Angel Oak Mortgage REIT (AOMD) risk factors, FY2024 10-K

Other

1. 01of operations and prospects and our ability to make distributions to our stockholders. Some of our more significant challenges and risks

Risks Related to Our Relationship with Our Manager and its Affiliates

1. 02We are dependent on our Manager and certain key personnel of Angel Oak who are or may be provided to us through our Manager, and may not find a suitable replacement if our Manager terminates the Management Agreement or such key personnel are no longer available to us
2. 03social and governance practices, among others. Similarly, market rumors and actual or perceived association with counterparties whose own
3. 04personnel, including key personnel, or otherwise materially adversely affect us
4. 05We rely on our Manager to source non-QM loans and other target assets for acquisition by us and Angel Oak Mortgage Lending is under no contractual obligation to sell to us any loans that it originates
5. 06Our Manager’s fee structure may not create proper incentives or may induce our Manager and its affiliates to make certain loans or other investments, including speculative investments, which increase the risk of our portfolio
6. 07Our Manager’s failure to identify and acquire assets that meet our target asset criteria or perform its responsibilities under the Management Agreement could materially and adversely affect us
7. 08We do not own the Angel Oak brand or trademark, but may use the brand and trademark pursuant to the terms of a trademark license agreement with Angel Oak
8. 09Our Manager manages our portfolio pursuant to very broad investment guidelines, which may result in us making riskier investments, and our Manager may change its investment process, or elect not to follow it, without stockholder consent at any time, which may materially and adversely affect us

Risks Related to Our Investment Activities

1. 10Our operating results are dependent upon our Manager’s ability to source a large volume of desirable non-QM loans and other target assets for our investment on attractive terms
2. 11Difficult conditions in the residential mortgage and residential real estate markets as well as general market concerns, including macroeconomic events, may adversely affect the value of residential mortgage loans, including non-QM loans, and other target assets in which we invest
3. 12Non-QM loans that are underwritten pursuant to less stringent underwriting guidelines could experience higher rates of delinquencies, defaults and foreclosures than those experienced by loans underwritten to more stringent underwriting guidelines
4. 13Angel Oak Mortgage Lending is subject to extensive licensing requirements and regulation, which could materially and adversely affect us if Angel Oak Mortgage Lending does not comply with these requirements
5. 14Currently, we are focused on acquiring and investing in non-QM loans, which may subject us to legal, administrative, regulatory, and other risks, which could materially and adversely affect us
6. 15The non-QM loans in which we invest are subject to increased risks
7. 16other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of our investments, any of which may materially and adversely affect us
8. 17The non-QM loans and other residential mortgage loans in which we invest are subject to a risk of default, among other risks
9. 18We may need to foreclose on certain of the residential mortgage loans we acquire, which could result in losses that materially and adversely affect us
10. 19Increases in interest rates could adversely affect the value of our assets, cause our interest expense to increase, increase the risk of default on our assets and cause a decrease in the volume of certain of our target assets, which could materially and adversely affect us
11. 20Changes in the fair values of our assets, liabilities, and derivatives can have a material adverse effect on us, including reduced earnings, increased earnings volatility, and volatility in our book value
12. 21SOFR has replaced U.S. dollar LIBOR as a reference rate of interest, which subjects us to various risks
13. 22Credit ratings assigned to our investments are or will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded
14. 23Prepayment rates may adversely affect the value of our portfolio
15. 24Our investments in Agency RMBS and non-Agency RMBS may result in losses stemming from prepayments on the underlying asset and changes in interest rates
16. 25We invest in investment property loans, which may expose us to an increased risk of loss
17. 26We have invested in, and may continue to invest in, jumbo prime mortgage loans, which may expose us to an increased risk of loss
18. 27The performance of our investments in commercial mortgage loans, including senior mortgage loans and small balance commercial mortgage loans, is dependent upon factors that are outside our control
19. 28We have acquired and may continue to acquire second lien mortgage loans and HELOC mortgage loans, which may pose additional risks for us
20. 29We may invest in commercial bridge loans, mezzanine loans, construction loans, and B-Notes as part of our strategy. Our investments in these asset classes would subject us to an increased risk of loss, as described below
21. 30We may invest in residential bridge loans, which would expose us to the risk that the borrower of such loan may not be able to sell the property on attractive terms or at all once the property has been re-developed, which may materially and adversely affect us
22. 31We may invest in Alt-A mortgage loans and subprime residential mortgage loans or RMBS collateralized by Alt-A mortgage loans and subprime residential mortgage loans, which are subject to increased risks
23. 32We may invest in CRT securities that are subject to mortgage credit risk
24. 33Investments that we make in CMBS pose additional risks
25. 34We may acquire MSRs or excess MSRs, which would expose us to significant risks
26. 35To a limited extent, we may invest in ABS and consumer loans if doing so would be consistent with qualifying and maintaining our qualification as a REIT under the Code and maintaining our exclusion from regulation as an investment company under the Investment Company Act
27. 36We may invest in distressed or non-performing residential mortgage loans and commercial mortgage loans, which could increase our risk of loss
28. 37We have invested in, and may continue to invest in, TBAs and execute TBA dollar roll transactions. It could be uneconomical to roll our TBA contracts or we may be unable to meet margin calls on our TBA contracts, which could expose us to risks
29. 38high, to sell certain other assets at prices that are too low, to overestimate or underestimate the timing or amount of cash flows expected to be collected, or to miss favorable opportunities altogether. Similarly, any hedging activities based on faulty models and data may prove to be unsuccessful
30. 39Valuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods of time and may differ from the values that would have been used if a ready market for these assets existed
31. 40The lack of liquidity in our assets may have a material adverse effect on us
32. 41We may be exposed to environmental liabilities with respect to properties in which we have an interest
33. 42Insurance proceeds on a property may not cover all losses, which could result in the corresponding non-performance of or loss on our investment related to such property

Risks Related to Our Company

1. 43We have a limited operating history and may not be able to operate our business successfully or generate sufficient revenue to make or sustain distributions to our stockholders
2. 44We are subject to risks associated with pandemics or other public health crises, which could materially and adversely affect us
3. 45We may change our strategy, investment guidelines, hedging strategy, asset allocation, operational, and management policies without notice or stockholder consent, which could materially and adversely affect us
4. 46Our due diligence on potential investments may not reveal all of the risks associated with such investments and may not reveal other weaknesses in such investments, which could materially and adversely affect us
5. 47The failure of our third-party servicers to service our investments effectively would materially and adversely affect us
6. 48We may be affected by deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process
7. 49Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, our target assets, which could materially and adversely affect us
8. 50We operate in a highly competitive market
9. 51A change to the conservatorship of Fannie Mae and Freddie Mac and related actions, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. Government, could materially and adversely affect us
10. 52Certain actions by the U.S. Federal Reserve could materially and adversely affect us
11. 53We are subject to counterparty risk and may be unable to seek indemnity or require our counterparties to repurchase mortgage loans if they breach representations and warranties, which could have a material adverse effect on us
12. 54Maintaining cybersecurity and data security is important to our business and a breach of our cybersecurity or data security could result in serious harm to our reputation and have a material adverse impact on our business and financial results
13. 55We and Angel Oak Mortgage Lending may be unable to make technological improvements as quickly as demanded by parties with which we or Angel Oak Mortgage Lending transact, which may adversely affect our results of operations, financial condition and liquidity
14. 56We are highly dependent on information systems, and system failures could significantly disrupt our business, which may, in turn, have a material adverse effect on us
15. 57Computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in the financial services industry and may occur on our systems in the future. We rely heavily on our financial, accounting, and other data processing systems
16. 58We or Angel Oak, including our Manager and its affiliates, may be subject to regulatory inquiries or proceedings
17. 59Our industry is highly regulated and we or Angel Oak, including our Manager, may be subject to adverse legislative or regulatory changes
18. 60Maintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significant limitations on our operations
19. 61Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes in accounting interpretations or assumptions could impact our consolidated financial statements
20. 62Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity, and disputes between us and our joint venture partners
21. 63If we fail to develop, enhance and implement strategies to adapt to changing conditions in the residential real estate and capital markets, our financial condition and results of operations may be materially and adversely affected

Risks Related to Our Financing and Hedging

1. 64Our significant debt subjects us to increased risk of loss, and our charter and bylaws contain no limitation on the amount of debt we may incur
2. 65Our access to financing sources, which may not be available on favorable terms, or at all, may be limited, and this may materially and adversely affect us
3. 66We use leverage in executing our business strategy, which may materially and adversely affect us
4. 67Market conditions and other factors may affect our ability to securitize assets, which could increase our financing costs and materially and adversely affect us
5. 68We may be unable to profitably execute securitization transactions, which could materially and adversely affect us
6. 69Our securitization transactions may result in litigation, which could materially and adversely affect us
7. 70Our securitization transactions may be on significantly less advantageous terms than we had anticipated and we may be materially and adversely affected
8. 71Our loan financing lines subject us to additional risks, which could materially and adversely affect us
9. 72Our lenders and our derivative counterparties may require us to post additional collateral, which may force us to liquidate assets, and if we fail to post sufficient collateral our debts may be accelerated and/or our derivative contracts terminated on unfavorable terms
10. 73Our rights under loan financing lines are subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders
11. 74Interest rate fluctuations could increase our financing costs, which could materially and adversely affect us
12. 75Hedging against interest rate changes and other risks may materially and adversely affect us
13. 76Our hedging activities may expose us to additional risks
14. 77Although the Dodd-Frank Act required many OTC derivative transactions previously entered into on a principal-to-principal basis to be submitted for clearing by a regulated clearinghouse, not all of our derivative transactions will be subject to the clearing requirements
15. 78Changes in regulations relating to OTC derivatives activities may cause us to limit such activity or subject us and our Manager to additional disclosure, recordkeeping, and other regulatory requirements

Risks Related to Our Organizational Structure

1. 79Our significant stockholders and their respective affiliates have significant influence over us and their actions might not be in your best interest as a stockholder
2. 80Additionally, the MS Entity and the DK Entity, and our other pre-IPO investors entered into a registration rights agreement with us in connection with our IPO, pursuant to which they are entitled to registration rights in respect of shares of our common stock
3. 81Certain provisions of Maryland law could inhibit a change in control
4. 82Our authorized but unissued common stock and preferred stock may prevent a change in control
5. 83Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit our stockholders’ recourse in the event of actions not in their best interests
6. 84Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management
7. 85Our charter contains provisions that reduce or eliminate the duties of certain of our directors and officers with respect to corporate opportunities
8. 86The ownership limits in our charter may discourage a takeover or business combination that may have benefited our stock
9. 87Our charter generally does not permit the ownership in excess of 9.8% of our common stock or of all classes and series of our stock, and attempts to acquire our shares in excess of the stock ownership limits will be ineffective unless an exemption is granted by our Board of Directors
10. 88Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our stockholders
11. 89We are a holding company with no direct operations and rely on funds received from our operating partnership to pay liabilities
12. 90Conflicts of interest could arise in the future between the interests of our stockholders and the interests of partners in our operating partnership, which may impede business decisions that could benefit our stockholders

Risks Related to our REIT Qualification and Certain Other U.S. Federal Income Tax Items

1. 91Legislative or other actions affecting REITs could materially and adversely affect us
2. 92Our failure to qualify as a REIT would subject us to U.S. federal income tax and potentially increased state and local taxes, which would reduce the amount of our income available for distribution to our stockholders
3. 93Even as a REIT, we may face tax liabilities that reduce our cash flow
4. 94Complying with REIT requirements and avoiding a prohibited transaction tax may force us to hold a significant portion of our assets and conduct a significant portion of our activities through a TRS, and a significant portion of our income may be earned through a TRS
5. 95REIT distribution requirements could adversely affect our ability to execute on our strategies and may require us to incur debt, sell assets or take other actions to make such distributions
6. 96Ordinary dividends payable by REITs do not generally qualify for the reduced tax rates applicable to certain corporate dividends
7. 97We may have phantom income from our acquisition and holding of subordinated RMBS and CMBS and excess MSRs
8. 98We are dependent on external sources of capital to finance our growth
9. 99We may engage in securitization transactions that result in our holding one or more REMIC “residual interests” that give rise to excess inclusion income (“EII”)
10. 100Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities
11. 101Complying with REIT requirements may force us to liquidate otherwise profitable assets, which could materially and adversely affect us
12. 102The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT
13. 103We may choose to make distributions to our stockholders in our own stock, in which case our stockholders could be required to pay income taxes in excess of the cash dividends they receive
14. 104Even though we have elected, and intend to qualify to be taxed, as a REIT, we may be required to pay certain taxes
15. 105Complying with REIT requirements may limit our ability to hedge effectively
16. 106Future sales of shares of our common stock or other securities convertible into shares of our common stock could cause the market value of shares of our common stock to decline and could result in dilution of existing shares
17. 107Our stockholders’ ability to control our operations is limited and our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election without the approval of our stockholders
18. 108If securities analysts do not publish research or reports about our business or if they downgrade our stock or our core market, the price of our securities and trading volume could decline
19. 109Terrorist attacks, other acts of violence or war, civil unrest, or a pandemic, or U.S. consumers’ fear of such events may cause a prolonged economic slowdown, which would affect the real estate industry generally and our business, financial condition, and results of operations
20. 110The obligations associated with being a public company require significant resources and attention from our Manager’s senior management team