What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-07 · 218 added, 185 removed, 693 unchanged (37% of the section changed)

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Overall macroeconomic environment and its effect on us

Markets remained focused on the latest inflation readings and macroeconomic conditions during the second quarter of 2024 as investors tried to determine the timing and degree to which the Federal Reserve Bank (“Fed”) will begin to cut interest rates.

Contrary to the first quarter, during which data underscored stubborn inflation, data in the second quarter and subsequent to the second quarter have shown signs of easing inflation.

Despite the macroeconomic movement, and given the conflicting and inconsistent nature of recent data and the fact that inflation is still above its annualized 2% target, the Fed elected to hold interest rates steady through the second quarter.

It has indicated that it still expects to cut rates in 2024, though the timing and number of rate cuts remains uncertain.

30 year fixed residential conforming mortgage rates ended at similar levels in the second quarter compared to the first quarter, with the average rate at the end of June at 6.87% compared to 6.79% at the end of March.

However, we observed volatility within the second quarter as rates increased from the end of March to the end of April, then fell back down to March levels by the end of June.

Home purchase and mortgage origination activity have remained suppressed in line with maintained elevated interest rates, high home prices, and limited supply.

However, mortgage application activity accelerated in June, reflecting the highest level since January of this year.

Rate cuts are expected to drive increased home purchase and mortgage origination activity, but the extent of such activity remains uncertain.

The two-year and five-year Treasury yields were relatively flat in the second quarter, increasing by approximately six basis points and two basis points, respectively.

Net of new loan purchases and securitizations, we observed an increase of approximately 216 basis points in the weighted average price of our residential whole loans portfolio since the end of first quarter 2024.

Additionally, we have increased the weighted average coupon of our residential whole loans portfolio by 60 basis points since the end of the first quarter 2024 to 7.71% as of the end of the second quarter of 2024.

In April, we executed the AOMT 2024-4 securitization as the sole contributor of loans, contributing approximately $300 million in scheduled unpaid principal balance of residential mortgage loans.

Additionally, we participated in the AOMT 2024-6 securitization in June, contributing approximately $22.9 million in scheduled unpaid principal balance of residential mortgage loans.

During the second quarter of 2024, we purchased $114.4 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 7.93%, weighted average loan-to-value ratio (“LTV”) of 70.4% and weighted average credit score of 757.

Over the course of the third quarter, signs of easing inflation and a stable employment sector that had emerged during the second quarter persisted, providing the Federal Reserve Bank of the United States (“the Fed”) with confidence to reduce interest rates at its September meeting for the first time since March of 2020.

At that meeting, the Fed elected to reduce rates by what was perceived to be an aggressive 50 basis points (“bps”).

Following the rate cut and now that an easing rate cycle has begun, analysts are split over the expected timing and extent of future rate cuts.

As of the end of September 2024, markets were pricing in an additional 1.5 cuts through the end of the year.

As of the end of September 2024, inflation was 2.4%, down from 2.9% as of the end of June but still above the Fed’s 2.0% target.

30 year fixed residential conforming mortgage rates also responded to the Fed rate cuts, with the average rate dropping 78bps, from from 6.86% at the end of June 2024 to 6.08% as of the end of September 2024.

According to the U.S.

Department of Housing and Urban Development, mortgage origination activity rose 9.6% in August 2024 on a month over month seasonally adjusted basis, driven by a 15.8% increase in single-family housing starts.

Rate cuts are expected to drive increased home purchase and mortgage origination activity going forward, but the extent of such activity remains uncertain.

On the heels of inflation data and the Fed rate cuts, the two-year and five-year Treasury yields decreased by 112bps and 82bps, respectively, in the third quarter of 2024 compared to the end of June 2024.

Net of new loan purchases and securitizations, we observed an increase of approximately 261 basis points in the weighted average price of our residential whole loans portfolio since the end of second quarter 2024.

The weighted average coupon of our residential whole loans portfolio held relatively flat at 7.73% as of the end of the third quarter of 2024 compared to 7.71% as of the end of the second quarter of 2024.

Subsequent to the end of the third quarter of 2024, in October, we executed the AOMT 2024-10 securitization as the sole contributor of loans, contributing approximately $316.8 million in scheduled unpaid principal balance of residential mortgage loans.

During the third quarter of 2024, we purchased $264.8 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 7.74%, weighted average loan-to-value ratio (“LTV”) of 70.0% and weighted average credit score of 754.

Notes offering

Subsequent to the end of the second quarter, on July 25, 2024, we closed an underwritten public offering and sale of, and issued, $50 million in aggregate principal amount of our 9.500% Senior Notes due 2029 (the “Notes”).

On July 25, 2024, we closed an underwritten public offering and sale of, and issued, $50 million in aggregate principal amount of our 9.500% Senior Notes due 2029 (the “Notes”).

The Notes bear interest at a rate of 9.500% per annum, payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year, commencing on October 30, 2024.

The Notes will mature on July 30, 2029, unless earlier redeemed or repurchased by us.

We intend to use the majority of the net proceeds from the offering for general corporate purposes, which may include the acquisition of non-QM loans and other target assets primarily sourced from our affiliated proprietary mortgage lending platform or other target assets through the secondary market in a manner consistent with our strategy and investment guidelines.

Additionally, we used the net proceeds from the offering to repurchase 1,707,922 shares of our common stock owned by Xylem Finance LLC, an affiliate of Davidson Kempner Capital Management LP, for an aggregate repurchase price of approximately $20.0 million.

We have deployed the majority of the net proceeds from the offering of the Notes for general corporate purposes, which included the acquisition of non-QM loans and other target assets primarily sourced from our affiliated proprietary mortgage lending platform and other target assets through the secondary market in a manner consistent with our strategy and investment guidelines.

Additionally, we used a portion of the net proceeds from the offering of the Notes to repurchase 1,707,922 shares of our common stock owned by Xylem Finance LLC, an affiliate of Davidson Kempner Capital Management LP, for an aggregate repurchase price of approximately $20.0 million.

Our investment performance

Net Interest Margin (“NIM”).

Despite holding fewer target assets in the second quarter of 2024 as compared to the second quarter of 2023, an increase in the yield of our target assets generated greater interest income in the second quarter of 2024.

Borrowings on our whole loan portfolio decreased as well, reducing our overall interest expense, despite continued high variable interest rates in the second quarter of 2024 compared to the second quarter of 2023.

An increase in both the balance and yield of our target assets generated greater interest income in the third quarter of 2024 as compared to the third quarter of 2023.

Interest income growth outpaced the growth in interest expense, leading to higher NIM in the third quarter of 2024 compared to the third quarter of 2023.

Net realized loss .

Our net realized loss for the quarter ended June 30, 2024 was primarily due to a realized loss on the sale of whole loans contributed into the AOMT 2024-6 securitization which was not consolidated into a VIE, as well as realized losses on loans held in securitization trusts associated with pay downs of underlying loans.

Our net realized loss for the quarter ended September 30, 2024 was primarily due to realized losses associated with rate hedge contracts, as well as paydowns on our residential loans and loans held in securitization trusts portfolios.

Net unrealized gain .

Our net unrealized gain for the quarter ended June 30, 2024 was primarily due to an increase in the valuation of our residential whole loans and the net valuation of loans in securitization trust and non-recourse securitization obligation portfolios.

Additionally,

the reversal of the unrealized loss (and thereby the recognition of net realized loss discussed above) on the sale of residential mortgage loans into the AOMT 2024-6 securitization contributed to our unrealized gain.

Our net unrealized gain for the quarter ended September 30, 2024 was driven by an increase in the valuation of our residential whole loans and the net valuation of loans in securitization trust and non-recourse securitization obligation portfolios.

Whole loans and securitization activity

During the quarter ended June 30, 2024, we purchased $114.4 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 7.93%, weighted average loan-to-value ratio (“LTV”) of 70.4% and weighted average credit score of 757.

During the quarter ended September 30, 2024, we purchased $264.8 million of newly-originated, current market coupon non-QM residential mortgage loans, with a weighted average coupon of 7.74%, weighted average LTV of 70.0% and weighted average credit score of 754.

In March 2024, we participated in AOMT 2024-3, an approximately $439.6 million scheduled unpaid principal balance securitization backed by a pool of residential mortgage loans, to which we contributed loans with a scheduled unpaid principal balance of approximately $48.7 million.

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We participated in this securitization alongside other Angel Oak entities, and may strategically enter into similar securitizations in the future.

Subsequent to quarter end, in October 2024, we issued AOMT 2024-10, an approximately $316.8 million scheduled unpaid principal balance securitization backed by a pool of residential mortgage loans.

We issued AOMT 2024-10 as the sole participant in the securitization.

As the primary beneficiary we will consolidate the AOMT 2024-10 securitization, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our condensed consolidated balance sheet as of the applicable balance sheet date.

Whole loan financing facilities activity

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See “Liquidity and Capital Resources” below for a full description of our financing arrangements.

Our total borrowing capacity was $1.1 billion as of June 30, 2024.

Highlights of whole loan financing facilities activity over the second quarter of 2024 are as follows:

• During the quarter ended June 30, 2024, we maintained the same whole loan financing facility lender base as of December 31, 2023.

• During the quarter ended June 30, 2024, we (i) renewed our loan financing facility with Multinational Bank 1 in accordance with the mechanism for six-month renewal periods simultaneously decreasing the interest rate pricing margin to 1.75% from 2.00% and (ii) amended our loan financing facility with Global Investment Bank 3 to allow for the financing of closed-end second position residential mortgage loans.

Our total borrowing capacity was $1.1 billion as of September 30, 2024.

Highlights of whole loan financing facilities activity over the third quarter of 2024 are as follows:

• During the quarter ended September 30, 2024, we maintained the same whole loan financing facility lender base as of December 31, 2023.

• During the quarter ended September 30, 2024, we (i) renewed our loan financing facility with Multinational Bank 1 in accordance with the mechanism for six-month renewal periods.

• Subsequent to quarter end, we (i) in October 2024, amended our loan financing facility with Global Investment Bank 2 to, among other changes, reduce the interest rate pricing spread to a range from 1.75% to 3.35% and (ii) in November 2024 amended our loan financing facility with Global Investment Bank 3 to, among other changes, (a) extend the termination date to November 1, 2025;

(b) reduce the interest rate pricing spread to a range from1.90% to 4.75% based on collateral type, loan status, dwell time and other factors;

and (c) eliminate the 20 basis point index spread adjustment.

Key Financial Metrics

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Given these requirements and our belief that dividends are generally one of the principal reasons that stockholders invest in our common stock, generally we intend to attempt to pay dividends to our stockholders in an amount equal to our REIT taxable income, if and to the extent authorized by our Board of Directors.

Distributable Earnings is one of a number of factors considered by our Board of Directors in declaring dividends and, while not a direct measure of REIT taxable income, over time, the measure can be considered a useful indicator of our dividends.

Distributable Earnings is one of a

number of factors considered by our Board of Directors in declaring dividends and, while not a direct measure of REIT taxable income, over time, the measure can be considered a useful indicator of our dividends.

Distributable Earnings should not be viewed in isolation and is not a substitute for net income computed in accordance with GAAP.

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 use Distributable Earnings to determine the incentive fee, if any, payable to our Manager pursuant to the management agreement that we and the Operating Partnership entered into with our Manager upon the completion of our IPO on June 21, 2021 and amended and restated on May 1, 2024 (as amended and restated, the “Management Agreement”).

We also use Distributable Earnings to determine the incentive fee, if any, payable to our Manager pursuant to the management agreement that we and the Operating Partnership entered into with our Manager upon the completion of our initial public offering of common stock (“IPO”) on June 21, 2021 and amended and restated on May 1, 2024 (as amended and restated, the “Management Agreement”).

For information on the fees that are payable to our Manager under the Management Agreement, see “Note 10 – Related Party Transactions” in our unaudited condensed consolidated financial statements included in this report.

Distributable Earnings were a loss of $2.3 million and a loss of $3.9 million for the three months ended June 30, 2024 and 2023, respectively.

Distributable Earnings were a loss of $3.4 million and a loss of $8.6 million for the three months ended September 30, 2024 and 2023, respectively.

The primary drivers of this quarter’s Distributable Earnings as compared to GAAP net income are the adjustments to remove unrealized gains associated with our residential loans and residential loans in securitization trusts and non-recourse securitization obligation portfolios.

The table below sets forth a reconciliation of net income (loss) allocable to common stockholders, calculated in accordance with GAAP, to Distributable Earnings for the three and six months ended June 30, 2024 and 2023:

Three Months Ended Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

Three Months Ended Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

(in thousands)

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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 and six months ended June 30, 2024 and 2023:

Three Months Ended Six Months Ended

June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

Set forth below is our computation of Distributable Earnings Return on Average Equity for the three and nine months ended September 30, 2024 and 2023:

Three Months Ended Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

($ in thousands)

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Book Value per Share of Common Stock

The following table sets forth the calculation of our book value per share of common stock as of June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

The following table sets forth the calculation of our book value per share of common stock as of September 30, 2024 and December 31, 2023:

September 30, 2024 December 31, 2023

(in thousands except for share and per share data)

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Economic book value does not represent and should not be considered as a substitute for book value per share of common stock or stockholders’ equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The following table sets forth a reconciliation from GAAP total stockholders’ equity and book value per share of common stock to economic book value and economic book value per share of common stock as of June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

(in thousands except for share and per share data)

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Results of Operations

Three Months Ended June 30, 2024 and 2023

The following table sets forth a summary of our results of operations for the three months ended June 30, 2024 and 2023:

Three Months Ended September 30, 2024 and 2023

The following table sets forth a summary of our results of operations for the three months ended September 30, 2024 and 2023:

Three Months Ended

June 30, 2024 June 30, 2023

September 30, 2024 September 30, 2023

(in thousands)

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Net unrealized gain (loss) on trading securities, mortgage loans, portion of debt at fair value option, and derivative contracts

35,172 17,299

TOTAL REALIZED AND UNREALIZED GAINS (LOSSES), NET $ 28,837 $ 5,255

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INCOME (LOSS) BEFORE INCOME TAXES $ 34,036 $ 8,273

Income tax expense (benefit) 142 781

Income tax expense 2,832 —

NET INCOME (LOSS) ALLOCABLE TO COMMON STOCKHOLDERS $ 31,204 $ 8,273

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Net Interest Income

The following table sets forth the components of net interest income for the three months ended June 30, 2024 and 2023:

The following table sets forth the components of net interest income for the three months ended September 30, 2024 and 2023:

Three Months Ended

June 30, 2024 June 30, 2023

September 30, 2024 September 30, 2023

(in thousands)

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Repurchase facilities 900 57,842 1,417 87,279

Senior unsecured notes

963 40,538 — —

Total interest expense 18,424 16,490

Net interest income $ 9,020 $ 7,410

Net interest income for the three months ended June 30, 2024 and 2023 was $9.5 million and $6.5 million, respectively.

Interest income increased in the three months ended June 30, 2024 as compared to the same period in 2023, primarily due to an increase in the yield of our assets in the second quarter of 2024 despite generally lower average balances.

Interest expense decreased as well, further contributing to the increase in net interest income, primarily due to lower balances and therefore less expense associated with notes payable as compared to the same period in 2023.

Net interest income for the three months ended September 30, 2024 and 2023 was $9.0 million and $7.4 million, respectively.

Net interest income increased in the three months ended September 30, 2024 as compared to the same period in 2023, primarily due to higher net interest income from our residential mortgage loans portfolio (residential mortgage loan interest income less notes payable interest expense) during the three months ended September 30, 2024 .

We observed net interest income associated with our residential mortgage loan portfolio of $1.8 million in the three months ended September 30, 2024 compared to $0.1 million in the comparable period of 2023.

This was primarily driven by an increase in the weighted average coupon rate of our residential mortgage loans portfolio versus the comparative period, as well as holding more unlevered loans, resulting in a proportionally lower notes payable balance.

Total Realized and Unrealized Gains (Losses)

The components of total realized and unrealized gains (losses), net for the three months ended June 30, 2024 and 2023 are set forth as follows:

The components of total realized and unrealized gains (losses), net for the three months ended September 30, 2024 and 2023 are set forth as follows:

Three Months Ended

June 30, 2024 June 30, 2023

September 30, 2024 September 30, 2023

(in thousands)

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Total realized and unrealized gains (losses), net $ 28,837 $ 5,255

For the three months ended June 30, 2024 and 2023, total realized and unrealized gains (losses), net resulted in losses of $4.1 million and $3.8 million, respectively.

During the three months ended June 30, 2024, losses on securitization, net of unrealized gain (loss) on

non-recourse securitization obligation drove the overall loss to our portfolio.

During the three months ended June 30, 2023, losses were driven by declines in securitization, net of unrealized gain (loss) on non-recourse securitization obligation, whole pool agency RMBS, interest rate futures, and residential mortgage loans, and were partially offset by unrealized appreciation on interest rate futures.

For the three months ended September 30, 2024 and 2023, total realized and unrealized gains (losses), net resulted in gains of $28.8 million and $5.3 million, respectively.

During the three months ended September 30, 2024, gains on securitization, net of unrealized gain (loss) on non-recourse securitization obligation drove the majority of the overall gain to our portfolio as valuations increased during the quarter.

Similarly, during the three months ended September 30, 2023 gains on securitization, net of unrealized gain (loss) on non-recourse securitization obligation drove the majority of the overall gain to our portfolio as well.

Operating Expenses

For the three months ended June 30, 2024 and 2023, our operating expenses were $1.3 million and $2.2 million, respectively.

Our operating expenses decreased compared to the comparative period due to continued cost savings actions such as in-sourcing of key accounting functions, vendor contract negotiations, and a decrease in servicing fees associated with servicing our whole loan portfolio.

For the three months ended September 30, 2024 and 2023, our operating expenses were $1.3 million and $1.4 million, respectively.

Our operating expenses decreased slightly compared to the comparative period due to continued cost savings actions such as in-sourcing of key accounting functions, vendor contract negotiations, and a decrease in servicing fees associated with servicing our whole loan portfolio.

Operating Expenses Incurred with Affiliate

For the three months ended June 30, 2024 and 2023, our operating expenses incurred with affiliate were $0.5 million and $0.6 million, respectively.

These expenses, which are substantially comprised of payroll reimbursements to our Manager, were relatively flat in the second quarter of 2024 compared to the same period of 2023.

For the three months ended September 30, 2024 and 2023, our operating expenses incurred with affiliate were $0.5 million and $0.6 million, respectively.

These expenses, which are substantially comprised of payroll reimbursements to our Manager, decreased slightly in the third quarter of 2024 compared to the same period of 2023 as a result of additional cost savings actions.

Due Diligence and Transaction Costs

For the three months ended June 30, 2024 and 2023, our due diligence and transaction costs were $359 thousand and $21 thousand, respectively.

Our due diligence and transaction expenses increased over the comparative period due to accelerated purchases of whole loans during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.

For the three months ended September 30, 2024 and 2023, our due diligence and transaction costs were $254 thousand and $115 thousand, respectively.

Our due diligence and transaction expenses increased over the comparative period due to increased purchases of whole loans during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Stock Compensation

For the three months ended June 30, 2024 and 2023, our stock compensation expense was $0.6 million and $0.2 million, respectively.

Our stock compensation expense increased for the three months ended June 30, 2024 due to an increase in the estimated impact for outstanding performance-based restricted stock unit awards.

For the three months ended September 30, 2024 and 2023, our stock compensation expense was $0.6 million and $0.4 million, respectively.

Our stock compensation expense increased for the three months ended September 30, 2024 due to an increase in the estimated impact for outstanding performance-based restricted stock unit awards.

Securitization Costs

For the three months ended June 30, 2024 and 2023, we incurred $1.4 million and $1.0 million of securitization costs, respectively.

The expense incurred in both periods was a proportional allocation of expenses in conjunction with our share of the loans contributed to the AOMT 2024-4 and AOMT 2024-6 securitizations in the second quarter of 2024 and the AOMT 2023-4 securitization in the second quarter of 2023, respectively.

For the three months ended September 30, 2024 and 2023, we incurred $0.0 million and $0.4 million of securitization costs, respectively.

There was no securitization activity in the third quarter of 2024, and the securitization costs in the comparative period in 2023 were driven by our participation in the AOMT 2023-5 securitization.

Management Fee Incurred with Affiliate

For the three months ended June 30, 2024 and 2023, our management fee incurred with affiliate was $1.3 million and $1.5 million, respectively.

The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the three months ended June 30, 2024 as compared to the same period in 2023.

For the three months ended September 30, 2024 and 2023, our management fee incurred with affiliate was $1.2 million and $1.4 million, respectively.

The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the three months ended September 30, 2024 as compared to the same period in 2023.

A key driver of the decrease in the three months ended September 30, 2024 versus the comparative period of 2023 is the repurchase of 1,707,922 million shares of our common stock owned by Xylem Finance, LLC, an affiliate of Davidson Kempner Capital Management, LP, for an aggregate repurchase price of approximately $20 million.

The calculation of Equity for the purposes of the Management Agreement includes the addition of Distributable Earnings, which is the primary departure from the calculation of equity in accordance with GAAP.

Six Months Ended June 30, 2024 and 2023

The following table sets forth a summary of our results of operations for the six months ended June 30, 2024 and 2023:

Six Months Ended

June 30, 2024 June 30, 2023

Nine Months Ended September 30, 2024 and 2023

The following table sets forth a summary of our results of operations for the nine months ended September 30, 2024 and 2023:

Nine Months Ended

September 30, 2024 September 30, 2023

(in thousands)

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Net Interest Income

The following table sets forth the components of net interest income for the six months ended June 30, 2024 and 2023:

Six Months Ended

June 30, 2024 June 30, 2023

The following table sets forth the components of net interest income for the nine months ended September 30, 2024 and 2023:

Nine Months Ended

September 30, 2024 September 30, 2023

(in thousands)

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Repurchase facilities 2,980 64,431 3,399 89,726

Senior unsecured notes

963 35,681 — —

Total interest expense 51,495 50,742

Net interest income $ 27,063 $ 20,661

Net interest income for the six months ended June 30, 2024 and 2023 was $18.0 million and $13.3 million, respectively.

Net interest income increased in the six months ended June 30, 2024 as compared to the same period in 2023, primarily due to higher net interest income from our residential mortgage loan portfolio (residential mortgage loan interest income less notes payable interest expense) during the six months ended June 30, 2024 .

The net interest income associated with our residential mortgage loan portfolio was $2.2 million in the six months ended June 30, 2024 as compared to a loss of $(2.9) million in the comparable period of 2023.

Net interest income for the nine months ended September 30, 2024 and 2023 was $27.1 million and $20.7 million, respectively.

Net interest income increased in the nine months ended September 30, 2024 as compared to the same period in 2023, primarily due to higher net interest income from our residential mortgage loans portfolio (residential mortgage loan interest income less notes payable interest expense) during the nine months ended September 30, 2024.

We observed net interest income associated with our residential mortgage loan portfolio of $4 million in the nine months ended September 30, 2024 compared to a loss of $(2.8) million in the comparable period of 2023.

Total Realized and Unrealized Gains (Losses)

The components of total realized and unrealized gains (losses), net for the six months ended June 30, 2024 and 2023 are set forth as follows:

Six Months Ended

June 30, 2024 June 30, 2023

The components of total realized and unrealized gains (losses), net for the nine months ended September 30, 2024 and 2023 are set forth as follows:

Nine Months Ended

September 30, 2024 September 30, 2023

(in thousands)

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(2,469) (1,545)

Unrealized gain (loss) on Whole Pool Agency RMBS (4,425) (260)

Realized and unrealized gain (loss) on Whole Pool Agency RMBS

(6,355) (12,627)

Realized gain (loss) on CMBS (186) (241)

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Total realized and unrealized gains (losses), net $ 33,987 $ 812

For the six months ended June 30, 2024 and 2023, total realized and unrealized gains (losses), net resulted in a net gain of $5.2 million and a loss of $(4.4) million, respectively.

During the six months ended June 30, 2024, gains on residential mortgage loans in securitization trust, net of non-recourse securitization obligation, residential mortgage loans, interest rate futures, and TBAs were offset by losses on RMBS and whole pool agency RMBS.

In the six months ended June 30, 2023, the net realized and unrealized loss was primarily due to losses on residential mortgage loans in securitization trust, net of non-recourse securitization obligation and TBAs offset by gains on residential mortgage loans.

For the nine months ended September 30, 2024 and 2023, total realized and unrealized gains (losses), net resulted in a net gain of $34 million and a loss of $0.8 million, respectively.

During the nine months ended September 30, 2024, gains on residential mortgage loans in securitization trust, net of unrealized gain (loss) on non-recourse securitization obligation, residential mortgage loans, TBAs, and interest rate futures were offset by losses on RMBS and whole pool agency RMBS.

In the nine months ended September 30, 2023, market volatility caused the valuation of our residential mortgage loans in securitization trust and whole pool agency RMBS to decrease, which was offset by gains in our residential mortgage loans portfolio and interest rate futures.

Operating Expenses

For the six months ended June 30, 2024 and 2023, our operating expenses were $3.3 million and $4.4 million, respectively.

For the nine months ended September 30, 2024 and 2023, our operating expenses were $4.6 million and $5.8 million, respectively.

Our operating expenses decreased during the comparative period due to continued cost savings actions such as in-sourcing of key accounting functions, vendor contract negotiations, and a decrease in servicing fees associated with servicing our whole loan portfolio.

Operating Expenses Incurred with Affiliate

For the six months ended June 30, 2024 and 2023, our operating expenses incurred with affiliate were $1.0 million and $1.1 million, respectively.

These expenses, which are substantially comprised of payroll reimbursements to our Manager, were relatively flat versus the comparative period.

For the nine months ended September 30, 2024 and 2023, our operating expenses incurred with affiliate were $1.44 million and $1.7 million, respectively.

These expenses, which are substantially comprised of payroll reimbursements to our Manager, decreased versus the comparative period as a result of additional cost savings actions.

Due Diligence and Transaction Costs

For the six months ended June 30, 2024 and 2023, our due diligence and transaction costs were $409 thousand and $21 thousand, respectively.

Our due diligence and transaction expenses increased versus the comparative period as we purchased more whole loans during the six months ended June 30, 2024 than the six months ended June 30, 2023.

For the nine months ended September 30, 2024 and 2023, our due diligence and transaction costs were $663 thousand and $136 thousand, respectively.

Our due diligence and transaction expenses increased versus the comparative period as we purchased more whole loans during the nine months ended September 30, 2024 than the nine months ended September 30, 2023.

Stock Compensation

For the six months ended June 30, 2024 and 2023 our stock compensation expense was $1.3 million and $0.7 million, respectively.

Stock compensation expense increased for the six months ended June 30, 2024 due to an increase in the estimated impact for outstanding performance-based restricted stock unit awards.

For the nine months ended September 30, 2024 and 2023 our stock compensation expense was $1.9 million and $1.2 million, respectively.

Stock compensation expense increased for the nine months ended September 30, 2024 due to an increase in the estimated impact for outstanding performance-based restricted stock unit awards.

Securitization Costs

Securitization costs of $1.6 million were incurred for the six months ended June 30, 2024 in connection with the AOMT 2024-3, AOMT 2024-4, and AOMT 2024-6 securitization transactions.

There were $1.9 million of securitization costs incurred for the comparable period in 2023, representing costs incurred in connection with the AOMT 2023-1 and AOMT 2023-4 securitizations.

Securitization costs of $1.6 million were incurred for the nine months ended September 30, 2024 in connection with the AOMT 2024-3, AOMT 2024-4, and AOMT 2024-6 securitization transactions.

There were $2.3 million of securitization costs incurred for the comparable period in 2023, representing costs incurred in connection with the AOMT 2023-1, AOMT 2023-4, and AOMT 2023-5 securitizations.

Management Fee Incurred with Affiliate

For the six months ended June 30, 2024 and 2023, our management fee incurred with affiliate was $2.6 million and $3.0 million, respectively.

The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the six months ended June 30, 2024 as compared to the same period in 2023.

For the nine months ended September 30, 2024 and 2023, our management fee incurred with affiliate was $3.8 million and $4.5 million, respectively.

The decrease is due to the decrease in our average Equity as defined in the Management Agreement for the nine months ended September 30, 2024 as compared to the same period in 2023.

A key driver of the decrease in the nine months ended September 30, 2024 versus the comparative period of 2023 is the repurchase of 1,707,922 million shares of our common stock owned by Xylem Finance, LLC, an affiliate of Davidson Kempner Capital Management, LP, for an aggregate repurchase price of approximately $20 million.

Our Portfolio

As of June 30, 2024, our portfolio consisted of approximately $1.9 billion of residential mortgage loans, RMBS, and other target assets.

As of September 30, 2024, our portfolio consisted of approximately $2.2 billion of residential mortgage loans, RMBS, and other target assets.

Certain of these portfolio assets are located in states such as Florida and California where natural disasters such as hurricanes and earthquakes may occasionally occur.

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The graphs in the subsequent detail of residential mortgage loans, residential mortgage loans held in securitization trusts, and residential mortgage loans underlying RMBS issuances show the percentage of residential mortgage loans held in each state where there is a concentration of loans.

The following table sets forth additional information regarding our portfolio, including the manner in which our equity capital was allocated among investment types, as of June 30, 2024:

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, 2024:

Fair Value Collateralized Debt Allocated Capital % of Total Capital

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Residential Mortgage Loans

The following table sets forth additional information on the residential mortgage loans in our portfolio as of June 30, 2024:

The following table sets forth additional information on the residential mortgage loans in our portfolio as of September 30, 2024:

Portfolio Range Portfolio Weighted Average

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Percentage of loans 90+ days delinquent (based on UPB) N/A 0.9%

The following charts illustrate the distribution of the credit scores and coupon rates by the number of loans in our residential mortgage loan portfolio as of June 30, 2024:

The following charts illustrate the distribution of the credit scores and coupon rates by the number of loans in our residential mortgage loan portfolio as of September 30, 2024:

The following charts illustrate the distribution of the credit scores and coupon rates by the number of loans in our residential mortgage loan portfolio as of December 31, 2023:

The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of June 30, 2024, based on the product profile, borrower profile, and geographic location (percentages are based on the aggregate unpaid principal balance of such loans):

Characteristics of Our Residential Mortgage Loans as of June 30, 2024:

No state in “Other” represents more than a 3% concentration of the residential mortgage loans in our portfolio that we owned directly as of June 30, 2024 .

The following charts illustrate additional characteristics of our residential mortgage loans in our portfolio that we owned directly as of September 30, 2024, 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, 2024:

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, 2024 .

Numbers presented may add to more than 100% due to rounding.

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Residential Mortgage Loans Held in Securitization Trusts

The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of June 30, 2024:

The following table sets forth the information regarding the underlying collateral of our residential mortgage loans held in securitization trusts as of September 30, 2024:

($ in thousands)

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(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 June 30, 2024 (percentages are based on the aggregate unpaid principal balance of such loans):

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 June 30, 2024 .

The following chart illustrates the geographic distribution of the underlying collateral of our residential mortgage loans held in securitization trusts as of September 30, 2024 (percentages are based on the aggregate unpaid principal balance of such loans):

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 September 30, 2024 .

Numbers presented may add to more than 100% due to rounding.

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Risk retention securities represent at least 5% of a horizontal or vertical slice of the bonds issued as part of the transaction.

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in such securitization transactions is set forth below as of June 30, 2024, unless otherwise stated:

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in such securitization transactions is set forth below as of September 30, 2024:

AOMT 2019 Securitizations

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

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

(4) The fair value of the first loss pieces presented for AOMT 2023-1, AOMT 2023-5, AOMT 2023-7, AOMT 2024-3, and AOMT 2024-6 is the total at risk for the Majority-Owned Affiliates.

(6) AOMT 2024-6 has been excluded as these data points do not yet exist.

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

Certain information regarding the mortgage loans underlying our portfolio of RMBS issued in AOMT securitization transactions is set forth below as of December 31, 2023, unless otherwise stated:

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(6) AOMT 2023-5 reflects one-month CPR.

The following table provides certain information with respect to our RMBS portfolio both received in AOMT securitization transactions and acquired from other third parties as of June 30, 2024:

The following table provides certain information with respect to our RMBS portfolio both received in AOMT securitization transactions and acquired from other third parties as of September 30, 2024:

RMBS Repurchase Debt (1)

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(1) Repurchase debt includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs).

(2) The whole pool RMBS presented as of June 30, 2024 were purchased from a broker to whom the Company owes approximately $181.8 million, payable upon the settlement date of the trade.

(2) The whole pool RMBS presented as of September 30, 2024 were purchased from a broker to whom the Company owes approximately $194.7 million, payable upon the settlement date of the trade.

See Note 6 — Due to Broker in our unaudited condensed consolidated financial statements included in this report.

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These bonds, with a fair value of $124.1 million, are not reflected in the condensed consolidated balance sheets, as the Company reflects the assets of the VIE (residential mortgage loans in securitization trusts - at fair value) on its condensed consolidated balance sheets.

The following table sets forth information with respect to our RMBS ending balances, at fair value, as of June 30, 2024:

The following table sets forth information with respect to our RMBS ending balances, at fair value, for the period ended September 30, 2024:

Senior Mezzanine Subordinate Interest Only Whole Pool Total

(in thousands)

Beginning fair value $ — $ 11,824 $ 58,955 $ 13,982 $ 360,375 $ 445,136

Beginning fair value as of June 30, 2024

$ — $ 13,100 $ 60,107 $ 13,027 $ 180,518 $ 266,752

Acquisitions:

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Third party securities — — — — 194,697 $ 194,697

Effect of principal payments / called deals — (318) — (359,892) $ (360,210)

Effect of principal payments / sales

— (280) — (178,702) $ (178,982)

IO and excess servicing prepayments — — — (565) — $ (565)

Changes in fair value, net — 644 2,115 593 (2,149) $ 1,203

Ending fair value $ — $ 13,100 $ 60,107 $ 13,027 $ 180,518 $ 266,752

The following table sets forth information with respect to our RMBS ending balances, at fair value, as of December 31, 2023:

Ending fair value as of September 30, 2024

$ — $ 13,464 $ 62,222 $ 13,055 $ 194,364 $ 283,105

The following table sets forth information with respect to our RMBS ending balances, at fair value, for the year ended December 31, 2023:

Senior Mezzanine Subordinate Interest Only Whole Pool Total

(in thousands)

Beginning fair value $ — $ 1,958 $ 49,578 $ 10,424 $ 993,378 $ 1,055,338

Beginning fair value as of December 31, 2022

$ — $ 1,958 $ 49,578 $ 10,424 $ 993,378 $ 1,055,338

Acquisitions:

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Third party securities — — — — 1,741,864 1,741,864

Effect of principal payments / called deals — (869) — — (2,339,028) (2,339,897)

Effect of principal payments / sales — (869) — — (2,339,028) (2,339,897)

IO and excess servicing prepayments — — — (1,396) — (1,396)

Changes in fair value, net — 52 1,207 501 (3,852) (2,092)

Ending fair value $ — $ 10,972 $ 55,665 $ 13,059 $ 392,362 $ 472,058

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of June 30, 2024 (percentages are based on the aggregate unpaid principal balance of such loans):

Ending fair value as of December 31, 2023

$ — $ 10,972 $ 55,665 $ 13,059 $ 392,362 $ 472,058

The following chart illustrates the geographic diversification of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of September 30, 2024 (percentages are based on the aggregate unpaid principal balance of such loans):

Geographic Diversification of Loans Underlying Our Portfolio

of RMBS Issued in AOMT Securitization Transactions

(as of June 30, 2024)

No state in “Other” represents more than a 4% concentration of the loans underlying our portfolio of RMBS issued in AOMT securitization transactions as of June 30, 2024.

(as of September 30, 2024)

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, 2024.

Numbers presented may add to more than 100% due to rounding.

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Numbers presented may add to more than 100% due to rounding.

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 June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

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 September 30, 2024 and December 31, 2023:

September 30, 2024 December 31, 2023

($ in thousands)

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Weighted average LTV at loan origination and deal date 56.2 % 56.2 %

The following table provides certain information with respect to the CMBS we received in connection with the AOMT 2020-SBC1 securitization transactions as of June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

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, 2024 and December 31, 2023:

September 30, 2024 December 31, 2023

CMBS Repurchase Debt Allocated Capital CMBS Repurchase Debt Allocated Capital

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Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund our investments and operating costs, make distributions to our stockholders, and satisfy other general business needs.

Our financing sources currently include payments of principal and interest we receive on our investment portfolio, unused borrowing capacity under our in‑place loan financing lines and repurchase facilities, and securitizations of our whole loans.

Additionally, on July 25, 2024, we closed an underwritten public offering and sale of, and issued, $50 million in aggregate principal amount of our 9.500% Senior Notes due 2029, the proceeds of which we intend to use for general corporate purposes and a portion of which was used to fund the repurchase of shares of our common stock as described in more detail under “—Trends and Recent Developments—Notes offering” in this report.

Additionally, on July 25, 2024, we closed an underwritten public offering and sale of, and issued, $50 million in aggregate principal amount of our 9.500% Senior Notes due 2029.

Additionally, we used the net proceeds from the offering of the Notes to repurchase 1,707,922 shares of our common stock owned by Xylem Finance LLC, an affiliate of Davidson Kempner Capital Management LP, for an aggregate repurchase price of approximately $20.0 million.

See “—Trends and Recent Developments—Notes offering” in this report.

Our financing sources historically have included the foregoing, as well as capital contributions from our investors prior to our IPO, and the proceeds from our IPO and concurrent private placement (which capital has all been deployed).

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Description of Existing Financing Arrangements

As of June 30, 2024, we were a party to three warehouse loan financing lines, which permitted borrowings in an aggregate amount of up to $1.1 billion.

During the quarter ended June 30, 2024, we (i) renewed our loan financing facility with Multinational Bank 1 in

accordance with the mechanism for six-month renewal periods simultaneously decreasing the interest rate pricing margin and (ii) amended our loan financing facility with Global Investment Bank 3 to allow for the financing of closed-end second position residential mortgage loans.

As of September 30, 2024, we were a party to three warehouse loan financing lines, which permitted borrowings in an aggregate amount of up to $1.1 billion.

During the quarter ended September 30, 2024, we renewed our loan financing facility with Multinational Bank 1 in accordance with the mechanism for six-month renewal periods.

Subsequent to the end of the quarter, we (i) amended our loan financing facility with Global Investment Bank 2 to, among other changes, reduce the interest rate pricing spread to a range from 1.75% to 3.35% and (ii) amended our loan financing facility with Global Investment Bank 3 to, among other changes, extend the termination date to (a) November 1, 2025;

(b) reduce the interest rate pricing spread to a range from 1.90% to 4.75% based on collateral type, loan status, dwell time and other factors;

and (c) eliminate the 20 basis point index spread adjustment.

Borrowings under warehouse loan financing lines (in general, each a “loan financing facility”) may be used to purchase whole loans for securitization or loans purchased for long‑term investment purposes.

Our financing facilities are generally subject to limits on borrowings related to specific asset pools (“advance rates”) and other restrictive covenants, as is usual and customary.

As of June 30, 2024, the advance rates (when required) of our three active lenders ranged from 65% to 92%, depending on the asset type and loan delinquency status.

As of September 30, 2024, the advance rates (when required) of our three active lenders ranged from 65% to 92%, depending on the asset type and loan delinquency status.

Our most restrictive covenants (when covenants are required by any of our three active lenders) included (1) our minimum tangible net worth must not (i) decline 20% or more in the previous 30 days, 25% or more in the previous 90 days, or 35% or more in the previous year, or (ii) fall below $200.0 million of tangible net worth as of September 30, 2022 plus 50% of any capital contribution made or raised after September 30, 2022;

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and (3) the maximum ratio of our and our subsidiaries’ total indebtedness to tangible net worth must not be greater than 5:1.

Our minimum liquidity requirement as of June 30, 2024 was $10.0 million.

A description of each loan financing facility in place during the quarter ended June 30, 2024 is set forth as follows:

Our minimum liquidity requirement as of September 30, 2024 was $10.0 million.

A description of each loan financing facility in place during the quarter ended September 30, 2024 is set forth as follows:

Multinational Bank 1 Loan Financing Facility.

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Pursuant to the terms of the master repurchase agreement, the agreement may be renewed every three months for a maximum six-month term.

As of June 30, 2024, the termination date of the master repurchase agreement was December 26, 2024.

As of September 30, 2024, the termination date of the master repurchase agreement was March 25, 2025.

The amount expected to be paid by Multinational Bank 1 for each eligible mortgage loan is based on an advance rate as a percentage of either the outstanding principal balance of the mortgage loan or the market value of the mortgage loan, whichever is less.

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Additionally, Multinational Bank 1 is under no obligation to purchase the eligible mortgage loans we offer to sell to them.

The interest rate on any outstanding balance under the master repurchase agreement that the applicable subsidiary is required to pay Multinational Bank 1 is generally in line with other similar agreements that the Company or one or more of its subsidiaries has entered into, where the interest rate is equal to the sum of (1) a pricing spread, as of June 25, 2024, 1.75% and (2) the average SOFR for each U.S.

Government Securities Business Day (as defined in the master repurchase agreement) beginning on April 11, 2022 and ending on the day that is two U.S.

The interest rate on any outstanding balance under the master repurchase agreement that the applicable subsidiary is required to pay Multinational Bank 1 is generally in line with other similar agreements that the Company or one or more of its subsidiaries has entered into, where the interest rate is equal to the sum of (1) a pricing spread generally ranging from 1.75% to 2.10% and (2) the average SOFR for each U.S.

Government Securities Business Day (as defined in the master repurchase agreement) until two U.S.

Government Securities Business Days prior to the date the applicable loan is repurchased by the applicable subsidiary.

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Global Investment Bank 2 Loan Financing Facility.

On March 28, 2024, two of our subsidiaries entered into a master repurchase agreement with a global investment bank (“Global Investment Bank 2”), replacing the existing master repurchase agreement with Global Investment Bank 2 entered into on February 13, 2020.

Investment Bank 2 entered into on February 13, 2020.

Our two subsidiaries are each considered a “Seller” under this agreement.

Pursuant to the agreement, on of our subsidiaries may sell to Global Investment Bank 2, and later repurchase, up to $250.0 million aggregate borrowings on mortgage loans.

Pursuant to the agreement, one of our subsidiaries may sell to Global Investment Bank 2, and later repurchase, up to $250.0 million aggregate borrowings on mortgage loans.

The agreement is set to terminate on March 27, 2026, unless terminated earlier pursuant to the terms of the agreement.

The principal amount paid by Global Investment Bank 2 for each mortgage loan is based on a percentage of the market value, cost‑basis value, or unpaid principal balance of the mortgage loan (depending on the type of loan and certain other factors and subject to certain other adjustments).

Pursuant to the agreement, Global Investment Bank 2 retains the right to determine the market value of the

mortgage loan collateral in its sole good faith discretion.

Pursuant to the agreement, Global Investment Bank 2 retains the right to determine the market value of the mortgage loan collateral in its sole good faith discretion.

Additionally, Global Investment Bank 2 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, our subsidiaries are required to repay Global Investment Bank 2 the principal amount related to such mortgage loan plus accrued and unpaid interest at a rate based on the sum of (1) the greater 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 pricing spread generally ranging from 2.10% to 3.35%.

he obligations of the subsidiaries under the master repurchase agreement are guaranteed by the Company pursuant to a guaranty executed contemporaneously with the master repurchase agreement.

The obligations of the subsidiaries under the master repurchase agreement are guaranteed by the Company pursuant to a guaranty executed contemporaneously with the master repurchase agreement.

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

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The advance rate for performing non-seasoned loans was increased to 85%.

On November 1, 2024, the facility’s termination date was extended to November 1, 2025.

In addition, the base interest rate spread was reduced to a range from 1.90% to 4.75% and the index spread adjustment of 0.20% was eliminated.

The loan financing line is marked-to-market at fair value, where Global Investment Bank 3 retains the right to determine the market value of the mortgage loan collateral in its sole and good faith discretion and in a commercially reasonable manner and is under no obligation to purchase the eligible mortgage loans we offered to sell to them.

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This financing facility was substantially unused, and expired by its terms on March 16, 2023.

The following table sets forth the details of our financing lines as of each of June 30, 2024 and December 31, 2023:

The following table sets forth the details of our loan financing facilities as of each of September 30, 2024 and December 31, 2023:

Spread Drawn Amount

Note Payable Base Interest Rate June 30, 2024 December 31, 2023

Note Payable Base Interest Rate September 30, 2024 December 31, 2023

($ in thousands)

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Regional Bank 1 (5)

1 month SOFR 2.50% - 3.50% N/A —

1 month SOFR 2.50% - 3.50%

Total $ 333,042 $ 290,610

(1) On June 25, 2024, this financing facility was extended through December 26, 2024 in accordance with the terms of the agreement, which contemplates six-month renewals, with an interest rate pricing spread of 1.75%.

Prior to this extension the interest rate pricing spread was up to 2.00%.

(1) On September 25, 2024, this financing facility was extended through March 25, 2025 in accordance with the terms of the agreement, which contemplates six-month renewals.

(2) On March 28, 2024 the amended and restated Master Repurchase Agreement was terminated and replaced with a new $250 million Master Repurchase Agreement which has a termination date of March 27, 2026.

Further, the interest rate pricing margin will range from 2.10% to 3.35%, based on loan status, dwell time and other factors.

Prior to this extension the interest rate pricing spread was up to 3.45%.

(3) This financing facility has a termination date of November 7, 2024.

On October 25, 2024, this facility was amended, reducing the interest rate pricing spread to a range from 1.75% to 3.35%, based on loan status, dwell time and other factors.

Prior to this extension the interest rate pricing spread ranged from 2.10% to 3.35%.

(3) On November 1, 2024, this facility was amended to (i) reduce the interest rate pricing spread to a range from 1.90% to 4.75%, based on loan status, dwell time and other factors, (ii) eliminate the 20 basis point index spread adjustment, and (iii) extend the facility’s termination date to November 1, 2025.

(4) These agreements expired by their terms on January 4, 2023.

(5) This agreement expired by its terms on March 16, 2023.

The following table sets forth the total unused borrowing capacity of each financing line as of June 30, 2024:

The following table sets forth the total unused borrowing capacity of each loan financing facility as of September 30, 2024:

Note Payable Borrowing Capacity Balance Outstanding Available Financing

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Total $ 1,050,000 $ 333,042 $ 716,958

Although available financing is uncommitted, the Company’s unused borrowing capacity is available if it has eligible collateral to pledge and meets other borrowing conditions as set forth in the applicable agreements.

Although available financing is uncommitted for each of our financing facilities, the Company’s unused borrowing capacity is available if it has eligible collateral to pledge and meets other borrowing conditions as set forth in the applicable agreements.

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.

The following table sets forth certain characteristics of our short-term repurchase facilities as of June 30, 2024 and December 31, 2023:

June 30, 2024

The following table sets forth certain characteristics of our short-term repurchase facilities as of September 30, 2024 and December 31, 2023:

September 30, 2024

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

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($ in thousands)

Treasury Bills $ 149,013 5.57 % 10

Treasury securities $ 149,013 5.57 % 10

44,643 7.04 % 16

Total $ 193,656 5.91 % 11

(1) A portion of repurchase debt outstanding as of both June 30, 2024 and December 31, 2023 includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs).

(1) A portion of repurchase debt outstanding as of both September 30, 2024 and December 31, 2023 includes borrowings against retained bonds received from on-balance sheet securitizations (i.e., consolidated VIEs).

The repurchase debt against the U.S.

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Q2 2023 340,701 101,731 340,701

188,101 87,279 188,101

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201,051 66,804 201,051

102,876 57,842 102,876

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

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Securitization Transactions

In June 2024, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 62% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

Subsequent to the end of the quarter, in October 2024, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, secured exclusively by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2024-10 issued approximately $316.8 million in face value of bonds.

We used the proceeds of the securitization transaction to repay outstanding debt of approximately $260.4 million and retained cash of $39.4 million, which was used for new loan purchases and operational purposes.

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

We will consolidate the AOMT 2024-10 securitization on our consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets in future reporting periods.

In June 2024, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2024-6 issued approximately $479.6 million in face value of bonds.

Our proportionate share of 4.51% of the retained bonds and investments in MOAs was approximately $2.5 million, including a retained discount on issuance of approximately $0.8 million.

We used the proceeds of the securitization transaction to repay outstanding debt of approximately $15.8 million and retained cash of $1.8 million, which was used for operational purposes.

We derecognized the mortgage loans sold in AOMT 2024-6 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of June 30, 2024.

In April 2024, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 79% of which were mortgage loans originated by our affiliated mortgage origination companies, secured exclusively by first liens on one‑to‑four family residential properties.

We derecognized the mortgage loans sold in AOMT 2024-6 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of September 30, 2024.

In April 2024, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, secured exclusively by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2024-4 issued approximately $299.8 million in face value of bonds.

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

We have consolidated the AOMT 2024-4 securitization on our consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets as of June 30, 2024.

In March 2024, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 60% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

In March 2024, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2024-3 issued approximately $439.6 million in face value of bonds.

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We used the proceeds of the securitization transaction to repay outstanding debt of approximately $35.9 million and retained cash of $4.6 million, which was used for operational purposes.

We derecognized the mortgage loans sold in AOMT 2024-3 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of June 30, 2024.

In December 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 60% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

We derecognized the mortgage loans sold in AOMT 2024-3 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of September 30, 2024.

In December 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2023-7 issued approximately $397.2 million in face value of bonds.

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We used the proceeds of the securitization transaction to repay outstanding debt of approximately $30.9 million and retained cash of $3.6 million, which was used for operational purposes.

We derecognized the mortgage loans sold in AOMT 2023-7 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of June 30, 2024.

In August 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 55% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

We derecognized the mortgage loans sold in AOMT 2023-7 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of September 30, 2024.

In August 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2023-5 issued approximately $260.6 million in face value of bonds.

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We used the proceeds of the securitization transaction to repay outstanding debt of approximately $63.4 million and retained cash of $10.7 million, which was used for operational purposes.

We derecognized the mortgage loans sold in AOMT 2023-5 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of June 30, 2024.

In June 2023, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, approximately 48% of which were mortgage loans originated by third parties and the remainder of which were originated by our affiliated mortgage origination companies, secured exclusively by first liens on one‑to‑four family residential properties.

We derecognized the mortgage loans sold in AOMT 2023-5 and recorded an investment in majority-owned affiliates located within “other assets” on our consolidated balance sheet as of September 30, 2024.

In June 2023, we were the sole participant in a securitization transaction of a pool of residential mortgage loans, secured exclusively by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2023-4 issued approximately $259.4 million in face value of bonds.

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

We have consolidated the AOMT 2023-4 securitization on our consolidated balance sheet, maintaining the residential mortgage loans held in the securitization trust and the related financing obligation thereto on our consolidated balance sheets as of June 30, 2024.

In January 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, approximately 59% of which were mortgage loans originated by our affiliated mortgage origination companies, secured primarily by first liens on one‑to‑four family residential properties.

In January 2023, we and other affiliated entities participated in a securitization transaction of a pool of residential mortgage loans, secured primarily by first liens on one‑to‑four family residential properties.

In the transaction, AOMT 2023-1 issued approximately $552.9 million in face value of bonds.

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We used the proceeds of the securitization transaction to repay outstanding debt of approximately $190.1 million and retained cash of $15.9 million, which was used for operational purposes.

We derecognized the mortgage loans sold in this transaction and recorded an investment in majority-owned affiliate located within “other assets” on our consolidated balance sheet as of June 30, 2024.

We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing, and market conditions.

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Notes Offering

On July 25, 2024, we closed an underwritten public offering and sale of, and issued, $50 million in aggregate principal amount of our 9.500% Senior Notes due 2029.

The Notes bear interest at a rate of 9.500% per annum, payable quarterly in arrears on January 30, April 30, July 30 and October 30 of each year, commencing on October 30, 2024.

The Notes will mature on July 30, 2029, unless earlier redeemed or repurchased by us.

The Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Operating Partnership, including the due and punctual payment of principal of, premium, if any, and interest on the Notes.

The Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Operating Partnership, including the due and punctual payment of principal of premium, if any, and interest on the Notes, whether at the stated maturity, upon, acceleration, call for redemption or otherwise.

We may redeem the Notes in whole or in part at any time or from time to time at our option on or after July 30, 2026 at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

Upon the occurrence of certain events relating to a change of control of us, we must make an offer to repurchase all outstanding Notes at a price in cash equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest to, but excluding, the repurchase date.

On August 8, 2024, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) to sell shares of the Company’s common stock (“common stock”) from time to time having an aggregate gross sales price of up to $75 million, through an “at the market” equity offering program (the “ATM Program”).

The Company issued and sold 188,456 shares of common stock through the ATM Program during the three-months and nine-months ended September 30, 2024 for net proceeds of $2.3 million.

As of September 30, 2024, the Company had approximately $73 million of shares of common stock available for issuance under the ATM Program and Sales Agreement.

Cash Availability

Cash and cash equivalents

Our cash balance as of June 30, 2024 was sufficient to meet our liquidity covenants under our financing facilities.

Our cash balance as of September 30, 2024 was sufficient to meet our liquidity covenants under our financing facilities.

We believe that we maintain sufficient cash to fund margin calls on our mark to market financing facilities or our economic hedge agreements, should such margin calls occur.

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Restricted Cash

Restricted cash of approximately $2.1 million as of June 30, 2024 was comprised of:

1.1 million of margin collateral held in support of our whole pool assets;

Restricted cash of approximately $2.7 million as of September 30, 2024 was comprised of:

no margin collateral held in support of our whole pool assets;

$2.3 million in interest rate futures margin collateral for the interest rate futures under our sole control;

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Our counterparties did not require any margin collateral for TBAs as of December 31, 2023.

Six Months Ended

June 30, 2024 June 30, 2023

Nine Months Ended

September 30, 2024 September 30, 2023

(in thousands)

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Cash flows provided by (used in) investing activities $ 86,040 $ (179,325)

Cash flows provided by financing activities $ (3,347) $ 54,962

Net increase in cash and restricted cash $ 1,606 $ 28,856

The cash provided by operating activities of $16.0 million for the six months ended June 30, 2024 as compared to the cash provided of $292.0 million for the six months ended June 30, 2023 was primarily due to the volume of residential mortgage loans sold into affiliate’s securitization trust during the first six months of 2023, as compared to the first six months of 2024.

The use of investing cash flows of $(11.1) million for the six months ended June 30, 2024 as compared to cash provided by investing activities of $(318.1) million for the six months ended June 30, 2023 were primarily due to the timing of purchases and maturities of U.S.

Cash flows provided by (used in) financing activities

$ 110,575 $ (171,318)

Net increase (decrease) in cash and restricted cash

$ 235 $ 3,101

The cash used in operating activities of $196.4 million for the nine months ended September 30, 2024 as compared to the cash provided by operating activities of $353.7 million for the nine months ended September 30, 2023 was primarily due to the volume of residential mortgage loans sold into an affiliate’s securitization trust during the first nine months of 2023, as compared to the first nine months of 2024.

The cash provided by investing activities of $86.0 million for the nine months ended September 30, 2024 as compared to cash used in investing activities of $179.3 million for the nine months ended September 30, 2023 were primarily due to the timing of purchases and maturities of U.S.

Treasury securities in the comparative period of 2023.

Financing cash flows used of $(3.3) million for the six months ended June 30, 2024 as compared to $55.0 million provided for the six months ended June 30, 2023 were primarily due to the activity within net borrowings under repurchase agreements and notes payable for the comparative periods.

Financing cash flows provided $110.6 million for the nine months ended September 30, 2024 as compared to cash used of $171.3 million for the nine months ended September 30, 2023 were primarily due to the activity within net borrowings under repurchase agreements and notes payable for the comparative periods.

Cash Flows - Residential and Commercial Loan Classification

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis