months ended March 31, 2021 as no grants were made during that period.

In connection with the IPO in June 2021, we issued restricted stock awards to key employees of Angel Oak, including our Manager, as well as the independent directors on our Board of Directors.

We issued additional restricted stock awards to other key employees on January 1, 2022.

Restricted stock awards vest in over one to three years, commencing on the one year anniversary of the grant date.

Securitization Costs

Management fee incurred with affiliate 4,015 2,503

Total operating expenses 10,925 7,655

NET INCOME (LOSS) 18,056 (6,266)

Preferred dividends (11) (11)

NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDER(S) $ 18,045 $ (6,277)

Other comprehensive income (loss) 5,433 (5,054)

TOTAL COMPREHENSIVE INCOME (LOSS) $ 23,478 $ (11,331)

Net Interest Income

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)

Interest income Interest income / expense Interest income / expense

Residential mortgage loans $ 13,962 $ 13,906

Residential mortgage loans in securitization trust 2,592

Commercial mortgage loans 469 1,839

RMBS 18,941 16,032

Treasury bills 7 104

Other interest income 7 48

Total interest income 37,763 31,929

Interest expense

Notes payable 4,332 6,672

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

Repurchase facilities 303 782

Total interest expense 5,277 7,454

Net interest income $ 32,486 $ 24,475

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 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)

Gain on securitization $ — $ 1,813

Realized loss on RMBS, net (8,455) (6,125)

Realized loss on CMBS (630) —

Realized loss on interest rate futures (431) —

Realized and unrealized loss on TBAs (6,693) —

Realized and unrealized gain (loss) on residential mortgage loans 9,780 (2,678)

Realized and unrealized gain (loss) on commercial mortgage loans 315 (1,884)

Realized and unrealized loss on U.S.

Treasury bills (8) (10)

Unrealized appreciation (depreciation) on interest rate futures 2,617 (14,202)

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

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 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 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.

Securitization costs of $2.0 million were incurred for the three months ended March 31, 2022 in the securitization of AOMT 2022-1.

During the comparative period of the three months ended March 31, 2021, we incurred no securitization expense as we did not enter into any securitizations during that period.

Management Fee Incurred with Affiliate

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, our sole common stockholder prior the IPO (the “pre-IPO management agreement”).

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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.

For the three months ended March 31, 2022 and 2021, our management fee incurred with affiliate was $1.9 million and $0.9 million, respectively.

The increase is due to the increase in our average equity for the three months ended March 31, 2022 as compared to the same period in 2021.

Our Portfolio

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 September 30, 2021:

As of March 31, 2022, our portfolio consisted of approximately $2.7 billion of residential mortgage loans, RMBS, and other target assets.

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 March 31, 2022:

Fair Value Collateralized Debt Allocated Capital % of Total Capital

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Total investment portfolio $ 3,053,778 $ 2,464,787 $ 588,991 139.8 %

Target assets (1)

$ 2,703,786 $ 2,115,920 $ 587,866 139.5 %

Cash 90,445 — 90,445 21.5 %

Other assets and liabilities (2)

(258,000) — (258,000) (61.2) %

Total $ 2,886,223 $ 2,464,787 $ 421,436 100.1 %

As of December 31, 2020, our portfolio consisted of approximately $308.2 million of residential mortgage loans, RMBS, and other target assets.

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

(1) “Target assets” as presented above includes the total investment portfolio excluding U.S.

Treasury Bills.

(2) Substantially comprised of $298.7 million due to broker.

As of December 31, 2021, our portfolio consisted of approximately $2.2 billion of residential mortgage loans, RMBS, and other target assets.

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 December 31, 2021:

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Residential mortgage loans $ 1,061,912 $ 852,961 $ 208,951 42.5 %

Residential mortgage loans in securitization trust 667,365 616,557 50,808 10.3 %

Commercial mortgage loans 18,664 447 18,217 3.7 %

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Total investment portfolio $ 2,494,330 $ 2,079,216 $ 415,114 84.5 %

Target assets (1)

$ 2,244,331 $ 1,830,466 $ 413,865 84.2 %

Cash $ 40,801 $ — $ 40,801 8.3 %

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Total $ 2,570,606 $ 2,079,216 $ 491,390 100.0 %

(1) “Target assets” as presented above includes the total investment portfolio excluding U.S.

Treasury Bills.

Residential Mortgage Loans

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

The following table sets forth additional information on the residential mortgage loans in our portfolio as of March 31, 2022:

Portfolio Range Portfolio Weighted Average

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Percentage of loans 90+ days delinquent (based on UPB) N/A 0.30%

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

The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2022:

($ in thousands)

UPB $1,092,291

Number of loans 2,483

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Weighted average credit score at loan origination and deal date 745

Current 3-month constant prepayment rate (“CPR”) (1)

Percentage of loans 90+ days delinquent (based on UPB) 0.1%

(1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year.

The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2022:

(1) No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of March 31, 2022 .

The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2021:

($ in thousands)

Number of loans 1494

Weighted average loan coupon 4.98%

Average loan amount 433

Weighted average LTV at loan origination and deal date 72%

Weighted average credit score at loan origination and deal date 741

Current 3-month CPR 35.1

Percentage of loans 90+ days delinquent (based on UPB) 0.13

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 chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 2021:

(1) No state in “Other” represents more than a 3% concentration of the underlying collateral of our residential mortgage loans held in securitization trusts as of December 31, 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 March 31, 2022:

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, 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 our residential mortgage loans in our portfolio that we owned directly as of March 31, 2022, 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 March 31, 2022:

(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 March 31, 2022 .

The following charts illustrate additional characteristics of the residential mortgage loans in our portfolio that we owned directly as of December 31, 2021, 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 September 30, 2021:

The following table provides additional information on the commercial mortgage loans in our portfolio as of March 31, 2022:

Portfolio Range Portfolio Weighted Average

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LTV at loan origination 46.7% - 75.0% 59.8%

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:

The following charts illustrate the geographic location of the commercial mortgage loans in our portfolio that we owned directly as of March 31, 2022 and December 31, 2021 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Our Commercial Mortgage Loans as of March 31, 2022:

Geographic Diversification of Our Commercial Mortgage Loans as of December 31, 2021:

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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 September 30, 2021, unless otherwise stated:

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in Angel Oak Mortgage Trust I (“AOMT”) securitization transactions is set forth below as of March 31, 2022, unless otherwise stated:

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

6 unchanged sentences

Weighted average credit score at loan origination and deal date 694 702 715 717

Current 3-month constant prepayment rate (“CPR”) (1)

49.85 % 52.77 % 57.36 % 47.70 %

Current 3-month CPR 42.3 % 48.3 % 41.3 % 42.2 %

90+ day delinquency (as a % of UPB) 12.9 % 11.1 % 5.4 % 4.0 %

3 unchanged sentences

21.82 % 10.19 % 7.11 % 13.61 %

(1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year.

(1) Represents the fair value of the securities we hold in the first loss tranche in each securitization.

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Current 3-month CPR 44.89 % 50.89 % 45.08 % 43.61 %

31.60 % 27.40 % 32.30 % 28.80 %

90+ day delinquency (as a % of UPB) 12.33 % 8.86 % 5.31 % 3.82 %

Fair value of first loss piece $13,634 $4,019 $2,334 $26,447

$12,897 $3,415 $2,029 $23,507

Investment thickness 18.95 % 8.61 % 6.20 % 11.82 %

10.00 % 4.50 % 3.30 % 6.80 %

(1) CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year.

(2) Represents the fair value of the securities we hold in the first loss tranche in each securitization.

(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 September 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 March 31, 2022:

RMBS Repurchase Debt Allocated Capital

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Total $ 100,364 $ 385,270 $ 485,634 $ 5,720 $ 354,781 $ 360,501 $ 94,644 $ 30,489 $ 125,133

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

The following table sets forth information with respect to our RMBS ending balances, at fair value, as of March 31, 2022:

Senior Mezzanine Subordinate Interest Only Whole Pool Total

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The following table sets forth information with respect to our RMBS ending balances, at fair value, as of December 31, 2021:

Senior Mezzanine Subordinate Interest Only Total

Senior Mezzanine Subordinate Interest Only Whole Pool Total

(in thousands)

1 unchanged sentence

Acquisitions:

Retained from AOMT securitizations — — 40,380 26,140 66,520

Secondary market purchases of AOMT securities — — 2,209 — — 2,209

4 unchanged sentences

Ending fair value $ 3,076 $ 2,178 $ 90,350 $ 17,975 $ 372,055 $ 485,634

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):

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of March 31, 2022 (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 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.

(as of March 31, 2022)

(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 March 31, 2022.

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of December 31, 2021 (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 September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

Certain information regarding the commercial mortgage loans underlying our portfolio of CMBS issued in the AOMT 2020-SBC1 securitization transaction is shown below as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

($ in thousands)

4 unchanged sentences

Weighted average LTV at loan origination and deal date 58.4 % 58.4 %

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

The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital

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The use of any particular source of capital and funds will depend on market conditions, availability of these sources, and the investment opportunities available to us.

We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage‑related assets pending their eventual securitization.

Upon accumulating an appropriate amount of assets, we expect to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long‑term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements.

We have used and expect to continue to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage‑related assets pending their eventual securitization.

Upon accumulating an appropriate amount of assets, we have financed and expect to continue to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long‑term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements.

Securitizations may either take the form of the issuance of securitized bonds or the sale of “real estate mortgage investment conduit” securities backed by mortgage loans or other assets, with the securitization proceeds being used in part to repay pre-existing loan financing lines and repurchase facilities.

4 unchanged sentences

Description of Existing Financing Arrangements

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.

As of March 31, 2022, 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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Pursuant to the agreement, we and our subsidiary may sell to Nomura, and later repurchase, up to $300.0 million aggregate borrowings on mortgage loans.

The agreement expires on August 5, 2022, unless terminated earlier pursuant to the terms of the agreement.

The agreement terminates on August 5, 2022, unless terminated earlier pursuant to the terms of the agreement.

However, we are permitted to extend the expiration date by up to 364 additional days, subject to certain conditions being satisfied.

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Pursuant to the agreement, we or our subsidiary may sell to Banc of California, and later repurchase, up to $50.0 million aggregate borrowings on mortgage loans.

The agreement expires on March 16, 2022, unless terminated earlier pursuant to the terms of the agreement.

The agreement was amended on March 7, 2022 to terminate on March 16, 2023, unless terminated earlier pursuant to the terms of the agreement.

Additionally, the amendment increased the aggregate purchase price limit to $75.0 million from $50.0 million, and beginning March 8, 2022, provided that interest will accrue on any new transactions under the Loan Financing Line at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus an additional spread.

The principal amount paid by Banc of California for each mortgage loan is based on the lesser of (1) a percentage of the original principal amount of the mortgage loan (ranging from 75% to 97%) and (2) a percentage of its take‑out commitment (97%) or $4.0 million, depending on the loan type.

1 unchanged sentence

Upon our or our subsidiary’s repurchase of the mortgage loan, we are, or our subsidiary is, required to repay Banc of California the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) a specified minimum rate (ranging from 3.50% to 4.13%) and (B) one‑month LIBOR plus a spread ranging from 2.50% to 3.13%, and (2) in the case of loans with maturities over 364 days, the seasoned spread of 1.0%.

The agreement requires the us to maintain various financial and other covenants, which include:

As discussed above, the LIBOR reference rate was changed to SOFR beginning March 8, 2022 and going forward.

The agreement requires us to maintain various financial and other covenants, which include:

(1) a minimum tangible net worth of $40.0 million consolidated;

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Pursuant to the agreement, we or our subsidiary may sell to Deutsche Bank, and later repurchase, up to $250.0 million aggregate borrowings on mortgage loans.

The agreement expires on February 11, 2022, unless terminated earlier pursuant to the terms of the agreement.

The principal amount paid by Deutsche Bank for each mortgage loan is based on a percentage of the market value, cost‑basis value or unpaid principal balance of the mortgage loan (generally ranging from 60% to 92%, depending on the type of loan and certain other factors and subject to certain other adjustments).

Pursuant to the agreement, Deutsche Bank retains the right to determine the market value of the mortgage loan collateral in its sole good faith discretion.

Additionally, Deutsche Bank is under no obligation to purchase the eligible mortgage loans we offer to sell to them.

Upon our or our subsidiary’s repurchase of the mortgage loan, we are, or our subsidiary is, required to repay Deutsche Bank the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) 0.00% and (B) one‑month LIBOR and (2) a spread generally ranging from 2.00% to 3.25%.

The agreement, as amended previously, was set to terminate on February 11, 2022.

On February 4, 2022, the agreement was amended to terminate on February 2, 2024, unless terminated earlier pursuant to the terms of the agreement.

Prior to the amendment executed on February 4, 2022, the principal amount paid by Deutsche Bank for each mortgage loan was based on a percentage of the market value, cost‑basis value or unpaid principal balance of the mortgage loan (generally ranging from 60% to 92%, depending on the type of loan and certain other factors and subject to certain other adjustments).

Pursuant to the agreement, Deutsche Bank retained the right to determine the market value of the mortgage loan collateral in its sole good faith discretion.

Additionally, Deutsche Bank was under no obligation to purchase the eligible mortgage loans we offered to sell to them.

Prior to the February 2, 2024 amendment, upon our or our subsidiary’s repurchase of the mortgage loan, we or our subsidiary were required to repay Deutsche Bank the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (1) the greater of (A) 0.00% and (B) one‑month LIBOR and (2) a spread generally ranging from 2.00% to 3.25%.

Pursuant to the amendment executed on February 4, 2022, interest will now accrue on any outstanding balance under the Master Repurchase Agreement at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month).

Previously, interest accrued at a rate based on one-month LIBOR.

Additionally, the agreement was also amended to remove any draw fees;

and adjust the pricing rate whereby upon the Company’s or the subsidiary’s repurchase of a mortgage loan, the Company or the subsidiary is required to repay Deutsche Bank the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (A) the greater of (i) 0.00% and (ii) Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) and (B) a spread generally ranging from 2.20% to 3.45%.

The agreement requires us to maintain various financial and other covenants, which include:

12 unchanged sentences

Pursuant to the agreement, we or our subsidiary may sell to Goldman, and later repurchase, up to $200.0 million aggregate borrowings on mortgage loans.

The agreement expires on March 5, 2022, unless terminated earlier pursuant to the terms of the agreement.

The agreement was extended on March 2, 2022 to terminate on March 5, 2023, unless terminated earlier pursuant to the terms of the agreement.

The principal amount paid by Goldman for each eligible mortgage loan is based on a percentage of the outstanding principal balance of the mortgage loan or the market value of the mortgage loan (generally ranging from 75% to 85%, depending on the type of loan), whichever is less.

2 unchanged sentences

Additionally, Goldman is under no obligation to purchase the eligible mortgage loans we offer to sell to them.

Upon our or our subsidiary’s repurchase of the mortgage loan, we are, or our subsidiary is, required to repay Goldman the principal amount related to such mortgage loan plus accrued interest generally at a rate based on three‑month LIBOR plus 2.25%.

Prior to the January 1, 2022 amendment, upon our or our subsidiary’s repurchase of the mortgage loan, we were, or our subsidiary was, required to repay Goldman the principal amount related to such mortgage loan plus accrued interest generally at a rate based on three‑month LIBOR plus 2.25%.

On January 1, 2022, the LIBOR-based index was replaced by reference to the sum of Compounded SOFR and a SOFR adjustment of 20 basis points.

Compounded SOFR is determined on a one-month basis and is defined as a daily rate as determined by Goldman to be the “USD-SOFR-Compound” rate as defined in the International Swaps and Derivatives Association, Inc.

The agreement requires us to maintain various financial and other covenants, such as that:

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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.

On February 11, 2022, we amended the financing facility to increase the size of the financing facility to $75.0 million from $50.0 million.

The Veritex Financing Line terminates, 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%.

Prior to the February 11, 2022 amendment, 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%.

After the February 11, 2022 amendment, interest will accrue on any outstanding balance at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus a margin equal to 2.41% per annum;

provided that the interest rate may not be less than 3.125% per annum.

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.

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

On January 27, 2022, this repurchase facility was amended to to state that interest will accrue on any outstanding balance at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) and increase the maximum purchase price permitted under the Master Repurchase Agreement to $550.0 million from $400.0 million, which is subject to reduction to $400.0 million upon the earlier to occur of (1) the issuance of securities pursuant to a securitization of the assets underlying the Master Repurchase Agreement and (2) March 30, 2022, which triggering event has occurred.

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.

Prior to the January 27, 2022 amendment, the interest rate on any outstanding balance under the Master Repurchase Agreement that the Subsidiary was required to pay Barclays was generally in line with other similar agreements that the Company or one of its subsidiaries has entered into, where the interest rate was 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 LIBOR.

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

As stated above, the interest rate is now calculated as a rate based on Term SOFR instead of one-month LIBOR.

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.

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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

The following table sets forth the details of our financing lines as of each of March 31, 2022 and December 31, 2021:

Line of Credit Facility Limit Base Interest Rate (A)

Interest Rate Spread (A)

March 31, 2022 December 31, 2021

($ 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)

$ 400,000 1 month LIBOR 1.70% - 3.50% $ 379,333 $ 362,899

$ 101,210 $ 8,011

Nomura Corporate Funding Americas, LLC (2)

$ 300,000 1 month or 3 month LIBOR 1.70% - 3.50% $ 20,207 103,149

Deutsche Bank, AG (3)

$ 250,000 1 month LIBOR 2.00% - 3.25% $ 235,743 231,981

$ 74,552 $ 34,905

Goldman Sachs Bank USA (4)

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

$ 200,000 3 month LIBOR 2.25% $ 193,351 109,283

Banc of California, National Association (5)

$ 75,000 1 month LIBOR 2.50% - 3.13% $ 52,869 34,838

$ 38,498 $ 38,989

Veritex Community Bank (6)

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

$ 75,000 1 month LIBOR 2.30% $ 74,662 11,258

Total $ 1,300,000 $ 956,165 $ 853,408

(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.

(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.

(A) See below for timing of applicable transitions to SOFR as base interest rate and corresponding applicable interest rate spreads.

(1) This agreement terminates on September 20, 2022.

On January 27, 2022, this repurchase facility was amended to to state that interest will accrue on any outstanding balance at a rate based on Term SOFR plus a spread and increase the maximum purchase price permitted under the Master Repurchase Agreement to $550.0 million from $400.0 million, which was subject to reduction to $400.0 million upon the issuance of securities pursuant to a securitization of the assets underlying the Master Repurchase Agreement which occurred on February 7, 2022.

(2) This agreement terminates on August 5, 2022.

(3) On February 4, 2022, this facility was amended to extend the initial termination date of the Master Repurchase Agreement from February 11, 2022 to February 2, 2024;

remove any draw fees;

and adjust the pricing rate whereby upon the Company’s or the Subsidiary’s repurchase of a mortgage loan, the Company or the Subsidiary is required to repay Deutsche Bank the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate (determined based on the type of loan) equal to the sum of (A) the greater of (i) 0.00% and (ii) Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) and (B) a spread generally ranging from 2.20% to 3.45%.

(4) On March 2, 2022, the agreement was extended to terminate on March 5, 2023, unless terminated earlier pursuant to the terms of the agreement.

On January 1, 2022, the agreement was amended to replace a LIBOR-based index rate with a SOFR-based index rate plus a spread equal to 20 basis points.

(5) On March 7, 2022, the agreement was amended to terminate on March 16, 2023, unless terminated earlier pursuant to the terms of the agreement.

(6) This agreement terminates on August 16, 2023.

On February 11, 2022, the Company amended the financing facility to (1) increase the size of the financing facility to $75.0 million from $50.0 million, and (2) interest will accrue on any outstanding balance at a rate based on Term SOFR (which is defined as the forward-looking term rate based on the Secured Overnight Financing Rate for a corresponding tenor of one month) plus a margin equal to 2.41% per annum;

provided that the interest rate may not be less than 3.125% per annum.

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 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

As of March 31, 2022, there was approximately $477.4 million outstanding under these repurchase facilities, with a weighted average interest rate of 0.32%.

The following table sets forth certain characteristics of our short-term repurchase facilities as of March 31, 2022 and December 31, 2021:

March 31, 2022

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

($ in thousands)

Treasury Bills $ 348,867 0.32 % 9

RMBS 128,555 0.56 % 15

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Q1 2022 477,422 272,282 477,422

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 the Operating Partnership.

Securitization Transactions

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 February 2022, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 56% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2022-1 issued approximately $551.8 million in face value of bonds.

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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.

Given the accounting rules surrounding this type of transaction, we have consolidated the AOMT 2022-1 securitization on our condensed 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 March 31, 2022.

In November 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 2021-7 issued approximately $386.9 million in face value of bonds.

We served as the “sponsor” (as defined in the U.S.

Risk Retention Rules) of the transaction, contributing non‑QM loans with a carrying value of approximately $482.9 million that we had accumulated and held on our balance sheet to AOMT 2020‑3.

The remaining non‑QM loans that we contributed to AOMT 2020‑3 were purchased from affiliated and unaffiliated entities.

We used the proceeds of the securitization transaction to repay outstanding debt of approximately $331.8 million and retained cash of $39.8 million, which was used to acquire additional non‑QM loans, pay down repurchase facilities, and acquire other target assets.

An affiliate of the Manager acted as the servicing administrator for AOMT 2020‑3, and as such is responsible for servicing the securitized mortgage loans pursuant to separate pooling and servicing agreements.

Series A Cumulative Non‑Voting Preferred Stock

In January 2019, in order for us to satisfy the 100‑holder REIT requirement under the Code, we issued 125 shares of our Series A preferred stock with a liquidation preference of $1,000 per share.

The shares of our Series A preferred stock may be redeemed at our option at any time, in whole or in part, for cash equal to $1,000 per share plus all accrued and unpaid dividends thereon to and including the date fixed for redemption.

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 AOMT 2021-7 securitization on our condensed consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.

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 condensed consolidated balance sheets, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.

Leverage and Hedging Strategies

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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.

Nine Months Ended

September 30, 2021 September 30, 2020

Three Months Ended

March 31, 2022 March 31, 2021

(in thousands)

Cash flows provided by (used in) operating activities $ (883,722) $ 118,123

Cash flow used in investing activities $ (408,479) $ 17,675

Cash flows used in operating activities $ (606,423) $ (81,615)

Cash flow provided by investing activities $ 261,363 $ 64,060

Cash flows provided by financing activities $ 388,644 $ 15,599

Net increase (decrease) in cash and restricted cash $ 43,584 $ (1,956)

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 $1.3 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.

Operating cash flows of $(606.4) million for the three months ended March 31, 2022 as compared to $(81.6) million for the three months ended March 31, 2021 were primarily due to the purchase of additional residential mortgage loans during the three months ended March 31, 2022.

Investing cash flows of $261.4 million for the three months ended March 31, 2022 as compared to $64.1 million for the three months ended March 31, 2021 were primarily due to the sale of RMBS during the quarter, partially offset by the purchase and maturity activity of U.S.

Treasury securities.

Financing cash flows of $388.6 million for the three months ended March 31, 2022 as compared to $15.6 million for the three months ended March 31, 2021 were increased primarily due to proceeds from the AOMT 2022-1 securitization, partially offset by principal payments to bond holders, dividends to common stockholders, and stock repurchase activity.

Cash Flows - Residential and Commercial Loan Classification

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Commercial mortgage loan activity is recognized in the statement of cash flows as an investing activity, as our commercial mortgage loan portfolio is generally deemed to be held for investing purposes.

Contractual Obligations and Commitments

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 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

Other than the unconsolidated securitization trusts that we participated in, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities.

Critical Accounting Policies and Estimates

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Actual results could differ from those estimates.

A discussion of critical accounting policies is included in the “Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” section in the Prospectus.

Management discusses the ongoing development and selection of these critical accounting policies with the Audit Committee of our Board of Directors.

A discussion of critical accounting policies and estimates is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” section in the Annual Report on Form 10-K.

Our critical accounting policies and estimates have not materially changed since December 31, 2021.

Management discusses the ongoing development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

We expect quarter-to-quarter GAAP earnings volatility from our business activities.

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Refer to the notes to our consolidated financial statements included in this report for a discussion of recent accounting pronouncements and any expected impact on the Company.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide this information.

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